Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




MARK ONE:




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
              for
      the Fiscal Year ended December 31,
2008




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




COMMISSION
FILE NUMBER:  0-11772




SPO
MEDICAL INC.


(Name of
registrant as specified in its chapter)





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





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


(Address
of Principal Executive Offices)





972
9 764-3570


(Registrant's
telephone number, including area code)




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




Securities
Registered Pursuant to Section 12(g) of the Exchange Act: $0.01 Par Value Common
Stock






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




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





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





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




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




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




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




The
registrant had 24,833,007 shares of common stock outstanding as of March 31,
2009.  The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant, computed by reference to the
closing price of such common stock on the over the counter Bulletin Board on
June 30, 2008, was $13 million.









Table of Contents




SPO
MEDICAL INC.


2008
FORM 10-K ANNUAL REPORT





TABLE OF CONTENTS





PART IItem 1
            Business
            3Item 1A
            Risk Factors
            8Item 1B
            Unresolved Staff Comments
            16Item 2
            Properties
            16Item 3
            Legal Proceedings
            17Item 4
            Submission of Matters to a Vote of Security
      Holders
            17PART IIItem 5
            Market for the Company's Common Stock and Related
      Stockholder Matters
            17Item 6
            Selected Financial Data
            18Item 7
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            18Item 7A
            Quantitative and Qualitative Disclosures about Market
      Risk
            22Item 8
            Financial Statements
            22Item 9
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            23Item 9A(T)
            Controls and Procedures
            23Item 9B
            Other Information
            24PART IIIItem 10
            Directors, Executive Officer and Corporate
      Governance
            24Item 11
            Executive Compensation
            26Item 12
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            28Item 13
            Certain Relationships and Related Transactions and Director
      Independence
            30Item 14
            Principal Accounting Fees and Services
            30Item 15
            Exhibits, Financial Statement Schedules
            31





- 2
-
 Table of Contents




FORWARD
LOOKING STATEMENTS




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




PART I





ITEM 1. BUSINESS




Overview





SPO
Medical Inc. is engaged in the design, development and marketing of non-invasive
pulse oximetry technologies to measure blood oxygen saturation and heart rate.
We have developed and patented proprietary technology that enables the
measurement of heart rate and oxygen saturation levels in the blood which is
known as Reflectance Pulse Oximetry (RPO). Using RPO, a sensor can be positioned
on various body parts, hence minimizing problems from motion artifacts and poor
perfusion. The unique design features contribute to substantially lower power
requirements and enhances wireless, stand-alone configurations facilitating
expanded commercial possibilities.





As of
March 2009, we hold four patents issued by the United States Patent and
Trademark Office ("USPTO") covering various aspects of our technology. As
further discussed below, our technologies are currently applied to products that
are designed for use by the, homecare, professional medical care, sports, safety
and search and rescue.




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





We need
to raise additional funds on an immediate basis in order to meet our on-going
operating requirements, pay outstanding loans in the aggregate approximate
amount of $1.1million and to realize our business plan. In response to the
deteriorating global economic conditions that began in 2008, we have taken
certain measures in an effort to reduce operating expenses and conserve our cash
resources. Beginning in July 2008 we have significantly curtailed our
non-essential product design and development, marketing activities and
reorganized our product manufacturing and delivery system to “just-in-time”
arrangements. We have terminated certain product development plans. During 2008,
we deferred part of management and employee salaries and benefits. As of March
31, 2009, we had 13 employees working on a full-time basis. If we are unable to
raise capital on an immediate basis, it may be necessary for us to take further
measures to reduce our cash burn including laying-off additional personnel. No assurance can be given
that we will be able to raise the needed capital. These conditions raise
substantial doubt about our ability to continue as a going
concern.


- 3
-
 Table of Contents




Background




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




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




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




Our
solution




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




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




Blood
      pressure using reflectance oximetry




Billirubin
      levels




Monitoring
      glucose levels in blood




Hemoglobin
      count in blood




Products




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




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




Check
MateTM— addresses the sports and aviation market’s demand for a lightweight,
inexpensive monitor for measuring SpO2 and heart rate during physically active
and high-altitude activities. It offers the user a greater ability to monitor
these vital signs under motion and is less expensive than most other available
devices. The Check Mate was first introduced


- 4
-
 Table of Contents


commercially
during third quarter of 2005. The Check Mate does not require FDA approval or
registration. It carries the CE and CSA mark for safety and audited
manufacturing processes.




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





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





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





Research
& Development / Products under Design and Development




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




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





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




Our
research and development activities as well as product design activities are
primarily conducted in our research and development subsidiary SPO Ltd. located
in Israel. In connection with our efforts to curtail operating expenses and
conserve our cash resources, in the latter half of 2008 we focused principally
on the development of the sports watch and ceased development of other products.
During our 2008 and 2007 fiscal years, we expended approximately $1,179,000 and
$1,198,000, respectively, on research and development.




Business
Strategy




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




Establishing our brand in both
      the medical and consumer marketplaces . The initial product launch
      PulseOx 5500TM was a demonstration of our strategy to establish our
      company within the most demanding part of the market - medical devices
      intended primarily for the homecare market requiring FDA approval and
      requiring a doctor's prescription. Thereafter, subject to regulatory
      approval, consumer applications using the technology will be marketed for
      direct purchase at appropriate outlets (e.g., retail drug chains, sports
      and fitness establishments, distributors of safety and security
      products).
              
              Increasing growth potential of
      our medical products. Since the launch of our medical products we
      have gained recognition for our technology in the medical markets. In
      addition to extending the product lines over the last few years we have
      also began a program of private labeling of our products for the larger
      medical equipment resellers. We have had initial success in this strategy
      in the US and we are looking to extend this in the future in our current
      markets.






- 5
-
 Table of Contents







Partner with highly qualified,
      focused companies, internationally . We intend to continue in our
      collaborative efforts with leading international distributors for our
      consumer products for which we have developed the prototypes, in
      preparation for technological due diligence. We have identified a number
      of potential partners for these products.
..




Research and
      Development . Subject to raising additional capital, our research
      and development strategy in the near future will focus on our consumer
      product lines and to maintain our technological leadership with respect to
      our existing medical products.




Suppliers




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




We
outsource our primary assembly and manufacturing operations. We utilize turn key
contract manufacturers that are ISO certified. However, the outsourcing of these
operations may mean that some degree of risks related to delivery schedules,
yields, and other factors are not directly under our control.




Marketing
and Sales Organization




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




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




Patents
and Proprietary Information




We
currently rely on a combination of patent, trade secret, copyright and trademark
law, as well as non-disclosure agreements and invention assignment agreements,
to protect proprietary information. However, such methods may not afford
complete protection and there can be no assurance that other competitors will
not independently develop such processes, concepts, ideas and documentation. As
of March 2009, we hold four 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 31, 2009, we had 13 employees working on a full time basis. None of these
employees are subject to collective bargaining agreements.






- 6
-
 Table of Contents





Beginning
July 2008, we began the deferral of salaries and benefits with respect to our
executive management and subsequently we applied this policy with respect to our
employees and also we reduced headcount in an effort to reduce operating
expenses and conserve our cash resources.





Competition




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




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





During
2008, several Chinese based medical device manufacturers extended their share of
the homecare market and have become direct competitors to a number of our
products. Their pricing models have significantly impacted this market and in
particular under the current economic conditions being experienced across world
wide markets.




Governmental
Regulations




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




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




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




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




place
      the company under observation and re-inspect the facilities; or issue a
      warning letter apprising of violating
conduct;




detain
      or seize products;




mandate
      a recall;




enjoin
      future violations; and




assess
      civil and criminal penalties against the company, its officers or its
      employees.






- 7
-
 Table of Contents




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 .





ITEM
1A.  RISK FACTORS




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




RISKS
RELATED TO OUR BUSINESS




OUR
NEED FOR ADDITIONAL FINANCING IS ACUTE AND FAILURE TO OBTAIN ADEQUATE FINANCING
COULD LEAD TO THE FINANCIAL FAILURE OF OUR COMPANY IN THE FUTURE.




We
believe that our existing cash resources as well as anticipated short-term
proceeds from revenues are insufficient to enable us to maintain operations as
presently conducted and meet our obligations as they come due, as well pay
outstanding loans which are currently due and payable. Without raising
additional funds on an immediate basis, whether through the issuance of our
securities, licensing fees for our technology or otherwise, we will also not be
able to maintain operations as presently conducted or commercially launch any
new products that are currently under design and development and may have to
restructure our operations or even cease operations entirely.  Without
adequate funding, we also may not be able to accelerate the development and
deployment of our products, respond to competitive pressures, develop new or
enhanced products or take advantage of unanticipated acquisition opportunities.
At the present time, we have no commitments for any financing, and there can be
no assurance that capital will be available to us on commercially acceptable
terms or at all. We may have difficulty obtaining additional funds as and when
needed, and we may have to accept terms that would adversely affect our
stockholders.Any
failure to achieve adequate funding will delay our development programs and
product launches and could lead to abandonment of one or more of our development
initiatives, as well as prevent us from responding to competitive pressures or
take advantage of unanticipated acquisition opportunities. In addition to a
number of outstanding amounts owed to suppliers and professional service
providers, as at December 31, 2008 we owe approximately $1,138,000 on
outstanding notes that we issued in April 2005 and July 2006. We do not have the
capital resources from which to pay these amounts.





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




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





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




- 8
-
 Table of Contents




ADVERSE
GLOBAL ECONOMIC CONDITIONS AFFECT OUR CUSTOMERS AND, IN TURN, OUR OPERATING
RESULTS





The
global economic environment deteriorated substantially during
2008.   The declining values in real estate, reduced credit
lending by banks, solvency concerns of major financial institutions, increases
in unemployment levels and recent significant declines and volatility in the
global financial markets have negatively impacted the budgeting and purchasing
behavior of our customers. This has affected our business.  During the
year ended December 31, 2008, our revenues declined by approximately 45%,
compared to the fiscal year 2007.  If the global economic environment
continues to be weak or deteriorates further, there will likely be a negative
effect on our revenues and earnings for the remainder of the current fiscal year
and continuing into fiscal 2010.








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




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




Potential
consumer products that appear to be promising are currently at 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;




*
            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.
In addition, we anticipate that we will need to raise from third parties
additional working capital before we undertake any additional product
development or launches.





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





Our
accumulated deficit was approximately $15,854,000 as at December 31, 2008. We
expect our operating losses to continue as we continue to expend resources to
further develop and enhance our existing product lines, to complete development
of new generation products, obtain regulatory clearances or approvals, expand
our marketing, sales, manufacturing and finance capabilities and conduct further
research and development.





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




- 9
-
 Table of Contents




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




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




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




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




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




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




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




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




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




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




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




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






- 10
-
 Table of Contents




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.




As of
March 2009, we have been issued four United States patents. One or more of the
patents for our existing or future products, may be successfully challenged,
invalidated or circumvented, or we may otherwise be unable to rely on these
patents. These risks are also present for the process we use or will use for
manufacturing our products. In addition, our competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, may apply for and obtain patents that prevent, limit or interfere
with our ability to make, use and sell our products, either in the United States
or in international markets.




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




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




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




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





We are
independently developing, marketing and distributing our oximetry line of
products and consumer 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 continue commercialize all, or any,
of these products.






- 11
-
 Table of Contents




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.





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




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




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




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




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




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




OUR
LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR REVENUE UNCERTAIN.




We are
responsible for marketing our oximetry product line. We have relatively limited
experience in marketing or selling medical device products and only have a two
person internal marketing and sales team. In order to successfully continue to
market and sell our products, we must either develop a marketing and sales force
or expand our arrangements with third parties to market and sell our products.
We may not be able to successfully develop an effective marketing and sales
force and we may not be able to enter into and maintain marketing and sales
agreements with third parties on acceptable terms, if at all. If we develop our
own marketing and sales capabilities, we will compete with other companies that
have experienced and well-funded marketing and sales operations. If we enter
into a marketing arrangement with a third party, any revenues we would receive
will be dependent on this third party, and we will likely be required to pay a
sales commission or similar compensation to this party. The efforts of these
third parties for the marketing and sale of our products may not be
successful.




- 12
-
 Table of Contents




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.




