UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




MARK ONE:




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
              for
      the Fiscal Year ended December 31,
2009




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF
      1934




COMMISSION
FILE NUMBER:  0-11772




SPO
MEDICAL INC.


(Name of
registrant as specified in its chapter)





Delaware
            11-3223672(State
      or Other Jurisdiction of Incorporation)
            (IRS
      Employer Identification No.)





3, Gavish
Street, POB 2454, Kfar Saba,
Israel


(Address
of Principal Executive Offices)





972
9 764-3570


(Registrant's
telephone number, including area code)




Securities
Registered Pursuant to Section 12(b) of the Exchange Act: None




Securities
Registered Pursuant to Section 12(g) of the Exchange Act: $0.01 par value common
stock




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




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈     No
x





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  x
      No  ̈





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.    ̈




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




Large
accelerated filer  ̈
    Accelerated filer  ̈
     Non-accelerated filer  ̈
     Smaller Reporting Company x




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




The
registrant had 25,183,007 shares of common stock outstanding as of March 29,
2010.  The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant, computed by reference to the
closing price of such common stock on the over the counter Bulletin Board on
June 30, 2009, was approximately $2.6 million.









SPO
MEDICAL INC.


2009
FORM 10-K ANNUAL REPORT





TABLE OF
CONTENTS





PART
      IItem
      1
                              Business
                              4Item
      1A
                              Risk
      Factors
                              9Item
      1B
                              Unresolved
      Staff Comments
                              15Item
      2
                              Properties
                              15Item
      3
                              Legal
      Proceedings
                              15Item
      4
                              [Reserved]
                              15PART
      IIItem
      5
                              Market
      for Registrant’s
      Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                              15Item
      6
                              Selected
      Financial Data
                              16Item
      7
                              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              16Item
      7A
                              Quantitative
      and Qualitative Disclosures about Market Risk
                              20Item
      8
                              Financial
      Statements and Supplementary Data
                              20Item
      9
                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                              20Item 9A(T)
                              Controls
      and Procedures
                              20Item
      9B
                              Other
      Information
                              21PART
      IIIItem
      10
                              Directors,
      Executive Officer and Corporate Governance
                              21Item
      11
                              Executive
      Compensation
                              23Item
      12
                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                              26Item
      13
                              Certain
      Relationships and Related Transactions and Director
      Independence
                              27Item
      14
                              Principal
      Accounting Fees and Services
                              28PART
      IVItem
      15
                              Exhibits,
      Financial Statement Schedules
                              28




- 2
-


FORWARD
LOOKING STATEMENTS




THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. CERTAIN STATEMENTS MADE
IN THIS DISCUSSION ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS,"
"INTENDS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," OR "CONTINUE" OR
THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S INTENDED BUSINESS PLANS;
EXPECTATIONS AS TO PRODUCT PERFORMANCE; EXPECTATIONS AS TO MARKET ACCEPTANCE OF
THE COMPANY'S TECHNOLOGY; AND BELIEF AS TO THE SUFFICIENCY OF CASH RESERVES.
BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE FACTORS
INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S ABILITY TO OBTAIN NECESSARY
FINANCING; SUFFICIENCY OF CASH RESERVES; SUCCESS OF RESTRUCTURED OPERATIONS;
GOING CONCERN QUALIFICATIONS; THE COMPETITIVE ENVIRONMENT GENERALLY AND IN THE
COMPANY'S SPECIFIC MARKET AREAS; CHANGES IN TECHNOLOGY; THE AVAILABILITY OF AND
THE TERMS OF FINANCING; INFLATION; CHANGES IN COSTS AND AVAILABILITY OF GOODS
AND SERVICES; ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC
MARKET AREAS; DEMOGRAPHIC CHANGES; CHANGES IN FEDERAL, STATE AND /OR LOCAL
GOVERNMENT LAW AND REGULATIONS AFFECTING THE TECHNOLOGY; CHANGES IN OPERATING
STRATEGY OR DEVELOPMENT PLANS; AND THE ABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON
ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE
FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.


- 3
-




PART
I





ITEM
1. BUSINESS




Overview





SPO
Medical Inc. (“we” or the “Company”) is engaged in the design, development and
marketing of non-invasive pulse oximetry technologies to measure blood oxygen
saturation and heart rate. We have developed and patented proprietary technology
that enables the measurement of heart rate and oxygen saturation levels in the
blood, which is known as Reflectance Pulse Oximetry (RPO). Using RPO, a sensor
can be positioned on various body parts, hence minimizing problems from motion
artifacts and poor perfusion. The unique design features contribute to
substantially lower power requirements and enhance wireless, stand-alone
configurations facilitating expanded commercial possibilities. As of March 2010,
we hold 12 patents issued by the United States Patent and Trademark Office
("USPTO") covering various aspects of our technologies. As further discussed
below, our technologies are currently applied to products that are designed for
use by in the homecare, professional medical care, sports, safety and search and
rescue markets.





In
January  2010, our wholly owned subsidiary SPO Ltd. (“Ltd”) entered
into an Alliance and License Agreement dated as of December 1, 2009 with an
entity owned and controlled by our Chief Technical Officer (the “Licensee”).
Under the terms of the license agreement, the PulseOx medical product line
discussed in further detail is being marketed by the Licensee in the medical
field.  Under the license agreement, all worldwide sales, marketing
and all existing inventory and manufacturing of the PulseOx line in the medical
field was transferred to the Licensee in consideration of  $200,000 in
cash and the Licensee’s (and its affiliates) agreement to pay to Ltd royalties
derived from these products in agreed upon amounts.





Following
the license agreement, we are primarily engaged in developing and licensing our
technology to third parties for integration with products in the recreational,
military, baby wellness monitoring and sleep monitoring fields. Following our
entry into the license agreement, we have restructured our business and ceased
all operating activities formerly conducted with respect to the manufacture and
marketing of our PulseOx product line to the medical market and we intend to
pursue joint ventures, OEM type arrangements, research and or subcontracting
agreements relating to our oximetry technology with respect to the recreational,
military, baby wellness monitoring and sleep monitoring fields.




We were
originally organized under the laws of the State of Delaware in September 1981
under the name "Applied DNA Systems, Inc." On November 16, 1994, we changed our
name to "Nu-Tech Bio-Med, Inc." On December 23, 1998, we changed our name to
"United Diagnostic, Inc." Effective April 21, 2005, we acquired 100% of the
outstanding capital stock of SPO Ltd. pursuant to a Capital Stock Exchange
Agreement dated as of February 28, 2005 among the Company, SPO Ltd. and the
shareholders of SPO Ltd., as amended and restated on April 21, 2005 pursuant to
which we issued to the former shareholders of SPO Ltd. a total of 5,769,106
shares of the Company's Common Stock representing approximately 90% of the
Common Stock then issued and outstanding.





We need
to raise additional funds in order to meet our on-going operating requirements,
pay outstanding loans in the aggregate approximate amount of $1.1 million and to
realize our restructured business plan. In response to the deteriorating global
economic conditions that began in 2008, we have taken certain measures in an
effort to reduce operating expenses and conserve our cash resources. Beginning
in July 2008 we significantly curtailed our non-essential product design and
development, marketing activities and reorganized our product manufacturing and
delivery system to “just-in-time” arrangements. We have terminated certain
product development plans. During 2008 and 2009, we deferred part of management
and employee salaries and benefits. As of December 31, 2009, we had 15 employees
working on a full-time basis; we have six employees as of March 29, 2010. As
noted above, in our restructured operations, we intend to pursue joint ventures,
OEM type arrangements, research and or sub contractor agreements relating to our
oximetry technology with respect to the recreational, military, baby wellness
monitoring and sleep monitoring fields. If we are unable to generate cash flow
through a joint-venture or similar type of agreement in the near term, it may be
necessary for us to take further measures to reduce our cash burn including
laying-off additional personnel. No assurance can be given
that we will be able to raise the needed capital. These conditions raise
substantial doubt about our ability to continue as a going concern.




Background




Pulse
oximetry is an important non-invasive process used both to measure blood oxygen
saturation levels (SpO2) by monitoring the percentage of hemoglobin that is
saturated with oxygen and to measure heart rate. This procedure has been used
regularly in hospitals during the past twenty years and is established as an
essential measurement in medical practice to ensure maintenance of adequate
oxygen and prevention of respiratory difficulty. In many disease states, oxygen
saturation is one of the most important vital signs to monitor.




There are
two methods to measure pulse oximetry by transmission through a body part or by
reflection. In general, the transmission method can only be used on certain
areas of the body, such as fingers, earlobes, etc. Furthermore, in some
instances when the transmission method is used, physiological conditions such as
stress and temperature can adversely affect the accuracy of pulse oximetry
readings.




- 4
-





Since
pulse oximetry measurements taken on-site in an emergency, at local medical
practices, and/or in home care can save lives and curtail intervention costs,
mobile units have been developed. However, mobile oximetry units have not been
widely adopted because their power requirements (and hence limited battery life)
often make them impractical. In addition, existing mobile units require patients
to remain absolutely stationary to produce reliable results, further reducing
their practicality.




Our
solution




Responding
to the need for life-saving information in the field where people cannot be
absolutely stationary, we have developed patented sensors that work accurately
during mild physical activity. This technique uses a reflectance method (known
as RPO) whereby a very small sensor placed on the body at various locations has
the ability to measure oxygen saturation and heart pulse rate. We have
incorporated our patented reflectance technology into portable devices for
medical and consumer applications. Moreover, these devices operate at a power
requirement approximately 1/50th of that compared to other commercially
available portable systems. This puts pulse oximetry into the hands medical
practitioners and emergency personnel on-site for the safety and benefit of all
and offers the opportunity to create new commercial and consumer
applications.




We intend
to continue to leverage our core technologies to develop new, innovative product
applications for the recreational, military, baby wellness monitoring and sleep
monitoring markets. In furtherance of this goal, we intend to pursue joint
ventures, OEM type arrangements, and research and or sub contractor agreements
relating to our oximetry technology with respect to these
fields.





Products




The
following details commercially available products that utilize our unique pulse
oximetry technology.




PulseOx
5500TM — a stand-alone commercial RPO spot check monitor for SpO2 and heart
rate. The PulseOx 5500TM uses SPO patented technology to provide a medical
device that is easier to use for many patients and less expensive to operate
than any other device that is commercially available. Its main advantages
include: (i) long lasting battery with more than 1,000 hours, using only a
fraction of the power used by competitive devices and (ii) resistance to many
forms of motion, reducing its susceptibility to the motion artifacts that are
typical of other pulse oximetry devices. The PulseOx 5500 was first introduced
commercially during the fourth quarter of 2004. The device was approved and
registered by the Food and Drug Administration ("FDA") in June 2004. The device
also carries the CE (European Directives 93/42/EEC and 90/385/EEC for regulatory
and safety standards of medical equipment) and Canadian Standards Association
(CSA) mark for safety and audited manufacturing processes, all of which were
obtained in February 2005.




Check
MateTM— addresses the sports and aviation market’s demand for a lightweight,
inexpensive monitor for measuring SpO2 and heart rate during physically active
and high-altitude activities. It offers the user a greater ability to monitor
these vital signs under motion and is less expensive than most other available
devices. The Check Mate was first introduced commercially during third quarter
of 2005. The Check Mate does not require FDA approval or registration. It
carries the CE and CSA mark for safety and audited manufacturing
processes.




PulseOx
7500TM —a monitor for extended monitoring of SpO2 and heart rate by means of
RPO. The monitor is being initially marketed for pre screening of sleep apnea
sufferers. Its main advantages include: (i) long lasting battery equivalent to a
month’s use of monitoring using only a fraction of the power used by competitive
devices  and hence
a lower cost of ownership and (ii) resistance to many forms of motion, reducing
its susceptibility to the motion artifacts that are typical of other similar
pulse oximetry devices.





PulseOx
6000 TM — a professional stand-alone commercial RPO spot check monitor for SpO2
and heart rate. The PulseOx 6000TM uses our patented technology to provide a
medical device which is easier to use for many patients and less expensive to
operate than any other device that is commercially available. Its main
advantages include: (i) long lasting battery with more than 500 hours, using
only a fraction of the power used by competitive devices and (ii) AutospotTM
technology which compensates for resistance to many forms of motion, thereby
reducing its susceptibility to the motion artifacts that are typical of other
pulse oximetry devices and low perfusion experienced in certain patients. The
PulseOx 600TM was first introduced commercially during the first quarter of
2008. The device is approved and registered by the Food and Drug Administration
("FDA"). The device carries the CE and CSA mark for safety and audited
manufacturing processes.





PulseOx
6100 TM — a professional stand-alone hand held commercial RPO spot check monitor
for SpO2 and heart rate. The PulseOx 6100TM uses our patented technology to
provide a medical device that is easier to use for many patients and less
expensive to operate than any other device that is commercially available. Its
main advantages include: (i) long lasting battery with more than 200 hours,
using only a fraction of the power used by competitive devices, (ii) AutospotTM
technology which compensates for resistance to many forms of motion reducing its
susceptibility to the motion artifacts that are typical of other pulse oximetry
devices and low perfusion experienced in certain patients and (iii) flash memory
for recording multiple patient readings. The PulseOx 6100TM was first introduced
commercially during the first quarter of 2008. The device carries the CE and CSA
mark for safety and audited manufacturing processes.





License
Agreement Relating to the Above Product Lines





In the
license agreement that we entered into in January 2010, the Licensee was granted
an exclusive, non transferable, royalty bearing  license, in the Field
of Use, subject to certain minimum annual payments discussed below, with respect
to the PulseOx product line (including the CheckMate Product line) to (i)
manufacture and distribute the PulseOxTM product line, including the Check MateTM
(collectively the “Special Products”), and derivates, (ii) to use and improve
our technology (whether or not related specifically to the Special Products) for
purpose of creating derivative products based on the Special Products, (iii)
bundle Special Products with licensee’s technology (the “Bundled Technology”).
The term “Field of Use” has been defined to mean medical technologies and
products designed to measure any vital sign(s) which utilize reflective oximetry
methodology, where “medical” has been limited to refer solely to any technology
or product being targeted for sale solely for use by persons with a potential or
existing illness and technology to determine whether a person is
alive.


- 5
-




The
license described above is exclusive with respect to Special Products and the
Bundled Technology that measure pulse (by any means) and one other vital sign
and non-exclusive with Special Products or the Bundled Technology that measure
only pulse (with no other vital sign being measured).





In
addition to the license rights described above, the Licensee was also granted an
exclusive non-transferable, royalty bearing, world wide license to manufacture
and distribute the Check MateTM device, SPO LTD’s specially designed monitor for
measuring SpO2 and heart rate during physically active and high latitude
activities.





Under the
agreement, the Licensee (and its affiliates) have undertaken to pay to SPO LTD
royalties derived from Special Products as follows (collectively, the
“Royalties”):




(i)
                all revenues deriving from
      purchase orders received during December 2009 in excess of
      $100,000;
 (ii)
                with respect to 2010, 50% of net
      revenues in excess of $390,000 per calendar
      quarter;
 (iii)
                with respect to 2011, 50% of net
      revenues in excess of $600,000 per calendar quarter;
      and
 (iv)
                From 2012 through the end of the
      lease term, 6% of gross
revenues.




With
respect to Bundled Technology, from 2010 through the end of the term, under the
Agreement the Licensee (and its affiliates) are to pay 3% of gross revenues,
payable on a quarterly basis, so long as Special Products do not comprise more
than 50% of Bundled Technology. If the Special Products constitute more than 50%
of the Bundled Technology, the per annum royalty rate shall be at the rate of
6%. Royalties are payable within the later to occur of (i) the 30 th day
following receipt of revenues proceeds or (ii) 30 th day
following the end of the period for which royalties are payable.





In
order to maintain the exclusive license rights described above, we are to
receive, beginning 2013 and continuing through the end of the license period,
per annum minimum royalties in the aggregate amount of at least $60,000 (the
“Minimum Royalty Payment”). The Minimum Royalty Payment is due by the 30th day
following the end of the year. If for whatever reason the Minimum Royalty
Payment is not paid when due, then the license shall automatically and without
any further action become non-exclusive. We have the right to audit to review or
audit the Licensee records to verify compliance with the terms of the
Agreement.





Unless
terminated earlier as provided therein, the license terms under the Agreement
extends through November 30, 2016. Notwithstanding the foregoing, either party
is entitled to terminate the Agreement (i) upon a material breach by the other
party and its failure to cure such breach within 30 days following receipt of
written notice thereof, (ii) upon the other party’s insolvency or liquidation
event or (iii) if the results of three audits performed by us shall reveal that
Licensee (or its affiliates) underreported by 10% the amount of payments due to
the Company.





Research
& Development / Products under Design and Development




We
currently have in various stages of development other wellness market devices
utilizing our oximetry technology. These include the following:




Baby
Movement Monitor — a monitor being designed specifically for the use with
infants. This unique monitor is being designed for continual non-invasive
monitoring of an infant particularly during the hours that the baby is
sleeping.





Sports
Watch - a sports watch for monitoring hear rate for sports enthusiast to monitor
their wellness while training or engaging in sport activities without the
requirement to wear a conventional chest strap or equivalent.





Sleep
Apnea monitoring — a module that could be applied within a home-screening device
that would monitor the number of sleep apnea events an individual may experience
during the hours of sleep; this potential offering could assist with screening
individuals for apnea related disorders.





Wellness
Bracelet — an easy-to-use bracelet that can be worn to continually measure
number of activities an individual performs on a daily basis; this potential
product offering could be marketed to the large obesity market for adult and
children alike.





Helmet
with vital signs – a module that could be integrated within a helmet
configuration for military or industrial safety applications that could monitor
continuously the wellness via heart-rate measurements of the
wearer.





Our
research and development activities as well as product design activities are
primarily conducted in our research and development subsidiary SPO Ltd. located
in Israel. In connection with our efforts to curtail operating expenses and
conserve our cash resources, in the latter half of 2008 and through 2009 we
focused principally on the development of the sports watch and ceased
development of other products. During our 2009 and 2008 fiscal years, we
expended approximately $414,000 and $1,179,000, respectively, on research and
development. The
expenses during 2009 are net of grants received from Chief Scientist of the
Government of Israel in the amount of $262,000.


- 6
-




Business
Strategy




Our
mission is to build a profitable business that develops and commercializes
wellness products that improve people's lives and provide reassurance of
wellness and thereby increase stockholder value. In January 2010, we completed a
restructuring plan in an attempt to focus primarily on licensing our core
technology for non-medical market applications. Going forward, we intend to
operate primarily as a development and licensing entity.





To
achieve our objectives, we are pursuing the following business
strategies:




Increasing growth potential by
pursuing new market opportunities. Through our initial success in
penetrating the medical device market with our proprietary oximetry technology,
we intend to diligently pursue other market opportunities that are seeking
similar technological solutions and product offerings as previously demonstrated
and implemented by us. These include the recreational, baby wellness monitoring
and sleep monitoring markets.
  Partner with highly qualified,
focused companies, internationally. We intend to continue to seek out
collaborative arrangements with leading international distributors for our
consumer products for which we have developed the prototypes, in preparation for
technological due diligence. We have identified a number of potential partners
for these products, although there can be no assurance that we will be able to
enter into any such collaborative arrangement..
  Research and Development.
Subject to raising additional capital, our research and development strategy in
the near future will focus on our consumer product lines to enable the Company
to partner with client corporations for commercialization and
distribution.


Suppliers




We
currently outsource part of our industrial design and associated prototyping
activities. However, the outsourcing of these operations may mean that some
degree of risks related to delivery schedules, yields, and other factors are not
directly under our control.




Marketing
and Sales Organization.





Following
the restructuring of our business operations in January 2010, we are primarily
engaged in research and development and design activities as well as business
development activities with potential client corporations for commercialization
and distribution of our oximetry technology.  We intend to pursue joint
ventures, OEM type arrangement, research and or sub contractor agreements
relating to our oximetry technology with respect to the recreational, military,
baby wellness monitoring and sleep monitoring fields. We anticipate that our
prospective partners, if any, will take responsibility for manufacturing and
sales/marketing of their products that include the oximetry technology component
from us.




