**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,
                2006




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




*COMMISSION
      FILE NUMBER:  0-11772*




**SPO
      MEDICAL INC.**


(Exact
      name of Small Business Issuer as specified in its chapter)





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





21860
      Burbank Blvd., North Building, Suite 380, Woodland Hills, CA 91367


(Address
      of Principal Executive Offices)





818-888-4380


(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, 2006: $3,714,000





As
      of
      March 16, 2007, there were 19,335,525 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 $28 million based on the last
      reported sale price of $1.89 per share on March 15, 2007 as quoted on the Pink
      Sheets. Shares of the registrant’s common stock held by each officer and
      director and each person known to the registrant to own 10% or more of the
      outstanding voting power of the registrant have been excluded in that such
      persons may be deemed to be affiliates. This determination of affiliate status
      is not a determination for other purposes.




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









**SPO
      MEDICAL INC.**


**2006
      FORM 10-KSB ANNUAL REPORT**





TABLE
      OF CONTENTS





PART
                IITEM
                1.
            DESCRIPTION
                OF BUSINESS
            1ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            12ITEM
                3.
            LEGAL
                PROCEEDINGS
            12ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            12PART
                IIITEM
                5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            12ITEM
                6.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            13ITEM
                7.
            FINANCIAL
                STATEMENTS
            17ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            17ITEM
                8A.
            CONTROLS
                AND PROCEDURES
            17ITEM
                8B.
            OTHER
                INFORMATION
            18PART
                IIIITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                ACT
            18ITEM
                10.
            EXECUTIVE
                COMPENSATION
            20ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            23ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            24ITEM
                13.
            EXHIBITS
            24ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES &
SERVICES
            26




-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**




**History**




SPO
      Medical Inc. was originally organized 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." and on December 23,
      1998, its name was changed to "United Diagnostic, Inc." Effective April 21,
      2005, we 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 among SPO Medical Inc., SPO Ltd. and
      the
      shareholders of SPO Ltd., as amended and restated on April 21, 2005. In exchange
      for the outstanding capital stock of SPO Ltd., we issued to the former
      shareholders of SPO Ltd. a total of 5,769,106 shares of its 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 our
      wholly owned subsidiary and we changed our name from United Diagnostic Inc.
      to
      "SPO Medical Inc." Upon consummation of the Acquisition Transaction, we effected
      a forward subdivision of our Common Stock issued and outstanding on a 2.65285:1
      basis.




Following
      the Acquisition Transaction, we began to engage in the business that SPO Ltd.
      was engaged in.




**Business
      Overview**




Since
      its
      incorporation in August 1995, SPO Ltd. has been 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
      utilize proprietary and patented technologies to deliver oximetry functionality
      through innovative commercial products that address such applications as
      emergency care, home monitoring, sleep apnea, cardiovascular performance,
      cardiac rehabilitation and the physiological monitoring of military personnel
      and safety care workers. We have developed and patented proprietary technology
      that enables the use of pulse oximetry in a reflectance mode of operation (i.e.
      a sensor that can be affixed to a single side of a body part). This technique
      is
      known as Reflectance Pulse Oximetry (RPO). Using RPO, a sensor can be positioned
      on various body parts, hence minimizing problems of motion and poor profusion.
      The unique design features contribute to substantially lower electric power
      requirements and enable a wireless, stand-alone configuration with expanded
      commercial possibilities.




**Background**




Pulse
      oximetry is an important non-invasive process used to both measure blood oxygen
      saturation levels (SpO2) by monitoring the percentage of hemoglobin (Hb) 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.  -1-




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.




**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 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.


-2-




**Research
      & Development / Products Under Design and Development**




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




Handheld
      -- a stand-alone commercial RPO spot check monitor for SpO2 and heart rate.
      The
      Handheld will use our patented technology to provide a medical device which
      is
      easier to use and have lower operating costs than other devices currently widely
      used in hospitals and related environments. The device’s main advantages are
      expected to 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




PedOMetrixTM
      -- a monitor being designed specifically for the use with infants. This unique
      monitor is being designed for continual non-invasive monitoring of an
      infant.




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 2006 and 2005 fiscal years, we expended approximately
      $972,000 and $629,000, respectively, on the research and
      development.




**Business
      Strategy**




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




*
            Establish
                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 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 target 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. Other medical products may be distributed
                by these
                and other distributors. 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. Finally,
                with
                medical and consumer products developed jointly with other companies,
                the
                most appropriate distribution channels will be used for each product
                and
                application.




*
            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 research and 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 of components which we manufacture or which are usually
      available from existing and alternate sources of supply. 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 increases and
      production delays.




We
      outsource our primary manufacturing operations. We utilize contract
      manufacturers that are ISO 13485:2003 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.




**Marketing
      and Sales Organization**




Our
      products are sold primarily through resellers in the United States and a
      combination of resellers and independent distributors in international markets.
      Our primary markets include home care, physicians, hospitals, other medical
      institutions and general home-care providers.  -3-




We
      provide service and maintenance to purchasers of our products under warranty.
      We
      employ service representatives in the United States and Europe and maintain
      service facilities in the United States and through our resellers in Europe
      and
      elsewhere.




**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.
      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 16, 2007, we employed 22 full-time employees, of which four work out
      of
      our corporate offices in California and 18 out of facilities in Israel. None
      of
      these employees is 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 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 Nellcor, a unit of the Tyco Healthcare division of Tyco International
      Ltd; 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 the SPO PulseOx 5500TM units.




**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.




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. The Company's PulseOx 5500TM and the PulseOx 7500TM
      have been classified by the FDA as Class II device and has secured a 510(k)
      pre-market notification clearance before being introduced into the United States
      market. For additional products, the process of obtaining 510(k) clearance
      typically takes several months and may involve the submission of limited
      clinical data supporting assertions that the product is substantially equivalent
      to an already approved device or to a device that was on the market before
      the
      enactment of the Medical Device Amendments of 1976.




Every
      company that manufactures or assembles medical devices to be sold in the United
      States is required to register with the FDA and adhere to certain "good
      manufacturing practices" in accordance with the FDA's Quality System Regulation
      which regulates the manufacture of medical devices, prescribes record keeping
      procedures and provides for the routine inspection of


-4-




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; o 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:




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




Our
      accumulated deficit was approximately $11,049,000 as at December 31, 2006.
      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 three products that are
      commercially available. In order to achieve and maintain profitability we must
      expand our existing product lines.




**WE
      MAY NEED TO RAISE ADDITIONAL FUNDS TO IMPLEMENT OUR BUSINESS PLAN AND THERE
      IS
      NO ASSURANCE THAT SUCH FUNDS CAN BE RAISED ON TERMS THAT WE WOULD FIND
      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 operating
      liquidity needs as they arise, circumstances may arise that would require us
      to
      raise additional capital in order to meet our liquidity needs and satisfy our
      current business plan.  We
      do not
      know whether additional financing will be available when needed, or on terms
      favorable to our stockholders or us. We may raise any necessary funds through
      public or private equity offerings, debt financings or additional corporate
      collaboration and licensing arrangements. Any  -5-


failure
      to achieve adequate funding in a timely fashion would delay our development
      programs 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. 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 three pulse oximetry products for the generation
      of
      revenues. The PulseOx 5500 was first commercially available in the fourth
      quarter of 2004. While our core technology has a number of potentially
      beneficial uses, if that core technology is not widely accepted in the
      marketplace, we currently do not have other commercialized products to fall
      back
      on.




We
      began
      commercial distribution of the PulseOx 7500TM first quarter 2007. Commercial
      distribution of the PedOMetrixTM, a monitor being designed specifically for
      the
      use with infants and also currently under development, is expected to commence
      during late fourth quarter of 2007. 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 these
      products.




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




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




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




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




·
            that
                we, or any collaborative partner, will make timely filings with the
                FDA;




·
            that
                the FDA will act favorably or quickly on these
                submissions;




·
            that
                we will not be required to submit additional information or perform
                additional clinical studies;




·
            that
                we would not be required to submit an application for pre-market
                approval,
                rather than a 510(k) pre-market notification submission as described
                below; or




·
            that
                other significant difficulties and costs will not be encountered
                to obtain
                FDA clearance or approval.


-6-




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.




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.




