**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




**MARK
      ONE:**




x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934**
              for
                the Fiscal Year ended December 31,
                2007




o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF
                1934**




*COMMISSION
      FILE NUMBER:  0-11772*




**SPO
      MEDICAL INC.**


(Name
      of
      Small Business Issuer in its chapter)





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





**Beit
      Hapa’amon, Suite 209, 20 Hata’as Street, Kfar Saba, Israel**


(Address
      of Principal Executive Offices)





**972
      9 764-3570**


(Small
      Business Issuer'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




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Securities Exchange Act of 1934. o




Check
      whether the issuer (1) 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 issuer was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure contained herein of delinquent filers in response to
      Item
      405 of Regulation S-B, and will not be contained, to the best of issuer's
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x




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




The
      issuer's revenues for the year ended December 31, 2007: $5,008,000





As
      of
      March 20, 2008, there were 21,585,188 shares of the issuer's common stock
      outstanding. The aggregate market value of the shares of the issuer's Common
      Stock held by non-affiliates was approximately $10.3 million.
      Such market value was calculated using the closing price of such Common Stock
      as
      of such date as quoted on the OTC Bulletin Board.




Transitional
      Small Business Disclosure Format (Check one): Yes o No x









**SPO
      MEDICAL INC.**


**2007
      FORM 10-KSB ANNUAL REPORT**





TABLE
      OF
      CONTENTS




PART
                  IITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              1ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              13ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              13ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              13PART
                  IIITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              13ITEM
                  6.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              15ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              18ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              18ITEM
                  8A (T)
              CONTROLS
                  AND PROCEDURES
              18ITEM
                  8B.
              OTHER
                  INFORMATION
              19PART
                  IIIITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION
                  16(A) OF THE EXCHANGE ACT
              20ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              21ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              24ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              25ITEM
                  13.
              EXHIBITS
              25ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES & SERVICES
              27
 
 -i-




**FORWARD
      LOOKING STATEMENTS**




CERTAIN
      STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-KSB 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. 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. 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.





**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**




**Overview**





SPO
      Medical Inc. 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 enhances wireless, stand-alone configurations facilitating
      expanded commercial possibilities.





We
      hold
      three patents issued by the United States Patent and Trademark Office ("USPTO")
      covering various aspects of our technology. As further discussed below, our
      technologies are currently applied to products that are designed for use by
      the,
      homecare, professional medical care, sports, safety and search and
      rescue.




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.




**Background**




Pulse
      oximetry is an important non-invasive process used to both measure blood oxygen
      saturation levels (SpO2) by monitoring the percentage of hemoglobin that is
      saturated with oxygen and 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.




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.




1




**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 leverage our core technologies to develop new, innovative product
      applications. For instance, we are currently investigating monitoring of other
      vital sign information that can be obtained using other optical, non-invasive
      techniques including :




Blood
                pressure using reflectance oximetry




Billirubin
                levels




Monitoring
                glucose levels in blood




Hemoglobin
                count in blood




**Products**




The
      following details our commercially available products utilizing 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 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 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 which
      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. Our monitor’s 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 which 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 which 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 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 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 which 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 600TM was first introduced
      commercially during the first quarter of 2008. The device carries the CE and
      CSA
      mark for safety and audited manufacturing processes.




2




**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.





Sports
      Watch - a sports watch for monitoring hear rate, calories.. for sports
      enthusiast to monitor their wellness whilst training or engaging in sport
      activities.




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. During our 2007 and 2006 fiscal years, we expended approximately
      $1,198,000 and $972,000, respectively, on research and development.




**Business
      Strategy**




Our
      mission is to build a profitable business that develops and commercializes
      medical biosensor products and wellness products that improve people's lives
      and
      provide reassurance of wellness and thereby increase stockholder value. To
      achieve this mission, we are pursuing the following business
      strategies:




*Establishing
                our brand in both the medical and consumer marketplaces*.
                The initial product launch PulseOx 5500TM was a demonstration of
                our
                strategy to establish our company within the most demanding part
                of the
                market - medical devices intended primarily for the homecare market
                requiring FDA approval and requiring a doctor's prescription. Thereafter,
                subject to regulatory approval, consumer applications using the technology
                will be marketed for direct purchase at appropriate outlets (e.g.,
                retail
                drug chains, sports and fitness establishments, distributors of safety
                and
                security products).




*Partner
                with highly qualified, focused companies, internationally*.
                We intend to collaborate with leading medical device resellers capable
                of
                distributing the products to the professional market. For instance,
                we
                currently sell the PulseOx 5500(TM) through reputable, established
                medical
                device distributors serving North American markets and the European,
                Asian
                and Latin American markets. Our professional products PulseOx 6000TM
                and
                PulseOx 6100Tm will be distributed by other distributors which
                specifically sell to the hospitals, Integrated Medical Care services
                and
                other medical professionals. We anticipate that our other consumer
                products, such as the Check Mate(TM), will be distributed by companies
                with access to its target market which includes sports enthusiasts.
                Our
                other commercial wellness products, which are currently under design
                and
                development, will not be sold during 2008; however we will be actively
                seeking distributors and other collaborators for the commercial
                distribution of these products in preparation of their
                launch.




*Research
                and Development*.
                Our research and development strategy is to continually improve and
                expand
                our product offerings by leveraging existing and newly developed
                proprietary technologies, as well as those of our collaborators,
                into new
                product offerings. We intend to pursue a multi-disciplinary approach
                to
                product design that includes substantial electrical, mechanical,
                software
                and biomedical engineering efforts. We are currently focusing our
                development programs on expanding our current product offering and
                investigations in to other non-invasive optical techniques for blood
                analysis of other vital signs in blood. In addition, we have established
                relationships with leading teaching hospitals and academic institutions
                for the purpose of clinically evaluating its new products. We have
                consulting arrangements with physicians and scientists in the areas
                of
                research, product development and clinical
                evaluation.




**Suppliers**




Our
      products are made from components which we either have manufactured for us
      or
      which are readily available off the shelf components. Some of our products
      are
      manufactured through agreements with unaffiliated companies. We purchase certain
      components from single or preferred sources of supply. The use of single or
      preferred sources of supply increases our exposure to price sensitivity and
      supply delays.




We
      outsource our primary assembly and manufacturing operations. We utilize turn
      key
      contract manufacturers that are ISO certified. 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.




3




**Marketing
      and Sales Organization**




Our
      products are sold primarily through resellers in the United States and a
      combination of resellers and independent distributors in other international
      markets. Our primary markets include homecare, physicians, hospitals, other
      medical institutions and general homecare providers.




We
      provide service and maintenance to purchasers of our products under warranty.
      We
      subcontract our customer support services in the United States. In other
      international markets our distributors provide fist line customer
      support.




**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 2008, we hold three 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
      March 20, 2008, we employed 22 full-time employees. None of these employees
      are
      subject to collective bargaining agreements.




**Competition**




We
      believe that hospitals and other medical institutions choose among competing
      products on the basis of product performance, features, price and service.
      In
      general, we believe that price has become an important factor in hospital
      purchasing decisions because of pressure to cut costs. These pressures on
      hospitals result from federal and state regulations that limit reimbursement
      for
      services provided to Medicare and Medicaid patients. There are also cost
      containment pressures on healthcare systems outside the U.S.A., particularly
      in
      certain European countries.




There
      are
      number of companies, some of which are substantially larger than we are and
      with significantly more resources, are engaged in manufacturing competing
      products. Our competition is primarily in the traditional 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.





During
      2007, several Chinese based medical device manufacturers entered the market.
      To
      the best of our knowledge, few of their products carry regulatory or other
      approvals. However, we anticipate that this situation will change over time
      as
      more of their products gain approval from the requisite regulatory
      bodies.




**Governmental
      Regulations**




The
      manufacture and sale of our products 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. Our 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 our new medical products 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.




4




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 website is located at http://www.spomedical.com. This reference to
      our
      Internet website does 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 .





**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 TO RAISE ADDITIONAL FUNDS IN ORDER TO IMPLEMENT OUR BUSINESS PLAN AND
      THERE
      IS NO ASSURANCE THAT SUCH FUNDS CAN BE RAISED ON TERMS THAT WE WOULD FIND
      COMMERCIALLY ACCEPTABLE, OR AT ALL.**




Although
      management believes funds on hand as well as revenues that we expect to generate
      in the ordinary course of our business may enable us to meet our current
      operating liquidity needs as they arise, without raising additional funds we
      do
      not believe that we will be able to commercially launch any of our products
      that
      are currently under design and development.   We may raise any necessary
      funds through public or private equity offerings, debt financings or additional
      corporate collaboration and licensing arrangements. Any failure
      to achieve adequate funding in a timely fashion will delay our development
      programs and product launches and could lead to abandonment of one or more
      of
      our development initiatives. To the extent we cannot obtain additional funding,
      our ability to continue to develop and introduce products to market will be
      limited and we may be required to delay planned product development and launches
      or further curtail expenses. In addition, we currently owe approximately
      $264,000 on outstanding notes that we issued in July 2006. We offered to the
      holders of the notes to convert the principal and accrued interest into shares
      of our Common Stock at a per share conversion price of $0.90, which offer was
      accepted by the holders of approximately $238,000 in principal amount of these
      loans. We are continuing in our efforts to have the holders of the remaining
      notes also agree to this resolution, In addition, as of March 26, 2008, we
      will
      owe approximately $1,626,000 on promissory notes that we issued in April 2005.
      While we intend to approach these investors in an effort to resolve this matter
      such that the amounts owed under these notes are converted into equity and/or
      applied to the exercise of warrants held by these investors, no assurance can
      be
      provided that we will be successful in these efforts. The resulting default
      under these notes could impair our ability to raise additional
      capital.




