UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
MARK ONE:
         |X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGEACT OF 1934 for the Fiscal Year ended December 31, 2005

         |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: : 0-11772

                                SPO MEDICAL INC.
--------------------------------------------------------------------------------
        (Exact name of Small Business Issuer as specified in its chapter)

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

    21860 Burbank Blvd., North Building, Suite 380, Woodland Hills, CA 91367
                    (Address of Principal Executive Offices)

                                  818-888-4380
         (Small Business Issuer's Telephone Number, including Area Code)

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

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

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

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

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

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

      The issuer's revenues for the year ended December 31, 2005: $1,825,000

      As of December 31, 2005, there were 17,029,407 shares of the issuer's
common stock outstanding. The aggregate market value of the shares of the
issuer's common stock held by non-affiliates was approximately $15.7 million
based on the last reported sale price of $1.25 per share on March 30, 2006 as
quoted on the Pink Sheets.

      Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|

<PAGE>

                                SPO MEDICAL INC.
                         2005 FORM 10-KSB ANNUAL REPORT


                                TABLE OF CONTENTS

                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS............................................ 1

ITEM 2.    DESCRIPTION OF PROPERTY............................................15

ITEM 3.    LEGAL PROCEEDINGS..................................................16

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................16

                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........16

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........17

ITEM 7.    FINANCIAL STATEMENTS...............................................22

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE...........................................22

ITEM 8A.   CONTROLS AND PROCEDURES............................................23

ITEM 8B.   OTHER INFORMATION..................................................23

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..................23

ITEM 10.   EXECUTIVE COMPENSATION.............................................26

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           AND RELATED STOCKHOLDER MATTERS....................................28

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................30

ITEM 13.   EXHIBITS...........................................................31

ITEM 14.   PRINCIPAL ACCOUNTANT FEES & SERVICES...............................32


                                       i
<PAGE>

                           FORWARD LOOKING STATEMENTS

CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-KSB ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY. BECAUSE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER
THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY
TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

History

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

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


                                       1
<PAGE>

Business Overview

      Since its incorporation in August 1995, SPO Ltd. has been engaged in the
design, development and marketing of non-invasive pulse oximetry technologies to
monitor blood oxygen saturation and heart rate for a variety of markets,
including medical, homecare, sports and search & rescue. Pulse oximetry is a
non-invasive process used to measure blood oxygen saturation levels and is an
established procedure in medical practice.

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

Background

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

      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.


                                       2
<PAGE>

      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 :

      o     Blood pressure using reflectance oximetry
      o     Billirubin levels
      o     Monitoring glucose levels in blood
      o     Hemoglobin count in blood

Products

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

      PulseOx 5500TM -- a stand-alone commercial RPO spot check monitor for SpO2
and heart rate. The PulseOx 5500TM uses SPO patented technology to provide a
medical device which is easier to use for many patients and less expensive to
operate than any other device 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 markets' demand for a
lightweight, inexpensive monitor for measuring SpO2 and heart rate during
physically active and high-altitude activities. It offers the user a greater
ability to monitor these vital signs under motion and is less expensive than
most other available devices. The Check Mate was first introduced commercially
during third quarter of 2005. The Check Mate does not require FDA approval or
registration. It carries the CE and CSA mark for safety and audited
manufacturing processes.

Research & Development / Products Under Design and Development

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

      PulseOx 7500TM --a monitor for extended monitoring of SpO2 and heart rate
by means of RPO. It is being designed for maximum user comfort and ease-of-use.
It uniquely places the sensor at the base of the finger so it operates as a ring
sensor which is more comfortable for the user.

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

      Our research and development activities as well as product design
activities are primarily conducted through our research and development
subsidiary SPO Ltd. located in Israel. During our 2005 and 2004 fiscal years, we
expended approximately $629,000 and $448,000, respectively, on the research and
development.


                                       3
<PAGE>

Business Strategy

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

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

      o     Partner with highly qualified, focused companies, internationally.
            We intend to collaborate with leading medical device resellers
            capable of distributing the products to the target market. For
            instance, we currently sell the PulseOx 5500(TM) through reputable,
            established medical device distributors serving North American
            markets and the European, Asian and Latin American markets. Other
            medical products may be distributed by these and other distributors.
            We anticipate that our other consumer products, such as the Check
            Mate(TM), will be distributed by companies with access to its target
            market which includes sports enthusiasts. Finally, with medical and
            consumer products developed jointly with other companies, the most
            appropriate distribution channels will be used for each product and
            application.

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

Suppliers

      Our products are made of components which we manufacture or which are
usually available from existing and alternate sources of supply. Some of our
products are manufactured through agreements with unaffiliated companies. We
purchase certain components from single or preferred sources of supply. The use
of single or preferred sources of supply increases our exposure to price
increases and production delays.

      We outsource our primary manufacturing operations. We utilize contract
manufacturers that are generally ISO 9000 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.


                                       4
<PAGE>

Marketing and Sales Organization

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

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

Patents and Proprietary Information

      We currently rely on a combination of patent, trade secret, copyright and
trademark law, as well as non-disclosure agreements and invention assignment
agreements, to protect proprietary information. However, such methods may not
afford complete protection and there can be no assurance that other competitors
will not independently develop such processes, concepts, ideas and
documentation. We hold two 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 30, 2006, we employed 17 full-time employees, of which four
work out of our corporate offices in California and 13 out of facilities in
Israel. None of these employees is subject to collective bargaining agreements.

Competition

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

      There are number companies, some of which are substantially larger than we
are and with significantly more resources, are engaged in manufacturing
competing products. Our competition is primarily in the traditional medical
market. Our competitors include Nellcor, a unit of the Tyco Healthcare division
of Tyco International Ltd; Nonin Medical Inc. of Plymouth, Minnesota, a
privately owned company; and Smiths Medical PM Inc. of Waukesha, WI, which is
the designer, manufacturer, and distributor of the BCI(R) brand of patient
monitoring equipment which competes with the SPO PulseOx 5500TM units.


                                       5
<PAGE>

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. The PulseOx 5500TM is
subject to the FDA's standards and procedures for the manufacture of medical
devices and our facilities are subject to inspection by the FDA for compliance
with such standards and procedures.

      The FDA classifies each medical device into one of three classes depending
on the degree of risk associated with the device and the extent of control
needed to ensure safety and effectiveness. The Company's PulseOx 5500TM has been
classified by the FDA as Class II device and has secured a 510(k) pre-market
notification clearance before being introduced into the United States market.
For additional products, the process of obtaining 510(k) clearance typically
takes several months and may involve the submission of limited clinical data
supporting assertions that the product is substantially equivalent to an already
approved device or to a device that was on the market before the enactment of
the Medical Device Amendments of 1976.

      Every company that manufactures or assembles medical devices 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:

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

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

AVAILABLE INFORMATION

      Our Internet website is located at http://www.spomedical.com. This
reference to our Internet website does not constitute incorporation by reference
in this report of the information contained on or hyperlinked from our Internet
website and such information should not be considered part of this report.

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


                                       6
<PAGE>

                                  Risk Factors

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

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

      Our accumulated deficit was approximately $6,086,000 as at December 31,
2005. We are not currently profitable. 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 two products
that are commercially available. In order to achieve and maintain profitability
we must expand our existing product lines.

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

      We do not know whether additional financing will be available when needed,
or on terms favorable to our stockholders or us. We may raise any necessary
funds through public or private equity offerings, debt financings or additional
corporate collaboration and licensing arrangements. Any failure to achieve
adequate funding in a timely fashion would delay our development programs and
could lead to abandonment of one or more of our development initiatives. To the
extent we cannot obtain additional funding, our ability to continue to develop
and introduce products to market will be limited. Any additional equity
financing may be dilutive to stockholders, and debt and certain types of equity
financing, if available, may involve restrictive covenants or other provisions
that would limit how we conduct our business or finance our operations.

      WE ARE CURRENTLY DEPENDENT ON TWO 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 two pulse oximetry products for the
generation of revenues. These products were commercially introduced into the
market place in the fourth quarter of 2004. While our core technology has a
number of potentially beneficial uses, if that core technology is not widely
accepted in the marketplace, we currently do not have other commercialized
products to fall back on.


                                       7
<PAGE>

      We expect to begin commercial distribution of the PulseOx 7500TM, a
monitor for extended monitoring of SpO2 and heart rate by means of RPO which is
currently in late design/development stage, during the current fiscal year.
Commercial distribution of the PedOMetrixTM, a monitor being designed
specifically for the use with infants and also currently under development, is
expected to commence during the second quarter of 2006. However, potential
products that appear to be promising at any development stage may not reach the
market for a number of reasons. These reasons include the possibility that the
potential products may:

o     be found ineffective or cause harmful side effects;

o     fail to receive necessary regulatory approvals;

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

o     be difficult to manufacture on a large scale; or

o     be uneconomical or fail to achieve market acceptance.