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


-7-




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.**




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.  -8-




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**




Certain
      components used in the Company's products are currently available to the Company
      from only one source and other components are currently available from only
      a
      limited number of sources. The Company does not have long-term supply contracts
      with its suppliers. In addition, the Company employs several unaffiliated
      subcontractors outside of Israel for the manufacture of its chipsets. While
      the
      Company has been able to obtain adequate supplies of components and has
      experienced no material problems with subcontractors to date, in the event
      that
      any of these suppliers or subcontractors is unable to meet the Company's
      requirements in a timely manner, the Company may experience an interruption
      in
      production. Any such disruption, or any other interruption of such suppliers'
      or
      subcontractors' ability to provide components to the Company and manufacture
      its
      chipsets, could result in delays in making product shipments, which could have
      a
      material adverse impact on the Company's 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 29% of our outstanding Common Stock as
      of
      December 31, 2006. 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 ACTIVE MARKET FOR OUR COMMON STOCK AND NONE MAY DEVELOP OR BE
      SUSTAINED**




Our
      Common Stock is quoted on the Pink Sheets under the symbol "SPOM". The Pink
      Sheets is a centralized quotation service that collects and publishes market
      maker quotes in real time, primarily through its web site,
      http://www.pinksheets.com. Because our stock trades on the Pink Sheets, rather
      than on a national securities exchange or event the NASDAQ over-the counter
      Bulletin Board (OTC) market, you may find it difficult to either dispose of,
      or
      to obtain quotations as to the price of, our Common Stock.




There
      has
      only been very limited trading activity in our Common Stock. There can be no
      assurance that a more active trading market will commence in our securities
      either before or following any new business transaction. Further, in the event
      that an active 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.




We
      can
      provide no assurance when, if ever, our board of directors, will take action
      to
      have our Common Stock quoted on the NASDAQ over-the-counter Bulletin Board
      (OTC)
      or, even, if the Board were to take such action, no assurance can be given
      that
      our Common Stock will in fact be quoted on the OTC Bulletin Board market.
      Failure to develop or maintain an active trading market could negatively affect
      the price of our securities.




**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


-10-




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 ADVERSELYAFFECT 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.




**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


-11-




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 21860 Burbank
      Blvd, North Building Suite 380, Woodland Hills California and are currently
      comprised of approximately 430 square feet. We use these premises primarily
      for
      our corporate offices. The current monthly rental under the lease is
      approximately $2,500. The lease term is scheduled to expire in June 2007 and
      has
      an extension option of a further six months, the rental cost will rise to $2,600
      from April 1, 2007. We anticipate that we will be able to renew and continue
      to
      rent on a month-by-month basis on substantially the same lease
      terms.




We
      also
      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 2008. with a further option to extend it through January 2009. In
      addition, we also lease approximately 3230 square feet in Kiryat Malachi, Israel
      which is used by SPO Ltd. for research 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.




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**




Our
      Common Stock is quoted on the Pink Sheets LLC's Electronic Inter-dealer
      Quotation and Trading System (the "Pink Sheets") under ticker symbol "SPOM".
      Trading of our Common Stock on the Pink Sheets 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. Prior to May 2005, although our Common
      Stock was quoted on the Pink Sheets under the symbol "UNDI", there was no active
      trading market for the Common Stock. Investors should not rely on historical
      stock price performance as an indication of future price
      performance.




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.  -12-




LOW
            
            HIGHYear
                Ended December 31, 2006First
                Quarter
            
            $
            1.25
            
            $
            2.25Second
                Quarter
            
            $
            1.5
            
            $
            2.5Third
                Quarter
            
            $
            1.9
            
            $
            3Fourth
                Quarter
            
            $
            1.5
            
            $
            2.5$Year
                Ended December 31, 2005First
                Quarter
            
            $
            —
            
            
            —Second
                Quarter
            
            $
            0.20
            
            
            1.00Third
                Quarter
            
            $
            0.65
            
            
            1.00Fourth
                Quarter
            
            $
            0.65
            
            
            1.25




As
      of
      February 26, 2007, there were approximately 118 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, 2006.




**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


-13-




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 of 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.




We
      also
      generate revenues from the provision of research and development services.
      Revenues generated from research and development services are recognized when
      such services are performed.




**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, 2006 (the “2006 Period”) AND THE YEAR ENDED
      DECEMBER 31, 2005 (the “2005 Period”)**




REVENUES.
      Revenues for the 2006 Period were $3,714,000, an increase of 103% over revenues
      of $1,825,000 for the 2005 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 2006 Period were $1,809,000 compared to
      $843,000 for 2005 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. Included in
      cost of revenues were non cash compensation benefits of $13,000 and $4,000
      in
      respect of 2006 and 2005 respectively.




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 and are net of any government grants and development
      fees charged to third parties. Research and development expenses for the 2006
      Period were $972,000 compared to $584,000 for the 2005 Period. The increase
      in
      research and development expenses for the 2006 Period as compared to 2005 Period
      is primarily attributable to the increase in employee and related compensation
      costs. Included in research and development expenses were non cash compensation
      benefits of $176,000 and $66,000 in respect of 2006 and 2005.




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 2006 Period and 2005 Period were $671,000
      and $786,000, respectively. The decrease in sales and marketing during the
      2006
      Period is primarily attributable to the decrease of non cash compensation
      benefits to consultants and employees which amounted to $99,000 and $349,000
      for
      the 2006 Period and 2005 Period, respectively, offset by the increase of
      employees engaged in sales and marketing activities and related compensation
      .




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, accounting services. General and administrative expenses for the 2006
      Period and 2005 Period were $923,000 and


-14-




$782,000,
      respectively. The increase in general and administrative expenses during 2006
      Period is primarily attributable to higher compensation costs and higher
      accounting and legal and professional expenses. Included in general and
      administrative expenses were non cash compensation benefits of $122,000 and
      $117,000 in respect of 2006 and 2005 respectively.




FINANCIAL
      EXPENSES, NET. Financial expense net, for the 2006 Period and 2005 Period were
      $4,302,000 and $617,000, respectively. Included in financial expenses were
      non
      cash compensation benefits to lenders and consultants and amortization of loan
      discounts of $4,097,000 and $370,000 in respect of 2006 and 2005
      respectively.




NET
      LOSS.
      For the 2006 Period and 2005 Period we had a net loss of $4,963,000 and
      $2,038,000, respectively.




**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      December 31, 2006, we had cash and cash equivalents of $836,000 compared to
      $493,000 at December 31, 2005. 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 $443,000
      during the 2006 Period compared to $1,209,000 for the 2005 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. In addition, the Amendment also provides that, subject to certain
      qualifications, our obligation to file a registration statement under the
      Securities Act of 1933, as amended, relating to the resale of our Common Stock
      underlying the April 2005 Warrants is extended to April 15, 2007. The Amendment
      became effective as of September 30, 2006. The Amendment resulted in a one
      time
      non-cash finance expense in the amount of approximately $2,500,000 being
      recognized in 2006. As of March 19, 2007, holders of Notes in the principal
      amount $1,414,000 have signed the Amendment and the holder of a note in the
      principal amount of $50,000 which matured on November 30, 2006 has requested
      repayment of principle and accrued interest. The Company is currently in contact
      with the remaining note holders of $80,000 of the April 2005 Notes with respect
      to obtaining their formal execution of the Amendment.




Our
      recent financings in 2006 are discussed below.




On
      February 1, 2006 we borrowed the principal amount of $150,000. This loan bears
      interest at an annual rate of prime plus 4% and is repayable in four equal
      installments every three calendar months through January 31, 2007. We issued
      to
      the holder of this indebtedness a three year warrant to purchase up to 60,000
      shares of Common Stock at a per share exercise price of $0.85. As of December
      31, 2006, we repaid $119,000 representing principal and accrued interest then
      due. On January 31, 2007 the final installment of $48,000 including accrued
      interest was repaid.




In
      January 2006 we and an institutional investor entered into an agreement pursuant
      to which we agreed to sell to such investor shares of our Common Stock at $0.70
      per share for aggregate gross proceeds of $600,000. The private placement was
      completed in June 2006.




In
      July
      2006, we commenced a private placement of units of our securities comprised
      of
      our (i) 8% promissory note that becomes due 12 months following issuance and
      (ii) warrants as described below. The principal and accrued interest on the
      promissory is scheduled to be paid in one balloon payment at the end of the
      twelve month period. Each purchaser of the note would receive warrants,
      exercisable over a period of two years form the date of issuance, to purchase
      16,250 shares of our


-15-




Common
      Stock for each $25,000 of principal loaned, at 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 our Common Stock during the warrant exercise period. We raised
      $550,000 in gross proceeds from this offering, which represents the maximum
      amount that could be raised under this offering.