Patents
and Proprietary Information




We
currently rely on a combination of patent, trade secret, copyright and trademark
law, as well as non-disclosure agreements and invention assignment agreements,
to protect proprietary information. However, such methods may not afford
complete protection and there can be no assurance that other competitors will
not independently develop such processes, concepts, ideas and documentation. As
of March 2010, we hold twelve patents issued by the United States Patent and
Trademark Office ("USPTO") covering various aspects of our unique sensors for
radiance based diagnostics using pulse oximetry. Although we believe that our
existing issued patents provide a competitive advantage, there can be no
assurance that the scope of our patent protection is or will be adequate to
protect our technologies or that the validity of any patent issued will be
upheld in the future.




Because
of the uncertainty of patent protection and the unavailability of patent
protection for certain processes and techniques, our policy is to require our
employees, consultants, other advisors, as well as utility and design
collaborators, to execute confidentiality and assignment of invention agreements
upon the commencement of employment, consulting or advisory relationships. These
agreements generally provide that all confidential information developed or made
known to a party by us during the course of the party's association with the
Company is to be kept confidential and not to be disclosed to third parties
except in specific circumstances. In the case of employees and consultants, the
agreements also provide that all inventions conceived by the individual in the
course of their employment or consulting relationship will be our exclusive
property.




Employees




As of
December 31, 2009, we had 15 employees working on a full time basis. However,
following the entry in January 2010 into the license for our oximetry technology
for the medical field we reduced our workforce.  Accordingly, as of
March 29, 2010, we had six employees. None of these employees are subject to
collective bargaining agreements.





Beginning
July 2008 and continuing through December 2009, we deferred salaries and
benefits with respect to our executive management and subsequently we applied
this policy with respect to our employees, along with the reduction in headcount
described above, in an effort to reduce operating expenses and conserve our cash
resources. This policy was implemented with the consent of the
employees.


- 7
-




Competition





We
believe that most of the companies that possess oximetry technology are
currently offering solutions exclusively in the medical or related market
applications. We are not aware of specific entities that have a similar strategy
as implemented by the Company to target sports and general wellness markets with
their oximetry technology or resultant product offerings. We further believe
that the reflective oximetry nature of the Company’s technology is a limiting
factor for other entities to operate in non-medical or related market
applications.





There are
number of companies, some of which are substantially larger than we are and
with significantly more resources, that are engaged in manufacturing competing
products specifically in the medical market. Our competitors include Nonin
Medical Inc. of Plymouth, Minnesota, a privately owned company; and Smiths
Medical PM Inc. of Waukesha, WI, which is the designer, manufacturer, and
distributor of the BCI(R) brand of patient monitoring equipment which competes
with our products.





Within
the last few years several Chinese based medical device manufacturers extended
their share of the homecare medical market and have become direct competitors to
a number of our medical products. Their pricing models have significantly
impacted this market and in particular under the current economic conditions
being experienced across world wide markets.





Governmental
Regulations




The
manufacture and sale of the PulseOx products by the Licensee are subject to
extensive regulation by numerous governmental authorities, principally by the
FDA and corresponding foreign agencies. The FDA administers the Federal Food,
Drug and Cosmetic Act and the regulations promulgated thereunder. The PulseOx
5500TM and PulseOx 7500TM are sold in the United States and are subject to the
FDA's standards and procedures for the manufacture of medical devices and our
facilities are subject to inspection by the FDA for compliance with such
standards and procedures. These regulations will be equally applicable to the
new medical products that utilize our technology— PulseOx 60000TM and PulseOx
6100TM.




The FDA
classifies each medical device into one of three classes depending on the degree
of risk associated with the device and the extent of control needed to ensure
safety and effectiveness. Our medical products have been classified by the FDA
as Class II device and have secured a 510(k) pre-market notification clearance
before being introduced into the United States market. For additional products,
the process of obtaining 510(k) clearance typically takes several months and may
involve the submission of limited clinical data supporting assertions that the
product is substantially equivalent to an already approved device or to a device
that was on the market before the enactment of the Medical Device Amendments of
1976.




Every
company that manufactures or assembles medical devices to be sold in the United
States is required to register with the FDA and adhere to certain "good
manufacturing practices" in accordance with the FDA's Quality System Regulation
which regulates the manufacture of medical devices, prescribes record keeping
procedures and provides for the routine inspection of facilities for compliance
with such regulations. The FDA also has broad regulatory powers in the areas of
clinical testing, marketing and advertising of medical devices.




Medical
device manufacturers are routinely subject to periodic inspections by the FDA.
If the FDA believes that a company may not be operating in compliance with
applicable laws and regulations, it can:




place the
company under observation and re-inspect the facilities; or issue a warning
letter apprising of violating conduct;
  detain or
seize products;
  mandate a
recall;
  enjoin
future violations; and
  assess
civil and criminal penalties against the company, its officers or its
employees.


We are
also subject to regulation in each of the foreign countries in which we sell our
products. Many of the regulations applicable to our products in such countries
are similar to those of the FDA. The national health or social security
organizations of certain countries require our products to be qualified before
they can be marketed in those countries.




AVAILABLE
INFORMATION




Our Internet websites are located athttp://www.spomedical.comandwww.spobaby.com. This reference to our Internet
websites do not constitute incorporation by reference in this report of the
information contained on or hyperlinked from our Internet website and such
information should not be considered part of this report.




The
public may read and copy any materials we file with the Securities and Exchange
Commission ("SEC") at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's Internet website is located at http://www.sec.gov
..


- 8
-




ITEM
1A.  RISK FACTORS




The
following risk factors should be considered carefully in addition to the other
information presented in this report. This report contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, the
following:




RISKS
RELATED TO OUR BUSINESS




WE
NEED ADDITIONAL FINANCING TO REALIZE OUR BUSINES PLAN AND FAILURE TO OBTAIN
ADEQUATE FINANCING COULD LEAD TO THE FINANCIAL AND OPERATING FAILURE OF OUR
COMPANY IN THE FUTURE.




We
believe that our existing cash resources are insufficient to enable us to
maintain operations as presently conducted and meet our obligations as they come
due, as well pay outstanding loans which are currently due and payable. We will
not be able to maintain operations as presently conducted beyond June 30, 2010
unless we raise additional funds or generate fees, whether through the issuance
of our securities, licensing fees for our technology or otherwise. If we are
unsuccessful in these efforts, we may consequently  have to cease
operations entirely.  Without adequate funding, we also may not be able to
accelerate the development and deployment of our products, respond to
competitive pressures, develop new or enhanced products. At the present time, we
have no commitments for any financing, and there can be no assurance that
capital will be available to us on commercially acceptable terms or at all. We
may have difficulty obtaining additional funds as and when needed, and we may
have to accept terms that would adversely affect our stockholders.   Any
failure to achieve adequate funding will delay our development programs and
product launches and could lead to abandonment of one or more of our development
initiatives, as well as prevent us from responding to competitive pressures or
take advantage of unanticipated acquisition opportunities. In addition to a
number of outstanding amounts owed to suppliers and professional service
providers, as at December 31, 2009 we owe approximately $1,135,000 on
outstanding notes that we issued in April 2005 and July 2006. We currently do
not have the capital resources from which to pay these
amounts.





Any
additional equity financing may be dilutive to stockholders, and debt and
certain types of equity financing, if available, may involve restrictive
covenants or other provisions that would limit how we conduct our business or
finance our operations.




Even if
we raise funds to address our immediate working capital requirements, we also
may be required to seek additional financing in the future to respond to
increased expenses or shortfalls in anticipated revenues, accelerate product
development and deployment, respond to competitive pressures, develop new or
enhanced products, or take advantage of unanticipated acquisition opportunities.
In addition, the deterioration in the general economic environment that began in
2008 and continued into 2009 further complicates our capital raising
efforts.





These
conditions raise substantial doubt as to our ability to continue as a going
concern and may make it more difficult for us to raise additional capital when
needed. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability of reported assets or liabilities
should we be unable to continue as a going concern.




FUTURE
ECONOMIC CONDITIONS IN THE U.S. AND GLOBAL MARKETS MAY HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION THAT WE CURRENTLY CANNOT
PREDICT.




The U.S.
and other world economies are slowly recovering from a recession which began in
2008 and extended into 2009. While economic growth has resumed, it remains
modest and the timing of an economic recovery is uncertain. There are likely to
be significant long-term effects resulting from the recession and credit market
crisis, including a future global economic growth rate that is slower than what
was experienced in recent years. Unemployment rates remain high and businesses
and consumer confidence levels have not yet fully recovered to pre-recession
levels. In addition, more volatility may occur before a sustainable, yet lower,
growth rate is achieved. This could result in an unfavorable market for us to
license our core technologies for the non medical market, thereby likely harming
our business, results of operations and financial conditions.





WE
HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES AND NEGATIVE OPERATING CASH
FLOWS IN THE FUTURE.





Our
accumulated deficit was approximately $16.3 million as at December 31, 2009. We
expect our operating losses to continue as we continue to expend resources to
further develop and enhance our technology offering, to complete prototyping
for  proof-of-concept, obtain regulatory clearances or approvals as
required, expand our business development activities and finance capabilities
and conduct further research and development We also expect to experience
negative cash flow in the short-term until licensing revenues become available
through the implementation of the Company’s technology via client corporations
for commercialization and distribution of products that include our
technology.




- 9
-





WE
DO NOT HAVE A LONG OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS.




SPO Ltd.
commenced operations in 1998. We introduced our first product into the
marketplace in the fourth quarter of 2004. Accordingly, there is limited
historical information regarding our revenue trends and operations upon which
investors can evaluate our business. Our prospects must be considered in light
of the substantial risks, expenses, uncertainties and difficulties encountered
by entrants into the medical device industry, which is characterized by
increasing intense competition and the relative failure rates.





THE
SALE OF OUR PRODUCTS IN THE UNITED STATES IS SUBJECT TO GOVERNMENT REGULATIONS
AND WE MAY NOT BE ABLE TO OBTAIN CERTAIN NECESSARY CLEARANCES OR
APPROVALS.




The
design, manufacturing, labeling, distribution and marketing of medical device
products in the United States is subject to extensive and rigorous regulation by
the Food and Drug Administration (FDA). In order for us to market our products
in the United States, we must obtain clearance or approval from the FDA which
can be expensive and uncertain and can cause lengthy delays before we can begin
selling our products. We cannot be sure:




·
              that we, or any collaborative
      partner, will make timely filings with the
  FDA;
  ·
              that the FDA will act favorably
      or quickly on these
submissions;
  ·
              that we will not be required to
      submit additional information or perform additional clinical
      studies;
  ·
              that we would not be required to
      submit an application for pre-market approval, rather than a 510(k)
      pre-market notification submission as described below;
      or
  ·
              that other significant
      difficulties and costs will not be encountered to obtain FDA clearance or
      approval.




The FDA
may impose strict labeling or other requirements as a condition of its clearance
or approval, any of which could limit our ability to market our products.
Further, if we wish to modify a product after FDA clearance of a pre-market
notification or approval of a pre-market approval application, including changes
in indications or other modifications that could affect safety and efficacy,
additional clearances or approvals will be required from the FDA. Any request by
the FDA for additional data, or any requirement by the FDA that we conduct
additional clinical studies or submit to the more rigorous and lengthier
pre-market approval process, could result in a significant delay in bringing our
products to market and substantial additional research and other expenditures.
Similarly, any labeling or other conditions or restrictions imposed by the FDA
on the marketing of our products could hinder our ability to effectively market
our products. Any of the above actions by the FDA could delay or prevent
altogether our ability to market and distribute our products. Further, there may
be new FDA policies or changes in FDA policies that could be adverse to
us.




OUTSIDE
THE UNITED STATES, WE ARE SUBJECT TO GOVERNMENT REGULATION, WHICH COULD DELAY OR
PREVENT OUR ABILITY TO SELL OUR PRODUCTS IN CERTAIN JURISDICTIONS.




In order
for us to market our products in Europe and some other international
jurisdictions, we and our distributors and agents must obtain required
regulatory registrations or approvals. We must also comply with extensive
regulations regarding safety, efficacy and quality in those jurisdictions. We
may not be able to obtain the required regulatory registrations or approvals, or
we may be required to incur significant costs in obtaining or maintaining any
regulatory registrations or approvals we receive. Delays in obtaining any
registrations or approvals required to market our products, failure to receive
these registrations or approvals, or future loss of previously obtained
registrations or approvals would limit our ability to sell our products
internationally. For example, international regulatory bodies have adopted
various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country.




EVEN
IF WE OBTAIN CLEARANCE OR APPROVAL TO SELL OUR PRODUCTS, WE ARE SUBJECT TO
ONGOING REQUIREMENTS AND INSPECTIONS THAT COULD LEAD TO THE RESTRICTION,
SUSPENSION OR REVOCATION OF OUR CLEARANCE.




We are
required to adhere to applicable FDA regulations and ISO standards regarding
good manufacturing practice, which include testing, control, and documentation
requirements. We are subject to similar regulations in foreign countries.
Ongoing compliance with good manufacturing practice and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
international jurisdictions by comparable Notified Body for CE Marking and ISO
Standards. Failure to comply with these regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, failure to
obtain premarket clearance or premarket approval for devices, withdrawal of
approvals previously obtained, and criminal prosecution. The restriction,
suspension or revocation of regulatory approvals or any other failure to comply
with regulatory requirements would limit our ability to operate and could
increase our costs.




- 10
-





OUR
SUCCESS LARGELY DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT THE PROPRIETARY
INFORMATION ON WHICH WE BASE OUR PRODUCTS.





Our
success depends in large part upon our ability to establish and maintain the
proprietary nature of our technology through the patent process, as well as our
ability to license from others patents and patent applications necessary to
develop our products. If any of our patents are successfully challenged,
invalidated or circumvented, or our right or ability to manufacture our products
was to be limited, our ability to continue to manufacture and market our
products could be adversely affected.




The
defense of patent infringement suits is costly and time-consuming and their
outcome is uncertain. In addition, our limited financial resources may limit our
ability to defend our granted patents, if challenged. An adverse determination
in litigation could subject us to significant liabilities, require us to obtain
licenses from third parties, or restrict or prevent us from selling our products
in certain markets. Although patent and intellectual property disputes are often
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, the necessary licenses may not be available to us on satisfactory
terms, if at all. Thus, as discussed above, if third party patents cover any
aspect of our products or processes, then we may lack freedom to operate in
accordance with our business plan.




As of
March 2010, we have been issued twelve United States patents. One or more of the
patents for our existing or future products, may be successfully challenged,
invalidated or circumvented, or we may otherwise be unable to rely on these
patents. These risks are also present for the process we use or will use for
manufacturing our products. In addition, our competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, may apply for and obtain patents that prevent, limit or interfere
with our ability to make, use and sell our products, either in the United States
or in international markets.




The
medical device industry has been characterized by extensive litigation regarding
patents and other intellectual property rights. In addition, the United States
Patent and Trademark Office may institute interference proceedings. The defense
and prosecution of intellectual property suits, Patent and Trademark Office
proceedings and related legal and administrative proceedings are both costly and
time consuming. Moreover, we may need to litigate to enforce our patents, to
protect our trade secrets or know-how, or to determine the enforceability, scope
and validity of the proprietary rights of others. Any litigation or interference
proceedings involving us may require us to incur substantial legal and other
fees and expenses and may require some of our employees to devote all or a
substantial portion of their time to the proceedings. An adverse determination
in the proceedings could subject us to significant liabilities to third parties,
require us to seek licenses from third parties or prevent us from selling our
products in some or all markets. We may not be able to reach a satisfactory
settlement of any dispute by licensing necessary patents or other intellectual
property. Even if we reached a settlement, the settlement process may be
expensive and time consuming, and the terms of the settlement may require us to
pay substantial royalties. An adverse determination in a judicial or
administrative proceeding or the failure to obtain a necessary license could
prevent us from manufacturing and selling our products.




In
addition to patents, we rely on trade secrets and proprietary know-how, which we
seek to protect, in part, through confidentiality and proprietary information
agreements. The other parties to these agreements may breach these provisions,
and we may not have adequate remedies for any breach. Additionally, our trade
secrets could otherwise become known to or be independently developed by
competitors.




OUR
PRODUCTS USE NOVEL TECHNOLOGIES OR APPLY TECHNOLOGIES IN MORE INNOVATIVE WAYS
THAN OTHER COMPETING MEDICAL DEVICES AND ARE OR WILL BE NEW TO THE MARKET;
ACCORDINGLY, WE MAY NOT BE SUCCESSFUL IN ACHIEVING WIDE ACCEPTANCE OF OUR
PRODUCTS AND OUR OPERATIONS AND GROWTH WOULD BE ADVERSELY AFFECTED.




Our
technology offering is based on new methods of reflective pulse oximetry. If
products that include our technology do not achieve significant market
acceptance, our royalties from sales will be limited and our financial condition
may suffer. To date, few independent studies regarding our technology have been
published. The lack of independent studies limits the ability of potential
OEM/licensing partners to compare products that include our technology within to
conventional products.





OUR
LIMITED BUSINESS DEVELOPMENT AND MARKETING EXPERIENCE MAKES OUR REVENUE
UNCERTAIN.




We are
responsible for business development and marketing our oximetry technology
offering. We have relatively limited experience in business development and
marketing and only have one internal person responsible for these tasks. In
order to successfully continue to promote our technology offering, we must
partner with client corporations for commercialization and distribution of
products that include our technology. We may not be able to successfully reach
agreements with client corporations for commercialization and distribution of
products that include our technology. In addition, we compete with other
companies that have experienced and well-funded marketing and sales operations.
If we enter into a marketing arrangement with a third party, any revenues we
would receive will be dependent on this third party, and we will likely be
required to pay a sales commission or similar compensation to this party. The
efforts of these third parties for the marketing and sale of products that
include our technology within may not be successful.




BECAUSE
WE OPERATE IN AN INDUSTRY WITH SIGNIFICANT PRODUCT LIABILITY RISK, AND WE HAVE
NOT SPECIFICALLY INSURED AGAINST THIS RISK, WE MAY BE SUBJECT TO SUBSTANTIAL
CLAIMS AGAINST OUR PRODUCTS.




Medical
products entail significant risks of product liability claims. We currently have
limited product liability insurance coverage beyond that provided by our general
liability insurance. Accordingly, we may not be adequately protected from any
liabilities, including any adverse judgments or settlements, we might incur in
connection with the development, clinical testing, manufacture and sale of our
products. A successful product liability claim or series of claims brought
against us that result in an adverse judgment against or settlement by us in
excess of any insurance coverage could seriously harm our financial condition or
reputation. In addition, product liability insurance is expensive and may not be
available to us on acceptable terms, if at all.


- 11
-




THE
AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS VIA OUR LICENSEE IS
UNCERTAIN, WHICH MAY LIMIT CONSUMER USE AND THE MARKET FOR OUR
PRODUCTS.




In the
United States and elsewhere, sales of medical products are dependent, in part,
on the ability of consumers of these products to obtain reimbursement for all or
a portion of their cost from third-party payors, such as government and private
insurance plans. Any inability of patients, hospitals, physicians and other
users of products that include our technology to obtain sufficient reimbursement
from third-party payors for our products, or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for these products, could limit the marketability of these
products. We are unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. Moreover,
third-party payors are increasingly challenging the prices charged for medical
products and services, and some health care providers are gradually adopting a
managed care system in which the providers contract to provide comprehensive
health care services for a fixed cost per person. Patients, hospitals and
physicians may not be able to justify the use of products that include our
technology by the attendant cost savings and clinical benefits that we believe
will be derived from the use of such products, and therefore may not be able to
obtain third-party reimbursement.




Reimbursement
and health care payment systems in international markets vary significantly by
country and include both government sponsored health care and private insurance.
Our Licensee may not be able to obtain approvals for reimbursement from these
international third-party payors in a timely manner, if at all. Any failure to
receive international reimbursement approvals could have an adverse effect on
market acceptance of products that include our technology in the international
markets in which approvals are sought.




OUR
SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN SCIENTIFIC, TECHNICAL,
MANAGERIAL AND FINANCE PERSONNEL.