If any of these potential problems occur, we may not successfully market these
products.

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

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

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

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

      o     that we, or any collaborative partner, will make timely filings with
            the FDA;
      o     that the FDA will act favorably or quickly on these submissions;
      o     that we will not be required to submit additional information or
            perform additional clinical studies;
      o     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
      o     that other significant difficulties and costs will not be
            encountered to obtain FDA clearance or approval.


                                       8
<PAGE>

      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.

      IN FOREIGN COUNTRIES, INCLUDING EUROPEAN COUNTRIES, WE ARE ALSO SUBJECT TO
GOVERNMENT REGULATION, WHICH COULD DELAY OR PREVENT OUR ABILITY TO SELL OUR
PRODUCTS IN THOSE 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 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 agencies. Failure to comply with these
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure to obtain premarket clearance or
premarket approval for devices, withdrawal of approvals previously obtained, and
criminal prosecution. The restriction, suspension or revocation of regulatory
approvals or any other failure to comply with regulatory requirements would
limit our ability to operate and could increase our costs.

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

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


                                       9
<PAGE>

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

      We have been issued two 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.

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

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


                                       10
<PAGE>

      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, our products have been used by only a limited number of
people, and 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.


                                       11
<PAGE>

      CONCENTRATIONS OF AVAILABLE SOURCES OF SUPPLY OF PRODUCTS

      Certain components used in the Company's products are currently available
to the Company from only one source and other components are currently available
from only a limited number of sources. The Company does not have long-term
supply contracts with its suppliers. In addition, the Company employs several
unaffiliated subcontractors outside of Israel for the manufacture of its
chipsets. While the Company has been able to obtain adequate supplies of
components and has experienced no material problems with subcontractors to date,
in the event that any of these suppliers or subcontractors is unable to meet the
Company's requirements in a timely manner, the Company may experience an
interruption in production. Any such disruption, or any other interruption of
such suppliers' or subcontractors' ability to provide components to the Company
and manufacture its chipsets, could result in delays in making product
shipments, which could have a material adverse impact on the Company's business,
financial condition and results of operations.

      OUR LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR REVENUE UNCERTAIN.

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

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

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

      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.


                                       12
<PAGE>

      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 30% of our outstanding Common
Stock as of December 31, 2005. These stockholders, acting together, would be
able to exert significant influence on substantially all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers and other business combination transactions.

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

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

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

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


                                       13
<PAGE>

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

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

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

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

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

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

                      RISKS RELATED TO OPERATIONS IN ISRAEL

      WE DEPEND ON A SINGLE FACILITY IN ISRAEL AND ARE SUSCEPTIBLE TO ANY EVENT
THAT WOULD ADVERSELYAFFECT ITS CONDITION.

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


                                       14
<PAGE>

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

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

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

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

      Since October 2000, there has been substantial deterioration in the
relationship between Israel and the Palestinian Authority that has resulted in
increased violence. The future effect of this deterioration and violence on the
Israeli economy and our operations is unclear. Ongoing violence between Israel
and the Palestinians as well as tension between Israel and the neighboring Syria
and Lebanon may have a material adverse effect on our business, financial
conditions or results of operations.

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

ITEM 2. DESCRIPTION OF PROPERTY

      We do not own any real property. Our corporate headquarters are located at
21860 Burbank Blvd, North Building Suite 380, Woodland Hills California and are
currently comprised of approximately 430 square feet. We use these premises
primarily for our corporate offices. The current monthly rental under the lease
is approximately $2,500. The lease term is scheduled to expire in April 2006. We
anticipate that we will be able to renew and continue to rent on a
month-by-month basis on substantially the same lease terms.

      We also lease approximately 1205 square feet in Kfar Saba, Israel which is
used for administrative offices for our subsidiary SPO Ltd. under a lease that
expires in January 2007. In addition, we also lease approximately 1506 square
feet in Ashkelon, Israel which is used by SPO Ltd. for research the research and
development activities under a lease that expires in July 2007 The aggregate
monthly rental payment for both of the leases in Israel are approximately
$2,000.


                                       15
<PAGE>

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

ITEM 3. LEGAL PROCEEDINGS

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

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

      None

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our Common Stock is quoted on the Pink Sheets LLC's Electronic
Inter-dealer Quotation and Trading System (the "Pink Sheets") under ticker
symbol "SPOM". Trading of our Common Stock on the Pink Sheets has been sporadic
and limited. There can be no assurance that an established trading market will
develop, that the current market will be maintained or that a liquid market for
our Common Stock will be available in the future. Prior to May 2005, although
our Common Stock was quoted on the Pink Sheets under the symbol "UNDI", there
was no active trading market for the Common Stock. Investors should not rely on
historical stock price performance as an indication of future price performance.

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


                                LOW     HIGH
                               -----   -----
Year Ended December 31, 2005
    First Quarter              $  --      --
    Second Quarter             $0.20    1.00
    Third Quarter              $0.65    1.00
    Fourth Quarter             $0.65    1.25

Year Ended December 31, 2004
    First Quarter              $  --      --
    Second Quarter             $  --      --
    Third Quarter              $  --      --
    Fourth Quarter             $  --      --

      As of March 30, 2006, there were approximately 87 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.


                                       16
<PAGE>

DIVIDEND POLICY

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

RECENT SALES OF UNREGISTERED SECURITIES

      The following paragraph sets forth certain information with respect to all
securities sold by us during the year ended December 31, 2005 without
registration under the Securities Act and not previously disclosed by us in a
Quarterly Report on Form 10-QSB.

      1. In November 2005 we issued to a service provider a five-year warrant to
purchase up to 360,000 shares of our Common Stock at a per share exercise price
of $0.01.

      2. In December 2005, we issued to a service provider a four-year warrant
to purchase up to 46,925 shares of our Common Stock at a per share exercise
price of $0.01. At the time of issuance the warrants

      All of the securities issued in the transaction described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in the transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in the above transaction. We believe the recipients were all "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act, or had such knowledge and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access to information about us. The
transaction described above did not involve general solicitation or advertising.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

OVERVIEW

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


                                       17
<PAGE>

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

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

CRITICAL ACCOUNTING POLICIES

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

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

           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.

           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.

           Revenue Recognition
           We generate revenues from sales of our 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 delivery of products to the reseller.

           All of the Company's products are sold through reseller agreements
           are non-exchangeable, non refundable and non returnable. Accordingly
           the resellers are considered end-users.


                                       18
<PAGE>

           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.

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

            Deferred income tax
           Deferred income taxes are provided for temporary differences between
           the assets and liabilities, as measured in the financial statements
           and for tax purposes, at the tax rates expected to be in effect when
           these differences reverse, in accordance with SFAS No. 109
           "Accounting for Income Taxes" ("SFAS No. 109").

           Concentrations of credit risk
           Financial instruments that potentially subject us to concentrations
           of credit risk consist primarily of cash and cash equivalents. The
           majority of our cash and cash equivalents are invested in deposits.
           Management believes that the financial institutions that hold our
           investments are financially sound, and accordingly, minimal credit
           risk exists with respect to these investments.

           Stock-based compensation
           As permitted under Statement of Financial Accounting Standards
           ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition
           and Disclosure," which amended SFAS No. 123, "Accounting for Stock
           Based Compensation" ("SFAS 123"), we have elected to continue to
           follow the intrinsic value method in accounting for our stock-based
           employee compensation arrangements, as defined by Accounting
           Principles Board Opinion No. 25, "Accounting for Stock Issued to
           Employees" ("APB No. 25"), and related interpretations including
           Financial Accounting Standards Board Interpretations No. 44,
           "Accounting for Certain Transactions Involving Stock Compensation,"
           an interpretation of APB No. 25.

           Under SFAS No. 123, we are required to disclose pro forma information
           regarding net loss and loss per share determined as if we had
           accounted for employee stock options under the fair value method of
           that statement. The fair value for these options was estimated at the
           date of grant using a Black-Scholes Option Valuation model with the
           following weighted-average assumptions for the twelve months ended
           December 31, 2005: weighted-risk-free interest rate of 3.2%, with
           dividend yields of 0% for the period, volatility factors of the
           expected market price of the Company's Common Stock of 100% and
           weighted-average expected life of the options of 1.25 years. Stock
           compensation, for pro forma purposes, is amortized over the vesting
           period.

RESULTS OF OPERATIONS

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2005 AND THE YEAR ENDED DECEMBER 31,
2004

      The discussion of financial results for the periods prior to the
Acquisition Transaction refer to the financial results of SPO Ltd.


                                       19
<PAGE>

      REVENUES. Revenues for the fiscal year ended December 31, 2005 were
$1,825,000 and were derived primarily from sales of our PulseOX 5500 TM designed
for the medical and homecare markets. Revenues for the fiscal year ended
December 31, 2004 were $168,000.