Additionally,
      we obtained an extension of nine months to the scheduled maturity of our
      convertible promissory notes (collectively the "Notes") that had been raised
      in
      January 2005 from the private placement of our debt instruments and warrants,
      in
      the aggregate principal amount of $300,000. The Notes became payable on
      September 30, 2006; interest accrued at a per annum rate of 8%. At the election
      of the holder, the Notes are convertible into our Common Stock at a per share
      price equal to the lesser of (i) 60% of the per share purchase price of any
      security subsequently sold by us and (ii) $0.705. In September 2006, the
      outstanding principal and accrued interest were converted into 948,949 shares
      of
      our Common Stock.




We
      will
      need to raise additional funds to be able to satisfy our cash requirements
      over
      the next twelve months. Product development, corporate operations and marketing
      expenses will continue to require additional capital. Our current revenue from
      operations is insufficient to cover our current operating expenses and projected
      expansion plans. We therefore are aggressively 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, 2006. While we have raised approximately
      $1,300,000 in gross proceeds from the issuance of our debt and equity securities
      during 2006, such "going concern" qualification may make it more difficult
      for
      us to raise funds when needed. Additional equity financings may be dilutive
      to
      holders of our Common Stock.




**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**




**(1)**
            SFAS
                No. 155, “Accounting for Certain Hybrid Financial Instruments—an
                Amendment of FASB Statements No. 133 and 140” - In February 2006, the
                Financial Accounting Standards Board (the “FASB”) issued Statement of
                Financial Accounting Standards (“SFAS”) No. 155, “Accounting for
                Certain Hybrid Financial Instruments—an Amendment of FASB Statements
                No. 133 and 140” ("SFAS 155") to simplify and make more consistent
                the accounting for certain financial instruments. Namely, SFAS 155
                amends
                SFAS No. 133, “Accounting for Derivative Instruments and Hedging
                Activities” to permit fair value remeasurement for any hybrid financial
                instrument with an embedded derivative that otherwise would require
                bifurcation, provided that the whole instrument is accounted for
                on a fair
                value basis. SFAS 155 amends SFAS No. 140, “Accounting for the
                Impairment or Disposal of Long-Lived Assets” to allow for a qualifying
                special-purpose entity to hold a derivative financial instrument
                that
                relates to a beneficial interest other than another derivative financial
                instrument.





SFAS
      155
      applies to all financial instruments acquired or issued after the beginning
      of
      an entity’s first fiscal year that begins after September 15, 2006, with
      earlier application permitted. Accordingly, the Company will adopt SFAS 155
      as
      of January 1, 2007. The
      adoption of SFAS 155 is not expected to have any effect on the Company's
      financial position or results of operations. ****





**(2)**
            FASB
                Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -
                an Interpretation of FASB Statement No. 109” - In June 2006, the FASB
                issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for
                Uncertainty in Income Taxes - an Interpretation of FASB Statement
                No. 109.” The interpretation clarifies the accounting for uncertainty
                in income taxes recognized in an entity's financial statements in
                accordance with SFAS No. 109, “Accounting for Income Taxes.”
                Specifically, FIN-48 prescribes a recognition threshold and a measurement
                attribute for the financial statement recognition and measurement
                of a tax
                position taken or expected to be taken. The provisions of FIN-48
                are
                effective for financial statements for fiscal years beginning after
                December 15, 2006. Accordingly, the Company will adopt FIN-48 as
                of
                January 1, 2007. The adoption of FIN-48 is not expected to have a
                material
                effect on the Company’s financial position or results of operations.





**(3)**
            SFAS
                No. 157, “Fair Value Measurements” - In September 2006, the FASB
                issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which
                defines
                fair value, establishes a framework for measuring fair value and
                expands
                disclosures about fair value measurements. SFAS 157 applies whenever
                other
                accounting standards require or permit assets or liabilities to be
                measured at fair value. Accordingly, it does not expand the use of
                fair
                value in any new circumstances. Fair value under SFAS 157 is defined
                as
                the price that would be received to sell an asset or paid to transfer
                a
                liability in an orderly transaction between market participants at
                the
                measurement date. This Standard clarifies the principle that fair
                value
                should be based on the assumptions market participants would use
                when
                pricing an asset or liability. In support of this principle, SFAS
                157
                establishes a fair value hierarchy that prioritizes the information
                used
                to develop those assumptions. The fair value hierarchy gives the
                highest
                priority to quoted prices in active markets and the lowest priority
                to
                unobservable data, for example, a reporting entity's own data. Under
                SFAS
                157, fair value measurements would be separately disclosed by level
                within
                the fair value hierarchy. SFAS 157 is effective for fiscal years
                beginning
                after November 15, 2007. Accordingly, the Company is to adopt SFAS
                157 on
                January 1, 2008. The adoption of SFAS 157 is not expected to have
                a
                material effect on the Company’s financial position or results of
                operations.


-16-




**(4)**
            Staff
                Accounting Bulletin No. 108, "Considering the Effects of Prior Year
                Misstatements When Quantifying Misstatements in Current Year Financial
                Statements" - In September 2006, the Securities and Exchange Commission
                issued Staff Accounting Bulletin No. 108, "Considering the Effects
                of
                Prior Year Misstatements When Quantifying Misstatements in Current
                Year
                Financial Statements" ("SAB 108"), which provides guidance on the
                consideration of the effects of prior year misstatements in quantifying
                current year misstatements for the purpose of a materiality assessment
                two
                approaches are commonly used to evaluate the materiality of misstatements
                or errors in financial statements: the roll-over, also known as the
                current-period or income-statement approach, and the iron curtain,
                also
                known as the cumulative or balance-sheet approach. The roll-over
                approach
                quantifies a misstatement based on the amount of the error originating
                in
                the current-period income statement. This approach could allow balance
                sheet items
                to grow each year by immaterial amounts, until the cumulative error
                becomes material. The iron curtain approach quantifies a misstatement
                based on the effects of correcting the misstatement existing in the
                balance sheet at the end of the current period. This approach does
                not
                consider the income statement effects of correcting prior year
                misstatements in the current year to be errors.





The
      reliance on only one of these approaches, to the exclusion of the other, does
      not appropriately quantify all misstatements that could be material to
      financial-statement users. Accordingly, SAB 108 will require quantification
      of
      financial statement errors based on the effects of the error on each of an
      entity's financial statements and the related financial statement disclosures.
      This model is commonly referred to as a dual approach because it essentially
      requires quantification of errors under both the iron-curtain and the roll-over
      approaches.





SAB
      108
      is effective for annual financial statements covering the first fiscal year
      ending after November 15, 2006. From a transition perspective, SAB 108 permits
      companies to record the cumulative effect of initially applying the dual
      approach in the first year ending after November 15, 2006 by recording any
      necessary correcting adjustments to the carrying values of assets and
      liabilities as of the beginning of that year with the offsetting adjustment
      recorded to the opening balance of retained earnings. The initial adoption
      of SAB 108 had no affect on the Company's financial position, results of
      operations or cash flows.




**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.**




Our
      auditor prior to the Acquisition Transaction was Marcum & Kliegman LLP
      ("MKLLP"). The auditor of SPO Ltd., the acquired company, prior to the
      Acquisition Transaction and thereafter, is Brightman Almagor & Co.,
      certified public accountants (Israel) and a member of Deloitte Touche Tohmatsu
      ("Brightman"). Following the Acquisition Transaction, effective November 18,
      2005, the audit committee and our board of directors dismissed MKLLP as our
      independent accountant and engaged the services of Brightman as new independent
      accountants.




The
      reports of MKLLP did not contain an adverse opinion or disclaimer of opinion
      but
      were qualified as to going concern limitations. During our two most recent
      fiscal years and subsequent interim periods there were no disagreements with
      MKLLP on any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedure, which disagreements, if not resolved
      to the satisfaction of MKLLP, would have caused MKLLP to make reference to
      the
      subject matter of the disagreements in their report on the financial statements
      for such years.




**ITEM
      8A. 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).




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


-17-




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.




CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. Except as described above, during
      our the three months ended December 31, 2006, there have not been any changes
      in
      our internal control over financial reporting that have materially affected,
      or
      are reasonably likely to materially affect, these controls.