5




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.




**WE
      ARE CURRENTLY DEPENDENT ON LIMITED NUMBER OF PRODUCTS AND IN ORDER TO SUCCEED
      WE
      WILL NEED TO DEVELOP AND COMMERCIALIZE OTHER PRODUCTS CURRENTLY UNDER
      DEVELOPMENT.**




Unlike
      many of our competitors which have commercialized a number of products, we
      are
      currently dependent on our five pulse oximetry products for the generation
      of
      revenues. The PulseOx 5500, our first commercial product, was first commercially
      available in the fourth quarter of 2004 and currently represents a significant
      portion of our revenues. While our core technology has a number of potentially
      beneficial uses, we have still to penetrate the markets with our recently
      released products in addition to the above product.




We
      began
      commercial distribution of the PulseOx 7500TM in the second half of 2007.
      Commercial distribution of the Baby Movement Monitor, a monitor being designed
      specifically for the use with infants and also currently under development,
      is
      not expected to commence before 2009. However, potential products that appear
      to
      be promising at any development stage may not reach the market for a number
      of
      reasons. These reasons include the possibility that the potential products
      may:




*
            be
                found ineffective or cause harmful side
                effects;




*
            fail
                to receive necessary regulatory
                approvals;




*
            be
                precluded from commercialization by proprietary rights of third
                parties;




*
            be
                difficult to manufacture on a large scale;
                or




*
            be
                uneconomical or fail to achieve market
                acceptance.




If
      any of
      these potential problems occur, we may not successfully market this product.
      In
      addition, we anticipate that we will need to raise from third parties additional
      working capital before we undertake any additional product
      launches.





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





Our
      accumulated deficit was approximately $12,653,000 as at December 31, 2007.
      We
      expect our operating losses to continue as we continue to expend resources
      to
      further develop and enhance our existing product lines, to complete development
      of new generation products, obtain regulatory clearances or approvals, expand
      our marketing, sales, manufacturing and finance capabilities and conduct further
      research and development.





We
      also
      expect to experience negative cash flow in the future as we fund our operating
      losses and capital expenditures. We currently have five products that are
      commercially available. In order to achieve and maintain profitability we must
      expand our existing product lines.




**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.**


6




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.




**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.




7




The
      defense of patent infringement suits is costly and time-consuming and their
      outcome is uncertain. 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 2008, we have been issued three 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.




Finally,
      our PulseOx 7500TM utilizes third party owned proprietary licensed software.
      If
      for, whatever reason, we are unable to maintain the license or renew it on
      commercially acceptable terms (or at all) or if such party’s right to such
      proprietary rights are challenged and we are unable to maintain these licenses
      or obtain or develop replacement technologies, our business may be adversely
      affected.




**WE
      ARE DEVELOPING OUR CURRENT PRODUCT LINES INDEPENDENTLY FROM ANY COLLABORATIVE
      PARTNERS, WHICH WILL REQUIRE US TO ACCESS ADDITIONAL CAPITAL AND TO DEVELOP
      ADDITIONAL SKILLS TO PRODUCE, MARKET AND DISTRIBUTE THESE
      PRODUCTS.**




We
      are
      independently finishing development, building up production capacity, launching,
      marketing and distributing our oximetry line of products. These activities
      require additional resources and skills that we will need to secure. There
      is no
      assurance that we will be able to raise sufficient capital or attract and retain
      skilled personnel to enable us to finish development, launch and market these
      products. Thus, there can be no assurance that we will be able to commercialize
      all, or any, of these products.




**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
      products are based on new methods of reflective pulse oximetry. If our products
      do not achieve significant market acceptance, our sales will be limited and
      our
      financial condition may suffer. Physicians and individuals may not recommend
      or
      use our products unless they determine that these products are an attractive
      alternative to current tests that have a long history of safe and effective
      use.
      To date, few independent studies regarding our products have been published.
      The
      lack of independent studies limits the ability of doctors or consumers to
      compare our products to conventional products.


**IF
        WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE MEDICAL DEVICE
        INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL
        SUFFER.**


8





The
      medical device industry in general, and the markets in which we expect to offer
      products in particular, are intensely competitive. Many of our competitors
      have
      substantially greater financial, research, technical, manufacturing, marketing
      and distribution resources than we possess and have greater name recognition
      and
      lengthier operating histories in the health care industry. We may not be able
      to
      effectively compete against these and other competitors. A number of competitors
      offer oximetry products. These products and monitors are widely accepted in
      the
      health care industry and have a long history of accurate and effective use.
      Further, if our products are not available at competitive prices, health care
      administrators who are subject to increasing pressures to reduce costs may
      not
      elect to purchase them.





Furthermore,
      our competitors may succeed in developing, either before or after the
      development and commercialization of our further products, devices and
      technologies that permit more efficient, less expensive non-invasive and less
      invasive pulse oximetry monitoring.




**WE
      HAVE LIMITED MANUFACTURING EXPERIENCE, WHICH COULD LIMIT OUR
      GROWTH.**




We
      do not
      have sufficient internal manufacturing experience that would enable us to make
      products in the volumes that would be necessary for us to achieve significant
      commercial sales, and we rely upon our suppliers. In addition, we may not be
      able to establish and maintain reliable, efficient, full scale manufacturing
      at
      commercially reasonable costs, in a timely fashion. Difficulties we encounter
      in
      manufacturing scale-up, or our failure to implement and maintain our
      manufacturing facilities in accordance with good manufacturing practice
      regulations, international quality standards or other regulatory requirements,
      could result in a delay or termination of production. We may decide to
      manufacture these products ourselves in the future or may decide to manufacture
      products that are currently under development in this market segment. Companies
      often encounter difficulties in scaling up production, including problems
      involving production yield, quality control and assurance, and shortages of
      qualified personnel.




Since
      we
      are relying on third party manufacturing for our initial product offerings
      in
      the pulse oximetry product line, we are dependent upon those parties for product
      supply. Any delay in initiating production or scaling production to higher
      volumes could result in delays of product introduction, or create lower
      availability of product than our expectations. These delays could lead to lower
      revenue achievement and additional cash requirements for us.




**CONCENTRATIONS
      OF AVAILABLE SOURCES OF SUPPLY OF PRODUCTS MAY IMPEDE OUR ABILITY TO MEET
      CUSTROMER REQUIREMENTS**




Certain
      components used in our products are currently available to us from only one
      source and other components are currently available from only a limited number
      of sources. We do not have long-term supply contracts with its suppliers. In
      addition, we employ several unaffiliated subcontractors outside of Israel for
      the manufacture of our chipsets. While we have been able to obtain adequate
      supplies of components and have not experienced material problems with
      subcontractors to date, in the event that any of these suppliers or
      subcontractors is unable to meet our requirements in a timely manner, we may
      experience an interruption in production. Any such disruption, or any other
      interruption of such suppliers' or subcontractors' ability to provide components
      to us and manufacture our chipsets, could result in delays in making product
      shipments, which could have a material adverse impact on our business, financial
      condition and results of operations.




**OUR
      LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR REVENUE
      UNCERTAIN.**




We
      are
      responsible for marketing our oximetry product line. We have relatively limited
      experience in marketing or selling medical device products and only have a
      two
      person internal marketing and sales team. In order to successfully continue
      to
      market and sell our products, we must either develop a marketing and sales
      force
      or expand our arrangements with third parties to market and sell our products.
      We may not be able to successfully develop an effective marketing and sales
      force and we may not be able to enter into and maintain marketing and sales
      agreements with third parties on acceptable terms, if at all. If we develop
      our
      own marketing and sales capabilities, we will 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 our products 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.**




The
      development, manufacture and sale of 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.




9




**THE
      AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS 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 our products 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 our ability to sell our products on a competitive basis.
      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 our products by the attendant cost savings and clinical
      benefits that we believe will be derived from the use of our 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.
      We 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 our products 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 products, 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 25.4% of our outstanding Common Stock as
      of
      March 20, 2008. 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 effect 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 20, 2008, we had 50 million authorized shares of Common Stock, of which
      21,585,188 shares of our Common Stock were issued and outstanding as of such
      date. An additional 6,032,133 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.




10




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.