Our
ability to operate successfully and manage our future growth depends in
significant part upon the continued service of key scientific, technical,
managerial and finance personnel, as well as our ability to attract and retain
additional highly qualified personnel in these fields. We may not be able to
attract and retain key employees when necessary, which would limit our
operations and growth. In addition, if we are able to successfully develop and
commercialize our technology, we will need to hire additional scientific,
technical, marketing, managerial and finance personnel. We face intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers.




WE
ARE SIGNIFICANTLY INFLUENCED BY OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR
AFFILIATED ENTITIES.




Our
directors, executive officers and entities affiliated with them beneficially
owned an aggregate of approximately 23% of our outstanding Common Stock as of
March 29, 2010. These stockholders, acting together, would be able to exert
significant influence on substantially all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
and other business combination transactions.





THERE
IS NO ESTABLISHED MARKET FOR OUR COMMON STOCK AND NONE MAY DEVELOP OR BE
SUSTAINED




Since
October 8 2007, our Common Stock has been quoted on the over-the-counter
Bulletin Board under the symbol ”SPOM". The Bulletin Board is a centralized
quotation service that collects and publishes market maker quotes in real time.
Because our stock trades on the Bulletin Board, rather than on a national
securities exchange this may affect the liquidity of our Common Stock. Prior to
such date, our Common Stock was quoted on the “Pink Sheets”.




There has
been very limited trading activity in our Common Stock. There can be no
assurance that a more active or established trading market will commence in our
securities. Further, in the event that an established trading market commences,
there can be no assurance as to the level of any market price of our shares of
common stock, whether any trading market will provide liquidity to investors, or
whether any trading market will be sustained.




FUTURE
SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING
MARKET PRICES FOR OUR COMMON STOCK




As of
March 29, 2010, we had 50 million authorized shares of Common Stock, of which
25,183,007 shares of our Common Stock were issued and outstanding as of such
date. An additional 6,098,701 shares have been reserved for issuance upon
exercise or conversion of outstanding options, warrants and convertible
securities. Many of the those options, warrants and convertible securities
contain provisions that require the issuance of increased numbers of shares of
common stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions. The occurrence of any such event or
the exercise or conversion of any of the options, warrants or convertible
securities described above would dilute the interest in our company represented
by each share of Common Stock and may adversely affect the prevailing market
price of our Common Stock.




- 12
-





Our board
of directors has the authority, without further action or vote of our
stockholders, to issue all or any part of the shares of our Common Stock that
are authorized for issuance and neither issued nor reserved for issuance.
Additionally, we require additional funds to continue to meet our liquidity
needs and maintain our operations as presently conducted and to realize our
business plan. Such stock issuances may be made at a price that reflects a
discount from the then-current trading price of our Common Stock. In order to
raise capital that we need at today's stock prices, we would likely need to
issue securities that are convertible into or exercisable for a significant
number of shares of our Common Stock.




The
shares of Common Stock issuable upon conversion of our securities or the
outstanding shares are saleable without restriction. Any of these issuances will
dilute the percentage ownership interests of our current stockholders, which
will have the effect of reducing their influence on matters on which our
stockholders vote, and might dilute the book value and market value of our
Common Stock. Our stockholders may incur additional dilution upon the exercise
of currently outstanding or subsequently granted options or warrants to purchase
shares of our Common Stock.




IF
WE ARE UNABLE TO SATISFY THE REQUIREMENTS OF SECTION 404 OF THE SARBANES-OXLEY
ACT, OR OUR INTERNAL CONTROL OVER FINANCIAL REPORTING IS NOT EFFECTIVE, THE
RELIABILITY OF OUR FINANCIAL STATEMENTS MAY BE QUESTIONED AND OUR SHARE PRICE
MAY SUFFER.




Section
404 of the Sarbanes-Oxley Act requires any company subject to the reporting
requirements of the U.S. securities laws to do a comprehensive evaluation of its
internal control over financial reporting. Our independent auditors will be
required to issue an opinion on management’s assessment of those matters for our
annual report on Form 10-K for our fiscal year ending December 31, 2010. The
rules governing the standards that must be met for management to assess our
internal controls over financial reporting are relatively new and complex and
require significant documentation, testing and possible remediation to meet the
detailed standards under the rules. It is possible that, as we prepare for this
audit, we could discover certain deficiencies in the design and/or operation of
our internal controls that could adversely affect our ability to record,
process, summarize and report financial data. We have invested and will continue
to invest significant resources in this process. Because an audit of our
internal controls has not been required to be reported in the past, we are
uncertain as to what impact a conclusion that deficiencies exist in our internal
controls over financial reporting would have on the trading price of our common
stock.




OUR
STOCK PRICE MAY BE VOLATILE.




The
market price of our common stock will likely fluctuate significantly in response
to the following factors, some of which are beyond our control:




·
              Variations in our quarterly
      operating results due to a number of factors, including but not limited to
      those identified in this "RISK FACTORS "
  section;
  ·
              Changes in financial estimates of
      our revenues and operating results by securities analysts or
      investors;
  ·
              Announcements by us of
      commencement of, changes to, or cancellation of significant contracts,
      acquisitions, strategic partnerships, joint ventures or capital
      commitments;
  ·
              Additions or departures of key
      personnel;
  ·
              Stock market price and volume
      fluctuations attributable to inconsistent trading volume levels of our
      stock;
  ·
              Commencement of or involvement in
      litigation; and
  ·
              announcements by us or our
      competitors of technological innovations or new
      products




In
addition, the equity markets have experienced volatility that has particularly
affected the market prices of equity securities issued by high technology
companies and that often has been unrelated or disproportionate to the operating
results of those companies. These broad market fluctuations may adversely affect
the market price of our Common Stock.




ADDITIONAL
BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE "PENNY STOCK"
RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON
STOCK.




Broker-dealer
practices in connection with transactions in "penny stocks" are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission.
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the Nasdaq system, provided that current prices and volume information
with respect to transactions in such securities are provided by the exchange or
system). If our Common Stock continues to be offered at a market price less than
$5.00 per share, and does not qualify for any exemption from the penny stock
regulations, our Common Stock will continue to be subject to these additional
regulations relating to low-priced stocks.




- 13
-


The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules generally require that prior to a transaction in
a penny stock the broker-dealer make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These requirements have
historically resulted in reducing the level of trading activity in securities
that become subject to the penny stock rules.




The
additional burdens imposed upon broker-dealers by these penny stock requirements
may discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market liquidity of our Common Stock and our
shareholders' ability to sell our Common Stock in the secondary
market.




OUR
BOARD OF DIRECTORS' RIGHT TO AUTHORIZE THE ISSUANCE OF ADDITIONAL SHARES OF
PREFERRED STOCK COULD ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON
STOCK.




Our board
of directors currently has the right to designate and authorize the issuance of
our preferred stock, in one or more series, with such voting, dividend and other
rights as our directors may determine. The board of directors can designate new
series of preferred stock without the approval of the holders of our Common
Stock. The rights of holders of our Common Stock may be adversely affected by
the rights of any holders of shares of preferred stock that may be issued in the
future, including without limitation dilution of the equity ownership percentage
of our holders of Common Stock and their voting power if we issue preferred
stock with voting rights. Additionally, the issuance of preferred stock could
make it more difficult for a third party to acquire a majority of our
outstanding voting stock.





RISKS
RELATED TO OPERATIONS IN ISRAEL




WE
DEPEND ON A SINGLE RESEARCH AND DEVLOPMENT FACILITY IN ISRAEL AND ARE
SUSCEPTIBLE TO ANY EVENT THAT WOULD ADVERSELY AFFECT ITS CONDITION




Most of
our laboratory capacity and principal research and development facilities are
located in the State of Israel. Fire, natural disaster or any other cause of
material disruption in our operation in this location could have a material
adverse effect on our business, financial condition and operating results. As
discussed above, to remain competitive in the network communications industry,
we must respond quickly to technological developments. Damage to our facility in
Israel could cause serious delays in the development of new products and
services and, therefore, could adversely affect our business. In addition, the
particular risks relating to our location in Israel are described
below.




WE
MAY BE ADVERSELY AFFECTED FROM FOREIGN CURRENCY MARKET
FLUCTUATIONS.





A
significant portion of our expenses, primarily labor expenses and certain
supplier contracts, are denominated in New Israeli Shekels “NIS”. As a result,
we have significant exposure to the risk of fluctuating exchange rates with the
US Dollar, our primary reporting currency. The recent volatility in the
international currency markets has been equally reflected against NIS and this
may continue in the future. Owing to the lack of cash flow resources and
financing, we are limited in our ability to hedge against currency
fluctuations.




THE
TRANSFER AND USE OF SOME OF OUR TECHNOLOGY AND ITS PRODUCTION IS LIMITED BECAUSE
OF THE RESEARCH AND DEVELOPMENT GRANTS WE RECEIVED FROM THE ISRAELI GOVERNMENT
TO DEVELOP SUCH TECHNOLOGY. SUCH LIMITATIONS MAY RESTRICT OUR BUSINESS GROWTH
AND PROFITABILITY.




Our
research and development efforts associated with the development of oximetry
products have been partially financed through grants from the Office of the
Chief Scientist of the State of Israel (the "Chief Scientist"). We are subject
to certain restrictions under the terms of the Chief Scientist grants.
Specifically, the products developed with the funding provided by these grants
may not be manufactured, nor may the technology which is embodied in our
products be transferred outside of Israel without appropriate governmental
approvals and/or fines. These restrictions do not apply to the sale or export
from Israel of our products developed with this technology. These restrictions
could limit or prevent our growth and profitability.




POLITICAL
AND ECONOMIC CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO PRODUCE AND SELL OUR
PRODUCTS. THIS COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND
BUSINESS.




Our
research and development and manufacturing facilities are located Israel.
Political, economic and security conditions in Israel directly influence us.
Since the establishment of the State of Israel in 1948, Israel and its Arab
neighbors have engaged in a number of armed conflicts. A state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Major hostilities between Israel and its neighbors may hinder Israel's
international trade and lead to economic downturn. This, in turn, could have a
material adverse effect on our operations and business.




Since
October 2000, there has been substantial deterioration in the relationship
between Israel and the Palestinian Authority that has resulted in increased
violence. The future effect of this deterioration and violence on the Israeli
economy and our operations is unclear. Ongoing violence between Israel and the
Palestinians as well as tension between Israel and the neighboring Syria and
Lebanon may have a material adverse effect on our business, financial conditions
or results of operations. Any future armed conflict, political instability or
continued violence in the region could have a negative effect on our operations
and business conditions in Israel, as well as our ability to raise additional
capital necessary for our business plan.




- 14
-





Generally,
male adult citizens and permanent residents of Israel under the age of 51 are
obligated to perform up to 36 days of military reserve duty annually.
Additionally, these residents may be called to active duty at any time under
emergency circumstances. The full impact on our workforce or business if some of
our employees are called upon to perform military reserve service is difficult
to predict.




ITEM 1B.  UNRESOLVED
STAFF COMMENTS




Not
applicable.





ITEM
2. PROPERTIES





We
do not own any real property.





Through
December 31, 2009, our corporate headquarters were located at Beit Hapa’amon,
Suite 209, at 20 Hata’as Street in Kfar Saba, Israel. We leased approximately
1,250 square feet at that location at a monthly rental amount of
$700.





In
January 2010, we relocated our corporate headquarters to Hagavish 3 Street,,
Kfar Saba, Israel. We lease approximately 250 square feet in Kfar Saba, Israel
which are the administrative offices for our subsidiary SPO Ltd.





In
addition, we also lease approximately 1615 square feet in Kiryat Malachi, Israel
which is used by SPO Ltd. for the research and development activities under a
lease that expires in August 2011 The aggregate monthly rental payment for both
of the leases in Israel are approximately $1,600.




We
believe that our facilities are generally in good condition and suitable to
carry on our business. We also believe that, if required, suitable alternative
or additional space will be available to us on commercially reasonable
terms.





ITEM
3. LEGAL PROCEEDINGS




There are
no material pending legal proceedings to which we are a party or to which any of
our properties are subject. There are no material proceedings known to us to be
contemplated by any governmental authority.





ITEM
4. RESERVED




PART
II





ITEM
5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES




As of
October 8, 2007, our Common Stock began to be quoted on the OTC Bulletin Board
under the symbol “SPOM”. Prior to such date, our Common Stock was quoted on the
Pink Sheets LLC's Electronic Inter-dealer Quotation and Trading System under
ticker symbol "SPOM". Trading of our Common Stock has been sporadic and limited.
There can be no assurance that an established trading market will develop, that
the current market will be maintained or that a liquid market for our Common
Stock will be available in the future.




The
following table shows the quarterly high and low bid prices for our Common Stock
over the last two completed fiscal years. The prices represent quotations by
dealers without adjustments for retail mark-ups, mark-downs or commission and
may not represent actual transactions.





LOW
                      
                      
                      HIGHYear
      Ended December 31, 2009First
      Quarter
                      
                      $
                      0.10
                      
                      
                      $
                      0.45Second
      Quarter
                      
                      $
                      0.08
                      
                      
                      $
                      0.30Third
      Quarter
                      
                      $
                      0.04
                      
                      
                      $
                      0.35Fourth
      Quarter
                      
                      $
                      0.07
                      
                      
                      $
                      0.39Year
      Ended December 31, 2008First
      Quarter
                      
                      $
                      0.41
                      
                      
                      $
                      0.90Second
      Quarter
                      
                      $
                      0.45
                      
                      
                      $
                      1.01Third
      Quarter
                      
                      $
                      0.37
                      
                      
                      $
                      0.70Fourth
      Quarter
                      
                      $
                      0.06
                      
                      
                      $
                      0.80




As of
March 29, 2010, there were approximately 142 holders of record of our Common
Stock. We believe that a number of shares of our Common Stock are held in either
nominee name or street name brokerage accounts and, consequently, we are unable
to determine the exact number of beneficial owners of our
stock.


- 15
-




DIVIDEND
POLICY




We have
paid no dividends on our Common Stock and do not expect to pay cash dividends in
the foreseeable future with respect to the Common Stock. It is the present
policy of our board of directors to retain all earnings to provide funds for our
growth. The declaration and payment of dividends in the future will be
determined by our board based upon our earnings, financial condition, capital
requirements and such other factors as our board may deem relevant. We are not
under any contractual restriction as to our present or future ability to pay
dividends.





RECENT
SALES OF UNREGISTERED SECURITIES




We did
not sell any securities during the three months ended December 31,
2009.





ITEM
6.  SELECTED FINANCIAL DATA





Not
Applicable.




ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS
AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THIS ANNUAL REPORT.




OVERVIEW




We are
engaged in the design, development and marketing of non-invasive pulse oximetry
technologies to monitor blood oxygen saturation and heart rate for a variety of
markets, including medical, homecare, sports and search & rescue. Pulse
oximetry is a non-invasive process used to measure blood oxygen saturation
levels and is an established procedure in medical practice.




Beginning
July 2008 and continuing through December 2009, we deferred salaries and
benefits with respect to our executive management and subsequently we applied
this policy with respect to our employees, along with the reduction in
headcount, in an effort to reduce operating expenses and conserve our cash
resources. As part of the restructure of our business we decided to focus
our business efforts on developing our core technology for the non-medical
market. In furtherance of this plan, in January 2010, our wholly owned
subsidiary SPO Ltd. (“Ltd”) entered into an Alliance and License Agreement dated
as of December 1, 2009 with an entity owned and controlled by our Chief
Technical Officer. Under the terms of the license agreement, the PulseOx medical
product line discussed in further detail is being marketed by the Licensee in
the medical field.  Under the license agreement, all worldwide sales,
marketing and all existing inventory and manufacturing of the PulseOx line in
the medical field was transferred to the Licensee in consideration
of  $200,000 in cash and the Licensee’s (and its affiliates) agreement
to pay to Ltd royalties derived from these products in agreed upon
amounts.





Following
the license agreement, we are primarily engaged in developing and licensing our
technology to third parties for integration with products in the recreational,
military, baby wellness monitoring and sleep monitoring fields. Following our
entry into the license agreement, we have restructured our business and ceased
all operating activities formerly conducted with respect to the manufacture and
marketing of our PulseOx product line to the medical market and we intend to
pursue joint ventures, OEM type arrangements, research and or sub contractor
agreements relating to our oximetry technology with respect to the recreational,
military, baby wellness monitoring and sleep monitoring fields.





We were
originally organized under the laws of the State of Delaware in September 1981
under the name "Applied DNA Systems, Inc." On November 16, 1994, we changed our
name to "Nu-Tech Bio-Med, Inc." On December 23, 1998, we changed our name to
"United Diagnostic, Inc." Effective April 21, 2005, we acquired 100% of the
outstanding capital stock of SPO Ltd. pursuant to a Capital Stock Exchange
Agreement dated as of February 28, 2005 among the Company, SPO Ltd. and the
shareholders of SPO Ltd., as amended and restated on April 21, 2005 pursuant to
which we issued to the former shareholders of SPO Ltd. a total of 5,769,106
shares of the Company's Common Stock representing approximately 90% of the
Common Stock then issued and outstanding.




We have
generated significant operating losses since inception and we have a limited
operating history upon which an evaluation of our prospects can be made. Our
prospects must therefore be evaluated in light of the problems, expenses, delays
and complications associated with a development stage company.





We need
to raise additional funds on an immediate basis in order to meet our on-going
operating requirements and to realize our business plan as well as pay
outstanding loans in the approximate amount of $ 1.1 million, which are
currently due and payable. In response to the deteriorating global economic
conditions that began in 2008, we have taken certain measures in an effort to
reduce operating expenses and conserve our cash resources. Beginning in
July 2008, we have significantly curtailed our non-essential product design
and development, marketing activities and reorganized our product manufacturing
and delivery system to “just-in-time” arrangements. We have terminated certain
product development plans. During 2008 we deferred part of management and
employee salaries and benefits. As of March 29, 2010, we had 6 employees working
on a full-time basis. If we are unable to raise capital on an immediate basis,
it may be necessary to for us to take further cost cutting measures to reduce
our cash burn including laying-off additional personnel. No assurance can be
given that we will be able to raise the needed capital. These conditions raise
substantial doubt about our ability to continue as a going
concern.


- 16
-




CRITICAL
ACCOUNTING POLICIES




The
discussion and analysis of our financial condition and results of operations are
based upon our audited consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, bad debts, investments, intangible assets
and income taxes. Our estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.




We have
identified the accounting policies below as critical to our business operations
and the understanding of our results of operations.




REVENUE
RECOGNITION




We
generate revenues principally from sales of our products. Revenues from the sale
of products are recognized when delivery has occurred, persuasive evidence of an
arrangement exists, the vendor's fee is fixed or determinable, no further
obligation exists and collection is probable and there are no remaining
significant obligations. Delivery is deemed to have occurred upon shipment of
products from any of our distribution centers.





Commencing
January 2010, revenue generation will be principally from OEM and licensing
agreements which will be recognized upon delivery of services through such
agreements.




USE
OF ESTIMATES




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.





RESULTS
OF OPERATIONS




COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2009 (the “2009 Period”) AND THE YEAR ENDED
DECEMBER 31, 2008 (the “2008 Period”)




REVENUES. Revenues for the
2009 Period and 2008 Period were derived primarily from our PulseOx 5500, Check
Mate and the PulseOx 7500 products. Revenues for the 2009 Period were $1,047,000
compared to $2,759,000 for the 2008 Period.   The decrease in
revenues for the 2009 Period is attributable to the combined
effect of a decrease in the volume of unit sales together with a
reduction of the per unit price attributable to the economic difficulties
currently prevailing in our principal market, the United States and the entry
into the United States market of a significant number of relatively low cost
products, primarily form China. We have, as of December 2009, discontinued the
operations that gave rise to these revenues, as discussed in Item
1.




COSTS OF REVENUES. Costs of
revenues for the 2009 Period were $632,000 compared to $1,839,000 for the 2008
Period. Cost of revenues include all costs related to manufacturing products and
services and consist primarily of direct material costs, shipping and salaries
and related expenses for personnel. The principal reason for the decrease in
cost of revenues as a percentage of revenues, from 67% in 2008 Period compared
with 60% in 2009 Period is due to the write off of inventory of raw materials in
the fourth quarter of 2008 in the amount of $295,000 that was considered not
recoverable.