**ITEM
      8B. OTHER INFORMATION**




None.




**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
            
            47
            
            President,
                Chief Executive Officer and DirectorRichard
                H. Ryan
            
            55
            
            Chief
                Operating OfficerJeff
                Feuer
            
            42
            
            Chief
                Financial OfficerIsrael
                Sarussi
            
            56
            
            Chief
                Technology OfficerPauline
                Dorfman
            
            42
            
            Director
                (1)Sidney
                Braun
            
            47
            
            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


-18-




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.




RICHARD
      H. RYAN has been Chief Operating Officer of the Company since May 2005. Prior
      to
      joining Philips Medical Systems in 2001, Mr. Ryan was contracted by Agilent
      Technologies, where he assisted in the successful divestiture of its Healthcare
      Solutions Group to Philips Medical Systems; he also oversaw the transfer of
      three production lines from Xing Dao, in Mainland China, to a local subsidiary
      in California. Following the acquisition by Philips, he was asked to join the
      corporate management team to help set up their new Global Materials Organization
      (the GMO) and was a founding member of its Executive Board. During his tenure
      at
      Philips Medical Systems, Mr. Ryan was instrumental in driving a cultural change
      in supplier management, creating new supply chain opportunities in Asia while
      reducing costs at most of the company's manufacturing sites
      worldwide.




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 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.





**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.  -19-


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
      2006, 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 2006 whose salary and bonus
      exceeded $100,000 for the year ended December 31, 2006 (the "Named Executive
      Officers").




**SUMMARY
      COMPENSATION TABLE**





Name
                & Principal Position
            Year
            Salary
                ($)
            Bonus
                ($)
            Option
                Awards
              ($)
                (1)
            All
                Other
              Compensation
                ($)
            Total
              ($)MICHAEL
                BRAUNOLD
              President
                and Chief Executive Officer
            2006
            $165,041
            —
            —
            $52,976
                (2)
            $218,017ISRAEL
                SARUSSI
              Chief
                Technology Officer
            2006
            $173,608
            —
            —
            $48,201
                (3)
            $221,809RICHARD
                H. RYAN
              Chief
                Operating Officer
            2006
            152,885
            —
            $55,668
            $12,444
                (4)
            $220,997





(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 theCompany'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%.




-20-





(2)
            Reflects
                payments made by us in connection with a leased automobile and related
                benefits ($12,567) and contributions to insurance premiums paid under
                Israeli law for pension, severance and further education funds
                ($40,409).




(3)
            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
                ($33,716).




(4)
            Reflects
                payments made by us for health insurance contributions.




None
      of
      the Named Executive Officers received any option grants during the fiscal year
      ended December 31, 2006.




**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,
      2006.


-21-




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END — DECEMBER 31, 2006**




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
            12/22/15Israel
                Sarusi
            —(2)
            —
            —
            —
            —Richard
                H. Ryan
            150,000
                (3)
            50,000
            —
            $0.05
            5/1/15







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




(2)
            Does
                not include Warrants for 446,383, issued to Mr. Sarusi on April 21,
                2005
                in exchange for warrants in SPO Ltd held prior to Acquisition
                Transaction..




(3)
            Options
                were issued under our 2005 Equity Incentive Plan on May 1, 2005.
                Options
                for 150,000 shares had vested as of December 31, 2006. Options for
                the
                remaining 50,000 shares are scheduled to vest on May 1, 2007.




**EMPLOYMENT
      AGREEMENTS WITH EXECUTIVE OFFICERS**




MICHAEL
      BRAUNOLD. On May 18, 2005, we entered into an employment agreement with Michael
      Braunold, pursuant to which he serve 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 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.




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 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.




RICHARD
      RYAN. On May 18, 2005, we entered into an employment agreement with Richard
      H.
      Ryan pursuant to which Mr. Ryan serves as our Chief Operating Officer. The
      agreement has an initial term of two years. Under the agreement as originally
      entered into, Mr. Ryan was entitled to a monthly salary of $8,334 and entitled
      to a bonus based on the amount of our net sales during the first year of the
      agreement. In January 2006 the agreement with Mr. Ryan was amended pursuant
      to
      which his monthly salary was increased to $12,500 and the bonus provisions
      were
      deleted. In addition, in connection with his employment, in May 2005 Mr. Ryan
      was granted an option under our 2005 Incentive Plan to purchase up to 200,000
      shares of our Common Stock, which option is scheduled to vest over two years
      vest from the date of grant and is at a per share exercise price of $0.05.
      The
      agreement may be terminated by Mr. Ryan on 60 days' notice or at our election
      on
      90 days' notice without cause.


-22-




**COMPENSATION
      OF DIRECTORS**




We
      paid
      each outside director $15,000 per annum for service on our Board of Directors
      in
      2006. 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. In January 2007, we increased the Director fees in respect of each of
      our
      directors to $25,000 per annum





The
      following table summarizes data concerning the compensation of our non-employee
      directors for the fiscal year ended December 31, 2006.





Fees
                Earned
            
            Optionor
                paid
            
            Awards($)
            
            TotalSidney
                Braun
            
            $
            15,000
            
            
            35,535(1
            )
            $
            50,535Pauline
                Dorfman
            
            $
            15,000
            
            
            35,535
                (1
            )
            $
            50,535





(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 13 of the Company’s financial statements
                for the year ended December 31, 2006 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
                3.5 years, risk free interest rate of 4.28%, 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
      19,
      2007, 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 19, 2007. 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 19,335,525 shares of common stock outstanding
      at March 19, 2007.





Common
                Stock
              Percentage
                ofName
                of Beneficial Owner (1)
            
            Beneficially
                Owned (2)
            
            Common
                StockMichael
                Braunold
            
            
            993,922
            (3)
            
            5.14
            %Richard
                H. Ryan
            
            
            200,000
            (4)
            
            1.03
            %Jeff
                Feuer
            
            
            120,000
            (5)
            
            *Israel
                Sarussi
            
            
            4,165,776
            (6)
            
            21.54
            %Pauline
                Dorfman
            
            
            75,000
            (7)
            
            *Sidney
                Braun
            
            
            75,000
            (7)
            
            *All
                officers and directors as a group (6 persons)
            
            
            5,629,698
            
            
            29.12
            %





*
            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.


-23-


(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 vested options under the Company's
                2005
                Plan.




(5)
            Represents
                shares issuable upon exercise of options under the Company's 2005
                Plan.




(6)
            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.




(7)
            Represents
                shares issuable upon exercise of currently exercisable options under
                the
                Company's 2005 Non-Employee Directors Stock Option Plan (the "2005
                Directors Plan").




**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, 2006 with respect to
      compensation plans under which equity securities were authorized for issuance,
      including the 2005 Plan and the Non-Employee Directors Plan and agreements
      granting options or warrants outside of these plans .





NUMBER
                OF SECURITIESTO
                BE ISSUED UPON
            
            WEIGHTED-AVERAGE
            
            NUMBER
                OF SECURITIESEXERCISE
                OF
            
            EXERCISE
                PRICE OF
            
            REMAINING
                AVAILABLE FOROUTSTANDING
                OPTIONS,
            
            OUTSTANDING
                OPTIONS,
            
            FUTURE
                ISSUANCE UNDERWARRANTS
                OR RIGHTS
            
            WARRANTS
                OR RIGHTS
            
            EQUITY
                COMPENSATION PLANSEquity
                compensation plans
              approved
                by security holders
            
            
            1,260,000
            
            $
            0.44
            
            
            890,000Equity
                compensation plans not
              approved
                by security holders
            
            
            5,047,422
            
            $
            0.65Total
            
            
            6,307,422
            
            $
            0.64
            
            
            890,000






**NON-SHAREHOLDER
      APPROVED PLANS**




The
      following is a description of options and warrants granted to employees,
      directors, advisory directors and consultants that were outstanding as of
      December 31, 2006.




As
      of
      December 31, 2006, we had outstanding options and warrants to purchase an
      aggregate of 854,308 shares of our Common Stock 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 406,925 shares of our Common Stock issued
      between April and December 2005 to consultants at per share exercise price
      of
      $0.01 and (iii) an unspecified number of warrants issued to placement agents
      and
      which will be equal to $30,000 divided by 60% less than the lowest price of
      shares of Common Stock sold by the Company in a subsequent
      transaction.




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




None.




