UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 MARK
ONE:
 
 x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2008
 
 o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 Commission
file number:0-51170
 IDO
SECURITY INC.
 (Exact
name of registrant as specified in its charter)
  Nevada
                          (State
      or other Jurisdiction
                          of
      Incorporation or Organization)
                        
                        
                        38-3762886
                            (I.R.S.
      EmployerIdentification No.)17
      State Street
                          New
      York, New York
                          (Address
      of Principal Executive Offices)
                        
                        
                        10004
                          (Zip
      Code)
  (646)
224-1234
 (Registrant’s telephone
number, including area code)
 
 Securities
registered under Section 12 (b) of the Exchange Act: None
 Securities
registered under Section 12 (g) of the Exchange Act: Common Stock, $.001 per
share
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
  Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yesx No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o Smaller Reporting
Company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
  The
registrant had
129,267,089 shares of common stock, par value $0.001 per share, outstanding as
of April 6, 2009. The aggregate market value of the voting and non-voting common
stock held by non-affiliates
of the registrant, computed by reference to the closing price of $1.45 of the
common stock on the OTC Bulletin Board on June 30, 2008, was approximately $48.8
million.





IDO
SECURITY INC.


2008
FORM 10-K ANNUAL REPORT


TABLE
OF CONTENTS


PagePART
      IItem
    1.
                  Business
                  
                  1Item
    1a.
                  Risk
      Factors
                  
                  7Item
    1b.
                  Unresolved Staff
      Comments
                  
                  15Item
    2.
                  Properties
                  
                  15Item
    3.
                  Legal
      Proceedings
                  
                  15Item
    4.
                  Submission of Matters to a Vote
      of Security Holders
                  
                  15PART
    IIItem
    5.
                  Market for Common Equity and
      Related Stockholder Matters
                  
                  15Item
    6.
                  Selected Financial
      Data
                  
                  16Item
    7.
                  Management Discussion and
      Analysis of Financial Condition and Results of
      Operation.
                  
                  16Item
    7a.
                  Quantitative and qualitative
      disclosures about market risk.
                  
                  23Item
    8.
                  Financial
      Statements
                  
                  23Item
    9.
                  Changes in and Disagreements
      With Accountants on Accounting and Financial
      Disclosure
                  
                  23Item
      9A(T).
                  Controls and
      Procedures
                  
                  23Item
    9b.
                  Other
      Information
                  
                  24PART
    IIIItem
    10.
                  Directors and Executive
      Officers and Corporate Governance
                  
                  24Item
    11.
                  Executive
      Compensation
                  
                  25Item
    12.
                  Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
                  
                  28Item
    13.
                  Certain Relationships and
      Related Transactions and Director Independence
                  
                  30Item
    14.
                  Principal Accounting Fees and
      Services
                  
                  30Item
    15.
                  Exhibits and Financial
      Statement Schedules
                  
                  31SIGNATURES
                  
                  33







FORWARD
LOOKING STATEMENTS




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







ITEM 1. BUSINESS




OVERVIEW




IDO
Security Inc. (referred to herein as “we,” “our,” “us,” “IDO,” or the “Company”)
is engaged in the design, development and marketing of devices for the homeland
security and loss prevention markets that are intended for use in security
screening procedures to detect metallic objects concealed on or in footwear,
ankles and feet through the use of electro-magnetic fields. These devices were
designed specifically for applications in the security screening to complement
the current methods for the detection of metallic items during security
screenings and at security checkpoints in venues such as airports, prisons,
schools, stadiums and other public locations requiring individual security
screening.




IDO
Security Inc. (formerly knows as “The Medical Exchange Inc.”) was incorporated
in the State of Nevada on January 23, 2004. On July 25, 2006, The Medical
Exchange, IDO Security Ltd. (“IDO Ltd.”) and IDO Ltd.’s Selling Shareholders
entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant
to which IDO Security Inc. purchased, in March 2007, all of the issued and
outstanding share capital of IDO Ltd. (the “Acquisition Transaction”). Following
the Acquisition Transaction, IDO Ltd. became a wholly-owned subsidiary of IDO
Security Inc. and we adopted the business of IDO Ltd. In June 2007, we then
changed our corporate name to “IDO Security Inc.”




From
the commencement of operations in March 2002, IDO Ltd. has been engaged in the
design, development, manufacturing and marketing of devices for Shoes-On
Metallic Weapons Inspection Systems (SWIS) for the homeland security market that
are used in security screening to detect metallic objects (both ferrous and
non-ferrous) concealed on or in shoes, ankles and feet through the use of
electro-magnetic fields, without the need of removing shoes. These devices were
designed specifically for applications in the security screening and detection
market to complement the current detection methods for the detection of metallic
items during security screenings and at security checkpoints in venues such as
schools, prisons, commercial aviation and maritime facilities, rail
transportation, shopping centers/places of entertainment, business facilities
bus and train stations, border crossings, government institutions/buildings,
critical infrastructure and defense facilities.




We
have designed and developed a security screening device containing proprietary
and patented technology known as the MagShoe. The MagShoe creates specific
electro-magnetic fields that can intelligently detect the presence of metallic
objects inside a person’s footwear, as well as next to or above the ankles. The
proprietary software included in the MagShoe provides for the collation and
delivery of the screening data to the operator for immediate analysis. The
MagShoe obviates the need to remove the footwear being inspected. Our technology
is designed to distinguish between a person’s left and right shoe, analyzing
anomalies for each foot but also for both together, and provides comparative
screening results. The technology allows for both the detection and assessment
of possible threats from the shoe and ankle area posed by foreign metal objects
based upon the analysis of the detected metal material(s) and their location in
shoes. The MagShoe device has been designed to be portable and to integrate into
and complement current security screening arrays and systems.




The
MagShoe has been deployed and is in operation in various countries including
Israel, Spain, Poland, The Czech Republic, and Australia. During the fourth
quarter of 2008, we began to penetrate the China based market, which we believe
may be one of our more significant markets. We are also actively pursuing
certain Requests for Proposals ( RFP) for footwear scanners that we are
beginning to receive from sources in various countries. We believe that these
RFPs further validate the need for our product. In addition, in January 2006,
the MagShoe was approved for use by the Department for Transport in the United
Kingdom, after field trials were conducted for the Home Office’s Police
Scientific Development Branch. In addition, we have been certified by the
International Organization for Standardization (“ISO”) under ISO 9001:2000
compliance for the design, development and manufacture of electronic,
electro-optic and electro-mechanical systems. In December of 2008, the company
received its certification from the Underwriter’s Laboratory (UL) in the United
States, which signifies that the MagShoe is safe for sale in the United
States.


1




We
need to raise additional funds on an immediate basis in order to meet our
on-going operating requirements and to realize our business plan. In response to
the deteriorating global economic conditions that began in 2008, we have taken
certain measures in an effort to reduce operating expenses and conserve our cash
resources. Beginning in April 2008, we have significantly curtailed our
non-essential product design and development, marketing activities. Our senior
and other employees have agreed to defer, in part, salaries and benefits. As of
March 31, 2009, we had 10 employees working on a full-time basis. If we are
unable to raise capital on an immediate basis, it may be necessary to for us to
take further measures to reduce our cash burn including laying-off additional
personnel, further curtail marketing efforts or cease operations entirely. No
assurance can be given that we will be able to raise the needed capital. These
conditions raise substantial doubt about our ability to continue as a going
concern.




Subject
to raising the needed funds, our goal is to incorporate our shoes-on weapons
metal detection proprietary technology as a complementary technology to the
existing walk through metal detectors, thereby augmenting the security equipment
and procedures currently used throughout the world.




INDUSTRY
BACKGROUND




The
tragic attacks of September 11, 2001 on the United States and other terrorist
attacks around the world have resulted in a heightened awareness for the need
for dramatically increasing the type and quality of security screening at
airports and other public venues. As terrorist attacks have increased in
frequency and terrorists have increased the level of sophistication of their
terrorist operations, those responsible for homeland security have sought new
and more sophisticated technologies and products to bolster the effectiveness
and minimize the gaps that are inherent in existing security
systems.




Airport
security has been the focus of homeland security departments worldwide; in
particular, the U.S. Department of Homeland Security (DHS) and the
Transportation Security Administration (TSA) are mandated to tighten aviation
security by allocating resources to create a comprehensive security screening
system that can react to current and future security threats. On August 14,
2006, the Transport Security Administration revised its airport security
procedures for travelers in the United States, when shoe removal and screening
became required for all passengers. The TSA made passenger screening a priority
and has recognized that passenger screening of shoes, feet and the ankle area
pose a unique challenge and an imminent threat to the safety of passengers.
Since the almost successful attempt by terrorists to detonate a shoe bomb on an
airplane nearly resulted in mid-air tragedy, increased passenger screening for
weapons and concealed bombs has necessitated the removal of shoes by persons
entering the security areas and in many instances an even more invasive
additional screening by security personnel.




The
current screening technologies and procedures for screening of shoes, feet and
ankles, do not meet the requirements of homeland security agencies throughout
the world and in particular, the TSA and DHS. Most screening technologies and
devices in use today, deliver unacceptable performance, having persistent
problems with high false alarm rates, slow throughput, operator dependence and
high transaction costs. This inherent weakness in the security screening process
has necessitated the imposing of the security procedure mandating that
passengers remove their shoes prior to a security walk-through gate. This new
and imposing security procedure in the United States, for ports-of-entry, is
generating delays, requires screening of shoes through baggage scanning
equipment which may be insufficient in detecting any items that may be located
on a persons shoe, ankle and foot, that are within approximately 10cm (4 inches)
of the ground. The current protocols for screening were instituted as stop-gap
measures until an effective technology could be implemented to solve the
problems.




Currently,
the cost of screening an individual at a checkpoint may be as high as several
dollars per person, per check, depending upon the cost of security personnel. It
is anticipated through the use of new technologies that the cost will drop
significantly to lower than one dollar per person, per check. Currently, a
significant part of that cost of a security screening is the necessity for the
handling and instructing of passengers at the checkpoint bottleneck and the
manual re-screening of shoes, foot and ankle area subsequent to the passenger
passing through the walk-through metal detector. These procedures are
labor intensive and as passenger volume increases, the cost of labor will
also increase, unless new technologies can be adapted and
utilized.


2




The
MagShoe utilizes proprietary and patented technologies to deliver a shoe and
ankle area screening product that is efficient, non-disruptive and delivers ease
and speed of use while increasing the quality and efficacy of the screening
process. IDO has developed and manufactured the MagShoe as a portable, easy to
use, purpose built metal detector, which can detect metals inside a shoe and
next to and on a person’s ankles, in an efficient and non-invasive manner that
is complimentary to and easily integrates with current screening practices and
security procedures.




OUR
SOLUTION – The MagShoe




The
MagShoe responds to the need for a quick, reliable and efficient way of
conducting a personal screening of the shoes and ankle area, without the need
for removing shoes. The MagShoe, a state-of-the-art device, is designed to
create specific electro-magnetic fields which are used to detect and assess
possible threats from metallic foreign objects by means of an intelligent
detector system that evaluates and analyzes multiple parameters including the
location of the object, mass and weight against a baseline of what is normally
found in shoes and the ankle area. The MagShoe contains our proprietary and
patented technology that allows high volume, highly effective screening without
the necessity of shoe removal. Scanning time is no more than 1.6 seconds per
person, with no need for the passenger to remove his shoes, thereby
significantly reducing bottlenecks at security screening points.




The
MagShoe is portable, weighing approximately 25 kilograms per unit and can be
deployed quickly by existing security personnel, who can integrate the MagShoe
into their current security protocols and systems. The subject being screened
places his feet on the device in the grooves designated for each foot and in
less than 1.6 seconds, the scan and check are completed. An audio-visual signal
alerts the operator of the results of the check and the results of the check
then appear on the control panel in an easily readable format.




The
MagShoe is an electronic system and consists of three main sub systems: a
control unit, magnetic field detectors and a processing unit. The control unit
is used to calibrate parameters in the system and to display the shoe screening
results. The magnetic field detectors are used to detect the metals in and
around the shoes and ankles. The Processing unit interfaces between the metal
detectors and the control unit.




We
believe that the MagShoe scan in conjunction with a walk-through metal detector
gate and/or a hand-held metal detector scan, offers a more thorough
security solution. The walk through metal detector gate scan is characterized by
its inherent weakness when scanning from ground levels up to approximately 10
centimeters (4 inches). MagShoe provides a completely effective coverage for
that area without the need to overhaul systems and technology already in
place.




The
MagShoe is manufactured by our subsidiary, IDO Ltd., at its facilities presently
located in Rishon Le Zion, Israel. Our manufacturing plant in Israel has been
certified by the International Organization for Standardization (“ISO”). Subject
to raising additional capital and identifying the appropriate source party, we
anticipate that during 2009, the MagShoe will also be manufactured by an outside
manufacturer, thereby enhancing our ability to turn out significant quantities
of MagShoe as needed.




BUSINESS
STRATEGY




Our
vision is to build a profitable business that develops and commercializes new,
advanced and affordable technologies and related products, to provide
comprehensive security screening solutions that are widely
adopted.


3




To achieve these
objectives, the key elements of our strategy include the
following:


●
                  Developing
      and establishing MagShoe brand in the security screening
      market.Most
      of the world’s leading security related businesses have strong brand
      identities enhancing their competitive position. We seek to establish
      brand identity for our company, communicate our brand and its values to
      investors and customers, build a relationship with our targeted markets
      and reinforce the relationship and further trigger
    recognition●
                  Consumer
      Market Analysis and our Product Features. We will seek to implement
      changes to enhance the performance, applications and functionality of
      MagShoe based on feedback from users, our constant current marketing
      analysis and our know-how. We believe that the enhancing MagShoe
      capabilities will add to its competitiveness and encourage its further
      usage.●
                  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
      its collaborators, into new product offerings. We are currently focusing
      our research and development on giving the MagShoe increased capabilities
      and on expanding its product offerings to additional
      areas.●
                  Global
      Market Expansion through Strategic and Collaborative
      Relationships.We
      believe that collaboration with leading scanning device manufacturers and
      providers is an avenue for us to increase consumer usage of our
      technology, increase demand for our products and generate revenues.
      We intend to promote our product sales in different geographic areas, as
      part of our expanding
strategy.




No
assurance can be provided that we will successfully implement our strategy. We
are subject to significant business risks and may need to raise additional
capital in order to realize our business plan and effectuate the above strategy.
See “Risk Factors.”




