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,
2007




OR




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








 ̈
            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 x No 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





Indicate
by check mark which financial statement item the registrant has elected to
follow.    Item 17 o    
Item 18 x




If “Other” has been checked in response
to the previous question indicateby 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








PART I
              
              1
 ITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
              1
 ITEM
      2.
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
              1
 ITEM
      3.
              KEY
      INFORMATION
              1
 ITEM
      4.
              INFORMATION
      ON THE COMPANY
              15
 ITEM
      4A.
              UNRESOLVED
      STAFF COMMENTS
              26
 ITEM
      5.
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
              26
 ITEM
      6.
              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
              35
 ITEM
      7.
              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              43
 ITEM
      8.
              FINANCIAL
      INFORMATION
              46
 ITEM
      9.
              THE
      OFFER AND LISTING
              46
 ITEM
      10.
              ADDITIONAL
      INFORMATION
              47
 ITEM
      11.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              60
 ITEM
      12.
              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
              60
 PART
      II
              
              60
 ITEM
      13.
              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
              60
 ITEM
      14.
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
              60
 ITEM
      15.
              CONTROLS
      AND PROCEDURES
              61
 ITEM
      15T.
              CONTROLS
      AND PROCEDURES
              61
 ITEM
      16.
              [RESERVED]
              61
 ITEM
      16A.
              AUDIT
      COMMITTEE FINANCIAL EXPERT
              61
 ITEM
      16B.
              CODE
      OF ETHICS
              61
 ITEM
      16C.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              61
 ITEM
      16D.
              EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              62
 ITEM
      16E.
              PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS
              62
 PART
      III
              
              62
 ITEM
      17.
              FINANCIAL
      STATEMENTS
              62
 ITEM
      18.
              FINANCIAL
      STATEMENTS
              62
 ITEM
      19.
              EXHIBITS
              63
 
 -i-
 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. This selected financial data 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 31,2003*
              
              
              2004*
              
              
              2005*
              
              
              2006*
              
              
              2007*UnauditedOperating
      expenses:Research
      and development costs, net
              
              $
              987,000
              
              
              $
              944,000
              
              
              $
              826,000
              
              
              $
              1,079,000
              
              
              $
              1,182,000General
      and administrative expenses
              
              
              664,000
              
              
              
              1,272,000
              
              
              
              922,000
              
              
              
              698,000
              
              
              
              901,000Amortization
      of intangible assets
              
              
              825,000
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Total
      operating expenses
              
              
              2,476,000
              
              
              
              2,216,000
              
              
              
              1,748,000
              
              
              
              1,777,000
              
              
              
              2,083,000Interest
      expense (income)
              
              
              8,000
              
              
              
              14,000
              
              
              
              23,000
              
              
              
              33,000
              
              
              
              13,000Net
      loss
              
              $
              (2,484,000
              )
              
              $
              (2,230,000
              )
              
              $
              (1,771,000
              )
              
              $
              (1,810,000
              )
              
              $
              (2,096,000
              )Basic
      and diluted net loss per share(1)
              
              $
              (.15
              )
              
              $
              (.13
              )
              
              $
              (.11
              )
              
              $
              (.11
              )
              
              $
              (.13
              )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
              
              
              
              16,722,973
  Balance
Sheet Data:
 As
      of December 31,2003*
              
              
              2004*
              
              
              2005*
              
              
              2006*
              
              
              2007UnauditedWorking
      capital (2)
              
              $
              (127,000
              )
              
              $
              (189,000
              )
              
              $
              (362,000
              )
              
              $
              (251,000
              )
              
              $
              (246,000
              )Total
      assets
              
              
              2,515,000
              
              
              
              2,774,000
              
              
              
              2,692,000
              
              
              
              2,706,000
              
              
              
              2,929,000Accumulated
      deficit
              
              
              (52,644,000
              )
              
              
              (54,874,000
              )
              
              
              (56,645,000
              )
              
              
              (58,455,000
              )
              
              
              (60,551,000
              )Total
      stockholders’ equity
              
              
              2,084,000
              
              
              
              2,133,000
              
              
              
              1,994,000
              
              
              
              2,083,000
              
              
              
              2,044,000
   *
      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.
 