RESEARCH AND DEVELOPMENT EXPENSES,
NET. Research and development expenses, net consist primarily of expenses
incurred in the design, development and testing of our products net of
government grants and participation by others. These expenses consist primarily
of salaries and related expenses for personnel, contract design and testing
services, supplies used and consulting and license fees paid to third parties.
Research and development expenses, net for the 2009 Period were $414,000
compared to $1,179,000, for the 2008 Period. The research and development
expenses, net in the 2009 Period were reduced primarily due to grants from the
Office of the Chief Scientist of the Government of Israel (“OCS”), on the amount
of $262,000 which we recognized in 2009 along with the reduce in the number of
employees and related compensation costs and the reduction in investment and
ceasing of certain of our development projects. The decrease in research and
development expenses, net during 2009 as compared to 2008 is primarily
attributable to our concerted efforts to control costs.





SELLING AND MARKETING
EXPENSES. Selling and marketing expenses consist primarily of costs
relating to compensation attributable to employees engaged in sales and
marketing activities, promotion, sales support, travel and related expenses.
Selling and marketing expenses for the 2009 Period were $132,000 compared to
$567,000 for the 2008 Period. The decrease was primarily due to reduce in the
number of employees and related compensation and the reduction of travel
expenses and expenses related to resellers support and consulting
fees.


- 17
-





GENERAL AND ADMINISTRATIVE
EXPENSES . General and administrative expenses primarily consist of
salaries and other related costs for personnel in executive and other
administrative functions. Other significant costs include professional fees for
legal and accounting services. General and administrative expenses for the 2009
Period and the 2008 Period were $834,000 and $1,614,000, respectively. The
decrease in general and administrative expenses primarily resulted from the
following (i)charge in the fourth quarter of 2008 for the provision for doubtful
debts in the amount of $203,000 and its partial recovery in the amount of
$58,000 net, in 2009, (ii) reduction in the expenses recognized in respect of
investor relations in the amount of $182,000 (iii) reduction of stock based
compensation expenses on the amount of $134,000 and (iv)reduction in employees
related compensation in the amount of $142,000.




RESTRUCTURING EXPENSES AND
RESTRUCTURING OF DEBT (INCOME) At the end of 2009, we determined that it
is not probable that  $262,000 of provision in excess of seven years
and that was originally recorded following the Company’s reverse merger with
United Diagnostics in 2005 would be paid. Additionally, in December 2009, we
reached an understanding with our non-executive directors pursuant to which the
outstanding directors fees owing to such persons was waived in consideration of
the issuance to them of warrants to purchase, in the aggregate, 100,000 shares
of the Company’s Common Stock at a per share exercise price of $0.08. The
warrants are exercisable through January 17, 2015.At the end of the year, we
agreed with our corporate counsel to restructure the monthly retainer amounts
paid to them as remuneration for legal services. We recorded other income in the
amount of $225,000 regarding these understandings





In
January 2010, we completed a restructuring plan in an attempt to focus primarily
on licensing our core technology for non-medical market applications. The
restructuring plan included a reduction of our corporate and manufacturing
workforce and entering into an alliance and license agreement as discussed.
Going forward, we intend to operate primarily as a development and licensing
entity.





In
connection with the restructuring, we reached settlement agreements with former
employees and recorded other income in the amount of $33,000.





In the
last half of the 2008 Period, we reduced the number of employees, primarily
those engaged in research and development. As a result of these cost cutting
measures, we separately recognized certain accrued expenses in the amount of
$81,000 relating to the termination of these employees.





OTHER INCOME. On January 26,
2010, our wholly owned subsidiary SPO Ltd. entered into an Alliance and License
Agreement dated as of December 1, 2009 with an entity owned an controlled by the
Company’ Chief Technical Officer. Under the agreement, the PulseOx medical
product line will henceforth be marketed by the Licensee.  Under the
license agreement, all worldwide sales, marketing and all existing inventory and
manufacturing of the PulseOx line has been transferred to the licensee in return
for $200,000 in cash and the Licensee’s (and its affiliates) agreement pay to
Ltd royalties derived from these products in agreed upon amounts. In connection
therewith, the Company’s Chief Technical Officer forgave amounts payable to him
relating to his employment. We recorded other income in the amount of $224,000
regarding this Agreement.





FINANCIAL EXPENSES, NET.
Financial expenses net, for the 2009 Period and 2008 Period were $263,000 and
$680,000, respectively. The principal expenses comprising the financial expenses
were:- (i) non cash amortization of loan discounts  and issuance of
shares to financial service provider - $29,000 in 2009 compared to $257,000 in
2008 (ii)exchange rate differences caused by fluctuations in the exchange rate
with the New Israeli Shekel (“NIS”) on  liabilities denominated in NIS
held by the subsidiary- $102,000 in 2009 compared to $187,000 in 2008
(iii)  one time non cash expenses relating to the issue of warrants
for the conversion to equity of certain loan notes and accrued interest thereon
- $105,000 in 2008 and (vi) interest in respect of debt instruments issued by
the Company between April 2005 and October 2006 in the amount of $112,000
in 2009 compared to $123,000 in 2008.





NET LOSS. For the 2009 Period
and 2008 Period we had a net loss of $477,000 and $3,201,000, respectively. The
decrease in net loss during the 2009 Period is primarily attributable to the
restructure of our business operations that was aimed at curtailing operating
costs.




LIQUIDITY
AND CAPITAL RESOURCES




As at
December 31, 2009, we had cash and cash equivalents of $386,000 compared to
$263,000 as at December 31, 2008.




We
generated positive cash flow from operating activities of approximately $132,000
during the 2009 Period compared to negative cash flow of $1,158,000 for the 2008
Period. The primary source of the increased cash flows resulted from the
receipts in 2009 of grant from the OCS as well as the contribution from cost
savings in the period.




In
December 2005 we completed the private placement to certain accredited investors
that we commenced in April 2005 for the issuance of up to $1,544,000 of units of
our securities, with each unit comprised of (i) our 18 month 6% promissory note
(collectively, the "April 2005 Notes") and (ii) three year warrants to purchase
up to such number of shares of our Common Stock as are determined by the
principal amount of the Note purchased by such investor divided by $ 0.85
(collectively the "April 2005 Warrants"). We and the holders of $1,464,000 in
principal amount of the April 2005 Notes subsequently agreed to (a) extend the
maturity term of the April 2005 Notes through March 26, 2008,
(b)extend  the exercise period of the April 2005 Warrants from three
to five years with an expiration date of September 26, 2010 and adjust the per
share exercise price to $0.60 and (c) increase  the interest rate on
the amounts outstanding under the April 2005 Notes to 8% per annum, effective
July 12, 2006. Holders of notes in the principal amount of $125,000 that agreed
to the extension of the maturity date on the notes , have since exercised their
warrants and converted the interest accrued there on into common stock; and a
holder of an April 2005 Note in the principal amount of $50,000 was
repaid.  The Amendment also provided that if we subsequently issue
shares of our Common Stock at an effective per share exercise price less than
that of the adjusted per share exercise price of the April 2005 Warrants during
the adjusted exercise period, then the exercise price thereof is to be reduced
to such lower exercise price, except for certain specified issuances. All of the
extended notes, matured on March 26, 2008. On December 31, 2009 the Company and
the last holder of $30,000 who did not sign the Amendment agreed to extend the
note’s maturity date to December 31, 2011 in consideration of the issuance of
warrants to purchase up to 50,000 shares of the of the Company’s common stock,
at a per share exercise price of $0.01 exercisable for a period of three
years.


- 18
-




In March
2008, we offered to the holders of the April 2005 Notes to apply the amounts
payable to them on the April 2005 Notes, to the exercise price of the April 2005
Warrants, thereby exercising these warrants, and to convert into Common Stock
the accrued interest on the 2005 Notes at a per share conversion price of $0.60.
Note holders who accepted this offer were issued new warrants for such number of
shares of Common Stock equal to 25% of the number shares issued to them upon
exercise of their existing warrants and conversion of the interest accrued on
the note. The new warrants will be exercisable over three years at an exercise
price of $0.60. As of December 31, 2009, the holders of approximately $439,000
in principal amount have agreed to apply the principal amount owed to them to
the exercise price of the April 2005 Warrants. Accordingly, approximately
$520,000 in amounts owed under the 2005 Notes have been converted into equity
and, accordingly, an aggregate of 866,528 shares of our Common Stock have been
issued upon exercise of the April 2005 Warrants and conversion of the interest
owing on the April 2005 Notes. Under the terms of the offer, new warrants for
216,636 share of our Common stock have been issued to these April 2005 Note
holders, exercisable over three years from the date of issuance. Three note
holders of the principal amount of $200,000 have agreed to extend their loan for
a further 24 months and we agreed to pay to them the interest accrued through
the original maturity date of March 26, 2008 in the aggregate amount of $40,000.
Under the terms of the agreement with the extending note holders, we will issue
to the extending holders new warrants for an aggregate of 50,000 shares of our
Common stock, which warrants are exercisable for three years from issuance and
contain the same operative terms, including exercise price, as the warrants that
were originally issued in connection with the issuance of the April 2005 Notes.
We have been informed by the holders of $300,000 in principal amount of their
election to not accept our offer, of which $250,000 of principal and the accrued
interest thereon has been repaid as of the date of the filing of this quarterly
report. On February 5, 2009, we agreed with one of the note holders to repay
$25,000 in principal over a number of payments during 2009 and to convert
accrued interest to 26,500 shares of common stock. On March 15, 2010, we agreed
with a holder of an April 2005 Note in the principal amount of $50,000 to extend
the note’s maturity date to September 15, 2010 and, in consideration thereof, we
agreed to pay the holder total amount of $45,000, of which $15,000 was paid and
$5,000 is to be paid on the 15th day of each month commencing April 15,
2010.





In July
2006, we commenced a private placement of units of our securities, with each
unit comprised of (i) our 8% month promissory note due 12 months from the date
of issuance and (ii) warrants as described below, pursuant to which we raised
$550,000 (the maximum amount that could be raised from this offering). Under the
terms of the offering, the principal and accrued interest is due in one balloon
payment at the end of the twelve month period. Each purchaser of the notes
received warrants, exercisable over a period of two years from the date of
issuance, to purchase 16,250 shares of Common Stock for each $25,000 of
principal loaned, at a per share exercise price equal to the lower of $1.50 or
35% less than any the offering price at an initial public offering of the
Company's Common Stock during the warrant exercise period. During 2007, we
offered to the holders of the notes to convert the principal and accrued
interest into shares of the Company’s Common Stock at a per share conversion
price of $0.90. As of March 29, 2010, the holders of $238,000 of the principal
amount agreed to convert the principal and accrued interest thereon into shares
of our Common Stock. We repaid to note holders the principal amount of $75,000
and the accrued interest thereon. On December 31, 2009 the Company and a holder
of a Loan Notes in the principal amount of $150,000 agreed to extend the note’s
maturity date to December 31, 2011 in consideration of the issuance of warrants
to purchase up to 50,000 shares of the of the Company’s common stock, at a per
share exercise price of $0.01 exercisable for a period of three
years.  We already paid the holder $84,000 on account for the amount
owed to him. We have not made the scheduled payment on the principal amount of
$87,000 that remains due and owing under the notes that have not been converted
and, accordingly, under the terms of such notes, we are in
default.  As of the March 29, 2010, approximately $222,000 in
respect of the principal and accrued interest on these notes remains
outstanding.





We need
to raise additional funds in order to meet our on-going operating requirements,
pay outstanding loans in the aggregate approximate amount of $1.1 million and to
realize our restructured business plan. In response to the deteriorating global
economic conditions that began in 2008, we have taken certain measures in an
effort to reduce operating expenses and conserve our cash resources. Beginning
in July 2008 we significantly curtailed our non-essential product design and
development, marketing activities and reorganized our product manufacturing and
delivery system to “just-in-time” arrangements. We have terminated certain
product development plans. During 2008 and 2009, we deferred part of management
and employee salaries and benefits. As of December 31, 2009, we had 15 employees
working on a full-time basis. Following the restructure of our business, we have
6 employees as of March 29, 2010. As noted above, in our restructured
operations, we intend to pursue joint ventures, OEM type arrangement, research
and or sub contractor agreements relating to our oximetry technology with
respect to the recreational, military, baby wellness monitoring and sleep
monitoring fields. If we are unable to raise capital through a financial raise
or joint-venture type of agreement in the near term, it may be necessary for us
to take further measures to reduce our cash burn including laying-off additional
personnel. No assurance
can be given that we will be able to raise the needed capital. These conditions
raise substantial doubt about our ability to continue as a going
concern.





Additional
equity financings is likely to be dilutive to holders of our Common Stock and
debt financing, if available, may require us to be bound by significant
repayment obligations and covenants that restrict our
operations.




- 19
-




RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS


Accounting
Standards Code (ASC) 105 establishes the Financial Accounting Standards Board
Accounting Standards Codification (Codification) as the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the Financial Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This Codification supersede
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative.   The Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.




In October 2009, the
FinancialAccountingStandardsBoard(FASB)issued “Accounting Standards
Update (“ASU”) 2009-13 Multiple Deliverable Revenue Arrangements a consensus of
EITF” (formerly topic 08-1) an amendment to ASC 605-25. The update provides
amendments to the criteria in Subtopic 605-25 for separating consideration in
multiple-deliverable arrangements. The amendments in this update establish a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. The
amendments in this update also will replace the term “fair value” in the revenue
allocation guidance with the term “selling price” in order to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant.The amendments will also
eliminate the residual method of allocation and require that arrangement
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. The relative selling price
method allocates any discount in the arrangement proportionally to each
deliverable on the basis of each deliverable's selling price. The update will be
effective for revenue arrangements entered into or modified in fiscal year
beginning on or after June 15, 2010 with earlier adoption permitted. The
adoption of this update is not expected to have material impact on the Company’s
consolidated financial statements.




ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
Applicable.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
information called for by this Item 7 is included following the "Index to
Consolidated Financial Statements" contained in this Annual Report on Form
10-K.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.





ITEM
9A(T). CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES.





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer, as appropriate, to allow
timely decisions regarding required disclosure based closely on the definition
of "disclosure controls and procedures" in Rule 13a-14(c).





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with participation of management, including our Chief
Executive Officer, who serves as our principal executive officer and principal
financial and accounting officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our
Chief Executive Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report to provide
reasonable assurance that material information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.




Management
is aware that there is a lack of segregation of duties due to the small number
of employees dealing with general administrative and financial matters. However,
at this time, management has decided that considering the employees involved,
the control procedures in place, and the outsourcing of certain financial
functions, the risks associated with such lack of segregation are low and the
potential benefits of adding additional employees to clearly segregate duties do
not justify the expenses associated with such increases. Management will
periodically reevaluate this situation. If the volume of the business increases
and sufficient capital is secured, it is our intention to increase staffing to
mitigate the current lack of segregation of duties within the general
administrative and financial functions.




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.


- 20
-





MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING; CHANGES IN INTERNAL
CONTROLS OVER FINANCIAL REPORTING.





During
the course of 2009 we affected a series of reductions in workforce that caused
the number of our employees to drop from 22 as of December 31, 2008, to 15 as of
December, 2009 with a further reduction to 6 persons after restructuring and
entering into agreement with Licensee. As a result of this decline, we were
unable to ensure a proper segregation of duties amongst different employees.
This had an effect on our internal controls over financial reporting, primarily
in the authorization, monitoring and segregation of duties.





With the
restructuring and agreement with Licensee, we have revised and improved our
internal control processes.  As a result, management concluded that our
internal controls over financial reporting were effective as of December 31,
2009.  Other than actions we have taken to remedy the weakness identified
above, there were no material changes in our internal control over financial
reporting during our most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our management, has, with the assistance of
external advisor and our audit committee, conducted an evaluation of the
effectiveness of our internal control over financial reporting. Our management
assessed the effectiveness of its internal control over financial reporting as
of December 31, 2009. In making this assessment, management employed the
framework incorporated under the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control - Integrated Framework..
Based on use of this framework, management believes that, as of
December 31, 2009, the Company’s internal control over financing reporting
is effective based on those criteria.





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




ITEM
9B. OTHER INFORMATION





None.





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




Management




The
individuals who serve as our executive officers and directors are:





NAME
                    
                    AGE
                    
                    POSITIONMichael
      Braunold
                    
                    50
                    
                    President,
      Chief Executive Officer and DirectorIsrael
      Sarussi
                    
                    59
                    
                    Chief
      Technology OfficerPauline
      Dorfman
                    
                    45
                    
                    Director
      (1)Sidney
      Braun
                    
                    50
                    
                    Director
      (1)


(1)
                Audit Committee and Compensation
      Committee
Member.




The
business experience, principal occupations and employment, as well as the
periods of service, of each of our directors and executive officers during at
least the last five years are set forth below.




MICHAEL
BRAUNOLD has been Chief Executive Officer of SPO Ltd. since March 1998 and the
President and Chief Executive Officer of the Company since May 18, 2005. Prior
to March 1998, Mr. Braunold was Senior Director of Business Development at
Scitex Corporation Ltd., a multinational corporation specializing in visual
information communication. In such capacity, Mr. Braunold played a strategic
role in managing a team of professionals assigned to M&A activities. During
his 12-year tenure at Scitex, he held various positions within the worldwide
organization, including a period in the United States as Vice President of an
American subsidiary of Scitex specializing in medical imaging. From March 2000
through September 2000, Mr. Braunold was also the Chief Executive Officer and
Chairman of Ambient Corporation, a Delaware company, that specializes in the
implementation of a proposed comprehensive high-speed communication
infrastructure that is designed to utilize existing electrical power
distribution lines as a high-speed communication medium. Mr. Braunold served as
a director of Amedia Networks, Inc. (formerly TTR Technologies, Inc.) from
February 2000 through August 2002. Mr. Braunold obtained a Bachelor of Science
degree with honors in Engineering and Management Sciences from Imperial College
Business School, London. Mr. Braunold as Chief Executive Officer of the company
along with his seasoned corporate experience makes him well suited to confront
the challenges our company faces.




- 21
-





ISRAEL
SARUSSI has been the Chief Technology Officer of SPO Ltd. since its inception in
1996 and Chief Technology Officer of the Company since April 21, 2005. Prior to
joining SPO Ltd., Mr. Sarussi established a private company specializing in
computer systems for agricultural applications. Israel has held various
technical positions at several hi-tech Israeli companies including Elta
Electronics, a company specializing in military communications, where he was
assigned to advanced development projects for the Israeli Air Force. He holds a
degree in Electronic Engineering from Ben Gurion University,
Be'ersheba.




PAULINE
DORFMAN has served as a director since April 21, 2005. Since January 2001 Ms.
Dorfman, a qualified chartered accountant and chartered business valuator, has
been a consultant that assists government, commercial business, law and
accounting firms in the area of valuations, forensic investigations, litigation
support and dispute resolution. Ms. Dorfman specializes in conducting analysis
and financial investigations in connection with valuations for various purposes
such as international development disputes, income tax, estate planning,
matrimonial disputes, and economic damage quantification for breach of contract
and insurance related matters such as expropriations, business interruptions and
personal injuries. Prior to this assignment, Ms. Dorfman worked for 10 years
with the Toronto Dominion Bank in the finance and commercial lending areas
analyzing the financial risk of various bank investments and strategies,
assisting in the development of new bank products, developing accounting
policies and controls and meeting the external and internal financial reporting
requirements of the bank.  Ms. Dorfman’s accounting and corporate
financial market experience makes her well suited to address the accounting
related matters we face.





SIDNEY
BRAUN has served as a director since April 21, 2005. From June 2004 to September
2006, Mr. Braun has served as the President and Chief Operating Officer for
Med-Emerg International Inc. (MEII), a company incorporated in the Province of
Ontario..Since September 2006, Mr. Braun is also a director of Romlight
International (USA) Inc., a developer and manufacturer of electronic ballasts
and Romlight International (Canada) Inc. Since June 2009, Mr. Braun has served
on the board of directors of AIM Health Group, a publically listed company on
TSVX and as a member of their Audit Committee. Mr. Braun has extensive
experience in commerce both in North America and Europe, including
manufacturing, distribution and trading. Prior to his position at MEII and
Romlight, Mr. Braun worked for 7 years as an independent consultant to several
large state-owned corporations from the former Eastern European block on
developing business strategies and adapting to new working conditions in western
markets. In addition, Mr. Braun developed expertise in emerging financial
markets in Europe and introduced several companies to the UK and German capital
markets.Mr.Braun’s
wide experience both as an entrepreneur and in the finance markets affords the
company access to wide array of prospective financing parties.