**ITEM
      13. EXHIBITS**




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


-24-




EXHIBIT
              NO.
            EXHIBIT  2.1
            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 May 18, 2005 between the Company and Richard
                Ryan. (2)+


10.5
            Employment
                Agreement effective as of July 14, 2005 between the Company and Jeffrey
                Feuer. (3)


10.6
            Employment
                Agreement effective as of July 14, 2005 between SPO Ltd. and Jeffrey
                Feuer. (3)


10.7
            Company's
                2005 Equity Incentive plan


10.8
            Company's
                2005 Non-Employee Directors Stock option
                Plan


10.9
            Stock
                Purchase Agreement dated as of January 10, 2006 between SPO Medical
                Inc.
                and the investor specified therein.
                (4)


10.10
            Form
                of Subscription Agreement between SPO Medical Inc. and certain Buyers
                (5)


10.11
            Form
                of First Amendment to Subscription Agreement between SPO Medical
                Inc. and
                parties thereto. (5)


14.1
            Code
                of Conduct (6)


31.1
            Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002


31.2
            Certification
                of the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002


32.1
            Certification
                of the Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002


32.2
            Certification
                of the Chief Executive 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




-25-




**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, 2006 and 2005.





Fiscal
                Year Ended
            
            Fiscal
                Year EndedDecember
                31, 2006
            
            December
                31, 2005Audit
                Fees
            
            $
            39,000
            
            $
            36,500Audit
                Related Fees
            
            $
            —
            
            
            —Tax
                Fees
            
            $
            6,500
            
            $
            18,500All
                Other Fees
            
            $
            —
            
            
            —Total
            
            $
            45,500
            
            $
            55,000




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




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




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




All
      OTHER
      FEES include any other fees charged by the Company's auditors that are not
      otherwise specified.




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.


-26-




**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 20, 2007
            /s/
                Michael BraunoldMichael
                BraunoldChief
                Executive Officer and DirectorDATE:
                March 20, 2007
            /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
                20, 2007Sidney
                Braun/s/
                Michael Braunold
            
            President,
                Chief Executive Officer
                and Director
            
            March
                20, 2007Michael
                Braunold/s/
                Pauline Dorfman
            
            Director
            
            March
                20, 2007Pauline
                Dorfman





-27-




**SPO
      MEDICAL INC. AND ITS SUBSIDIARY**




**CONSOLIDATED
      FINANCIAL STATEMENTS**




**AS
      OF DECEMBER 31, 2006**




**U.S.
      DOLLARS IN THOUSANDS**




**INDEX**





PageReport
                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


F-1




**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, 2006, and the related statements
      of operations, changes in stockholders' equity and cash flows for each of the
      two years in the period ended December 31, 2006. 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, 2006, and the consolidated results
      of their operations and their cash flows for each of the two years in the period
      ended December 31, 2006, 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 suffered 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,
      2007


F-2




**SPO
      MEDICAL INC**


**CONSOLIDATED
      BALANCE SHEET**


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





**December
                31,****Note**
            
            **2006****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            
            
            
            $
            836Trade
                receivables
            
            
            
            
            
            568Prepaid
                expenses
            
            
            
            
            
            202Other
                accounts receivable
            
            
            
            
            
            48Inventories
            
            
            4
            
            
            8112,465**LONG
                TERM INVESTMENTS**Deposits
            
            
            
            
            
            11Severance
                pay fund
            
            
            
            
            
            209220**PROPERTY
                AND EQUIPMENT, NET**
            
            
            5
            
            
            106**Total
                net assets**
            
            
            
            
            $
            2,791


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**
            
            **2006****LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****Current
                Liabilities**Short-term
                loans, net
            
            
            6
            
            $
            710Trade
                payables
            
            
            
            
            
            488Employees
                and Payroll accruals
            
            
            
            
            
            214Deferred
                revenues
            
            
            9
            
            
            395Accrued
                expenses and other liabilities
            
            
            10
            
            
            5722,379**Long-Term
                Liabilities**Long
                term loans, net
            
            
            6
            
            
            983Accrued
                severance pay
            
            
            11
            
            
            3311,314**COMMITMENTS
                AND CONTINGENT LIABILITIES**
            
            
            14**STOCKHOLDERS’
                DEFICIENCY**Stock
                capital
            
            
            15Preferred
                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 - 19,335,525
                shares
            
            
            
            
            
            193Additional
                paid-in capital
            
            
            
            
            
            9,954Accumulated
                deficit
            
            
            
            
            
            (11,049
            )(902
            )**Total
                liabilities and stockholders’ deficiency**
            
            
            
            
            $
            2,791


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****2006**
            
            **2005****Revenues**
            
            $
            3,714
            
            $
            1,825Cost
                of revenues
            
            
            1,809
            
            
            843**Gross
                profit**
            
            
            1,905
            
            
            982**Operating
                expenses**Research
                and development
            
            
            972
            
            
            584Selling
                and marketing
            
            
            671
            
            
            786General
                and administrative
            
            
            923
            
            
            782Merger
                expenses
            
            
            —
            
            
            251**Total
                operating expenses**
            
            
            2,566
            
            
            2,403**Operating
                loss**
            
            
            661
            
            
            1,421Financial
                expenses, net
            
            
            4,302
            
            
            617**Net
                Loss for the year**
            
            $
            4,963
            
            $
            2,038Basic
                and diluted loss per ordinary share
            
            $
            0.26
            
            $
            0.11Weighted
                average number of shares outstanding used in computation of basic
                and
                diluted loss per share
            
            
            19,069,380
            
            
            17,882,715


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, 2005**
            
            $
            600
            
            $
            2,675
            
            $
            —
            
            $
            (4,048
            )
            $
            (773
            )Issuance
                of ordinary shares upon conversion of loans
            
            
            35
            
            
            224
            
            
            
            
            
            
            
            
            259Warrants
                issued in private placement
            
            
            
            
            
            949
            
            
            
            
            
            
            
            
            949Warrants
                issued in connection with loans
            
            
            
            
            
            22
            
            
            
            
            
            
            
            
            22Deferred
                stock-based compensation related to options granted to employees
                and
                consultants
            
            
            
            
            
            762
            
            
            (762
            )
            
            
            
            
            —Amortization
                of deferred Stock-based compensation related to options granted to
                employees
            
            
            
            
            
            
            
            
            187
            
            
            
            
            
            187Amortization
                of deferred Stock-based compensation related to options granted to
                consultants
            
            
            
            
            
            
            
            
            348
            
            
            
            
            
            348Reverse
                merger transaction and forward split of issued share
                capital
            
            
            (465
            )
            
            201
            
            
            
            
            
            
            
            
            (264
            )Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            (2,038
            )
            
            (2,038
            )**Balance
                as of December 31, 2005**
            
            
            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
            )






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


F-6




**MEDICAL
      INC**


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


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




**Year
                ended**
              **December
                31,****2006**
            
            **2005****Cash
                Flows from Operating Activities**Net
                Loss for the period
            
            $
            (4,963
            )
            $
            (2,038
            )Adjustments
                to reconcile loss to net cash used in operating
                activities:Depreciation
            
            
            24
            
            
            8Stock-based
                compensation expenses
            
            
            1,152
            
            
            535Amortization
                of loan discounts
            
            
            814
            
            
            370Increase
                (decrease) in accrued severance pay, net
            
            
            (7
            )
            
            93Increase
                in accrued interest payable on loans
            
            
            156
            
            
            112Loan
                commission
            
            
            20
            
            
            —Benefit
                resulting from changes to warrant terms
            
            
            2,534
            
            
            —Changes
                in assets and liabilities:Increase
                in trade receivables
            
            
            (369
            )
            
            (46
            )Increase
                in prepaid expenses
            
            
            (202
            )
            
            —Increase
                in other receivables
            
            
            (6
            )
            
            (4
            )Increase
                in inventories
            
            
            (351
            )
            
            (460
            )Increase
                in accounts payable
            
            
            263
            
            
            75Increase
                in deferred revenues
            
            
            395
            
            
            —Increase
                in accrued expenses and other liabilities
            
            
            97
            
            
            146Net
                cash used in operating activities
            
            
            (443
            )
            
            (1,209
            )**Cash
                Flows from Investing Activities**Decrease
                (increase) in short-term investments
            
            
            —
            
            
            33Increase
                in long-term deposits
            
            
            (1
            )
            
            (5
            )Purchase
                of property and equipment
            
            
            (82
            )
            