 2
 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 Cell
Carrier Business
  We
have a history of operating losses, and we cannot assure you that we will
achieve future revenues or operating profits.
  Historically,
we and Medis El, our predecessor, have incurred net operating losses each year
since inception. Although Medis El had limited revenues in earlier years, we
cannot assure you that we will be able to develop revenue sources or that our
operations will become profitable, even if
we are able to commercialize our CKChip technology and products and applications
and potential future products and applications developed from this
technology. If we continue to suffer losses as we and our predecessor
have 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 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
commercialization. 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.
  Although
Medis has committed to fund our operations, to the extent we are unable to do so
ourselves, for a period of one year after the completion of our January 2008
rights offering, we anticipate the need for additional financing
thereafter.
  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 curtail some, or all, of our operations,
including those of our medical device incubator. See the risk factor entitled
“—Risks Relating to our Medical Device Incubator—As our primary emphasis is the
commercialization of our CKChip technology, we currently do not have sufficient
cash resources to fund any prospective partner companies”
below.
 3
 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 may not
be sufficient to fund our operations through the commercialization of our first
CKChip application or product. Further, as our first priority in addressing our
cash flow needs will be the commercialization of our CKChip technology and the
development of successive generations of CKChip applications and products, we do
not at this time have sufficient funds to grow our medical device
incubator.
  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 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.
  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 Molecular Cytomics Inc., a
privately-held company registered in Cyprus and with facilities in Israel and in
Boston, Massachusetts, which offers a microscope slide-based device that
contains 8,000 micron-sized wells. Its technology enables high content analysis
of non-adherent primary 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 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 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 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.
 4
 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
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:
 5
 ·
              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, which may be infringed by our potential
      products or technologies.
  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.
 6
 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, 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. In particular, the loss of Dr. Asaf Ben-Arye, our chief executive
officer, as well as one or more of certain of our key employees, would be
significantly detrimental to us. In addition, recruiting and retaining qualified
scientific and technical personnel to perform research and development work is
critical to our success. Our anticipated 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. The failure to attract and retain such personnel or
to develop such expertise would adversely affect our business.
 7
 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, 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.
  Risks Relating to our
Medical Device Incubator
  As
our primary emphasis is the commercialization of our CKChip technology, we
currently do not have sufficient cash resources to fund any prospective partner
companies.
  While it
was our intention to invest in early stage technologies such as Scorpion
Surgical Technologies “(Scorpion”), we have decided to accord priority to the
development and commercialization of our CKChip technology and successive
generations of CKChip applications and products. Accordingly, we do not expect
at the current time to develop and expand a diverse partner company portfolio,
and we will be delaying implementing our plans for additional investments in
early stage medical device enterprises to a later date, if at all. The remaining
risk factors herein relating to our development of a medical device incubator
assumes we determine to again fund prospective partner companies and make such
additional investments, of which we can give no assurance.
  Our
management may fail to identify early stage medical device companies in which to
acquire interests or to complete these transactions.
  Our
success may depend in part on our ability to identify opportunities to acquire
minority equity interests in early stage medical device enterprises that offer
significant growth potential and to successfully negotiate the terms of any
acquisitions we make. Our management will have sole and absolute discretion in
identifying and selecting companies in which to acquire interests or to
establish and in structuring, negotiating, undertaking and divesting of
interests in our partner companies. We may combine, reorganize, alter the
business plan of or sell any of our partner companies at any time, as our
management determines is appropriate. You will not be able to evaluate the
merits of our acquisition of an interest in, or the establishment of, or any
particular company before we take any of these actions. In addition, in making
decisions to acquire interests in or establish partner companies, we may rely,
in part, on financial projections developed by our management and the management
of potential partner companies. These projections will likely be based on
assumptions and subjective judgments. The actual results of our partner
companies may differ significantly from these projections.
  Beyond
our interest in Scorpion, which interest was acquired in July 2007, we may be
unable to acquire an interest in companies that we identify for many reasons,
including:
  ·
              our
      inability to interest companies in joining our collaborative
      network;
 ·
              our
      inability to agree on the terms of an acquisition or to acquire a
      controlling or significant minority interest in the
    company;
 ·
              incompatibility
      between us and management of the company;
and
 ·
              Fund
      raising constraints.
  8
 We expect
that, even if we can identify, acquire and establish additional partner
companies, we will not be profitable for the foreseeable future as a result of
such acquisitions and may never become profitable.
  We
have had limited experience in actively managing, operating or promoting medical
device companies, and if we cannot do so effectively, our business strategy will
fail.
  Our
strategy involves helping partner companies to grow and access capital markets
by providing them with management and operational support. With the exception of
Dr. Asaf Ben-Arye, our President and Chief Executive Officer, our senior
management has had limited experience in the active management, operation or
promotion of medical device companies, and we cannot assure you that they will
be able to do so effectively. In addition, we may acquire interests in or
establish medical device companies focused on areas in which Dr. Ben-Arye and
our other senior management have little experience. If our senior management
cannot effectively manage, operate and promote, or contribute to the management,
operation and promotion of our partner companies, they may not become profitable
or gain access to the capital markets, and we may be unable to convince new
companies to join our proposed incubator.
  It
is possible that we will only be able to acquire interests in, or establish, one
or a limited number of partner companies, which may cause us to be dependent
upon the development or market acceptance of a limited number of
products.
  In
addition to the capital contribution of up to $1,500,000 that Medis has agreed
to provide to us, the net proceeds of our January 2008 rights offering were
approximately $455,000, which are being primarily used to fund our CKChip
development and commercialization programs, to invest in, or establish, partner
companies and to provide for our other working capital needs. Although Medis has
committed to fund our operations subject to the abovementioned cap, to the
extent we are unable to do so ourselves, for a period through January 2009, we
anticipate the need for additional financing thereafter. In the absence of
additional financing, we can give no assurance that we will be able to enter
into any future partner company transactions. The resulting lack of
diversification may:
  ·
              result
      in our dependency upon the performance of a single or a small number of
      partner businesses; and
 ·
              result
      in our dependency upon the development or market acceptance of a single or
      limited number of medical device
products.
  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.
  Our
one existing partner company has, and we expect any future partner companies
will have, a history of operating losses, and none of them may ever be
profitable.
  Our one
existing partner company, Scorpion Surgical Technologies, has, and we expect
that most of our future partner companies will have, a limited operating history
and significant losses, and none of them may ever be profitable. We also expect
that many will have incurred substantial costs to develop and market their
products, incurred net losses and will be unable to fund their cash needs from
operations. We believe that the operating expenses of our partner companies will
increase substantially in the foreseeable future as they continue to develop
products and services, increase sales and marketing efforts and expand
operations.
  Our
partner companies may fail if they do not adapt to the rapidly changing medical
device marketplace.
  If our
partner companies fail to adapt to the rapid changes in technology and customer
demands, they may not generate revenues or become or remain
profitable.
 9
 The
medical device market is characterized by:
  ·
              rapidly
      changing technology;
 ·
              evolving
      industry standards;
 ·
              frequent
      new product introductions; and
 ·
              changing
      customer demands.
  Our
future success will depend on our partner companies’ ability to adapt to this
rapidly evolving marketplace. They may not be able to adapt their products
adequately or economically, develop new products or establish and maintain
effective distribution channels for their products. If our partner companies are
unable to meet these challenges, they may be unable to sell their products and
generate revenues. Therefore, their businesses may become or remain
unprofitable.
  Our
partner companies’ growth will depend on their ability to attract and retain
their key personnel.
  We
generally expect to direct all of the operating activities of portfolio
companies in which our equity ownership and voting power percentage is greater
than 50%. We may seek, but may not achieve significant involvement in and
influence over the operating activities of portfolio companies in which our
equity ownership and voting power percentage is at least 20%, but not more than
50%, in part through board representation and rights to participate in and, in
certain instances, approve material decisions. However, the growth of our
partner companies, even those that we may establish and those in which our
voting power percentage may be greater than 50%, will depend on their ability to
attract and retain their own senior management personnel to oversee the
day-to-day operation of their businesses. As they grow, our partner companies
will also need to continue to hire additional technical, marketing, financial
and other key personnel, unless they rely on us or other partner companies or
third parties to provide these services. A shortage in the availability of
required personnel could limit the ability of our partner companies to grow,
sell their existing products and launch new products.
  Our
partner companies 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
partner company interests.
  We expect
to acquire less than majority voting interests in the majority of our partner
companies. We may not be able to control significant business decisions of our
partner companies. Further, we may not be able to maintain our initial ownership
or control levels in our partner companies, including partner companies that we
established, if well portions of our interests or our partner companies issue
additional equity to other parties.
  Our
ownership of interests in partner companies over which we do not exercise
complete control involves additional risks that could cause the performance of
our interests and our operating results to suffer, including:
  ·
              management
      of a partner company having economic or business interests or objectives
      that are different than ours; and
 ·
              partner
      companies not taking our advice with respect to the financial or operating
      difficulties that they encounter.
  Our
inability to control our partner companies completely could prevent us from
assisting them, financially or otherwise, or could prevent us from liquidating
our interests in them at a time or at a price that is favorable to us.
Additionally, to the extent we do not completely control them, our partner
companies may not act in ways that are consistent with our business strategy and
may compete with us or other partner companies. These factors could hamper our
ability to maximize returns on our equity interests, and cause us to recognize
losses on our interests in partner companies.
 10
 If
we are unable or unwilling to provide our partner companies with the significant
additional financing they will need, our interests in them may be diluted or
they may fail.
  We expect
that our future partner companies will be in the early stages of their
development and will require significant amounts of additional capital beyond
our initial capital infusions to compete successfully, meet their business
objectives and produce revenues and profits. We are currently unable to predict
the future capital needs of any of our partner companies, and we may decide not
to provide the additional capital that our partner companies, including the
partner companies that we establish, require or may not be given the opportunity
to provide it. If our partner companies receive capital from other sources, our
ownership interest in them may be diluted. If our partner companies are unable
to obtain additional capital, they may fail.
  Our
business strategy may not be successful if valuations in the market sectors in
which our partner companies participate decline.
  Our
strategy involves creating value for our shareholders by helping our partner
companies build value and, if appropriate, accessing the public and private
capital markets. Therefore, our success is dependent on the value of our partner
companies as determined by the public and private capital markets. Many factors,
including reduced market interest, may cause the market value of our publicly
traded partner companies, if any, to decline. If valuations in the market
sectors in which our partner companies participate decline, their access to the
public and private capital markets on terms acceptable to them may be
limited.
  Our
partner companies will face intense competition, which could adversely affect
their business, financial condition, results of operations and prospects for
growth.
  There is
intense competition in the medical device marketplace, and we expect competition
to intensify in the future. Our business, financial condition, results of
operations and prospects for growth will be materially adversely affected if our
partner companies are not able to compete successfully. Virtually all of the
present and potential competitors of our partner companies may have greater
financial, technical, marketing and other resources than those of our partner
companies. This may place our partner companies at a disadvantage in responding
to the offerings of their competitors, technological changes or changes in
customer client requirements. Also, our partner companies may be at a
competitive disadvantage because many of their competitors have greater name
recognition, more extensive client bases and a broader range of product
offerings. In addition, our partner companies may compete against one
another.
  Our
future success will depend on our partner companies’ ability to adapt to this
rapidly evolving marketplace. They may not be able to adequately or economically
adapt their products and services, develop new products or establish and
maintain effective distribution channels for their products. If our partner
companies are unable to offer competitive products or maintain effective
distribution channels, they will sell fewer products and forego potential
revenue, possibly causing them to lose money. In addition, we and our partner
companies may not be able to respond to the rapid technology changes in an
economically efficient manner, and our partner companies may become or remain
unprofitable.
  Government
regulations and legal uncertainties may place financial burdens on the
businesses of our partner companies.
  Failure
to comply with applicable requirements of the Israeli Ministry of Health, the
FDA or comparable regulation in other countries may result in fines, recall or
seizure of medical devices, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution. Manufacturers of
medical devices are subject to strict regulation regarding validation and the
quality of manufacturing facilities. Failure to comply with these quality
regulation systems requirements could result in civil or criminal penalties or
enforcement proceedings, including the recall of a product or a “cease
distribution” order.
 11
 We
may have to buy, sell or retain assets when we would otherwise not wish to do so
in order to avoid registration under the Investment Company Act.
  The
Investment Company Act of 1940 regulates companies which are engaged primarily
in the business of investing, reinvesting, owning, holding or trading in
securities. Under the Investment Company Act, a company may be deemed to be an
investment company if it owns investment securities with a value exceeding 40%
of the value of its total assets (excluding government securities and cash
items) on an unconsolidated basis, unless an exemption or safe harbor applies.
We refer to this test as the “40% test.” Securities issued by companies other
than majority-owned subsidiaries are generally considered “investment
securities” for purpose of the Investment Company Act. We are a company that
intends to partner with growth-stage medical device companies to build value; we
will not be engaged primarily in the business of investing, reinvesting or
trading in securities. We are currently, and intend to remain in compliance with
the 40% test. Consequently, we do not believe that we are an investment company
under the Investment Company Act.
  We will
monitor our compliance with the 40% test and will seek to conduct our business
activities to comply with this test. It is not feasible for us to be regulated
as an investment company because the Investment Company Act rules are
inconsistent with our strategy of actively helping our partner companies in
their efforts to build value. In order to continue to comply with the 40% Test,
we may need to take various actions which we would otherwise not pursue. For
example, we may need to retain a majority interest in a partner company that we
no longer consider strategic, we may not be able to acquire an interest in a
company unless we are able to obtain majority ownership interest in the company,
or we may be limited in the manner or timing in which we sell our interests in a
partner company. Our ownership levels may also be affected if our partner
companies are acquired by third parties or if our partner companies issue stock
which dilutes our majority ownership. The actions we may need to take to address
these issues while maintaining compliance with the 40% Test could adversely
affect our ability to create and realize value at our partner
companies.
  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 $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.
 12
 We
presently have members of management, other key employees and consultants
located in various countries, which adds complexities to the operation of our
business.
  Presently,
we 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. Based on the
anticipated value of our outstanding shares during the year and the cash that we
anticipate holding and generating during the year, including the cash we raise
as a result of this rights offering, we believe that we should not be classified
as a PFIC for 2007, 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
are not in compliance with the laws of the State of Israel that relate to the
composition of our Board of Directors and establishment of Board
committees.
  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.
The appointment of our external directors was required to be confirmed by a
general meeting of our shareholders no later than three months following the
February 11, 2008 commencement of the quotation of our ordinary shares. As of
the filing of this Annual Report, we have not been successful in identifying and
selecting external directors and consequently are not in compliance with the
Companies Law. We intend to hold a meeting of our shareholders as soon as
practicable after we so select external directors, to seek approval for the
appointment of our external directors. Additionally, we are required under the
Companies Law to establish both an audit committee and an option committee. We
have not yet established either of such committees, as we have not yet appointed
external directors, of whom the committees must include. Failure to so be in
compliance with the Companies Law in this regard could expose us and our Board
to increased liability to shareholders (other than Medis El) and creditors that
claim damages due to any of our actions or inactions, which actions include the
approval of our financial statements included in this annual
report.
 13
 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 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 one of our 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 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
 14
 contingent
obligation to pay royalties out of future revenues to a maximum of $2,434,000.
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.
 
 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 derived from the CellScan, 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
 15
 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 new and proprietary 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, principally for the
mobile handset and portable consumer markets. 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
applications.
  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 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
$593,000.  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.
 16
 B.  Business
Overview
  Introduction
  We are
seeking to commercially exploit what we believe to be an ever-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.  Our business model also
contemplates the sourcing, vetting and investing in early stage Israeli-based
medical device companies; however, as our primary emphasis is on the
commercialization of our CKChip technology, we currently do not plan to devote
resources to fund any prospective partner companies beyond our existing
investment in Scorpion Surgical Technologies.
  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 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, anyone interested in
using the CKChipTM may be able to do so without having to invest in purchasing a
monitoring device.
  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 functions 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; and
 ·
              drug
      discovery.
  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, we do not expect at the current time to develop and expand a
diverse partner company portfolio, and we will be delaying implementing our
plans for additional investments in early stage medical device enterprises to a
later date, if at all.
  Subject
to the availability of funds and the attractiveness of the opportunities that
may be presented to us, we would intend to source, vet and invest in early stage
Israeli-based medical device companies. To this end, we would hope to build
value for our shareholders through building value in our partner companies,
i.e., those companies in which we will invest, by assembling and making
available to our partner companies at no cost to them an array of strategic,
operational, financial and managerial resources to enable them to primarily
focus their efforts upon technological innovation, product development and
timely attainment of predetermined milestones for committed follow-on financing
rather than having to devote limited personnel and resources to addressing
managerial burdens and repeatedly pursuing diverse funding
sources.
 