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 24.5% of our outstanding Common Stock as of
March 31, 2009. 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.




- 13
-
 Table of Contents




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




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




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




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




As of
March 31, 2009, we had 50 million authorized shares of Common Stock, of which
24,833,007 shares of our Common Stock were issued and outstanding as of such
date. An additional 5,876,152 shares have been reserved for issuance upon
exercise or conversion of outstanding options, warrants and convertible
securities. Many of the those options, warrants and convertible securities
contain provisions that require the issuance of increased numbers of shares of
common stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions. The occurrence of any such event or
the exercise or conversion of any of the options, warrants or convertible
securities described above would dilute the interest in our company represented
by each share of Common Stock and may adversely affect the prevailing market
price of our Common Stock.




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




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




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




Section
404 of the Sarbanes-Oxley Act requires any company subject to the reporting
requirements of the U.S. securities laws to do a comprehensive evaluation of its
internal control over financial reporting. To comply with this statute, we are
required to document and test our internal control procedures and our management
is required to issue a report concerning our internal controls over financial
reporting in this Annual Report on form 10-K for our fiscal year ended December
31, 2008. Our independent auditors will be required to issue an opinion on
management’s assessment of those matters for our annual report on Form 10-K for
our fiscal year ending December 31, 2009. The rules governing the standards that
must be met for management to assess our internal controls over financial
reporting are relatively new and complex and require significant documentation,
testing and possible remediation to meet the detailed standards under the rules.
It is possible that, as we prepare for this audit, we could discover certain
deficiencies in the design and/or operation of our internal controls that could
adversely affect our ability to record, process,
summarize and report financial data. We have invested and will continue to
invest significant resources in this process. Because an audit of our internal
controls has not been required to be reported in the past, we are uncertain as
to what impact a conclusion that deficiencies exist in our internal controls
over financial reporting would have on the trading price of our common
stock.




OUR STOCK PRICE MAY BE
VOLATILE.




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




·
            Variations
      in our quarterly operating results due to a number of factors, including
      but not limited to those identified in this "RISK FACTORS "
      section;






- 14
-
 Table of Contents






·
            Changes
      in financial estimates of our revenues and operating results by securities
      analysts or investors;




·
            Announcements
      by us of commencement of, changes to, or cancellation of significant
      contracts, acquisitions, strategic partnerships, joint ventures or capital
      commitments;




·
            Additions
      or departures of key personnel;




·
            Stock
      market price and volume fluctuations attributable to inconsistent trading
      volume levels of our stock;




·
            Commencement
      of or involvement in litigation;
and




·
            announcements
      by us or our competitors of technological innovations or new
      products




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




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




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




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.




- 15
-
 Table of Contents




RISKS
RELATED TO OPERATIONS IN ISRAEL




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




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




WE
MAY BE ADVERSELY AFFECTED FROM FOREIGN CURRENCY MARKET
FLUCTUATIONS.





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




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




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




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




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




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




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




ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM 2. PROPERTIES




We do not
own any real property. Our corporate headquarters are located at Beit Hapa’amon,
Suite 209, 20 Hata’as Street, Kfar Saba, Israel. We lease approximately 1290
square feet in Kfar Saba, Israel which are the administrative offices for our
subsidiary SPO Ltd. The lease for this property has been renewed until December
31, 2009. We have an option under the terms of lease, to be released from the
commitments of the lease at any time during the period of the lease, providing
we give a notice period of three months




- 16
-
 Table of Contents





In
addition, we also lease approximately 3230 square feet in Kiryat Malachi, Israel
which is used by SPO Ltd. for the research and development activities under a
lease that expires in August 2011 The aggregate monthly rental payment for both
of the leases in Israel are approximately $3,200.








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





ITEM 3. LEGAL PROCEEDINGS




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





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None




PART II





ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS




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




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





LOW
            
            
            HIGHYear
      Ended December 31, 2008First
      Quarter
            
            $
            0.41
            
            
            $
            0.90Second
      Quarter
            
            $
            0.45
            
            
            $
            1.01Third
      Quarter
            
            $
            0.37
            
            
            $
            0.70Fourth
      Quarter
            
            $
            0.06
            
            
            $
            0.80Year
      Ended December 31, 2007First
      Quarter
            
            $
            1.50
            
            
            $
            2.15Second
      Quarter
            
            $
            1.25
            
            
            $
            2.15Third
      Quarter
            
            $
            0.90
            
            
            $
            1.50Fourth
      Quarter
            
            $
            0.53
            
            
            $
            2.00




As of
March 31, 2009, there were approximately 150 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.




- 17
-
 Table of Contents




RECENT
SALES OF UNREGISTERED SECURITIES




We did
not sell any securities during the three months ended December 31,
2008.





ITEM 6.  SELECTED FINANCIAL DATA





Not
Applicable.




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




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




OVERVIEW




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




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




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





We need
to raise additional funds on an immediate basis in order to meet our on-going
operating requirements and to realize our business plan as well as pay
outstanding loans in the approximate amount of $ 1.1 million, which are
currently due and payable. In response to the deteriorating global economic
conditions that began in 2008, we have taken certain measures in an effort to
reduce operating expenses and conserve our cash resources.
Beginning  in July 2008, we have  significantly curtailed
our non-essential product design and development, marketing activities and
reorganized our product manufacturing and delivery system to “just-in-time”
arrangements. We have terminated certain product development plans During 2008
we deferred part of management and employee salaries and benefits. As of March
31, 2009, we had 13 employees working on a full-time basis. If we are unable to
raise capital on an immediate basis, it may be necessary to for us to take
further cost cutting measures to reduce our cash burn including laying-off
additional personnel. No
assurance can be given that we will be able to raise the needed capital. These
conditions raise substantial doubt about our ability to continue as a going
concern.




CRITICAL
ACCOUNTING POLICIES




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




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




- 18
-
 Table of Contents




REVENUE
RECOGNITION




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




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. Our
write-off represents the excess of the carrying value, typically cost, over the
amount we expect to realize from the ultimate sale or other disposal of
inventory based upon our assumptions regarding forecasted consumer demand,
inventory aging and technological obsolescence. If our estimates regarding
consumer demand are inaccurate or changes in technology affect demand for
certain products in an unforeseen manner, we may be exposed to losses or gains
in excess of our established write-off that could be material




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, 2008 (the “2008 Period”) AND THE YEAR ENDED
DECEMBER 31, 2007 (the “2007 Period”)




REVENUES . Revenues for the
2008 Period and 2007 Period were derived primarily from our PulseOx 5500, Check
Mate and the PulseOx 7500 products. Revenues for the 2008 Period were $2,759,000
compared to $5,008,000 for the 2007 Period.The decrease in
revenues for the 2008 Period is attributable to the combined
effect of a decrease in the volume of unit sales together with a
reduction of the per unit price attributable to the economic difficulties
currently prevailing in our principal market, the United States and the entry
into the United States market of a significant number of relatively low cost
products, primarily form China.




COSTS OF REVENUES . Costs of
revenues for the 2008 Period were $1,839,000 compared to $2,447,000 for the 2007
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. The principal reason for the
increase in cost of revenues from 49% in 2007 Period compared with 67% in 2008
Period is due to the write off of inventory of raw materials in the fourth
quarter of 2008 in the amount of $295,000





RESEARCH AND DEVELOPMENT
EXPENSES. Research and development costsconsist primarily of
expenses incurred in the design, development and testing of our products. These
expenses consist primarily of salaries and related expenses for personnel,
contract design and testing services, supplies used and consulting and license
fees paid to third parties. Research and development expenses for the 2008
Period were $1,179,000 compared to $1,198,000, for the 2007 Period. The research
and development expenses in the 2008 Period were reduced by the reduction in the
number of employees and related compensation costs and the reduction in
investment and ceasing of certain of our development projects. However, this was
offset by the influence of the strength of New Israeli Shekel against the US$ in
the period.




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 2008 Period were $567,000 compared to $675,000 for
the 2007 Period. The decrease was primarily due to the closure of the sales
offices in the US in mid 2007.




GENERAL AND ADMINISTRATIVE
EXPENSES . General and administrative expenses primarily consist of
salaries and other related costs for personnel in executive and other
administrative functions. Other significant costs include professional fees for
legal and accounting services. General and administrative expenses for the 2008
Period and the 2007 Period were $1,614,000 and $1,450,000, respectively. The
increase in general and administrative expenses primarily resulted from the
charge in the fourth quarter of 2008 for the provision for doubtful debts in the
amount of $203,000.




- 19
-
 Table of Contents





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





FINANCIAL EXPENSES, NET .
Financial expenses net, for the 2008 Period and 2007 Period were $680,000 and
$842,000, respectively. The principal expenses comprising the financial expenses
were:- (i) non cash amortization of loan discounts  and issuance of
shares to financial service provider - $257,000 in 2008 compared to $666,000 in
2007 (ii)exchange rate differences caused by fluctuations in the exchange rate
with the New Israeli Shekel (“NIS”) on  liabilities denominated in NIS
held by the subsidiary- $187,000 in 2008 compared to $20,000 in 2007
(iii)  one time non cash expenses relating to the issue of warrants
for the conversion to equity of certain loan notes and accrued interest thereon
- $105,000 in 2008 and (vi) interest in respect of debt instruments issued by
the Company between April 2005 and October 2006 in the amount of $123,000
in 2008 compared to $154,000 in 2007





NET LOSS . For the 2008 Period
and 2007 Period we had a net loss of $3,201,000 and $1,604,000, respectively.
The increase in net loss during the 2008 Period is primarily attributable to the
decrease in  revenues as discussed  above.




LIQUIDITY
AND CAPITAL RESOURCES




As at
December 31, 2008, we had cash and cash equivalents of $263,000 compared to
$1,242,000 as at December 31, 2007.




We
generated negative cash flow from operating activities of approximately
$1,158,000 during the 2008 Period compared to $559,000 for the 2007
Period.




In
December 2005 we completed the private placement to certain accredited investors
that we commenced in April 2005 for the issuance of up to $1,544,000 of units of
our securities, with each unit comprised of (i) our 18 month 6% promissory note
(collectively, the "April 2005 Notes") and (ii) three year warrants to purchase
up to such number of shares of our Common Stock as are determined by the
principal amount of the Note purchased by such investor divided by $ 0.85
(collectively the "April 2005 Warrants"). We and the holders of $1,464,000 in
principal amount of the April 2005 Notes subsequently agreed to (a) extend the
maturity term of the April 2005 Notes through March 26, 2008,
(b)extend  the exercise period of the April 2005 Warrants from three
to five years with an expiration date of September 26, 2010 and adjust the per
share exercise price to $0.60 and (c) increase  the interest rate on
the amounts outstanding under the April 2005 Notes to 8% per annum, effective
July 12, 2006. Holders of notes in the principal amount of $125,000 that agreed
to the extension of the maturity date on the notes , have since exercised their
warrants and converted the interest accrued there on into common stock; and a
holder of an April 2005 Note in the principal amount of $50,000 was
repaid.  The Amendment also provided that if we subsequently issue
shares of our Common Stock at an effective per share exercise price less than
that of the adjusted per share exercise price of the April 2005 Warrants during
the adjusted exercise period, then the exercise price thereof is to be reduced
to such lower exercise price, except for certain specified issuances. All of the
extended notes, matured on March 26, 2008.





In March
2008, we offered to the holders of the April 2005 Notes to apply the amounts
payable to them on the April 2005 Notes, to the exercise price of the April 2005
Warrants, thereby exercising these warrants, and to convert into Common Stock
the accrued interest on the 2005 Notes at a per share conversion price of $0.60.
Note holders who accepted this offer were issued new warrants for such number of
shares of Common Stock equal to 25% of the number shares issued to them upon
exercise of their existing warrants and conversion of the interest accrued on
the note. The new warrants will be exercisable over three years at an exercise
price of $0.60. As of December 31, 2008, the holders of approximately $439,000
in principal amount have agreed to apply the principal amount owed to them to
the exercise price of the April 2005 Warrants. Accordingly, approximately
$520,000 in amounts owed under the 2005 Notes have been converted into equity
and, accordingly, an aggregate of 866,528 shares of our Common
Stock have been issued upon exercise of the April 2005 Warrants and conversion
of the interest owing on the April 2005 Notes. Under the terms of the offer, new
warrants for 216,636 share of our Common stock have been issued to these April
2005 Note holders, exercisable over three years from the date of issuance. Three
note holders of the principal amount of $200,000 have agreed to extend their
loan for a further 24 months and we agreed to pay to them the interest accrued
through the original maturity date of March 26, 2008 in the aggregate amount of
$40,000. Under the terms of the agreement with the extending note holders, we
will issue to the extending holders new warrants for an aggregate of 50,000
shares of our Common stock, which warrants are exercisable for three years from
issuance and contain the same operative terms, including exercise price, as the
warrants that were originally issued in connection with the issuance of the
April 2005 Notes. We have been informed by the holders of $300,000 in principal
amount of their election to not accept our offer, of which $250,000 of principal
and the accrued interest thereon has been repaid as of the date of the filing of
this quarterly report. As of the March 31, 2009, approximately $886,000 in
respect of the principal and accrued interest on the April 2005 Notes remains
outstanding.