Resignation





Mr. Jeff
Feuer resigned form his position as Chief Financial Officer as of December 24,
2009. Mr. Feuer held this position since July 14, 2005.





Committees
of the Board of Directors





Our Board
of Directors operates with the assistance of the Audit Committee and the
Compensation Committee. Due to the small size of our Board, we do not presently
maintain a formal nominating committee. The entire Board participates in the
process of nominating candidates for the Board of Directors.





The
function of the Audit Committee is to (i) make recommendations to the full Board
of Directors with respect to appointment of our independent public accountants,
and (ii) meet periodically with our independent public accountants to review the
general scope of audit coverage, including consideration of internal accounting
controls and financial reporting.





The Board
of Directors has determined that Pauline Dorfman is an "Audit Committee
Financial Expert" for purposes of the SEC's rules. The Board believes that Ms.
Dorfman meets the independence criteria set out in Rule 4200(a)(14) of the
Marketplace Rules of the National Association of Securities Dealers and the
rules and other requirements of the SEC.





The
Compensation Committee sets compensation policy and administers our cash and
equity incentive programs for the purpose of attracting and retaining skilled
executives who will promote the Company’s business goals and build shareholder
value. The committee is also responsible for reviewing and making
recommendations to the Board regarding all forms of compensation to be provided
to the Company’s named executive officers, including stock compensation and
bonuses.





Board
of Directors; Appointment of Officers





All
directors are elected by a plurality vote at the annual meeting of the
shareholders, and hold office until a successor is duly elected and qualified.
Any vacancy occurring in the Board of Directors may be filled by the
shareholders, the Board of Directors, or if the Directors remaining in office
constitute less than a quorum of the Board of Directors, they may fill the
vacancy by the affirmative vote of a majority of the Directors remaining in
office. A director elected to fill a vacancy is elected for the unexpired term
of his predecessor in office. Any directorship filled by reason of an increase
in the number of directors shall expire at the next shareholders' meeting in
which directors are elected, unless the vacancy is filled by the shareholders,
in which case the term shall expire on the later of (i) the next meeting of the
shareholders or (ii) the term designated for the director at the time of
creation of the position being filled.




Our
executive officers are appointed by our board of directors. Each officer shall
hold office until the earlier of: his death; resignation or removal from office;
or the appointment and qualification of his successor.




- 22
-





CODE
OF ETHICS




We have
adopted a code of ethics that applies to our chief executive officer, president,
chief financial officer, controller and others performing similar executive and
financial functions at the Company. A copy of our policy was attached as an
exhibit to our annual report on Form 10-KSB for the year ended December 31,
2005. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics by
posting such information on our Website, at the address and location specified
above.




SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires each of our
officers and directors and each person who owns more than 10% of a registered
class of our equity securities to file with the SEC an initial report of
ownership and subsequent reports of changes in such ownership. Such persons are
further required by SEC regulation to furnish us with copies of all Section
16(a) forms (including Forms 3, 4 and 5) that they file. Based solely on our
review of the copies of such forms received by us with respect to fiscal year
2009, or written representations from certain reporting persons, we believe all
of our directors and executive officers met all applicable filing requirements
except that each of our non-employee directors, Mr. Sidney Braun and Ms. Pauline
Dorfman, failed to timely file a Form 4 with respect to the award to each of
them of on December 31, 2009 of non-plan warrants to purchase up to 50,0000
shares of our Common Stock in consideration of the waiver by each of $32,500 in
director fees owing to them. Each director has disclosed these awards in a Form
5 filed on March 26, 2010.




ITEM
11. EXECUTIVE COMPENSATION




The
following table sets forth all compensation for the last fiscal year awarded to,
earned by, or paid to our Chief Executive Officer, the other most highly paid
executive officer serving as such at the end of 2009 whose salary and bonus
exceeded $100,000 for the year ended December 31, 2009 and one individual for
whom disclosure would have been  one of our two most highly
compensated executive officers as of year end, but for the fact that he was no
longer serving as an executive officer as of the end of the fiscal year (the
"Named Executive Officers").




SUMMARY
COMPENSATION TABLE





Name & Principal Position
                                  
                                  Year
                                  
                                  Salary ($)
                                  
                                  
                                  Bonus
      ($)
                                  
                                  
                                  Option Awards
                                    ($) (1)
                                  
                                  
                                  All Other
                                    Compensation
                                    ($)
                                  
                                  
                                  Total
                                    ($)MICHAEL
      BRAUNOLD
                                  
                                  2008
                                  
                                  $
                                  216,696
                                  (2)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  23,300
                                  
                                  
                                  $
                                  39,607
                                  (3)
                                  
                                  $
                                  279,603President
      and Chief Executive Officer
                                  
                                  2009
                                  
                                  $
                                  180,113
                                  (4)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  62,761
                                  (5)
                                  
                                  $
                                  242,874ISRAEL
      SARUSSI
                                  
                                  2008
                                  
                                  $
                                  219,963
                                  (6)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  41,549
                                  (7)
                                  
                                  $
                                  261,512Chief
      Technology Officer
                                  
                                  2009
                                  
                                  $
                                  180,176
                                  (8)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  68,016
                                  (9)
                                  
                                  $
                                  248,192JEFFREY
      FEUER
                                  
                                  2008
                                  
                                  $
                                  167,806
                                  (11)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  101,623
                                  
                                  
                                  $
                                  36,192
                                  (12)
                                  
                                  $
                                  305,621Former
      Chief Financial Officer (10)
                                  
                                  2009
                                  
                                  $
                                  135,934
                                  (13)
                                  
                                  
                                  
                                  
                                  
                                  $
                                  59,828
                                  (14)
                                  
                                  $
                                  117,272
                                  (15)
                                  
                                  $
                                  313,034




(1)
              Amounts
      shown do not reflect compensation actually received by the named executive
      officer. The amounts in the Option Awards column reflect the dollar amount
      recognized as compensation cost for financial statement reporting purposes
      for the fiscal years ended December 31, 2009 and 2008, in accordance with
      ASC 718 for all stock options granted in such fiscal years. The
      calculation in the table above excludes all assumptions with respect to
      forfeitures. There can be no assurance that the amounts set forth in the
      Option Awards column will ever be realized. A forfeiture rate of zero was
      used in the expense calculation in the financial
    statements.
 
 (2)
              Of this amount, $163,223 was paid
      in 2008 and $53,473 is being deferred. This deferred amount has been
      accrued in full at December 31, 2008. See “Michael Braunold”
      below.
 
 (3)
              Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($14,976) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds
      ($24,631).
 
 (4)
              Of
      this amount, $88,865 was paid in 2009 and $48,785 is being deferred. The
      balance of $42,463 has been waived. See “Michael Braunold”
      below
 
 (5)
              Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($13,292) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds
      ($49,469).
 
 (6)
              Of this amount, $166,490 was paid
      in 2008 and $53,473 was deferred (as of July 2008). This deferred amount
      has been accrued in full as at December 31, 2008. Effective December 1,
      2009, the accrued amount has been forgiven. See “Israel Sarussi”
      below.
 
 (7)
              Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($18,206) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds ($3,496).Of
      this amount, $19,847 was deferred as of July 2008. Effective December 1,
      2009, the accrued amounts have been forgiven. See “Israel Sarussi”
      below.
  - 23
-




(8)
              Of this amount, $88,929 was paid
      in 2009 and $48,784, was deferred. The balance of $42,463 has been waived.
      Effective December 1, 2009, the accrued amount has been forgiven. See
      “Israel Sarussi” below.
 
 (9)
              Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($15,685) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds ($16,117)
      Of this amount, $36,215 was deferred as of July 2008. Effective December
      1, 2009, the accrued amount has been forgiven. See “Israel Sarussi”
      below.
 
 (10)
              Mr.
      Feuer resigned from all positions held with us as of December 24,
      2009.
 
 (11)
              Of this amount, $137,704 was paid
      in 2008 and $30,102 was deferred. This deferred amount has been accrued in
      full as at December 31, 2008. Pursuant to the agreement entered into with
      Jeff Feuer in January 2010, the deferred amount was subsumed into the
      payments being made to him. See “Jeff Feuer”
  below.
 
 (12)
              Reflects payments made by us in
      connection with a leased automobile and related benefits ($17,605) and
      contributions to insurance premiums paid under Israeli law for pension,
      severance and further education funds ($3,608). Of this amount, $14,979
      was deferred as of July 2008. This deferred amount has been accrued in
      full as at December 31, 2008 and since forgiven, effective December 24,
      2009. through the resignation of Mr. Feuer (see footnote
      15).
 
 (13)
              Of
      this amount, $97,399 was paid through December 24, 2009. Pursuant to the
      agreement entered into with Jeff Feuer in January 2010, the balance of
      $38,535 is being subsumed into the payments being made to him periodically
      through January 2015. See “Jeff Feuer”
below.
 
 (14)
              In
      connection with the termination of Mr. Feuer’s employment, the exercise
      period with respect to previously granted options to purchase up to
      469,000 shares of our common stock has been extended to December 31, 2014.
      Additionally, in connection with the termination, Mr. Feuer was awarded
      options for an additional 200,000 shares of the Company’s Common Stock at
      a per share exercise price of $0.01 and exercisable through December 2014.
      The expense we recorded for the extension of the exercise period for the
      previously granted options amounted to $36,842 and the fair value of the
      newly granted options amounted to $22,986. See “Jeff Feuer”
      below.
 
 (15)
              Includes
      $22,549 paid by us in connection with a leased automobile and related
      benefits while Mr. Feuer was still employed by the company. The other
      amounts are being made in connection with the agreement entered into with
      Mr. Feuer in December 2009 pursuant to which he resigned from the Company.
      See “Jeff Feuer” below.




Outstanding
Equity Awards at Fiscal Year End




The
following table sets forth information concerning unexercised options and stock
that has not vested for each of our executive officers named in the Summary
Compensation Table that are outstanding as of December 31, 2009.





OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-END  DECEMBER 31, 2009




Name
                                      
                                      Number of Securities
                                        Underlying
                                        Unexercised Options
                                        (#)(1)
                                        
                                        Exercisable
                                      
                                      
                                      Number of Securities
                                        Underlying
                                        Unexercised Options
                                        (#)
                                        
                                        Unexercisable
                                      
                                      
                                      Equity Incentive Plan
                                        Awards: Number of
                                        Securities Underlying
                                        Unexercsied Unearend
                                        Options (#)
                                      
                                      
                                      Option Exercise
                                        Price
                                        
                                        ($)
                                      
                                      Option Expiration
                                        DateMichael
      Braunold
                                      
                                      
                                      250,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      0.60
                                      
                                      12/22/2015200,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      0.13
                                      
                                      12/05/2018Jeffrey
      Feuer (2)
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      0.60
                                      
                                      12/24/2014100,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.78
                                      
                                      12/24/2014249,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.13
                                      
                                      12/24/2014200,000
                                      (3)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.01
                                      
                                      12/24/2014Israel
      Sarussi
                                      
                                      
                                      —
                                      (4)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      —


(1)
                Options were issued under our
      2005 Equity Incentive Plan and are fully
  vested.
 (2)
                Mr.
      Feuer resigned from all positions with our company on December 24,
      2009.
 (3)
                Refers
      to warrants issued to Mr. Feuer in December 2009 upon his resignation from
      our Company.
 (4)
                Does
      not include warrants for 446,383 shares of our Common Stock issued to Mr.
      Sarussi on April 21, 2005 in exchange for warrants in SPO Ltd held prior
      to Acquisition
Transaction




- 24
-




EMPLOYMENT
AGREEMENTS WITH EXECUTIVE OFFICERS




MICHAEL BRAUNOLD. On May 18,
2005, we entered into an employment agreement with Michael Braunold, pursuant to
which he serves as our Chief Executive Officer and President. On such date, Mr.
Braunold and SPO Ltd., entered into an employment agreement pursuant to which
Mr. Braunold serves as SPO Ltd.'s Chief Executive Officer. Each of the
agreements with us and SPO Ltd. continues in effect through May 18, 2010;
thereafter, the agreement and is automatically renewable for successive two year
terms unless we or Mr. Braunold indicate in writing, upon 90 days prior to the
scheduled termination of the term that such party does not intend to renew the
agreement. Mr. Braunold is currently entitled to a monthly salary of $13,250
under the agreement with SPO Ltd. However, in order to reduce operating expenses
and conserve cash, since July 2008 Mr. Braunold has been deferring a part of his
salary and social benefits due thereon until such time as our cash position
permits payment of salary in full without interfering with our ability to pursue
our plan of operations, and, as of December 31, 2009, such deferred amount
totaled an aggregate of $155,053. The agreements may be terminated by Mr.
Braunold for any reason on 60 days written notice or for Good Reason (as defined
in the employment agreement) or by us for Just Cause (as defined in the
employment agreement) or for any other reason. In the event of a termination by
Mr. Braunold for Good Reason or by us for any reason other than Just Cause, we
are to pay Mr. Braunold an amount equal to (i) if such termination occurs during
the initial term of the agreement, the base salary then payable, if any, for the
longer of (a) the period from the date of such termination to the end of the
initial term as if the agreement had not been so terminated and (b) twelve
months and (ii) if such termination occurs after the initial term, the base
salary then payable, if any, for a period of twelve months as if the agreement
had not been so terminated. Mr. Braunold is not entitled to a salary under the
agreement with us was granted options in December 2005 under our 2005 Equity
Incentive Plan (the “2005 Plan”) to purchase up to 250,000 shares of our Common
Stock at a per share exercise price of $0.60, all of which options are currently
exercisable. In December 2008, Mr. Braunold was awarded options to purchase up
to 200,000 additional shares of Common Stock under the 2005 Plan, at a per share
exercise price of $0.13, all of which options were exercisable upon
grant.




ISRAEL SARUSSI. In January
1998 SPO Ltd. entered into an employment agreement with Israel Sarussi and which
was subsequently amended in 2002 and 2005. Pursuant to the agreement Mr. Sarussi
serves as the SPO Ltd.'s Chief Technical Officer. The agreement with SPO Ltd.
terminates on the earlier of: (i) Mr. Sarussi's death or disability, (ii)
termination by SPO Ltd. without cause upon 12 months written notice; or (iii)
termination of Mr. Sarussi with cause. Mr. Sarussi is currently paid a monthly
salary of $13,250under the agreement with
SPO Ltd. However, in order to reduce operating expenses and conserve cash, since
July 2008 Mr. Sarussi has been deferring a part of his salary and social
benefits and, as of December 31, 2009, such deferred amount totaled $151,943.
However, in connection with the entry in January 2010 of the license agreement
relating to our PulseOx product with an entity owned and controlled by Mr.
Sarussi, which agreement was effective as of December 1, 2009, Mr. Sarussi
forgave the above referenced deferred amounts.





JEFFREY FEUER. On July 14,
2005, we entered into an employment agreement with Jeffrey Feuer, pursuant to
which Mr. Feuer served as our Chief Financial Officer. Previously, on May 15,
2005, Mr. Feuer and SPO Ltd. entered into an employment agreement pursuant to
which Mr. Feuer served as SPO Ltd.'s Chief Financial Officer. By its terms, each
of the agreements with the Company and SPO Ltd. terminated on the earlier of:
(i) Mr. Feuer's death or disability, (ii) termination by the Company or Mr.
Feuer without cause upon 6 months written notice or (iii) termination of Mr.
Feuer with cause. Mr. Feuer is currently paid a monthly salary of $10,000 under
the agreement with SPO Ltd. Mr. Feuer was not entitled to a salary under the
agreement with us but was granted options in December 2005 under the Company's
2005 Equity Incentive Plan to purchase 120,000 shares of the Company's Common
Stock at a per share exercise price of $0.60, all of which options are currently
exercisable. In April 2008, Mr. Feuer was granted options to purchase up to
100,000 additional shares of Common Stock under the 2005 Plan, at a per share
exercise price of $0.78 and in December2008, was granted options to purchase up
to 249,000 additional shares of Common Stock at a per share exercise
price of $0.13, all of which options were exercisable upon
grant.





By mutual
agreement, effective as of December 24, 2009, Mr. Feuer has resigned from all
positions held with the Company.  In connection with his resignation,
on December 24, 2009, the Company’s wholly owned subsidiary SPO Ltd and Mr.
Feuer entered into an agreement terminating Mr. Feuer’s employment agreement
with SPO Ltd. Under the agreement entered into relating to his termination, SPO
Ltd.  agreed to remit to Mr. Feuer amounts payable to him under the
agreement in the aggregate amount of approximately $88,000, of which
approximately $68,000 is payable on a monthly basis of approximately $5,700 per
month over a 12 month period between February 2010 and January 2011 and the
balance of approximately  $20,000 was paid between January and March
2010. In addition, in a separate agreement entered into between us and Mr. Feuer
on December 24, 2009, Mr. Feuer will be able to exercise options for 469,000
shares for our common stock previously granted to him through December 31, 2014.
The options are exercisable at per share exercise prices ranging between $0.13
and $0.78. In addition, we awarded to Mr. Feuer options for an additional
200,000 shares of our Common Stock at a per share exercise price of $0.01 and
exercisable through December 2014. Each of Mr. Feuer, the Company and SPO Ltd
furnished to the other general releases.





Each of
these agreements includes certain customary intellectual property development
rights, confidentiality and non-compete provisions that prohibit the executive
from competing with us for one year, or soliciting our employees for one year,
following the termination of his employment.




COMPENSATION
OF DIRECTORS




We
undertook to pay each outside director $25,000 per annum for service on our
Board of Directors in 2009.


- 25
-




The
following table summarizes data concerning the compensation of our non-employee
directors for the fiscal year ended December 31, 2009.




Fees Earned
                        
                        Optionor
      paid (1)
                        
                        Awards($)
      (2)
                        
                        TotalSidney
      Braun
                        
                        $
                        —
                        
                        3,791
                        
                        $
                        3,791Pauline
      Dorfman
                        
                        $
                        —
                        
                        3,791
                        
                        $
                        3,791


(1)
                In order to conserve our cash
      flow, our non-employee directors agreed, in December 2009, to waive
      $75,000 payable to them in respect of directors fees for 2008 and 2009 in
      consideration of our issuance to them of warrants to purchase in the
      aggregate 100,000 shares of our Common Stock at a per share exercise price
      of $0.08. The warrants are exercisable through December 2014. see
      footnote (2).
  (2)
                The amounts in the Option Awards
      column reflect the dollar amount recognized as compensation cost for
      financial statement reporting purposes for the fiscal year ended December
      31, 2009 in accordance with ASC 718 for all stock options granted in such
      fiscal year. The calculation in the table above excludes all assumptions
      with respect to forfeitures. There can be no assurance that the amounts
      set forth in the Option Awards column will ever be realized. A forfeiture
      rate of zero was used in the expense calculation in the financial
      statements. The assumptions used to calculate the fair value of stock
      option grants under FAS 123R, were: expected holding period of five
      years, risk free interest rate of 0.5%, no dividend yield and volatility
      of 273%.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
following table sets forth information as of the close of business on March 29,
2010, concerning shares of our common stock beneficially owned by each director
and named executive officer, each other person beneficially owning more than 5%
of our Common Stock and by all directors and executive officers as a
group.




In
accordance with the rules of the SEC, the table gives effect to the shares of
common stock that could be issued upon the exercise of outstanding options and
warrants within 60 days of March 29, 2010. Unless otherwise noted in the
footnotes to the table and subject to community property laws where applicable,
the following individuals have sole voting and investment control with respect
to the shares beneficially owned by them. We have calculated the percentages of
shares beneficially owned based on 25,183,007 shares of Common Stock outstanding
at March 29, 2010.