            (34
            )Net
                cash used in investing activities
            
            
            (83
            )
            
            (6
            )**Cash
                Flows from Financing Activities**Issuance
                of stock capital
            
            
            580
            
            
            —Exercise
                of warrants by consultant
            
            
            5
            
            
            —Receipt
                of short-term loans
            
            
            152
            
            
            496Proceeds
                on issuance of exercisable warrants
            
            
            528
            
            
            —Receipt
                of long-term loans
            
            
            —
            
            
            1,018Receipt
                of convertible notes
            
            
            —
            
            
            300Repayment
                of short-term loans
            
            
            (396
            )
            
            (115
            )Net
                cash provided by financing activities
            
            
            869
            
            
            1,699**Increase
                (decrease) in cash and cash equivalents**
            
            
            343
            
            
            484Cash
                and cash equivalents at the beginning of the year
            
            
            493
            
            
            9Cash
                and cash equivalents at the end of the period
            
            $
            836
            
            $
            493**Non
                cash transactions**Conversion
                of convertible notes
            
            $
            569
            
            $
            —


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


F-7




**SPO
      MEDICAL INC**


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


**NOTE
      1**  **-**  **GENERAL**





SPO
      Medical Inc. (hereinafter referred to as "SPO" or the "Company") 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 the accompanying financial statements, the Company’s operations for
      the year ended December 31, 2006, resulted in a net loss of $4,963 and the
      Company’s balance sheet reflects a net stockholders’ deficit of $902. 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


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




**NOTE
      3**  **-**  **Significant
      Accounting Policies**





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





**a.**
            **Principles
                of Consolidation**





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





**b.**
            **Use
                of estimates**





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





**c.**
            **Financial
                statements in U.S. dollars**





The
      reporting currency of the Company is the U.S. dollar ("dollar"). The dollar
      is
      the functional currency of the Company. Transactions and balances originally
      denominated in dollars are presented at their original amounts. Non-dollar
      transactions and balances are remeasured into dollars in accordance with the
      principles set forth in 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




F-9




**SPO
      MEDICAL INC**


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




**NOTE
      3**  **-**  **Significant
      Accounting Policies** **(Cont.)**





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, 2006, no
      impairment losses have been recorded.





**f.**
            **Revenue
                recognition**





The
      Company generates its revenues mainly from sales of its products. Revenues
      are
      recognized when delivery has occurred, persuasive evidence of an arrangement
      exists, the vendor’s fee is fixed or determinable, no further obligation exists
      and collection is probable and there are no remaining significant obligations.
      Delivery is considered to have occurred upon shipment from the Company’s
      distribution centers of products 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.


F-10




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        3**  **-**  **Significant
        Accounting Policies** **(Cont.)**


**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.





Additionally
      the financial instruments of the Company include long term loans which according
      to the Company’s management recorded close to their fair value.





**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,****2006**Cost
                  of revenues
              
              $
              13Research
                  and development, net
              
              
              176Selling
                  and marketing
              
              
              99General
                  and administrative
              
              
              122$
              410
 
 Prior
        to
        January 1, 2006, the Company accounted for share-based compensation cost
        using
        the intrinsic value method in accordance with Accounting Principles Board
        No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and
        related interpretations. The Company also followed disclosure requirements
        of
        SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS
        No. 148, “Accounting for Stock-Based Compensation-Transition and
        Disclosure”.
 
 The
        company adopted SFAS No. 123R using the modified prospective method and,
        accordingly, the Consolidated Statement of Operations for prior years has
        not
        been restated to reflect the fair value method of recognizing compensation
        cost
        relating to stock options. Share-based compensation cost relating to stock
        options recognized in 2006 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.
 
 Compensation
        cost related to stock options is recognized in operating results (included
        in
        cost of revenues, research and development, selling and marketing, general
        and
        administrative expenses) under SFAS No. 123R in 2006 was $410 thousand.
        Compensation cost related to stock options recognized in our Consolidated
        Statement of Operations in 2006 includes (1) compensation cost for stock
        option awards granted prior to, but not yet vested as of December 31, 2005,
        based on the grant-date fair value estimated in accordance with the pro forma
        provisions of SFAS No. 123 and (2) compensation cost for stock option
        awards granted subsequent to December 31, 2005, based on the grant-date
        fair value estimated in accordance with the provisions of SFAS
        No. 123R.
 
 The
        following table illustrates the effect on net income and earnings per share
        as
        if we had applied the fair value recognition provisions of SFAS No. 123 in
        the
        year prior to the adoption of FAS No. 123R:






**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
          3**  **-**  **Significant
          Accounting Policies** **(Cont.)**




**Year
                  ended**
                **December
                  31,****2005**Net
                  Loss, as reported
              
              $
              2,038Deduct:
                  stock-based compensation determined under APB 25
              
              
              193Add:
                  Stock-based compensation determined under SFAS123
              
              
              599Pro-forma
                  net loss
              
              $
              2,444Basic
                  and fully diluted Loss per share as reported
              
              $
              0.11Basic
                  and fully diluted Loss per share proforma
              
              $
              0.14
 
 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 4.3%.


**m.**
            **Effects
                of recently issued accounting
                standards**





**(1)**
            SFAS
                No. 155, “Accounting for Certain Hybrid Financial Instruments—an
                Amendment of FASB Statements No. 133 and 140” - In February 2006, the
                FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
                Instruments—an Amendment of FASB Statements No. 133 and 140” ("SFAS
                155") to simplify and make more consistent the accounting for certain
                financial instruments. Namely, SFAS 155 amends SFAS No. 133,
                “Accounting for Derivative Instruments and Hedging Activities” to permit
                fair value remeasurement for any hybrid financial instrument with
                an
                embedded derivative that otherwise would require bifurcation, provided
                that the whole instrument is accounted for on a fair value basis.
                SFAS 155
                amends SFAS No. 140, “Accounting for the Impairment or Disposal of
                Long-Lived Assets” to allow for a qualifying special-purpose entity to
                hold a derivative financial instrument that relates to a beneficial
                interest other than another derivative financial instrument.





F-12




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        3**  **-**  **Significant
        Accounting Policies** ****





**m.**
            **Effects
                of recently issued accounting standards****(Cont.)**




SFAS
      155
      applies to all financial instruments acquired or issued after the beginning
      of
      an entity’s first fiscal year that begins after September 15, 2006, with
      earlier application permitted. Accordingly, the Company is to adopt SFAS 155
      on
      January 1, 2007. The
      adoption of SFAS 155 is not expected to have any effect on the Company's
      financial position or results of operations. ****





**(2)**
            FASB
                Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -
                an Interpretation of FASB Statement No. 109” - In June 2006, the FASB
                issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for
                Uncertainty in Income Taxes - an Interpretation of FASB Statement
                No. 109.” The interpretation clarifies the accounting for uncertainty
                in income taxes recognized in an entity's financial statements in
                accordance with SFAS No. 109, “Accounting for Income Taxes.”
                Specifically, FIN-48 prescribes a recognition threshold and a measurement
                attribute for the financial statement recognition and measurement
                of a tax
                position taken or expected to be
                taken.




The
      provisions of FIN-48 are effective for financial statements for fiscal years
      beginning after December 15, 2006. Accordingly, the Company is to adopt FIN-48
      on January 1, 2007. The adoption of FIN-48 is not expected to have a material
      effect on the Company’s financial position or results of operations.





**(3)**
            SFAS
                No. 157, “Fair Value Measurements” - In September 2006, the FASB
                issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which
                defines
                fair value, establishes a framework for measuring fair value and
                expands
                disclosures about fair value measurements. SFAS 157 applies whenever
                other
                accounting standards require or permit assets or liabilities to be
                measured at fair value. Accordingly, it does not expand the use of
                fair
                value in any new circumstances. Fair value under SFAS 157 is defined
                as
                the price that would be received to sell an asset or paid to transfer
                a
                liability in an orderly transaction between market participants at
                the
                measurement date. This Standard clarifies the principle that fair
                value
                should be based on the assumptions market participants would use
                when
                pricing an asset or liability. In support of this principle, SFAS
                157
                establishes a fair value hierarchy that prioritizes the information
                used
                to develop those assumptions. The fair value hierarchy gives the
                highest
                priority to quoted prices in active markets and the lowest priority
                to
                unobservable data, for example, a reporting entity's own data. Under
                SFAS
                157, fair value measurements would be separately disclosed by level
                within
                the fair value hierarchy. SFAS 157 is effective for fiscal years
                beginning
                after November 15, 2007. Accordingly, the Company is to adopt SFAS
                157 on
                January 1, 2008. The adoption of SFAS 157 is not expected to have
                a
                material effect on the Company’s financial position or results of
                operations.