MARKETING
PLAN AND SALES ORGANIZATION




We
have identified a number of markets for our products and have developed programs
to gain access to those target markets. Generally, private industry and
government facilities that possess sensitive information, valuable assets or by
virtue of the nature of their business may be subject to terrorist threats,
recognize the need to implement security measures to protect personnel and
property. In many instances, laws have been enacted and mandates decreed for
compliance with some minimum-security standards. Airport security is a prime
example. We target these entities as well as entities where we can demonstrate
the need for security measures.




The
MagShoe is being sold internationally, primarily through independent regional
distributors and local agents, on a non-exclusive basis, and in Israel directly
to end-users. MagShoe’s primary markets are in the areas of homeland security
and include educational institutions, prisons, commercial aviation and maritime
facilities, rail transportation, shopping centers/places of entertainment,
business facilities bus and train stations, border crossings, government
institutions/buildings, critical infrastructure and defense
facilities.




We
presently have no significant steady revenue generating arrangement and no
assurance can be provided that we will in fact be able to enter into agreements
or arrangements on terms that are commercially acceptable to us. Our success in
concluding any revenue generating commercial agreements is premised, in part, on
the acceptance of our products. We anticipate that our business may generate
disproportionate amount of revenues from one period to another and therefore our
financial results will vary significantly from period to period.




Our
marketing strategy calls for the distributor to market the product to on-site
security providers as a system upgrade that enhances the security screening
process and that can be used in conjunction with currently used walk-through
metal detector gates.




We
intend to further develop existing channels of sales and to locate additional
channels of sales, and to enter into representation agreements with distributors
of similar items or entities which operate within the security field. We also
intend to target the Original Equipment Manufacturer (OEM) market which will
enable us to bundle MagShoe with their walk-through metal detectors
suppliers..


4




According
to our tactical marketing program, we have targeted the following market niches:
schools, prisons, commercial aviation and maritime facilities, rail
transportation, shopping centers/places of entertainment, business facilities
bus and train stations, border crossings, government institutions/buildings,
critical infrastructure and defense facilities.




According
to our marketing plan, we have and will continue to run field trials and pilot
demonstrations. These are directed toward a variety of goals including
developing and demonstrating MagShoe’s capabilities and applications. As of
March 2009, we have completed a series of pilot programs at strategic locations
of the type mentioned above.




We
attend trade shows and other security industry gatherings, on a stand alone
basis or partner with our distributors or potential distributors. We use the
media and other avenues to bring our products to the attention of decision
makers in the security industry.




Given
our lack of sufficient resources, our marketing efforts described above have
been significantly curtailed pending the raising of additional funds. As of the
filing of this annual report on Form 10-K, we have no commitment for any such
funding and no assurance can be provided that we will be able to raise the
needed funds on commercially acceptable terms or at all.




SUPPLIERS




Core
components of the MagShoe are currently manufactured by our subsidiary, IDO Ltd.
Certain non-core components are manufactured by third party unaffiliated
contractors. Testing and assembly of MagShoe units are managed by our subsidiary
at its facilities in Israel. We purchase certain components from a single source
which is based in Israel.




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




SERVICE
AND SUPPORT




Service
and support for our product is primarily provided by our independent
distributors in consultation with us. Installation is usually effected by the
end-user and maintenance support primarily derives from our independent
distributors, supported by our in-house engineering staff. This support
generally includes consultations with the independent distributor, repair and
unit replacement, traveling to the customer site to explain the technical
operation of the system, clarifying the configurations, detailing any necessary
software customization and defining any integration issues. Once installed, the
systems are supported by our independent distributors Our product generally
carrier a one-year warranty and an extended service is offered through a choice
of maintenance contracts. Additional support after the expiration of the
warranty period is available for a fee.




PATENTS
AND PROPIETARY RIGHTS




Protecting
our proprietary rights, such as our brand name and our proprietary technologies,
is critical to building consumer loyalty and attracting and retaining
customers.




We
seek to protect our proprietary rights through a combination of copyright, trade
secret, patent and trademark law and contractual restrictions, such as
confidentiality agreements and proprietary rights agreements. We enter into
confidentiality and proprietary rights agreements with our service providers,
and generally control access to and distribution of our proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
obtain and use our intellectual property, and we cannot be certain that the
steps we have taken will prevent misappropriation or confusion among consumers
and merchants. If we are unable to procure, protect and enforce our intellectual
property rights, then we may not realize the full value of these assets, and our
business may suffer.


5




We
hold one patent issued by the United States Patent and Trademark Office
(“USPTO”) covering various aspects of our unique technology for the detection of
metal objects and we have one patent application pending in Israel for the same
technology.




Except
for the patents referred to above, we currently do not have any registered
trademarks or patents.




COMPETITION




The
market for design, development and marketing of devices for the homeland
security is highly competitive and we expect competition to intensify in the
future. Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. Many of our competitors also have much
greater brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.




We
expect competitors to introduce new and improved products and services with
lower prices, and we will need to do the same to remain competitive. We may not
be able to compete successfully against either current or future competitors
with respect to new products.




We
expect competition to increase as other companies introduce products that are
that may have increased functionality such as multi-threat detection capability
or that incorporate technological advances that are not yet developed or
implemented by us. Some of our present and potential competitors have financial,
marketing and research resources substantially greater than those of us. In
order to compete effectively in this environment, we must continually develop
and market new and enhanced products and have the resources to invest in
significant research and development activities.




In
addition, new generation full body scan technology may replace the need for the
MagShoe. This technology, commonly known as “backscatter” x-rays, uses
high-energy X-ray waves that are more likely to scatter than penetrate materials
as compared to lower-energy X-rays used in the medical field. The result is a
detailed image of what’s underneath a person’s clothing, enabling screeners to
easily identify foreign objects strapped to the human body beneath garments. The
technology is currently in use in a number of countries but has not been
accepted in the United States and other countries due to invasion of privacy
concerns. Further, it is extremely expensive and therefore possibly
cost-prohibitive in many venues.




A
significant number of established and startup companies and leaders in the field
of body screening for security may be developing applications that could
significantly reduce our worldwide markets. Some of these companies are
developing walk through “backscatter” and “magnometer” gates that will provide
full head to toe body scan capabilities. If one or more of these approaches is
widely adopted, it would significantly reduce the potential market for our
product.




EMPLOYEES




We
presently employ 10 full time employees and consultants, all of whom but for our
President and acting Chief Executive Officer, work out of IDO Ltd.’s offices in
Israel. None of these employees are subject to collective bargaining
agreements.


6




RESEARCH
AND DEVELOPMENT




Since
the Acquisition Transaction in March 2007, we incurred $390,988 and $279,177 on
the research and development of the MagShoe product in each of the years ended
December 31, 2008 and 2007, respectively.




AVAILABLE
INFORMATION




Our
Internet website is located at http://www.idosecurityinc.com. The reference to
our Internet website does not constitute incorporation by reference of the
information contained on or hyperlinked from our Internet website and should not
be considered part of this document. The public may read and copy any materials
we file with the 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.




1A. RISK FACTORS




OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED BY VARIOUS RISKS, INCLUDING, BUT NOT LIMITED TO THE PRINCIPAL
RISKS NOTED BELOW.




RISKS
CONCERNING OUR BUSINESS




WE
HAVE A HISTORY OF OPERATING LOSSES THAT MAY CONTINUE FOR THE FORESEEABLE FUTURE,
THUS RAISING SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.




Since
inception, we have incurred significant operating losses. Since the Acquisition
Transaction in March 2007 and through December 31, 2008, we have incurred losses
totaling $8.2 million. Prior to the Acquisition Transaction, our subsidiary, IDO
Ltd., incurred losses of $2 million. We believe that we will continue to
incur net losses for the foreseeable future as we continue to further develop
and promote the MagShoe and related products. We cannot assure you that we will
achieve or sustain profitability or that our operating losses will not increase
in the future. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
We expect to expend substantial financial resources on research and development,
marketing and administration as we continue to develop our products. These
expenditures will necessarily precede the realization of substantial revenues
from the sales of our single product line, if any, which may result in future
operating losses.




The
report of our independent registered public accounting firm for our financial
statements for the year ended December 31, 2008 includes an explanatory
paragraph regarding substantial doubt about our ability to continue as a going
concern. This “going concern” paragraph may have an adverse effect on our
ability to obtain financing for operations and to further develop and market
products. If we do not receive additional capital when and in the amounts needed
in the near future, our ability to continue as a going concern is in substantial
doubt.


7




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




We
believe that our existing cash resources are insufficient to enable us to
maintain operations as presently conducted and meet our obligations as they come
due. Without raising additional funds on an immediate basis, whether through the
issuance of our securities, licensing fees for our technology or otherwise, we
will also not be able to maintain operations as presently conducted or
commercially and may have to restructure our operations or even cease operations
entirely. Without adequate funding, we also may not be able to accelerate the
development and deployment of the MagShoe, respond to competitive pressures,
develop new or enhanced products or take advantage of unanticipated acquisition
opportunities. At the present time, we have no commitments for any financing,
and there can be no assurance that capital will be available to us on
commercially acceptable terms or at all. We may have difficulty obtaining
additional funds as and when needed, and we may have to accept terms that would
adversely affect our stockholders. Any failure to achieve adequate funding will
delay our development programs and product launches and could lead to
abandonment of one or more of our development initiatives, as well as prevent us
from responding to competitive pressures or take advantage of unanticipated
acquisition opportunities. Additionally, in connection with our financings in
December 2007 and December 2008, under the terms of the agreements with these
holders, without their consent we may not grant any additional security interest
until our obligations incurred in connection with such convertible debenture
financing are paid out. The holders of these notes will also need to approve any
additional financing in our company. The recent and continuing turmoil in the
credit and equity markets may adversely affect our ability to raise the needed
funds.




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




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




HOLDERS
OF OUR SDECURED CONVERTIBLE PROMISSORY NOTES HAVE LIENS ON SUBSTANTIALLY ALL OF
OUR ASSETS AND COULD FORECLOSE IN THE EVENT THAT WE DEFAULT UNDER THE
NOTES.




Under the
terms of the agreements with the holders of our secured promissory notes that we
issued in December 2007 and December 2008, the note holders have a first
priority lien on substantially all of our assets, including our cash balances.
If we default under the notes, the note holders would be entitled to, among
other things, foreclose on our assets (whether inside or outside a bankruptcy
proceeding) in order to satisfy our obligations under the credit
facility.




OUR
SHAREHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION UPON THE CONVERSION OF OUR
OUTSTANDING DEBENTURES AND PREFERRED STOCK BECAUSE THESE SECURITIES CONVERT AT A
DISCOUNT TO THE MARKET PRICE OF OUR COMMON STOCK AT THE TIME OF
CONVERSION.




We
currently have outstanding approximately $5.0 million of our 10% two year
secured convertible promissory notes due November and December 2009 (the
“December 2007 Notes”), $1.1 million of Convertible Promissory Notes due April
20, 2010 (“the “December 2008 Notes”; together with the December 2007 Notes, the
“Investor Notes”) and approximately $2.7 million in stated value of Series A
Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred
Stock”). We are required to make monthly payments with respect to the accrued
principal and interest on the notes (dividends, in the case of the Series A
Preferred Stock). These payments may be made, at our option, in shares of our
Common Stock at a rate equal to 75% of the average of the closing bid prices of
the common stock for the five trading days preceding the payment date (which
shall in no event exceed $0.15 per share). We have been making the required
payments in shares of our Common Stock and intend to continue doing so for the
foreseeable future.


8




There is an inverse relationship between our stock price and the number of
shares issuable upon conversion of these securities. That is, the higher the
market price of our Common stock at the time a Debenture is converted, the fewer
shares we would be required to issue, and the lower the market price of our
Common Stock at the time payment is made with respect to a security, the more
shares we would be required to issue. Between January and April 6, 2009, we
issued 83,158,089shares of our common stock
in payment of approximately $138,588in principal and accrued
interest in respect of the December 2007 Notes, at a average per share price of
$0.077 for the January 2009 payments,
$0.0012for the February 2009
payments and $0.00098per share for the March and
April 2009 payments. Payments on the December 2008 Notes and the Series A
Preferred Stock will commence in April 2009.




WE
HAVE A LIMITED OPERATING HISTORY IN THE FIELD OF DESIGN DEVELOPMENT AND
MARKETING OF DEVICES FOR THE HOMELAND SECURITY MARKET AND CONSEQUENTLY, THERE IS
LIMITED HISTORICAL FINANCIAL DATA UPON WHICH AN EVALUATION OF OUR BUSINESS
PROSPECTS CAN BE MADE.




Our
wholly-owned subsidiary, IDO Ltd. has been engaged in the design, development
and marketing of devices for the homeland security market that are used in
security screening to detect metallic objects concealed on or in shoes, ankles
and feet through the use of electro-magnetic fields, without the need of
removing shoes. We have released only one single product line and have generated
limited revenues since inception. As a result, we have limited historical
financial data that can be used to evaluate our business prospects and to
project future operating results. For example, we cannot predict operating
expenses based on our historical results, and we have instead to forecast
expenses based in part on future revenue projections. In addition, our ability
to accurately forecast our revenue going forward is limited.




WE
ARE RELIANT ON REVENUES FROM ONE SINGLE PRODUCT AND OUR PRODUCT MAY BE SUBJECT
TO FURTHER DEVELOPMENT AND TESTING.




We
currently have only one product that is being marketed and sold, the MagShoe.
While the product is unique and we currently believe that we will generate
revenues from the MagShoe in the foreseeable future, there is no assurance that
this will be the case.




While
there is not widely known current direct competition to the MagShoe, there can
be no assurance that competitors will not develop and market a superior or more
competitively priced product or that the nature of security screenings will
change and no longer include the type of screening that the MagShoe was
designated for.




Our
success is highly dependent on market acceptance of our product, acceptance
which is uncertain. If the market for MagShoe (or any related product we
develop) fails to grow, develops more slowly than we expect, or becomes
saturated with competing products or services, then our business, financial
condition and results of operations will be materially adversely
affected.




Investors
should consider the risks and uncertainties that we may encounter in a new and
unproven market. These uncertainties include:


●
                our
      ability to re-design our present product, if required, and design and
      develop additional products having the desired technological features in a
      cost efficient manner;●
                demand
      for and acceptance of our product utilizing our
    technologies;●
                our
      ability to demonstrate the benefits of our product to end
      users;●
                non-predictable
      unfavorable economic conditions in the industry; and●
                our
      ability to raise funds when needed on commercially acceptable
      terms.