- 20
-
 Table of Contents





In July
2006, we commenced a private placement of units of our securities, with each
unit comprised of (i) our 8% month promissory note due 12 months from the date
of issuance and (ii) warrants as described below, pursuant to which we raised
$550,000 (the maximum amount that could be raised from this offering). Under the
terms of the offering, the principal and accrued interest is due in one balloon
payment at the end of the twelve month period. Each purchaser of the notes
received warrants, exercisable over a period of two years from the date of
issuance, to purchase 16,250 shares of Common Stock for each $25,000 of
principal loaned, at a per share exercise price equal to the lower of $1.50 or
35% less than any the offering price at an initial public offering of the
Company's Common Stock during the warrant exercise period. During 2007, we
offered to the holders of the notes to convert the principal and accrued
interest into shares of the Company’s Common Stock at a per share conversion
price of $0.90. As of March 31, 2009, the holders of $238,000 of the principal
amount agreed to convert the principal and accrued interest thereon into shares
of our Common Stock. We repaid to a note holder the principal amount of $75,000
and the accrued interest thereon. We have not made the scheduled payment on the
principal amount of $237,000 that remains due and owing under the notes that
have not been converted and, accordingly, under the terms of such notes, we are
in default.  As of the March 31, 2009, approximately
$262,000  in respect of the principal and accrued interest on these
notes remains outstanding.





Our
recent financings are discussed below.




In March
2008, we received from an investor gross proceeds of $250,000 and, in connection
therewith, in May 2008 we issued to such investor 312,500 shares of our Common
Stock and warrants, exercisable through the third anniversary of issuance, to
purchase an additional 156,250 shares of Common Stock at a per share exercise
price of $0.80. The net proceeds from this financing were $223,000 after cash
fee paid to the placement agent and other related expenses.





In May
2008, we received from certain investors gross proceeds of $365,000 in
consideration for the purchase of our Common Stock. The net proceeds from this
financing were $334,000 after cash fees paid to the placement agent and other
related expenses. In connection therewith, in June 2008, we issued to such
investors an aggregate of 456,250 shares of our Common Stock and warrants,
exercisable through the third anniversary of issuance, to purchase up to an
additional 228,125 shares of our Common Stock at a per share exercise price of
$0.80.





As noted
above, we need to raise additional funds on an immediate basis in order to be
able to satisfy our cash requirements and fulfill our business plan over the
next twelve months as well as pay outstanding loans in the approximate amount of
$1.1 million, which are currently due and payable. Without raising additional
funds on an immediate basis, whether through the issuance of our securities,
licensing fees for our technology or otherwise, we will also not be able to
maintain operations as presently conducted or to commercially launch any new
products that are currently under design and development. As previously
disclosed in our periodic reports, we have been actively seeking additional
capital. In response to the general deterioration in the general economic
environment which began in 2008, we have taken several cost-cutting measures. We
have laid-off a number of our employees and as of March 31, 2009, we have 13
full time remaining employees on staff. Additionally, we have been forced to
delay payments to most of our vendors and defer salaries for management and
employees. If we are unable to raise additional capital on an immediate basis,
we may be forced lay-off additional employees and either restructure or cease
operations entirely. At the present time, we have no commitments for financing
and no assurance can be given that we will be able to raise capital on
commercially acceptable terms or at all We may not be successful in our efforts
to raise additional funds. Even if we raise cash to meet our immediate working
capital needs, our cash needs could be heavier than anticipated in which case we
could be forced to raise additional capital. Our auditors included a "going
concern" qualification in their auditors' report for the year ended December 31,
2008. While we raised approximately gross $615,000 during the year ended
December 31, 2008, such "going concern" qualification may make it more difficult
for us to raise funds when needed. In addition, the current economic situation
may further complicate our capital raising efforts.





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




RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





(1)
            In
      May 2008, the Financial Accounting Standards Board (FASB) issued FASB
      Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt
      Instruments That May Be Settled in Cash upon Conversion (Including Partial
      Cash Settlement)” (“APB 14-1”). APB 14-1 requires the issuer to separately
      account for the liability and equity components of convertible debt
      instruments in a manner that reflects the issuer’s nonconvertible debt
      borrowing rate. The guidance will result in companies recognizing higher
      interest expense in the statement of operations due to amortization of the
      discount that results from separating the liability and equity components.
      APB 14-1 will be effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within
      those fiscal years. The Company is currently assessing the impact of APB
      14-1 on its consolidated financial
statements.






- 21
-
 Table of Contents





(2)
            In
      June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
      “Determining Whether Instruments Granted in Share-Based Payment
      Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF
      03-6-1 establishes that unvested share-based payment awards that contain
      nonforfeitable rights to dividends or dividend equivalents (whether paid
      or unpaid) are participating securities as defined in Emerging Issues Task
      Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class
      Method under FASB Statement No. 128”, and should be included in the
      computation of earnings per share pursuant to the two-class method as
      described in Statement of Financial Accounting Standards No. 128,
      “Earnings per Share”. FSP EITF 03-6-1 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those years. All prior-period earnings per share
      data presented shall be adjusted retrospectively to conform to the
      provisions of FSP EITF 03-6-1. Early application is not permitted. The
      Company is currently evaluating the impact that the adoption of FSP EITF
      03-6-1 will have on its consolidated financial statements but believes
      that its effect will be immaterial due to immaterial use of instruments
      within the scope of the FSP.





(3)
            In
      May 2008, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles.
      SFAS No. 162 identifies the sources of accounting principles and provides
      entities with a framework for selecting the principles used in preparation
      of financial statements that are presented in conformity with GAAP. The
      current GAAP hierarchy has been criticized because it is directed to the
      auditor rather than the entity, it is complex, and it ranks FASB
      Statements of Financial Accounting Concepts, which are subject to the same
      level of due process as FASB Statements of Financial Accounting Standards,
      below industry practices that are widely recognized as generally accepted
      but that are not subject to due process. The FASB believes the GAAP
      hierarchy should be directed to entities because it is the entity (not its
      auditors) that is responsible for selecting accounting principles for
      financial statements that are presented in conformity with GAAP. The
      adoption of FASB 162 is not expected to have a material impact on the
      Company's financial position.





(4)
            In
      June 2008, the FASB Emerging Items Task Force reached a consensus on EITF
      Issue No. 07-5, “Determining Whether an Instrument (or an Embedded
      Feature) Is Indexed to an Entity’s Own Stock". The Consensus was reached
      on the following three issues:




1).
            The
      way an entity should evaluate whether an instrument (or embedded feature)
      is indexed to its own stock.


2.)
            The
      way the currency in which the strike price of an equity-linked financial
      instrument (or embedded equity-linked feature) is denominated affects the
      determination of whether the instrument is indexed to an entity’s own
      stock.


3).
            The
      way an issuer should account for market-based employee stock option
      valuation instruments.




This
consensus will affect entities with (1) options or warrants on their own shares
(not within the scope of Statement 150), including market-based employee stock
option valuation instruments; (2) forward contracts on their own shares,
including forward contracts entered into as part of an accelerated share
repurchase program; and (3) convertible debt instruments and convertible
preferred stock. Also affected are entities that issue equity-linked financial
instruments (or financial instruments that contain embedded equity-linked
features) with a strike price that is denominated in a foreign
currency.





The
consensus is effective for fiscal years (and interim periods) beginning after
December 15, 2008. The consensus must be applied to outstanding instruments as
of the beginning of the fiscal year in which the issue is adopted as a
cumulative-effect adjustment to the opening balance of retained earnings for
that fiscal year. Early application is not permitted.




The Company is currently evaluating the
effect of EITF 07-5 and has not yet determined the impact of the consensus on
its financial position or results of operations.




ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
Applicable.





ITEM 8.  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-K.




- 22
-
 Table of Contents





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





None.





ITEM 9A(T). CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES.





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer 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 Financial Officer concluded
that our disclosure controls and procedures were effective as of the end of the
period covered by this report to provide reasonable assurance that material
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.




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




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




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





During
the year ended December 31, 2008, there have been no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.







Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our management, including our principal
financial officer, has, with the assistance of external advisor and our audit
committee, conducted
an evaluation of the effectiveness of our internal control over financial
reporting. Our management assessed the effectiveness of its internal control
over financial reporting as of December 31, 2008. In making this
assessment, management employed the framework incorporated under the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control - Integrated Framework.. Based on use of this framework, management
believes that, as of December 31, 2008, the Company’s internal control over
financing reporting is effective based on those criteria.





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




- 23
-
 Table of Contents




ITEM 9B. OTHER INFORMATION




None.




PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Management




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





NAME
            
            AGE
            
            POSITIONMichael
      Braunold
            
            49
            
            President,
      Chief Executive Officer and DirectorJeff
      Feuer
            
            44
            
            Chief
      Financial OfficerIsrael
      Sarussi
            
            58
            
            Chief
      Technology OfficerPauline
      Dorfman
            
            44
            
            Director
      (1)Sidney
      Braun
            
            49
            
            Director
      (1)





(1)
            Audit
      Committee and Compensation Committee
Member.




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




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




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




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




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




- 24
-
 Table of Contents




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




Committees
of the Board of Directors





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





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





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





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





Board
of Directors; Appointment of Officers





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




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




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
2008, or written representations from certain reporting persons, we believe all
of our directors and executive officers met all applicable filing
requirements,except that (i) Jeff Feuer filed a late Form 4 with respect to a grant on
each of April 14 and December 5, 2008 of options to purchase, respectively,
100,000 and 249,000 shares of our Common Stock, (ii) Michael Braunold filed
a late Form 4 with respect to a grant on December 5, 2008 of options to purchase
200,000 shares of our Common Stock and (iii) each of Pauline Dorfman and Sidney
Braun, our non-executive directors, did not timely report on Form 4 the grant,
on December 5, 2008, of options to purchase 25,000 shares of our
common stock and, in lieu thereof, reported these transactions on a
Form 5.




- 25
-
 Table of Contents




ITEM 11. EXECUTIVE COMPENSATION




The
following table sets forth all compensation for the last fiscal year awarded to,
earned by, or paid to our Chief Executive Officer and the two most highly paid
executive officers serving as such at the end of 2008 whose salary and bonus
exceeded $100,000 for the year ended December 31, 2008 (the "Named Executive
Officers").