Furthermore,
      in April 2007, we filed a registration statement on Form SB-2 (File Number
      333-142141) covering sales by selling stockholders of approximately 4.6 million
      shares issued or issuable upon conversion of certain of our outstanding
      securities. These included approximately 950,000 of our currently issued and
      outstanding shares of Common Stock. The shares of Common Stock issuable upon
      conversion of our securities or the outstanding shares included in this
      registration statement are saleable without restriction immediately upon
      issuance. 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. To comply with this statute, we
      are
      required to document and test our internal control procedures and our management
      is required to issue a report concerning our internal controls over financial
      reporting in this Annual Report for our fiscal year ended December 31, 2007.
      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, 2009. 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.




11




**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.




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 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 and manufacturing
      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
      portion
      of our expenses, primarily labor expenses and certain supplier contracts, are
      nominated 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 weakness of the US Dollar in the
      international markets has been equally reflected against NIS and this may
      continue in the future. Since December 31, 2007 the US Dollar has devalued
      by
      approximately 12% against NIS. Continuing devaluation of the US dollar against
      the NIS will result in higher operating costs from NIS denominated expenses.





12




**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.




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 officers and employees are called upon to perform military reserve service
      is difficult to predict.





**ITEM
      2. DESCRIPTION OF PROPERTY**




We
      do not
      own any real property. Our corporate headquarters are located at Beit Hapa’amon,
      Suite 209, 20 Hata’as Street, Kfar Saba, Israel. We lease approximately 1290
      square feet in Kfar Saba, Israel which is used for administrative offices for
      our subsidiary SPO Ltd. under a lease that expires in January 2009. We
      anticipate that we will be able to renew this lease on similar lease
      terms.





In
      addition, we also lease approximately 3230 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 $3,000.





Through
      June 2007, we had corporate offices located at 21860 Burbank Blvd, North
      Building Suite 380, Woodland Hills California. Through such time, we leased
      approximately 430 square feet. We used these premises primarily for our
      corporate offices. The monthly rental under the lease through June 2007 was
      approximately $2,500. The lease term expired in June 2007 and was not
      subsequently renewed.





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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




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.




13




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. The last reported closing price of our
      Common Stock on March 14, 2008, was $0.60 per
      share.****





LOW
            
            HIGHYear
                Ended December 31, 2007First
                Quarter
            
            $
            1.50
            
            $
            2.15Second
                Quarter
            
            $
            1.25
            
            $
            2.15Third
                Quarter
            
            $
            0.90
            
            $
            1.50Fourth
                Quarter
            
            $
            0.53
            
            $
            2.00Year
                Ended December 31, 2006First
                Quarter
            
            $
            1.25
            
            $
            2.25Second
                Quarter
            
            $
            1.5
            
            $
            2.5Third
                Quarter
            
            $
            1.9
            
            $
            3Fourth
                Quarter
            
            $
            1.5
            
            $
            2.5




As
      of
      March 20, 2008, there were approximately 135 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.




**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,
      2007.





**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, 2007 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 plansapproved
                  by security holders
              
              
              1,
                  080,000
              
              $
              0.75
              
              
              870,000Equity
                  compensation plans notapproved
                  by security holders
              
              
              1,064,141
              
              $
              0.14Total
              
              
              2,144,141
              
              $
              0.45
              
              
              870,000




14




**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, 2007.




As
      of
      December 31, 2007, we had outstanding options and warrants to purchase an
      aggregate of 1,064,141 shares of our Common Stock which were granted outside
      of
      the Plans. These are comprised of the following: (i) vested options to purchase
      up to 446,383 shares of our Common Stock issued in April 2005 were granted
      to
      Israel Sarussi, an executive officer, at a per share exercise price of $0.01,
      (ii) vested warrants to purchase up to 534,425 shares of our Common Stock issued
      between April 2005 and December 2007 to consultants and service providers at
      per
      share exercise price of between $0.01 and $1.5 (iii) an unspecified number
      of
      warrants issued to placement agents and which will be equal to $30,000 divided
      by 40% less than the lowest price of shares of Common Stock sold by the Company
      in a subsequent transaction.





**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS**




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.




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.




**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 the distribution centers of the Company.





15




**INVENTORY
      VALUATION**




Inventories
      are stated at the lower of cost or market. Cost is determined as follows: raw
      materials, components and finished products - on the first in first out (FIFO)
      basis. Work-in-process - on the basis of direct manufacturing
      costs.




**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, 2007 (the “2007 Period”) AND THE YEAR ENDED
      DECEMBER 31, 2006 (the “2006 Period”)**




**REVENUES** .
      Revenues for the 2007 Period were $5,008,000, represents an increase of 35%
      over
      revenues of $3,714,000 for the 2006 Period. Revenues were derived primarily
      from
      sales of our PulseOX 5500 TM designed for the medical and homecare
      markets.




**COSTS
      OF REVENUES** .
      Costs
      of revenues for the 2007 were $2,447,000 compared to $1,809,000 for the 2006
      Period. Costs 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.





**RESEARCH
      AND DEVELOPMENT EXPENSES.** Research
      and development expenses consist primarily of expenses incurred in the design,
      development and testing of our products. 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 for the 2007 Period were $1,198,000 compared
      to $972,000 for the 2006 Period. The increase in research and development
      expenses for the 2007 Period as compared to 2006 Period is primarily
      attributable to the increase in employee and related compensation costs and
      costs associated with the development of new products. Included in research
      and
      development expenses were non cash compensation benefits of $21,000 and $176,000
      in respect of 2007 and 2006, respectively.




**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 2007 Period were $675,000 compared to $671,000 for the 2006 Period. The
      reasons that our selling and marketing expenses did not increase in an amount
      commensurate with our increase in revenues is primarily attributable to the
      closure of our California office during 2007.




**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 2007 Period and the 2006 Period
      were
      $1,450,000 and $923,000, respectively. The increase in general and
      administrative expenses during 2007 Period is primarily attributable to
      professional fees incurred in connection with our efforts to raise additional
      funds through public and/or private offerings of our securities in and outside
      the United States. Included in general and administrative expenses were non
      cash
      compensation benefits of $127,000 and $122,000 in respect of 2007 and 2006,
      respectively.




**FINANCIAL
      EXPENSES, NET** .
      Financial expense net, for the 2007 Period and 2006 Period were $842,000 and
      $4,302,000, respectively. The relatively higher amount of financial expenses
      recorded during the 2006 Period are primarily attributable to a one time
      non-cash expense that was recognized in the 2006 Period in respect of a stock
      based compensation benefits as well the interest accrued on loans that were
      advanced to us since April 2005 and which matured during 2006. Included in
      financial expenses were non cash compensation benefits to lenders and
      consultants and amortization of loan discounts of $667,000 and $4,176,000 in
      respect of 2007 and 2006 respectively.




**NET
      LOSS** .
      For the
      2007 Period and 2006 Period we had a net loss of $1,604,000 and $4,963,000,
      respectively. The
      decrease in net loss during the 2007 Period is primarily attributable to the
      one
      time non-cash expense that was recognized in the 2006 period in respect of
      deferred compensation benefits and interest expenses on loans which are referred
      to above under "Financial Expenses, Net".





16




**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      December 31, 2007, we had cash and cash equivalents of $1,242,000 compared
      to
      $836,000 at December 31, 2006. The increase in available cash resources is
      primarily attributable to the funds raised from the private placement of our
      securities discussed below.




We
      generated negative cash flow from operating activities of approximately $559,000
      during the 2007 Period compared to $443,000 for the 2006 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"). In September 2006, we offered to
      the
      holders of the April 2005 Notes to revise certain of the terms of the original
      offering in order to facilitate an extension to the scheduled maturity date
      of
      the Note, (hereinafter the "Amendment"). The Amendment provides that (a) the
      maturity date of the April 2005 Notes is to be extended by one year from the
      original maturity date on the original note, (b) the exercise period of the
      April 2005 Warrants is to be extended from three to five years and the per
      share
      exercise price was adjusted to $0.60 and (c) the interest rate on the amounts
      outstanding under the April 2005 Notes was increased to 8% per annum, effective
      July 12, 2006. The Amendment also provides 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; provided, that, this protection will not apply to
      certain of our equity or debt issuances (i) from approved stock option plans
      to
      employees, directors and other service providers, (ii) upon exercise of options
      and warrants outstanding as of September 27, 2006 and (iii) to our consultants
      that an unaffiliated third party would deem to be commercially reasonable and
      fair. The Amendment became effective as of September 30, 2006. As of December
      31, 2007, holders of Notes in the principal amount $1,439,000 have signed the
      Amendment, the holder of a note in the principal amount of $50,000 has been
      repaid and the holders of notes in the principal amount $125,000 have exercised
      their warrants and converted the accrued interest on the note. The holders
      of
      notes in the amount of $55,000 have not signed the amendment. **** All
      of
      these notes, including the notes held by the holders who agreed to the extension
      of the maturity date, are scheduled to mature on March 26, 2008. We intend
      to
      approach these note holders in an effort to reach a resolution whereby the
      amounts payable under the April 2005 Notes are converted and/or applied to
      the
      exercise of the April 2005 Warrants. No assurance can be provided that we will
      be successful in reaching any such resolution.