9




OUR
REVENUES DEPEND ON CUSTOMERS’ PROCUREMENT PROCEDURES AND PRACTICES. A
SUBSTANTIAL DECREASE IN OUR CUSTOMERS’ BUDGETS WOULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.




The
MagShoe is primarily sold to entities, governmental, public or private, many of
which have complex and time-consuming procurement procedures. A substantial
period of time often elapses from the time we begin marketing a product until we
actually sell that product to a particular customer. In addition, our intended
sales to governmental agencies, authorities and companies are directly affected
by their budgetary constraints and the priority given in their budgets to the
procurement of our products. A decrease in the priorities of our customers’
budgets for the acquisition of our product may adversely affect our results of
operations.




WE MAY NOT BE ABLE TO IMPLEMENT OUR
GROWTH STRATEGY.




As
part of our growth strategy, we seek to further develop MagShoe as a product,
become interested in acquiring or invest in complementary, including
competitive, businesses, products and technologies. We currently have no
commitments or agreements with respect to any acquisitions or investments and we
may not be able to consummate any acquisition or investment. Even if we do
acquire or invest in these businesses, products or technology, the process of
integrating acquired additional technologies and/or assets into our operations
may result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for the
ongoing development of our business. In addition, we have limited experience in
making acquisitions and managing growth. We may not be able to realize the
anticipated benefits of any synergic technologies and/or
businesses.




OUR
PRODUCT MAY CONTAIN TECHNOLOGICAL FLAWS WHICH COULD RESULT IN THE FAILURE OF OUR
PRODUCT TO ACHIEVE MARKET ACCEPTANCE




Complex
technological products like ours often contain unpredictable or non-detectable
errors or failures when first introduced or as new versions are released.
Despite testing by us, the occurrence of these errors could result in delays or
failure to achieve market acceptance of our product, which could have a material
adverse effect on our business, financial condition and results of
operations.




WE
MAY BE SUBJECT TO LOSS IN MARKET SHARE AND MARKET ACCEPTANCE AS A RESULT OF
MANUFACTURING ERRORS, DELAYS AND SHORTAGES




Performance
failure in our products may cause loss of market share, delay in or loss of
market acceptance, warranty expense or product recall, or other contractual
liabilities. We have no experience in high volume manufacturing which may lead
to delays or shortages in the availability of our only product. The negative
effects of any delay or failure could be exacerbated if failure occurs in the
products. If a product or service launch is delayed or is the subject of an
availability shortage because of problems with our ability to manufacture or
assemble the product or service successfully on a timely basis, or if a product
or service otherwise fails to meet performance criteria, we may lose revenue
opportunities entirely and/or experience delays in revenue recognition
associated with a product or service in addition to incurring higher operating
expenses during the period required to correct the defects. There is a risk that
for unforeseen reasons we may be required to repair or replace a substantial
number of products in use or to reimburse customers for products that fail to
work or meet strict performance criteria.




In
addition, given the sensitive nature of the product and its market niche, a
failure of the product at the point of deployment could potentially result in a
security breach at that may result in significant physical and financial
harm.


10




FAILURE
BY US TO MAINTAIN AND PROTECT THE PROPIETARY NATURE OF OUR TECHNOLOGY,
INTELLECTUAL PROPERTY AND MANUFACTURING PROCESSES COULD HAVE MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, OPERATIONAL RESULTS, FINANCIAL CONDITION AND STOCK PRICE
AND OUR ABILITY TO COMPETE EFFECTIVELY.




We
rely upon patent, trade secret and contract law to establish and protect
our proprietary rights. There is a risk that claims allowed on any patents we
hold may not be broad enough to protect our technology. In addition, our patents
may be challenged, invalidated or circumvented and we cannot be certain that the
rights granted thereunder will provide competitive advantages to us. Moreover,
any current or future issued or licensed patents, or currently existing or
future developed trade secrets or know-how may not afford sufficient
protection against competitors with similar technologies or processes, and the
possibility exists that certain of our already issued patents may infringe upon
third party patents or trademarks or be designed around by others. In addition,
there is a risk that others may independently develop proprietary technologies
and processes, which are the same as, substantially equivalent or superior to
ours, or become available in the market at a lower price.




There
is a risk that we may have infringed or in the future will infringe patents
owned by others, that we will need to acquire licenses under patents belonging
to others for technology potentially useful or necessary to us, and that
licenses will not be available to us on acceptable terms, if at
all.




We
may have to litigate to enforce our patents or to determine the scope and
validity of other parties’ proprietary rights. Litigation could be very costly
and divert management’s attention. An adverse outcome in any litigation may have
a severe negative impact on our financial results and stock price. To determine
the priority of inventions, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or
oppositions in foreign patent and trademark offices, which could result in
substantial cost to the Company and limitations on the scope or validity of our
patents.




We
also rely on trade secrets and proprietary know-how, which we seek to protect by
confidentiality agreements with our employees, consultants, service providers
and third parties. There is a risk that these agreements may be breached, and
that the remedies available to us may not be adequate. In addition, our trade
secrets and proprietary know-how may otherwise become known to or be
independently discovered by others.




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




We
are independently developing, manufacturing, marketing and distributing our
MagShoe product. Once our sales increase, these activities may 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 ramp up manufacturing, develop new products
and market these products. Thus, there can be no assurance that we will be able
to fully commercialize the MagShoe or any future products.




GOVERNMENT
REGULATIONS AND STANDARDS ARE CONSTANTLY EVOLVING AND UNFAVORABLE CHANGES COULD
SUBSTANTIALLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS. REGULATION AND
STANDARDS IN CERTAIN COUNTRIES, COULD DELAY OR PREVENT OUR ABILITY TO SELL OUR
PRODUCT IN THOSE OR OTHER JURISDICTIONS.




Existing
and future laws and regulations may impede the viability and commercialization
of our product. These regulations and laws may cover taxation, restrictions on
imports and exports, customs, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts and other
communications, consumer protection, and the characteristics and quality of
products and services. It is not clear how existing laws governing issues such
as property ownership, sales and other taxes, libel and personal privacy apply
to our field of business. Unfavorable resolution of these issues may
substantially harm our business and results of operations.


11




OUR
FAILURE TO RAPIDLY RESPOND TO TECHNOLOGICAL CHANGE AND MARKET NEEDS COULD RESULT
IN OUR SERVICES OR SYSTEMS BECOMING OBSOLETE AND SUBSTANTIALLY HARM OUR BUSINESS
AND RESULTS OF OPERATIONS.




With
the rapid evolvement of technologies for Homeland Security and such market needs
we may be required to license emerging technologies useful in our business,
enhance our existing product, develop new products and technologies that address
the increasingly sophisticated and varied needs of our prospective customers and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. We may not be able to adequately implement
new technologies or adapt our business accordingly.




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, 2008. Our
independent auditors will be required to issue an opinion on management’s
assessment of those matters for our annual report on Form 10-K for our fiscal
year ending December 31, 2009. The rules governing the standards that must be
met for management to assess our internal controls over financial reporting are
relatively new and complex and require significant documentation, testing and
possible remediation to meet the detailed standards under the rules. It is
possible that, as we prepare for this audit, we could discover certain
deficiencies in the design and/or operation of our internal controls that could
adversely affect our ability to record, process, summarize and report financial
data. 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.




RISKS
ASSOCIATED WITH OUR SECURITIES AND CAPITAL STRUCTURE




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




As
of April 6, 2009, we had 2,000,000,000 authorized shares of Common Stock, of
which 129,267,089 shares of our Common Stock were issued and outstanding as of
such date. Except with respect to the Investor Notes and the Series A Preferred
Stock, approximately
18,000,000 shares have been reserved for issuance upon exercise or
conversion of outstanding options, warrants and convertible securities as of
April 6, 2009. The effective conversion price of the Investor Notes and the
Series A Preferred Stock is variable, and is based upon a 25% discount to the
average of the closing bid prices for our common stock for the five trading days
preceding the conversion date (not to exceed $0.15 per share). The occurrence of
any such event or the exercise or conversion of any of the options, warrants or
convertible securities described above would dilute the interest in our company
represented by each share of Common Stock and may adversely affect the
prevailing market price of our Common Stock.




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


12




OUR
BOARD OF DIRECTORS’ RIGHT TO AUTHORIZE THE ISSUANCE 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.




THERE
IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY
AFFECT THE ABILITY OF INVESTORS TO SELL THEIR SECURITIES IN THE PUBLIC
MARKET.




Although
our common stock is listed on the OTC Bulletin Board, a regular trading market
for the securities does not yet exist and may not exist or be sustained in the
future. The OTC Bulletin Board is an inter-dealer, over-the-counter market that
provides significantly less liquidity than the NASD’s automated quotation system
(the “NASDAQ Stock Market”). Quotes for stocks included on the OTC Bulletin
Board are not listed in the financial sections of newspapers as are those for
the NASDAQ Stock Market. Therefore, prices for securities traded solely on the
OTC Bulletin Board may be difficult to obtain and holders of common stock may be
unable to resell their securities at or near their original offering price or at
any price. Market prices for its common stock will be influenced by a number of
factors, including:


●
                the
      issuance of new equity securities;●
                competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital commitments;●
                variations
      in quarterly operating results;●
                change
      in financial estimates by securities analysts;●
                the
      depth and liquidity of the market for our common stock;●
                investor
      perceptions of our company and the security industry generally;
      and●
                general
      economic conditions.




OUR
COMMON STOCK IS SUBJECT TO THE PENNY STOCK RULES, YOU MAY EXPERIENCE SUBSTANTIAL
DIFFICULTY IN SELLING YOUR SHARES. 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.




Our
common stock is considered a penny 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.


13




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 market.




RISKS
RELATED TO OPERATIONS IN ISRAEL




WE
MAY BE ADVERSELY AFFECTED FROM FOREIGN CURRENCY MARKET
FLUCTUATIONS.




A
portion of our expenses, primarily labor expenses and certain supplier
contracts, are nominated in New Israeli Shekels “NIS”. As a result, we have
significant exposure to the risk of fluctuating exchange rates with the US
Dollar, our primary reporting currency. During the last two years, the value of
the US Dollar decreased by almost 25% before recovering. Any renewed devaluation
of the US dollar against the NIS will result in higher operating costs from NIS
denominated expenses.




WE
DEPEND ON A SINGLE DEVELOPING AND MANUFACTURING FACILITY IN ISRAEL AND ARE
SUSCEPTIBLE TO ANY EVENT THAT WOULD ADVERSELY AFFECT ITS CONDITION. CONDUCTING
OUR SINGLE DEVELOPING AND MANUFACTURING FACILITY IN ISRAEL ENTAILS SPECIAL
RISKS.




Most
of the subsidiary’s laboratory capacity, principal research and development and
manufacturing facilities are located in the State of Israel and accordingly, all
these may be affected by economic, political and military conditions in the
State of Israel. In addition, 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 Homeland Security industry, we
must respond quickly to technological developments. Damage to our facility in
Israel could cause serious delays in the development of new products and
services and, therefore, could adversely affect our business. In addition, the
particular risks relating to our location in Israel are described
below.




THE
TRANSFER AND USE OF SOME OF OUR TECHNOLOGY AND THE 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.


14




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.




ITEM IB. UNRESOLVED STAFF
COMMENTS




Not
Applicable.




ITEM 2.
PROPERTIES


We do not own any real property. Our corporate offices are located at 17 State
Street, New York, NY 10004. We paid $40,000 for the use of the office space for
fiscal years 2008 and 2009.
  Through
November 15, 2008, we leased office space comprised of 224 square meters in
Rishon Le’Zion in Israel, for administrative offices for our subsidiary IDO
Ltd., under a sub-lease at the monthly rental amount of $1,256. The sub-lessor
was a private company whose sole shareholder is Mr. Gil Stiss, IDO Ltd.’s Chief
Scientist and a director of IDO Ltd.




As
of November 16, 2008, we entered into a lease for new premises, also in Rishon
Le’Zion, comprised of approximately 370 square meters, at a monthly rate of
approximately $3,900 per month. The lease continues in effect through November
15, 2010, and, at our option, may be renewed for an additional one year
term.




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




We
are not involved in any pending legal proceedings that we anticipate can result
in a material adverse effect on our business or operations.




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




No
matters were submitted to a vote of stockholders during the three-month period
ended December 31, 2008.




PART
II




ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS




Our
Common Stock is quoted on the OTC Bulletin Board under the symbol “IDOI.” Until
May 2007, there was only sporadic trading in our stock. As of May 31, 2007, a
more active though limited trading market developed. 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. Investors should not rely on historical stock price performance as an
indication of future price performance.


15




The
following table shows the quarterly high and low bid prices for our Common Stock
over the last completed quarter of 2008 and 2007 as quoted on the OTC Bulletin
Board. The prices represent quotations by dealers without adjustments for retail
mark-ups, mark-downs or commission and may not represent actual
transactions.


LOW
                  
                  
                  HIGHYear
      Ended December 31, 2008First
      Quarter
                  
                  $
                  1.41
                  
                  
                  $
                  3.02Second
      Quarter
                  
                  $
                  1.30
                  
                  
                  $
                  1.84Third
      Quarter
                  
                  $
                  0.15
                  
                  
                  $
                  1.75Fourth
      Quarter
                  
                  $
                  0.06
                  
                  
                  $
                  .35Year
      Ended December 31, 2007Second
      Quarter
                  
                  $
                  1.00
                  
                  
                  $
                  2.43Third
      Quarter
                  
                  $
                  2.43
                  
                  
                  $
                  2.50Fourth
      Quarter
                  
                  $
                  2.05
                  
                  
                  $
                  3.70




As
of April 6, 2009, there were 36 holders of record of our Common Stock. A
significant 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 number of beneficial owners of our stock.




DIVIDEND
POLICY




We
have not paid dividends on our Common Stock and do not expect to pay cash
dividends in the foreseeable future. It is the present policy of the Board to
retain all earnings to provide funds for the growth of our company. The
declaration and payment of dividends in the future will be determined by the
Board based upon our earnings, financial condition, capital requirements and
such other factors as the Board may deem relevant.




ITEM 6 SELECTED FINANCIAL DATA




Not
Applicable.




ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION




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




IDO
Security Inc. is engaged in the design, development and marketing of devices for
the homeland security and loss prevention markets that are intended for use in
security screening procedures to detect metallic objects concealed on or in
footwear, ankles and feet through the use of electro-magnetic fields. These
devices were designed specifically for applications in the security screening to
complement the current methods for the detection of metallic items during
security screenings and at security checkpoints in venues such as
airports, prisons, schools, stadiums and other public locations requiring
individual security screening. Our common stock trades on the OTC
Bulletin Board under the symbol IDOI.




We
believe that the market for security and inspection products will continue to be
positively impacted by the threat of terrorist activities and by new government
regulations and appropriations for security and inspection products and
procedures. We anticipate that the promulgation of new governmental regulation
and standards will establish performance baselines against which we will be able
to direct certain of our continued research and development spending and market
our products to customers, worldwide. In addition, we believe that the
increasing awareness of security, in general, will bring increased awareness of
available products and methods, such as ours, for anti-crime and loss prevention
fields.


16




We
need to raise additional funds on an immediate basis in order to meet our
on-going operating requirements and to realize our business plan. In response to
the deteriorating global economic conditions that began in 2008, we have taken
certain measures in an effort to reduce operating expenses and conserve our cash
resources. Beginning in April 2008, we have significantly curtailed our
non-essential product design and development. Our senior and other employees
have agrees to, defer, in part, salaries and benefits. As of March 31, 2009, we
had 10 employees working on a full-time basis. If we are unable to raise capital
on an immediate basis, it may be necessary to for us to take further cost
cutting measures to reduce our cash burn including laying-off additional
personnel. No assurance can be given that we will be able to raise the needed
capital. These conditions raise substantial doubt about our ability to continue
as a going concern.




Subject
to raising additional working capital, we intend to pursue our business plan
over the next twelve months with respect to product development and enhancement
and field testing, as well as initial marketing efforts. We have been expanding
our contact base and are aggressively seeking collaborative arrangements
worldwide for our MagShoe product. In May 2008, we selected a leading contract
manufacturer for high volume production of MagShoe and in June 2008, we
announced the availability of an elite network of industry leading distributors
and systems integrators for the MagShoe device which, together with the high
volume production capabilities that we established in the second quarter of
2008, significantly strengthens our infrastructure to commercially manufacture
and distribute the MagShoe device. In July 2008, we announced our entry into a
collaborative relationship with Bryant Integrated Technologies, a leading
security and consulting firm, to lead our product distribution efforts in the
United States, and with Hwan Technology and Trade Co., one of China’s largest
distributors of walk-through metal detectors, to lead our distribution efforts
in China. Shortly thereafter, we announced our initial sale of the MagShoe Unit
(through Bryant) in the United States to a leading commercial cruise line which
intends to use the MagShoe device to significantly reduce passenger waiting
lines while improving security. In addition, as a result of the recent terror
attacks in Mumbai, India, we have targeted that area for special attention by
our marketing department. This follows a successful test of the MagShoe at both
the Mumbai and New Delhi airport several months ago.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




Our
financial statements and accompanying notes have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of these financial statements required management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. We continually evaluate the
accounting policies and estimates it uses to prepare the consolidated financial
statements and bases its estimates on historical experiences and assumptions
believed to be reasonable under current facts and circumstances. Actual amounts
and results could differ from these estimates made by management.




We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.




Our
significant accounting policies are summarized in Note 2 of Notes to
Consolidated Financial Statements. While all these significant accounting
policies impact its financial condition and results of operations, the Company
views certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates. Our management
believes that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause
effect on our consolidated results of operations, financial position or
liquidity for the presented in this report.


17




RESULTS
OF OPERATIONS




COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2008 TO THE YEAR ENDED DECEMBER 31,
2007




On
March 8, 2007, we completed the acquisition of IDO Ltd. As we were a shell
company prior to the acquisition, IDO Ltd. is deemed to be our
predecessor.




Pro
forma financial results for the year ended December 31, 2007 (“2007”) include
our results for the year ended December 31, 2007 combined with the results of
IDO Ltd. for the period from January 1, 2007 to March 7, 2007, adjusted to give
effect to our March 8, 2007 acquisition as if it had occurred on January 1,
2007.


2007(Proforma)Revenues
                  
                  $
                  69,080Cost
      of sales
                  
                  
                  125,230Gross
      loss
                  
                  
                  (56,150
                  )Operating
      expensesResearch
      and development costs
                  
                  
                  304,253Selling,
      general and administrative expenses
                  
                  
                  1,031,304Stock
      based compensation
                  
                  
                  5,379,103Total
      operating expenses
                  
                  
                  6,714,660Loss
      from operations
                  
                  
                  (6,770,810
                  )Interest
      expense
                  
                  
                  (647,293
                  )Interest
      income
                  
                  
                  3,295Amortization
      of debt discount
                  
                  
                  (7,175,483
                  )Amortization
      of beneficial conversion feature
                  
                  
                  (452,993
                  )Amortization
      of deferred finance costs
                  
                  
                  (126,822
                  )Net
      loss
                  
                  $
                  (15,170,106
                  )




Revenues and cost of goods sold- We had revenues of $326,780 for 2008 as compared to $69,080 for 2007,
all of which were derived from sales of the MagShoe units. Cost of goods sold in
the amount of $339,263 and $125,230 in 2008 and 2007 exceeded sales resulting in
gross losses of $12,483 and $56,150, respectively. Because we are a development
stage company, the allocation of fixed manufacturing costs to cost of goods sold
may continue to result in negative gross profit until we reach commercial
viability.




Research and Development-
Research and development expense consist primarily of expenses incurred in
designing, developing and field testing our products. These expenses consist
primarily of salaries/fees and related expenses for personnel, contract design
and testing services, supplies used and consulting and license fees paid to
third parties. We incurred research and development expenses in the amount of
$390,988 and $304,253 in 2008 and 2007, respectively. The increase in research
and development expenses is principally attributable to the intensified research
and design and development activities, including the hiring of additional
engineers.


18




Selling, general and administrative
expenses- We incurred selling, general and administrative expenses of
$2,148,752 and $1,031,304 for 2008 and 2007, respectively. These expenses
primarily consist of salaries/fees and other related costs for personnel in
executive and other administrative functions and consultants. Other significant
costs include professional fees for legal, accounting and other services. The
increase in selling, general and administrative expenses is principally
attributable to intensified marketing related activities.




Stock Based Compensation.
Between March and September 2007, we granted stock options to employees and
consultants valued at $8.4 million. In April 2008, we granted additional stock
options to employees valued at $307,000. The value of these options is being
amortized over the vesting periods of each grant. Stock based compensation
totaled 546,000 and $5.4 million for the year ended December 31, 2008 and 2007,
respectively. Stock-based compensation is non-cash and, therefore, has no impact
on cash flow or liquidity.




Interest expense- Interest
expense was $655,810 and $647,293 for 2008 and 2007, respectively. The interest
related primarily to the interest on the convertible promissory
notes.




Loss on Extinguisment of Debt– We accounted for the modification of our 2008 Notes as an
extinguishment of debt in accordance with EITF 05-7 “Accounting for Modifications to
Conversion Options Embedded in Debt Instruments and Related Issues” and
EITF 96-19 “Debtor’s
Accounting for a Modification or Exchange of Debt Instruments”, (“EITF
96-19”).” We deemed the terms of the amendment to be substantially different and
treated the Convertible Promissory Notes as extinguished and exchanged for new
notes. As such, it was necessary to reflect the Convertible Promissory Notes at
fair market value and record a loss on extinguishment of debt of approximately
$991,000.




Amortizations- We recorded
amortization totaling $3.4 million and $7.7 million in 2008 and 2007,
respectively. Amortization for the period relates to the debt discount,
beneficial conversion feature and deferred finance costs incurred in connection
with the placement of our convertible promissory notes which were issued in 2008
and 2007. These costs are amortized to the date of maturity of the debt unless
converted earlier.




Net
Loss - We had a net loss of $8,183,960 for the year ended December 31, 2008 as
compared to $15,170,106 for the year ended December 31, 2007.




Preferred Stock Dividends– In
December 2008, as a part of our private placement of the December 2008 Notes, we
issued 26,664 shares of newly created Series A Preferred Stock. The shares
accrue a dividend of 10% per annum. The dividends are cumulative commencing on
the issue date whether or not declared. For the year ended December 31, 2008, we
declared dividends totaling $44,562. For financial reporting purposes, we
recorded a discount of $1,562,395 to reflect the difference in the amount of
proceeds allocable to the Series A Preferred Stock in the offering based on
relative fair values and the stated value. In addition, in accordance with EITF
No. 00-27, an additional discount of $552,003 was recorded to reflect the
beneficial conversion feature. The discounts are being amortized as deemed
dividends on preferred stock to the date of maturity unless converted earlier.
Amortization of discounts for the year ended December 31, 2008 amounted to
$239,657.




LIQUIDITY
AND CAPITAL RESOURCES




As
of December 31, 2008, we had a cash balance of $391,569 compared to $353,701 at
December 31, 2007.




19




Cash
used in operating activities was $1,760,225 for the year ended December 31,
2008. The decrease in cash was primarily attributable to funding the loss for
the period.




Cash
used in investing activities was $26,349 for the year ended December 31, 2008
primarily attributable to the addition of property and equipment.




Cash
provided by financing activities was $1,824,442 for the year ended December 31,
2008 and resulted from the following transactions:


●
                    We
      received proceed of $1,900,000 from the issuance of our December 2007
      Notes, of which $1,150,000 was received in January 2008 from our escrow
      agent for notes previously issued We incurred financing costs of
      $160,455.●
                    We
      received proceeds totaling $442,355 in short-term financing from certain
      of our shareholders and investors and incurred financing costs of
      $37,346.●
                    We
      received proceeds of $567,724 from the issuance of the December 2008 Notes
      (as hereinafter defined) and in connection therewith, we incurred
      financing costs of
$19,250.




We
repaid outstanding promissory notes totaling $1,029,767. Our wholly-owned
subsidiary obtained a line of credit totaling approximately $250,000 of which
$161,181 had been drawn down.




To
date we have financed our operations primarily from the sale of our securities.
Our recent financings are discussed below.




Between
December 5, 2007 and January 24, 2008, we raised gross proceeds of $5,404,550
from the private placement to certain accredited institutional and individual
investors (the “2008 Investors”) of our two-year 10% Secured Convertible
Promissory Notes (collectively, the “December 2007 Notes”, each a “December 2007
Note”) are scheduled to mature in December 2009. We received net proceeds
of $1 million from the proceeds of the December 2007 Notes, after the payment of
offering related fees and expenses and after the repayment of bridge loans then
due and owing. Holders of certain notes outstanding participated in the private
placement and the gross proceeds raised include amounts that we owed to these
investors in the approximate amount of $2.7 million that were offset against
such investors’ respective purchases of the December 2007 Notes. Commencing on
the fourth month anniversary of the issuance of the December 2007 Notes and on
the same day of each month thereafter until the principal amount of the December
2007 Notes has been paid in full, we are required to prepay 5% of the aggregate
principal amount of the December 2007 Notes originally issued, together with all
accrued interest due and payable up to such repayment date (each such date, a
“Scheduled Payment Date.”). The amount may be paid either in (i) cash, at 110%
of the principal amount due and 100% of all other amounts due or (ii) shares of
Common Stock at a rate equal to the lower of (A) the Fixed Conversion Price or
(B) 75% of the average closing bid price of the Common Stock for the five
trading days ending on the trading day immediately preceding the Scheduled
Payment Date, provided that at the time of payment there is then in effect an
effective Registration Statement (as defined below) or the shares so issued can
be resold under Rule 144 promulgated under the Securities Act of 1933, as
amended (“Rule 144”); provided, that, if such monthly amount is to be paid with
shares of Common Stock, it will be automatically deferred unless the holder
gives notice to the Company at least five (5) days before a repayment date that
the holder will accept payment of such monthly amount in the form of Common
Stock. During the year ended December 31, 2008, we repaid principal and accrued
interest in the amount of $608,671 in the form of 3,326,272 shares of our Common
Stock. Additionally, as of December 31, 2008, we owed approximately $516,000 to
these investors as liquidated damages in respect of the non-filing of a
registration statement in respect of the resale of the Common Stock underlying
the December 2007 Notes and the warrants issued in connection
therewith.




Between
April 29, 2008 and November 25, 2008 (the “April-November 2008 Loans”), we
received gross loan proceeds of $442,355 from two 2008 investors and one
stockholder. All of these loans were rolled into the financing consummated in
December 2008 and discussed below.


20




Pursuant
to an offering dated October 30, 2008 to the holders of the 2008 Notes, on
December 17, 2008, the Company realized net proceeds of $548,474, before the
payment of offering related fees and expenses, from a private placement of
$1,066,540 in principal amount of Secured Convertible Promissory Note due April
20, 2010 (“collectively the “December 2008 Notes”) and Series A Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”).
The amount raised included $478,816 in principal and accreted interest on the
April-November 2008 Loans that were offset against such purchasers’ respective
purchases of the Purchased Securities. Commencing on April 30, 2009, and
thereafter on the last day of each subsequent calendar month until the principal
amount of the December 2008 Notes has been paid in full (each a “Scheduled
“Repayment Date”), we are required to prepay 8.33% of the aggregate principal
amount of the December 2008 Notes originally issued, together with all accrued
interest due and payable on the entire outstanding amount up to such repayment
date. The amount may be paid, at the Company’s election, either in (i) cash, at
110% of the principal amount due and 100% of all other amounts due or (ii)
shares of Common Stock at a rate equal to the lower of (A) the Fixed Conversion
Price of $0.15 or (B) 75% of the average of the closing bid price of the Common
Stock for the five trading days ending on the trading day immediately preceding
the Scheduled Repayment Date; provided, that, if such monthly amount is to be
paid with shares of Common Stock, it will be automatically deferred unless the
holder gives notice to the Company at least five (5) days before a repayment
date that the holder will accept payment of such monthly amount in the form of
Common Stock. Commencing on April 30, 2009, and thereafter on the last day of
each subsequent calendar month, we are also required to redeem 8.33% of the
aggregate outstanding stated value of the Series A Preferred Stock until the
stated value and all accrued dividends have been paid in full. Redemption
payments on the Series A Preferred Stock may be made, at our election, in cash
or shares of Common Stock, in the same manner as provided above with respect to
the December 2008 Notes, subject to automatic deferral in the case of payment in
shares unless the holder gives notice to us of such holder’s agreement to accept
payment in shares.