SUMMARY
COMPENSATION TABLE





Name & Principal Position
            
            Year
            
            Salary ($)
            
            
            Bonus
      ($)
            
            
            Option Awards
              ($) (1)
            
            
            All Other
              Compensation
              ($)
            
            
            Total
              ($)MICHAEL
      BRAUNOLD
            
            2007
            
            $
            188,311
            
            
            
            —
            
            
            $
            —
            
            
            $
            70,467
            (2)
            
            $
            258,778President
      and Chief Executive Officer
            
            2008
            
            $
            216,696
            (3)
            
            
            —
            
            
            
            23,300
            
            
            $
            39,607
            (4)
            
            $
            279,603JEFFREY
      FEUER
            
            2007
            
            $
            129,007
            
            
            
            —
            
            
            
            
            
            
            $
            59,169
            (5)
            
            $
            188,176Chief
      Financial Officer
            
            2008
            
            $
            167,806
            (6)
            
            
            
            
            
            $
            101,623
            
            
            $
            36,192
            (7)
            
            $
            305,621ISRAEL
      SARUSSI
            
            2007
            
            $
            160,718
            
            
            
            —
            
            
            
            —
            
            
            $
            70,310
            (8)
            
            $
            231,028Chief
      Technology Officer
            
            2008
            
            $
            219,963
            (9)
            
            
            —
            
            
            
            —
            
            
            $
            41,549
            (10)
            
            $
            261,512





(1)
            Amounts
      in this column reflect the expense recognized by us for accounting
      purposes calculated in accordance with FASB Statement of Financial
      Accounting Standards No. 123R (“FAS 123R”) with respect to employee stock
      options issued under the Company's 2005 Incentive Plan in 2005.  The assumptions
      used to calculate the fair value of stock option grants under FAS 123R,
      were: expected holding period of 10 years, risk free interest rate of
      2.13%, no dividend yield and volatility of 100%.(2)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($13,154), payment in lieu of accrued vacation ($9,238).and
      contributions to insurance premiums paid under Israeli law for pension,
      severance and further education funds ($48,075)(3)
            Of
      this amount, $163,223 was paid and $53,473 is being deferred (as of July
      2008). This deferred amount has been accrued in full as at December 31,
      2008.(4)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($14,979) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds ($4,780).
      Of this amount, $19,848 is being deferred as of July 2008. This deferred
      amount has been accrued in full as at December 31,
2008.(5)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($14,976) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds
      ($44,193).(6)
            Of
      this amount, $137,704 was paid and $30,102 is being deferred (as of July
      2008). This deferred amount has been accrued in full as at December 31,
      2008.(7)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($17,605) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds ($3,608).
      Of this amount, $14,979 is being deferred as of July 2008. This deferred
      amount has been accrued in full as at December 31,
2008.(8)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($19,100) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds
      ($51,210).(9)
            Of
      this amount, $166,490 was paid and $53,473 is being deferred (as of July
      2008). This deferred amount has been accrued in full as at December 31,
      2008.(10)
            Reflects
      payments made by us in connection with a leased automobile and related
      benefits ($18,206) and contributions to insurance premiums paid under
      Israeli law for pension, severance and further education funds ($3,496).Of
      this amount, $19,847 is being deferred as of July 2008. This deferred
      amount has been accrued as at December 31,
  2008.


- 26
-
 Table of Contents




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, 2008.





OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-END  DECEMBER 31, 2008




Name
              
              Number of Securities
                Underlying
                Unexercised Options
                (#)(1)
                
                Exercisable
              
              
              Number of Securities
                Underlying
                Unexercised Options
                (#)
                
                Unexercisable
              
              
              Equity Incentive Plan
                Awards: Number of
                Securities Underlying
                Unexercsied Unearend
                Options (#)
              
              
              Option Exercise
                Price
                
                ($)
              
              Option Expiration
                DateMichael
      Braunold
              
              
              250,000
              
              
              
              
              
              
              
              
              
              $
              0.60
              
              12/22/2015200,000
              
              
              
              —
              
              
              
              —
              
              
              
              0.13
              
              12/05/2018Jeffrey
      Feuer
              
              
              120,000
              
              
              
              
              
              
              
              
              
              
              $
              0.60
              
              12/22/2015100,000
              
              
              
              
              
              
              
              
              
              
              
              0.78
              
              04/12/2018249,000
              
              
              
              
              
              
              
              
              
              
              
              0.13
              
              12/05/2018Israel
      Sarussi
              
              
              —
              (2)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              —





(1)
            Options
      were issued under our 2005 Equity Incentive Plan and are fully
      vested.(2)
            Does
      not include warrants for 446,383 shares of our Common Stock issued to Mr.
      Sarussi on April 21, 2005 in exchange for warrants in SPO Ltd held prior
      to Acquisition Transaction




EMPLOYMENT
AGREEMENTS WITH EXECUTIVE OFFICERS




MICHAEL
BRAUNOLD. On May 18, 2005, we entered into an employment agreement with Michael
Braunold, pursuant to which he serves as our Chief Executive Officer and
President. On such date, Mr. Braunold and SPO Ltd., entered into an employment
agreement pursuant to which Mr. Braunold serves as SPO Ltd.'s Chief Executive
Officer. Each of the agreements with us and SPO Ltd. continues in effect through
May 18, 2010; thereafter, the agreement and is automatically renewable for
successive two year terms unless we or Mr. Braunold indicate in writing, upon 90
days prior to the scheduled termination of the term, that such party does not
intend to renew the agreement. Mr. Braunold is currently entitled to a monthly
salary of $13,250 under the agreement with SPO Ltd. However, in order to reduce
operating expenses and conserve cash, since July 2008 Mr. Braunold has been
deferred a part of his salary and social benefits due thereon, and, as of
December 31, 2008, such deferred amount totaled $73,321 .The agreements may be
terminated by Mr. Braunold for any reason on 60 days written notice or for Good
Reason (as defined in the employment agreement) or by us for Just Cause (as
defined in the employment agreement) or for any other reason. In the event of a
termination by Mr. Braunold for Good Reason or by us for any reason other than
Just Cause, we are to pay Mr. Braunold an amount equal to (i) if such
termination occurs during the initial term of the agreement, the base salary
then payable, if any, for the longer of (a) the period from the date of such
termination to the end of the initial term as if the agreement had not been so
terminated and (b) twelve months and (ii) if such termination occurs after the
initial term, the base salary then payable, if any, for a period of twelve
months as if the agreement had not been so terminated. Mr. Braunold is not
entitled to a salary under the agreement with us was granted options in December
2005 under our 2005 Equity Incentive Plan (the “2005 Plan”) to purchase up to
250,000 shares of our Common Stock at a per share exercise price of $0.60, all
of which options are currently exercisable. In December 2008, Mr. Braunold was
awarded options to purchase up to 200,000 additional shares of Common Stock
under the 2005 Plan, at a per share exercise price of $0.13, all of which
options were exercisable upon grant.




JEFFREY
FEUER. On July 14, 2005, we entered into an employment agreement with Jeffrey
Feuer, pursuant to which Mr. Feuer serves as our Chief Financial Officer.
Previously, on May 15, 2005, Mr. Feuer and SPO Ltd. entered into an employment
agreement pursuant to which Mr. Feuer continues to serves as SPO Ltd.'s Chief
Financial Officer. Each of the agreements with the Company and SPO Ltd.
terminates on the earlier of: (i) Mr. Feuer's death or disability, (ii)
termination by the Company or Mr. Feuer without cause upon 6 months written
notice or (iii) termination of Mr. Feuer with cause. Mr. Feuer is currently paid
a monthly salary of $10,000 under the agreement with SPO Ltd. However, in order
to reduce operating expenses and conserve cash, since July 2008 Mr. Feuer has
been deferred a part of his salary and social benefits and, as of December 31,
2008, such deferred amount totaled $45,081. Mr. Feuer is not entitled to a
salary under the agreement with us but was granted options in December 2005
under the Company's 2005 Equity Incentive Plan to purchase 120,000 shares of the
Company's Common Stock at a per share exercise price of $0.60, all of which
options are currently exercisable. In April 2008, Mr. Feuer was granted options
to purchase up to 100,000 additional shares of Common Stock under the 2005 Plan,
at a per share exercise price of $0.78 and in December2008, was granted options
to purchase up to 249,000 additional shares of Common Stock at a per share
exercise price  of $0.13, all of which options were exercisable upon
grant.




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.


- 27
-
 Table of Contents


The
agreement with SPO Ltd. terminates on the earlier of: (i) Mr. Sarussi's death or
disability, (ii) termination by SPO Ltd. without cause upon 12 months written
notice; or (iii) termination of Mr. Sarussi with cause. Mr. Sarussi is currently
paid a monthly salary of $13,250 under the agreement with SPO Ltd. However, in
order to reduce operating expenses and conserve cash, since July 2008 Mr.
Sarussi has been deferred a part of his salary and social benefits and, as of
December 31, 2008, such deferred amount totaled $73,320.




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




COMPENSATION
OF DIRECTORS




We
undertook to pay each outside director $25,000 per annum for service on our
Board of Directors in 2008.  In addition, we have
granted stock options to directors to compensate them for their services. In
December 2008 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 Common Stock each at a per share exercise price of $0.13.





The
following table summarizes data concerning the compensation of our non-employee
directors for the fiscal year ended December 31, 2008..




Fees Earned
            
            Optionor
      paid (1)
            
            Awards($)
      (2)
            
            TotalSidney
      Braun
            
            $
            25,000
            
            
            2,432
            
            $
            25,000Pauline
      Dorfman
            
            $
            25,000
            
            
            2,432
            
            $
            25,000





(1)
              Amounts include deferred payment
      of directors’ remuneration to the non-executive directors of $25,000 for
      the period from July through December 2008. This amount of deferred
      directors remuneration has been accrued in full as at December 31,
      2008.


(2)
              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, 2008 included
      elsewhere in this report. Options are discussed in further detail in the
      Outstanding Equity Awards at Fiscal Year End Table. The assumptions used
      to calculate the fair value of stock option grants under FAS 123R, were:
      expected holding period of five years, risk free interest rate of
      1.82%, no dividend yield and volatility of
100%.
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS




The
following table sets forth information as of the close of business on March 31,
2009, 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 31, 2009. 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 24,756,507 shares of Common Stock outstanding
at December 31, 2008.


- 28
-
 Table of Contents




Common
      Stock
              Percentage
      ofName
      of Beneficial Owner (1)
            
            Beneficially
      Owned (2)
            
            Common
      StockMichael
      Braunold
            
            
            1,193,922
            (3)
            
            4.82
            %Jeffrey
      Feuer
            
            
            469,000
            (4)
            
            1.89
            %Israel
      Sarussi
            
            
            4,165,776
            (5)
            
            16.83
            %Pauline
      Dorfman
            
            
            125,000
            (6)
            
            *Sidney
      Braun
            
            
            125,000
            (6)
            
            *All
      officers and directors as a group (5 persons)
            
            
            6,078,698
            
            
            24.55
            %





*
            Less
      than 1%




(1)
            Except
      as otherwise indicated, the address of each beneficial owner is c/o SPO
      Medical Inc., Hata’as 20, POB 2454, Kfar Saba,  Israel
      44425.




(2)
            Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission and generally includes voting or investment power with
      respect to the shares shown. Except where indicated by footnote and
      subject to community property laws where applicable, the persons named in
      the table have sole voting and investment power with respect to all shares
      of voting securities shown as beneficially owned by
  them.





(3)
            Includes
      450,000 shares of our Common Stock that are issuable upon exercise of
      vested options issued under our 2005 Equity Incentive Plan (the "2005
      Plan").




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




(5)
            Comprised
      of 3,719,393 shares of the Company's Common Stock and 446,383 shares of
      Common Stock issuable upon exercise of currently exercisable
      warrants.




(6)
            Represents
      shares issuable upon exercise of currently exercisable options under the
      Company's 2005 Non-Employee Directors Stock Option Plan (the "2005
      Directors Plan").




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, 2008 with respect to
compensation plans under which equity securities were authorized for issuance,
including the 2005 Plan and the Non-Employee Directors Plan and agreements
granting options or warrants outside of these plans.




NUMBER OF
              SECURITIESTO BE ISSUED
              UPON
            
            WEIGHTED-
              AVERAGE
            
            NUMBER OF
              SECURITIESEXERCISE
              OF
            
            EXERCISE PRICE
              OF
            
            REMAINING
              AVAILABLE FOROUTSTANDING
              OPTIONS,
            
            OUTSTANDING
              OPTIONS,
            
            FUTURE ISSUANCE
              UNDERWARRANTS
              OR RIGHTS
            
            WARRANTS
              OR RIGHTS
            
            EQUITY COMPENSATION
              PLANSEquity
      compensation plans approved by security holders
            
            
            1,
      900,000
            
            $
            0.39
            
            
            50,000Equity
      compensation plans not approved by security holders
            
            
            1,445,141
            
            $
            0.11Total
            
            
            3,345,141
            
            $
            0.27
            
            
            50,000





- 29
-
 Table of Contents




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, 2008.