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 purchase16,250 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 the quarter ended
      September 30, 2007, we offered to the holders of the notes to convert the
      principal and accrued interest into shares of our Common Stock at a per share
      conversion price of $0.90. As of March 2008, 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 a note holder the principal amount
      of $75,000 and the accrued interest thereon. We have not made the scheduled
      payment on the amounts owing under the notes that have not been converted and,
      accordingly, under the terms of such notes, we are in default thereunder. We
      are
      in discussions with these note holders in an attempt to resolve this
      matter.




Our
      recent financings are discussed below.




In
      March
      2007, we entered into a Line of Credit Facility with an institutional investor
      pursuant to which we can borrow up to $200,000, which can be drawn on demand
      at
      the discretion of the Company. The facility continued in effect until January
      28, 2008. Amounts outstanding accrue interest at a per annum rate of 9% and
      accrued interest is payable on a quarterly basis, All amounts borrowed and
      accrued and unpaid interest need to be repaid by January 28, 2009. In
      consideration of the line of credit facility, we issued to the investor a
      warrant for 50,000 shares of our Common Stock, exercisable through March 27,
      2010 at a per share exercise price of $1.50, of which warrants for 20,000 shares
      is exercisable immediately and the warrants for the remaining 30,000 shares
      exercisable only following (and subject to) our first draw-down under the
      facility. We have not drawn down on the facility prior to its expiration and,
      accordingly, the warrants for the 30,000 shares are no longer
      exercisable.





In
      July
      2007 we issued to an investor 1,444,444 shares of our Common Stock for aggregate
      gross proceeds of $1,300,000. The net proceeds from this financing were
      $1,183,000 after cash fee paid to the placement agent.





We
      will
      need to raise additional funds to be able to satisfy our cash requirements
      over
      the next twelve months. Continuing product development and enhancement, expected
      new product launches, corporate operations and marketing expenses will continue
      to require additional capital. Our current revenues from operations are
      insufficient to cover our projected expansion plans. We therefore are seeking
      additional financing through the sale of our equity and/or debt securities
      to
      satisfy future capital requirements until such time as we are able to generate
      sufficient cash flow from revenues to finance on-going operations. No assurance
      can be provided that additional capital will be available to us on commercially
      acceptable or at all. Our auditors included a "going concern" qualification
      in
      their auditors' report for the year ended December 31, 2007, which qualification
      may make it more difficult for us to raise funds. Additional equity financings
      may be dilutive to holders of our Common Stock.




17




**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Statement (“SFAS”) No. 157, “Fair Value
      Measurements” (SFAS No. 157). The purpose of SFAS No. 157 is to define fair
      value, establish a framework for measuring fair value, and enhance disclosures
      about fair value measurements. The measurement and disclosure requirements
      first
      became effective for us beginning in the first quarter of fiscal year 2008.





In
      February, 2008, the FASB issued Staff Position (“FSP”) FAS 157-2, which delays
      the effective date of FAS 157 for all non-financial assets and liabilities,
      except those that are recognized or disclosed at fair value in the financial
      statements. Except as FAS 157 relates to our non-financial assets and
      liabilities, FAS 157 will be effective for us as of the year beginning
      January 1, 2008. The adoption of SFAS No. 157 is not expected to have a
      significant impact on our consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
      No. 159 permits companies to choose to measure certain financial
      instruments and certain other items at fair value. The standard requires that
      unrealized gains and losses on items for which the fair value option has been
      elected be reported in earnings. SFAS No. 159 became effective for us as of
      the first quarter of fiscal year 2008, although earlier adoption is permitted.
      The adoption of SFAS 159 is not expected to have a significant impact on
      our consolidated financial statements.





In
      June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue
      No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
      Services to Be Used in Future Research and Development Activities” (EITF 07-3).
      EITF 07-3 requires non-refundable advance payments for goods and services to
      be
      used in future research and development activities to be recorded as an asset
      and the payments to be expensed when the research and development activities
      are
      performed. EITF 07-3 applies prospectively for new contractual arrangements
      entered into beginning in the first quarter of fiscal year 2008. We currently
      recognize these non-refundable advanced payments as an expense upon payment.
      The
      adoption of EITF 07-3 is not expected to have a significant impact on our
      consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”
(“SFAS 141(R)”) and SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statement” (“SFAS 160”). SFAS 141(R) requires
      the acquiring entity in a business combination to record all assets acquired
      and
      liabilities assumed at their respective acquisition-date fair values and changes
      other practices under FAS 141, some of which could have a material impact
      on how we account for business combinations. SFAS 141(R) also requires
      additional disclosure of information surrounding a business combination, such
      that users of the entity’s financial statements can fully understand the nature
      and financial impact of the business combination. SFAS 160 requires
      entities to report non-controlling (minority) interests in subsidiaries as
      equity in the consolidated financial statements. We are required to adopt
      SFAS 141(R) and SFAS 160 simultaneously in our fiscal year beginning
      November 1, 2009. The provisions of SFAS 141(R) will only impact us if
      we become a party to a business combination after the pronouncement has been
      adopted. The adoption of SFAS 141(R) and SFAS 160 is not expected to
      have a significant impact on our consolidated financial statements.




**ITEM
      7. FINANCIAL STATEMENTS**




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-KSB.





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





None.





**ITEM
      8A(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 and our Chief Financial
      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).




18




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 and Chief Financial Officer, of the effectiveness of the
      design and operation of our disclosure controls and procedures. Based on the
      foregoing, our Chief Executive Officer and Principal Financial 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.




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





During
      the three months ended December 31, 2007, there have been no changes in our
      internal control over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, these controls. ****





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Our management, including our principal
      financial officer, has, with the assistance of external advisor and our audit
      committee, conducted an evaluation of the effectiveness of our internal control
      over financial reporting. Based on our evaluation, our management has concluded
      that our internal controls over financial reporting were effective as of
      December 31, 2007.





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
      8B. OTHER INFORMATION**




None.





19


**PART
      III**





**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**




**Management**




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





NAME
            
            AGE
            
            POSITIONMichael
                Braunold
            
            48
            
            President,
                Chief Executive Officer and DirectorJeff
                Feuer
            
            43
            
            Chief
                Financial OfficerIsrael
                Sarussi
            
            57
            
            Chief
                Technology OfficerPauline
                Dorfman
            
            43
            
            Director
                (1)Sidney
                Braun
            
            48
            
            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.




JEFF
      FEUER has been Chief Financial Officer of the Company since July 14, 2005.
      Prior
      to joining the Company, Mr. Feuer served in similar capacities at Transpharma
      Medical Ltd., a biomedical device start-up company (January 2004 through May
      2005), and Finjan Software Inc., a security software company (September 1999
      through September 2003). From July 1996 to September 1999, he served as
      corporate controller of Aladdin Knowledge Systems, Ltd., an Israeli based NASDAQ
      company. Prior to this he was a senior auditor in public accounting both in
      Israel and the UK.




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.




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 and continues to serve on the board of directors of MEII. 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.. 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.





20




**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 shall hold office until his 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.




**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
      2007, or written representations from certain reporting persons, we believe
      all
      of our directors and executive officers met all applicable filing
      requirements.




**ITEM
      10. 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 and the two most highly paid
      executive officers serving as such at the end of 2007 whose salary and bonus
      exceeded $100,000 for the year ended December 31, 2007 (the "Named Executive
      Officers").





21





**SUMMARY
      COMPENSATION TABLE**





Name & Principal Position
            
            Year
            
            Salary ($)
            
            Bonus ($)
            
            Option Awards
              ($) (1)
            
            All Other
              Compensation ($)
            
            Total
              ($)MICHAEL
                BRAUNOLD
              President
                and Chief Executive Officer
            
            
            2007
              2006
            
            $
              
              $
            188,311
              
              158,441
            
            
            —
              
              —
            
            
            —
              
              —
            
            $
              
              $
            70,467
              
              59,576
            (2)
              
              (3)
            $
              
              $
            258,778
              
              218,017JEFFREY
                FEUER
              Chief
                Financial Officer
            
            
            2007
              2006
            
            $
              
              $
            129,007
              
              89,683
            
            
            __
              
              __
            
            $
            —
              
              23,499
            
            $
              
              $
            59,169
              
              45,785
            (4)
              
              (5)
            $
              
              $
            188,176
              
              158,967ISRAEL
                SARUSSI
              Chief
                Technology Officer
            
            
            2007
              2006
            
            $
              $
            160,718
              158,441
            
            
            —
              —
            
            
            —
              —
            
            $
              $
            70,310
              63,369
            (6)
              (7)
            $
              $
            231,028
              221,810







(1)
            Amounts
                in this column reflect the expense recognized by us for accounting
                purposes calculated in accordance with FASB Statement of Financial
                Accounting Standards No. 123R (“FAS 123R”) with respect to employee stock
                options issued under the Company's 2005 Incentive Plan in 2005.****The assumptions used to calculate the fair value of stock option
                grants
                under FAS 123R, were: expected holding period of 10 years, risk free
                interest rate of 2.63%, no dividend yield and volatility of
                100%.(2)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($13,154), payment in lieu of accrued vacation ($9,238).and
                contributions to insurance premiums paid under Israeli law for pension,
                severance and further education funds ($48,075)(3)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($12,568) and contributions to insurance premiums paid under
                Israeli law for pension, severance and further education funds
                ($47,008).(4)
            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
                ($44,193).(5)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($12,726) and contributions to insurance premiums paid under
                Israeli law for pension, severance and further education funds
                ($33,059).(6)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($19,100) and contributions to insurance premiums paid under
                Israeli law for pension, severance and further education funds
                ($51,210).(7)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($14,486) and contributions to insurance premiums paid under
                Israeli law for pension, severance and further education funds
                ($48,883).