In
connection with the financing that was consummated in December 2008, the
investors waived, through December 31, 2008, the events of default existing
under the transaction documents relating to the December 2007 Notes, which
primarily related to the filing of the above referenced registration statement
and the non-payment of these amounts in a timely fashion. We currently do not
intend to file such Registration Statement as the shares of Common Stock
issuable upon conversion of the December 2007 Notes or exercise of the warrants
issued in connection (as a result of a cashless exercise) therewith would be
eligible to be resold under Rule 144. The non-filing of such registration
statement as well as the non-payment of the liquidated damages and other related
amounts (which will be paid upon request) constituted, as of January 2009,
events of default under the transaction documents relating to the December 2007
Notes. However, the transaction documents also provide that the remedies
available to the holders upon such event of default can be exercised only by the
affirmative action of the holders o 65% of the outstanding principal amount of
the 2008 Notes.




As
noted above, we need to raise additional funds on an immediate basis in order to
be able to satisfy our cash requirements and fulfill our business plan over the
next twelve months. In response to the general deterioration in the general
economic environment which began in 2008, we have taken several cost-cutting
measures. We have laid-off a number of our employees and as of March 31, 2009,
we have 10 full time remaining employees on staff. Additionally, we have been
forced to delay payments to most of our vendors and defer salaries for
management and employees. Nonetheless, without raising additional funds on an
immediate basis, whether through the issuance of our securities, licensing fees
for our technology or otherwise, we will also not be able to maintain operations
as presently conducted. As previously disclosed in our periodic reports, we have
been actively seeking additional capital. At the present time, we have no
commitments for financing and no assurance can be given that we will be able to
raise capital on commercially acceptable terms or at all. Even if we raise cash
to meet our immediate working capital needs, our cash needs could be heavier
than anticipated in which case we could be forced to raise additional capital.
Our auditors included a “going concern” qualification in their auditors’ report
for the year ended December 31, 2008. While we raised approximately gross $1
million during the year ended December 31, 2008, such “going concern”
qualification may make it more difficult for us to raise funds when needed. In
addition, we will need the consent of holders of 66.67% of the outstanding
amount of the December 2007 Notes and the December 2008 Notes to raising
additional funds. These investors also have a lien on substantially all of our
assets. Moreover, the current economic situation may further complicate our
capital raising efforts. If we are unable to raise additional capital on an
immediate basis, we may be forced lay-off additional employees and either
restructure or cease operations entirely.


21




RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
FAS 141(R), “Business Combinations - a replacement of FASB Statement
No. 141”, which significantly changes the principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquire. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This statement is effective prospectively, except for certain
retrospective adjustments to deferred tax balances, for fiscal years beginning
after December 15, 2008. This statement will be effective for the Company
beginning in fiscal 2009. The Company is currently evaluating FAS 141(R), and
has not yet determined the impact if any, FAS 141(R) will have on its
consolidated results of operations or financial position.




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“FAS 161”). FAS 161 requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. The objective of the guidance is to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for; and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. FAS 161 is
effective for fiscal years beginning after November 15, 2008. The Company
is currently evaluating the impact FAS 161 will have on the Company’s
consolidated financial statements, but it currently does not expect the effect
to be material.




In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States (commonly referred to as the
GAAP hierarchy). The statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” The Company is currently evaluating the impact
SFAS 161 will have on the Company’s consolidated financial statements, but it
currently does not expect the effect to be material.




In
May 2008, FASB issued FSP Accounting Principles Board No. 14−1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement” (“FSP APB 14−1”). FSP APB 14−1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion (including partial cash settlement) to separately
account for the liability and equity components of the instrument in a manner
that reflects the issuer’s non−convertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14−1 is effective for us
beginning after January 1, 2009. The Company is evaluating the effect of
adopting FSP APB 14−1 on its financial statements.




In
June 2008, FASB ratified EITF Issue No. 08-4,“Transition Guidance
for Conforming Changes to Issue No. 98-5” (“EITF No. 08-4”). Per EITF No. 08-4,
conforming changes made to EITF Issue No. 98-5,“Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, that result from EITF Issue No. 00-27,“Application of Issue
No. 98-5 to Certain Convertible Instruments” and SFAS No. 150,“Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”,
shall be effective for us beginning after January 1, 2009. The Company
is evaluating the effect of adopting FSP APB 14−1 on its financial
statements.


22




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
Applicable.




ITEM 8. FINANCIAL STATEMENTS




The
information called for by this Item 8 is included following the “Index to
Consolidated Financial Statements” contained in this Annual Report on Form
10-K.




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




None.




ITEM 9A(T). CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES.


We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to management, including our President and Chief Executive Officer (who also
serves as our principal financial and accounting officer) to allow timely
decisions regarding required disclosure based closely on the definition of
“disclosure controls and procedures” in Rule 13a-15(e).




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
President and Chief Executive Officer (who also serves as our principal
financial and accounting officer), of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our
President and Chief Executive Officer concluded that our disclosure controls and
procedures were effective.




MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING; CHANGES IN INTERNAL
CONTROLS OVER FINANCIAL REPORTING.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with accounting principles generally accepted
in the United States. Because of inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. We carried out an
evaluation, under the supervision and with participation of management,
including our President and Acting Chief Executive Officer (who also serves as
our principal financial and accounting officer), of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on his evaluation under the framework in Internal Control - Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2008.




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




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


23




ITEM 9B. OTHER INFORMATION




None.




PART III




ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
names, ages and positions of our directors, executive officers and key employees
are as follows:


Name
            
            Age
            
            PositionMichael
      Goldberg
            
            59
            
            President,
      Acting Chief Executive Officer and DirectorIrit
      Reiner
            
            51
            
            DirectorJohn
      Mitola
            
            42
            
            DirectorHenry
      Shabbat
            
            68
            
            Chief
      Operating Officer (IDO Security Ltd.)




Business
Experience




The following is a
brief account of the education and business experience of each director and
executive officer during at least the past five years, indicating each person’s
business experience, principal occupation during the period, and the name and
principal business of the organization by which he was
employed.




Michael
Goldberghas
served as a director and Acting Chief Executive Officer since July 2006, and
President since June 2007. Mr. Goldberg serves as Chief Executive Officer of Rx
Medical Services Corp., a position he has held from May 1991. RXM was a medical
company, which at one time managed and owned small rural hospitals, clinical
laboratories and MRI/CT centers and is now inactive. Mr. Goldberg currently also
serves as a Director of Kreisler Industries a publicly traded aero-space
engineering company and serves on its Audit and Compensation committee. Mr.
Goldberg also consults for both private and public companies.




Irit
Reinerhas
served as a director since June 2006. Ms. Reiner possesses approximately 25
years experience in the field of arranging and overseeing the provision of
recreational touring services to individuals and groups. From January 2002 to
March 2006, Ms. Reiner devoted the majority of her time to completing the
requisite coursework and obtaining an MBA in business administration from the
Jerusalem School of Business Administration at the Hebrew University in
Jerusalem (October 2002 to June 2004) and from September 2004 to March 2006 she
was enrolled in a post graduate course at the Israel Management Center. From
February 1997 to April 2002 she was affiliated with Diesenhuas Peltours, an
Israeli based tour operator with various branch offices throughout Israel, where
she oversaw the management and operation of several of their branch
offices.




John
Mitolahas
served as a director since September 2007. Mr. Mitola is currently a managing
partner with Kingsdale Capital International, a private equity and capital
advisory firm specializing in merchant banking. Mr. Mitola also currently serves
as Chairman of the Illinois Toll Highway Authority, a position to which he was
appointed in March 2003. From January 2000 to February 2006, he served as chief
executive officer of Electric City Corp. He possesses over 20 years experience
in the energy and environmental industries, real estate development, venture
capital, engineering and construction.




Henry Shabathas
served as the Chief Operating Officer of our subsidiary IDO Security Ltd. since
July 2007. Since June 2002, Mr. Shabat has provided consulting and managerial
services primarily related to the homeland security field, including development
and manufacturing of communications and aeronautical systems, police and
security encrypted communications systems and border control
systems.


24





All
directors of our company hold office until the next annual meeting of the
stockholders or until their successors have been elected and qualified. The
officers of our company are appointed by our board of directors and hold office
until their death, resignation or removal from office.




Section 16(A) Beneficial
Ownership Reporting Compliance




Section 16(a) of the
Securities Exchange Act of 1934, as
amended, requires each of our officers and directors and each person who owns
more than 10% of a registered class of our equity securities to file with the
SEC an initial report of ownership and subsequent reports of changes in such
ownership. Such persons are further required by SEC regulation to furnish us
with copies of all Section 16(a) forms (including Forms 3, 4 and 5) that they
file. Based solely on our review of the copies of such forms received by us with
respect to fiscal year 2008, or written representations from certain reporting
persons, we believe all of our directors and executive officers met all
applicable filing requirements for the fiscal year ended December 31,
2008.




Code
of Ethics




We
have adopted a code of ethics in compliance with Item 406 of Regulation S-B that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. We undertake herewith to provide by mail to any person without
charge, upon request, a copy of such code of ethics if we receive the request in
writing by mail to the address listed on the cover page of this Report on Form
10-K.




Audit
Committee and Audit Committee Financial Expert




At
present we do not have a separately designated standing audit committee. The
entire board of directors is acting as our Company’s Audit Committee, as
specified in section 3(a)(58)(b) of the Exchange Act. The board of directors has
determined that at present we have no audit committee financial expert serving
on the Audit Committee. Our Company, at present, does not have significant
operations.




ITEM 11. EXECUTIVE COMPENSATION




Summary Compensation
Table




The
following table sets forth all compensation for each of the last two fiscal
years awarded to, or earned by, our Chief Executive Officer and the most highly
compensated executive officer other than the Chief Executive Officer serving as
such at the end of 2008 whose total compensation exceeded $100,000 for the year
ended December 31, 2008.




Name and
                                                                                            Principal
                                                                                            Position(s)
                                                                                          
                                                                                          
                                                                                          Year
                                                                                          
                                                                                          
                                                                                          
                                                                                          Salary
                                                                                          
                                                                                          
                                                                                          Bonus
                                                                                          
                                                                                          
                                                                                          
                                                                                          Option
      Awards(1)
                                                                                          
                                                                                          
                                                                                          
                                                                                          TotalMichael  Goldberg,
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          $
                                                                                          198,000
                                                                                          (2)
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          565,033
                                                                                          (3)
                                                                                          
                                                                                          $
                                                                                          763,033President and  Acting Chief

                                                                                              Executive Officer
                                                                                              (and Principal
                                                                                              Financial Officer)(2)
                                                                                          
                                                                                          
                                                                                          2007
                                                                                          
                                                                                          
                                                                                          $
                                                                                          115,500
                                                                                          (4)
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,997,677
                                                                                          (5)
                                                                                          
                                                                                          $
                                                                                          2,113,177Henry Shabbat, Chief
                                                                                            Operating
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          $
                                                                                          72,000
                                                                                          
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          216,572
                                                                                          (6)
                                                                                          
                                                                                          $
                                                                                          288,572Officer of IDO Security
                                                                                            Ltd.
                                                                                          
                                                                                          
                                                                                          2007
                                                                                          
                                                                                          
                                                                                          $
                                                                                          36,000
                                                                                          
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          $
                                                                                          312,068
                                                                                          (7)
                                                                                          
                                                                                          $
                                                                                          348,068


25




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 that we
issued. The assumptions used to calculate the fair value of stock option grants
under FAS 123R, were: expected holding period of seven years, risk free interest
rate of 5.09%, no dividend yield and volatility of 134.97%.




2. Of the
amount earned, approximately $95,000 was paid and $103,000 was deferred as of
December 31, 2008.




3.
Reflects the vesting in 2008 of options to purchase 337,500 shares of common
stock (of a total of 1,200,000) that were previously awarded in June
2007.




4. Mr.
Goldberg’s paid employment with the Company began as of July 1, 2007. Mr.
Goldberg’s total annual salary is $198,000. Of the amount actually earned
through December 31, 2007, $27,000 has been deferred (as of such date). Mr.
Goldberg received the deferred salary in 2008.




5.
Reflects the granting in 2007 of options to purchase 1,200,000 shares of common
stock that were awarded in June 2007. Of such amount, 693,750 options vested in
2007.




6.
Reflects the vesting in 2008 of options to purchase 120,000 shares of common
stock (of a total of 240,000) that were previously awarded in July
2007.




7.
Reflects the granting in 2007 of options to purchase 240,000 shares of common
stock that were awarded in July 2007. Of such amount, 60,000 options vested in
2007




Employment/Consulting
Agreements




Michael
Goldberg. On June
20, 2007, we entered into an employment agreement with Mr. Goldberg, which
became effective as of July 2, 2007, pursuant to which Mr. Goldberg was retained
as our President at an annual salary of $198,000, payable monthly. Mr. Goldberg
agreed to defer $4,500 of his monthly gross salary until such time as the
Company shall have concluded permanent financing, which period ended in January
2008. The employment agreement has an initial term of one year; thereafter, the
employment agreement provides that it is to be renewed automatically for
additional one year periods unless either party shall advise the other 90 days
before expiration of the initial (or a renewal term) of its intention to not
renew the agreement beyond its then scheduled expiration date. Mr. Goldberg can
terminate the employment agreement and the relationship thereunder at any time
upon 60 days’ notice. If during the initial term the Company were to terminate
the agreement for any reason other than “Just Cause” (as defined the employment
agreement), then the Company is to pay to Mr. Goldberg the salary then payable
under the agreement through the scheduled expiration of the initial term; if
such termination for any reason other than “Just Cause” were to take place
during a renewal period, then the Company is to pay to Mr. Goldberg an amount
equal to three months’ salary. Under the agreement, Mr. Goldberg was
awarded options to purchase 1,200,000 shares of the Company’s common stock, of
which options for 525,000 shares, at a per share purchase price of $0.17, shall
be fully vested at the time of grant and options for the remaining shares are to
vest in equal installments of 84,375 shares at the end of each calendar quarter,
beginning September 30, 2007, at per share exercise prices ranging between $0.25
and $1.25. Mr. Goldberg has served as our Acting Chief Executive Officer since
June 2006.