      COSTS OF REVENUES. Costs of revenues for the year ended December 31, 2005
were $786,000. Costs of revenues for the year ended December 31, 2004 were
$96,000. Costs of revenues include all costs related to manufacturing products
and services and consist primarily of direct material costs, shipping and
salaries and related expenses for personnel. Included in cost of revenues were
non cash compensation benefits of $4,000 and $0 in respect of 2005 and 2004
respectively.

      RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of expenses incurred in the design, development and testing of
our products. These expenses consist primarily of salaries and related expenses
for personnel, contract design and testing services, supplies used and
consulting and license fees paid to third parties and are net of any government
grants and development fees charged to third parties. Research and development
expenses for the years ended December 31, 2005 and 2004 were $629,000 and
$448,000 respectively. The increase in research and development expenses for
fiscal year 2005 as compared to fiscal year 2004 is primarily attributable to
the increase in employee and related compensation costs. Included in research
and development expenses were non cash compensation benefits of $66,000 and
$283,000 in respect of 2005 and 2004 respectively.

      SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
sales and marketing activities, promotion, sales support, travel and related
expenses. Selling and marketing expenses for the years ended December 31, 2005
and 2004 were $786,000 and $184,000, respectively. The increase in sales and
marketing costs for fiscal year 2005 as compared fiscal year 2004 is primarily
attributable to the increased sales costs incurred in connection with the
distribution of our PulseOX 5500 product. Included in selling and marketing
expenses were non cash compensation benefits to consultants of $349,000 and $0
in respect of 2005 and 2004 respectively.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily consist of salaries and other related costs for personnel in executive
and other administrative functions. Other significant costs include professional
fees for legal, accounting services. General and administrative expenses for the
fiscal years ended December 31, 2005 and 2004 were $794,000 and $237,000,
respectively. The increase in general and administrative expenses during 2005 as
compared to 2004 is primarily attributable to higher compensation costs and
higher accounting and legal and professional expenses. Included in general and
administrative expenses were non cash compensation benefits of $117,000 and $0
in respect of 2005 and 2004 respectively.

      FINANCIAL EXPENSES, NET. Financial expense net, for the fiscal years ended
December 31, 2005 and 2004 were $617,000 and $262,000, respectively. The amounts
recorded during the year 2004 include a one time charge for beneficial
conversion of $115,000 resulting from the accounting treatment accorded to
certain loans that were incurred prior to the Acquisition Transaction and that
we repaid in November 2005. The principal increase in finance expenses in 2005
over 2004 relates to the paid and accrued interest on the additional loans
advanced to us during the year ended December 31, 2005. Included in financial
expenses were non cash compensation benefits to consultants of $370,000 and
$193,000 in respect of 2005 and 2004 respectively.

      NET LOSS. For the fiscal years ended December 31, 2005 and 2004 we had a
net loss of $2,038,000 and $2,536,000 respectively.


                                       20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 2005, we had cash and cash equivalents of $493,000
compared to $9,000 at December 31, 2004. The increase in available cash
resources is primarily attributable to the funds raised from the private
placement of our securities discussed below.

      We generated negative cash flow from operating activities of approximately
$1,209,000 during the fiscal year ended December 31, 2005 compared to $482,000
for the fiscal year ended December 31, 2004.

      From inception, we have financed our operations primarily from the sale of
our securities, loans and grants from the Israeli government. Our recent
financings are discussed below.

      In January 2005, we raised an aggregate of $300,000 from the issuance of
one-year convertible notes. The notes bear interest at an annual rate of 8% and
are convertible into shares of our Common Stock upon certain specified
conditions.

      In April 2005, we commenced a private placement (the "2005 Private
Placement") to certain accredited investors of up to $1,150,000 by the sale of
units of our securities, with each unit comprised of (i) an 18 month 6%
Promissory Note and (ii) three year warrants to purchase up to such number of
shares of our Common Stock of the Company as are determined by the principal
amount of the Note purchased by such investor divided by $ 0.85, at a per share
exercise price of $0.85. We subsequently increased to $1,500,000 the amount that
can be raised under the 2005 Private Placement. As of January 2006, we raised
the maximum amount of the 2005 Private Placement.

      In September 2005 we borrowed the principal amount of $100,000. The
principal amount of this loan, plus $10,000 in arrangement fees, was repaid on
January 16, 2006.

      In February 2006 we borrowed the principal amount of $150,000 under a
credit line that it obtained from an investor. One quarter of the principal
amount of the loan plus interest at prime plus 4% is repayable every three
calendar months over the twelve calendar month period following the advance of
the loan.

      In March 2006, we raised $485,000 in gross proceeds from the sale of our
Common Stock.

      Product development, corporate operations and marketing expenses will
continue to require additional capital. Management anticipates that the current
revenue from operations will be insufficient to cover the current operating
expenses and projected expansion plans over the next 12 months and that we will
require additional capital in order to expand the scope of our product
development and sales and marketing efforts. We therefore are seeking additional
financing through the sale of our equity and/or debt securities to satisfy
future capital requirements until such time as we are able to generate
sufficient cash flow from revenues to finance on-going operations. No assurance
can be provided that additional capital will be available to us on commercially
acceptable terms or at all. Our auditors included a "going concern"
qualification in their auditors' report for the year ended December 31, 2005.
While we have raised approximately $2.19 million in gross proceeds from the sale
of our debt and equity securities between April 2005 and March 2006, such "going
concern" qualification may make it more difficult for us to raise funds when
needed. Additional equity financings may be dilutive to holders of our Common
Stock.


                                       21
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R). SFAS No. 123(R) requires employee share-based equity awards to
be accounted for under the fair value method, and eliminates the ability to
account for these instruments under the intrinsic value method prescribed by APB
Opinion No. 25 and allowed under the original provisions of SFAS No. 123. SFAS
No. 123(R) requires the use of an option pricing model for estimating fair
value, which is then amortized to expense over the service periods. If we had
adopted SFAS 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma
net income and income per share above. SFAS No. 123(R) allows for either
prospective recognition of compensation expense or retrospective recognition. In
the first quarter of 2006, we began to apply the prospective recognition method
and implemented the provisions of SFAS No. 123(R). In January 2005, the SEC
issued SAB No. 107, which provides supplemental implementation guidance for SFAS
No. 123(R). SFAS No. 123(R) will be effective for us beginning in the first
quarter of fiscal 2006.


      In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB Opinion No. 20. "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. We do not expect the adoption of SFAS No. 154 will have any material
impact on our consolidated financial statements.

ITEM 7. FINANCIAL STATEMENTS

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

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

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

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


                                       22
<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES

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

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

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

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

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. Except as described
above, during our the three months ended December 31, 2005, there have not been
any changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, these
controls.

ITEM 8B. OTHER INFORMATION

      None.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

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



NAME                    AGE                        POSITION

Michael Braunold        46              President, Chief Executive Officer and
                                        Director

Richard H. Ryan         54              Chief Operating Officer

Jeffrey Feuer           41              Chief Financial Officer

Israel Sarussi          55              Chief Technology Officer

Pauline Dorfman         41              Director (1)

Sidney Braun            46              Director (1)


(1) Audit Committee and Compensation Committee Member

                                       23
<PAGE>

      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.

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

      JEFFREY 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 of the Company since April 21,
2005. Since January 2001, Ms. Dorfman, a qualified chartered accountant, has
been a consultant with Berenblut Consulting, an Ontario firm that assists
commercial business, law firms and governments across North America and Europe
in several areas covering economics, finance, accounting, valuation and
strategy. Ms. Dorfman specializes in conducting analysis and financial
investigations in connection with international development disputes and
economic damage quantification for breach of contract and personal medical
malpractice cases. 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 and meeting the external and
internal financial reporting requirements of the bank.


                                       24
<PAGE>

      SIDNEY BRAUN has served as a director of the Company since April 21, 2005.
Since June 2004 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. MEII is a publicly listed healthcare services company
specializing in the coordination and delivery of emergency and primary health
care related services in Canada such as physician and nurse staffing and
recruitment, clinical management services, a national drug infusion service and
a comprehensive physician practice management program. Mr. Braun has extensive
experience in commerce both in North America and Europe, including
manufacturing, distribution and trading. Prior to his current position at MEII,
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.

AUDIT COMMITTEE FINANCIAL EXPERT

      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.

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 the Code of
Ethics is attached as an Exhibit to this Annual Report. 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
2005, or written representations from certain reporting persons, we believe all
of our directors and executive officers met all applicable filing requirements.


                                       25
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth all compensation for each of the last three
fiscal years awarded to, earned by, or paid to our Chief Executive Officer and
all other executive officers serving as such at the end of 2005 whose salary and
bonus exceeded $100,000 for the year ended December 31, 2005 (the "Named
Executive Officers").