None
      of
      the Named Executive Officers received any option grants during the fiscal year
      ended December 31, 2007.




**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, 2007.





22







**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END — DECEMBER 31, 2007 [JEFF UPDATE TABLE AND
      FOOTNOTES**




Name
            
            Number of Securities
              Underlying
              Unexercised Options
              (#)
              
              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
            (1)
            
            —
            
            
            —
            
            $
            0.60
            
            
            12/22/15Jeffrey
                Feuer
            
            
            120,000
            (2)
            
            
            
            
            
            
            $
            0.60
            
            
            12/22/15Israel
                Sarussi
            
            
            —
            (3)
            
            —
            
            
            —
            
            
            —
            
            
            —








(1)
            Options
                were issued under our 2005 Equity Incentive Plan on December 22,
                2005 and
                were fully vested upon issuance.(2)
            Options
              were issued under our 2005 Equity Incentive plan on December 22,
              2005.(3)
            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




**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. has an initial term of
      three years commencing on the date of 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 initial term
      or
      any renewal term, that such party does not intend to renew the agreement. Mr.
      Braunold is currently paid a monthly salary of $13,250 under the agreement
      with
      SPO Ltd. Mr. Braunold is not entitled to a salary under the agreement with
      us
      but has been granted options under our 2005 Equity Incentive Plan to purchase
      250,000 shares of our Common Stock at a per share exercise price of $0.60.
      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.




JEFFREY
      FEUER. On July 14, 2005, we entered into an employment agreement with Jeffrey
      Feuer, pursuant to which Mr. Feuer serves 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 continues to serves as SPO Ltd.'s Chief
      Financial Officer. Each of the agreements with the Company and SPO Ltd.
      terminates on the earlier of: (i) Mr. Feuer's death or disability, (ii)
      termination by the Company or Mr. Feuer without cause upon 60 days 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
      is
      not entitled to a salary under the agreement with us but has been granted
      options 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.




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 $13,250 under the agreement with SPO Ltd.




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.




23




**COMPENSATION
      OF DIRECTORS UPDATE**




We
      paid
      each outside director $25,000 per annum for service on our Board of Directors
      in
      2007. **** In
      addition, we have granted stock options to directors to compensate them for
      their services. In June 2006 we issued to each of Pauline Dorfman and Sidney
      Braun options under our 2005 Non-Employee Directors Stock Option to purchase
      up
      to 25,000 shares of our Common Stock each at a per share exercise price of
      $0.85.





The
      following table summarizes data concerning the compensation of our non-employee
      directors for the fiscal year ended December 31, 2007.




Fees Earned
            
            Optionor
                paid
            
            Awards($)
            
            TotalSidney
                Braun
            
            $
            25,000
            
            
            28,814
                (1
            )
            $
            53,814Pauline
                Dorfman
            
            $
            25,000
            
            
            28,814
                (1
            )
            $
            53,814








(1)
            Amounts
                in this column reflect the expense recognized by the Company for
                accounting purposes calculated in accordance with FASB Statement
                of
                Financial Accounting Standards No. 123R (“FAS 123R”) with respect to
                employee stock options issued under the Company's 2005 Incentive
                Plan in
                2005.****For information on the assumptions used to calculate the value of
                stock
                option grants under FAS 123R, see Note 12 of the Company’s financial
                statements for the year ended December 31, 2007 included elsewhere
                in this
                report. Options are discussed in further detail in the Outstanding
                Equity
                Awards at Fiscal Year End Table. 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 5.02%, no dividend
                yield and volatility of 100%.




**ITEM
      11. 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
      20,
      2008, 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 20, 2008. 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 21,585,188 shares of Common Stock outstanding
      at March 20, 2008.




Common
                Stock
              Percentage
                ofName
                of Beneficial Owner (1)
            
            Beneficially
                Owned (2)
            
            Common
                StockMichael
                Braunold
            
            
            993,922
            (3)
            
            4.60
            %Jeffrey
                Feuer
            
            
            120,000
            (4)
            
            *Israel
                Sarussi
            
            
            4,165,776
            (5)
            
            19.30
            %Pauline
                Dorfman
            
            
            100,000
            (6)
            
            *Sidney
                Braun
            
            
            100,000
            (6)
            
            *All
                officers and directors as a group (5 persons)
            
            
            5,479,698
            
            
            25.39
            %





*
            Less
                than 1%




(1)
            Except
                as otherwise indicated, the address of each beneficial owner is c/o
                SPO
                Medical Inc., 21860 Burbank Blvd., North Building, Suite 380, Woodland
                Hills, CA 91367.




(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.




24




(3)
            Includes
                250,000 shares of our Common Stock that are issuable upon exercise
                of
                vested options issued under our 2005 Equity Incentive Plan (the "2005
                Plan").




(4)
            Represents
                shares issuable upon exercise of options under the Company's 2005
                Plan.




(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
                shares issuable upon exercise of currently exercisable options under
                the
                Company's 2005 Non-Employee Directors Stock Option Plan (the "2005
                Directors Plan").




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




**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.





**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 Mrs. Dorfman were appointed to the Audit Committee in 2005,
      and are presently the sole members of the committee.




**ITEM
      13. EXHIBITS**




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)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)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
                  Instruments14.1
              
              Code
                  of Conduct (6)31.1
              
              Certification
                  of the Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.2
              
              Certification
                  of the Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
  25
  32.1
              
              Certification
                  of the Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.2
              
              Certification
                  of the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002





(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




26


**ITEM
      14. PRINCIPAL ACCOUNTANT 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, 2007 and 2006.





Fiscal
                Year Ended
            
            Fiscal
                Year EndedDecember
                31, 2007
            
            December
                31, 2006Audit
                Fees
            
            $
            38,500
            
            $
            39,000Audit
                Related Fees
            
            $
            —
            
            
            —Tax
                Fees
            
            $
            3,500
            
            $
            6,500All
                Other Fees
            
            $
            60,000
            
            
            —Total
            
            $
            102,000
            
            $
            45,500




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.




27


**SIGNATURES**




In
      accordance with the requirements of the Exchange Act the issuer caused this
      report to be signed by the undersigned thereunto duly authorized.





DATE:
                March 21, 2008
            /s/
                Michael BraunoldMichael
                BraunoldChief
                Executive Officer and DirectorDATE:
                March 21, 2008
            /s/
                Jeff FeuerJeff
                FeuerChief
                Financial Officer(Principal
                financial and accounting officer)




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
                21, 2008Sidney
                Braun/s/
                Michael Braunold
            
            President,
                Chief Executive Officer and Director
            
            March
                21, 2008Michael
                Braunold/s/
                Pauline Dorfman
            
            Director
            
            March
                21, 2008Pauline
                Dorfman





28





**SPO
      MEDICAL INC. AND ITS SUBSIDIARY**




**CONSOLIDATED
      FINANCIAL STATEMENTS**




**AS
      OF DECEMBER 31, 2007**




**U.S.
      DOLLARS IN THOUSANDS**




**INDEX**




**Page**Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheet
            
            
            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







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Stockholders of**


**SPO
      MEDICAL INC.**





We
      have
      audited the accompanying consolidated balance sheet of SPO MEDICAL INC. ("the
      Company") and its subsidiary as of December 31, 2007, and the related statements
      of operations, changes in stockholders' deficiency and cash flows for each
      of
      the two years in the period ended December 31, 2007. These financial statements
      are the responsibility of the Company's management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our 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, the consolidated financial statements referred to above, present
      fairly, in all material respects, the consolidated financial position of the
      Company and its subsidiary as of December 31, 2007, and the consolidated results
      of their operations and their cash flows for each of the two years in the period
      ended December 31, 2007, in conformity with U.S. generally accepted accounting
      principles.





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 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 & Co.


Certified
      Public Accountants


A
      member
      firm of Deloitte Touche Tohmatsu





/s/
      Brightman Almagor & Co.