 17
 CKChip
  Introduction
  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.
  In order
to reach optimum understanding of biological processes and to carry out tests on
such processes, it is necessary to integrate separate functions into one complex
module. The smallest living unit, the cell, plays a central role as a functional
system model for such tests. Detailed quantitative understanding of single cell
functions and integration of various aspects of cellular events become important
tools for cell function analysis.
  Typically,
cell-based assays do not aim at differentiating the various heterogeneous cell
populations and cellular events. In principal, results are represented by the
summation of such events and cellular responses because of the lack of ability
to monitor the heterogeneous cell populations and other tested parameters
separately. This is because contemporary technologies do not enable sufficient
sensitivity to identify sub-populations within a mass of cells. In addition,
monitoring very small live cell populations or rare events, and identification
of such events by flow cytometry is almost impossible since they require
repeated scoring of small numbers of live cells at high resolution.
  Consequently,
we believe there exists an ever-growing need to study individual live cells as
well as rare cells and rare cell events. This includes the ability to study
small as well as large numbers of individual cells simultaneously and repeatedly
and the ability to identify rare cells and to define cell sub-populations.
Live-cell-based assays offer an authentic representation of cell behavior as
compared with fixed and stained cell chemical assays. They also offer the
possibility of conducting dynamic experiments through monitoring the behavior of
the live cells over time
  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.
  Emerging
markets which require live cell analysis include cancer research, immunology,
mammalian cell cloning, gene expression, drug discovery and toxicity screening,
and stem cell research.
  The
following live cell investigations are becoming increasingly important. We
believe that in many instances, the tools currently available for these
investigations are inadequate for the task.
 18
  ·
              Rare
      Cells
  Include
embryonic or adult stem cells which are found primarily in the bone marrow and
have the ability to differentiate into various types of tissues, such as bone,
cartilage, tendon, fat and muscle. These stem cells can be used for tissue
repair. Other rare cells are used in the production and characterization of
genetically engineered antibody molecules; using the standard techniques of
genetic engineering and gene transfection, drug-resistant cells are identified
and selected to permit the efficient isolation of the rare cells that express
transfected DNA.
  ·
              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 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
throughput 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 heavily 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.
 19
  ·
              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 it lacks a number of
      capabilities and features needed in today’s life science and medical
      diagnostics research. Cell sorting using flow cytometry remains a fairly
      difficult and unreliable task, especially in populations made up of small
      numbers of cells.
  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 cells cannot be
      re-analyzed;
 ·
              Flow
      cytometry cannot 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) and it is
      not readily available to the researcher or to the clinical
      laboratory.
  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 will enable 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;
 ·
              Retrieval
      of specific cells; and
 ·
              Simultaneous
      monitoring of kinetic data of multiple individual
  cells.
  The Cell
Carrier, which are currently marketing on a limited basis and which we intend to
continue to market under the “CKChip” trade-name, is a 4 sq mm, grid with
between 2,500 and 10,000 conical micro-wells. Cells are loaded onto the CKChip
and distributed across the microwells. Each cell is drawn/siphoned into a
microwell by creating a small negative pressure in the chamber. Cells become
trapped in their individual microwells and are held there by adhesion/cohesion
forces during their 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 without having to invest in purchasing a
monitoring device.
 20
 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;
 ·
              adding
      and rinsing reagents from living cells under observation;
    and
 ·
              savings
      in the cost of reagents.
  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: an estimated
      60 — 70% of medical decisions involve a diagnostic test. In clinical
      diagnostics, a biological sample is taken from the patient and sent to a
      hospital-based or private 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.
 ·
              Cytokines.  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.
 21
 Our
Products
  Our
current products, as well as products in varied states of development, are
summarized below:
  ·
              Generation I (CCI) —
      The CCI is currently offered for fluorescence microscopy applications
      enabling repeated multi-live single cell monitoring. In addition,
      it  allows multiple rinsing of reagents. This product currently
      is available for sales to end users at a list price of $168 per 6 unit
      box. A starter kit, which includes a cell loader, cover-slips, holder
      unit, vacuum-pen, 8 CKChip units and our “WELLS” software,
      is currently available at a list price of $1,720 per
  kit.
 ·
              Generation II (CCT) — a
      transparent Cell Carrier that in addition to the features described above
      for the CCI, is also suitable for light microscopy, reagent, chemical, and
      biological coating options. We expect that this product, which is in a
      development stage, will be introduced for sale in the second quarter of
      2009.
 ·
              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 expect
      to select our first clinical diagnostic application for the CCM by the end
      of 2008, with development over a two year period
    thereafter.
  Our
Marketing Strategy
  We have
recently commenced the marketing of the CCI, our first product. To this end, we
presented the CKChip at two international congresses of cell biology and
cytometry, as well as in a series of scientific seminars presented at the U.S.
National Institute of Health, Boston University, Max Plank Institute in Munich,
the German Cancer Research Center (DKFZ) in Heidelberg and others. In
addition, we have recently announced the signing with Rikaken Co., Ltd. Japan,
of an exclusive distribution agreement for marketing and distributing our CKChip
in Japan.
 
 We intend
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 also
intend to continue to present our technology at appropriate professional
meetings, lectures and seminars. 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
 22
 and
joint ventures with third parties possessing these capabilities until we can
raise sufficient funds to perform these functions with our own
personnel.
  In order
to maintain market awareness and overall control, we intend to be highly
involved in directing the sales force of our strategic partners and will seek to
manage their sales efforts with vigorous, focused marketing
activities.
  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.
  Medical
Device Incubator
  Introduction
  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, we do not expect at the current time to develop and expand a
diverse partner company portfolio, and we will be delaying implementing our
plans for additional investments in early stage medical device enterprises to a
later date, if at all.
  Subject
to the availability of funds and the attractiveness of the opportunities that
may be presented to us, we would intend to source, vet and invest in early stage
Israeli-based medical device companies. To this end, we would hope to build
value for our shareholders through building value in our partner companies,
i.e., those companies in which we will invest, by assembling and making
available to our partner companies at no cost to them an array of strategic,
operational, financial and managerial resources to enable them to primarily
focus their efforts upon technological innovation, product development and
timely attainment of predetermined milestones for committed follow-on financing
rather than having to devote limited personnel and resources to addressing
managerial burdens and repeatedly pursuing diverse funding
sources.
  Our
Current Investment in a Medical Device Company
  We have
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. It is targeted in particular, to the
growing market of posterior dynamic 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 have
agreed to acquire up to a 23.6% equity interest 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. We also have been given the right to appoint a
director to Scorpion’s board of directors, which we have already appointed.
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 or 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. We have also received information
rights, providing us with consolidated balance sheets, statements of income,
statements of cash flow and statements of shareholders equity of Scorpion. Dr.
Ben-Arye, who is a director and co-founder of Scorpion, did not
 23
 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 acquisition of the 23.6%
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, and
one Chinese patent on our Cell Carrier technology. We have also filed national
phase patent applications in Europe and Japan. Further, we have a patent in
Canada related to system and method for cell selection and have filed two
additional applications under the Patent Cooperation Treaty relating to
improvements and modifications to our cell carrier technology.
  Two
additional provisional patents applications covering unique features and design
related to the Cell Carrier technology have been submitted to the U.S. Patent
and Trademark Office. We intend to continue to file patent applications in the
U.S. and internationally for our Cell Carrier technologies.
  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 project our Cell Carrier technology as the
underlying patents and attendant proprietary rights have either expired or will
shortly expire by their respective terms.
  Competition
  CKChip
  The life
sciences research and clinical diagnostics markets are characterized by intense
competition. We believe that we directly compete with Molecular Cytomics Inc., a
privately-held company registered in Cyprus with operating facilities in Israel
and in Boston, Massachusetts, which offers a microscope slide-based device that
contains 8,000 micron-sized wells. Its technology enables high content analysis
of non-adherent primary cells such as human blood, bone marrow and stem cells
for research, drug discovery and clinical diagnostics. We are also aware of 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.
  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.
 24
 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.
  Medical
Device Incubator
  If we
decide to move forward with further investments in  medical
device companies, we would expect to face intense competition from other
companies that acquire, or provide capital to, medical device businesses.
Competitors will include technology incubators affiliated with major Israeli
academic centers such as the Technion-Israel Institute of Technology and the
University of Tel-Aviv, publicly traded incubators such as Maayan Ventures and
numerous venture capital and private equity investors, as well as companies
seeking to make strategic acquisitions. Many providers of growth capital also
offer strategic guidance networking access for recruiting and general advice.
Virtually all of the present and potential competitors of our partner companies
may have greater financial, technical, marketing and other resources than those
of our partner companies. This may place our partner companies at a disadvantage
in responding to the offerings of their competitors, technological changes or
changes in customer client requirements. Also, our partner companies may be at a
competitive disadvantage because many of their competitors have greater name
recognition, more extensive client bases and a broader range of product
offerings. In addition, our partner companies may compete against one
another.
  We
believe that we would be able to effectively compete based upon our selection of
a niche market of very early development stage companies in potential markets of
between $50.0 million to $150.0 million, which many of our competitors view as
limiting their potential financial return, and the visibility, reputation and
experience of our executive officers and directors, particularly Dr. Asaf
Ben-Arye and Jacob Weiss.
  Government
Regulation
  CKChip
  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.
  Medical
Device Incubator
  Failure
to comply with applicable requirements of the Israeli Ministry of Health, the
FDA or comparable regulation in other countries may result in fines, recall or
seizure of products, total or partial suspension of production, withdrawal of
existing product approvals or clearances, refusal to approve or clear new
applications or notices and criminal prosecution. Manufacturers of medical
diagnostic devices are subject to strict regulation regarding validation and the
quality of manufacturing and laboratory facilities. Failure to comply with these
quality regulation systems requirements could result in civil or criminal
penalties or enforcement proceedings, including the recall of a product or a
“cease distribution” order.
  Facilities
  Medis
currently provides us with office and laboratory facilities of approximately
2,700 square feet at 2 Yodfat Street, Lod, Israel. We intend to occupy these
facilities, which we believe to be adequate for projected needs, through at
least 12 months. Medis El charges us for these facilities at its cost as a
contribution to our capital and has agreed to do so for a period of at least 18
months from the January 7, 2008 completion date of our rights
offering.
 25
 Employees
  As of
December 31, 2007, we had 10 full-time employees, including our chief executive
officer, and one part-time employee. 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.
  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 to further refine and commercialize Medis’
CellScan and related technology, as a successor to Medis El. We are seeking to
exploit commercially an improved Cell Carrier which was considered to be “the
heart” of CellScan system. This unique CKChipTM can accommodate up to 10,000
cells, each in individual wells, for measuring reactions of living cells while
the cells are in a static state. 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 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
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 screening, in particular for
non-adherent live cells.
  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, we do not expect at the current time to develop and expand a
diverse partner company portfolio, and we will be delaying implementing our
plans for additional investments in early stage medical device enterprises to a
later date, if at all.
 26
 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.
  Medis El
was formed in July 1992 and completed an initial public offering in December
1993. In June 2000, Medis completed an exchange of its common stock for the
shares of Medis El that it did not already own. Upon completion of this
exchange, Medis effectuated the listing of its common stock on the Nasdaq Small
Cap Market and then later moved to what is now the Nasdaq Global Market, and
Medis El ceased to be a publicly traded company. Subsequent to Medis El’s
December 1993 IPO, Medis El’s operations were principally funded though investor
equity financing. Subsequent to the June 2000 exchange, Medis El and we have
been financed by funds from Medis. In addition to the net proceeds that we have
received from the completion of our rights offering on January 7,
2008,  we expect to continue to be dependent on funding from Medis
through January 2009 and/or 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.
  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
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.
  Basis
of Presentation
  Our
financial statements 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.
 27
 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, 2007, the net book values 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. In amortizing our goodwill
through December 31, 2001, we made estimates and assumptions regarding the
useful lives of such assets. If our estimates and assumptions had changed, the
useful lives and resulting charges to operations for amortization of such assets
would have also changed.
  Additionally,
with respect to our goodwill, as of January 1, 2002, we adopted
SFAS No. 142, “Goodwill and Other Intangible Assets,” which was issued
by the Financial Accounting Standards Board in June 2001. SFAS No. 142
requires enterprises, effective January 1, 2002, to discontinue amortizing
goodwill, and instead requires that goodwill be subject to at least an annual
assessment for impairment. As part of our initial evaluation of our goodwill and
intangible assets for any possible impairment, as of January 1, 2002, we were
required to use estimates and assumptions with respect to markets for our
products, future cash flows, discount rates and timing of commercialization of
our technologies in determining the fair value of our reporting units. We have
also performed annual tests for impairment of our goodwill for each of the years
from 2002 through 2007. The estimates we used assume that our products will be
accepted and that we will gain market share in the future and will experience
growth in such market share. If we fail to deliver products or to achieve our
assumed revenue growth rates or assumed gross margins, if the products fail to
gain expected market acceptance, or if our estimates and/or other assumptions
change or other circumstances change with respect to future cash flows, discount
rates and timing of commercialization of our technologies, we may, in the
future, be required to record charges to operations for impairment of our
goodwill and/or our intangible assets
  Income
Taxes
  We
consider accounting policies related to income taxes  to be critical
due to the estimation processes involved.  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. While our adoption of FIN 48 did
not have a material impact on our December 31, 2007 financial statements, its
application requires the exercise of judgment and the use estimates and,
depending on transactions and circumstances, could potentially have a
significant impact on our consolidated financial statements
  Stock-based
compensation
  We also
consider accounting policies related to stock-based compensation to be critical
due to the estimation process involved. We view stock options as an important
part of our compensation program. Accounting for stock options can results in
significant non-cash charges to our operations. There are assumptions and
estimates involved in determining the value of such stock options 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 and interest
rates. The market price of Medis’ stock and assumptions made by Medis in valuing
its stock-based compensation has also had a significant impact on charges we
incur related to stock-based compensation in our financial statements. If these
estimates and assumptions change or if our stock price or Medis’ stock price
changes or if the value of our stock changes, the charges to operations and/or
accumulated loss could also change significantly.
 28
 Effective
January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”), and related Securities and Exchange
Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. Under this method, (compensation cost recognized
beginning January 1, 2006 include costs related to 1) all share-based
payments (stock options and restricted stock awards) granted prior to but not
yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of FAS 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), and 2) all share-based
payments granted subsequent to December 31, 2005 based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123(R).
Compensation costs for stock options are generally recognized ratably over the
vesting period.
  Recently
Enacted Accounting Pronouncements
  In June
2007, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF
07-3).  EITF 07-3 requires that non-refundable advance payments for
goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. The deferred amounts
would be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to
be provided.  This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2007 and earlier
application is permitted.  EITF 07-3 is to be applied prospectively
for new contracts entered into on or after the effective date. The adoption of
this pronouncement is not expected to have a material effect on our financial
statements.
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). This statement provides a single definition of fair value, a framework
for measuring fair value, and expanded disclosures concerning fair value.
Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except SFAS No.
123(R) and related interpretations. The statements does not apply to accounting
standard that require or permit measurement similar to fair value but are not
intended to measure fair value. This pronouncement is effective for fiscal years
beginning after November 15, 2007.
  In
February, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157 (the FSP).  The FSP amends FASB
Statement No. 157, Fair Value Measurements (Statement 157), to delay the
effective date of Statement 157 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (that is, at least
annually).  For items within its scope, the FSP defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.
  We are
currently evaluating the effect that the adoption of SFAS 157 will have on our
financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS No. 159 is effective for us beginning in the first quarter of fiscal year
2008, although earlier adoption is permitted. We are currently evaluating the
impact that SFAS No. 159 will have on our financial statements.
  In
December, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB
110”), which, effective January 1, 2008, amends and replaces SAB 107,
Share-Based Payment.  SAB 110 expresses the views of the SEC staff
regarding the use of a “simplified” method in developing an estimate of expected
term of “plain vanilla” share options in accordance with FASB Statement No.
123(R), Share-Based Payment.  Under the “simplified” method, the expected
term is calculated as the midpoint between the vesting date and the end of the
contractual term of the option. The use of the “simplified” method, which was
first described in Staff Accounting Bulletin No. 107, was scheduled to expire on
December 31, 2007.  SAB 110 extends the use of the “simplified” method for
“plain vanilla” awards in certain situations.  The SEC staff does not
expect the “simplified” method to be used when sufficient information regarding
exercise behavior, such as historical exercise data or exercise information from
external
 29
 sources,
becomes available.  We are currently assessing the potential impact that
the adoption of SAB 110 could have our financial statements.
 