As of
December 31, 2008, we had outstanding options and warrants to purchase an
aggregate of 1,445,141 shares of our Common Stock which were granted outside of
the Plans. These are comprised of the following: (i) Penny warrants issued to
Israel Sarussi, an executive officer (446,383) and to service providers
((787,925), (ii) vested warrants to purchase up to 127,500 shares of our Common
Stock issued between April 2005 and December 2007 to consultants and service
providers at per share exercise price of between $0.6 and $1.5 (iii) an
unspecified number of warrants issued to placement agents and which will be
equal to $30,000 divided by 40% less than the lowest price of shares of Common
Stock sold by the Company in a subsequent transaction.




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




Certain Relationships and
Related Transactions





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





Director
Independence





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




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Audit
and Non-Audit Fees




The
following table presents fees for professional audit services rendered by
Brightman Almagor & Co., Certified Public Accountants, A member firm of
Deloitte Touche Tohmatsu, for the audit of our annual financial statements for
the year ended December 31, 2008 and 2007.





Fiscal
      Year Ended
            
            
            Fiscal
      Year EndedDecember
      31, 2008
            
            
            December
      31, 2007Audit
      Fees
            
            $
            42,500
            
            
            $
            38,500Audit
      Related Fees
            
            $
            —
            
            
            
            —Tax
      Fees
            
            $
            3,500
            
            
            $
            3,500All
      Other Fees
            
            $
            —
            
            
            
            60,000Total
            
            $
            46,000
            
            
            $
            102,000




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.




- 30
-
 Table of Contents




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




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




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




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




EXHIBIT NO.
            
            EXHIBIT2.1
            
            Restated
      Capital Stock Exchange Agreement dated as of April 21, 2005 among the
      Company, SPO Ltd. and the SPO Ltd. shareholders specified therein.
      (1)3.1
            
            Amended
      and Restated Certificate of Incorporation of the Company.
    (1)3.2
            
            Bylaws
      of the Company (1)3.3
            
            Articles
      of Association of SPO Medical Equipment Ltd.4.1
            
            Form
      of Promissory Note issued to certain investors. (1)4.2
            
            Form
      of Warrant Instrument issued to certain investors.(1)4.3
            
            Form
      of Promissory Note issued in connection with the Subscription Agreement
      referred to in Item 10.1. (5)4.4
            
            Form
      of Warrant issued in connection with the Agreement referred to in Item
      10.1 (5)4.5
            
            Form
      of Warrant (8)4.6
            
            Form
      of Common Stock Purchase Warrant (8)10.1
            
            Form
      of subscription Agreement with certain investors.10.2
            
            Employment
      Agreement effective as of May 18, 2005 between the Company and Michael
      Braunold. (2)+10.3
            
            Employment
      Agreement effective as of May 18, 2005 between SPO Ltd. and Michael
      Braunold. (2)+10.4
            
            Employment
      Agreement effective as of July 14, 2005 between the Company and Jeffrey
      Feuer. (3)10.5
            
            Employment
      Agreement effective as of July 14, 2005 between SPO Ltd. and Jeffrey
      Feuer. (3)10.6
            
            Company's
      2005 Equity Incentive plan10.7
            
            Company's
      2005 Non-Employee Directors Stock option Plan10.8
            
            Stock
      Purchase Agreement dated as of January 10, 2006 between SPO Medical Inc.
      and the investor specified therein. (4)10.9
            
            Form
      of Subscription Agreement between SPO Medical Inc. and certain Buyers
      (5)10.10
            
            Form
      of First Amendment to Subscription Agreement between SPO Medical Inc. and
      parties thereto. (5)10.11
            
            Confidential
      Private Placement Subscription Agreement dated as of July 7, 2007 by and
      between SPO Medical Inc. and Rig III10.12
            
            Form
      of Agreement Relating to the Conversion of outstanding Debt
      Instruments10.13
            
            Form
      of Warrant Exercise and Note Conversion Agreement dated as of March 26,
      2008 (8)10.14
            
            Form
      of Second Amendment to an SPO Subscription Agreement
(8)10.15
            
            Form
      of Subscription Agreement (8)10.16
            
            Mutual
      Release and Waiver dated as of April 16, 2008 between SPO Medical Inc. and
      Active Health Care Inc.(9)14.1
            
            Code
      of Conduct (6)31.1
            
            Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002


32.1
            
            Certification
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





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






- 31
-
 Table of Contents




SIGNATURES




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





DATE:
      March 31, 2009
            /s/
      Michael BraunoldMichael
      BraunoldChief
      Executive Officer and DirectorDATE:
      March 31, 2009
            /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
      31, 2009Sidney
      Braun/s/
      Michael Braunold
            
            President,
      Chief Executive Officer and Director
            
            March
      31, 2009Michael
      Braunold/s/
      Pauline Dorfman
            
            Director
            
            March
      31, 2009Pauline
      Dorfman


- 32
-
 Table of Contents
 SPO
MEDICAL INC. AND ITS SUBSIDIARY
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 AS
OF DECEMBER 31, 2008
 U.S.
DOLLARS IN THOUSANDS
 
 
 Table of Contents
 
 SPO
MEDICAL INC. AND ITS SUBSIDIARY
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 AS
OF DECEMBER 31, 2008
 U.S.
DOLLARS IN THOUSANDS
 
 
 INDEX
 
 
 PageReport
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets
                  F-3
      - F-4Consolidated
      Statements of Operations
                  F-5Statements
      of Changes in Stockholders' Deficiency
                  F-6Consolidated
      Statements of Cash Flows
                  F-7Notes
      to Consolidated Financial Statements
                  F-8
      – F-23
 
 F-1
 Table of Contents
  REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 To
the Stockholders of
 SPO MEDICAL
INC.
 
 We have
audited the accompanying consolidated balance sheets of SPO MEDICAL INC. ("the
Company") and its subsidiary as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for each of the two years in the period ended December 31, 2008.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, such consolidated financial statements, present fairly, in all material
respects, the financial position of the Company and its subsidiary as of
December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United states of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring losses from operations and has a
shareholders' deficiency that raises substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The accompanying financial statements do not include
any adjustments that might result from the outcome of
this uncertainty.
 
 Brightman
Almagor Zohar & Co.
 Certified
Public Accountants
 A member
firm of Deloitte Touche Tohmatsu
 
 Tel-Aviv,
Israel
 March 31,
2009
 
 F-2
 Table of Contents
  SPO MEDICAL INC.
 CONSOLIDATED
BALANCE SHEETS
 U.S.
dollars in thousands (except share data)
 
 December
      31,Note
                  
                  
                  2008
                  
                  
                  2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  
                  
                  
                  $
                  263
                  
                  
                  $
                  1,242Trade
      receivables, net
                  
                  
                  4
                  
                  
                  
                  224
                  
                  
                  
                  883Prepaid
      expenses and other accounts receivable
                  
                  
                  
                  
                  
                  
                  32
                  
                  
                  
                  120Inventories
                  
                  
                  5
                  
                  
                  
                  850
                  
                  
                  
                  1,0811,369
                  
                  
                  
                  3,326LONG
      TERM INVESTMENTSDeposits
                  
                  
                  
                  
                  
                  
                  12
                  
                  
                  
                  15Severance
      pay fund
                  
                  
                  
                  
                  
                  
                  270
                  
                  
                  
                  313282
                  
                  
                  
                  328PROPERTY AND EQUIPMENT,
      NET
                  
                  
                  6
                  
                  
                  
                  189
                  
                  
                  
                  177Total
      net assets
                  
                  
                  
                  
                  
                  $
                  1,840
                  
                  
                  $
                  3,831
 
 The
accompanying notes to these financial statements are an integral part
thereof.
  F-3
 Table of Contents
  
 SPO
MEDICAL INC.
 CONSOLIDATED
BALANCE SHEETS
 U.S.
dollars in thousands (except share data)
 
 December
      31,Note
                
                
                2008
                
                
                2007LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      LiabilitiesShort-term
      loans, net
                
                
                7
                
                
                $
                1,138
                
                
                $
                1,814Trade
      payables
                
                
                
                
                
                
                298
                
                
                
                576Employees
      and Payroll accruals
                
                
                8
                
                
                
                492
                
                
                
                294Other
      Creditors
                
                
                9
                
                
                
                -
                
                
                
                485Accrued
      expenses and other liabilities
                
                
                10
                
                
                
                785
                
                
                
                7502,713
                
                
                
                3,919Long-Term
      LiabilitiesAccrued
      severance pay
                
                
                11
                
                
                
                492
                
                
                
                446COMMITMENTS
      AND CONTINGENT LIABILITIES
                
                
                17STOCKHOLDERS’
      DEFICIENCYStock
      capital
                
                
                13Preferred
      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 - 24,756,507 and 21,510,188
      shares as at December 31, 2008 and 2007, respectively
                
                
                
                
                
                
                248
                
                
                
                215Additional
      paid-in capital
                
                
                
                
                
                
                14,241
                
                
                
                11,904Accumulated
      deficit
                
                
                
                
                
                
                (15,854
                )
                
                
                (12,653
                )(1,365
                )
                
                
                (534
                )Total
      liabilities and stockholders’ deficiency
                
                
                
                
                
                $
                1,840
                
                
                $
                3,831
 
 The
accompanying notes to these financial statements are an integral part
thereof.
  F-4
 Table of Contents
  SPO
MEDICAL INC.
 CONSOLIDATED
STATEMENT OF OPERATIONS
 U.S.
dollars in thousands (except share data)
 
 Year
      ended December 31Note
                
                
                2008
                
                
                2007Revenues
                
                
                
                
                $
                2,759
                
                
                $
                5,008Cost
      of revenues
                
                
                
                
                
                1,839
                
                
                
                2,447Gross
      profit
                
                
                
                
                
                920
                
                
                
                2,561Operating
      expensesResearch
      and development
                
                
                
                
                
                1,179
                
                
                
                1,198Selling
      and marketing
                
                
                
                
                
                567
                
                
                
                675General
      and administrative
                
                
                
                
                
                1,614
                
                
                
                1,450Re-organization
      expenses
                
                
                14
                
                
                
                81
                
                
                
                -Total
      operating expenses
                
                
                
                
                
                
                3,441
                
                
                
                3,323Operating
      loss
                
                
                
                
                
                
                2,521
                
                
                
                762Financial
      expenses, net
                
                
                15
                
                
                
                680
                
                
                
                842Net
      Loss for the year
                
                
                
                
                
                $
                3,201
                
                
                $
                1,604Basic
      and diluted loss per ordinary share
                
                
                
                
                
                $
                0.13
                
                
                $
                0.08Weighted
      average number of shares outstanding used incomputation
      of basic and diluted loss per share
                
                
                
                
                
                
                24,650,271
                
                
                
                21,099,367
  The
accompanying notes to these financial statements are an integral part
thereof.
  F-5
 Table of Contents
 
 SPO MEDICAL INC.
 STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIENCY
 U.S.
dollars in thousands (except share data)
 
 Share
      capital
                
                
                Additional
                  paid-in
                  capital
                
                
                Accumulated
      deficit
                
                
                TotalBalance
      as of January 1, 2007
                
                $
                193
                
                
                $
                9,954
                
                
                $
                (11,049
                )
                
                $
                (902
                )Issuance
      of stock capital, net
                
                
                14
                
                
                
                1,169
                
                
                
                
                
                
                
                1,183Exercise
      of stock options
                
                
                2
                
                
                
                8
                
                
                
                
                
                
                
                10Benefit
      on warrants issued in connection with credit line
                
                
                
                
                
                
                19
                
                
                
                
                
                
                
                19Benefit
      resulting from changes to warrant terms
                
                
                
                
                
                
                41
                
                
                
                
                
                
                
                41Issuance
      of ordinary shares upon exercise of warrants and conversion of
      loans
                
                
                6
                
                
                
                510
                
                
                
                
                
                
                
                516Amortization
      of deferred stock-based compensation related to options granted to
      employees
                
                
                
                
                
                
                110
                
                
                
                
                
                
                
                110Amortization
      of deferred stock-based compensation related to options granted to
      directors
                
                
                
                
                
                
                58
                
                
                
                
                
                
                
                58Amortization
      of deferred stock-based compensation related to options granted to
      consultants
                
                
                
                
                
                
                35
                
                
                
                
                
                
                
                35Net
      Loss
                
                
                
                
                
                
                
                
                
                
                (1,604
                )
                