Tel-Aviv,
      Israel


March
      19,
      2008




F-2


**SPO
      MEDICAL INC.**


**CONSOLIDATED
      BALANCE SHEET**


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




**December 31,****Note**
            
            **2007****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            
            
            
            $
            1,242Trade
                receivables
            
            
            
            
            
            883Prepaid
                expenses and other accounts receivable
            
            
            
            
            
            120Inventories
            
            
            4
            
            
            1,0813,326**LONG
                TERM INVESTMENTS**Deposits
            
            
            
            
            
            15Severance
                pay fund
            
            
            
            
            
            313328**PROPERTY
                AND EQUIPMENT, NET**
            
            
            5
            
            
            177**Total
                net assets**
            
            
            
            
            $
            3,831





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


F-3


**SPO
      MEDICAL INC.**


**CONSOLIDATED
      BALANCE SHEET**


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





**December
                31,****Note**
            
            **2007****LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                Liabilities**Short-term
                loans, net
            
            
            6
            
            $
            1,814Trade
                payables
            
            
            
            
            
            576Employees
                and Payroll accruals
            
            
            
            
            
            294Other
                creditors
            
            
            8
            
            
            485Accrued
                expenses and other liabilities
            
            
            9
            
            
            7503,919**Long-Term
                Liabilities**Accrued
                severance pay
            
            
            10
            
            
            446**COMMITMENTS
                AND CONTINGENT LIABILITIES**
            
            
            14**STOCKHOLDERS’
                DEFICIENCY**Stock
                capital
            
            
            11Preferred
                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 - 21,510,188
                shares
            
            
            
            
            
            215Additional
                paid-in capital
            
            
            
            
            
            11,904Accumulated
                deficit
            
            
            
            
            
            (12,653
            )(534
            )**Total
                liabilities and stockholders’ deficiency**
            
            
            
            
            $
            3,831




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
                31****2007**
            
            **2006****Revenues**
            
            $
            5,008
            
            $
            3,714Cost
                of revenues
            
            
            2,447
            
            
            1,809**Gross
                profit**
            
            
            2,561
            
            
            1,905**Operating
                expenses**Research
                and development
            
            
            1,198
            
            
            972Selling
                and marketing
            
            
            675
            
            
            671General
                and administrative
            
            
            1,450
            
            
            923**Total
                operating expenses**
            
            
            3,323
            
            
            2,566**Operating
                loss**
            
            
            762
            
            
            661Financial
                expenses, net
            
            
            842
            
            
            4,302**Net
                Loss for the year**
            
            $
            1,604
            
            $
            4,963Basic
                and diluted loss per ordinary share
            
            $
            0.08
            
            $
            0.26Weighted
                average number of shares outstanding used in computation of basic
                and
                diluted loss per share
            
            
            21,099,367
            
            
            19,069,380





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**
            
            **Deferred**
              **compensation**
            
            **Accumulated
                deficit**
            
            **Total****Balance
                as of January 1, 2006**
            
            $
            170
            
            $
            4,833
            
            $
            (227
            )
            $
            (6,086
            )
            $
            (1,310
            )Deferred
                compensation reclassified due to FAS 123R implementation for the
                first
                time
            
            
            
            
            
            (227
            )
            
            227
            
            
            
            
            
            —Warrants
                issued in connection with loans
            
            
            
            
            
            530
            
            
            
            
            
            
            
            
            530Amortization
                of deferred stock-based compensation related to options granted to
                consultants
            
            
            
            
            
            893
            
            
            
            
            
            
            
            
            893Exercise
                of warrants by external consultant
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            5Benefit
                resulting from changes to warrant terms
            
            
            
            
            
            2,534
            
            
            
            
            
            
            
            
            2,534Exercise
                of convertible notes
            
            
            9
            
            
            560
            
            
            
            
            
            
            
            
            569Amortization
                of deferred stock-based compensation related to options granted to
                employees
            
            
            
            
            
            189
            
            
            
            
            
            
            
            
            189Amortization
                of deferred stock-based compensation related to options granted to
                directors
            
            
            
            
            
            71
            
            
            
            
            
            
            
            
            71Issuance
                of ordinary shares
            
            
            9
            
            
            571
            
            
            
            
            
            
            
            
            580Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            (4,963
            )
            
            (4,963
            )**Balance
                as of December 31, 2006**
            
            $
            193
            
            $
            9,954
            
            $
            —
            
            $
            (11,049
            )
            $
            (902
            )Issuance
                of stock capital, net
            
            
            14
            
            
            1,169
            
            
            
            
            
            
            
            
            1,183Exercise
                of stock options
            
            
            2
            
            
            8
            
            
            
            
            
            
            
            
            10Warrants
                issued in connection with credit line
            
            
            
            
            
            19
            
            
            
            
            
            
            
            
            19Benefit
                resulting from changes to warrant terms
            
            
            
            
            
            41
            
            
            
            
            
            
            
            
            41Issuance
                of ordinary shares upon exercise of warrants and conversion of
                loans
            
            
            6
            
            
            510
            
            
            
            
            
            
            
            
            516Amortization
                of deferred stock-based compensation related to options granted to
                employees
            
            
            
            
            
            110
            
            
            
            
            
            
            
            
            110Amortization
                of deferred stock-based compensation related to options granted to
                directors
            
            
            
            
            
            58
            
            
            
            
            
            
            
            
            58Amortization
                of deferred stock-based compensation related to options granted to
                consultants
            
            
            
            
            
            35
            
            
            
            
            
            
            
            
            35Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            (1,604
            )
            
            (1,604
            )**Balance
                as of December 31, 2007**
            
            $
            215
            
            $
            11,904
            
            $
            —
            
            $
            (12,653
            )
            $
            (534
            )





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


F-6


**SPO
      MEDICAL INC.**


**CONSOLIDATED**  **STATEMENTS
      OF CASH FLOWS**


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




**Year
                ended****December
                31,****2007**
            
            **2006****Cash
                Flows from Operating Activities**Net
                Loss for the period
            
            $
            (1,604
            )
            $
            (4,963
            )Adjustments
                to reconcile loss to net cash used in operating
                activities:Depreciation
            
            
            31
            
            
            24Stock-based
                compensation expenses
            
            
            224
            
            
            1,152Amortization
                of loan discounts
            
            
            491
            
            
            814Increase
                in accrued interest payable on loans
            
            
            154
            
            
            156Loan
                commission
            
            
            —
            
            
            20Benefit
                resulting from changes to warrant terms
            
            
            41
            
            
            2,534Revaluation
                of loans
            
            
            112Changes
                in assets and liabilities:Increase
                in trade receivables
            
            
            (315
            )
            
            (369
            )Decrease
                (Increase) in prepaid expenses and other receivables
            
            
            130
            
            
            (208
            )Increase
                in inventories
            
            
            (270
            )
            
            (351
            )Increase
                in accounts payable
            
            
            88
            
            
            263Increase
                (decrease) in accrued severance pay, net
            
            
            11
            
            
            (7
            )Increase
                in other creditors
            
            
            90
            
            
            395Increase
                in accrued expenses and other liabilities
            
            
            258
            
            
            97Net
                cash used in operating activities
            
            
            (559
            )
            
            (443
            )**Cash
                Flows from Investing Activities**Increase
                in long-term deposits
            
            
            (4
            )
            
            (1
            )Sale
                of property and equipment
            
            
            1
            
            
            —Purchase
                of property and equipment
            
            
            (103
            )
            
            (82
            )Net
                cash used in investing activities
            
            
            (106
            )
            
            (83
            )**Cash
                Flows from Financing Activities**Issuance
                of stock capital
            
            
            1,183
            
            
            580Exercise
                of warrants by consultant
            
            
            —
            
            
            5Receipt
                of short-term loans
            
            
            —
            
            
            152Proceeds
                on issuance of exercisable warrants
            
            
            —
            
            
            528Issuance
                of stock capital upon exercise of options
            
            
            10
            
            
            —Repayment
                of short-term loans
            
            
            (122
            )
            
            (396
            )Net
                cash provided by financing activities
            
            
            1,071
            
            
            869**Increase
                in cash and cash equivalents**
            
            
            406
            
            
            343Cash
                and cash equivalents at the beginning of the year
            
            
            836
            
            
            493Cash
                and cash equivalents at the end of the period
            
            $
            1,242
            
            $
            836**Non
                cash transactions**Conversion
                of convertible notes
            
            $
            —
            
            $
            569Conversion
                of loan notes into stock capital
            
            $
            368
            
            $




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


F-7


**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; homecare, professional medical care,
      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." 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".





**NOTE
      2**  **-**  **GOING
      CONCERN**





As
      reflected in these financial statements, the Company’s operations for the year
      ended December 31, 2007, resulted in a net loss of $1,604 and the Company’s
      balance sheet reflects a net stockholders’ deficit of $534. The Company’s
      ability to continue operating as a “going concern” is dependent on its ability
      to raise sufficient additional working capital. Management’s plans in this
      regard include raising additional cash from current and potential stockholders
      and increasing the marketing of its current and new products.




F-8





**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 Statement of Financial Accounting Standards ("SFAS")
      No.
      52 “Foreign Currency Translation” (“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 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, 2007, no
      impairment losses have been recorded.


F-9





**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,
      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.**
            **Inventory:**





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.





**H.**
            **Research
                and development costs:**





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





**I.**
            **Income
                taxes:**





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
      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.





**J.**
            **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





**NOTE
      3**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**K.**
            **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.