 In
December 2007, the FASB issued SFAS 141(R), Business Combinations (“SFAS
141(R)”). This Statement replaces SFAS 141, Business Combinations, and requires
an acquirer to recognize the assets acquired, the liabilities assumed, including
those arising from contractual contingencies, any contingent consideration, and
any noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
statement. SFAS 141(R) also requires the acquirer in a business combination
achieved in stages (sometimes referred to as a step acquisition) to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)’s requirement to
measure the noncontrolling interest in the acquiree at fair value will result in
recognizing the goodwill attributable to the noncontrolling interest in addition
to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109,
Accounting for Income Taxes, to require the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the
combination or directly in contributed capital, depending on the circumstances.
It also amends SFAS 142, Goodwill and Other Intangible Assets, to, among other
things, provide guidance on the impairment testing of acquired research and
development intangible assets and assets that the acquirer intends not to use.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We are currently assessing the
potential impact that the adoption of SFAS 141(R) could have on our financial
statements.
 
 In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 also changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods,
and interim periods within those fiscal years, beginning on or after December
15, 2008. We are currently assessing the potential impact that the adoption of
SFAS 141(R) could have on our financial statements
  Results
Of Operations
  From the
inception of Medis El in July 1992 through December 31, 2007, we have generated
an accumulated deficit of approximately $60,551,000, including the CellScan
related operations of our predecessor – Medis El. We expect to incur additional
operating losses through the end of 2008 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 and costs related to any further
investments in early stage Israeli-based medical device companies.
  Year
ended December 31, 2007 compared to year ended December 31, 2006
  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
 30
 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 23.6% 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. We expect our research and development costs
to increase further in 2008 as we devote more resources to the further
development and commercialization of our CKChip products, even as we cease
making investments in early stage Israeli-based medical device
companies.
  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.
  Year
ended December 31, 2006 compared to year ended December 31, 2005
  We
sustained net losses of $1,810,000 during the year ended December 31, 2006,
compared to $1,771,000 during the year ended December 31, 2005. The increase in
the net loss can primarily be attributed to an increase in research and
development costs, substantially offset by a decrease in general and
administrative expenses.
  Our
research and development costs increased from $826,000 for the year ended
December 31, 2005 to $1,079,000 for the year ended December 31, 2006. During the
year ended December 31, 2006 research and development costs were incurred
related to the further refinement and assembly of the desktop CellScan, on
various research activities (including modifying the Cell Carrier design to
enable its use with standard fluorescence microscopes and cell carrier coating
development) 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. During the year ended December 31,
2005 costs were incurred related to further refinement of the desktop CellScan
system and on various research activities. The increases in our research and
development costs during the year ended December 31, 2006 can be primarily
attributed to increases in materials costs for the assembly of additional
desktop CellScans, labor and related costs – including hiring additional
personnel for cell carrier design costs and cell carrier coating development
among other activities — and other expenses, partially offset by a decrease in
costs of subcontractors and consultants.
  Our
marketing, general and administrative expenses during the year ended December
31, 2006 amounted to approximately $698,000, compared to approximately $922,000
during the year ended December 31, 2005. The decrease of $224,000 for the year
ended December 31, 2006 is primarily attributable to a decrease in labor and
related costs of approximately $494,000 (principally due to higher general
management costs in 2005 including severance costs incurred upon the voluntary
termination of our predecessor’s general manager), partially offset by increases
in non-cash charges relating to the issuance of stock options of approximately
$176,000, resulting principally from Medis’, Medis El’s and our adoption of
SFAS 123(R) on January 1, 2006, increases in costs for maintenance of
patents of approximately $68,000, and net increases in various other SG&A
cost categories of approximately $26,000.
  Effective
January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” and related SEC rules included in Staff Accounting
Bulletin No. 107, on a modified prospective basis. As a result of adopting
SFAS 123(R), our net loss for the year ended December 31, 2006, is
approximately $181,000 greater than if we had continued to account for
share-based compensation under Accounting Principles Board Opinion
No. 25.
  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.
 31
 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 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 (0.1)% and 3.4% in 2006 and 2007,
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 2006
and 2007, the appreciation of the NIS against the dollar, which amounted to
8.21% and 8.97% accordingly, exceeded the inflation rate for the same periods,
thereby negatively 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. We expect to continue to be
dependent on funding from Medis for a period of at least until January 2009
and/or 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.
  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 early stage Israeli-based medical device
      companies;
 ·
              the
      level of our marketing, general and administrative expenses, other than
      those amounts charged to us by Medis El and Medis prior to July 9, 2009
      (which are treated as contribution to our capital);
  and
 ·
              Medis’
      ability to provide to us financial assistance beyond its contractual
      obligations.
  32
 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 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 to 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 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
$593,000.  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, 2005, 2006 and 2007, we recorded capital
contributions on our balance sheet for funding from Medis El and Medis
aggregating approximately $1,530,000, $1,716,000 and $1,846,000, respectively.
For 2006 and 2007, such capital contributions include funds provided to us by
Medis, as well as amounts allocated to our operations by Medis El and Medis. For
2005, such capital contributions represent amounts allocated and charged to our
operations by Medis El and Medis.
  During
the year ended December 31, 2007, net cash used in operating activities was
$1,723,000 compared to $1,683,000 for the year ended December 31, 2006. The
increase of $40,000 was primarily attributable to increases in research and
development costs and general and administrative costs, as described more fully
above.
  During
the year ended December 31, 2007, cash used in investing activities was $97,000,
compared to $16,000 during the year ended December 31, 2006. The increase of
$81,000 was primarily attributable to an increase in investments in property and
equipment of $31,000 and an investment of $50,000 in Scorpion, as described more
fully above.
  For the
year ended December 31, 2007, cash aggregating $1,805,000 was provided by
financing activities, compared to $1,718,000 for the year ended December 31,
2006. 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. The cash provided by
financing activities for the year ended December 31, 2006 was comprised of funds
provided to us by Medis and amounts allocated to our operations by Medis El and
Medis aggregating $1,716,000 and proceeds of $2,000 from issuance of our
ordinary shares to Medis El.
  We expect
our research and development costs to increase further in 2008 as we devote more
resources to the further development and commercialization of our CKChip product
line.
  We have
historically financed our operations primarily through the proceeds of Medis
El’s investor equity financing and more recently through financing from Medis.
We expect to continue to be dependent on funding from
 33
 Medis
for a period of at least one year after the closing of the offering, including
the capital contribution of up to $1.5 million that Medis has agreed to
provide to us, and/or other sources of equity or debt financing until such time
as we are able to successfully commercialize our CKChip products.
  Our
failure to successfully commercialize or sell our CKChip products may materially
adversely affect our ability to raise funds as needed. In any event, it is not
possible to make any reliable estimate of the funds required to complete the
development of our Cell Carrier products or market and produce our CKChip
products
  Research
and Development, Patents and Licenses
  We
incurred costs of approximately $1,182,000 during the year ended December 31,
2007, compared to costs of approximately $ 1,079,000 during the year ended
December 31, 2006. 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. Costs incurred during the year ended
December 31, 2006 principally related improvement of our Cell Carrier design to
enable its use with standard fluorescence microscopes, as well as extending our
intellectual property and development of specific applications to be used with
the Cell Carrier.  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.
  Off-Balance
Sheet Arrangements
  We are
not a party to any material off-balance sheet arrangements.
  Contractual
Obligation
  The
following is a summary of our significant contractual obligations as of December
31, 2007:
  Contractual
      Obligations
              
              Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
      and thereafterPurchase
      Obligations
              
              
              82,000
              
              
              
              82,000
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Other
      Long-Term Liabilities (Note 1)
              
              
              157,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              93,000Total
              
              $
              239,000
              
              
              $
              98,000
              
              
              $
              16,000
              
              
              $
              16,000
              
              
              $
              16,000
              
              
              $
              93,000
  Note
      1:
              Other
      Long-Term Liabilities represents our accrued severance pay as of December
      31, 2007. 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 2008 through 2011 and the remainder in 2012 and
      thereafter.
 
 34
 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
              PositionJacob
      Weiss
              55
              Chairman
      of the Board of DirectorsDr.
      Asaf Ben-Arye
              46
              President
      and Chief Executive OfficerIsrael
      Fisher
              60
              Chief
      Financial OfficerMitchell
      H. Freeman
              58
              DirectorAndrew
      A. Levy
              61
              DirectorDaniel
      A. Luchansky
              49
              Director
  Jacob Weiss has been the
Chairman of our Board of Directors since October 1, 2007 and President of Medis
since April 2006 and a Director since its inception. He was Medis’ Senior Vice
President — Business Development from August 2000 until April 2006 and was a
consultant to More Energy Ltd., a subsidiary of Medis. Mr. Weiss served as the
Corporate Vice President and General Counsel to Israel Aerospace from 1996 to
2000. Prior to that, he was Deputy General Counsel — International Division of
Israel Aerospace. Previously Mr. Weiss was the Chief Executive Officer of
ImageSat International, a company established by Israel Aerospace to
commercialize its remote sensing satellite 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.
  Israel Fisher has been our
Chief Financial Officer since May 2006 and  the Senior Vice President
of Medis since February 2004, and was its Vice President-Finance from June 2000
until February 2004. Mr. Fisher has been Vice President-Finance and Secretary of
Medis El since its inception in 1992. From 1990 to 1992, he served as the Deputy
Manager of Israel Aerospace for financial planning and credit management. From
1987 to 1990, he served as the Deputy Finance Manager of the Tamam Plant of the
Electronics Division of Israel Aerospace. He has a MBA from the University of
Tel Aviv and two BA degrees from Bar-Ilan University; one in accounting and the
other in Economics and Business Administration.
  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
 35
 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.
  Andrew A. Levy has been Chief
Executive Officer of Redstone Capital Corporation and its predecessors since
1978. Redstone is an investment banking firm involved in advising on
acquisitions, mergers and restructurings in manufacturing and military
industries, project financings in the oil and gas and cogeneration fields, and
leverage buyouts. Mr. Levy, who holds a B.S. (Engineering) from Yale University,
and a J.D. from Harvard Law School, is Chairman of Fraser-Volpe LLC, a company
which manufactures military electro-optic equipment, and Chairman of CNC
Diversified Mfg. Incorporated, a company which manufactures components for the
aerospace industry. Mr. Levy is a director nominee of Medis.
  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 and serves on its Audit
Committee.
  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.
 36
 Chief
Scientific Consultant
  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 either Dr. Ben-Arye or us at any time by giving the other
party 120 days prior written notice of such termination.
  We do not
pay any cash compensation to our officers and directors who are affiliated with
Medis for their services as such. Our other directors each receive a fee of $500
for each board meeting attended. Our external directors, once appointed, are
expected to receive a fee in accordance with applicable Israeli law and
regulations promulgated thereunder.
  In
October 2007, we granted options to purchase an aggregate of 145,000 of our
ordinary shares to an executive officer 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
2007, we paid Professor Berke, our chief scientific
consultant, an aggregate of $50,000 for his
services.
 37
 C.   Board
Practices
  Board
of Directors and Officers
  Our board
of directors consists of four 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. All of our current directors were appointed
by Medis. 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. 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.
The appointment of our external directors was required to be confirmed by a
general meeting of our shareholders no later than three months following the
February 11, 2008 commencement of the quotation of our ordinary shares. As of
the filing of this Annual Report, we have not been successful in identifying and
selecting external directors and are not in compliance with the Companies Law.
We intend to hold a meeting of our shareholders as soon as practicable after we
so select external directors, to seek approval for the appointment of our
external directors. Failure to so be in compliance with the Companies Law in
this regard could expose us and our Board to increased liability to shareholders
(other than Medis El) and creditors that claim damages due to any of our actions
or inactions, which actions include the approval of our financial statements
included in this annual report.
  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;
 38
  ·
              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.
 39
 Board
Committees
  Our Board
of Directors is required under the Companies Law to establish an audit committee
and an option committee. We have not yet established either of such committees,
due to our lack of external directors, of whom the committees must
include.  We expect to form each of the audit committee and option
committee as soon as practicable after we identify and appoint the requisite
number of external directors. Failure to so be in compliance with the Companies
Law in this regard could expose us and our Board to increased liability to
shareholders (other than Medis El) and creditors that claim damages due to any
of our actions or inactions, which actions include the approval of our financial
statements included in this annual report.
  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.”
  It is
expected that our audit committee will provide 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 is also expected
to oversee the audit efforts of our independent accountants and take those
actions as 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.
  Option
Committee
  It is
expected that our option committee will administer the issuance of options under
our 2007 equity incentive plan to our employees who are not office holders, as
well as any actions and decisions necessary for the ongoing management of the
plan.
  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.
 40
 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.
  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
 41
 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 a controlling shareholder
  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, 2007, we had 10 full-time employees, including our chief executive
officer, and one part-time employee. 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.
  E.  Share
Ownership
  2007
Equity Incentive Plan
  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.
 42
 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.
  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, 2008, we had outstanding 19,993,435 ordinary
shares.
  The
following table sets forth, as of June 15, 2008, 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; and (iii) each
anticipated beneficial owner of more than 5% of our ordinary
shares.
 43
 
 Name
      or Group
              
              Ordinary
      Shares Beneficially Owned (1)Number
              
              
              PercentageMedis
      El Ltd.
              
              
              16,500,000
              (2)
              
              
              82.53
              %Jacob
      Weiss
              
              
              20,537
              (3)
              
              
              *Dr.
      Asaf Ben-Arye
              
              
              272,250
              (4)
              
              
              1.34
              %Israel
      Fisher
              
              
              –
              
              
              
              –Mitchell
      H. Freeman
              
              
              18,750
              (4)
              
              
              *Andrew
      A. Levy
              
              
              18,750
              (4)
              
              
              *Daniel
      A. Luchansky
              
              
              18,750
              (4)
              
              
              *All
      of our executive officers and directors as a group (six
      persons)
              
              
              349,037
              (5)
              
              
              1.72
              %
 
 *
      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,
2008.
 (2)
              Medis
      El Ltd. is a wholly owned subsidiary of Medis. Medis’ Chairman and Chief
      Executive Officer, and Deputy Chairman and COO, is Robert K. Lifton and
      Howard Weingrow, respectively. Messrs. Lifton and Weingrow collectively
      beneficially own, as of April 28, 2008, an aggregate of 6,376,919 shares
      of Medis’ common stock, or approximately 17% of Medis’ then outstanding
      common stock. Messrs. Lifton and Weingrow collectively beneficially own
      638,107 of our ordinary shares and 319,003 warrants to acquire our
      ordinary shares as of June 15, 2008, all of which were purchased in our
      January 2008 rights offering.
 (3)
              Includes
      options to acquire 18,750 ordinary shares and warrants to acquire 594
      ordinary shares.
 (4)
              Represents
      options to acquire our ordinary
shares.
 (5)
              Includes
      options to acquire 347,250 ordinary shares and warrants to acquire 594
      ordinary shares.
 
 
 Description
Of Share Capital
  The
following description of our share capital and provisions of our articles of
association are summaries and are qualified by reference to the articles of
association that will become effective upon closing of this offering, which have
been filed with the SEC as an exhibit to our registration statement, of which
this prospectus forms a part.
  Ordinary
Shares
  Our
authorized share capital at December 31, 2007 consists of 30,000,000 million
ordinary shares, par value NIS 0.01 per share, of which 16,500,000 were issued
and outstanding. Upon the completion of our rights offering on January 7, 2008,
we issued an aggregate of 3,492,788 of our ordinary shares, increasing the total
number of our ordinary shares issued and outstanding to 19,992,788. As of June
15, 2008, 3,493,435 of our ordinary shares were held by 102 holders of record in
the United States.
  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.
 44
 B.  Related
Parties Transactions
  License and Service
Agreements— As of May 1, 2006, we entered into a license and service
agreement with Medis El and Medis, pursuant to which they provide personnel,
administrative services, equipments usage and facilities to us and pursuant to
which Medis El granted a license to us to use certain of its CellScan and Cell
Carrier related intellectual property and certain other assets in connection
with the carrying-out of our business. Under the Agreement, Medis El and Medis
charge us at cost, as an additional contribution to the share capital issued to
Medis. This agreement was terminated upon us entering into the July 2007 service
agreement described below.
  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.
  Asset Purchase Agreement — In
July 2007, we 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 us, in
consideration of 15,500,000 of our ordinary shares. As our financial statements
reflect the carve-out of our operations as if we were 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 therein prior to the date of the
transfer.
  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, 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,
2005, 2006 and 2007.
  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, 2005, 2006 and
2007.
  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 23.6% 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’s signing an agreement with a
medical research center for the performance of clinical trials, as well as the
fulfillment of several administrative conditions. We were 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 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. hawse have recorded our investment in Scorpion as
in-process research and development expense.
 45
 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. 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 months since our ordinary shares commenced trading, the high and low closing
market prices for our ordinary shares on the OTC Bulletin
Board:
  High
              
