---

 

SPO MEDICAL INC.

2007 FORM 10-KSB ANNUAL REPORT

 

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.

 

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

 

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

 

1

---

 

Our solution

 

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

 

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

 

Blood pressure using reflectance oximetry

 

Billirubin levels

 

Monitoring glucose levels in blood

 

Hemoglobin count in blood

 

Products

 

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

 

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

 

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

 

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

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

 

2

---

 

Research & Development / Products Under Design and Development

 

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

 

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

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

 

Our research and development activities as well as product design activities are primarily conducted in our research and development subsidiary SPO Ltd. located in Israel. During our 2007 and 2006 fiscal years, we expended approximately $1,198,000 and $972,000, respectively, on research and development.

 

Business Strategy

 

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

 

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

 

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

 

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

 

Suppliers

 

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

 

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

 

3

---

 

Marketing and Sales Organization

 

 

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

 

Patents and Proprietary Information

 

We currently rely on a combination of patent, trade secret, copyright and trademark law, as well as non-disclosure agreements and invention assignment agreements, to protect proprietary information. However, such methods may not afford complete protection and there can be no assurance that other competitors will not independently develop such processes, concepts, ideas and documentation. As of March 2008, we hold three patents issued by the United States Patent and Trademark Office ("USPTO") covering various aspects of our unique sensors for radiance based diagnostics using pulse oximetry. Although we believe that our existing issued patents provide a competitive advantage, there can be no assurance that the scope of our patent protection is or will be adequate to protect our technologies or that the validity of any patent issued will be upheld in the future.

 

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

 

Employees

 

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

 

Competition

 

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

 

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

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

 

Governmental Regulations

 

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

 

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

 

4

---

 

 

9

---

 

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

 

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

 

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

 

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

 

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

 

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

 

Our directors, executive officers and entities affiliated with them beneficially owned an aggregate of approximately 25.4% of our outstanding Common Stock as of March 20, 2008. These stockholders, acting together, would be able to exert significant influence on substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers and other business combination transactions.

 

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

 

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

 

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

 

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

 

As of March 20, 2008, we had 50 million authorized shares of Common Stock, of which 21,585,188 shares of our Common Stock were issued and outstanding as of such date. An additional 6,032,133 shares have been reserved for issuance upon exercise or conversion of outstanding options, warrants and convertible securities. Many of the those options, warrants and convertible securities contain provisions that require the issuance of increased numbers of shares of common stock upon exercise or conversion in the event of stock splits, redemptions, mergers or other transactions. The occurrence of any such event or the exercise or conversion of any of the options, warrants or convertible securities described above would dilute the interest in our company represented by each share of Common Stock and may adversely affect the prevailing market price of our Common Stock.

 

10

---

 

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

 

Furthermore, in April 2007, we filed a registration statement on Form SB-2 (File Number 333-142141) covering sales by selling stockholders of approximately 4.6 million shares issued or issuable upon conversion of certain of our outstanding securities. These included approximately 950,000 of our currently issued and outstanding shares of Common Stock. The shares of Common Stock issuable upon conversion of our securities or the outstanding shares included in this registration statement are saleable without restriction immediately upon issuance. Any of these issuances will dilute the percentage ownership interests of our current stockholders, which will have the effect of reducing their influence on matters on which our stockholders vote, and might dilute the book value and market value of our Common Stock. Our stockholders may incur additional dilution upon the exercise of currently outstanding or subsequently granted options or warrants to purchase shares of our Common Stock.

 

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

 

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its internal control over financial reporting. To comply with this statute, we are required to document and test our internal control procedures and our management is required to issue a report concerning our internal controls over financial reporting in this Annual Report for our fiscal year ended December 31, 2007. Our independent auditors will be required to issue an opinion on management’s assessment of those matters for our annual report on Form 10-K for our fiscal year ending December 31, 2009. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are relatively new and complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. It is possible that, as we prepare for this audit, we could discover certain deficiencies in the design and/or operation of our internal controls that could adversely affect our ability to record, process, summarize and report financial data. We have invested and will continue to invest significant resources in this process. Because an audit of our internal controls has not been required to be reported in the past, we are uncertain as to what impact a conclusion that deficiencies exist in our internal controls over financial reporting would have on the trading price of our common stock.

 

 OUR STOCK PRICE MAY BE VOLATILE.

 

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

·

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

 

·

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

 

·

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

 

·

Additions or departures of key personnel;

 

·

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

 

·

Commencement of or involvement in litigation; and

 

·

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

 

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

 

11

---

 

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

 

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

 

As of March 20, 2008, there were approximately 135 holders of record of our Common Stock. We believe that a number of shares of our Common Stock are held in either nominee name or street name brokerage accounts and, consequently, we are unable to determine the exact number of beneficial owners of our stock.