26




Henry
Shabbat. On July
1, 2007, IDO Ltd. and Henry Shabat Ltd., a company owned by Mr. Henry Shabat,
entered into a Management Agreement pursuant to which Mr. Shabat is to serve as
IDO Ltd.’s Chief Operating Officer. Under the management agreement, Mr. Shabat
is to be paid a monthly fee of $6,000. The management agreement has an initial
term of one year; thereafter, the management agreement provides that it is to be
renewed automatically for additional one year periods unless either party shall
advise the other 90 days before expiration of the initial (or a renewal term) of
its intention to not renew the agreement beyond its then scheduled expiration
date. Mr. Shabat was awarded options to purchase 240,000 shares of the
Company’s common stock, which are scheduled to vest in equal installments of
30,000 shares at the end of each 90 day period following the execution of the
management agreement. The per share exercise price range between $0.17 and $1.67
(post split level). The employment agreement also includes certain customary
confidentiality and non-compete provisions that prohibit the executive from
competing with the Company or soliciting the Company’s employees for 12 months
following the termination of his retention.




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




The
following table sets forth information as of December 31, 2008, concerning
unexercised options for the purchase of common stock held by the named executive
officers.




Name
                                            
                                            Number
      of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              Exercisable
                                            
                                            
                                            Number
                                              of Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              Unexercisable
                                            
                                            
                                            Option
                                              Exercise
      Price
                                            
                                            Option
                                              Expiration
      DateMichael
      Goldberg
                                            
                                            
                                            525,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            0.17
                                            
                                            6/20/1484,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.25
                                            
                                            9/30/1484,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.42
                                            
                                            12/30/1484,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.58
                                            
                                            3/31/1584,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.72
                                            
                                            6/30/1584,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.95
                                            
                                            9/30/1584,375
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1.08
                                            
                                            12/30/1584,375
                                            
                                            
                                            
                                            1.17
                                            
                                            3/31/1684,375
                                            
                                            
                                            
                                            1.25
                                            
                                            6/30/16Henry
      Shabat
                                            
                                            
                                            30,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            0.17
                                            
                                            9/30/1430,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.25
                                            
                                            12/31/1430,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.42
                                            
                                            3/31/1530,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.58
                                            
                                            6/30/1530,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.72
                                            
                                            9/30/1530,000
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            0.95
                                            
                                            12/31/1530,000
                                            
                                            
                                            
                                            1.08
                                            
                                            3/31/1630,000
                                            
                                            
                                            
                                            1.17
                                            
                                            6/30/16


27




Compensation of
Directors




It
is our policy to reimburse our directors for reasonable expenses incurred in
traveling to and from board or committee meetings.




The
following table sets forth all compensation for the last fiscal year awarded to,
or earned by, our Directors.


Name
                  
                  
                  Fees
      Earned
                  
                  
                  Option
                    Awards(1)
                  
                  
                  TotalIrit
      Reiner
                  
                  $
                  21,000
                  (2)
                  $
                  153,396
                  (3)
                  $
                  174,396John
      Mitola
                  
                  $
                  48,000
                  (4)
                  $
                  —
                  (5)
                  $
                  48,000




1.
                Amounts
      in this column reflect the expense recognized by the Company for
      accounting purposes calculated in accordance with FASB Statement of
      Financial Accounting Standards No. 123R (“FAS 123R”) with respect to
      employee stock options issued under the Company’s 2005 Incentive Plan.
      Options are discussed in further detail in the Outstanding Equity Awards
      at Fiscal Year End Table.2.
                Represents
      payment to Ms. Reiner for attendance at Board meetings and other services
      rendered to the Company.3.
                Reflects
      the vesting of options issued in 2008 to purchase 100,000 shares of common
      stock. The assumptions used to calculate the fair value of stock option
      grants under FAS 123R, were: expected holding period of five years, risk
      free interest rate of 2.98%, no dividend yield and volatility of
      134.97%.4.
                The
      entire amount has been deferred by the director.5.
                Represents
      the vesting of options for the purchase of up to 100,000 shares of common
      stock granted to Mr. Mitola in September 2007 at the per share exercise
      price of $1.00 which vest in 36 monthly installments. As of December 31,
      2008, all of the 100,000 option shares, were
  vested.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS




Beneficial Ownership of
Certain Shareholders, Directors and Executive Officers




The
following table sets forth information as of the close of business on April 6,
2009, concerning shares of our common stock beneficially owned by: (i) each
director; (ii) each named executive officer; (iii) all directors and executive
officers as a group; and (iv) each person known by the Company to own
beneficially more than 5% of the outstanding shares of common
stock.




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 April 6, 2009. Unless otherwise noted in the
footnotes to the table and subject to community property laws where applicable,
the following individuals have sole voting and investment control with respect
to the shares beneficially owned by them. We have calculated the percentages of
shares beneficially owned based on 129,267,089 shares of common stock
outstanding at April 6, 2009.




Name
      and Address of
                    Beneficial
      Owner
                  
                  Common
      Stock
                    Beneficially
                    Owned
                  
                  
                  
                  Percentage
      of
                    Common
                    StockMichael
      Goldberg
                    President
      and acting Chief Executive Officer
                    c/o
      17 State Street
                    New
      York, NY
                  
                  
                  1,115,625
                  (1)
                  
                  
                  
                  *Henry
      Shabat
                    Chief
      Operating Officer of IDO Security Ltd.
                    c/o
      17 State Street
                    New
      York,, NY
                  
                  
                  210,000
                  (2)
                  
                  
                  
                  *Irit
      Reiner
                    Director
                    c/o
      17 State Street
                    New
      York,, NY
                  
                  
                  4,680,000
                  (3)
                  
                  
                  
                  3.62
                  %John
      Mitola
                    Director
                    c/o
      17 State Street
                    New
      York, NY
                  
                  
                  100,000
                  (4)
                  
                  
                  
                  *Mr.
      Gil Stiss
                    Chief
      Technology Officer of IDO Security Ltd.
                    41/13
      Nahal Lachish St., Ashdod, Israel 77707
                  
                  
                  8,400,000
                  (5)
                  
                  
                  
                  6.49
                  %All
      directors and officers as a group
                  
                  
                  14,505,625
                  
                  
                  
                  
                  11.11
                  %


28




* Less
than 1%.


(1)
                      Represent
      shares of Common stock issuable upon exercise of employee stock
      options.(2)
                      Represent
      shares of Common stock issuable upon exercise of employee stock options.
      Does not include an additional 30,000 shares issuable upon exercise of
      employee stock options scheduled to vest over the next 6
      months.(3)
                      Comprised
      of (i) 4,580,000 shares of Common Stock held by Ms. Reiner’s husband and
      (ii) 100,000 shares issuable upon exercise of stock options issued to Ms.
      Reiner for services rendered as a director of our company. Does not
      include warrants to purchase an additional 200,000 shares of Common Stock
      issuable upon conversion of convertible debt securities and warrants held
      by Ms. Reiner husband. The warrants and convertible debt instruments
      contain provisions that prohibit the exercise of such warrants and/or
      conversion of the convertible debt instruments if following such exercise
      or conversion the aggregate holdings of such person would exceed 4.9% of
      the then issued and outstanding shares of our Common
  Stock.(4)
                      Represent
      shares of Common stock issuable upon exercise of employee stock
      options.(5)
                      Includes
      3,300,000 shares to which the stockholder holds an irrevocable proxy to
      vote these shares on all matters submitted to stockholders. The selling
      stockholder disclaims any beneficial interest in the shares to which he
      holds a
proxy.




Securities
Authorized for Issuance Under Equity Compensation Plans




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 2007 Equity
Incentive Plan (the “2007 Plan”) and the 2007 Non-Employee Directors Stock
Option Plan (the “2007 Directors Plan”; together with the 2007 Plan, the
“Plans”). Our shareholders have approved these Plans.




The
following table sets forth certain information with respect to securities
authorized for issuance under equity compensation plans as of December 31,
2008.


Plan Category
                                                          
                                                          
                                                          Number of securities
                                                            to be issued upon
                                                            exercise of
                                                            outstanding options,
                                                            warrants and rights
                                                            (a)
                                                          
                                                          Weighted-average
                                                            exercise price of
                                                            outstanding options,
                                                            warrants and rights
                                                            (b)
                                                          
                                                          
                                                          Number of securities
                                                            remaining available for future
                                                            issuance under equity
                                                            compensation plans
                                                            (excluding securities reflected
                                                            in column (a))
                                                            (c)Equity
      compensation plansapproved
      by security holders:
                                                          
                                                          
                                                          
                                                          3,490,000
                                                          
                                                          $
                                                          1.47
                                                          
                                                          
                                                          
                                                          510,000Equity
      compensation plans notapproved
      by security holders:
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —TOTAL
                                                          
                                                          
                                                          
                                                          3,490,000
                                                          
                                                          $
                                                          1.47
                                                          
                                                          
                                                          
                                                          510,000




29




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




Certain Relationships and
Related Transactions




One
of the individual investors who advanced the Company $200,000 in connection with
the private placement of the notes in March 2007 is the spouse of Ms. Irit
Reiner, one of the Company’s non-employee directors.




IDO
Ltd. sub-leased office space from a private company wholly-owned by Mr. Gil
Stiss, IDO Ltd.’s Chief Scientist and a director on of IDO Ltd. The sub-lease
expired in March 2008 and, from the date of expiration through November 15,
2008, we were leasing the premises on a month-to-month basis at a monthly rate
of approximately $1,256 per month. On November 16, 2008, we moved to new
premises.




Director
Independence




The
Board believes that John Mitola 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.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Audit
and Non-Audit Fees




Aggregate
fees for professional services rendered for the Company by Rotenberg Meril
Solomon Bertiger & Guttilla, P.C., our independent registered public
accounting firm, for the fiscal years ended December 31, 2008 and 2007 are set
forth below.


Fiscal Year Ended
                    December 31, 2008
                  
                  
                  Transition
                    Period Ended
                    December 31, 2007Audit
      Fees
                  
                  $
                  97,500
                  
                  
                  $
                  74,000Audit
      Related Fees
                  
                  $
                  —
                  
                  
                  $
                  5,000Tax
      Fees
                  
                  $
                  —
                  
                  
                  $
                  —All
      Other Fees
                  
                  $
                  —
                  
                  
                  $
                  —Total
                  
                  $
                  97,500
                  
                  
                  $
                  79,000




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


30





Audit-Related
Feeswere 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 Feeswere for professional
services related to tax compliance, tax authority audit support and tax
planning. All Other Fees include any other fees charged by our auditors that are
not otherwise specified.




Our
full Board pre-approves all audit and permissible non-audit services to be
provided by our independent registered public accountants and the estimated fees
for these services. None of the services provided by the independent registered
public accountants that are described above were approved by the Audit Committee
pursuant to a waiver of the pre-approval requirements of the SEC’s rules and
regulations.




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




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


EXHIBIT NO.
              
              EXHIBIT2.1
              
              Securities
      Purchase Agreement dated as of _July 19, 2006 among The Medical Exchange
      Inc., IDO Security Ltd. and the selling shareholders identified therein,
      filed as an Exhibit to the Current Report Field on March 14, 2007 and
      incorporated herein by reference.3.1
              
              Amended
      and Restated Certificate of Incorporation of the Company filed as an
      exhibit to IDO's annual report on Form 10-KSB for the year ended December
      31, 20073.2
              
              Bylaws
      of the Company, filed as an exhibit to IDO’s annual report on Form 10-KSB
      for the year ended December 31, 20073.3
              
              Certificate
      of Designation of Series A Preferred Stock filed December 11, 2008, filed
      as an exhibit to IDO’s current report on Form 8-K filed on December 23,
      20084.1
              
              Form
      of Promissory Note issued to certain investors, filed as an exhibit to
      IDO’s annual report on Form 10-KSB for the year ended December 31,
      20084.2
              
              Form
      of Class A Common Stock Purchase Warrant, filed as an exhibit to the
      Current Report on Form 8-K filed on April 6, 20074.3
              
              Form
      of Warrant filed as an exhibit to IDO’s annual report on Form 10-KSB for
      the year ended December 31, 20084.4
              
              Form
      of Promissory Note issued on July 30, 2008, filed as an exhibit to IDO’s
      quarterly report on Form 10-Q for the three months ended June 30,
      20084.5
              
              Form
      of Secured Convertible Promissory Note due April 30, 2010, filed as an
      exhibit to IDO’s current report on Form 8-K filed on December 23,
      20084.6
              
              Form
      of Warrant issued as of October 31, 2008, filed as an exhibit to IDO’s
      current report on Form 8-K filed on December 23, 200810.1
              
              Form
      of subscription Agreement, dated as of December 24, 2007, with certain
      investors filed as an exhibit to IDO’s annual report on Form 10-KSB for
      the year ended December 31, 2008.10.2
              
              Form
      of Security Interest Agreement filed as an exhibit to IDO’s annual report
      on Form 10-KSB for the year ended December 31, 2008.10.3
              
              Subscription
      Agreement dated as of October 31, 2008 by and between IDO Security Inc and
      the investors, filed as an exhibit to IDO’s quarterly report on Form 10-Q
      for the three months ended June 30,
2008.


31





10.4
                        
                        Modification,
      Waiver and Consent Agreement dated as of December 17, 2008 between IDO
      Security Inc. and certain of the holders of certain of the Company’s
      previously issued notes, filed as an exhibit to IDO’s quarterly report on
      Form 10-Q for the three months ended June 30, 2008.10.5
                        
                        Employment
      Agreement dated as of June 1, 2007 between IDO Security Inc. and Michael
      Goldberg, filed as an exhibit to the Quarterly Report on Form 10-QSB for
      the three months ended June 30, 2007 +10.6
                        
                        Management
      Agreement dated as of July 1, 2007 between IDO Security Ltd. and Henry
      Shabat Ltd., filed as an exhibit to the Quarterly Report on Form 10-QSB
      for the three months ended June 30, 2007 +10.7
                        
                        Company’s
      2007 Equity Incentive plan, filed as an exhibit to the Company’s
      information statement filed on February 26, 200810.8
                        
                        Company’s
      2007 Non-Employee Directors Stock option Plan, filed as an exhibit to the
      Company’s information statement filed on February 26,
  200831
                        
                        Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232
                        
                        Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of
2002


32




SIGNATURES




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


DATE:
      April 14, 2009IDO
      SECURITY INC./s/
      MICHAEL GOLDBERGMICHAEL
      GOLDBERGACTING
      CHIEF EXECUTIVE OFFICER (PRINCIPALEXECUTIVE
      OFFICER AND PRINCIPAL FINANCIAL ANDACCOUNTING
      OFFICER) AND PRESIDENT




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/
      Irit Reiner
                
                Chairman,
      Director
                
                April
      14, 2009Irit
      Reiner/s/
      Michael Goldberg
                
                President,
      Acting Chief Executive Officer and Director
                
                April
      14, 2009Michael
      Goldberg/s/
      John Mitola
                
                Director
                
                April
      14, 2009John
      Mitola


33


IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 CONSOLIDATED
FINANCIAL STATEMENTS
  
 
  Reports
      of Independent Registered Public Accounting Firms
                    F-1Consolidated
      Balance Sheet
                    F-2Consolidated
      Statements of Operations
                    F-3Consolidated
      Statements of Changes in Shareholders’ Equity (Deficiency)
                    F-4Consolidated
      Statements of Cash Flows
                    F-5Notes
      to Consolidated Financial Statements
                    F-6
  
  REPORT
OF INDEPENDENT REGISTERED ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders of
 IDO
Security, Inc.
 