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                ANNUAL COMPENSATION                LONG TERM COMPENSATION
                          ----------------------------------   -----------------------------
                                                                Securities     All
Name and Principal                           Other Annual       Underlying     Other
Position(s)        Year    Salary    Bonus   Compensation (1)   Options (2)    compensation
----------------   ----   --------   -----   -------------     -------------   -------------
<C>                <C>    <C>        <C>     <C>               <C>             <C>
MICHAEL BRAUNOLD   2005   $141,921      --          40,114           250,000   $      62,500(4)
President and      2004   $ 44,176      --          12,988                --              --
Chief Executive    2003   $ 61,780      --          26,625                --              --
Officer(3)

ISRAEL SARUSSI     2005   $148,420      --          36,103                --              --
Chief Technology   2004   $ 44,177      --          12,187           446,383              --
Officer(5)         2003   $ 62,540      --          26,906                --              --
</TABLE>

(1) Includes, for each Named Executive Officer, some or all of the following:
(i) Company contributions to insurance premiums and (ii) taxable automobile
related benefits.

(2) Represents shares of Common Stock issuable upon the exercise of employee
stock options issued under the Company's 2005 Incentive Plan and, in the case of
Israel Sarussi, shares of Common Stock issuable upon exercise of options issued
under an employee stock plan maintained by SPO Ltd.

(3) Mr. Braunold was appointed Chief Executive Officer of the Company on May 18,
2005. From March 1998 until his appointment as Chief Executive Officer, Mr.
Braunold served as Chief Executive Officer of SPO Ltd.

(4) Represents the value of the options issued to Michael Braunold.

(5) Mr. Sarussi was appointed our Chief Technology Officer on April 21, 2005.
From March 1996 until April 2005, Mr. Sarussi served as Chief Technology Officer
of SPO Ltd.

OPTION GRANTS IN THE LAST FISCAL YEAR

      The following table sets forth information concerning individual grants of
stock options made during the year ended December 31, 2005 to each of the Named
Executive Officers.

<TABLE>
<CAPTION>
                    NUMBER OF SECURITIES   % OF TOTAL OPTIONS
                     UNDERLYING OPTIONS    GRANTED TO EMPLOYEES   EXERCISE   EXPIRATION
                          GRANTED            IN FISCAL YEAR        PRICE        DATE
                    --------------------   --------------------   --------   ----------
<S>                 <C>                    <C>                    <C>        <C>
Michael Braunold                 250,000                     29%  $   0.60     12/22/15
</TABLE>


                                       26
<PAGE>

AGGREGATE OPTIONS EXERCISED IN 2005 AND YEAR-END OPTION VALUES

         The Named Executive Officers did not exercise any stock options during
the year ended December 31, 2005. The following table sets forth information as
of December 31, 2005 concerning options held by the Named Executive Officers.

<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES             VALUE OF UNEXERCISED
                                                    UNDERLYING UNEXERCISED                IN-THE-MONEY
                                                  OPTIONS AT FISCAL YEAR END       OPTIONS AT FISCAL YEAR END
                                                  --------------------------       --------------------------
                       SHARES        VALUE
                    ACQUIRED ON     REALIZED
                    EXERCISE (#)      ($)        EXERCISABLE    UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
                    ------------      ---        -----------    -------------     -----------     -------------
<S>                     <C>            <C>          <C>               <C>          <C>                <C>
Michael Braunold        --             --           250,000           --           $162,500           $ --

Israel Sarussi          --             --           446,383           --           $553,515
</TABLE>

(1) Based upon the difference between the exercise price of such options and the
closing price of the Common Stock $1.25 on December 30, 2005, as quoted on the
Pink Sheets.

COMPENSATION OF DIRECTORS

      We pay each outside director $15,000 per annum for service on our Board of
Directors. In addition, we have granted stock options to directors to compensate
them for their services. In April 2005 we issued to each of Pauline Dorfman and
Sidney Braun options under our 2005 Non-Employee Directors Stock Option to
purchase up to 50,000 shares of our Common Stock at a per share exercise price
of $0.055. Half of the options were vested at issuance and the remaining half
are scheduled to vest in April 2006.

EMPLOYMENT AGREEMENT WITH EXECUTIVE OFFICERS

      MICHAEL BRAUNOLD. On May 18, 2005, we entered into an employment agreement
with Michael Braunold, pursuant to which he serve as our Chief Executive Officer
and President. On such date, Mr. Braunold and SPO Ltd., entered into an
employment agreement pursuant to which Mr. Braunold serves as SPO Ltd.'s Chief
Executive Officer. Each of the agreements with us and SPO Ltd. has an initial
term of three years commencing on the date of the agreement and is automatically
renewable for successive two year terms unless we or Mr. Braunold indicate in
writing, upon 90 days prior to the scheduled termination of the initial term or
any renewal term, that such party does not intend to renew the agreement. Mr.
Braunold is paid a monthly salary of $13,250 under the agreement with SPO Ltd.
Mr. Braunold is not entitled to a salary under the agreement with us but has
been granted options under our 2005 Equity Incentive Plan to purchase 250,000
shares of our Common Stock at a per share exercise price of $0.60. The
agreements may be terminated by Mr. Braunold for any reason on 60 days written
notice or for Good Reason (as defined in the employment agreement) or by us for
Just Cause (as defined in the employment agreement) or for any other reason. In
the event of a termination by Mr. Braunold for Good Reason or by us for any
reason other than Just Cause, we are to pay Mr. Braunold an amount equal to (i)
if such termination occurs during the initial term of the agreement, the base
salary then payable, if any, for the longer of (a) the period from the date of
such termination to the end of the initial term as if the agreement had not been
so terminated and (b) twelve months and (ii) if such termination occurs after
the initial term, the base salary then payable, if any, for a period of twelve
months as if the agreement had not been so terminated.


                                       27
<PAGE>

      ISRAEL SARUSSI. In January 1998 SPO Ltd. entered into an employment
agreement with Israel Sarussi and which was subsequently amended in 2002 and
2005. Pursuant to the agreement Mr. Sarussi serves as the SPO Ltd.'s Chief
Technical Officer. The agreement with SPO Ltd. terminates on the earlier of: (i)
Mr. Sarussi's death or disability, (ii) termination by SPO Ltd. without cause
upon 12 months written notice; or (iii) termination of Mr. Sarussi with cause.
Mr. Sarussi is paid a monthly salary of $13,250 under the agreement with SPO
Ltd.

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

      In addition, during the fiscal year ended December 31, 2005, we entered
into agreements discussed below with each of the following executive officers.

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

      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. 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 us and SPO Ltd. terminates on the
earlier of: (i) Mr. Feuer's death or disability, (ii) termination by us or Mr.
Feuer without cause upon 60 days written notice; or (iii) termination of Mr.
Feuer with cause. Mr. Feuer is paid a monthly salary of $7,500 under the
agreement with SPO Ltd. and is not entitled to a salary under the agreement with
us. In connection with his employment with us, in December 2005 we granted under
our 2005 Equity Incentive Plan options to purchase 120,000 shares of our Common
stock, vesting over a one year period from the date of grant and at a per share
exercise price of $0.60.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The following table sets forth information as of the close of business on
March 30, 2006, 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.


                                       28
<PAGE>

      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 30, 2006. 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 17,722,264 shares of common
stock outstanding at March 30, 2006. The number of shares outstanding reflects
the forward subdivision of the Company's Common Stock on a 2.65285:1 basis after
giving effect to the transactions contemplated by Restated Exchange Agreement.

                                        Common Stock Percentage of
Name of Beneficial Owner (1)               Beneficially Owned (2)   Common Stock

Michael Braunold                                  993,922 (3)           5.53%

Richard H. Ryan                                   100,000 (4)              *

Jeffrey Feuer                                     120,000 (5)              *

Israel Sarussi                                  4,165,776 (6)          22.93%

Pauline Dorfman                                    50,000 (7)              *

Sidney Braun                                       50,000 (7)              *

All officers and directors as a group           5,479,698              29.24%
(6 persons)

* Less than 1%

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

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

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

(4) Represents shares issuable upon exercise of vested options issued in May
2005 under the Company's 2005 Plan. Does not include an additional 100,000
shares issuable upon exercise of options issued in May 2005 under the 2005 Plan
that are scheduled to vest by May 2007.

(5) Represents shares issuable upon exercise of options issued in December 2005
under the Company's 2005 Plan of which options for 90,000 shares are exercisable
as of the filing of this report and the remaining options for 30,000 shares are
scheduled to vest in June 2006.

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

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


                                       29
<PAGE>

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, 2005 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.