              
              LowJune
      2008 (through June 27, 2008)
              
              $
              1.25
              
              
              $
              0.51May
      2008
              
              
              1.90
              
              
              
              1.15April
      2008
              
              
              1.82
              
              
              
              1.15March
      2008
              
              
              1.79
              
              
              
              1.02February
      2008 (from February 11, 2008)
              
              
              1.65
              
              
              
              0.40
 
 The
following table sets forth, for the months since our warrants commenced trading,
the high and low closing market prices for our warrants on the OTC Bulletin
Board:
  High
              
              
              LowJune
      2008 (through June 27, 2008)
              
              $
              1.30
              
              
              $
              0.35May
      2008
              
              
              3.00
              
              
              
              1.01April
      2008
              
              
              2.60
              
              
              
              0.75March
      2008 (from March 12, 2008)
              
              
              0.90
              
              
              
              0.50
 
 
 46
 ITEM
10. ADDITIONAL
INFORMATION
  A.
              Memorandum
      and Articles of Association
  1.
              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.”
  2.
              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 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
 47
 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 (5) 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
 48
 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.
  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. Although we became a public company
under Israeli law upon the commencement of our ordinary shares’ quotation on the
OTC Bulletin Board on February 11, 2008, we have not, to date, appointed
external directors, but intends to do so as soon as
practicable.  Failure to so be in compliance with the Companies Law in
this regard could expose us and our Board to increased liability to shareholders
(other than Medis El) and creditors that claim damages due to any of our actions
or inactions, which actions include the approval of our financial statements
included in this annual report.
  Alternate
Directors
 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 has become a public company on
February 11, 2008, it has not, to date, appointed an internal auditor, but
intends to do so as soon as possible.
  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
 At the
shareholders’ meeting on July 23, 2007, the Company adopted new Articles of
Association which provide for insurance and indemnification for
office.
  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
 49
 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 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, 2008.
  3.
              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.
 50
 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.
  4.
              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.
  5.
              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 foreign shareholders to hold or
exercise voting rights except for shareholders who are subjects of countries
that are enemies of the State of Israel.
  6.
              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.
 51
  7.
              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 our
material contracts.
 52
 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.
  General
  Generally,
Israeli companies are subject to corporate tax at the rate of 29% for the 2007
tax year, 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 29% (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%).
  Special
Provisions Relating to Taxation under Inflationary Conditions
  We are
subject to the provisions of the Income Tax Law (Inflationary Adjustments),
1985, referred to as the Inflationary Adjustments Law, which attempts to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
The features that are material to us can be described as follows:
  ·
              When
      the value of a company’s equity, as calculated under the Inflationary
      Adjustments Law, exceeds the depreciated cost of its fixed assets (as
      defined in the Inflationary Adjustments Law), a deduction from taxable
      income is permitted equal to the product of the excess multiplied by the
      applicable annual rate of inflation. The maximum deduction permitted in
      any single tax year is 70% of taxable income, with the unused portion
      permitted to be carried forward, linked to the increase in the Israeli
      CPI.
 53
  ·
              If
      the depreciated cost of a company’s fixed assets exceeds its equity, the
      product of the excess multiplied by the applicable annual rate of
      inflation is added to taxable
income.
 ·
              Subject
      to certain limitations, depreciation deductions on fixed assets and losses
      carried forward are adjusted for inflation based on the increase in the
      Israeli CPI.
  The
Minister of Finance, with the approval of the Finance Committee of the Israeli
Parliament, may determine, during a certain fiscal year (or until February 28th
of the following year) in which the rate of increase of the Israeli CPI will not
exceed (or did not exceed) 3%, that some or all of the provisions of the
Inflationary Adjustments Law will not apply with respect to such fiscal year, or
that the rate of increase of the Israeli CPI relating to such fiscal year will
be deemed to be 0%, and to make the adjustments required to be made as a result
of such determination.
  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.
  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%.
  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).
 54
 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
 55
  ·
              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
 56
 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 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
 57
 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 will be eligible to trade
in the over-the-counter market on the OTC Bulletin Board maintained by the NASD
or the pink sheets maintained by Pink Sheets LLC, 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 trade in the over-the-counter
market or the pink sheets or 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 2007 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 intend to invest in early stage
Israeli-based medical device companies but, to the extent our investment in any
medical device company 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 a 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 medical device 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
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
 58
 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 will be eligible to trade in the over-the-counter market or the
pink sheets, 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.
  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
 59
 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.
   PART
II
  ITEM
12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES
 Not applicable.
  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 $593,000. None of the
ordinary shares offered in the rights offering were purchased during our 2007
fiscal year. We have been using the net proceeds, and expect to continue to use
the net proceeds, primarily to fund our ongoing efforts to commercialize our
CKChip applications. Pending use, substantially all of the remaining net
proceeds will be held in interest-bearing accounts.
 60
 
 ITEM
15. CONTROLS AND
PROCEDURES
 Not
applicable
  ITEM
15T.                      CONTROLS AND
PROCEDURES
  Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of December 31, 2007.  Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of such date were effective to provide
reasonable assurance that information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934, as amended,
(i) is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
 This
annual report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period
established by the rules of the Securities and Exchange Commission for newly
public companies.
  ITEM
16.                        [RESERVED]
  ITEM
16A.                      AUDIT COMMITTEE FINANCIAL
EXPERT
  Our Board
of Directors has not yet determined whether any of our directors meets the
requirements of an audit committee financial expert as defined under the U.S.
securities laws. Furthermore, we have not yet established an audit
committee.
  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 2006
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, 2006 and 2007, as follows:
 61
  2007
              
              
              2006Audit
      fees
              
              $
              30,000
              
              
              $
              ─Audit-related
      fees
              
              
              20,000
              
              
              
              85,000Tax
      fees
              
              
              11,000
              
              
              
              11,000All
      other fees
              
              ─
              
              
              ─Total
              
              $
              61,000
              
              
              $
              96,000
 
 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.
  Historically,
Medis’ 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. Accordingly, Medis’
audit committee must approve the permitted service before the independent
auditor is engaged to perform it. As we have not yet established an audit
committee, we have not yet implemented pre-approval policies and procedures with
respect to audit services, audit-related services, tax services and other
services performed by our independent auditor. We expect that our audit
committee, once established, will implement these policies and
procedures.
  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.
 62
  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)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.4.9
              
              Convertible
      Promissory Note #2 between Medis-El Ltd. and Cell Kinetics
      Ltd.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)12.1
              
              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
 
 63
  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, 2008
                By:
                /s/ Asaf
      Ben-AryeName:
      Asaf Ben-AryeTitle:
      President and Chief Executive Officer
   64
 
 INDEX
     PageCell Kinetics Ltd. Financial
      StatementsReport
      of Independent Registered Public Accounting Firm
                      
                      F-2Financial
      StatementsBalance
      Sheets as of December 31, 2006 and 2007
                      
                      F-3Statements
      of Operations for the years ended December 31, 2005, 2006 and
      2007
                      
                      F-4Statements
      of Stockholders’ Equity for the years ended December 31, 2005, 2006 and
      2007
                      
                      F-5Statements
      of Cash Flows for the years ended December 31, 2005, 2006 and
      2007
                      
                      F-6Notes
      to Financial Statements
                      
                      F-8
                     F-1
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    To the
Board of Directors and Stockholders of Cell Kinetics Ltd.
  We have
audited the accompanying carve-out balance sheet of Cell Kinetics Ltd. (the
“Company”) as of December 31, 2006 and the balance sheet as of December 31,
2007, and the related carve-out statements of operations, stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2007. 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, 2006
and 2007, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
  As
discussed in Note B-9 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment”, effective January 1, 2006.
    /s/ KOST FORER GABBAY &
      KASIERERTel
      Aviv, Israel
                      June 30,
      2008
                    KOST
      FORER GABBAY & KASIERER
                      A
      MEMBER OF ERNST & YOUNG GLOBAL
                F-2
 Cell
Kinetics Ltd.
  Balance
Sheets
 (in U.S.
dollars)
   December
      31,2006*
                        (NoteA-2)
                    
                    
                    2007ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    19,000
                    
                    
                    $
                    4,000Other
      accounts receivable and prepaid expenses
                    
                    
                    63,000
                    
                    
                    
                    7,000Total
      current assets
                    
                    
                    82,000
                    
                    
                    
                    11,000Issuance
      costs on rights offering (Note E)
                    
                    
                    —
                    
                    
                    
                    512,000Property
      and equipment, net
                    
                    
                    230,000
                    
                    
                    
                    55,000Goodwill
                    
                    
                    2,212,000
                    
                    
                    
                    2,212,000Severance
      pay fund
                    
                    
                    182,000
                    
                    
                    
                    139,000Total
      assets
                    
                    $
                    2,706,000
                    
                    
                    $
                    2,929,000LIABILITIES
      AND
                      STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    61,000
                    
                    
                    $
                    116,000Accrued
      expenses and other current liabilities (Note C)
                    
                    
                    272,000
                    
                    
                    
                    141,000Total
      current liabilities
                    
                    
                    333,000
                    
                    
                    
                    257,000Other
      long-term liabilities (Note D)
                    
                    
                    71,000
                    
                    
                    
                    471,000Accrued
      severance pay
                    
                    
                    219,000
                    
                    
                    
                    157,000Total
      liabilities
                    
                    
                    623,000
                    
                    
                    
                    885,000Commitments
      and contingent liabilities (Note F)Stockholders’
      equity (Note E)Ordinary
      shares, .01 NIS par value; 30,000,000 shares authorized at
      December 31, 2006 and 2007; 16,500,000 shares issued and outstanding,
      at December 31, 2006 and 2007
                    
                    
                    2,000
                    
                    
                    
                    39,000Receipts
      on account of shares
                    
                    
                    37,000
                    
                    
                    
                    —Additional
      paid-in capital
                    
                    
                    60,499,000
                    
                    
                    
                    62,556,000Accumulated
      deficit
                    
                    
                    (58,455,000
                    )
                    
                    
                    (60,551,000
                    )Total
      stockholders’ equity
                    
                    
                    2,083,000
                    
                    
                    
                    2,044,000Total
      liabilities and stockholders’ equity
                    
                    $
                    2,706,000
                    
                    
                    $
                    2,929,000
 
  *
                    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 31,2005*
                        (NoteA-2)
                    
                    
                    2006*
                        (NoteA-2)
                    
                    
                    2007*
                        (NoteA-2)Operating
      expenses:Research
      and development costs
                    