 We have
audited the accompanying consolidated balance sheets of IDO Security, Inc. and
Subsidiary (the “Company”) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, changes in stockholders’ (deficiency)
equity and cash flows for the years then ended.  The consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007 and the results of their operations and cash flows for the
years ended December 31, 2008 and 2007, in conformity with accounting principles
generally accepted in the United States of America.
 
 The
financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has not achieved profitable
operations, has incurred recurring losses, has a working capital deficiency and
expects to incur further losses in the development of the business, raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans concerning these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
  As
discussed in Note 2 to the consolidated financial statements, the Company
adopted SFAS No. 157, “Fair Value Measurements” as of January 1,
2008.
  
 
 
 /s/
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
 
 ROTENBERG
MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
 Saddle
Brook, New Jersey
 April 13,
2009
  F-1
 IDO
SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 December
      31,
                      2008
                    
                    
                    December
      31,
                      2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    391,569
                    
                    
                    $
                    353,701Due
      from escrow agent
                    
                    
                    —
                    
                    
                    
                    1,150,000Inventory
                    
                    
                    124,708
                    
                    
                    
                    177,037Prepaid
      expenses and other current assets
                    
                    
                    81,840
                    
                    
                    
                    75,678Total
      current assets
                    
                    
                    598,117
                    
                    
                    
                    1,756,416Property
      and equipment, net
                    
                    
                    44,875
                    
                    
                    
                    52,192Goodwill
                    
                    
                    1,955,002
                    
                    
                    
                    1,955,002Deferred
      financing costs, net
                    
                    
                    17,068
                    
                    
                    
                    718,106Total
      assets
                    
                    $
                    2,615,062
                    
                    
                    $
                    4,481,716LIABILITIES
      AND STOCKHOLDERS’ (DEFICIENCY) EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
                    
                    $
                    1,727,440
                    
                    
                    $
                    516,962Bank
      line of credit
                    
                    
                    161,181
                    
                    
                    
                    —Convertible
      promissory notes (net
      of discount of $2,236,792 and $855,758)
                    
                    
                    3,526,160
                    
                    
                    
                    2,256,563Loan
      payable, related party
                    
                    
                    44,826
                    
                    
                    
                    44,826Total
      current liabilities
                    
                    
                    5,459,607
                    
                    
                    
                    2,818,351NON-CURRENT
      LIABILITIESConvertible
      promissory notes(net
      of discount of $236,413 and $2,642,522)
                    
                    
                    30,225
                    
                    
                    
                    —Accrued
      severance pay
                    
                    
                    178,205
                    
                    
                    
                    155,681Total
      liabilities
                    
                    
                    5,668,037
                    
                    
                    
                    2,974,032Redeemable
      Series A Cumulative Convertible Preferred Stock,$.001
      par value; $100 stated value 34,000 shares authorized; 26,664 shares
      outstanding(net
      of discount of $1,874,740 and $-0-)
                    
                    
                    791,660
                    
                    
                    
                    —STOCKHOLDERS’
      (DEFICIENCY) EQUITYCommon
      stock, $.001 par value;100,000,000
      shares authorized; 46,083,070 and 34,361,250 issued and outstanding,
      respectively
                    
                    
                    46,083
                    
                    
                    
                    34,361Additional
      paid-in capital
                    
                    
                    19,306,867
                    
                    
                    
                    16,431,941Stock
      subscription receivable
                    
                    
                    (25
                    )
                    
                    
                    (25
                    )Accumulated
      other comprehensive loss
                    
                    
                    (331
                    )
                    
                    
                    (331
                    )Deferred
      stock based compenation
                    
                    
                    (55,007
                    )
                    
                    
                    —Accumulated
      deficit
                    
                    
                    (23,142,222
                    )
                    
                    
                    (14,958,262
                    )Total
      stockholders’ (deficiency) equity
                    
                    
                    (3,844,635
                    )
                    
                    
                    1,507,684Total
      liabilities and stockholders’ (deficiency) equity
                    
                    $
                    2,615,062
                    
                    
                    $
                    4,481,716
  See Notes
to Consolidated Financial Statements.
 F-2
  IDO
SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Year
                          Ended
                          December
      31,
                          2008
                        
                        
                        Year
                          Ended
                          December
      31,
                          2007Revenues
                        
                        $
                        326,780
                        
                        
                        $
                        49,095Cost
      of sales
                        
                        
                        339,263
                        
                        
                        
                        107,187Gross
      loss
                        
                        
                        (12,483
                        )
                        
                        
                        (58,092
                        )Operating
      expensesResearch
      and development costs
                        
                        
                        390,988
                        
                        
                        
                        279,177Selling,
      general and administrative expenses
                        
                        
                        2,148,752
                        
                        
                        
                        991,688Stock
      based compensation
                        
                        
                        546,068
                        
                        
                        
                        5,379,103Total
      operating expenses
                        
                        
                        3,085,808
                        
                        
                        
                        6,649,968Loss
      from operations
                        
                        
                        (3,098,291
                        )
                        
                        
                        (6,708,060
                        )Interest
      expense (including amortizations of debt discount, beneficial conversion
      features and deferred finance costs)
                        
                        
                        (4,095,848
                        )
                        
                        
                        (8,069,987
                        )Interest
      income
                        
                        
                        1,828
                        
                        
                        
                        3,295Loss
      on extinguishment of debt
                        
                        
                        (991,649
                        )
                        
                        
                        —Net
      loss
                        
                        
                        (8,183,960
                        )
                        
                        
                        (14,774,752
                        )Preferred
      stock dividends
                        
                        
                        (284,219
                        )
                        
                        
                        —Net
      loss attibutable to common stockholders
                        
                        $
                        (8,468,179
                        )
                        
                        $
                        (14,774,752
                        )Basic
      and diluted loss per share
                        
                        $
                        (0.20
                        )
                        
                        $
                        (0.45
                        )Weighted
      average number of shares outstanding – Basic and
      diluted
                        
                        
                        42,479,287
                        
                        
                        
                        32,779,589
  See
Notes to Consolidated Financial Statements.
 F-3
  IDO
SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY
 Accumulated
                        Other
                        Comprehensive
                        Income
                      
                      
                      
                      
                      
                      Deferred
                        Stock
      Based
                        CompensationAdditional
                        Paid-in
                        Capital
                      
                      
                      
                      
                      
                      Common
                        Stock
                        SubscribedPreferred
      Stock
                      
                      
                      Common
      Stock
                      
                      
                      Accumulated
                        DeficitShares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      TotalBalances
      at January 1, 2007
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      30,600,000
                      
                      
                      $
                      30,600
                      
                      
                      $
                      124,331
                      
                      
                      $
                      (183,510
                      )
                      
                      $
                      (331
                      )
                      
                      $
                      (36,500
                      )
                      
                      $
                      —
                      
                      
                      $
                      (65,410
                      )Common
      stock subscriptions
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      36,475
                      
                      
                      
                      —
                      
                      
                      
                      36,475Common
      stock and warrants issued in connection with debt
placement
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,761,250
                      
                      
                      
                      3,761
                      
                      
                      
                      9,986,440
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      9,990,201Beneficial
      conversion feature of of convertible debt issued
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      942,067
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      942,067Stock
      based compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      5,379,103
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      5,379,103Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (14,774,752
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (14,774,752
                      )Balances
      at December 31, 2007
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      34,361,250
                      
                      
                      $
                      34,361
                      
                      
                      
                      16,431,941
                      
                      
                      $
                      (14,958,262
                      )
                      
                      $
                      (331
                      )
                      
                      $
                      (25
                      )
                      
                      $
                      —
                      
                      
                      $
                      1,507,684Exercise
      of warrants
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      8,340,948
                      
                      
                      
                      8,341
                      
                      
                      
                      (8,341
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Common
      stock issued for services
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      30,000
                      
                      
                      
                      30
                      
                      
                      
                      90,570
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (90,600
                      )
                      
                      
                      —Conversion
      of convertible promissory notes and accrued interest and
    fees
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,350,872
                      
                      
                      
                      3,351
                      
                      
                      
                      629,920
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      633,271Warrants
      issued in connection with debt placement
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,551,310
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,551,310Beneficial
      conversion feature of of convertible debt issued
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      385,211
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      385,211Stock
      based compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      510,475
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      35,593
                      
                      
                      
                      546,068Preferred
      stock dividends
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (284,219
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (284,219
                      )Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (8,183,960
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (8,183,960
                      )Balances
      at December 31, 2008
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      46,083,070
                      
                      
                      $
                      46,083
                      
                      
                      
                      19,306,867
                      
                      
                      $
                      (23,142,222
                      )
                      
                      $
                      (331
                      )
                      
                      $
                      (25
                      )
                      
                      $
                      (55,007
                      )
                      
                      $
                      (3,844,635
                      )
  See
Notes to Consolidated Financial Statements.
 F-4
  IDO
SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Year
                    Ended
                    December
      31,
                    2008
                  
                  
                  Year
                    Ended
                    December
      31,
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (8,183,960
                  )
                  
                  $
                  (14,774,752
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  528,606
                  
                  
                  
                  133,190Loss
      on extinguishment of debt
                  
                  
                  991,649Amortization
      of note discount
                  
                  
                  2,525,906
                  
                  
                  
                  6,905,171Amortization
      of beneficial conversion feature of convertible debt
                  
                  
                  396,777
                  
                  
                  
                  452,993Accretion
      of interest on notes payable
                  
                  
                  41,936
                  
                  
                  
                  509,842Stock
      based compensation
                  
                  
                  546,068
                  
                  
                  
                  5,379,103Stock
      issued in lieu of interest and other charges
                  
                  
                  135,771
                  
                  
                  
                  —Loss
      on sale of property and equipment
                  
                  
                  22,415
                  
                  
                  
                  —Increase
      in net liability for severance pay
                  
                  
                  22,524
                  
                  
                  
                  4,878Increase
      (decrease) in cash attributable to changes in operating assets and
      liabilitiesInventory
                  
                  
                  52,329
                  
                  
                  
                  15,382Prepaid
      expenses and other current assets
                  
                  
                  (6,162
                  )
                  
                  
                  (62,834
                  )Accounts
      payable
                  
                  
                  408,881
                  
                  
                  
                  40,624Accrued
      expenses and other current liabilities
                  
                  
                  757,035
                  
                  
                  
                  82,118Net
      cash used in operating activities
                  
                  
                  (1,760,225
                  )
                  
                  
                  (1,314,285
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of IDO Security Ltd., net of cash acquired of $19,974
                  
                  
                  —
                  
                  
                  
                  (950,171
                  )Deferred
      acquisition costs
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from sale of property and equipment
                  
                  
                  1,006
                  
                  
                  
                  —Purchases
      of property and equipment
                  
                  
                  (27,355
                  )
                  
                  
                  (41,378
                  )Net
      cash used in investing activities
                  
                  
                  (26,349
                  )
                  
                  
                  (991,549
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      subscription receivable
                  
                  
                  —
                  
                  
                  
                  36,475Proceeds
      from issuance of secured convertible notes
                  
                  
                  750,000
                  
                  
                  
                  5,375,000Proceeds
      from issuance of convertible notes and preferred stock
                  
                  
                  567,724
                  
                  
                  
                  —Due
      from escrow agent
                  
                  
                  1,150,000
                  
                  
                  
                  (1,150,000
                  )Payments
      of deferred finance costs
                  
                  
                  (217,051
                  )
                  
                  
                  (554,103
                  )Proceeds
      from related party loans
                  
                  
                  —
                  
                  
                  
                  12,735Proceeds
      from short-term debt
                  
                  
                  442,355
                  
                  
                  
                  —Proceeds
      from line of credit
                  
                  
                  161,181
                  
                  
                  
                  —Repayment
      of notes payable
                  
                  
                  (1,029,767
                  )
                  
                  
                  (130,000
                  )Repayment
      of short-term debt
                  
                  
                  —
                  
                  
                  
                  (938,056
                  )Net
      cash provided by financing activities
                  
                  
                  1,824,442
                  
                  
                  
                  2,652,051INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  
                  37,868
                  
                  
                  
                  346,217CASH
      AND CASH EQUIVALENTS - BEGINNING OF YEAR
                  
                  
                  353,701
                  
                  
                  
                  7,484CASH
      AND CASH EQUIVALENTS - END OF YEAR
                  
                  $
                  391,569
                  
                  
                  $
                  353,701Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                  
                  $
                  49,546
                  
                  
                  $
                  —Non-cash
      activitiesIssuance
      of common stock and warrants relating to convertible promissory
      notes
                  
                  $
                  633,271
                  
                  
                  $
                  1,194,931Issuance
      of common stock for cashless exercise of warrants
                  
                  $
                  8,341
                  
                  
                  $
                  —Preferred
      stock dividends and deemed dividends
                  
                  $
                  284,219
                  
                  
                  $
                  —
 See Notes to Consolidated
Financial Statements.
 F-5
  IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
 