**L.**
            **Stock-based
                compensation:**





Effective
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
“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 SFAS
      No. 123 (revised 2004) included in Statement of Operations:





**Year
                ended December 31,****2007**
            
            **2006**Cost
                of revenues
            
            $
            7
            
            $
            13Research
                and development, net
            
            
            21
            
            
            176Selling
                and marketing
            
            
            48
            
            
            99General
                and administrative
            
            
            127
            
            
            122$
            203
            
            $
            410





Share-based
      compensation cost relating to stock options recognized in 2006 and 2007 is
      based
      on the value of the portion of the award that is ultimately expected to vest.
      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
      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% and
      (4) risk-free interest rate of approximately 4.5%.


F-11





**NOTE
      3**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**M.**  **Effects
      of recently issued accounting standards:**





(1)
            In
                September 2006, the Financial Accounting Standards Board (“FASB”) issued
                SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). The purpose of
                SFAS No. 157 is to define fair value, establish a framework for measuring
                fair value, and enhance disclosures about fair value measurements.
                The
                measurement and disclosure requirements are effective for the Company
                beginning in the first quarter of fiscal year 2008. In February,
                2008, the
                FASB issued Staff Position (“FSP”) FAS 157-2, which delays the effective
                date of FAS 157 for all non-financial assets and liabilities, except
                those
                that are recognized or disclosed at fair value in the financial
                statements. As applicable to the Company, FAS 157, except as it relates
                to
                non-financial assets and liabilities as noted in proposed FSP FAS
                157-2,
                will be effective as of the year beginning January 1, 2008.The
                adoption of SFAS No. 157 is not expected to have a significant impact
                on
                the Company’s consolidated financial
                statements.




(2)
              In
                  February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
                  for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
                  No. 159 permits companies to choose to measure certain financial
                  instruments and certain other items at fair value. The standard
                  requires
                  that unrealized gains and losses on items for which the fair value
                  option
                  has been elected be reported in earnings. SFAS No. 159 is effective
                  for the Company beginning in the first quarter of fiscal year 2008,
                  although earlier adoption is permitted. The adoption of SFAS No.
                  159 is
                  not expected to have a significant impact on the Company’s consolidated
                  financial statements.





(3)
            In
                June 2007, the FASB ratified Emerging Issues Task Force
                (EITF) Issue No. 07-3, “Accounting for Nonrefundable Advance
                Payments for Goods or Services to Be Used in Future Research and
                Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable
                advance payments for goods and services to be used in future research
                and
                development activities to be recorded as an asset and the payments
                to be
                expensed when the research and development activities are performed.
                EITF
                07-3 applies prospectively for new contractual arrangements entered
                into
                beginning in the first quarter of fiscal year 2008. The Company currently
                recognizes these non-refundable advanced payments as an expense upon
                payment. The adoption of EITF 07-3 is not expected to have a significant
                impact on the Company's consolidated financial
                statements.





(4)
              In
                  December 2007, the FASB issued SFAS No. 141(R) “Business
                  Combinations” (“SFAS 141(R)”) and SFAS No. 160,
                  “Non-controlling Interests in Consolidated Financial Statement”
                  (“SFAS 160”). SFAS 141(R) requires the acquiring entity in a
                  business combination to record all assets acquired and liabilities
                  assumed
                  at their respective acquisition-date fair values and changes other
                  practices under FAS 141, some of which could have a material impact
                  on how the Company accounts for business combinations. SFAS 141(R)
                  also requires additional disclosure of information surrounding
                  a business
                  combination, such that users of the entity’s financial statements can
                  fully understand the nature and financial impact of the business
                  combination. SFAS 160 requires entities to report non-controlling
                  (minority) interests in subsidiaries as equity in the consolidated
                  financial statements. The Company is required to adopt SFAS 141(R)
                  and SFAS 160 simultaneously in its fiscal year beginning
                  November 1, 2009. The provisions of SFAS 141(R) will only impact
                  the Company if it is a party to a business combination after the
                  pronouncement has been adopted. The adoption of SFAS 141(R) and
                  SFAS 160 is not expected to have a significant impact on the
                  Company’s consolidated financial
                  statements.




F-12




**NOTE
      3**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**N.**  **Basic
      and diluted net loss per share:**





Basic
      and
      diluted net loss per share is presented in accordance with Statement of
      Accounting Financial Standards No. 128, "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 4,562,100 and 5,472,838
      for the years ended December 31, 2007 and 2006, respectively.





**NOTE
      4**  **-**  **INVENTORIES**




**December
                31,****2
                0 0 7**Raw
                Materials
            
            $
            771Work
                In Process
            
            
            77Finished
                Goods
            
            
            233$
            1,081





**NOTE
      5****-****PROPERTY
      AND EQUIPMENT**




**December
                31,****2
                0 0 7**Cost:Computer
                and peripheral equipment
            
            $
            216Leasehold
                Improvement
            
            
            31Office
                furniture and equipment
            
            
            28$
            275Accumulated****depreciation:Computer
                and peripheral equipment
            
            $
            86Leasehold
                Improvement
            
            
            2Office
                furniture and equipment
            
            
            10$
            98Property
                and Equipment, net
            
            $
            177




Depreciation
      expenses for the years ended December 31, 2007 and 2006 amounted to $31 and
      $24
      respectively.


F-13





**NOTE
      6**  **-**  **SHORT-TERM
      LOANS**





**A.**
              In
                  December 2005 the Company completed a private placement to certain
                  accredited investors that it 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").





For
      financial reporting purposes, the Company recorded a discount of $949 to reflect
      the value of the warrants and is amortizing this amount to the date of
      maturity.





In
      September 2006, the Company offered to the holders of the April 2005 Notes
      to
      revise certain of the terms of the original offering in order to facilitate
      an
      extension to the scheduled maturity date of the Note, (hereinafter the
      "Amendment"). The Amendment provides that (a) the maturity date of the April
      2005 Notes is to be extended by one year from the original maturity date on
      the
      original note, (b) the exercise period of the April 2005 Warrants is to be
      extended from three to five years and the per share exercise price was adjusted
      to $0.60 and (c) the interest rate on the amounts outstanding under the April
      2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment
      also provides that if the Company subsequently issues 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; provided, that, this protection will not apply to certain Company equity
      or debt issuances (i) from approved stock option plans to employees, directors
      and other service providers, (ii) upon exercise of options and warrants
      outstanding as of September 27, 2006 and (iii) to Company consultants that
      an
      unaffiliated third party would deem to be commercially reasonable and
      fair.





The
      Amendment was effective as of September 30, 2006 and the accounting costs
      related to the Amendment has been fully recognized in 2006. For financial
      reporting purposes, the Company recorded a one time non-cash finance expense
      in
      the amount of $2,534 in respect of the full amount ($1,494) of the April 2005
      Note.





In
      November 2007, holders of $125 of the April 2005 Notes elected to exercise
      their
      right represented by the warrants to purchase shares of common stock of the
      Company. Accordingly the Company issued 244,076 shares of common stock
      calculated based on principal and accrued interest through the date of exercise.
      The per share exercise price payable in respect of the April 2005 Warrants
      being
      exercised was offset against the amounts owed by the Company under the April
      2005 Notes.





As
      of the
      date of the financial statements holders of Notes in the principal amount $1,439
      have signed the Amendment and the holder of a note in the principal amount
      of
      $50 received a repayment of the principle and accrued interest. The holder
      of a
      note in the principal amount of $55 has not signed the Amendment. By their
      terms, all of the notes come due on March 26 2008.





The
      Company intends to approach these note holders in an effort to reach a
      resolution whereby the amounts payable under the April 2005 Notes are converted
      and/or applied to the exercise of the April 2005 Warrants. No assurance can
      be
      provided that the Company will be successful in reaching any such resolution.


F-14





**NOTE
      6** **-**  **SHORT-TERM
      LOANS (Cont.)**





**B.**
            In
                July 2006, the Company commenced a private placement of units of
                securities, 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.The
                company raised $550.Under
                the terms of the offering the principal and accrued interest are
                due in
                one balloon payment at the end of the twelve month period. Each purchaser
                of the note 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 the 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 and to reduce the
                per share
                exercise price of the warrants to $0.90. As of the date of the financial
                statements, 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. The Company repaid to a note holder the principal amount
                of
                $75 and the accrued interest thereon. The warrants held by note holders
                who do not convert are not being re-priced. The Company has not met
                the
                scheduled payment on the remaining outstanding $237 owing under these
                notes and, therefore, under the terms of the notes the Company is
                in
                default under these notes. The Company is in discussion with the
                holders
                of these notes in an attempt to resolve this
                matter.