                
                (1,604
                )Balance
      as of December 31, 2007
                
                $
                215
                
                
                $
                11,904
                
                
                $
                (12,653
                )
                
                $
                (534
                )Issuance
      of ordinary stock upon conversion of loans and accrued
      interest
                
                
                10
                
                
                
                512
                
                
                
                
                
                
                
                522Issuance
      of stock capital, net
                
                
                8
                
                
                
                549
                
                
                
                
                
                
                
                557Issuance
      of ordinary stock to service providers
                
                
                9
                
                
                
                356
                
                
                
                
                
                
                
                365Issuance
      of ordinary stock on cancellation of distribution
agreement
                
                
                4
                
                
                
                481
                
                
                
                
                
                
                
                485Benefit
      on issuance of warrants in connection with conversion of loans and accrued
      interest
                
                
                
                
                
                
                105
                
                
                
                
                
                
                
                105Amortization
      of deferred stock-based compensation related to options granted to
      employees
                
                
                
                
                
                
                249
                
                
                
                
                
                
                
                249Issuance
      of ordinary stock in consideration of unpaid legal fees
                
                
                2
                
                
                
                28
                
                
                
                
                
                
                
                30Benefit
      on issuance of options  and re-pricing of options granted to
      directors
                
                
                
                
                
                
                10
                
                
                
                
                
                
                
                10Benefit
      on issuance of penny warrants to service providers
                
                
                
                
                
                
                47
                
                
                
                
                
                
                
                47Net
      Loss
                
                
                
                
                
                
                
                
                
                
                (3,201
                )
                
                
                (3,201
                )Balance
      as of December 31, 2008
                
                $
                248
                
                
                $
                14,241
                
                
                $
                (15,854
                )
                
                $
                (1,365
                )
 
 The
accompanying notes to these financial statements are an integral part
thereof.
  F-6
 Table of Contents
  MEDICAL INC.
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 U.S.
dollars in thousands (except share data)
  Year ended December
      31,2008
                
                
                2007Cash
      Flows from Operating ActivitiesNet
      Loss for the period
                
                $
                (3,201
                )
                
                $
                (1,604
                )Adjustments
      to reconcile loss to net cash used in operating
activities:Depreciation
                
                
                41
                
                
                
                31Stock-based
      compensation expenses
                
                
                672
                
                
                
                224Amortization
      of loan discounts
                
                
                49
                
                
                
                491Increase
      in accrued interest payable on loans
                
                
                124
                
                
                
                154Benefit
      resulting from changes to warrant terms
                
                
                105
                
                
                
                41Revaluation
      of loans
                
                
                -
                
                
                
                112Changes
      in assets and liabilities:Decrease
      (Increase) in trade receivables
                
                
                659
                
                
                
                (315
                )Decrease  in
      prepaid expenses and other receivables
                
                
                88
                
                
                
                130Decrease
      (Increase) in inventories
                
                
                231
                
                
                
                (270
                )Increase
      (decrease)  in accounts payable
                
                
                (278
                )
                
                
                88Increase
      in accrued severance pay, net
                
                
                89
                
                
                
                11Increase
      in other creditors
                
                
                -
                
                
                
                90Increase
      in accrued expenses and other liabilities
                
                
                263
                
                
                
                258Net
      cash used in operating activities
                
                
                (1,158
                )
                
                
                (559
                )Cash
      Flows from Investing ActivitiesDecrease
      (increase) in long-term deposits
                
                
                3
                
                
                
                (4
                )Sale
      of property and equipment
                
                
                -
                
                
                
                1Purchase
      of property and equipment
                
                
                (53
                )
                
                
                (103
                )Net
      cash used in investing activities
                
                
                (50
                )
                
                
                (106
                )Cash
      Flows from Financing ActivitiesIssuance
      of stock capital
                
                
                557
                
                
                
                1,183Issuance
      of stock capital upon exercise of options
                
                
                -
                
                
                
                10Repayment
      of short-term loans
                
                
                (328
                )
                
                
                (122
                )Net
      cash provided by financing activities
                
                
                229
                
                
                
                1,071Increase
      (decrease) in cash and cash equivalents
                
                
                (979
                )
                
                
                406Cash
      and cash equivalents at the beginning of the year
                
                
                1,242
                
                
                
                836Cash
      and cash equivalents at the end of the year
                
                $
                263
                
                
                $
                1,242Non
      cash transactionsIssuance
      of ordinary stock on settlement of distribution agreement
                
                $
                485
                
                
                $
                -Conversion
      of loan notes into stock capital
                
                $
                522
                
                
                $
                368
  The
accompanying notes to these financial statements are an integral part
thereof.
  F-7
 Table of Contents
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      1
                GENERAL
 
 SPO
Medical Inc. (hereinafter referred to as "SPO" or the "Company") is engaged in
the design, development and marketing of non-invasive pulse oximetry
technologies to measure blood oxygen saturation and heart rate. The applications
are marketed, in the following sectors; professional medical care, homecare,
sports, safety and search & rescue.
 
 The
Company was originally incorporated under the laws of the State of Delaware in
September 1981 under the name "Applied DNA Systems, Inc." On November 16, 1994,
the Company changed its name to "Nu-Tech Bio-Med, Inc." On December 23, 1998,
the Company changed its name to "United Diagnostic, Inc." 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, 2008, resulted in a net loss of $3,201 and the
Company’s balance sheet reflects a net stockholders’ deficit of $1,365. The
Company’s ability to continue operating as a “going concern” is dependent on its
ability to raise sufficient additional working capital. As disclosed in previous
filings with the Securities and Exchange Commission, management has been
attempting to raise capital from current and potential stockholders and plans to
continue these efforts. Pending the raise of additional capital, and in an
attempt to conserve the cash resources, the Company has significantly reduced
its head count and curtailed its product design, development and marketing
efforts and reduced the manufacturing operations. Failure to raise additional
cash may require the Company to carry out further cost cutting measures,
including the laying off of additional employees.
  F-8
 Table of Contents
 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
 
 In
accordance with Statement of Financial Accounting Standards (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, 2008, no impairment losses have been
recorded.
  F-9
 Table of Contents
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      3
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 F.
                Revenue
      recognition:
 
 The
Company generates its revenues mainly from sales of its products. Revenues are
recognized when delivery has occurred, persuasive evidence of an arrangement
exists, the vendor’s fee is fixed or determinable, no further obligation exists
and collection is probable and there are no remaining significant obligations.
Delivery is considered to have occurred upon shipment from the Company’s
distribution centers to the reseller. All of the Company’s products that are
sold through reseller agreements are non-exchangeable, non refundable and non
returnable. Accordingly the resellers are considered end users.
 
 G.
                Allowance
      for doubtful accounts:
 
 The
allowance for doubtful accounts is computed mainly on the basis of accounts
whose collectability, in the Company’s estimation, is uncertain. The related
expenses are recorded under general and administrative expenses.
 
 H.
                Inventory:
 
 The
Company and its subsidiaries periodically evaluate the quantities on hand
relative to current and historical selling prices and historical and projected
sales volume. Based on this evaluation, an impairment charge is recorded when
required to write-down inventory to its market value.
 Inventories
are stated at the lower of cost or market. Cost is determined as
follows:
 Raw
materials, components and finished products - on the FIFO basis.
 Work-in-process
- on the basis of direct manufacturing costs
 
 I.
                Research
      and development costs:
 
 Research and development costs, net of
government grants and participation by others, are charged to expenses as
incurred.
 
 J.
                Income
      taxes:
 
 The
Company accounts for income taxes in accordance with 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.
 
 K.
                Fair
      value of financial instruments:
 
 The
financial instruments of the Company consist mainly of cash and cash
equivalents, short-term investments, trade receivables, accounts payable and
short-term loans. In view of their nature, the fair value of the Company’s
financial instruments is usually identical or close to their carrying
value.
 
 F-10
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
  
 NOTE
      3
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 L.
                Concentrations
      of credit risk:
 
 Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents. The majority of the
Company’s cash and cash equivalents are invested in US dollar deposits.
Management believes that the financial institutions that hold the Company’s
investments are financially sound, and accordingly, minimal credit risk exists
with respect to these investments. Exposure to credit risk is also resulting
from economic factors affecting our trading partners. The factors which affect
the fluctuations in the company’s provisions for bad debts and write offs of
uncollectible accounts include the financial health and economic environment of
the customer. The company identifies the credit exposure and then makes specific
provisions.
 
 M.
                Stock-based
      compensation:
 
 Effective
January 1, 2006, the Company adopted 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 31,2008
                
                
                2007Cost
      of revenues
                
                $
                5
                
                
                $
                7Research
      and development, net
                
                
                21
                
                
                
                21Selling
      and marketing
                
                
                42
                
                
                
                48General
      and administrative
                
                
                179
                
                
                
                127Re-organization
      expenses
                
                
                12
                
                
                
                -$
                259
                
                
                $
                203
 
 Share-based
compensation cost relating to stock options recognized in 2007 and 2008 is based
on the value of the portion of the award that is ultimately expected to vest.
SFAS No. 123R requires forfeitures to be estimated at the time of grant in
order to estimate the portion of the award that will ultimately vest. Such
portion is currently estimated at 0%, based on the Company's historical rates of
forfeiture.
 
 Under SFAS 123, the fair market value of option
grants was estimated on the date of grant using the “Black-Scholes option
pricing” method with the following weighted-average assumptions: (1) expected
life of 3.5 or 10 years (as per option's terms); (2) dividend yield of 0% (3)
expected volatility of 100% and (4) risk-free interest rate of approximately
1.8%.
  F-11
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE
      3
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 N.
                  Effects
      of recently issued accounting
standards:
 
 (1)
                In
      May 2008, the Financial Accounting Standards Board (FASB) issued FASB
      Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt
      Instruments That May Be Settled in Cash upon Conversion (Including Partial
      Cash Settlement)” (“APB 14-1”). APB 14-1 requires the issuer to separately
      account for the liability and equity components of convertible debt
      instruments in a manner that reflects the issuer’s nonconvertible debt
      borrowing rate. The guidance will result in companies recognizing higher
      interest expense in the statement of operations due to amortization of the
      discount that results from separating the liability and equity components.
      APB 14-1 will be effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within
      those fiscal years. The Company is currently assessing the impact of APB
      14-1 on its consolidated financial
statements.
 
 (2)
                In
      June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
      “Determining Whether Instruments Granted in Share-Based Payment
      Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF
      03-6-1 establishes that unvested share-based payment awards that contain
      nonforfeitable rights to dividends or dividend equivalents (whether paid
      or unpaid) are participating securities as defined in Emerging Issues Task
      Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class
      Method under FASB Statement No. 128”, and should be included in the
      computation of earnings per share pursuant to the two-class method as
      described in Statement of Financial Accounting Standards No. 128,
      “Earnings per Share”. FSP EITF 03-6-1 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those years. All prior-period earnings per share
      data presented shall be adjusted retrospectively to conform to the
      provisions of FSP EITF 03-6-1. Early application is not permitted. The
      Company is currently evaluating the impact that the adoption of FSP EITF
      03-6-1 will have on its consolidated financial statements but believes
      that its effect will be immaterial due to immaterial use of
      instrumentswithinthe scope of the
      FSP.
 
 F-12
 Table of Contents
 
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
  NOTE
      3
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 Effects
of recently issued accounting standards (Cont.)
 
 (3)
                In
      May 2008, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles.
      SFAS No. 162 identifies the sources of accounting principles and provides
      entities with a framework for selecting the principles used in preparation
      of financial statements that are presented in conformity with GAAP. The
      current GAAP hierarchy has been criticized because it is directed to the
      auditor rather than the entity, it is complex, and it ranks FASB
      Statements of Financial Accounting Concepts, which are subject to the same
      level of due process as FASB Statements of Financial Accounting Standards,
      below industry practices that are widely recognized as generally accepted
      but that are not subject to due process. The FASB believes the GAAP
      hierarchy should be directed to entities because it is the entity (not its
      auditors) that is responsible for selecting accounting principles for
      financial statements that are presented in conformity with GAAP. The
      adoption of FASB 162 is not expected to have a material impact on the
      Company's financial position.
 