<TABLE>
<CAPTION>
                                      NUMBER OF SECURITIES
                                        TO BE ISSUED UPON      WEIGHTED-AVERAGE       NUMBER OF SECURITIES
                                           EXERCISE OF         EXERCISE PRICE OF     REMAINING AVAILABLE FOR
                                      OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,     FUTURE ISSUANCE UNDER
                                       WARRANTS OR RIGHTS     WARRANTS OR RIGHTS    EQUITY COMPENSATION PLANS
                                       ------------------     ------------------    -------------------------
<S>                                           <C>                     <C>                    <C>
Equity compensation plans
   approved by security holders               1,020,000               $0.44                  1,130,000

Equity compensation plans not
   approved by security holders               2,215,756               $0.69                         --
                                              ---------               -----                  ---------

Total                                         3,235,756               $0.61                  1,130,000
                                              =========               =====                  =========
</TABLE>

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, 2005.

      As of December 31, 2005, we had outstanding options and warrants to
purchase an aggregate of 854,308 shares of our Common Stock were granted outside
of the Plans. These are comprised of the following: (i) vested options to
purchase up to 446,383 shares of our Common Stock issued in April 2005 were
granted to Israel Sarussi, an executive officer, at a per share exercise price
of $0.01, (ii) vested warrants to purchase up to 406,925 shares of our Common
Stock issued between April and December 2005 to consultants at per share
exercise price of $0.01 and (iii) an unspecified number of warrants issued to
placement agents and which will be equal to $30,000 divided by 60% less than the
lowest price of shares of Common Stock sold by the Company in a subsequent
transaction.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      None.


                                       30
<PAGE>

ITEM 13. EXHIBITS

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

EXHIBIT NO.                         EXHIBIT
-----------                         -------

2.1   Restated Capital Stock Exchange Agreement dated as of April 21, 2005 among
      the Company, SPO Ltd. and the SPO Ltd. shareholders specified therein. (1)

3.1   Amended and Restated Certificate of Incorporation of the Company. (1)

3.2   Bylaws of the Company (1)

3.3   Articles of Association of SPO Medical Equipment Ltd.

3.5   Form of Promissory Note issued to certain investors. (1)

3.6   Form of Warrant Instrument issued to certain investors.(1)

10.1  Form of subscription Agreement with certain investors.

10.1  Employment Agreement effective as of May 18, 2005 between the Company and
      Michael Braunold. (2)+

10.2  Employment Agreement effective as of May 18, 2005 between SPO Ltd. and
      Michael Braunold. (2)+

10.3  Employment Agreement effective as of May 18, 2005 between the Company and
      Richard Ryan. (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 plan

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

14.1  Code of Conduct

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

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

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

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

----------
      (1)   Incorporated by reference to Current Report on Form 8-K filed April
            27, 2005.

      (2)   Incorporated by reference to the Company's Quarterly Report Form 10-
            QSB for the quarter ended June 30, 2005

      (3)   Incorporated by reference to the Company's Quarterly Report Form 10-
            QSB for the quarter ended September 30, 2005


                                       31
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Non-Audit Fees

      The following table presents fees for professional audit services rendered
by Brightman Almagor & Co., Certified Public Accountants, A member firm of
Deloitte Touche Tohmatsu, for the audit of our annual financial statements for
the year ended December 31, 2005 and 2004.

      --------------------------------------------------------------------------
                                       Fiscal Year Ended      Fiscal Year Ended
                                       December 31, 2005      December 31, 2004
      --------------------------------------------------------------------------
      Audit Fees                             $36,500              $63,000
      --------------------------------------------------------------------------
      Audit Related Fees                     $    --                   --
      --------------------------------------------------------------------------
      Tax Fees                               $18,500              $ 2,000
      --------------------------------------------------------------------------
      All Other Fees                         $    --
      --------------------------------------------------------------------------
      Total                                  $55,000              $65,000
      --------------------------------------------------------------------------

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

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

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

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

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


                                       32
<PAGE>

                                   SIGNATURES

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


DATE: April 11, 2006                    /s/ Michael Braunold
                                        Michael Braunold
                                        Chief Executive Officer and Director


DATE: April 11, 2006                    /s/ Jeffrey Feuer
                                        Jeffrey Feuer
                                        Chief 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                   April 11, 2006
----------------
Sidney Braun


/s/ Michael Braunold         President, Chief Executive           April 11, 2006
--------------------
Michael Braunold             Officer and Director


/s/ Pauline Dorfman          Director                             April 11, 2006
-------------------
Pauline Dorfman


                                       33
<PAGE>

                       SPO MEDICAL INC. AND ITS SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2005

                            U.S. DOLLARS IN THOUSANDS

                                      INDEX

                                                                         Page
                                                                      ----------

Report of Independent Registered Public Accounting Firm                    i

Consolidated Balance Sheet                                             F-1 - F-2

Consolidated Statements of Operations                                     F-3

Statements of Changes in Stockholders' Deficiency                         F-4

Consolidated Statements of Cash Flows                                     F-5

Notes to Consolidated Financial Statements                                F-6

<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Stockholders of

                                SPO MEDICAL INC.

We have audited the accompanying consolidated balance sheet of SPO MEDICAL INC.
("the Company") and its subsidiary as of December 31, 2005, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiary as of December 31, 2005, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.

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

Tel-Aviv, Israel
April 1, 2006


                                       i
<PAGE>

                                 SPO MEDICAL INC
                           CONSOLIDATED BALANCE SHEET
                  U.S. dollars in thousands (except share data)

                                                                    December 31,
                                                                        2005
                                                                    ------------

ASSETS

CURRENT ASSETS
Cash and cash equivalents                                           $        493
Trade receivables                                                            199
Other accounts receivable and prepaid expenses (Note 4)                       42
Inventories (Note 5)                                                         460
                                                                    ------------
                                                                           1,194

LONG-TERM INVESTMENTS
Deposits                                                                      10
Severance pay fund                                                           125
                                                                    ------------
                                                                             135

PROPERTY AND EQUIPMENT, NET (Note 6)                                          48
                                                                    ------------

Total assets                                                        $      1,377
                                                                    ============

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


                                      F-1
<PAGE>

                                 SPO MEDICAL INC
                           CONSOLIDATED BALANCE SHEET
                  U.S. dollars in thousands (except share data)

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                        2 0 0 5
                                                                                     ------------
<S>                                                                                  <C>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY

Current Liabilities
Short-term loans, net (Note 7)                                                       $        439
Convertible notes, net (Note 8)                                                               581
Trade payables                                                                                225
Employees and Payroll accruals                                                                155
Accrued expenses and other liabilities (Note 9)                                               534
                                                                                     ------------
                                                                                            1,934

Long-Term Liabilities
Long term loans, net (Note 7)                                                                 499
Accrued severance pay (Note 10)                                                               254
                                                                                     ------------
                                                                                              753

COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)

STOCKHOLDERS' DEFICIENCY
Stock capital: (Note 11)
Preferred stock of $0.01 par value
Authorized - 2,000,000 shares, issued and outstanding - none Common stock $0.01
par value-
Authorized - 50,000,000 shares, issued and outstanding - 17,029,407 shares                    170
Additional paid-in capital                                                                  4,833
Deferred compensation                                                                        (227)
Accumulated deficit                                                                        (6,086)
                                                                                     ------------
                                                                                           (1,310)
                                                                                     ------------

Total liabilities and stockholders' deficiency                                       $      1,377
                                                                                     ============
</TABLE>

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


                                      F-2
<PAGE>

                                 SPO MEDICAL INC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  U.S. dollars in thousands (except share data)

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                         -------------------------------
                                                                             2005               2004
                                                                         ------------       ------------
<S>                                                                      <C>                <C>
Revenues                                                                 $      1,825       $        168

Cost of revenues                                                                  786                 96
                                                                         ------------       ------------

Gross profit                                                                    1,039                 72
                                                                         ------------       ------------

Operating expenses

Research and development, net                                                     629                448

Selling and marketing                                                             786                184

General and administrative                                                        794                237

Merger expenses                                                                   251              1,477
                                                                         ------------       ------------

Total operating expenses                                                        2,460              2,346
                                                                         ------------       ------------

Operating loss                                                                  1,421              2,274

Financial expenses, net                                                           617                262
                                                                         ------------       ------------

Loss for the period                                                      $      2,038       $      2,536
                                                                         ============       ============

Basic and diluted loss per ordinary share                                $      (0.11)      $      (0.83)
                                                                         ============       ============

Weighted average number of shares

outstanding used in computation of basic and diluted loss per share        17,882,715          3,057,595
                                                                         ============       ============
</TABLE>

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


                                      F-3
<PAGE>

                                 SPO MEDICAL INC
                STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
                  U.S. dollars in thousands (except share data)