Common
      Stock
                      Percentage
      ofName of Beneficial Owner
(1)
                    
                    Beneficially Owned
                      (2)
                    
                    
                    Common StockMichael
      Braunold
                    
                    
                    1,193,922
                    (3)
                    
                    
                    4.74
                    %Jeffrey
      Feuer (4)Israel
      Sarussi
                    
                    
                    4,165,776
                    (5)
                    
                    
                    16.54
                    %Pauline
      Dorfman
                    
                    
                    175,000
                    (6)
                    
                    
                    *Sidney
      Braun
                    
                    
                    175,000
                    (6)
                    
                    
                    *All
      officers and directors as a group (4 persons)
                    
                    
                    5,709,698
                    
                    
                    
                    22.67
                    %









*
              Less than
    1%
  (1)
              Except as otherwise indicated,
      the address of each beneficial owner is c/o SPO Medical 3 Gavish Street,
      POB 2454, Kfar Saba,  Israel
  44425.
  (2)
              Beneficial ownership is
      determined in accordance with the rules of the Securities and Exchange
      Commission and generally includes voting or investment power with respect
      to the shares shown. Except where indicated by footnote and subject to
      community property laws where applicable, the persons named in the table
      have sole voting and investment power with respect to all shares of voting
      securities shown as beneficially owned by
  them.
  - 26
-
  (3)
              Includes 450,000 shares of our
      Common Stock that are issuable upon exercise of vested options issued
      under our 2005 Equity Incentive Plan (the "2005
    Plan").
  (4)
              Mr. Feuer resigned from all
      positions held with out company as of December 24,
      2009.
  (5)
              Comprised of 3,719,393 shares of
      the Company's Common Stock and 446,383 shares of Common Stock issuable
      upon exercise of currently exercisable
  warrants.
  (6)
              Represents
      (i) shares issuable upon exercise of currently exercisable options under
      the Company's 2005 Non-Employee Directors Stock Option Plan (the "2005
      Directors Plan") and (ii) warrants to purchase 100,000 shares of our
      common stock issued in December
2009.


EQUITY
COMPENSATION PLAN INFORMATION




We have
two compensation plans (excluding individual stock option grants outside of such
plans) under which our equity securities are authorized for issuance to
employees, directors and consultants in exchange for services - the 2005 Equity
Incentive Plan (the "2005 Plan") and the 2005 Non-Employee Directors Stock
Option Plan (the "2005 Directors Plan"; together with the 2005 Plan, the
"Plans"). Our shareholders have approved these plans.




The
following table presents information as of December 31, 2009 with respect to
compensation plans under which equity securities were authorized for issuance,
including the 2005 Plan and the Non-Employee Directors Plan and agreements
granting options or warrants outside of these plans.




NUMBER OF
                    SECURITIESTO BE ISSUED
                    UPON
                  
                  
                  WEIGHTED-
                    AVERAGE
                  
                  
                  NUMBER OF
                    SECURITIESEXERCISE
                    OF
                  
                  
                  EXERCISE PRICE
                    OF
                  
                  
                  REMAINING
                    AVAILABLE FOROUTSTANDING
                    OPTIONS,
                  
                  
                  OUTSTANDING
                    OPTIONS,
                  
                  
                  FUTURE ISSUANCE
                    UNDERWARRANTS
                    OR RIGHTS
                  
                  
                  WARRANTS
                    OR RIGHTS
                  
                  
                  EQUITY COMPENSATION
                    PLANSEquity
      compensation plans approved by security holders
                  
                  
                  1, 900,000
                  
                  
                  $
                  0.39
                  
                  
                  
                  50,000Equity
      compensation plans not approved by security holders
                  
                  
                  1,631,808
                  
                  
                  $
                  0.07Total
                  
                  
                  3,531,808
                  
                  
                  $
                  0.24
                  
                  
                  
                  50,000




NON-SHAREHOLDER
APPROVED PLANS




The
following is a description of options and warrants granted to employees,
directors, advisory directors and consultants that were outstanding as of
December 31, 2009.




As of
December 31, 2009, we had outstanding options and warrants to purchase an
aggregate of 1,631,808 shares of our Common Stock which were granted outside of
the Plans. These are comprised of the following: (i) Penny warrants issued to
Israel Sarussi, an executive officer (446,383) ,to service providers ((787,925)
and to our former CFO (200,000), (ii) vested warrants to purchase up to 97,500
shares of our Common Stock issued between April 2005 and December 2007 to
consultants and service providers at per share exercise price of between $0.6
and $1.5 (iii) 100,000 warrants to be issued to Directors in lieu of fees owed
to them.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




Certain Relationships and
Related Transactions





Since the
beginning of its last fiscal year, the Company has not engaged in any
transaction, or any proposed transaction, to which the Company or any of its
subsidiaries was or is to be a party and (1) in which the amount involved
exceeds the lesser of $120,000 or one percent of the average of the Company’s
assets at year end for the last three completed fiscal years and (2) in which
any of the Company’s directors, nominees for director, executive officers or
beneficial owners of more than 5% of its Common Stock, or members of the
immediate families of those individuals, had or will have, a direct or indirect
material interest.




- 27
-




Director
Independence





The Board
believes that each of Sidney Braun and Pauline Dorfman meets the independence
criteria set out in Rule 4200(a)(14) of the Marketplace Rules of the National
Association of Securities Dealers and the rules and other requirements of the
SEC. Mr. Braun and Ms. Dorfman were appointed to the Audit Committee in 2005,
and are presently the sole members of the committee.




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Audit
and Non-Audit Fees




The
following table presents fees for professional audit services rendered by
Brightman Almagor & Co., Certified Public Accountants, A member firm of
Deloitte Touche Tohmatsu, for the audit of our annual financial statements for
the year ended December 31, 2009 and 2008.





Fiscal
      Year
                      Ended
                    
                    
                    Fiscal
      Year
                      EndedDecember
      31,
                      2009
                    
                    
                    December
      31,
                      2008Audit
      Fees
                    
                    $
                    27,500
                    
                    
                    $
                    42,500Audit
      Related Fees
                    
                    $
                    —
                    
                    
                    
                    —Tax
      Fees
                    
                    $
                    3,500
                    
                    
                    $
                    3,500All
      Other Fees
                    
                    $
                    —
                    
                    
                    
                    —Total
                    
                    $
                    31,000
                    
                    
                    $
                    46,000




AUDIT
FEES were for professional services rendered for the audits of our consolidated
financial statements, quarterly review of the financial statements included in
our Quarterly Reports on Form 10-QSB, consents, and other assistance required to
complete the year-end audit of the consolidated financial
statements.




AUDIT-RELATED
FEES were for assurance and related services reasonably related to the
performance of the audit or review of financial statements and not reported
under the caption Audit Fees.




TAX FEES
were for professional services related to tax compliance, tax authority audit
support and tax planning.




All OTHER
FEES include professional advisory fees relating to Company’s efforts to raise
additional funds through a public offering of our securities outside the United
States.




Our audit
committee (the "Audit Committee") reviews non-audit services rendered for each
year and determines whether such services are compatible with maintaining the
accountants' independence. The Audit Committee's policy is to pre-approve all
audit services and all non-audit services that our independent public
accountants are permitted to perform for us under applicable federal securities
regulations. As permitted by the applicable regulations, the Audit Committee's
policy utilizes a combination of specific pre-approval on a case-by-case basis
of individual engagements of the independent public accountants and general
pre-approval of certain categories of engagements up to predetermined dollar
thresholds that are reviewed annually by the Audit Committee. Specific
pre-approval is mandatory for, among other things, the annual financial
statement audit engagement.




PART IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




The
following exhibits are incorporated herein by reference or are filed with this
report as indicated below.




EXHIBIT NO.
                  
                  EXHIBIT2.1
                  
                  Restated
      Capital Stock Exchange Agreement dated as of April 21, 2005 among the
      Company, SPO Ltd. and the SPO Ltd. shareholders specified therein.
      (1)3.1
                  
                  Amended
      and Restated Certificate of Incorporation of the Company.
    (1)3.2
                  
                  Bylaws
      of the Company (1)3.3
                  
                  Articles
      of Association of SPO Medical Equipment Ltd.4.1
                  
                  Form
      of Promissory Note issued to certain investors. (1)4.2
                  
                  Form
      of Warrant Instrument issued to certain investors.(1)4.3
                  
                  Form
      of Promissory Note issued in connection with the Subscription Agreement
      referred to in Item 10.1. (5)4.4
                  
                  Form
      of Warrant issued in connection with the Agreement referred to in Item
      10.1 (5)4.5
                  
                  Form
      of Warrant (8)4.6
                  
                  Form
      of Common Stock Purchase Warrant (8)10.1
                  
                  Form
      of subscription Agreement with certain investors.10.2
                  
                  Employment
      Agreement effective as of May 18, 2005 between the Company and Michael
      Braunold. (2)+10.3
                  
                  Employment
      Agreement effective as of May 18, 2005 between SPO Ltd. and Michael
      Braunold. (2)+10.4
                  
                  Employment
      Agreement effective as of July 14, 2005 between the Company and Jeffrey
      Feuer. (3)
  - 28
-
  10.5
                
                Employment
      Agreement effective as of July 14, 2005 between SPO Ltd. and Jeffrey
      Feuer. (3)10.6
                
                Company's
      2005 Equity Incentive plan10.7
                
                Company's
      2005 Non-Employee Directors Stock option Plan10.8
                
                Stock
      Purchase Agreement dated as of January 10, 2006 between SPO Medical Inc.
      and the investor specified therein. (4)10.9
                
                Form
      of Subscription Agreement between SPO Medical Inc. and certain Buyers
      (5)10.10
                
                Form
      of First Amendment to Subscription Agreement between SPO Medical Inc. and
      parties thereto. (5)10.11
                
                Confidential
      Private Placement Subscription Agreement dated as of July 7, 2007 by and
      between SPO Medical Inc. and Rig III10.12
                
                Form
      of Agreement Relating to the Conversion of outstanding Debt
      Instruments10.13
                
                Form
      of Warrant Exercise and Note Conversion Agreement dated as of March 26,
      2008 (8)10.14
                
                Form
      of Second Amendment to an SPO Subscription Agreement
(8)10.15
                
                Form
      of Subscription Agreement (8)10.16
                
                Mutual
      Release and Waiver dated as of April 16, 2008 between SPO Medical Inc. and
      Active Health Care Inc.(9)10.17
      *
                
                Settlement
      Agreement dated as of December 24, 2009 between SPO Medical Equipment Ltd
      and Jeff Feuer.10.18*
                
                Settlement
      Agreement dated as of December 24, 2009 between SPO Medical Inc. and Jeff
      Feuer.10.19
      *
                
                Alliance
      and License Agreement, dated as of December 1, 2009 between SPO Medical
      Equipment Ltd. and SPO Medical Systems Ltd.14.1
                
                Code
      of Conduct (6)31*
                
                Certification
      of the Chief Executive Officer (Principal Executive officer and Principal
      financial and accounting officer) pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232*
                
                Certification
      of the Chief Executive Officer (Principal Executive officer and Principal
      financial and accounting officer) pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


+ 
Management Agreement


*  Attached
hereto




(1)
              Incorporated by reference to
      Current Report on Form 8-K filed April 27,
  2005.
 (2)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended June 30,
      2005
 (3)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended September 30,
      2005
 (4)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended March 31,
      2006
 (5)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended September 30,
      2006
 (6)
              Incorporated by reference to the
      Company's Annual Report Form 10-KSB for the fiscal year ended December 31,
      2006
 (7)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended September 30,
      2007
 (8)
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended March 31,
      2008
 ()
              Incorporated by reference to the
      Company's Quarterly Report Form 10-QSB for the quarter ended June 30,
      2008




- 29
-




SIGNATURES




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





DATE:
      March 29, 2010
              /s/
      Michael BraunoldMichael
      BraunoldChief
      Executive Officer  (Principal Executive Officer and Principal
      Financial and Accounting Officer) and Director




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the issuer and in the capacities and on the dates
indicated.





SIGNATURE
                                    
                                    TITLE
                                    
                                    DATE/s/
      Sidney Braun
                                    
                                    Chairman,
      Director
                                    
                                    March
      29, 2010Sidney
      Braun/s/
      Michael Braunold
                                    
                                    President,
      Chief Executive Officer and Director
                                    
                                    March
      29, 2010Michael
      Braunold/s/
      Pauline Dorfman
                                    
                                    Director
                                    
                                    March
      29, 2010Pauline
      Dorfman




- 30
-




SPO
MEDICAL INC. AND ITS SUBSIDIARY





CONSOLIDATED
FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009


U.S.
DOLLARS IN THOUSANDS





INDEX





PageReport
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets
            F-3
      - F-4Consolidated
      Statements of Operations
            F-5Statements
      of Changes in Stockholders' Deficiency
            F-6Consolidated
      Statements of Cash Flows
            F-7Notes
      to Consolidated Financial Statements
            F-8
      – F-22




F-1


REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM





To
the Stockholders of


SPO MEDICAL
INC.





We have
audited the accompanying consolidated balance sheets of SPO MEDICAL INC. ("the
Company") and its subsidiary as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for each of the two years in the period ended December 31, 2009.
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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, such consolidated financial statements, present fairly, in all material
respects, the financial position of the Company and its subsidiary as of
December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United states of
America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring losses from operations and has a
shareholders' deficiency that raises substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The accompanying financial statements do not include
any adjustments that might result from the outcome of
this uncertainty.





Brightman
Almagor Zohar & Co.


Certified
Public Accountants


A member
firm of Deloitte Touche Tohmatsu





Tel-Aviv,
Israel


March 29,
2010





F-2


SPO MEDICAL INC.


CONSOLIDATED
BALANCE SHEETS


U.S.
dollars in thousands (except share data)





December
      31,Note
                
                
                2009
                
                
                2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                
                
                
                $
                386
                
                
                $
                263Trade
      receivables, net
                
                
                4
                
                
                
                15
                
                
                
                224Prepaid
      expenses and other accounts receivable
                
                
                
                
                
                
                151
                
                
                
                32Inventories
                
                
                5
                
                
                
                -
                
                
                
                850552
                
                
                
                1,369LONG
      TERM INVESTMENTSDeposits
                
                
                
                
                
                
                -
                
                
                
                12Severance
      pay fund
                
                
                
                
                
                
                166
                
                
                
                270166
                
                
                
                282PROPERTY AND EQUIPMENT,
      NET
                
                
                6
                
                
                
                141
                
                
                
                189Total
      net assets
                
                
                
                
                
                $
                859
                
                
                $
                1,840





The
accompanying notes to these financial statements are an integral part
thereof.





F-3


SPO
MEDICAL INC.


CONSOLIDATED
BALANCE SHEETS


U.S.
dollars in thousands (except share data)





December 31,Note
                  
                  
                  2009
                  
                  
                  2008LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      LiabilitiesShort-term
      loans, net
                  
                  
                  7
                  
                  
                  $
                  1,135
                  
                  
                  $
                  1,138Trade
      payables
                  
                  
                  
                  
                  
                  
                  32
                  
                  
                  
                  298Employees
      and Payroll accruals
                  
                  
                  8
                  
                  
                  
                  485
                  
                  
                  
                  492Accrued
      expenses and other liabilities
                  
                  
                  9
                  
                  
                  
                  588
                  
                  
                  
                  7852,240
                  
                  
                  
                  2,713Long-Term
      LiabilitiesAccrued
      severance pay
                  
                  
                  10
                  
                  
                  
                  295
                  
                  
                  
                  492295
                  
                  
                  
                  492COMMITMENTS
      AND CONTINGENT LIABILITIES
                  
                  
                  18STOCKHOLDERS’
      DEFICIENCY
                  
                  
                  12Stock
      capitalPreferred
      stock of $0.01 par value
                    Authorized
      - 2,000,000 shares, issued and outstanding - noneCommon
      stock $0.01 par value-
                    Authorized
      - 50,000,000 shares, issued and outstanding - 25,183,007 and 24,756,507
      shares as at December 31, 2009 and 2008, respectively
                  
                  
                  
                  
                  
                  
                  252
                  
                  
                  
                  248Additional
      paid-in capital
                  
                  
                  
                  
                  
                  
                  14,403
                  
                  
                  
                  14,241Accumulated
      deficit
                  
                  
                  
                  
                  
                  
                  (16,331
                  )
                  
                  
                  (15,854
                  )(1,676
                  )
                  
                  
                  (1,365
                  )Total
      liabilities and stockholders’ deficiency
                  
                  
                  
                  
                  
                  $
                  859
                  
                  
                  $
                  1,840





The
accompanying notes to these financial statements are an integral part
thereof.




F-4


SPO
MEDICAL INC.


CONSOLIDATED
STATEMENT OF OPERATIONS


U.S.
dollars in thousands (except share data)





Year
      ended December 31Note
              
              
              2009
              
              
              2008Revenues
              
              
              
              
              $
              1,047
              
              
              $
              2,759Cost
      of revenues
              
              
              
              
              
              632
              
              
              
              1,839Gross
      profit
              
              
              
              
              
              415
              
              
              
              920Operating
      expensesResearch
      and development, net
              
              
              13
              
              
              
              414
              
              
              
              1,179Selling
      and marketing
              
              
              
              
              
              
              132
              
              
              
              567General
      and administrative
              
              
              
              
              
              
              834
              
              
              
              1,614Restructuring
      expenses and restructuring of debt (income)
              
              
              14
              
              
              
              (527
              )
              
              
              81Other
      Income – agreement with a licensee
              
              
              15
              
              
              
              (224
              )
              
              
              -Total
      operating expenses
              
              
              
              
              
              
              629
              
              
              
              3,441Operating
      loss
              
              
              
              
              
              
              214
              
              
              
              2,521Financial
      expenses, net
              
              
              16
              
              
              
              263
              
              
              
              680Net
      Loss for the year
              
              
              
              
              
              $
              477
              
              
              $
              3,201Basic
      and diluted loss per ordinary share
              
              
              
              
              
              $
              0.02
              
              
              $
              0.13Weighted
      average number of shares outstanding used in computation of basic and
      diluted loss per share
              
              
              
              
              
              
              26,215,454
              
              
              
              24,650,271





The
accompanying notes to these financial statements are an integral part
thereof.


F-5





SPO MEDICAL INC.


STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIENCY


U.S.
dollars in thousands (except share data)





Share capital
                        
                        
                        Additional
                          paid-in
                          capital
                        
                        
                        Accumulated
                          Deficit
                        
                        
                        TotalBalance
      as of January 1, 2008
                        
                        $
                        215
                        
                        
                        $
                        11,904
                        
                        
                        $
                        (12,653
                        )
                        
                        $
                        (534
                        )Issuance
      of ordinary stock upon conversion of loans and accrued
      interest
                        
                        
                        10
                        
                        
                        
                        512
                        
                        
                        
                        
                        
                        
                        
                        522Issuance
      of stock capital, net
                        
                        
                        8
                        
                        
                        
                        549
                        
                        
                        
                        
                        
                        
                        
                        557Issuance
      of ordinary stock to service providers
                        
                        
                        9
                        
                        
                        
                        356
                        
                        
                        
                        
                        
                        
                        
                        365Issuance
      of ordinary stock on cancellation of distribution
agreement
                        
                        
                        4
                        
                        
                        
                        481
                        
                        
                        
                        
                        
                        
                        
                        485Benefit
      on issuance of warrants in connection with conversion of loans and accrued
      interest
                        
                        
                        
                        
                        
                        
                        105
                        
                        
                        
                        
                        
                        
                        
                        105Amortization
      of deferred stock-based compensation related to options granted to
      employees
                        
                        
                        
                        
                        
                        
                        249
                        
                        
                        
                        
                        
                        
                        
                        249Issuance
      of ordinary stock in consideration of unpaid legal fees
                        
                        
                        2
                        
                        
                        
                        28
                        
                        
                        
                        
                        
                        
                        
                        30Benefit
      on issuance of options  and re-pricing of options granted to
      directors
                        
                        
                        
                        
                        
                        
                        10
                        
                        
                        
                        
                        
                        
                        
                        10Benefit
      on issuance of penny warrants to service providers
                        
                        
                        
                        
                        
                        
                        47
                        
                        
                        
                        
                        
                        
                        
                        47Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (3,201
                        )
                        
                        
                        (3,201
                        )Balance
      as of December 31, 2008
                        
                        $
                        248
                        
                        
                        $
                        14,241
                        
                        
                        $
                        (15,854
                        )
                        
                        $
                        (1,365
                        )Amortization
      of deferred stock-based compensation related to options granted to
      employees
                        
                        
                        
                        
                        
                        
                        41
                        
                        
                        
                        
                        
                        
                        
                        41Issuance
      of ordinary stock upon conversion of unpaid accrued
    interest
                        
                        
                        *-
                        
                        
                        
                        6
                        
                        
                        
                        
                        
                        
                        
                        6Issuance
      of ordinary stock to service providers
                        
                        
                        4
                        
                        
                        
                        28
                        
                        
                        
                        
                        
                        
                        
                        32Benefit
      on issuance of warrants in consideration of unpaid directors
      fees
                        
                        
                        
                        
                        
                        
                        8
                        
                        
                        
                        
                        
                        
                        
                        8Benefit
      on issuance of warrants in connection with extension of loans and accrued
      interest
                        
                        
                        
                        
                        
                        
                        8
                        
                        
                        
                        
                        
                        
                        
                        8Amortization
      of deferred stock-based compensation related to options granted to
      employees in restructuring
                        
                        
                        
                        
                        
                        
                        71
                        
                        
                        
                        
                        
                        
                        
                        71Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (477
                        )
                        
                        
                        (477
                        )Balance
      as of December 31, 2009
                        
                        $
                        252
                        
                        
                        $
                        14,403
                        
                        
                        $
                        (16,331
                        )
                        
                        $
                        (1,676
                        )


* Less
than $1





The
accompanying notes to these financial statements are an integral part
thereof.