 (4)
                In
      June 2008, the FASB Emerging Items Task Force reached a consensus on EITF
      Issue No. 07-5, “Determining Whether an Instrument (or an Embedded
      Feature) Is Indexed to an Entity’s Own Stock". Consensus was reached on
      the following three issues:
 1). The
way an entity should evaluate whether an instrument (or embedded feature) is
indexed to its own stock.
 2.) The
way the currency in which the strike price of an equity-linked financial
instrument (or embedded equity-linked feature) is denominated affects the
determination of whether the instrument is indexed to an entity’s own
stock.
 3.)  The
way an issuer should account for market-based employee stock option valuation
instruments.
 
 This
consensus will affect entities with (1) options or warrants on their own shares
(not within the scope of Statement 150, including market-based employee stock
option valuation instruments; (2) forward contracts on their own shares,
including forward contracts entered into as part of an accelerated share
repurchase program; and (3) convertible debt instruments and convertible
preferred stock. Also affected are entities that issue equity-linked financial
instruments (or financial instruments that contain embedded equity-linked
features) with a strike price that is denominated in a foreign
currency.
 
 The
consensus is effective for fiscal years (and interim periods) beginning after
December 15, 2008. The consensus must be applied to outstanding instruments as
of the beginning of the fiscal year in which the issue is adopted as a
cumulative-effect adjustment to the opening balance of retained earnings for
that fiscal year. Early application is not permitted.
  The
Company is currently evaluating the effect of EITF 07-5 and has not yet
determined the impact of the consensus on its financial position or results of
operations.
  F-13
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      3
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 N.
                Basic
      and diluted net loss per share:
 
 Basic and
diluted net loss per share is presented in accordance with Statement of
Accounting Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
for all periods presented. Basic and diluted net loss per share of Common stock
was determined by dividing net loss attributable to Common stock holders by
weighted average number of shares of Common stock outstanding during the period.
Diluted net loss per share of Common stock is the same as basic net loss per
share of Common stock for all periods presented as the effect of the Company's
potential additional shares of Common stock were anti-dilutive.
 
 All
outstanding stock options and warrants have been excluded from the calculation
of the diluted net loss per share of Common stock because all such securities
are anti-dilutive since the Company reported losses for those years. The total
number of shares related to the outstanding options and warrants excluded from
the calculations of diluted net loss per share was 4,391,844 and 4,562,100
for the years ended December 31, 2008 and 2007, respectively.
 
 NOTE 4
                TRADE RECEIVABLES,
  NET
 
 December
      31,2008
                
                
                2007Trade
      receivables
                
                $
                427
                
                
                $
                883Allowance
      for of doubtful accounts
                
                
                203
                
                
                
                -trade
      receivables, net
                
                
                224
                
                
                
                883
 
 NOTE
      5
                INVENTORIES
 
 December
      31,2008
                
                
                2007Raw
      Materials
                
                $
                372
                
                
                $
                771Work
      In Process
                
                
                135
                
                
                
                77Finished
      Goods
                
                
                343
                
                
                
                233$
                850
                
                
                $
                1,081
 
 Write-down
of inventory of raw materials was recorded as a cost of goods sold and amounted
to $295, for the year ended December 31, 2008. There have been no charges in prior
years.
 
 F-14
 Table of Contents
 
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE 6
                PROPERTY AND
  EQUIPMENT
  December
      31,2008
                
                
                2007Cost:Computer
      and peripheral equipment
                
                $
                270
                
                
                $
                216Leasehold
      Improvement
                
                
                31
                
                
                
                31Office
      furniture and equipment
                
                
                29
                
                
                
                28$
                330
                
                
                $
                275Accumulated
      
      depreciation:Computer
      and peripheral equipment
                
                $
                123
                
                
                $
                86Leasehold
      Improvement
                
                
                6
                
                
                
                2Office
      furniture and equipment
                
                
                12
                
                
                
                10$
                141
                
                
                $
                98Property
      and Equipment, net
                
                $
                189
                
                
                $
                177
  Depreciation
expenses for the years ended December 31, 2008 and 2007 amounted to $41 and $31
respectively.
 
 NOTE
      7
                SHORT-TERM
      LOANS
 
 A.In December 2005 the
Company completed the private placement to certain accredited investors that
commenced in April 2005 for the issuance of up to $1,544 of units of its
securities, with each unit comprised of (i) the Company’s 18 month 6% promissory
note (collectively, the "April 2005 Notes") and (ii) three year warrants to
purchase up to such number of shares of the Company’s Common Stock as are
determined by the principal amount of the Note purchased by such investor
divided by $ 0.85 (collectively the "April 2005 Warrants"). The Company and the
holders of $1,464 in principal amount of the April 2005 Notes subsequently
agreed to (a) extend the maturity term of the April 2005 Notes through March 26,
2008, (b)extend  the exercise period of the April 2005 Warrants from
three to five years with an expiration date of September 26, 2010 and adjust the
per share exercise price thereof to $0.60 and (c) increase the interest rate on
the amounts outstanding under the April 2005 Notes to 8% per annum, effective
July 12, 2006. Holders of notes in the principal amount of $125 that have agreed
to the extension of the maturity date on the notes, have since exercised their
warrantsand
converted the interest accrued there on into Common Stock; a holder of an April
2005 Notes in the principal amount of $50 was repaid.  The Amendment
also provided that if the Company subsequently issue shares of its Common Stock
at an effective per share exercise price less than that of the adjusted per
share exercise price of the April 2005 Warrants during the adjusted exercise
period, then the exercise price thereof is to be reduced to such lower exercise
price, except for certain specified issuances. All of the extended notes matured
on March 26, 2008.
  F-15
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE
      7
                  SHORT-TERM
      LOANS (Cont.)
 
 In March
2008, the Company offered to the holders of the April 2005 Notes to apply the
amounts payable to them on the April 2005 Notes to the exercise price of the
April 2005 Warrants, thereby exercising these warrants, and to convert into, the
Company’s Common Stock the accrued interest on the 2005 Notes at a per share
conversion price of $0.60. Note holders who accepted this offer were issued new
warrants for such number of shares of Common Stock equal to 25% of the number
shares issued to them upon exercise of their existing warrants and conversion of
the interest accrued on the note. The new warrants are exercisable over three
years at an exercise price of $0.60. In the year ended December 31, 2008, the
holders of approximately $439 in principal amount have agreed to apply the
principal amount owed to them to the exercise price of the April 2005 Warrants.
As such, approximately $520 in amounts owed under the 2005 Notes were converted
into equity and, accordingly  an aggregate of 866,528 shares of our
Common Stock was issued. Under the terms of the offer, new warrants for 216,636
share of the Company’s Common stock have been issued to these April 2005 Note
holders, exercisable over three years from the date of issuance. Three note
holders of the principal amount of $200 have agreed to extend their loan for a
further 24 months and the Company agreed to pay to them the interest accrued
through the original maturity date of March 26, 2008 in the aggregate amount of
$40. Under the terms of the agreement with the extending note holders, the
Company will issue to the extending holders new warrants for an aggregate of
50,000 shares of the Company’s Common stock, which warrants are exercisable for
three years from issuance and contain the same operative terms, including
exercise price, as the warrants that were originally issued in connection with
the issuance of the April 2005 Notes. As of December 31, 2008, there remains
outstanding on the April 2005 Notes principal and accrued interest in the
aggregate amount of $860.
 
 B. In July 2006, the
Company commenced a private placement of units of its 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, pursuant to which the
Company raised $550 (the maximum amount that could be raised from this
offering). Under the terms of the offering, the principal and accrued interest
was due in one balloon payment at the end of the twelve month period. Each
purchaser of the notes received warrants, exercisable over a period of two years
from the date of issuance, to purchase 16,250 shares of Common Stock for each
$25 of principal loaned, at a per share exercise price equal to the lower of
$1.50 or 35% less than any the offering price at an initial public offering of
the Company's Common Stock during the warrant exercise period. During 2007, the
Company offered to the holders of the notes to convert the principal and accrued
interest into shares of the Company’s Common Stock at a per share conversion
price of $0.90. The holders of $238 of the principal amount agreed to convert
the principal and accrued interest thereon into shares of the Company’s Common
Stock. In 2007, the Company repaid to one note holder the principal amount of
$75 and the accrued interest thereon. As of the December 31, 2008, approximately
$278 in respect of the principal and accrued interest on these notes remains
outstanding.
  F-16
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE 8
                EMPLOYEES AND PAYROLL
      ACCRUALS
 
 The
Company’s liability to its employees in respect of salaries and employment
benefits. The balance as at December 31, 2008 also includes accruals for
salaries and benefits thereon that have been deferred by the Company since July
2008.
 
 NOTE
      9
                  OTHER
      CREDITORS
 
 In April
2008 the Company entered in to a settlement agreement with a distributor that
had originally been retained by it to distribute one of its future products.
Pursuant to such agreement, the Company received advance payments in the amount
of $485 in several installments between June 2006 and January 2007. This amount
was included under Other Creditors in the year ended December 31, 2007. Under
the terms of the settlement of this outstanding amount, in April 2008, the
Company issued to the distributor 400,000 shares of the Company’s common stock,
par value $0.01 per share.
 
 NOTE
      10
                ACCRUED
      EXPENSES AND OTHER LIABILITIES
 
 December
      31,2008
                
                
                2007Accrued
      expenses pre merger
                
                $
                263
                
                
                $
                263Royalties
      to the office of the Chief Scientist
                
                
                310
                
                
                
                317Other
      accrued expenses
                
                
                212
                
                
                
                170$
                785
                
                
                $
                750
 
 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. These policies are assets of the Company and, under labor agreements,
subject to certain limitations, they may be transferred to the ownership of the
beneficiary employees. Severance
pay expenses for the years ended December 31, 2008 and 2007 were $178 and $115
respectively.
  F-17
 Table of Contents
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      12
                PRIVATE
      PLACEMENTS
 
 On July
5, 2007, the Company privately placed with an institutional investor 1,444,444
shares of its Common Stock for aggregate gross proceeds of $1,300. The Shares
were placed pursuant to a Confidential Private Placement Agreement between the
Company and the investor entered into as of July 5, 2007. In connection with the
placement of the shares, the Company paid to a placement agent a cash fee of
$117.
 
 In March,
2008 the Company issued to a service provider 75,000 restricted shares in
consideration of services rendered. The service provider is entitled to an
additional 75,000 shares of Common Stock upon the occurrence of certain
specified events. In connection therewith, on June 23, 2008 the Company issued
to the service provider an additional 9,375 restricted shares in respect of this
commitment. The Company has no further commitments in respect of this
agreement.
 
 In March
2008, the Company received from an investor gross proceeds of $250 and, in
connection therewith, in May 2008 the Company issued to such investor 312,500
shares of its Common Stock and warrants, exercisable through the third
anniversary of issuance, to purchase an additional 156,250 shares of Common
Stock at a per share exercise price of $0.80. The net proceeds from this
financing were $223 after cash fee paid to the placement agent and other related
expenses.
 
 In April
2008 the Company issued to three designees of a service provider 100,000
restricted shares of Common Stock in consideration for investor relations
services rendered. Subject to certain events being achieved by the service
provider, the Company originally committed to issue up to an additional 300,000
restricted shares of Common Stock. On July 7, 2008, the Company signed an
amendment to the agreement with this service provider reducing the additional
commitment to 100,000 additional restricted shares and, in connection therewith,
on July 23, 2008, the Company issued to two designees an aggregate of 50,000
restricted shares.
 
 In April
2008 the Company entered in to a settlement agreement with a company that had
originally been retained by it to distribute one of its future products.
Pursuant to such agreement, the Company received advance payments in the amount
of $485 in several installments between June 2006 and January 2007. This amount
has been recorded in Other Creditors and in respect of the full settlement of
this outstanding amount the Company issued to the distributor 400,000 shares of
the Company’s common stock, par value $0.01 per share.
 
 In May
2008, the Company received from certain investors gross proceeds of $365 in
consideration for the purchase of the Company’s Common Stock. The net proceeds
from this financing were $334 after cash fees paid to the placement agent and
other related expenses. In connection therewith, in June 2008, the Company
issued to such investors an aggregate of 456,250 shares of its Common Stock and
warrants, exercisable through the third anniversary of issuance, to purchase up
to an additional 228,125 shares of its Common Stock at a per share exercise
price of $0.80.
 