<TABLE>
<CAPTION>
                                                                    Additional
                                                      Share           paid-in         Deferred       Accumulated
                                                     capital          capital       compensation        deficit           Total
                                                  ------------     ------------     ------------     ------------     ------------
<S>                                               <C>              <C>              <C>              <C>              <C>
Balance as of January 1, 2004                     $        501     $        927     $         --     $     (1,512)    $        (84)
Issuance of ordinary shares to consultants                  99            1,272                                              1,371
Stock-based compensation related to
  options granted to employee                                               283                                                283
Stock-based compensation related to
  warrant granted to lender                                                  78                                                 78
Beneficial conversion feature of
  convertible notes                                                         115                                                115
Net Loss                                                                                                   (2,536)          (2,536)
                                                  ------------     ------------     ------------     ------------     ------------
Balance as of December 31, 2004                            600            2,675               --           (4,048)            (773)
Issuance of ordinary shares upon
  conversion of loans                                       35              224                                                259
Warrants issued in private placement                                        949                                                949
Warrants issued in connection with loans                                     22                                                 22
Deferred stock-based compensation related
  to options granted to employees and
  consultants                                                               762             (762)                               --
Amortization of deferred Stock-based
compensation related to options granted
to employees                                                                                 187                               187
Amortization of deferred Stock-based
compensation related to options granted
to consultants                                                                               348                               348
Reverse merger transaction and forward
split of issued share capital                             (465)             201                                               (264)
Net Loss                                                                                                   (2,038)          (2,038)
                                                  ------------     ------------     ------------     ------------     ------------
Balance as of December 31, 2005                   $        170     $      4,833     $       (227)    $     (6,086)    $     (1,310)
                                                  ------------     ------------     ------------     ------------     ------------
</TABLE>


                                      F-4
<PAGE>

                                 SPO MEDICAL INC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  U.S. dollars in thousands (except share data)

<TABLE>
<CAPTION>
                                                                                    Year ended December 31,
                                                                                -----------------------------
                                                                                    2005             2004
                                                                                ------------     ------------
<S>                                                                             <C>              <C>
Cash Flows from Operating Activities
Loss for the period                                                             $     (2,038)    $     (2,536)
Adjustments to reconcile loss to net cash used in operating activities:
  Depreciation                                                                             8                4
  Stock-based compensation expenses                                                      535            1,731
  Amortization of loan discounts                                                         370               --
  Increase (decrease) in accrued severance pay, net                                       93               (3)
  Increase in accrued interest payable on loans                                          112               23
  Beneficial conversion feature expense                                                   --              115

Changes in assets and liabilities:
  Increase in trade receivables                                                          (46)            (153)
  Decrease (increase) in other receivables                                                (4)              17
  Increase in inventories                                                               (460)              --
  Increase in accounts payable                                                            75              109
Increase in accrued expenses and other liabilities                                       146              211
                                                                                ------------     ------------

Net cash used in operating activities                                                 (1,209)            (482)

Cash Flows from Investing Activities

Decrease (increase) in short-term investments                                             33              (33)
Increase in long-term deposits                                                            (5)              (5)
Purchase of property and equipment                                                       (34)              (7)
                                                                                ------------     ------------
Net cash used in investing activities                                                     (6)             (45)

Cash Flows from Financing Activities

Receipt of short-term loans                                                              496              565
Receipt of long-term loans                                                             1,018               --
Receipt of convertible notes                                                             300               --
Repayment of short-term loans                                                           (115)             (35)
                                                                                ------------     ------------
Net cash provided by financing activities                                              1,699              530

Increase in cash and cash equivalents                                                    484                3
Cash and cash equivalents at the beginning of
  the year                                                                                 9                6
                                                                                ------------     ------------

Cash and cash equivalents at the end of the period                              $        493     $          9
                                                                                ============     ============
</TABLE>

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


                                      F-5
<PAGE>

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

NOTE 1 -GENERAL

      SPO Medical Inc. (hereinafter referred to as "SPO" or the "Company") was
      originally incorporated under the laws of the State of Delaware in
      September 1981under the name "Applied DNA Systems, Inc." On November 16,
      1994, the Company changed its name to "Nu-Tech Bio-Med, Inc." Thereafter,
      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 Company's acquisition of SPO Ltd was accounted for as a reverse
      merger. As the former shareholders of SPO Ltd. held the largest ownership
      interest in the Company following the Acquisition Transaction, SPO Ltd was
      determined to be the "accounting acquirer" following such acquisition. As
      a result, the historical financial statements of the Company were replaced
      with the historical financial statements of the SPO Ltd. for the periods
      preceding the Acquisition Transaction.

      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, 2005, resulted in a net loss of
      $2,038 and the Company's balance sheet reflects a net stockholders'
      deficit of $1,310. The Company's ability to continue operating as a "going
      concern" is dependent on its ability to raise sufficient additional
      working capital. Management's plans in this regard include raising
      additional cash from current and potential stockholders and lenders and
      increasing the marketing of its current and new products.


                                      F-6
<PAGE>

                                                                 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                7 - 10  years
            Office furniture and equipment                   7 - 15  years


                                      F-7
<PAGE>
                                                                 SPO MEDICAL INC
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share data)

NOTE 3 -Significant Accounting Policies (Cont.)

            In accordance with SFAS No. 144, "Accounting for Impairment or
            Disposal of Long-Lived Assets", management reviews long-lived assets
            for impairment whenever events or changes in circumstances indicate
            that the carrying amount of an asset may not be recoverable based on
            estimated future undiscounted cash flows. If so indicated, an
            impairment loss would be recognized for the difference between the
            carrying amount of the asset and its fair value. As of December 31,
            2005, no impairment losses have been recorded.

      f.    Revenue recognition

            The Company generates its revenues 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 delivery of products to
            the reseller.

            All of the Company's products that are sold through reseller
            agreements are non-exchangeable, non refundable and non returnable.
            Accordingly the resellers are considered end users.

      g.    INVENTORY

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

      h.    Research and development costs

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

      i.    Income taxes

            The Company accounts for income taxes in accordance with Statement
            of Financial Accounting Standards No. 109, "Accounting for Income
            Taxes" ("SFAS No. 109"). This statement prescribes the use of the
            liability method whereby deferred tax assets and liability account
            balances are determined based on differences between financial
            reporting and tax bases of assets and liabilities and are measured
            using the enacted tax rates and laws that will be in effect when the
            differences are expected to reverse. The Company provides a
            valuation allowance, if necessary, to reduce deferred tax assets to
            their estimated realizable value


                                      F-8
<PAGE>

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

NOTE 3 -Significant Accounting Policies (Cont.)

      j.    Fair value of financial instruments

            The financial instruments of the Company consist mainly of cash and
            cash equivalents, short-term investments, trade receivables,
            accounts payable and short-term loans.

            In view of their nature, the fair value of the Company's financial
            instruments is usually identical or close to their carrying value.

      k.    Concentrations of credit risk

            Financial instruments that potentially subject the Company to
            concentrations of credit risk consist primarily of cash and cash
            equivalents. The majority of the Company's cash and cash equivalents
            are invested in deposits. Management believes that the financial
            institutions that hold the Company's investments are financially
            sound, and accordingly, minimal credit risk exists with respect to
            these investments.

      l.    Stock-based compensation

            As permitted under Statement of Financial Accounting Standards
            ("SFAS") No. 148, "Accounting for Stock-Based
            Compensation-Transition and Disclosure," which amended SFAS No. 123,
            "Accounting for Stock Based Compensation" ("SFAS 123"), the Company
            has elected to continue to follow the intrinsic value method in
            accounting for its stock-based employee compensation arrangements,
            as defined by Accounting Principles Board Opinion No. 25,
            "Accounting for Stock Issued to Employees" ("APB No. 25"), and
            related interpretations including Financial Accounting Standards
            Board Interpretations No. 44, "Accounting for Certain Transactions
            Involving Stock Compensation," an interpretation of APB No. 25.

            Under SFAS No. 123, the Company is required to disclose pro forma
            information regarding net loss and loss per share determined as if
            the Company had accounted for its employee stock options under the
            fair value method of that statement. The fair value for these
            options was estimated at the date of grant using a Black-Scholes
            Option Valuation model with the following weighted-average
            assumptions for the twelve months ended December 31, 2005:
            weighted-risk-free interest rate of 3.2%, with dividend yields of 0%
            for the period, volatility factors of the expected market price of
            the Company's Common Stock of 100% and weighted-average expected
            life of the options of 1.25 years. Stock compensation, for pro forma
            purposes, is amortized over the vesting period.

            The following table illustrates the effect on net loss and loss per
            share as if the fair value method had been applied to all
            outstanding and unvested awards in each period

            Pro forma information under SFAS No. 123 is as follows


                                      F-9
<PAGE>

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

NOTE 3 -Significant Accounting Policies (Cont.)

      l.    Stock-based compensation (Cont.)