F-6





MEDICAL INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS


U.S.
dollars in thousands (except share data)




Year ended December
      31,2009
                
                
                2008Cash
      Flows from Operating ActivitiesNet
      Loss for the period
                
                $
                (477
                )
                
                $
                (3,201
                )other
      income recorded due to agreement with a licensee
                
                
                (224
                )Adjustments
      to reconcile loss to net cash used in operating
activities:Depreciation
                
                
                48
                
                
                
                41Stock-based
      compensation expenses
                
                
                160
                
                
                
                672Amortization
      of loan discounts
                
                
                -
                
                
                
                49Increase
      in accrued interest payable on loans
                
                
                112
                
                
                
                124Benefit
      resulting from changes to warrant terms
                
                
                -
                
                
                
                105Changes
      in assets and liabilities:Decrease
      in trade receivables
                
                
                209
                
                
                
                659Decrease
      (Increase)  in prepaid expenses and other
      receivables
                
                
                (7
                )
                
                
                88Decrease
      in inventories
                
                
                538
                
                
                
                231Decrease  in
      accounts payable
                
                
                (266
                )
                
                
                (278
                )Increase  in
      accrued severance pay, net
                
                
                16
                
                
                
                89Increase in
      accrued expenses and other liabilities
                
                
                23
                
                
                
                263Net
      cash resulted from (used in) operating activities
                
                
                132
                
                
                
                (1,158
                )Cash
      Flows from Investing ActivitiesDecrease
      (increase) in long-term deposits
                
                
                -
                
                
                
                3Cash
      from agreement with licensee
                
                
                100
                
                
                
                -Purchase
      of property and equipment
                
                
                -
                
                
                
                (53
                )Net
      cash  results from (used in) investing
activities
                
                
                100
                
                
                
                (50
                )Cash
      Flows from Financing ActivitiesIssuance
      of stock capital
                
                
                -
                
                
                
                557Repayment
      of short-term loans
                
                
                (109
                )
                
                
                (328
                )Net
      cash provided by (used in) financing activities
                
                
                (109
                )
                
                
                229Increase
      (decrease) in cash and cash equivalents
                
                
                123
                
                
                
                (979
                )Cash
      and cash equivalents at the beginning of the year
                
                
                263
                
                
                
                1,242Cash
      and cash equivalents at the end of the year
                
                $
                386
                
                
                $
                263Non
      cash transactionsIssuance
      of ordinary stock on settlement of distribution agreement
                
                $
                
                
                
                $
                485Conversion
      of loan notes into stock capital
                
                $
                
                
                
                $
                522


The
accompanying notes to these financial statements are an integral part
thereof.





F-7


SPO MEDICAL INC.


NOTES
TO THE FINANCIAL STATEMENTS


U.S.
dollars in thousands (except share data)





NOTE
      1
            GENERAL





SPO
Medical Inc. (hereinafter referred to as "SPO" or the "Company") is engaged in
the design, development and marketing of non-invasive pulse oximetry
technologies to measure blood oxygen saturation and heart rate. The applications
are marketed, in the following sectors; professional medical care, homecare,
sports, safety and search & rescue.





The
Company was originally incorporated under the laws of the State of Delaware in
September 1981 under the name "Applied DNA Systems, Inc." On November 16, 1994,
the Company changed its name to "Nu-Tech Bio-Med, Inc." On December 23, 1998,
the Company changed its name to "United Diagnostic, Inc." (UNDI) Effective April
21, 2005, the Company acquired (the "Acquisition Transaction") 100% of the
outstanding capital stock of SPO Medical Equipment Ltd., a company incorporated
under the laws of the State of Israel ("SPO Ltd."), pursuant to a Capital Stock
Exchange Agreement dated as of February 28, 2005 between the Company, SPO Ltd.
and the shareholders of SPO Ltd., as amended and restated on April 21, 2005 (the
"Exchange Agreement"). In exchange for the outstanding capital stock of SPO
Ltd., the Company issued to the former shareholders of SPO Ltd. a total of
5,769,106 shares of the Company's common stock, par value $0.01 per share
("Common Stock"), representing approximately 90% of the Common Stock then issued
and outstanding after giving effect to the Acquisition Transaction. As a result
of the Acquisition Transaction, SPO Ltd. became a wholly owned subsidiary of the
Company as of April 21, 2005 and, subsequent to the Acquisition Transaction, the
Company changed its name to "SPO Medical Inc." Upon consummation of the
Acquisition Transaction, the Company effectuated a forward subdivision of the
Company's Common Stock issued and outstanding on a 2.65285:1 basis.





The
merger between UNDI and the SPO Ltd was accounted for as a reverse merger. As
the shareholders of SPO Ltd. received the largest ownership interest in the
Company, SPO Ltd was determined to be the "accounting acquirer" in the reverse
acquisition. As a result, the historical financial statements of the Company
were replaced with the historical financial statements of the SPO
Ltd.





The
Company and its subsidiary, SPO Ltd., are collectively referred to as the
"Company".





In
January 2010, the Company restructured its operations in an attempt to focus
primarily on licensing its core technology for non-medical market applications.
The restructuring included reduction of the Company’s corporate and
manufacturing workforce and entering into an alliance and license agreement as
discussed in Notes 14 and 15 below. Going forward the Company will operate as a
development and licensing entity.





NOTE
      2
            GOING
      CONCERN





As
reflected in the accompanying financial statements, the Company’s operations for
the year ended December 31, 2009, resulted in a net loss of $477 and the
Company’s balance sheet reflects a net stockholders’ deficit of $1,676. The
Company’s ability to continue operating as a “going concern” is dependent on its
ability to raise sufficient additional working capital. As disclosed in previous
filings with the Securities and Exchange Commission, management has been
attempting to raise capital from current and potential stockholders and plans to
continue these efforts. In January 2010, the Company restructured its operations
in an attempt to focus primarily on licensing its core technology for
non-medical market applications .The restructuring included entering into a
licensing agreement for the existing medical PulseOx product line, which
resulted in the cessation of the Company’s production and sales and marketing
activities. See Note 14 and 15 below.


F-8


SPO
MEDICAL INC.


NOTES
TO THE FINANCIAL STATEMENTS


U.S.
dollars in thousands (except share data)





NOTE
      3
            SIGNIFICANT
      ACCOUNTING POLICIES





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





A.
              Principles
      of Consolidation:





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, SPO Ltd. All material inter-company accounts and
transactions have been eliminated in consolidation.





B.
            Use
      of estimates:





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.





C.
            Financial
      statements in U.S. dollars:





The
reporting currency of the Company is the U.S. dollar ("dollar"). The dollar is
the functional currency of the Company. Transactions and balances originally
denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances are remeasured into dollars in accordance with the
principles set forth in Accounting Standards Codification (ASC) 830-10, "Foreign
Currency Translation" (formerly “SFAS No. 52”). All exchange gains and losses
from remeasurement of monetary balance sheet items resulting from transactions
in non-dollar currencies are recorded in the statement of operations as they
arise.





D.
            Cash
      and Cash Equivalents:





The
Company considers all highly liquid investments originally purchased with
maturities of three months or less to be cash equivalents.





E.
            Property
      and Equipment:





Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, as
follows:





Computer
      and peripheral equipment
              3 -
      7 yearsOffice
      furniture and equipment
              7 -
      15 yearsLeasehold
      improvement
              Over
      the term of the lease





In
accordance with ASC 360-10, (SFAS No. 144), “Accounting for Impairment or
Disposal of Long-Lived Assets”, management reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based on estimated future
undiscounted cash flows. If so indicated, an impairment loss would be recognized
for the difference between the carrying amount of the asset and its fair value.
As of December 31, 2009, no impairment losses have been
recorded.


F-9


SPO
MEDICAL INC.


NOTES
TO THE FINANCIAL STATEMENTS


U.S.
dollars in thousands (except share data)





NOTE
      3
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





F.
            Revenue
      recognition:





The
Company generates its revenues mainly from sales of its products. Revenues are
recognized when delivery has occurred, persuasive evidence of an arrangement
exists, the vendor’s fee is fixed or determinable, no further obligation exists
and collection is probable and there are no remaining significant obligations.
Delivery is considered to have occurred upon shipment from the Company’s
distribution centers to the reseller. All of the Company’s products that are
sold through reseller agreements are non-exchangeable, non refundable and non
returnable. Accordingly the resellers are considered end users.





G.
            Allowance
      for doubtful accounts:





The
allowance for doubtful accounts is computed mainly on the basis of accounts
whose collectability, in the Company’s estimation, is uncertain. The related
expenses are recorded under general and administrative expenses.





H.
            Inventory:





The
Company and its subsidiaries periodically evaluate the quantities on hand
relative to current and historical selling prices and historical and projected
sales volume. Based on this evaluation, an impairment charge is recorded when
required to write-down inventory to its market value.


Inventories
are stated at the lower of cost or market. Cost is determined as
follows:


Raw
materials, components and finished products - on the FIFO basis.


Work-in-process
- on the basis of direct manufacturing costs


On
December 1, 2009 all inventory was sold to SPO Medical Systems Ltd according to
the agreement signed with them as discussed in Note 15




I.
            Research
      and development costs:





Research and development costs, net of
government grants and participation by others, are charged to expenses as
incurred.





J.
            Income
      taxes:





The
Company accounts for income taxes in accordance with ASC 740-10, "Accounting for
Income Taxes" (SFAS No. 109). This statement prescribes the use of the liability
method whereby deferred tax assets 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.





K.
            Fair
      value of financial instruments:





The
financial instruments of the Company consist mainly of cash and cash
equivalents, short-term investments, trade receivables, accounts payable and
short-term loans. In view of their nature, the fair value of the Company’s
financial instruments is usually identical or close to their carrying
value.




F-10


SPO
MEDICAL INC.


NOTES
TO THE FINANCIAL STATEMENTS


U.S.
dollars in thousands (except share data)





NOTE
      3
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





L.
            Concentrations
      of credit risk:





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents. The majority of the
Company’s cash and cash equivalents are invested in US dollar deposits.
Management believes that the financial institutions that hold the Company’s
investments are financially sound, and accordingly, minimal credit risk exists
with respect to these investments. Exposure to credit risk is also resulting
from economic factors affecting our trading partners. The factors which affect
the fluctuations in the company’s provisions for bad debts and write offs of
uncollectible accounts include the financial health and economic environment of
the customer. The company identifies the credit exposure and then makes specific
provisions.





M.
            Stock-based
      compensation:





Effective
January 1, 2006, the Company adopted ASC 718-10, "Share-Based Payment" (SFAS
No. 123R) requiring that compensation cost relating to share-based payment
awards made to employees and directors be recognized in the financial
statements. The awards issued under Company's stock-based compensation plans are
described in Note 13, “Stockholder's Equity". The cost for such awards is
measured at the grant date based on the calculated fair value of the award. The
value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods (generally the vesting
period of the equity award) in the Company's Consolidated Statement of
Operations. The following table summarizes the effects of stock-based
compensation resulting from the application of ASC 718-10 (SFAS No. 123 (revised
2004)) included in Statement of Operations:





Year
      ended December 31,2009
                      
                      
                      2008Cost
      of revenues
                      
                      $
                      -
                      
                      
                      $
                      5Research
      and development, net
                      
                      
                      -
                      
                      
                      
                      21Selling
      and marketing
                      
                      
                      13
                      
                      
                      
                      42General
      and administrative
                      
                      
                      36
                      
                      
                      
                      179Restructuring
      expenses
                      
                      
                      71
                      
                      
                      
                      12$
                      120
                      
                      
                      $
                      259





Share-based
compensation cost relating to stock options recognized in 2009 and 2008 is based
on the value of the portion of the award that is ultimately expected to
vest.ASC 718-10
(SFAS No. 123R) requires forfeitures to be estimated at the time of grant
in order to estimate the portion of the award that will ultimately vest. Such
portion is currently estimated at 0%, based on the Company's historical rates of
forfeiture.





Under ASC 718-10 (SFAS 123), the fair market value
of option grants was estimated on the date of grant using the “Black-Scholes
option pricing” method with the following weighted-average assumptions: (1)
expected life of 3.5 or 10 years (as per option's terms); (2) dividend yield of
0% (3) expected volatility of 100% in 2008  and  273% in
2009 and (4) risk-free interest rate of approximately 1.8% in 2008 and 0.5% in
2009


F-11


SPO
MEDICAL INC.


NOTES
TO THE FINANCIAL STATEMENTS


U.S.
dollars in thousands (except share data)





NOTE
      3
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





N.
              Effects
      of recently issued accounting
standards:





ASC
105-10-65-1 establishes the Financial Accounting Standards Board
Accounting Standards Codification (Codification) as the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the Financial Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This Codification superseded
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative.   The Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.




In October 2009, the FASB
issued “Accounting Standards Update (“ASU”) 2009-13 Multiple Deliverable Revenue
Arrangements a consensus of EITF” (formerly topic 08-1) an amendment to ASC
605-25. The update provides amendments to the criteria in Subtopic 605-25 for
separating consideration in multiple-deliverable arrangements. The amendments in
this update establish a selling price hierarchy for determining the selling
price of a deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific objective evidence nor third-party evidence is
available. The amendments in this update also will replace the term “fair value”
in the revenue allocation guidance with the term “selling price” in order to
clarify that the allocation of revenue is based on entity-specific assumptions
rather than assumptions of a marketplace participant.




The amendments will also
eliminate the residual method of allocation and require that arrangement
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. The relative selling price
method allocates any discount in the arrangement proportionally to each
deliverable on the basis of each deliverable's selling
price.




The update will be effective
for revenue arrangements entered into or modified in fiscal year beginning on or
after June 15, 2010 with earlier adoption permitted. The adoption of this update
is not expected to have material impact on the Company’s consolidated financial
statements.





O.        Basic
and diluted net loss per share:





Basic and
diluted net loss per share is presented in accordance with ASC 260-10, "Earnings
Per Share" ("SFAS No. 128") for all periods presented. Basic and diluted net
loss per share of Common stock was determined by dividing net loss attributable
to Common stock holders by weighted average number of shares of Common stock
outstanding during the period. Diluted net loss per share of Common stock is the
same as basic net loss per share of Common stock for all periods presented as
the effect of the Company's potential additional shares of Common stock were
anti-dilutive.





All
outstanding stock options and warrants have been excluded from the calculation
of the diluted net loss per share of Common stock because all such securities
are anti-dilutive since the Company reported losses for those years. The total
number of shares related to the outstanding options and warrants excluded from
the calculations of diluted net loss per share was 4,298,511 and 4,562,100
for the years ended December 31, 2009 and 2008, respectively.




F - 12




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE 4
            TRADE RECEIVABLES,
  NET




December 31,2009
                
                
                2008Trade
      receivables
                
                $
                15
                
                
                $
                427Allowance
      for of doubtful accounts
                
                
                -
                
                
                
                203Trade
      receivables, net
                
                
                15
                
                
                
                224




NOTE
      5
            INVENTORIES





December 31,2009
                
                
                2008Raw
      Materials
                
                $
                -
                
                
                $
                372Work
      In Process
                
                
                -
                
                
                
                135Finished
      Goods
                
                
                -
                
                
                
                343$
                -
                
                
                $
                850





Write-down
of inventory of raw materials was recorded as a cost of goods sold and amounted
to $295, for the year ended December 31, 2008. There have been no charges
in prior years.





On
December 1, 2009 all inventory was sold to SPO Medical Systems Ltd pursuant to
the agreement signed with them as discussed in Note 15.




NOTE
      6
            PROPERTY
      AND EQUIPMENT




December 31,2009
                  
                  
                  2008Cost:Computer
      and peripheral equipment
                  
                  $
                  267
                  
                  
                  $
                  270Leasehold
      Improvement
                  
                  
                  31
                  
                  
                  
                  31Office
      furniture and equipment
                  
                  
                  29
                  
                  
                  
                  29$
                  327
                  
                  
                  $
                  330Accumulated
      
      depreciation:Computer
      and peripheral equipment
                  
                  $
                  156
                  
                  
                  $
                  123Leasehold
      Improvement
                  
                  
                  17
                  
                  
                  
                  6Office
      furniture and equipment
                  
                  
                  13
                  
                  
                  
                  12$
                  186
                  
                  
                  $
                  141Property
      and Equipment, net
                  
                  $
                  141
                  
                  
                  $
                  189





Depreciation
expenses for the years ended December 31, 2009 and 2008 amounted to $48 and $41
respectively.





F - 13




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE
      7
            SHORT-TERM
      LOANS





A.
            In
      December 2005 the Company completed the private placement to certain
      accredited investors that commenced in April 2005 for the issuance of up
      to $1,544 of units of its securities, with each unit comprised of (i) the
      Company’s 18 month 6% promissory note (collectively, the "April 2005
      Notes") and (ii) three year warrants to purchase up to such number of
      shares of the Company’s Common Stock as are determined by the principal
      amount of the Note purchased by such investor divided by $ 0.85
      (collectively the "April 2005 Warrants"). The Company and the holders of
      $1,464 in principal amount of the April 2005 Notes subsequently agreed to
      (a) extend the maturity term of the April 2005 Notes through March 26,
      2008, (b)extend  the exercise period of the April 2005 Warrants
      from three to five years with an expiration date of September 26, 2010 and
      adjust the per share exercise price thereof to $0.60 and (c) increase the
      interest rate on the amounts outstanding under the April 2005 Notes to 8%
      per annum, effective July 12, 2006. Holders of notes in the principal
      amount of $125 that have agreed to the extension of the maturity date on
      the notes,  have since exercised their warrantsand converted the
      interest accrued there on into Common Stock; a holder of an April 2005
      Notes in the principal amount of $50 was repaid.  The Amendment
      also provided that if the Company subsequently issue shares of its Common
      Stock at an effective per share exercise price less than that of the
      adjusted per share exercise price of the April 2005 Warrants during the
      adjusted exercise period, then the exercise price thereof is to be reduced
      to such lower exercise price, except for certain specified issuances. All
      of the extended notes matured on March 26,
2008.