 

DIVIDEND POLICY

 

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

 

RECENT SALES OF UNREGISTERED SECURITIES

 

We did not sell any securities during the three months ended December 31, 2007.

EQUITY COMPENSATION PLAN INFORMATION

 

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

 

The following table presents information as of December 31, 2007 with respect to compensation plans under which equity securities were authorized for issuance, including the 2005 Plan and the Non-Employee Directors Plan and agreements granting options or warrants outside of these plans.

 

		NUMBER OF 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
Equity compensation plans approved by security holders			1, 080,000		$	0.75			870,000
Equity compensation plans not approved by security holders			1,064,141		$	0.14
Total			2,144,141		$	0.45			870,000

 

14

---

 

NON-SHAREHOLDER APPROVED PLANS

 

The following is a description of options and warrants granted to employees, directors, advisory directors and consultants that were outstanding as of December 31, 2007.

 

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

RESULTS OF OPERATIONS

 

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

 

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

 

COSTS OF REVENUES. Costs of revenues for the 2007 were $2,447,000 compared to $1,809,000 for the 2006 Period. Costs of revenues include all costs related to manufacturing products and services and consist primarily of direct material costs, shipping and salaries and related expenses for personnel.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of expenses incurred in the design, development and testing of our products. These expenses consist primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties Research and development expenses for the 2007 Period were $1,198,000 compared to $972,000 for the 2006 Period. The increase in research and development expenses for the 2007 Period as compared to 2006 Period is primarily attributable to the increase in employee and related compensation costs and costs associated with the development of new products. Included in research and development expenses were non cash compensation benefits of $21,000 and $176,000 in respect of 2007 and 2006, respectively.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of costs relating to compensation attributable to employees engaged in sales and marketing activities, promotion, sales support, travel and related expenses. Selling and marketing expenses for the 2007 Period were $675,000 compared to $671,000 for the 2006 Period. The reasons that our selling and marketing expenses did not increase in an amount commensurate with our increase in revenues is primarily attributable to the closure of our California office during 2007.

 

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses primarily consist of salaries and other related costs for personnel in executive and other administrative functions. Other significant costs include professional fees for legal and accounting services. General and administrative expenses for the 2007 Period and the 2006 Period were $1,450,000 and $923,000, respectively. The increase in general and administrative expenses during 2007 Period is primarily attributable to professional fees incurred in connection with our efforts to raise additional funds through public and/or private offerings of our securities in and outside the United States. Included in general and administrative expenses were non cash compensation benefits of $127,000 and $122,000 in respect of 2007 and 2006, respectively.

 

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

 

16

---

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

We generated negative cash flow from operating activities of approximately $559,000 during the 2007 Period compared to $443,000 for the 2006 Period.

 

In December 2005 we completed the private placement to certain accredited investors that we commenced in April 2005 for the issuance of up to $1,544,000 of units of our securities, with each unit comprised of (i) our 18 month 6% promissory note (collectively, the "April 2005 Notes") and (ii) three year warrants to purchase up to such number of shares of our Common Stock as are determined by the principal amount of the Note purchased by such investor divided by $ 0.85 (collectively the "April 2005 Warrants"). In September 2006, we offered to the holders of the April 2005 Notes to revise certain of the terms of the original offering in order to facilitate an extension to the scheduled maturity date of the Note, (hereinafter the "Amendment"). The Amendment provides that (a) the maturity date of the April 2005 Notes is to be extended by one year from the original maturity date on the original note, (b) the exercise period of the April 2005 Warrants is to be extended from three to five years and the per share exercise price was adjusted to $0.60 and (c) the interest rate on the amounts outstanding under the April 2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment also provides that if we subsequently issue shares of our Common Stock at an effective per share exercise price less than that of the adjusted per share exercise price of the April 2005 Warrants during the adjusted exercise period, then the exercise price thereof is to be reduced to such lower exercise price; provided, that, this protection will not apply to certain of our equity or debt issuances (i) from approved stock option plans to employees, directors and other service providers, (ii) upon exercise of options and warrants outstanding as of September 27, 2006 and (iii) to our consultants that an unaffiliated third party would deem to be commercially reasonable and fair. The Amendment became effective as of September 30, 2006. As of December 31, 2007, holders of Notes in the principal amount $1,439,000 have signed the Amendment, the holder of a note in the principal amount of $50,000 has been repaid and the holders of notes in the principal amount $125,000 have exercised their warrants and converted the accrued interest on the note. The holders of notes in the amount of $55,000 have not signed the amendment. All of these notes, including the notes held by the holders who agreed to the extension of the maturity date, are scheduled to mature on March 26, 2008. We intend to approach these note holders in an effort to reach a resolution whereby the amounts payable under the April 2005 Notes are converted and/or applied to the exercise of the April 2005 Warrants. No assurance can be provided that we will be successful in reaching any such resolution.