<TABLE>
<CAPTION>
                                                                                Year ended
                                                                       -----------------------------
                                                                                December 31
                                                                       -----------------------------
                                                                           2005             2004
                                                                       ------------     ------------
<S>                                                                    <C>              <C>
      Net Loss, as reported                                            $      2,038     $      2,536

      Deduct: stock-based compensation determined under APB 25                  193               --

      Add: Stock-based compensation determined under SFAS123                    599               --
                                                                       ------------     ------------

      Pro-forma net loss                                               $      2,444     $      2,536
                                                                       ============     ============

      Basic and fully diluted Loss per share as reported               $       0.11     $       0.83
                                                                       ============     ============

      Basic and fully diluted Loss per share proforma                  $       0.14     $       0.83
                                                                       ============     ============
</TABLE>

      m.    Effects of recently issued accounting standards

            In December 2004, the Financial Accounting Standards Board (FASB)
            issued SFAS No. 123(R). SFAS No. 123(R) requires employee
            share-based equity awards to be accounted for under the fair value
            method, and eliminates the ability to account for these instruments
            under the intrinsic value method prescribed by APB Opinion No. 25
            and allowed under the original provisions of SFAS No. 123. SFAS No.
            123(R) requires the use of an option pricing model for estimating
            fair value, which is then amortized to expense over the service
            periods. Had the Company adopted SFAS 123(R) in prior periods, the
            impact of that standard would have approximated the impact of SFAS
            123 as described in the disclosure of pro forma net income and
            income per share above. SFAS No. 123(R) allows for either
            prospective recognition of compensation expense or retrospective
            recognition. In the first quarter of 2006, the company began to
            apply the prospective recognition method and implemented the
            provisions of SFAS No. 123(R). In January 2005, the SEC issued SAB
            No. 107, which provides supplemental implementation guidance for
            SFAS No. 123(R). SFAS No. 123(R) will be effective for the Company
            beginning in the first quarter of fiscal 2006.

            In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
            Error Corrections." SFAS No. 154 replaces APB Opinion No. 20.
            "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes
            in Interim Financial Statements." SFAS No. 154 requires
            retrospective application to prior periods' financial statements of
            changes in accounting principle, unless it is impracticable to
            determine either the period-specific effects or the cumulative
            effect of the change. The Company does not expect the adoption of
            SFAS No. 154 will have any material impact on its consolidated
            financial statements.


                                      F-10
<PAGE>

                                                                 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 for the periods
            presented. The total number of shares related to the outstanding
            options and warrants excluded from the calculations of diluted net
            loss per share, was 2,594,545 and 0 for the years ended December 31,
            2005 and 2004, respectively.

NOTE 4 -Other Accounts Receivable and Prepaid Expenses

                                                                    December 31,
                                                                        2005
                                                                    ------------
      Tax authorities                                               $         22
      Others                                                                  20
                                                                    ------------
                                                                    $         42
                                                                    ============

NOTE 5 -Inventories

                                                                    December 31,
                                                                    ------------
                                                                        2005
                                                                    ------------

      Raw Materials                                                 $        216
      Work In Process                                                        186
      Finished Goods                                                          58
                                                                    ------------
                                                                    $        460
                                                                    ============


                                      F-11
<PAGE>

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

NOTE 6 -Property and Equipment

                                                                    December 31,
                                                                    ------------
                                                                        2005
                                                                    ------------
      Cost:
      Computer and peripheral equipment                             $         89
      Office furniture and equipment                                          12
                                                                    ------------
                                                                             101
                                                                    ------------
      Accumulated depreciation:
      Computer and peripheral equipment                                       47
      Office furniture and equipment                                           6
                                                                    ------------
                                                                    $         53
                                                                    ------------
      Property and Equipment, net                                   $         48
                                                                    ============

      Depreciation expenses for the years ended December 31, 2005 and 2004
      amounted to $8 and $4 respectively.

NOTE 7 -Long -term and Short-term Loans

      a.    In August 2004 the Company renegotiated with a lender the extension
            of the scheduled maturity date of indebtedness in the principal
            amount of $140 that was originally scheduled to mature on October
            12, 2005. The maturity of $100 of the original principal amount of
            this indebtedness was extended to March 31, 2006 and, on December
            22, 2005, $47 of the remaining principal amount and accrued interest
            was repaid. In consideration of the extension of the principal
            amount of $100, the Company paid to the lender a one time
            arrangement fee of $19.5 and issued to the holder of the debt a
            three year warrant to purchase up to 15,000 shares of the Company's
            Common Stock at a per share price of $0.75.

            For financial reporting purposes, the company recorded a discount of
            $8 to reflect the value of the warrants and amortized this amount to
            the date of maturity.

      b.    In April 2005, the Company commenced a private placement (the "2005
            Private Placement") to certain accredited investors of up to $1,150
            of units of its securities, with each unit comprised of (i) the
            Company's 18 month 6% promissory note 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. The Company
            subsequently increased to $1,500 the amount that can be raised under
            the 2005 Private Placement. As of December 2005, the Company raised
            the maximum amount of the 2005 Private Placement. Approximately $450
            in principal amount of the notes issued in connection with the 2005
            Private Placement are scheduled to mature during fiscal year 2006.

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


                                      F-12
<PAGE>

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

NOTE 7 -Long -term and Short-term Loans (Cont.)

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

            For financial reporting purposes, the company recorded a discount of
            $14 to reflect the value of the warrants and amortized this amount
            to the date of maturity.

      d.    Repayment of Outstanding Debt

            In April 2004, prior to the consummation of the Acquisition
            Transaction, SPO Ltd. issued to each of two entities its one-year
            promissory note in the principal amount of $57.5 in consideration of
            funds loaned to SPO Ltd. to cover certain costs incurred in
            connection with the Acquisition Transaction. Interest accrued on the
            loans at a per annum rate of 10% through maturity. The notes were
            not repaid at maturity.

            On November 10, 2005, the Company paid $144 to the note holders in
            full settlement of all obligations under these notes. This amount
            included $27 in interest, charged by the lenders at the rate 18% per
            annum retroactive to November 2004 as required under the default
            terms of the notes.

NOTE 8 -Convertible Notes

      In January 2005, the Company issued to 10 investors its convertible
      promissory note (collectively the "Notes") in the aggregate principal
      amount of $300. The Notes, bear interest at an annual rate of 8% and are
      payable on September 30, 2006. At the election of the holder, the Notes
      are convertible into the Company's Common Stock at a per share price (the
      "Exercise Price") equal to the lesser of (i) 60% of the per share purchase
      price of any Company security subsequently sold by the Company and (ii)
      $0.705.

      The Company determined that the convertible notes contained embedded
      derivatives. Derivatives instruments are contractual commitments or
      payment exchange agreements between counterparties that derive their value
      from an underlying asset, liability or equity, depending on their
      characteristics. The Company determined each derivative component should
      be recorded as a liability. The Company valued the derivative components
      using the Black Scholes model. The value of the derivatives as of December
      31, 2005 is $410. The derivatives will be revalued at each reporting
      period. Charge for the year 2005 was $257.

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


                                      F-13
<PAGE>

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

NOTE 9 -Accrued Expenses and other liabilities

                                                                    December 31,
                                                                    ------------
                                                                        2005
                                                                    ------------

      Accrued expenses  pre merger                                  $        263
      Royalties                                                               61
      Other accrued expenses                                                 210
                                                                    ------------
                                                                    $        534
                                                                    ============

NOTE 10 -Accrued Severance Pay

      The Company's liability for severance pay is calculated in accordance with
      Israeli law based on the latest salary paid to employees and the length of
      employment in the Company. The Company's liability for severance pay is
      fully provided for. Part of the liability is funded through individual
      insurance policies. The policies are assets of the Company and, under
      labor agreements, subject to certain limitations, they may be transferred
      to the ownership of the beneficiary employees.

      Severance pay expenses (income) for the years ended December 31, 2005 and
      2004 were $136 and ($160) respectively.

NOTE 11 -Stockholders Equity

      a.    Equity Incentive Plans

            In April 2005, the Company adopted the 2005 Equity Incentive Plan
            (the "2005 Plan"). A total of 1.75 million shares of Common Stock
            were originally reserved for issuance under the 2005 Plan. The 2005
            Plan provides for the grant of incentive stock options, nonqualified
            stock options, stock appreciation rights, restricted stock, bonus
            stock, awards in lieu of cash obligations, other stock-based awards
            and performance units. The 2005 Plan also permits cash payments
            under certain conditions. The compensation committee of the Board of
            Directors is responsible for determining the type of award, when and
            to who awards are granted, the number of shares and the terms of the
            awards and exercise prices. The options are exercisable for a period
            not to exceed ten years from the date of grant. Vesting periods
            range from immediately to four years.

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

            The options granted vest over periods of up to five years from the
            date of the grant. Most of the options granted in previous years
            expire after 10 years from the date of the grant while most of the
            options granted in 2005 expire after 6 years. With respect to
            options granted at exercise prices below the fair market value of
            the underlying shares at the date of grant, deferred compensation
            totaling $407 is recorded and charged to earnings over the vesting
            period of the options in accordance with APB 25 and FIN 44.