**NOTE
      7** **-**  **LINE
      OF CREDIT**





On
      March
      27, 2007, the Company entered into a Line of Credit Facility with a private
      investor pursuant to which the Company can borrow up to $200, which can be
      drawn
      on demand at the discretion of the Company. The facility continues in effect
      until January 28, 2008. Amounts outstanding accrue interest at a per annum
      rate
      of 9% and accrued interest is payable on a quarterly basis. All amounts borrowed
      and accrued and unpaid interest are required to be repaid by January 28, 2009.
      In consideration of the line of credit facility, the Company issued to the
      investor warrants for 50,000 shares of its Common Stock, exercisable through
      March 27, 2010 at a per share exercise price of $1.50, of which warrants for
      20,000 shares are exercisable immediately and the warrants for the remaining
      30,000 shares exercisable only following (and subject to) the Company first
      draw-down under the facility. The Company did not draw on the credit facility
      before its expiration and, accordingly, the warrants for the 30,000 shares
      that
      were subject to the drawing of the credit facility are no longer
      exercisable.








**NOTE
      8** **-**  **OTHER
      CREDITORS**





In
      February 2006 the Company entered into a Distribution Agreement with a
      Distributor to market and distribute certain of the Company’s products. In
      accordance with this agreement, as at the balance sheet date, the distributor
      advanced the Company $485.


F-15





**NOTE
      9** **-**  **ACCRUED
      EXPENSES AND OTHER LIABILITIES**





**December
                31,****2
                0 0 7**Accrued
                expenses pre merger
            
            $
            263Royalties
            
            
            317Other
                accrued expenses
            
            
            170$
            750





**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 expenses resulting from the increase in the provision for the years ended
      December 31, 2007 and 2006 were $115 and $78 respectively.




**NOTE
      11** **-**  **PRIVATE
      PLACEMENTS**





In
      January 2006, the Company entered into an agreement with an institutional
      investor for the private placement of 857,143 shares of its Common Stock for
      net
      proceeds of $580 net of the payment of the placement related expenses
      aggregating approximately to $20.





On
      July
      5, 2007, the Company privately placed with an institutional investor 1,444,444
      shares of its Common Stock for aggregate gross proceeds of $1,300. The Shares
      were placed pursuant to a Confidential Private Placement Agreement between
      the
      Company and the investor entered into as of July 5, 2007. In connection with
      the
      placement of the shares, the Company paid to a placement agent a cash fee of
      $117.




F-16




**NOTE
      12** **-**  **STOCKHOLDER'S
      EQUITY**





**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 after 10 years 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 2006 and 2007, relating to options
      granted through December 31, 2007, the Company applied the provisions of SFAS
      No. 123(R) and SAB No. 107, which require employee share-based equity
      awards to be accounted for under the fair value method, 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
      2007 and 2006 the Company recorded Stock-based compensation expenses in the
      amount of $203 and $1,152, respectively.





The
      following is a summary of the Company’s outstanding options and
      warrants:




F-17





**NOTE
      12**  **-**  **STOCKHOLDER'S
      EQUITY (Cont.)**





**B.**
            **Stock
                Options:**





As
      of
      December 31, 2007 an aggregate of 870,000 options remain available for future
      grants under the Company’s 2005 Plan and 2005 Directors Plan.




**December
                31, 2007****Amount
                of**
              **Options**
            
            **Weighed**
              **Average
                Exercise**
              **Price**Outstanding
                at the beginning of the year
            
            
            1,230,000
            
            $
            0.59Granted
            
            
            50,000
            
            
            1.50Exercised
            
            
            200,000
            
            
            0.05Outstanding
                at the end of the year
            
            
            1,080,000
            
            
            0.73Exercisable
                at the end of the year
            
            
            931,667
            
            
            0.70




The
      options outstanding as of December 31, 2007, have exercise prices as
      follows:





**Range
                of exercise price**
            
            **Options**
              **outstanding**
              **as
                of**
              **December
                31,**
              **2007**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Options**
              **exercisable**
              **as
                of**
              **December
                31,**
              **2007**
            
            **Weighted**
              **average
                exercise**
              **price
                of options exercisable**$
            0.055
            
            
            100,000
            
            
            3.32
            
            $
            0.05
            
            
            100,000
            
            $
            0.05$
            0.60
            
            
            720,000
            
            
            7.63
            
            $
            0.60
            
            
            645,000
            
            $
            0.60$
            0.85
            
            
            110,000
            
            
            6.14
            
            $
            0.85
            
            
            70,000
            
            $
            0.85$
            1.50
            
            
            50,000
            
            
            4.47
            
            $
            1.50
            
            
            50,000
            
            $
            1.50$
            1.85
            
            
            100,000
            
            
            8.81
            
            $
            1.85
            
            
            66,667
            
            $
            1.851,080,000
            
            
            7.04
            
            $
            0.73
            
            
            931,667
            
            $
            0.70




F-18





**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,**
              **2007**
            
            **Exercisable through**2005
            (1)
            
            
            1,857,066
            
            
            0.85
            
            
            -
            
            
            -2005
            (2)
            
            
            40,000
            
            
            0.75
            
            
            40,000
            
            
            August
                20082005
            (3)
            
            
            853,308
            
            
            0.01
            
            
            853,308
            
            
            December
                2010-April 2015February
                2006
            (2)
            
            
            60,000
            
            
            0.85
            
            
            60,000
            
            
            January
                2009April
                2006
            (4)
            
            
            30,000
            
            
            0.60
            
            
            30,000
            
            
            November
                2009September 2006
            (5)
            
            
            83,333
            
            
            0.36
            
            
            83,333
            
            
            August
                2009September
                2006
            (5)
            
            
            57,500
            
            
            0.60
            
            
            57,500
            
            
            September
                2010September
                2006
            (6)
            
            
            2,340,491
            
            
            0.60
            
            
            2,340,491
            
            
            September
                2010October
                2006
            (7)
            
            
            357,500
            
            
            updated to 0.9
              in Sept 2007
            
            
            357,500
            
            
            October
                2010March
                2007
            (8)
            
            
            20,000
            
            
            1.50
            
            
            20,000
            
            
            March
                2010September 2007
            (4)
            
            
            40,000
            
            
            1.50
            
            
            40,000
            
            
            September
                2011





(1)
            Warrants
                issued to investors in the private placement in connection with the
                April
                2005 Notes. According to the Company offer all of these warrants
                except
                for 58, 823 were replaced to new warrants see (6) and Note
                6a.


(2)
                Warrants
                    issued to other lenders


(3)
                Penny
                    warrants issued to service providers and an employee during
                    2005


(4)
            Warrants
                issued to service providers


(5)
            Warrants
                issued to consultant for financial
                services.


(6)
            Warrants
                issued according to the Amendment and replace the warrants issued
                in
                connection with the April 2005 Notes of which 244,076 were exercised
                see
                Note 6a. This number of warrants excludes 428,396 warrants, resulting
                from
                accrued interest through the end of the period of the note, which
                at the
                holders’ election can be converted to warrants.


(7)
            Issued
                in connection with a private placement of units of securities see
                Note
                6b.


(8)
            Issued
                in connection with line of credit see Note 7





**D.**
            **Dividends**





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




F-19




**NOTE
      13**  **-**  **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 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 SFAS No. 109, the components of deferred income taxes are as
      follows:





**December 31,****2
                0 0 7**Tax
                on net operating losses carry forward
            
            $
            1,559Less
                - valuation allowance
            
            
            (1,559
            )-





**C.**
            The
                Company has provided valuation allowances in respect of deferred
                tax
                assets resulting from tax loss carry forward 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 carry forward and other temporary differences
                will not
                be realized in the foreseeable
                future.





Net
      operating loss carry forward as of December 31, 2006 are as
      follows:





**December 31,****2
                0 0 7**Israel
            
            $
            4,263USA
            
            
            1,542**Total**
            
            $
            5,805


Net
      operating losses in Israel may be carried forward indefinitely. Net operating
      losses in the U.S. are available through 2032.


F-20





**NOTE
      14**  **-**  **COMMITMENTS
      AND CONTINGENCIES**





**Lease
      Commitments**





Research
      and development is carried out at the Company’s premises in Kiryat Malachi,
      Israel, which are comprised of laboratory and development facilities covering
      an
      area of 300 square meters. In addition, the Company sub-leases a smaller
      facility of 112 square meters in Kfar Saba, Israel for local administrative
      staff. The facilities in Kiryat Malachi, Israel are leased pursuant to a lease
      agreement that is scheduled to expire in July 2011 at an approximate per month
      rate of $2.3. The administrative facilities in Israel are leased pursuant to
      a
      lease agreement that was originally scheduled to terminate in January 2007
      with
      an option to extend the lease for two additional 12 month periods at an
      approximate monthly rate of $0.7. The Company exercised the option to extend
      the
      lease term.





**Government
      of Israel**





The
      Company’s wholly owned subsidiary, SPO Ltd., is committed to pay royalties to
      the Government of Israel on proceeds from the sale of products, the research
      and
      development of which the Government 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, 2007 was $1,086. 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 Government of Israel. The grants were received from the
      Government 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, 2007 the Company has provided for $330
      in
      royalties payable from such grants.





**NOTE
      15**  **-**  **SUBSEQUENT
      EVENT**





On
      March
      11, 2008, the Company issued 75,000 shares of Common Stock to a provider of
      investment banking services. The service provides is entitled to an additional
      75,000 shares of Common Stock upon the occurrence of certain specified
      events.




F-21