In July 2006, we commenced a private placement of units of our securities, with each unit comprised of (i) our 8% month promissory note due 12 months from the date of issuance and (ii) warrants as described below, pursuant to which we raised $550,000 (the maximum amount that could be raised from this offering). Under the terms of the offering, the principal and accrued interest is due in one balloon payment at the end of the twelve month period. Each purchaser of the notes received warrants, exercisable over a period of two years from the date of issuance, to purchase16,250 shares of Common Stock for each $25,000 of principal loaned, at a per share exercise price equal to the lower of $1.50 or 35% less than any the offering price at an initial public offering of the Company's Common Stock during the warrant exercise period. During the quarter ended September 30, 2007, we offered to the holders of the notes to convert the principal and accrued interest into shares of our Common Stock at a per share conversion price of $0.90. As of March 2008, the holders of $238,000 of the principal amount agreed to convert the principal and accrued interest thereon into shares of our Common Stock. We repaid to a note holder the principal amount of $75,000 and the accrued interest thereon. We have not made the scheduled payment on the amounts owing under the notes that have not been converted and, accordingly, under the terms of such notes, we are in default thereunder. We are in discussions with these note holders in an attempt to resolve this matter.

 

Our recent financings are discussed below.

 

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

19

---

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

Board of Directors; Appointment of Officers

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

 

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

 

CODE OF ETHICS

 

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

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each of our officers and directors and each person who owns more than 10% of a registered class of our equity securities to file with the SEC an initial report of ownership and subsequent reports of changes in such ownership. Such persons are further required by SEC regulation to furnish us with copies of all Section 16(a) forms (including Forms 3, 4 and 5) that they file. Based solely on our review of the copies of such forms received by us with respect to fiscal year 2007, or written representations from certain reporting persons, we believe all of our directors and executive officers met all applicable filing requirements.

 

21

---

SUMMARY COMPENSATION TABLE

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

______

(1)	Amounts in this column reflect the expense recognized by us for accounting purposes calculated in accordance with FASB Statement of Financial Accounting Standards No. 123R (“FAS 123R”) with respect to employee stock options issued under the Company's 2005 Incentive Plan in 2005.   The assumptions used to calculate the fair value of stock option grants under FAS 123R, were: expected holding period of 10 years, risk free interest rate of 2.63%, no dividend yield and volatility of 100%.
(2)	Reflects payments made by us in connection with a leased automobile and related benefits ($13,154), payment in lieu of accrued vacation ($9,238).and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($48,075)
(3)	Reflects payments made by us in connection with a leased automobile and related benefits ($12,568) and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($47,008).
(4)	Reflects payments made by us in connection with a leased automobile and related benefits ($14,976) and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($44,193).
(5)	Reflects payments made by us in connection with a leased automobile and related benefits ($12,726) and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($33,059).
(6)	Reflects payments made by us in connection with a leased automobile and related benefits ($19,100) and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($51,210).
(7)	Reflects payments made by us in connection with a leased automobile and related benefits ($14,486) and contributions to insurance premiums paid under Israeli law for pension, severance and further education funds ($48,883).

 

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

 

Name		Number of Securities Underlying Unexercised Options (#)   Exercisable			Number of Securities Underlying Unexercised Options (#)   Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Unexercsied Unearend Options (#)			Option Exercise Price   ($)			Option Expiration Date
Michael Braunold			250,000	(1)		—			—		$	0.60			12/22/15
Jeffrey Feuer			120,000	(2)							$	0.60			12/22/15
Israel Sarussi			—	(3)		—			—			—			—

______

(1)	Options were issued under our 2005 Equity Incentive Plan on December 22, 2005 and were fully vested upon issuance.
(2)	Options were issued under our 2005 Equity Incentive plan on December 22, 2005.
(3)	Does not include warrants for 446,383 shares of our Common Stock issued to Mr. Sarussi on April 21, 2005 in exchange for warrants in SPO Ltd held prior to Acquisition Transaction

 

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

 

 

JEFFREY FEUER. On July 14, 2005, we entered into an employment agreement with Jeffrey Feuer, pursuant to which Mr. Feuer serves as our Chief Financial Officer. Previously, on May 15, 2005, Mr. Feuer and SPO Ltd. entered into an employment agreement pursuant to which Mr. Feuer continues to serves as SPO Ltd.'s Chief Financial Officer. Each of the agreements with the Company and SPO Ltd. terminates on the earlier of: (i) Mr. Feuer's death or disability, (ii) termination by the Company or Mr. Feuer without cause upon 60 days written notice; or (iii) termination of Mr. Feuer with cause. Mr. Feuer is currently paid a monthly salary of $10,000 under the agreement with SPO Ltd. Mr. Feuer is not entitled to a salary under the agreement with us but has been granted options under the Company's 2005 Equity Incentive Plan to purchase 120,000 shares of the Company's Common Stock at a per share exercise price of $0.60.