F-13


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




**NOTE
      3**  **-**  **Significant
      Accounting Policies** ****





**m.**
            **Effects
                of recently issued accounting standards****(Cont.)**




**(4)**
            Staff
                Accounting Bulletin No. 108, "Considering the Effects of Prior Year
                Misstatements When Quantifying Misstatements in Current Year Financial
                Statements" - In September 2006, the Securities and Exchange Commission
                issued Staff Accounting Bulletin No. 108, "Considering the Effects
                of
                Prior Year Misstatements When Quantifying Misstatements in Current
                Year
                Financial Statements" ("SAB 108"), which provides guidance on the
                consideration of the effects of prior year misstatements in quantifying
                current year misstatements for the purpose of a materiality assessment
                two
                approaches are commonly used to evaluate the materiality of misstatements
                or errors in financial statements: the roll-over, also known as the
                current-period or income-statement approach, and the iron curtain,
                also
                known as the cumulative or balance-sheet approach. The roll-over
                approach
                quantifies a misstatement based on the amount of the error originating
                in
                the current-period income statement. This approach could allow balance
                sheet items
                to grow each year by immaterial amounts, until the cumulative error
                becomes material. The iron curtain approach quantifies a misstatement
                based on the effects of correcting the misstatement existing in the
                balance sheet at the end of the current period. This approach does
                not
                consider the income statement effects of correcting prior year
                misstatements in the current year to be errors.





The
      reliance on only one of these approaches, to the exclusion of the other, does
      not appropriately quantify all misstatements that could be material to
      financial-statement users. Accordingly, SAB 108 will require quantification
      of
      financial statement errors based on the effects of the error on each of an
      entity's financial statements and the related financial statement disclosures.
      This model is commonly referred to as a dual approach because it essentially
      requires quantification of errors under both the iron-curtain and the roll-over
      approaches.




SAB
      108
      is effective for annual financial statements covering the first fiscal year
      ending after November 15, 2006. From a transition perspective, SAB 108 permits
      companies to record the cumulative effect of initially applying the dual
      approach in the first year ending after November 15, 2006 by recording any
      necessary correcting adjustments to the carrying values of assets and
      liabilities as of the beginning of that year with the offsetting adjustment
      recorded to the opening balance of retained earnings. The initial adoption
      of SAB 108 had no affect on the Company's financial position, results of
      operations or cash flows.




**(5)**
              In
                  February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
                  for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
                  No. 159 permits companies to choose to measure certain financial
                  instruments and certain other items at fair value. The standard
                  requires
                  that unrealized gains and losses on items for which the fair value
                  option
                  has been elected be reported in earnings. SFAS No. 159 is effective
                  for the company beginning in the first quarter of fiscal year 2008,
                  although earlier adoption is permitted. The company is currently
                  evaluating the impact that SFAS No. 159 will have on its financial
                  statements.




**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.





F-14




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        3**  **-**  **Significant
        Accounting Policies** ****





**o.**
                **Basic
                    and diluted net loss per share
                    (Cont.)**





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 5,472,838 and 3,614,545
      for the years ended December 31, 2006 and 2005, respectively.





**NOTE
      4**  **-**  **Inventories**




**December
                31,****2006**Raw
                Materials
            
            $
            115Work
                In Process
            
            
            210Finished
                Goods
            
            
            486$
            811





**NOTE
      5**  **-**  **Property
      and Equipment**




**December
                31,****2006**Cost:Computer
                and peripheral equipment
            
            $
            140Leasehold
                Improvement
            
            
            16Office
                furniture and equipment
            
            
            22$
            178Accumulated****depreciation:Computer
                and peripheral equipment
            
            $
            63Leasehold
                Improvement
            
            
            1Office
                furniture and equipment
            
            
            8$
            72Property
                and Equipment, net
            
            $
            106





Depreciation
      expenses for the years ended December 31, 2006 and 2005 amounted to $24 and
      $8
      respectively.





F-15




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        6**  **-**  **Long
        -term and 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.





In
      addition, the Amendment also provides that, subject to certain qualifications,
      the Company's obligation to file a registration statement under the Securities
      Act of 1933, as amended, relating to the resale of the Company's Common Stock
      underlying the April 2005 Warrants was extended to April 15, 2007.





As
      of the
      date of signing the financial statements holders of Notes in the principal
      amount $1,414 have signed the Amendment and the holder of a note in the
      principal amount of $50 received repayment of principle and accrued interest.
      The Company is currently in contact with the remaining note holders of $80
      of
      the April 2005 Notes with respect to obtaining their formal execution of the
      Amendment.





The
      Amendment was effective as of September 30, 2006 and the accounting costs
      related to the Amendment has been fully recognized in the current accounting
      year. 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 of the
      April 2005 Note $1,494.




**b.**
            On
                February 1, 2006 the Company borrowed the principal amount of $150.
                Interest accrued at an annual rate of prime plus 4% and was repayable
                in
                four equal installments every three calendar months (commencing June
                30,
                2006) through January 31, 2007. The Company issued to the holder
                of this
                indebtedness a three-year warrant to purchase up to 60,000 shares
                of
                Common Stock at a per share exercise price of $0.85. As of December
                31,
                2006, the Company repaid $119 representing principal and accrued
                interest
                then due. On January 31, 2007 the final installment of $48 including
                accrued interest was repaid.





F-16




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        6**  **-**  **Long
        -term and 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 principal and accrued interest are due in
                one
                balloon payment at the end of the twelve month period. Each purchaser
                of
                the note would receive warrants, exercisable over a period of two
                years
                from the date of issuance, to purchase16,250 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. The Company raised a gross amount of $550, which is the maximum
                amount that can be raised under the
                offering.





The
      Company recorded in the financial statements a discount of $463 to reflect
      the
      value of the warrants and is amortizing this amount through the date of the
      loans maturity.





**NOTE
      7** **-** **Repayment
      of Outstanding Debt**





**a.**
            On
                September 6, 2005 the Company negotiated with a lender a loan in
                the
                principal amount of $100 plus a one time arrangement fee of $10.
                This loan
                was repaid in January 2006. The Company also issued to the holder
                of the
                debt a three-year warrant to purchase up to 25,000 shares of the
                Company’s
                Common Stock at a per share price of
                $0.75.





The
      Company recorded in the financial statements a discount of $14 to reflect the
      value of the warrants and amortized this amount through the date of the maturity
      of the loan.





**b.**
            In
                August 2004 the Company negotiated with a lender the extension of
                the
                scheduled maturity date of indebtedness in the principal amount of
                $140
                that was originally scheduled to mature on October 12, 2005. The
                maturity
                date of $100 of the original principal amount of this indebtedness
                was
                extended to March 31, 2006. In consideration of the extension of
                the
                principal amount of $100, the Company paid to the lender a one-time
                arrangement fee of $20 and issued to the holder of the debt a three-year
                warrant to purchase up to 15,000 shares of the Company's Common Stock
                at a
                per share price of $0.75. On March 31, 2006 the principal amount
                of $100
                was repaid in full.





**NOTE
      8**  **-**  **Convertible
      Loans**





In
      January 2005, the Company issued to 10 investors its convertible promissory
      notes (collectively the "Notes") in the aggregate principal amount of $300.
      The
      Notes became payable on September 30, 2006 and bore interest at an annual rate
      of 8%. Under the terms of the Notes at the election of the holder the Notes
      were
      convertible into the Company's Common Stock at a per share price equal to the
      lesser of (i) 60% of the per share purchase price of any Company security
      subsequently sold by the Company and (ii) $0.705. All the holders of these
      convertible promissory notes elected to convert the principal and the accrued
      interest. The conversion resulted in the issuance to these investors of a total
      of 948,949 shares of the Company's Common Stock.





In
      addition, the Company issued to three of the holders of these Notes, as
      compensation for their participation in raising the funds relating to the Notes,
      warrants, exercisable through April 21, 2008, to purchase such number of shares
      of Common Stock as is determined by dividing $30 by the Exercise
      Price.