 In
September 2008, the Company entered in to an agreement with a consultant to
render consulting services. Under this agreement the Company issued to the
consultant 150,000 shares of the Company’s common stock, par value $0.01 per
share shares during the period September through November 2008.
 
 In October 2008, the Company entered in to an agreement
with a service provider and issued to certain designees of the service provider
596,666 restricted shares in consideration for the services
rendered.
  In
December 2008 the Company entered in to an agreement with its lawyers, under the
agreement, the Company issued to its lawyers  230,000 shares of the
Company’s common stock, par value $0.01 per share. in lieu of outstanding fees
owed to them.
 
 F-18
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE
      13
                STOCKHOLDER'S
      DEFECIENCY
 
 A.
                Equity
      Incentive Plans
 
 In April
2005, the Company adopted the 2005 Equity Incentive Plan (the "2005 Plan"). A
total of 1.75 million shares of Common Stock were originally reserved for
issuance under the 2005 Plan. The 2005 Plan provides for the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards
and performance units. The 2005 Plan also permits cash payments under certain
conditions. The compensation committee of the Board of Directors is responsible
for determining the type of award, when and to who awards are granted, the
number of shares and the terms of the awards and exercise prices. The options
are exercisable for a period not to exceed ten years from the date of grant.
Vesting periods range from immediately to four years. Under the 2005 plan
options granted expire no later than the tenth anniversary from the date of the
grant.
 
 In April
2005, the Company adopted the 2005 Non-Employee Directors Stock Option Plan (the
"2005 Directors Plan") providing for the issuance of up to 400,000 shares of
Common Stock to non-employee directors. Under the 2005 Directors Plan, only
non-qualified options may be issued and they will be exercisable for a period of
up to six years from the date of grant.
 
 With
respect to compensation expenses recorded in 2008 and 2007, relating to options
granted through December 31 2008, the Company applied the provisions of SFAS
No. 123(R) and SAB No. 107, which require employee share-based equity
awards to be accounted for under the fair value method, SFAS No. 123(R) requires
the use of an option pricing model for estimating fair value, which is then
amortized to expense over the service periods.
  During
2008 and 2007 the Company recorded Stock-based compensation expenses in the
amount of $259 and $203, respectively.
 
 The
following is a summary of the Company’s outstanding options and
warrants:
  F-19
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE
      13
                STOCKHOLDER'S
      DEFECIENCY (Cont).
 
 B.
                Stock
      Options:
 
 As of
December 31, 2008, options for an aggregate of 50,000 shares of Common Stock
remain available for future grants under the Company’s 2005 Plan and 2005
Directors Plan.
 
 December
      31, 2008Amount
      of
                  Options
                
                
                Weighed
      Average Exercise PriceOutstanding
      at the beginning of the year (1)
                
                
                1,080,000
                
                
                $
                0.64Granted
      (2)
                
                
                1,007,000
                
                
                
                0.20forfeited
                
                
                (187,000
                )
                
                
                0.60Outstanding
      at the end of the year
                
                
                1,900,000
                
                
                
                0.41Exercisable
      at the end of the year
                
                
                1,863,333
                
                
                
                0.41
 (1)
                Of
      which 50,000 options granted to non-executive directors were re-priced
      during 2008(2)
                Of
      which 200,000 were granted to the Chief Executive Officer and 349,000 to
      the Chief  Financial
Officer.
 
 The
options outstanding as of December 31, 2008, have been separated into ranges of
exercise price as follows:
 
 Range
      of exercise price
                
                
                Options
      outstanding as of December 31, 2008
                
                
                Weighted
      average remaining contractual life (years)
                
                
                Weighted
      average exercise price
                
                
                Options
      exercisable
                    as
      of
                    December
      31, 2008
                
                
                Weighted
      average exercise price of options exercisable$
                0.05-0.055
                
                
                
                100,000
                
                
                
                2.32
                
                
                $
                0.05
                
                
                
                100,000
                
                
                $
                0.055$
                0.13-0.15
                
                
                
                957,000
                
                
                
                9.58
                
                
                $
                0.13
                
                
                
                957,000
                
                
                $
                0.13$
                0.60
                
                
                
                533,000
                
                
                
                6.51
                
                
                $
                0.60
                
                
                
                533,000
                
                
                $
                0.60$
                0.78
                
                
                
                100,000
                
                
                
                9.29
                
                
                $
                0.78
                
                
                
                100,000
                
                
                $
                0.78$
                0.85
                
                
                
                110,000
                
                
                
                5.14
                
                
                $
                0.85
                
                
                
                90,000
                
                
                $
                0.85$
                1.85
                
                
                
                100,000
                
                
                
                7.80
                
                
                $
                1.85
                
                
                
                83,333
                
                
                $
                1.851,900,000
                
                
                
                7.97
                
                
                $
                0.41
                
                
                
                1,863,333
                
                
                $
                0.41
 
 F-20
 Table of Contents
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      13
                STOCKHOLDER'S
      EQUITY (Cont.)
 
 C.
                Stock
      warrants
 
 The
Company has the following warrants outstanding:
 
 Issuance
      date
                
                
                
                
                
                number
      of warrants issued
                
                
                Exercise
      price
                
                
                Exercisable
                    as
      of
                    December
      31, 2008
                
                Exercisable
      through2005-2008
                
                
                
                (1)
                
                
                
                1,234,308
                
                
                
                0.01
                
                
                
                1,234,308
                
                November
      2010-April 2015September
      2006
                
                
                
                (2)
                
                
                
                83,333
                
                
                
                0.36
                
                
                
                83,333
                
                August
      2009April
      2006
                
                
                
                (2)
                
                
                
                87,500
                
                
                
                0.60
                
                
                
                87,500
                
                November
      2009-September 2010March
      2008
                
                
                
                (3)
                
                
                
                1,816,636
                
                
                
                0.60
                
                
                
                1,816,636
                
                September
      2010March-June
      2008
                
                
                
                (4)
                
                
                
                384,375
                
                
                
                0.80
                
                
                
                384,375
                
                March-
      June 2011February
      2006
                
                
                
                (5)
                
                
                
                60,000
                
                
                
                0.85
                
                
                
                60,000
                
                January
      2009March-September
      2007
                
                
                
                (6)
                
                
                
                60,000
                
                
                
                1.50
                
                
                
                60,000
                
                March
      2010 -September 2011
 
 1)
                Penny
      warrants issued to an employee (446,383) and to service providers 787,925
      of which 381,000 were issued in
2008.
 2)
                Warrants
      issued to service providers
 3)
                Warrants
      issued to investors in the private placement in connection with the April
      2005 Notes. The amount is comprised of
:
 ·
                1,550,000
      warrants granted according to original agreement on the
      principal
 ·
                216,636
      granted to note holders who signed the 2nd amendment, converted principal
      & accrued interest received 25% additional
  warrants
 ·
                50,000
      warrants granted to loaners who extended the Note and got paid for accrued
      interest  received 15% additional warrants on the principal
      loan
 The
amount excludes 335,303 warrants, resulting from accrued interest through the
end of the period of the notewhich at the holders’
election can be converted to warrants
 4)
                Warrants
      issued to investors in private placement during 2008 (see also note
      12)
 5)
                Warrants
      issued to a lender
 6)
                Warrants
      Issued  to a service provider (40,000) and in connection with
      line of credit (20,000)
 
 D.
                Dividends
 
 The
Company does not intend to pay cash dividends in the foreseeable
future.
 
 F-21
 Table of Contents
 
 SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 
 NOTE
      14
                RE
      ORGANIZATION EXPENSES
                  
                  Due
      to the Company’s ongoing losses and reduction in cash resources, the
      Company initiated a reorganization process in an attempt to cut the
      Company’s operating costs significantly and better align the Company’s
      operations with its current business model.  Under this
      restructuring plan, the Company reduced the number of full time employees
      in the company and recognized $81 in related
  costs
 
 NOTE
      15
                FINANCIAL
      EXPENSES
 
 Financial
expenses, for the years 2008 and 2007 were $680 and $842. The principal expenses
comprising the financial expenses during 2008 and 2007 were:- (i) non cash
amortization of loan discounts  and issuance of shares to financial
service provider - $257 and $ 666 respectively, (ii)exchange rate differences
caused by fluctuations in the exchange rate with the New Israeli Shekel (“NIS”)
on  liabilities denominated in NIS held by the subsidiary- $187 and
$20, respectively (iii)  one time non cash expenses relating to the
issue of warrants in 2008 for the conversion to equity of certain loan notes and
accrued interest thereon - $105 in 2008 and (vi) interest in respect of debt
instruments issued by the Company between April 2005 and October 2006 - $123 and
$154 respectively
  NOTE
      16
                DEFERRED
      TAXES
 
 A.
                Measurement
      of taxable income under the Income Tax Law (Inflationary Adjustments),
      1985:
 
 The
results for tax purposes of the Israeli subsidiary are measured in terms of
earnings in NIS, after certain adjustments for increases in the Israeli Consumer
Price Index ("CPI"). As explained in Note 3c, the functional currency is the
U.S. dollar. The difference between the annual change in the Israeli CPI and in
the NIS/dollar exchange rate causes a further difference between taxable income
and the income before taxes presented in the financial statements. In accordance
with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional currency and the tax bases
of assets and liabilities at the Israeli subsidiary.
 
 B.
                Deferred
      income taxes reflect the net tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial reporting
      purposes and the amounts used for income tax
  purposes.
 
 In
accordance with SFAS No. 109, the components of deferred income taxes are as
follows:
 
 December
      31,2008
                
                
                2007Tax
      on net operating losses carryforward
                
                $
                2,305
                
                
                $
                1,559Less
      - valuation allowance
                
                
                (2,305
                )
                
                
                (1,559
                )-
                
                
                
                -
 
 C.
                The
      Company has provided valuation allowances in respect of deferred tax
      assets resulting from tax loss carryforward and other temporary
      differences. Management currently believes that since the Company has a
      history of losses it is more likely than not that the deferred tax
      regarding the loss carryforward and other temporary differences will not
      be realized in the foreseeable
future.
  F-22
 Table of Contents
  SPO
MEDICAL INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 U.S.
dollars in thousands (except share data)
 NOTE
      16
                DEFERRED
      TAXES (Cont.)
 
 Net
operating loss carryforwards as of December 31, 2008 are as
follows:
 
 December
      31,2008
                
                
                2007Israel
                
                $
                6,622
                
                
                $
                4,263USA
                
                
                2,030
                
                
                
                1,542Total
                
                $
                8,652
                
                
                $
                5,805
  Net
operating losses in Israel may be carried forward indefinitely. Net operating
losses in the U.S. are available through 2033.
 
 NOTE
      17
                COMMITMENTS
      AND CONTINGENCIES
 
 Lease
Commitments
 
 Research
and development is carried out at the Company’s premises in Kiryat Malachi,
Israel, which are comprised of laboratory and development facilities covering an
area of 300 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 $2.3. The
administrative facilities in Israel are leased pursuant to a lease agreement of
approximate monthly rate of $0.7. The agreement has been renewed
until December 31, 2009. The Company has an option under the terms of lease, to
be released from the commitments of the lease at any time during the period of
the lease, providing it gives an advance notice period of three
months.
 
 Government of Israel
 
 The
Company’s wholly owned subsidiary, SPO Ltd., is committed to pay royalties to
the Office of the Chief Scientist of the Government of Israel (OCS”) on proceeds
from the sale of products, the research and development of which the OCS has
participated in by way of grants, up to the amount of 100%-150% of the grants
received plus interest at dollar LIBOR. The royalties are payable at a rate of
3% for the first three years of product sales and 3.5% thereafter. The total
amount of grants received or accrued, net of royalties paid or accrued, as of
December 31, 2008 was $992. The refund of the grants is contingent upon the
successful outcome of the research and development and the attainment of sales.
The Company has no obligation to refund these grants, if sales are not
generated. The financial risk is assumed completely by the OCS. The grants were
received from the OCS on a project-by-project basis. If the project fails the
Company has no obligation to repay any grant received for the specific
unsuccessful or aborted project. As of December 31, 2008 the Company has
provided for $310 (2007 - $317) in royalties from sales of its products. Owing
to the current financial situation of the Company, the Company has deferred
these payments under an informal agreement with the OCS.
  F-23