                    $
                    826,000
                    
                    
                    $
                    1,079,000
                    
                    
                    $
                    1,182,000Marketing,
      general and administrative expenses
                    
                    
                    922,000
                    
                    
                    
                    698,000
                    
                    
                    
                    901,000Total
      operating expenses
                    
                    
                    1,748,000
                    
                    
                    
                    1,777,000
                    
                    
                    
                    2,083,000Interest
      expense
                    
                    
                    23,000
                    
                    
                    
                    33,000
                    
                    
                    
                    13,000Net
      Loss
                    
                    
                    1,771,000
                    
                    
                    
                    1,810,000
                    
                    
                    
                    2,096,000Basic
      and diluted net loss per share
                    
                    $
                    (.11
                    )
                    
                    $
                    (.11
                    )
                    
                    $
                    (.13
                    )Weighted-average
      number of ordinary shares used in computing basic and diluted net loss per
      share
                    
                    
                    16,722,973
                    
                    
                    
                    16,722,973
                    
                    
                    
                    16,722,973
  
  *
                      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
      Shares
                      
                      
                      Receipts
      on account of shares
                      
                      
                      Receivables
      in respect of shares issued
                      
                      
                      Additional
      Paid-in Capital
                      
                      
                      Accumulated
      Deficit
                      
                      
                      Total
      Stockholders’ EquityShares
                      
                      
                      
                      AmountBalance
      at December 31, 2004 (Note
      A-2)*
                      
                      
                      16,722,973
                      
                      
                      
                      2,000
                      
                      
                      
                      37,000
                      
                      
                      
                      (2,000
                      )
                      
                      
                      56,970,000
                      
                      
                      
                      (54,874,000
                      )
                      
                      
                      2,133,000Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,771,000
                      )
                      
                      
                      (1,771,000
                      )Funds
      from parent company
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,530,000
                      
                      
                      
                      —
                      
                      
                      
                      1,530,000Stock
      options granted to directors
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,000
                      )Stock
      options granted to non-employees
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      104,000
                      
                      
                      
                      —
                      
                      
                      
                      104,000Balance
      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  (Note
A-2)*
                      
                      
                      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(Note
      A-2)*
                      
                      
                      16,722,973
                      
                      
                      $
                      39,000
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      62,556,000
                      
                      
                      $
                      (60,551,000
                      )
                      
                      $
                      2,044,000
 *
                      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-5
 Cell
Kinetics Ltd.
  Statements
of Cash Flows
 (in U.S.
dollars)
 Year
      ended December 31,2005
                        (Note
      A-2)*
                    
                    
                    2006
                        (Note
      A-2)*
                    
                    
                    2007
                        (Note
      A-2)*Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (1,771,000
                    )
                    
                    $
                    (1,810,000
                    )
                    
                    $
                    (2,096,000
                    )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization of property and equipment
                    
                    
                    65,000
                    
                    
                    
                    64,000
                    
                    
                    
                    44,000Non-cash
      stock based compensation expense
                    
                    
                    102,000
                    
                    
                    
                    181,000
                    
                    
                    
                    255,000Amortization
      of in-process research and development
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    50,000Changes
      in operating assets and liabilitiesOther
      accounts receivable and prepaid expenses
                    
                    
                    35,000
                    
                    
                    
                    (29,000
                    )
                    
                    
                    42,000Accounts
      payable
                    
                    
                    (28,000
                    )
                    
                    
                    41,000
                    
                    
                    
                    63,000Accrued
      expenses and other current liabilities
                    
                    
                    103,000
                    
                    
                    
                    (104,000
                    )
                    
                    
                    (76,000
                    )Other
      long-term liabilities, net
                    
                    
                    (24,000
                    )
                    
                    
                    (24,000
                    )
                    
                    
                    (11,000
                    )Accrued
      severance pay, net
                    
                    
                    25,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    6,000Net
      cash used in operating activities
                    
                    
                    (1,493,000
                    )
                    
                    
                    (1,683,000
                    )
                    
                    
                    (1,723,000
                    )Cash
      flows from investing activitiesInvestment
      in early-stage company
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (50,000
                    )Capital
      expenditures
                    
                    
                    (37,000
                    )
                    
                    
                    (16,000
                    )
                    
                    
                    (47,000
                    )Net
      cash used in investing activities
                    
                    
                    (37,000
                    )
                    
                    
                    (16,000
                    )
                    
                    
                    (97,000
                    )Cash
      flows from financing activitiesProceeds
      in respect of shares issued
                    
                    
                    —
                    
                    
                    
                    2,000
                    
                    
                    
                    —Rights
      offering costs paid by parent company
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    316,000Issuance
      cost on rights offering
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (357,000
                    )Funds
      from the parent company
                    
                    
                    1,530,000
                    
                    
                    
                    1,716,000
                    
                    
                    
                    1,846,000Net
      cash provided by financing activities
                    
                    
                    1,530,000
                    
                    
                    
                    1,718,000
                    
                    
                    
                    1,805,000Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    —
                    
                    
                    
                    19,000
                    
                    
                    
                    (15,000
                    )Cash
      and cash equivalents at beginning of the period
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    19,000Cash
      and cash equivalents at end of the period
                    
                    $
                    —
                    
                    
                    $
                    19,000
                    
                    
                    $
                    4,000
  
  
  
  
 F-6
 Cell
Kinetics Ltd.
  Statements
of Cash Flows
 (in U.S.
dollars)
  (Continued)
    Year
      ended December 31,2005
                        (Note
      A-2)*
                    
                    
                    2006
                        (Note
      A-2)*
                    
                    
                    2007
                        (Note
      A-2)*Supplemental
      disclosures of cash flow information:Offering
      costs included in issuance costs on rights offering
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    155,000Carve
      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-7
 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 CKChipTM 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 $593,000. 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, subsequent to the balance sheet date in 2008, proceeds from its rights
offering to fund its research and development activities and other operating
expenses. Management believes this dependence will continue unless it is able to
successfully develop and market its products.
  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.
  See
Note E for a discussion of CKL’s rights offering. See notes F-1 and
F-2 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.
  2.
                    Basis
      of presentation
  As
described in Note 1, Medis El assigned all of its intellectual property rights
to the CellScan, including the Cell Carrier, to CKL on July 26, 2007. These
financial statements 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
  F-8
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
A — GENERAL MATTERS (Continued)
  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 SFAS 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.
  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.
   F-9
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)
  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, accounts receivable,
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
 
  Depreciation
and amortization expense on property and equipment for the years ended December
31, 2005, 2006 and 2007 amounted to $65,000, $64,000 and $44,000,
respectively.
  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
  F-10
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)
  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, 2005, 2006 and 2007, no impairment losses were
identified. See note A for a discussion of the allocation on goodwill to the
Company.
  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
2005, 2006 and 2007, no impairment losses have been identified.
  9. Stock-based
Compensation
  Effective
January 1, 2006, the Company adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”), and related Securities and Exchange
Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. Under this method, compensation cost recognized
beginning January 1, 2006 will include costs related to 1) all share-based
payments (stock options and restricted stock awards) granted prior to but not
yet vested as of January 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of FAS 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), and 2) all share-based
payments granted subsequent to December 31, 2005 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R).
Compensation cost for stock options is generally recognized ratably over the
vesting period.
  Prior to
the adoption of SFAS 123(R), the Company applied SFAS 123, amended by
SFAS 148, “Accounting for Stock-Based Compensation — Transition and
Disclosure,” which allowed companies to apply the existing accounting rules
under APB 25, “Accounting for Stock Issued to Employees,” and related
interpretations. In general, as the exercise price of options granted was equal
to the market price of the underlying stock on the grant date, no stock-based
employee compensation cost was recognized in the net loss attributed to common
stockholders for periods prior to the adoption of SFAS 123(R).
  10. 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.
  11. 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. See Note E-1 for a discussion of loss per share retroactive
adjustment included in these financial statements.
  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.
 F-11
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
   NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)
  12. 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, 2006 and the balance sheet as of
December 31, 2007. Severance expenses for the years ended December 31, 2005,
2006 and 2007 amounted to approximately $249,000, $40,000 and $54,000,
respectively.
  13. Income
Taxes
  The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards 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.
  In
July 2006, the FASB issued 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. Pursuant to the provisions of
FIN 48, the differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts reported
after adoption would be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. FIN 48 is effective for
fiscal years beginning after December 15, 2006.
  Effective
January 1, 2007, the Company adopted the provisions of FIN 48. The
Company files Israeli income tax returns and may be subject to examination by
the Israeli tax authorities for the years 2006 and 2007.
  The
adoption of FIN 48 did not have a material impact on the Company’s
financial statements and no accruals for tax contingencies were
recorded.
  14. 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 financially sound and, accordingly, minimal credit
risk exists with respect to these investments.
    F-12
  Cell
Kinetics Ltd.
 Notes to
Financial Statements
   NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)
  15. Recently
Issued Accounting Pronouncements in the United States
  In June
2007, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF
07-3).  EITF 07-3 requires that non-refundable advance payments for
goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. The deferred amounts
would be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to
be provided.  This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2007 and earlier
application is permitted.  EITF 07-3 is to be applied prospectively
for new contracts entered into on or after the effective date. The adoption of
this pronouncement is not expected to have a material effect on the Company’s
financial statements.
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). This statement provides a single definition of fair value, a framework
for measuring fair value, and expanded disclosures concerning fair value.
Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except SFAS No.
123(R) and related interpretations. The statements does not apply to accounting
standard that require or permit measurement similar to fair value but are not
intended to measure fair value. This pronouncement is effective for fiscal years
beginning after November 15, 2007.
  On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157 (the “FSP”).  The FSP amends SFAS
No. 157 to delay the effective date of SFAS No. 157 for non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (that
is, at least annually).  For items within its scope, the FSP defers
the effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years.
  The
Company is currently evaluating the effect that the adoption of SFAS
No. 157 will have on its financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS No. 159 is effective for the Company beginning in the first quarter of
fiscal year 2008, although earlier adoption is permitted. The Company is
currently evaluating the impact that SFAS No. 159 will have on its financial
statements, if any.
  On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB
110”), which, effective January 1, 2008, amends and replaces SAB 107,
Share-Based Payment.  SAB 110 expresses the views of the SEC staff
regarding the use of a “simplified” method in developing an estimate of expected
term of “plain vanilla” share options in accordance with FASB Statement No.
123(R), Share-Based Payment.  Under the “simplified” method, the expected
term is calculated as the midpoint between the vesting date and the end of the
contractual term of the option. The use of the “simplified” method, which was
first described in Staff Accounting Bulletin No. 107, was scheduled to expire on
December 31, 2007.  SAB 110 extends the use of the “simplified” method for
“plain vanilla” awards in certain situations.  The SEC staff does not
expect the “simplified” method to be used when sufficient information regarding
exercise behavior, such as historical exercise data or exercise information from
external sources, becomes available.  The Company is currently assessing
the potential impact that the adoption of SAB 110 could have on its financial
statements.
 