F-17




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        9**  **-** **Deferred
        Revenues**





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 $395. This advance will be offsettable against future
      amounts due from the Distributor in respect of future sales of certain products
      subject to other commitments per the Distribution Agreement. Accordingly, this
      amount has been recorded as deferred revenues.





**NOTE
      10**  **-**  **Accrued
      Expenses and other liabilities**





**December
                31,****2006**Accrued
                expenses pre merger
            
            $
            263Royalties
            
            
            171Other
                accrued expenses
            
            
            138$
            572








**NOTE
      11**  **-**  **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. The 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 for the years ended December 31, 2006 and 2005 were $78 and $136
      respectively.





**NOTE
      12** **-**  **Private
      Placement**





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
      gross proceeds of $600 (prior to the payment of placement related expenses
      aggregating approximately to $20).





**NOTE
      13**  **-**  **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.





F-18




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        13**  **-**  **Stockholder's
        Equity** **(Cont.)**





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
      six years from the date of grant.




The
      options granted vest over periods of up to five years from the date of the
      grant. Most of the options granted prior to 2005 expire after 10 years from
      the
      date of the grant while most of the options granted in 2005 expire after 6
      years.




With
      respect to options granted through December 31, 2005 at exercise prices below
      the fair market value of the underlying shares at the date of grant, deferred
      compensation amortization totaling $187 was recorded and charged to earnings
      during 2005 in accordance with APB 25 and FIN 44.




With
      respect to compensation expenses recorded in 2006, relating to options granted
      through December 31 2006, the Company applied the provisions of SFAS
      No. 123(R) and SAB No. 107, using the prospective recognition method, which
      require employee share-based equity awards to be accounted for under the fair
      value method, and eliminates the ability to account for these instruments under
      the intrinsic value method prescribed by APB Opinion No. 25 and allowed
      under the original provisions of SFAS No. 123.
      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
      2006 the Company recorded Stock-based compensation expenses in the amount of
      $1,152.






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





**b.**
            **Stock
                Options:**





As
      of
      December 31, 2006 an aggregate of 890,000 options remain available for future
      grants under the Company’s 2005 Plan and 2005 Directors Plan.




**December
                31, 2006****Amount
                of**
              **Options**
            
            **Weighed
                Average Exercise Price**Outstanding
                at the beginning of the year
            
            
            1,020,000
            
            $
            0.44Granted
            
            
            240,000
            
            
            1.24Forfeited
            
            
            —
            
            
            —Outstanding
                at the end of the year
            
            
            1,260,000
            
            
            0.59Exercisable
                at the end of the year
            
            
            980,000
            
            $
            0.54




F-19




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        13**  **-**  **Stockholder's
        Equity** **(Cont.)**





The
      options outstanding as of December 31, 2006, have been separated into ranges
      of
      exercise price as follows:





**Weighted****Options**
            
            **Weighted**
            
            
            
            **Options**
            
            **average****outstanding**
            
            **average**
            
            **Weighted**
            
            **exercisable**
            
            **exercise****as
                of**
            
            **remaining**
            
            **average**
            
            **as
                of**
            
            **price
                of****December
                31**
            
            **contractual**
            
            **exercise**
            
            **December
                31**
            
            **options****Range
                of exercise price**
            
            **2006**
            
            **life
                (years)**
            
            **price**
            
            **2006**
            
            **exercisable**$0.5-$0.55
            
            
            300,000
            
            
            8.42
            
            $
            0.05
            
            
            250,000
            
            $
            0.05$0.60
            
            
            750,000
            
            
            8.74
            
            $
            0.60
            
            
            630,000
            
            $
            0.60$0.85
            
            
            110,000
            
            
            7.14
            
            $
            0.85
            
            
            50,000
            
            $
            0.85$1.85
            
            
            100,000
            
            
            9.81
            
            $
            1.85
            
            
            50,000
            
            $
            1.851,260,000
            
            
            8.61
            
            $
            1.24
            
            
            980,000
            
            $
            0.54





**c.**
            **Stock
                warrants**





The
      Company has issued warrants as follows:





**Outstanding**
            
            
            
            **Exercisable****as
                of**
            
            
            
            **as
                of****December**
            
            **Exercise**
            
            **December**
            
            **Exercisable****Issuance
                date**
            
            
            
            **31,
                2006**
            
            **Price**
            
            **31,
                2006**
            
            **through**May
                2005
            
            (1)
            
            88,236
            
            0.85
            
            88,236
            
            May
                2008June
                2005
            
            (1)
            
            382,354
            
            0.85
            
            382,354
            
            June
                2008July
                2005
            
            (1)
            
            117,648
            
            0.85
            
            117,648
            
            September
                2008September
                2005
            
            (2)
            
            40,000
            
            0.75
            
            40,000
            
            September
                2008September
                2005
            
            (1)
            
            910,003
            
            0.85
            
            910,003
            
            November
                2008November
                2005
            
            (3)
            
            406,925
            
            0.01
            
            406,925
            
            November
                2008November
                2005
            
            (1)
            
            152,942
            
            0.85
            
            152,942
            
            December
                2008December
                2005
            
            (1)
            
            117,648
            
            0.85
            
            117,648
            
            December
                2008February
                2006
            
            (2)
            
            60,000
            
            0.85
            
            60,000
            
            January
                2009February
                2006
            
            (4)
            
            500,000
            
            0.01
            
            —
            
            —September
                2006
            
            (5)
            
            83,333
            
            0.36
            
            83,333
            
            August
                2009September
                2006
            
            (5)
            
            57,500
            
            0.60
            
            57,500
            
            September
                2010September
                2006
            
            (6)
            
            Up
                to 1,773,333
            
            0.60
            
            Up
                to 1,773,333
            
            September
                2010October
                2006
            
            (7)
            
            357,500
            
            1.50
                or 35% less than IPO
            
            357,500
            
            October
                2008




F-20




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        13**  **-**  **Stockholders
        Equity** **(Cont.)**





**c.**
            **Stock
                warrants**





(1)
            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 shall be replaced to new warrants see (6) and Note
                6a.


(2)
            Warrants
                issued to other lenders


(3)
            Warrants
                issued to service providers


(4)
            Warrants
                issued to service provider for consulting services relating to the
                development of financial and strategic business relationships. Warrants
                were exercisable through February 2010 and were exercised in full
                on
                February 22, 2006.


(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 see Note 6a.


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


(8)
            This
                table does not include the 948,949 warrants related to the convertible
                loan converted on September 30, 2006 see Note
                8.





**d.**
            **Dividends**





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





**NOTE
      14**  **-**  **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.





F-21




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        14**  **-**  **Deferred
        Taxes** **(Cont.)**


In
      accordance with SFAS No. 109, the components of deferred income taxes are as
      follows:





**December
                31,****2006**Tax
                on net operating losses carryforward
            
            $
            1,037Less
                - valuation allowance
            
            
            (1,037
            )$
            —








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





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




**December
                31,****2006**Israel
            
            $
            3,090USA
            
            
            827Total
            
            $
            3,917




Net
      operating losses in Israel may be carried forward indefinitely. Net operating
      losses in the U.S. are available through 2031.





**NOTE
      15**  **-**  **Commitments
      and Contingencies**





**Lease
      Commitments**





The
      Company maintains its principal offices in the Warner Gateway campus in Warner
      Center, Woodland Hills, CA, USA. The offices are leased at a monthly cost of
      approximately $2.6 and cover a square area of 60 square meters. The lease period
      for this office terminates in June 2007.The Company has an option to extend
      the
      lease a further six months through the end of December 2007. The Company intends
      to maintain the lease of the premises on a month-to-month basis. The offices
      provide accommodation for sales, internal administrative and external customer
      support operations.





F-22




**SPO
      MEDICAL INC**


**NOTES
                    TO THE FINANCIAL STATEMENTS****U.S.
                    dollars in thousands (except share
                    data)**
  **NOTE
        15**  **-**  **Commitments
        and Contingencies** **(Cont.)**





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 sq. m. 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 to expire in July 2011 at an approximate per month rate of $1.5. The
      administrative facilities in Israel are leased pursuant to a lease agreement
      that terminates in December 2007 with an option to extend the lease for two
      additional 12 month periods at an approximate monthly rate of $0.7.





**Government
      of Israel**





The
      Company’s subsidiary, SPO Ltd., is committed to pay royalties of 3% 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, 2006 was $1,371. 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, 2006 the Company has provided for $171
      in
      royalties payable from such grants.


F-23