 

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

 

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

 

23

---

 

28

---

SPO MEDICAL INC. AND ITS SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2007

 

U.S. DOLLARS IN THOUSANDS

 

INDEX

 

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

 

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of

SPO MEDICAL INC.

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

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

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

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

Brightman Almagor & Co.

Certified Public Accountants

A member firm of Deloitte Touche Tohmatsu

/s/ Brightman Almagor & Co.

Tel-Aviv, Israel

March 19, 2008

 

F-2

---

NOTE 7     - LINE OF CREDIT

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

NOTE 8     - OTHER CREDITORS

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

F-15

---

NOTE 9     - ACCRUED EXPENSES AND OTHER LIABILITIES

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

NOTE 10   - ACCRUED SEVERANCE PAY

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

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

 

NOTE 11   - PRIVATE PLACEMENTS

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

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

 

F-16

---

 

NOTE 12    - STOCKHOLDER'S EQUITY

A.

Equity Incentive Plans

In April 2005, the Company adopted the 2005 Equity Incentive Plan (the "2005 Plan"). A total of 1.75 million shares of Common Stock were originally reserved for issuance under the 2005 Plan. The 2005 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The 2005 Plan also permits cash payments under certain conditions. The compensation committee of the Board of Directors is responsible for determining the type of award, when and to who awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date of grant. Vesting periods range from immediately to four years. Under the 2005 plan, options granted expire after 10 years from the date of the grant.

 

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

 

With respect to compensation expenses recorded in 2006 and 2007, relating to options granted through December 31, 2007, the Company applied the provisions of SFAS No. 123(R) and SAB No. 107, which require employee share-based equity awards to be accounted for under the fair value method, SFAS No. 123(R) requires the use of an option pricing model for estimating fair value, which is then amortized to expense over the service periods.

During 2007 and 2006 the Company recorded Stock-based compensation expenses in the amount of $203 and $1,152, respectively.

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

 

F-17

---

NOTE 12   - STOCKHOLDER'S EQUITY (Cont.)

B.

Stock Options:

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

 

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

 

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

Range of exercise price			Options outstanding as of December 31, 2007			Weighted average remaining contractual life (years)			Weighted average exercise price			Options exercisable as of December 31, 2007			Weighted average exercise price of options exercisable
$	0.055			100,000			3.32		$	0.05			100,000		$	0.05
$	0.60			720,000			7.63		$	0.60			645,000		$	0.60
$	0.85			110,000			6.14		$	0.85			70,000		$	0.85
$	1.50			50,000			4.47		$	1.50			50,000		$	1.50
$	1.85			100,000			8.81		$	1.85			66,667		$	1.85
				1,080,000			7.04		$	0.73			931,667		$	0.70

 

F-18

---

NOTE 12 - STOCKHOLDER'S EQUITY (Cont.)

C.

Stock warrants

The Company has the following warrants outstanding:

 

Issuance date			number of warrants issued			Exercise price			Exercisable as of December 31, 2007			Exercisable through
2005	(1)			1,857,066			0.85			-			-
2005	(2)			40,000			0.75			40,000			August 2008
2005	(3)			853,308			0.01			853,308			December 2010-April 2015
February 2006	(2)			60,000			0.85			60,000			January 2009
April 2006	(4)			30,000			0.60			30,000			November 2009
September 2006	(5)			83,333			0.36			83,333			August 2009
September 2006	(5)			57,500			0.60			57,500			September 2010
September 2006	(6)			2,340,491			0.60			2,340,491			September 2010
October 2006	(7)			357,500			updated to 0.9 in Sept 2007			357,500			October 2010
March 2007	(8)			20,000			1.50			20,000			March 2010
September 2007	(4)			40,000			1.50			40,000			September 2011

(1)

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

(2)

Warrants issued to other lenders

(3)

Penny warrants issued to service providers and an employee during 2005

(4)

Warrants issued to service providers

(5)

Warrants issued to consultant for financial services.

(6)

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

(7)

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

(8)

Issued in connection with line of credit see Note 7

D.

Dividends

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

 

F-19

---

 

NOTE 13 - DEFERRED TAXES

A.

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

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

B.

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

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

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

C.

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

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

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

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

F-20

---

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Lease Commitments

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