 
 F-13
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
C — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
  Accrued
expenses and other current liabilities consist of the following:
  December
      31,2006
                    
                    
                    2007Employees
      and related liabilities
                    
                    $
                    185,000
                    
                    
                    $
                    109,000Professional
      services
                    
                    
                    46,000
                    
                    
                    
                    —Subcontractors
      and consultants
                    
                    
                    30,000
                    
                    
                    
                    11,000Others
                    
                    
                    11,000
                    
                    
                    
                    21,000$
                    272,000
                    
                    
                    $
                    141,000
 
  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. See Note F for more details on
the prommisory note to Medis El with respect to such rights offering costs paid
by MTL and Medis El.
   NOTE
E — STOCKHOLDERS’ EQUITY
  Share
Capital
  As of
December 31, 2006, the Company had 10,000,000 authorized shares of .01 New
Israeli Shekel (“NIS”) par value ordinary shares, of which 1,000,000 shares were
issued and outstanding All such shares were issued to Medis El in May 2002 for
aggregate proceeds of approximately $2,000, which were paid in September
2006.  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 these financial statements 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, subsequent to the balance sheet date, 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 $593,000. As of
December 31, 2007, the Company’s balance sheet includes non-current assets of
$512,000 for costs incurred on the rights offering and other long-term
liabilities of $471,000 related to the rights offering, of which $316,000 was
paid by MTL and Medis El on behalf of the Company.
 F-14
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
  NOTE
E — STOCKHOLDERS’ EQUITY (Continued)
  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.
  Stock
Options
  Medis
Technologies Stock Options
  During
the year ended on December 31, 2007, MTL granted options to purchase an
aggregate of 775,000 shares of its common stock under its 2007 Equity Incentive
Plan to employees, officers and directors of MTL. The following table sets forth
the terms of such grants:
  Grant Date
                    
                    Exercise
      Price*
                    
                    
                    Number
      of optionsgranted
                    
                    
                    Vesting
      periodyears
                    
                    
                    Expiration
      periodyearsJanuary,
      2007
                    
                    
                    $ 
      17.39
                    
                    
                    
                    10,000
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00March,
      2007
                    
                    
                    17.61
                    
                    
                    
                    6,000
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00June,
      2007
                    
                    
                    14.90
                    
                    
                    
                    254,000
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00June,
      2007
                    
                    
                    13.83
                    
                    
                    
                    2,500
                    
                    
                    
                    0.51
                    
                    
                    
                    4.00June,
      2007
                    
                    
                    13.83
                    
                    
                    
                    2,500
                    
                    
                    
                    1.51
                    
                    
                    
                    4.00July,
      2007
                    
                    
                    14.23
                    
                    
                    
                    330,500
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00August,
      2007
                    
                    
                    11.19
                    
                    
                    
                    165,000
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00October,
      2007
                    
                    
                    13.15
                    
                    
                    
                    4,500
                    
                    
                    
                    1.00
                    
                    
                    
                    4.00775,000
   * The
market price of MTL’s common stock on the grant date.
  In
accordance with SFAS 123(R), share based compensation is based on the
grant-date fair value estimate and is recognized over the vesting term of such
options, net of an estimated forfeiture rate. MTL estimates the fair value of
stock based awards, accounted for in accordance with SFAS 123 (R), using
the Black-Scholes option pricing model for such options using the following
weighted average assumptions for the year ended December 31, 2007:
  Dividend
      yield
                    0%Expected
      term (years)
                    2.28-3.80Risk-free
      interest rate
                    4.0%-4.92%Volatility
                    58%-61%Forfeiture
      rate
                    0%-3.43%
 
  In July,
2007, MTL granted 50,000 shares of restricted stock under its 2007 Equity
Incentive Plan to each of its Chairman and Chief Executive Officer and its
Deputy Chairman and Chief Operation Officer (both of whom are Principal
Stockholders of the Company). Such shares of restricted stock shall vest in full
after one year. MTL accounted for such shares of restricted stock in accordance
with SFAS 123(R), using the Black-Scholes option pricing model assuming a 4.91%
risk free interest rate, 0% dividend yield, expected term of 1 year and 66%
volatility.
  F-15
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
E — STOCKHOLDERS’ EQUITY (Continued)
  The
following table illustrates the effect on net loss attributed to ordinary shares
and net loss per share, assuming that the Company had applied the fair value
recognition provision of SFAS No. 123 on its stock-based employee
compensation during the year ended December 31, 2005:
  Year
      ended December 31,2005Net
      loss for the year as reported
                    
                    $
                    (1,771,000
                    )Add:
      Stock-based employee compensation expense (income) included in the
      reported loss
                    
                    
                    (2,000
                    )Deduct:
      Stock-based employee compensation expense determined under fair value
      based method
                    
                    
                    (494,000
                    )Pro
      forma net loss
                    
                    $
                    (2,267,000
                    )Basic
      and diluted net loss per share as reported
                    
                    $
                    (.11
                    )Pro
      forma basic and diluted net loss per share
                    
                    $
                    (.14
                    )
   The fair
value of each option granted is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
  Year
      ended December 31,2005Dividend
      yield
                    
                    
                    0%Risk-free
      interest rate
                    
                    
                    3.80%Expected
      life in years
                    
                    
                    3.0Volatility
                    
                    
                    70%
 
  The
exercise price of all options granted in 2005 was equal to the market price and
the fair value of such options was $7.25.
  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.
  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
  F-16
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
  NOTE
E — STOCKHOLDERS’ EQUITY (Continued)
  In
October 2007, the Company granted options to purchase an aggregate of 506,750
shares of its 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.
Using the Black-Scholes option pricing model with the assumptions set forth
below, the Company has estimated the aggregate fair value of such options
granted to be approximately $58,000.
  Dividend
      yield
                    0%Expected
      term (years)
                    3.63-5.00Risk-free
      interest rate
                    4.24%Volatility
                    41%-46%Forfeiture
      rate
                    0%
 
 The
Company measures the compensation cost of employee options based on the fair
value method as stated in SFAS 123R. 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. In determining fair value,
management has considered a number of factors, including valuations and
appraisals. 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.
  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.
  As a
result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss
for the year ended December 31, 2006, was $181,000 greater than if the Company
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, 2006 is $.01 greater than it would
have been if the Company had continued to account for share-based compensation
under APB 25.
  As a
result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss
for the year ended December 31, 2007, was $255,000 greater than if the Company
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 is $.01 greater than it would
have been if the Company had continued to account for share-based compensation
under APB 25.
  In
January 2008, subsequent to the balance sheet date, the Company granted options
to purchase an aggregate of 10,000 shares of its ordinary shares to a
consultant. Such options are exercisable at $.60 per share, expire seven years
from the date of the grant and vest in equal installments on each of the first
three anniversaries of the grant date.
    F-17
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 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 years
ended December 31, 2006 and 2007:
  Number
      of Options
                    
                    
                    Weighted
      Average Exercise PriceOutstanding
      at December 31, 2005
                    
                    
                    —
                    
                    
                    $
                    —Granted
                    
                    
                    330,000
                    
                    
                    
                    *—Exercised
                    
                    
                    —
                    
                    
                    
                    —Forfeited
      or expired
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at December 31, 2006
                    
                    
                    330,000
                    
                    
                    $
                    *—Granted
                    
                    
                    506,750
                    
                    
                    
                    0.30Exercised
                    
                    
                    —
                    
                    
                    
                    —Forfeited
      or expired
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at December 31, 2007
                    
                    
                    836,750
                    
                    
                    $
                    0.18Number
      of options exercisable at December 31, 2007
                    
                    
                    245,750
                    
                    
                    $
                    —Vested
      and expected to vest at December 31, 2007
                    
                    
                    836,750
                    
                    
                    $
                    0.18Vested
      and expected to vest at December 31, 2006
                    
                    
                    330,000
                    
                    
                    $
                    —
 
 *Represents
price less than one cent.
  As of
December 31, 2007, there were unrecognized compensation costs
of  approximately $52,000 related to stock options that are expected
to be recognized in future periods (exclusive of amounts that may be allocated
to the Company by Medis El and by MTL).
  The
following table summarizes information about options to employees, officers,
directors and a non-employee consultant outstanding at December 31, 2007 under
Cell Kinetics plans:
  Options
      Outstanding
                    
                    
                    Options
      ExercisableExercise
      Price
                    
                    
                    Outstanding
      at
                      December 31, 2007
                    
                    
                    Weighted
      average Remaining contractual life years
                    
                    
                    Exercise prices
                    
                    
                    Exercisable at
                      December 31, 2007
                    
                    
                    Exercise prices$
                    *—
                    
                    
                    
                    330,000
                    
                    
                    
                    6.79
                    
                    
                    $
                    *—
                    
                    
                    
                    214,500
                    
                    
                    $
                    *—$
                    0.30
                    
                    
                    
                    506,750
                    
                    
                    
                    6.76
                    
                    
                    $
                    0.30
                    
                    
                    
                    31,250
                    
                    
                    $
                    0.30836,750
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    245,750
  *Represents
price less than one cent.
   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-1 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. As these financial statements 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.
  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 required to be paid during the
three years ended December 31, 2005, 2006 and 2007.
   F-18
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
  NOTE
F — COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  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, 2005, 2006
and 2007.
  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 23.6% 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. 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.
  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, subsequent to the
balance sheet date, 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,
subsequent to the balance sheet date, 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.
 
           F-19
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 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.
  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 to the Company are as
follows:
  The
income of the Company is taxed under Israeli law at regular rates. On July 25,
2005, the “Knesset” (Israeli Parliament) passed the Law for the Amendment of
Income Tax Ordinance (No. 147), 2005 which prescribes, among others things,
a gradual decrease in the corporate tax rates in Israel to the following tax
rates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.
  Since the
Company provided a full valuation allowance for its deferred tax assets, the
abovementioned amendment had no effect on these financial
statements.
  Carryforward
      losses:
  As of
December 31, 2007, the Company had net operating losses, for Israeli tax
purposes, aggregating approximately $1,784,000, 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 2007.
  
    F-20
 
 Cell
Kinetics Ltd.
 Notes to
Financial Statements
 NOTE
G — INCOME TAXES (Continued)
  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:
  December
      31,2006
                    
                    
                    2007Net
      operating loss carryforward
                    
                    $
                    34,000
                    
                    
                    $
                    446,000Other
      differences
                    
                    
                    54,000
                    
                    
                    
                    275,00088,000
                    
                    
                    
                    721,000Valuation
      allowance
                    
                    
                    (88,000
                    )
                    
                    
                    (721,000
                    )Deferred
      tax assets, net of valuation allowance
                    
                    $
                    —
                    
                    
                    $
                    —
 
  Reconciliation
      of the theoretical tax benefit to the actual tax expense
      benefit:
  In 2005,
2006 and 2007, 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-21