In March
2008, the Company offered to the holders of the April 2005 Notes to apply the
amounts payable to them on the April 2005 Notes to the exercise price of the
April 2005 Warrants, thereby exercising these warrants, and to convert into, the
Company’s Common Stock the accrued interest on the 2005 Notes at a per share
conversion price of $0.60. Note holders who accepted this offer were issued new
warrants for such number of shares of Common Stock equal to 25% of the number
shares issued to them upon exercise of their existing warrants and conversion of
the interest accrued on the note. The new warrants are exercisable over three
years at an exercise price of $0.60. In the year ended December 31, 2009, the
holders of approximately $439 in principal amount have agreed to apply the
principal amount owed to them to the exercise price of the April 2005 Warrants.
As such, approximately $520 in amounts owed under the 2005 Notes were converted
into equity and, accordingly an aggregate of 866,528 shares of our Common Stock
was issued. Under the terms of the offer, new warrants for 216,636 share of the
Company’s Common stock have been issued to these April 2005 Note holders,
exercisable over three years from the date of issuance. Three note holders of
the principal amount of $200 have agreed to extend their loan for a further 24
months and the Company agreed to pay to them the interest accrued through the
original maturity date of March 26, 2008 in the aggregate amount of $40. Under
the terms of the agreement with the extending note holders, the Company will
issue to the extending holders new warrants for an aggregate of 50,000 shares of
the Company’s Common stock, which warrants are exercisable for three years from
issuance and contain the same operative terms, including exercise price, as the
warrants that were originally issued in connection with the issuance of the
April 2005 Notes.





On
February 5, 2009, the Company agreed with one of the note holders to repay $25
over a number of payments during the current financial year and to convert
accrued interest to 26,500 shares of common stock.





On
December 31, 2009 the Company and a holder of an April 2005 Notes in the
principal amount of $30 agreed to extend the note’s maturity date to December
31, 2011 in consideration of the issuance of warrants to purchase up to 50,000
shares of the of the Company’s common stock, at a per share exercise price of
$0.01 exercisable for a period of three years. As of December 31, 2009, the
outstanding April 2005 Notes principal and accrued interest in the aggregate
amount of $899.


F - 14


SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE
      7
            SHORT-TERM
      LOANS (Cont.)





B.
            In
      July 2006, the Company commenced a private placement of units of its
      securities the “Loan Notes”,with
      each unit comprised of (i) the Company’s 8% month promissory note due 12
      months from the date of issuance and (ii) warrants as described below,
      pursuant to which the Company raised $550 (the maximum amount that could
      be raised from this offering). Under the terms of the offering, the
      principal and accrued interest was due in one balloon payment at the end
      of the twelve month period. Each purchaser of the notes received warrants,
      exercisable over a period of two years from the date of issuance, to
      purchase 16,250 shares of Common Stock for each $25 of principal loaned,
      at a per share exercise price equal to the lower of $1.50 or 35% less than
      any offering price at an initial public offering of the Company's Common
      Stock during the warrant exercise period. During 2007, the Company offered
      to the holders of the notes to convert the principal and accrued interest
      into shares of the Company’s Common Stock at a per share conversion price
      of $0.90. The holders of $238 of the principal amount agreed to convert
      the principal and accrued interest thereon into shares of the Company’s
      Common Stock. In 2007, the Company repaid to one note holder the principal
      amount of $75 and the accrued interest thereon. On December 31, 2009 the
      Company and a holder of a Loan Notes in the principal amount of $150
      agreed to extend the note’s maturity date to December 31, 2011 in
      consideration of the issuance of warrants to purchase up to 50,000 shares
      of the of the Company’s common stock, at a per share exercise price of
      $0.01 exercisable for a period of three
years


As of
December 31, 2009, approximately $236 in respect of the principal and accrued
interest on these notes remain outstanding.




NOTE 8
            EMPLOYEES AND PAYROLL
      ACCRUALS





At
December 31, 2009, the Company’s liability to its employees in respect of unpaid
salaries and employment benefits, which also includes accruals for salaries and
benefits thereon that have been deferred since July 2008, aggregated
$310.




NOTE 9
            ACCRUED
      EXPENSES AND OTHER LIABILITIES





December 31,2009
                
                
                2008Accrued
      expenses pre merger
                
                $
                -
                
                
                $
                263Royalties
      to the office of the Chief Scientist
                
                
                346
                
                
                
                310Liability
      results from re-organization
                
                
                95
                
                
                
                -Other
      accrued expenses
                
                
                147
                
                
                
                212$
                588
                
                
                $
                785





NOTE
      10
            ACCRUED
      SEVERANCE PAY





The
Company's liability for severance pay is calculated in accordance with Israeli
law based on the most recent salary paid to employees and the length of
employment in the Company. The Company's liability for severance pay has been
fully provided for. Part of the liability is funded through individual insurance
policies. These policies are assets of the Company and under labor agreements,
subject to certain limitations, they may be transferred to the ownership of the
beneficiary employees. Severance
pay income for the year ended December 31, 2009 amounted to $38 due to
settlements with ex employees. Severance pay expenses for the year ended
December 31, 2008, aggregated  $178.




F - 15




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE
      11
            PRIVATE
      PLACEMENTS




In March,
2008 the Company issued to a service provider 75,000 restricted shares in
consideration of services rendered. The service provider is entitled to an
additional 75,000 shares of Common Stock upon the occurrence of certain
specified events. In connection therewith, on June 23, 2008 the Company issued
to the service provider an additional 9,375 restricted shares to settle this
commitment. The Company has no further commitments in respect of this
agreement.





In March
2008, the Company received from an investor gross proceeds of $250 and, in
connection therewith, in May 2008 the Company issued to such investor 312,500
shares of its Common Stock and warrants, exercisable through the third
anniversary of issuance, to purchase an additional 156,250 shares of Common
Stock at a per share exercise price of $0.80. The net proceeds from this
financing were $223 after cash fee paid to the placement agent and other related
expenses.





In April
2008 the Company issued to three designees of a service provider 100,000
restricted shares of Common Stock in consideration for investor relations
services rendered. Subject to certain events being achieved by the service
provider, the Company originally committed to issue up to an additional 300,000
restricted shares of Common Stock. On July 7, 2008, the Company signed an
amendment to the agreement with this service provider reducing the additional
commitment to 100,000 additional restricted shares and, in connection therewith,
on July 23, 2008, the Company issued to two designees an aggregate of 50,000
restricted shares.





In April
2008 the Company entered in to a settlement agreement with a company that had
originally been retained by it to distribute one of its future products.
Pursuant to such agreement, the Company received advance payments in the amount
of $485 in several installments between June 2006 and January 2007. This amount
has been recorded in Other Creditors and in respect of the full settlement of
this outstanding amount the Company issued to the distributor 400,000 shares of
the Company’s common stock, par value $0.01 per share.





In May
2008, the Company received from certain investors gross proceeds of $365 in
consideration for the purchase of the Company’s Common Stock. The net proceeds
from this financing were $333 after cash fees paid to the placement agent and
other related expenses. In connection therewith, in June 2008, the Company
issued to such investors an aggregate of 456,250 shares of its Common Stock and
warrants, exercisable through the third anniversary of issuance, to purchase up
to an additional 228,125 shares of its Common Stock at a per share exercise
price of $0.80.





In
September 2008, the Company entered in to an agreement with a consultant to
render consulting services. Under this agreement the Company issued to the
consultant 150,000 shares of the Company’s common stock, par value $0.01 per
share shares during the period September through November 2008.





In
October 2008, the Company entered in to an agreement with a service provider and
issued to certain designees of the service provider 596,666 restricted shares in
consideration for the services rendered.




In
December 2008 the Company entered into an agreement with its lawyers. Under the
agreement, the Company issued to its lawyers 230,000 shares of the Company’s
common stock, par value $0.01 per share in lieu of outstanding fees owed to
them.


F - 16




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)


NOTE 11
            PRIVATE PLACEMENTS
(Cont.)




On
February 5, 2009 the Company issued one of the note holders 26,500 shares of
common stock as described in Note 7.





In March
and July 2009, the Company issued to a consultant 50,000 and 200,000 shares of
common stock, at per share purchase price of $0.01in respect of an agreement
with the consultant for financial advisory services.





In August
2009, the Company entered into an agreement with a service provider for investor
relations services. Under the terms of the agreement the service provider
received 150,000 shares of common stock, at per share purchase price of
$0.01.




NOTE
      12
            STOCKHOLDER'S
      DEFECIENCY





A.
            Equity
      Incentive Plans





In April
2005, the Company adopted the 2005 Equity Incentive Plan (the "2005 Plan"). A
total of 1.75 million shares of Common Stock were originally reserved for
issuance under the 2005 Plan. The 2005 Plan provides for the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards
and performance units. The 2005 Plan also permits cash payments under certain
conditions. The compensation committee of the Board of Directors is responsible
for determining the type of award, when and to who awards are granted, the
number of shares and the terms of the awards and exercise prices. The options
are exercisable for a period not to exceed ten years from the date of grant.
Vesting periods range from immediately to four years. Under the 2005 plan
options granted expire no later than the tenth anniversary from the date of the
grant.





In April
2005, the Company adopted the 2005 Non-Employee Directors Stock Option Plan (the
"2005 Directors Plan") providing for the issuance of up to 400,000 shares of
Common Stock to non-employee directors. Under the 2005 Directors Plan, only
non-qualified options may be issued and they will be exercisable for a period of
up to six years from the date of grant.




With
respect to compensation expenses recorded in 2009 and 2008, relating to options
granted through December 31 2009, the Company applied the provisions of ASC
718-10 (SFAS No. 123(R)), which require employee share-based equity awards
to be accounted for under the fair value method,ASC 718-10 (SFAS No.
123(R)) requires the use of an option pricing model for estimating fair value,
which is then amortized to expense over the service periods.





During
2009 and 2008 the Company recorded Stock-based compensation expenses in the
amount of $120 and $259, respectively.




F - 17




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE
      12
            STOCKHOLDER'S
      DEFECIENCY (Cont).





B.
            Stock
      Options:





As of
December 31, 2009, options for an aggregate of 70,000 shares of Common Stock
remain available for future grants under the Company’s 2005 Plan and 2005
Directors Plan.





December 31, 2009Amount of
                  Options
                
                
                Weighed
                    Average Exercise
                    PriceOutstanding
      at the beginning of the year *
                
                
                1,900,000
                
                
                $
                0.41Forfeited
                
                
                (20,000
                )
                
                
                0.13Outstanding
      at the end of the year
                
                
                1,880,000
                
                
                
                0.41Exercisable
      at the end of the year
                
                
                1,880,000
                
                
                
                0.41





*       Of
which 50,000 options granted to non-executive directors were re-priced during
2008





The
options outstanding as of December 31, 2009, have been separated into ranges of
exercise price as follows:





Range of
                    exercise price
                
                Options
                    outstanding
                    as of
                    December
                    31, 2009
                
                
                Weighted
                    average
                    remaining
                    contractual
                    life (years)
                
                
                Weighted
                    average
                    exercise
                    price
                
                
                Options
                    exercisable
                    as of
                    December 31,
                    2009
                
                
                Weighted
                    average
                    exercise price
                    of options
                    exercisable$0.05-0.055
                
                
                100,000
                
                
                
                1.32
                
                
                $
                0.05
                
                
                
                100,000
                
                
                $
                0.055$0.13-0.15
                
                
                937,000
                
                
                
                7.02
                
                
                $
                0.13
                
                
                
                937,000
                
                
                $
                0.13$0.60
                
                
                533,000
                
                
                
                5.29
                
                
                $
                0.60
                
                
                
                533,000
                
                
                $
                0.60$0.78
                
                
                100,000
                
                
                
                5.00
                
                
                $
                0.78
                
                
                
                100,000
                
                
                $
                0.78$0.85
                
                
                110,000
                
                
                
                4.14
                
                
                $
                0.85
                
                
                
                110,000
                
                
                $
                0.85$1.85
                
                
                100,000
                
                
                
                6.80
                
                
                $
                1.85
                
                
                
                100,000
                
                
                $
                1.851,880,000
                
                
                
                5.94
                
                
                $
                0.43
                
                
                
                1,880,000
                
                
                $
                0.43




F - 18




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)


NOTE
      12
            STOCKHOLDER'S
      EQUITY (Cont.)





C.
              Stock
      warrants





The
Company has the following warrants outstanding:





Issuance date
                
                
                number of
                    warrants
                    issued
                
                
                Exercise
                    price
                
                
                Exercisable
                    as of
                    December
                    31, 2009
                
                Exercisable
                    through2005-2009
                (1)
                
                
                1,534,308
                
                
                
                0.01
                
                
                
                1,534,308
                
                November
      2010-April 20152009
                (2)
                
                
                100,000
                
                
                
                0.08
                
                
                
                100,000
                
                December
      2014April
      2006
                (3)
                
                
                57,500
                
                
                
                0.60
                
                
                
                57,500
                
                September
      2010March
      2008
                (4)
                
                
                1,812,518
                
                
                
                0.60
                
                
                
                1,812,518
                
                September
      2010March-June
      2008
                (5)
                
                
                384,375
                
                
                
                0.80
                
                
                
                384,375
                
                March-
      June 2011March-September
      2007
                (6)
                
                
                60,000
                
                
                
                1.50
                
                
                
                60,000
                
                March
      2010 -September 2011




1)
            Penny
      warrants issued to an employee 446,383, service providers 787,925, an
      ex-employee 200,000 and holders of April 2005 Notes and July 2006 loan
      50,000 penny warrants each.


2)
            Warrants
      issued to directors in lieu of outstanding fees owed to
    them.


3)
            Warrants
      issued to service providers


4)
            Warrants
      issued to investors in the private placement in connection with the April
      2005 Notes. The amount is comprised of
:


·
            1,545,882
      warrants granted according to original agreement on the
      principal


·
            216,636
      granted to note holders who signed the 2nd amendment, converted principal
      & accrued interest received 25% additional
  warrants


·
            50,000
      warrants granted to loaners who extended the Note and got paid for accrued
      interest  received 15% additional warrants on the principal
      loan


The
amount excludes 343,911 warrants, resulting from accrued interest through the
end of the period of the notewhich at the holders’
election can be converted to warrants


5)
            Warrants
      issued to investors in private placement during 2008 (see also note
      11)


6)
            Warrants
      Issued  to a service provider (40,000) and in connection with
      line of credit (20,000)





D.
              Dividends





The
Company does not intend to pay cash dividends in the foreseeable
future.




F - 19




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE 13
            RESEARCH AND DEVELOPMENT
      EXPENSES, NET





Research
and development expenses consist of the following:





December 31,2009
                
                
                2008Research
      and development expenses
                
                $
                676
                
                
                $
                1,179Grants
      from Office of the Chief Scientist of the Government of
    Israel
                
                
                262
                
                
                
                -Research
      and development expenses, net
                
                $
                414
                
                
                $
                1,179




NOTE
      14
            RESTRUCTURING
      EXPENSES AND RESTRUCTURING OF DEBT
(INCOME)





In
January 2010, the Company completed a restructuring plan in an attempt to focus
primarily on licensing its core technology for non-medical market applications.
The restructuring plan included a reduction of the Company’s corporate and
manufacturing workforce and entering into an alliance and license agreement as
discussed in Note 15 below. Going forward the Company will operate as a
development and licensing entity.





In December 2009. the Company reached an understanding with its
non-executive directors pursuant to which the outstanding directors fees owing
to such persons was waived in consideration of the issuance to them of warrants
to purchase, in the aggregate, 100,000 shares of the  Company’s Common
Stock. The warrants are exercisable through January 17, 2015 and have a per
share exercise price of $0.08.





At the
end of the year, the Company decided to write off $262 of debt that had aged in
excess of seven years that was originally recorded following the Company’s
reverse merger with United Diagnostics in 2005.




NOTE 15
            OTHER INCOME






On
January 26, 2010, the Company’s wholly owned subsidiary SPO Ltd. (“Ltd”) entered
into an Alliance and License Agreement dated as of December 1, 2009 with an
entity owned and controlled by the Company’ Chief Technical Officer (the
“Licensee”). Under the agreement, the PulseOx medical product line will
henceforth be marketed by the Licensee.  Under the license agreement,
all worldwide sales, marketing and all existing inventory and manufacturing of
the PulseOx line have been transferred to the Licensee in return for $200 in
cash and the Licensee’s (and its affiliates) agreement to pay Ltd royalties
derived from these products. In connection therewith, the Company’s Chief
Technical Officer foregave amounts payable to him relating to his employment.
The Company recorded other income in the amount of $224 as a result of this
Agreement.





Following
the Agreement, the Company will primarily be engaged in developing and
commercializing non-medical applications for its technology.




NOTE 16
              FINANCIAL
      EXPENSES




Financial
expenses, for the years 2009 and 2008 were $263 and $680, respectively. The
principal expenses comprising the financial expenses during 2009 and 2008 were:-
(i) non cash amortization of loan discounts  and issuance of shares to
financial service provider - $29 and $ 257, respectively, (ii) exchange rate
differences caused by fluctuations in the exchange rate with the New Israeli
Shekel (“NIS”) on  liabilities denominated in NIS held by the
subsidiary- $102 and $187, respectively (iii)  one time non
cash expenses relating to the issue of warrants in 2008 for the conversion to
equity of certain loan notes and accrued interest thereon - $105 in 2008 and
(vi) interest in respect of debt instruments issued by the Company between April
2005 and October 2006 - $112 and $123 respectively




F - 20




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE 17
              DEFERRED
    TAXES





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





The
results for tax purposes of the Israeli subsidiary are measured in terms of
earnings in NIS, after certain adjustments for increases in the Israeli Consumer
Price Index ("CPI"). As explained in Note 3c, the functional currency is the
U.S. dollar. The difference between the annual change in the Israeli CPI and in
the NIS/dollar exchange rate causes a further difference between taxable income
and the income before taxes presented in the financial statements. In accordance
with paragraph 9(f) of ASC 740-10 (SFAS No. 109), the Company has not provided
deferred income taxes on the difference between the functional currency and the
tax bases of assets and liabilities at the Israeli subsidiary.





B.
            Deferred
      income taxes reflect the net tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial reporting
      purposes and the amounts used for income tax
  purposes.





In
accordance with ASC 740-10 (SFAS No. 109), the components of deferred income
taxes are as follows:





December 31,2009
                      
                      
                      2008Tax
      on net operating losses carryforward
                      
                      $
                      1,997
                      
                      
                      $
                      2,305Less
      - valuation allowance
                      
                      
                      (1,997
                      )
                      
                      
                      (2,305
                      )-
                      
                      
                      
                      -





C.
            The
      Company has provided valuation allowances in respect of deferred tax
      assets resulting from tax loss carryforward and other temporary
      differences. Management currently believes that since the Company has a
      history of losses it is more likely than not that the deferred tax
      regarding the loss carryforward and other temporary differences will not
      be realized in the foreseeable
future.


F - 21




SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)




NOTE
      17
            DEFERRED
      TAXES (Cont.)





Net
operating loss carryforwards as of December 31, 2009 and 2008 are as
follows:





December 31,2009
                
                
                2008Israel
                
                $
                6,352
                
                
                $
                6,622USA
                
                
                2,438
                
                
                
                2,030Total
                
                $
                8,790
                
                
                $
                8,652





Net
operating losses in Israel may be carried forward indefinitely. Net operating
losses in the U.S. are available through 2034.




NOTE
      18
            COMMITMENTS
      AND CONTINGENCIES





Lease
Commitments





Research
and development is carried out at the Company’s premises in Kiryat Malachi,
Israel, laboratory and development facilities covering an area of 1,615 square
feet. The facilities are leased pursuant to a lease agreement that is to expire
in July 2011 at an approximate per month rate of $1.6.





Government of Israel





The
Company’s wholly owned subsidiary, SPO Ltd., is committed to pay royalties to
the Office of the Chief Scientist of the Government of Israel (“OCS”) on sales
of products, the research and development of which the OCS has participated in
by way of grants, up to the amount of 100%-150% of the grants received plus
interest at dollar LIBOR. The royalties are payable at a rate of 3% for the
first three years of product sales and 3.5% thereafter. The total amount of
grants received or accrued, net of royalties paid or accrued, as of December 31,
2009 was $1,225. The refund of the grants is contingent upon the successful
outcome of the research and development and the attainment of sales. The Company
has no obligation to refund these grants, if sales are not generated. The
financial risk is assumed completely by the OCS. The grants were received from
the OCS on a project-by-project basis. If the project fails the Company has no
obligation to repay any grant received for the specific unsuccessful or aborted
project. As of December 31, 2009 the Company has provided for $346 (2008 - $310)
in royalties from sales of its products. Owing to the current financial
situation of the Company, the Company has deferred these payments under an
informal agreement with the OCS.




F - 22