                                      F-14
<PAGE>

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

NOTE 11 -Stockholders Equity (Cont.)

      a.    Equity Incentive Plans (Cont.)

            Under the 1998 Stock Option Plan (the "1998 Plan") for employees of
            SPO Ltd., there were options to purchase up to 253,000 ordinary
            shares of the Company may be granted at an exercise price that shall
            be determined by the Stock Option Committee appointed by the Board
            of Directors of the Company. The options granted were exercisable on
            the date and for the number of shares provided in the option
            agreement. Under the 1998 Plan, options expire ten years from the
            date of the grant. In January 1999 the Company granted to the
            Company's Chief Executive Officer options to purchase up to 120
            ordinary shares of the Company pursuant to his employment agreement
            and the 1998 Plan. The options had an exercise price of New Israeli
            Shekels (NIS) of 1.00 and vested over two years. In connection with
            this issuance, the Company recorded a stock-based compensation
            expense totaling $133. All of the options were exercised during 1999
            and 2000.

            On October 18, 2004 the Company granted to the Company's Chief
            Technology Officer fully vested stock options to purchase 90,978
            ordinary shares of the Company at an exercise price of NIS 0.01 per
            share under Company's 1998 Stock Option Plan. In connection with
            this issuance, the Company recorded a stock-based compensation
            expense totaling $567.

            Pursuant to the Restated Exchange Agreement, in connection with the
            Acquisition Transaction, in April 2005, the above referenced options
            were exchanged for fully vested options to purchase up to 168,275
            shares of the Company's Common Stock at a per share exercise price
            of $0.01.

            In addition to the options granted under the stock option plans
            discussed above, the Company has issued options outside of the
            plans, pursuant to various employment and consulting agreements.

      b.    Stock Options:

            As of December 31, 2005 an aggregate of 1,130,000 options remain
            available for future grants under the Company's 2005 Plan and 2005
            Directors Plan.

            The following is a summary of the Company's outstanding options and
            warrants.

                                                         December 31, 2005
                                                   -----------------------------
                                                                      Weighed
                                                                      Average
                                                    Amount of        Exercise
                                                     Options           Price
                                                   ------------     ------------

      Outstanding at the beginning of the year               --               --

      Granted                                         1,020,000     $       0.44
      Forfeited                                              --               --
                                                   ------------     ------------

      Outstanding at the end of the year              1,020,000     $       0.44
                                                   ============     ============

      Exerciseable at the end of the year               605,000     $       0.46
                                                   ============     ============


                                      F-15
<PAGE>

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

NOTE 11 -Stockholders Equity (Cont.)

      b.    Stock Options: (Cont.)

            The options outstanding as of December 31, 2005, have been separated
            into ranges of exercise price as follows:

<TABLE>
<CAPTION>
                                                                                                     Weighted
                                  Options         Weighted                         Options            average
                                outstanding       average          Weighted       exercisable        exercise
                                   as of         remaining         average          as of            price of
                                December 31     contractual        exercise       December 31         options
      Range of exercise price      2005         life (years)         price           2005           exercisable
                               ------------     ------------     ------------     ------------     ------------
<S>                               <C>                   <C>      <C>                   <C>         <C>
      $0.5-$0.55                    300,000             9.42     $       0.05          150,000     $       0.05
      $0.60                         720,000             9.98     $       0.60          455,000     $       0.60
                               ------------     ------------     ------------     ------------     ------------
                                  1,020,000             9.82     $       0.44          605,000     $       0.46
                               ============     ============     ============     ============     ============
</TABLE>

      c.    Stock warrants

            The Company has issued warrants as follows:

<TABLE>
<CAPTION>
                                         Outstanding                            Exercisable
                                            as of             Exercise             as of
                                           December             Price             December             Exercisable
            Issuance date                  31, 2005               $              31, 2005               through
                                         -----------          --------          -----------            -----------
<S>                                      <C>                     <C>            <C>                   <C>
            May 2005(1)                     88,236               0.85              88,236             May 2008
            June 2005(1)                   382,354               0.85             382,354             June 2008
            July 2005 (1)                  117,648               0.85             117,648             September 2008
            September 2005 (2)              40,000               0.75              40,000             September 2008
            September 2005(1)              910,003               0.85             910,003             November 2008
            November 2005 (3)              406,925               0.01             406,925             November 2008
            November 2005 (1)              152,942               0.85             152,942             December 2008
            December 2005 (1)              117,648               0.85             117,648
                                       -----------                            -----------
                          (4)            2,215,756                              2,215,756
                                       ===========                            ===========
</TABLE>

            (1)   Issued to investors in the private placement
            (3)   Warrants issued to other lenders
            (4)   Warrants issued to service providers
            (5)   This table does not include the 785,714 warrants that would
                  result from the promissory notes issued in January 2005 see
                  note 8.

      d.    Dividends

            In the event that dividends are declared in the future, such
            dividends will be paid in U.S. dollars.

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


                                      F-16
<PAGE>

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

NOTE 12 -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 financial statements are
                  measured in U.S. dollars. 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 shown 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,
                                                                      2005
                                                                  ------------
                  Tax on net operating losses carryforward        $      1,086
                  Less - valuation allowance                            (1,086)
                                                                  ------------
                                                                  $         --
                                                                  ============

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

                  Net operating loss carryforwards as of December 31, 2005 are
                  as follows:

                                                                    December 31,
                                                                        2005
                                                                    ------------
                  Israel                                            $      3,396
                  USA                                                        192
                                                                    ------------
                  Total                                             $      3,588
                                                                    ============

                  Net operating losses in Israel may be carried forward
                  indefinitely. Net operating losses in the U.S. are available
                  through 2025.


                                      F-17
<PAGE>

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

NOTE 13 -Commitments and Contingencies

      Lease Commitments

      The Company maintains its principal offices in the Warner Gateway campus
      in Warner Center, Woodland Hills, CA, USA. The offices are leased at a
      monthly cost of approximately $2.5 and cover a square area of 430 square
      feet. The lease period for this office terminates in April 2006. The
      Company intends to maintain the lease of the premises on a month to month
      basis. The offices provide accommodation for sales, internal
      administrative and external customer support operations.

      Research and development continue to be performed at the premises in
      Ashkolon, Israel, which are comprised of laboratory and development
      facility covering a square area of 1506 square feet. In addition, the
      Company sub-leases a smaller facility of 1205 square feet in Kfar Saba,
      Israel. for local administrative staff. The facilities in Ashkolon, Israel
      are leased pursuant to a lease agreement into which SPO Ltd. entered that
      runs through July 2006 at an approximate per month rate of $1. The
      administrative facilities in Israel are leased by SPO Ltd. pursuant to a
      lease agreement that runs through January 2007 at an approximate per month
      rate of $0.7.

      Government of Israel

      The Company's subsidiary, SPO Ltd., is committed to pay royalties of 3% to
      the Government of Israel on proceeds from the sale of products, the
      research and development of which the Government has participated in by
      way of grants, up to the amount of 100%-150% of the grants received plus
      interest at LIBOR (in dollar terms). The royalties are payable at a rate
      of 4% for the first three years of product sales and 4.5% thereafter. The
      total amount of grants received or accrued, net of royalties paid or
      accrued, as of December 31, 2005 was $1,414. The refund of the grants is
      contingent upon the successful outcome of the research and development and
      the attainment of sales. The Company has no obligation to refund these
      grants, if sales are not generated. The financial risk is assumed
      completely by the Government of Israel. The grants are received from the
      Government on a project by project basis. If the project fails the Company
      has no obligation to repay any grant received for the specific
      unsuccessful or aborted project. As of December 31, 2005 the Company has
      provided for $62 in royalties payable against such grants.

NOTE 14- Subsequent Events

      On February 1, 2006 Company entered into an agreement for a line of credit
      with a lender who has previously advanced funds to the Company in the
      amount of $150. The terms of the loan provide that the credit line,
      subject to certain terms, may be extended to a maximum of $300 at the
      discretion of the lender. Pursuant to this line of credit, in February
      2006 the Company borrowed the principal amount of $150. One quarter of the
      principal amount of the loan plus interest at prime plus 4% is repayable
      every three calendar months over the 12 calendar month period following
      the draw-down.

      In February 2006 the Company entered into a one year Agreement with a
      consultant for consulting services relating to the development of
      financial and strategic business relationships. In connection therewith,
      the Company issued to such consultant warrants exercisable through
      February 2010 to purchase up to 500,000 shares of the Company's Common
      Stock at a per share exercise price of $.01. This option was exercised in
      full on February 22, 2006.

      In March 2006, the Company raised $485 in gross proceeds from the sale of
      its Common Stock.


                                      F-18