 NOTE
1 - GENERAL
  Overview
  IDO
Security Inc. (hereinafter, “IDO”) is engaged in the design, development and
marketing of devices for the homeland security and loss prevention markets that
are intended for use in security screening procedures and are designed to detect
concealed metallic objects through the use of electro-magnetic fields. These
devices were designed specifically for applications in the security screening
and detection market to complement the current detection methods for detecting
metallic items during security screenings at security checkpoints in venues such
as airports, prisons, schools, stadiums and other public locations
requiring individual security screening. The consolidated financial statements
include the accounts of IDO and IDO Security Ltd. (“IDO Ltd.”), its wholly-owned
subsidiary (collectively the “Company”).
  IDO was
incorporated in the State of Nevada on January 23, 2004 under the name “The
Medical Exchange, Inc.”  On July 25, 2006, IDO Ltd. and the holders of
all of the issued and outstanding share capital of IDO Ltd. (collectively the
“IDO Selling Shareholders”) entered into a Securities Purchase Agreement
pursuant to which The Medical Exchange Inc. (“Med Ex”) agreed to purchase all of
the issued and outstanding share capital of IDO Ltd. (the “Acquisition
Transaction”). On March 8, 2007, the Acquisition Transaction was consummated.
Following the consummation of the Acquisition Transaction, IDO Ltd. became a
wholly-owned subsidiary of Med Ex and Med Ex adopted the business of IDO
Ltd.
  In June
2007, Med Ex changed its name to “IDO Security Inc.” and effected other changes
to its capital structure discussed in Note 7 (Stockholders’ (Deficiency)
Equity). The Company also effected a three-for-one forward stock split of its
shares of common stock, par value $0.001 (the “Common Stock”). All share figures
and results in this Annual Report on Form 10-K are reflected on a post-split
basis.
  We
conduct our principal operations in Israel and revenues are derived principally
from shipments to Asian and European countries.
  Basis
of presentation
  The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. At December 31, 2008, the Company
had not achieved profitable operations, had accumulated losses of $23.4 million
(since inception), a working capital deficiency of $4.9 million and expects to
incur further losses in the development of its business. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
  The
Company’s ability to continue as a going concern is dependent upon its ability
to generate future profitable operations or management’s ability to find sources
of additional equity capital. The Company needs to raise additional funds to
continue to meet its liquidity needs and realize its business plan and maintain
operations.  The Company’s current cash resources are not sufficient
to support any unforeseen contingencies that may arise or permit the Company to
take advantage of business opportunities that may arise. Management of the
Company is continuing its efforts to secure funds through equity and/or debt
instruments for its operations. Presently, the Company does not have any
financing commitment from any person, and there can be no assurance that
additional capital will be available to the Company on commercially acceptable
terms or at all.
  F-6
  The
Company has been funding its operations from the net proceeds from the private
placement of its convertible securities.  In December 2007 and January
2008, the Company received net proceeds of approximately $1 million from the
proceeds of the private placement to certain accredited investors (the “December
2007 Investors”) its two-year 10% Secured Convertible Promissory Notes, after
the payment of offering related fees and expenses and after the repayment of
short-term debentures and bridge loans that came due. Additionally, between
April and November 2008, the Company received from two previous investors and
one stockholder, gross loan proceeds totaling $442,355, which are discussed
below in Note 6.  Finally, in December 2008, the Company raised net
proceeds of $548,474 from certain December 2007 Investors in a private
placement of convertible notes and preferred stock.
  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. There can be no assurance that management will be
successful in implementing a business plan or that the successful implementation
of a business plan will actually improve the Company’s operating
results
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles
of Consolidation
 The
accompanying consolidated financial statements include the accounts of IDO Ltd.,
the Company’s wholly-owned subsidiary. All significant inter-company balances
and transactions have been eliminated.
  Development
Stage Activities and Operations
 From
inception through the third quarter of 2008, the Company was in the development
stage and has had insignificant revenues.  Statement of Financial
Accounting Standard (“SFAS”) No. 7 defines a development stage activity as one
in which all efforts are devoted substantially to establishing a new business
and even if planned principal operations have commenced, revenues are
insignificant.  In the fourth quarter of 2008, management determined
that the Company was no longer in the development stage as the Company generated
significant revenues.
  Cash
Equivalents
 The
Company considers all highly liquid investments purchased with a maturity date
of three months or less at the date acquired to be cash
equivalents.  Cash equivalents consist of a money market
account.
  Use
of Estimates
 These
financial statements and accompanying notes have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The Company continually evaluates the
accounting policies and estimates we use to prepare the consolidated financial
statements. The Company bases its estimates on historical experiences and
assumptions believed to be reasonable under current facts and circumstances.
Actual amounts and results could differ from these estimates made by
management.
  Functional
Currency
 The
majority of Company’s sales are in United States dollars. In addition, the
majority of the Company’s investing and financing activities are in United
States dollars. Accordingly, the Company has determined the United States dollar
as the currency of its primary economic environment and thus, its functional and
reporting currency. Non-dollar transactions and balances have been measured in
United States dollars in accordance with SFAS No. 52 “Foreign Currency
Translation.”  All transaction gains and losses from the measurement of
monetary balance sheet items denominated in non-dollar currencies are reflected
in the statement of operations as financial income or expenses, as
appropriate.
  Revenue
Recognition
 Revenue is
recognized upon the sale of product upon shipment to the customer, subject to
the following criteria: (i) persuasive evidence of an arrangement exists, (ii)
the selling price is fixed and determinable and (iii) no significant obligations
remain to the Company and collection of the related receivable is reasonable
assured. When the above stated revenue recognition criteria are not met, the
Company will record deferred revenue.
  F-7
  Concentrations
 IDO
maintains cash in bank accounts which may, at times, exceed federally insured
limits. IDO has not experienced any losses on these accounts. At December 31,
2008 and 2007, amounts in excess of insurance amounted to approximately $171,000
and $229,000, respectively.
  For the
year ended December 31, 2008, 62% of the Company’s revenue was derived from
shipments to China.  For the year ended December 31, 2007, 85% of the
Company’s revenue was derived from shipments to Poland.
   Inventories
 Inventories,
consisting of completed devices, devices partially completed and components are
valued at the lower of cost determined by the moving-average basis or market.
The value of the inventories is adjusted for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions.
  Inventories
at December 31, 2008 consisted of components totaling $65,100 and partially
completed and completed devices totaling $59,608.   Inventories
at December 31, 2007 consisted of components totaling $33,847 and partially
completed and completed devices totaling $143,190.
  Accounts
Receivable
 Accounts
receivable, if any, is reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts. The Company will estimate
doubtful accounts based on historical bad debts, factors related to specific
customers’ ability to pay, and current economic trends. The Company will write
off accounts receivable against the allowance when a balance is determined to be
uncollectible.
  Property
and Equipment
 Depreciation
of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Long-lived assets are reviewed for
impairment in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable.
  Deferred
Financing Costs
 Deferred
financing costs are being amortized over the respective lives of the convertible
promissory notes.
  Goodwill
 Goodwill
consists of the excess of cost over net assets acquired of IDO Ltd. on March 8,
2007. Under the provisions of SFAS no. 142, “Goodwill and Other Intangible
Assets”, goodwill is not amortized, but is tested at least annually for
impairment, or if circumstances change that will more likely than not reduce the
fair value of the reporting unit below its carrying amount.   The
Company has performed its first impairment test in the first quarter of
2008.  The Company currently will perform annual impairment testing on
a recurring basis in the last quarter of each year. Impairments, if any, will be
expensed in the year incurred. As of December 31, 2008, there was no impairment
to goodwill.
  Research
and Development
 Costs
incurred in connection with the research and development of the Company’s
products is expensed as incurred.
  Severance
Pay
 The
Company’s subsidiary liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment as of balance sheet date.
Employees are entitled to one month’s salary for each year of employment, or a
portion thereof (on a pro-rata basis). Such liability in Israel is fully
provided by monthly deposits in accordance with insurance policies and by an
accrual. The deposited funds include profits accumulated through December 31,
2008. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The value
of the deposited funds is based on the cash surrendered value of these policies,
and includes immaterial profits.
  F-8
  Income
Taxes
 Income
taxes are accounted for under the liability method. Under this method, deferred
tax assets and liabilities are recorded based on the temporary differences
between the financial statement and the tax bases of assets and liabilities and
for operating loss carry forwards measured using the enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company periodically evaluates if its net deferred tax assets can be realized
and records a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
  In
June 2006, the Financial Accounting Standards Board  issued FASB
Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income
Taxes (an interpretation of FASB Statement No. 109”) which became effective
in 2007. This interpretation was issued to clarify the accounting for
uncertainty in the amount of income taxes recognized in the financial statements
by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more likely than not to be sustained upon examination by the
taxing authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being realized upon
ultimate settlement. The provisions of FIN 48 were adopted by the Company on
January 1, 2007 and had no effect on the Company’s financial statements
upon adoption. The Company also evaluated its tax positions as of
December 31, 2008 and 2007 and reached the same conclusion.
  Stock-Based
Compensation
 The
Company accounts for stock-based compensation in accordance with the provisions
of SFAS 123R, 
“Share-Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on grant-date fair value of the
award. That cost will be recognized over the period during which an employee is
required to provide service in exchange for the reward—known as the requisite
service period. No compensation cost is recognized for equity instruments for
which employees do not render the requisite service. The grant-date fair value
of employee share options and similar instruments are estimated using
option-pricing models adjusted for the unique characteristics of those
instruments.
  Equity instruments issued
to non-employees are recorded at their fair values as determined in accordance
with SFAS No. 123 and Emerging Issues Task Force(EITF)96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods and Services”, and are periodically revalued as
the stock options vest and are recognized as expense over the related service
period.
  Earning
(loss) per Share
 Basic
earnings (loss) per share are computed by dividing net income (loss) available
to common stockholders by the weighted-average number of shares of Common Stock
outstanding during the period. Diluted earnings (loss) per share give effect to
dilutive convertible securities, options, warrants and other potential Common
Stock outstanding during the period, only in periods in which such effect is
dilutive. The following securities have been excluded from the calculation of
net loss per share, as their effect would be anti-dilutive:
  Shares
      of Common StockIssuable
      upon Conversion/Exerciseof
      asDecember
      312008
                              
                              
                              2007Warrants
                              
                              
                              14,559,154
                              
                              
                              
                              23,797,048Convertible
      notes
                              
                              
                              43,611,427
                              
                              
                              
                              4,863,065Stock
      options
                              
                              
                              3,490,000
                              
                              
                              
                              3,890,000Convertible
      preferred stock
                              
                              
                              18,073,080
                              
                              
                              
                              —
  F-9
  Fair
Value of Financial Instruments
  Substantially
all of the Company’s financial instruments, consisting primarily of cash
equivalents, accounts payable and accrued expenses, other current liabilities
and convertible notes, are carried at, or approximate, fair value because of
their short-term nature or because they carry market rates of
interest.
  Fair
Value Measurements
  Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements,” for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. SFAS 157 establishes a new
framework for measuring fair value and expands related disclosures. Broadly, the
SFAS 157 framework requires fair value to be determined based on the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants. SFAS 157
establishes market or observable inputs as the preferred source of values,
followed by unobservable inputs or assumptions based on hypothetical
transactions in the absence of market inputs.
  ●
                                  Level
      1, is defined as observable inputs being quoted prices in active markets
      for identical assets;●
                                  Level 2, is defined
      as observable inputs including quoted prices for similar assets;
      and●
                                  Level
      3, is defined as unobservable inputs in which little or no market data
      exists, therefore requiring assumptions based on the best information
      available.
  The
adoption of this pronouncement did not have a material effect on the financial
condition or results of operations of the Company.
  Recently
Issued Accounting Pronouncements
  In
December 2007, the FASB issued SFAS 141(R), “Business Combinations - a
replacement of FASB Statement No. 141”, which significantly changes the
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquire. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This statement is effective prospectively,
except for certain retrospective adjustments to deferred tax balances, for
fiscal years beginning after December 15, 2008. This statement will be
effective for the Company beginning in fiscal 2009. The Company is currently
evaluating SFAS 141(R), and has not yet determined the impact if any, SFAS
141(R) will have on its consolidated results of operations or financial
position.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS 161”).  SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. The objective of the guidance is to provide users of
financial statements with an enhanced understanding of how and why an entity
uses derivative instruments; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for fiscal years beginning after November 15, 2008.
The Company is currently evaluating the impact SFAS 161 will have on the
Company’s consolidated financial statements, but it currently does not expect
the effect to be material.
  F-10
  In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States (commonly referred to as the
GAAP hierarchy). The statement is effective 60 days following approval by
the Securities and Exchange Commission (“SEC”) of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” The Company
is currently evaluating the impact SFAS 161 will have on the Company’s
consolidated financial statements, but it currently does not expect the effect
to be material.
  In May
2008, FASB issued FSP Accounting Principles Board No. 14−1,“Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement”   (“FSP APB
14−1”).  FSP APB 14−1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion
(including partial cash settlement) to separately account for the liability and
equity components of the instrument in a manner that reflects the issuer’s
non−convertible debt borrowing rate when interest cost is recognized in
subsequent periods.  FSP APB 14−1 is effective for us beginning after
January 1, 2009.  The Company is evaluating the effect of
adopting FSP APB 14−1 on its financial statements.
  In June
2008, FASB ratified EITF Issue No. 08-4,“Transition
Guidance for Conforming Changes to Issue No. 98-5” (“EITF No. 08-4”).  Per
EITF No. 08-4, conforming changes made to EITF Issue No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, that result from EITF Issue No. 00-27,
 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and
SFAS No. 150,  “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, shall be effective for us beginning after January 1,
2009.  The Company is evaluating the effect of adopting FSP APB
14−1 on its financial statements.
  Management
does not believe that any recent issued, but not yet effective, accounting
standards if currently adopted, would have a material affect on the accompanying
financial statements.
  NOTE
3 - ACQUISITION
  On July
25, 2006, IDO Inc., IDO Ltd. and the IDO Selling Shareholders entered into a
Securities Purchase Agreement pursuant to which IDO Inc. agreed to purchase all
of the issued and outstanding share capital of IDO Ltd. On March 8, 2007, the
Acquisition Transaction was completed for total consideration of $1,000,000.
Acquisition costs of $25,695 were incurred by IDO Inc. to complete the
transaction. Following the consummation of the transaction, IDO Ltd. became a
wholly-owned subsidiary of IDO Inc. and IDO Inc. adopted the business of IDO
Ltd.
  The Acquisition Transaction was
accounted for as a purchase. The following table summarizes the estimated
aggregated fair values of the assets acquired and the liabilities
assumed.
  Cash
                            
                            $
                            19,974Inventories
                            
                            
                            192,419Other current
      assets
                            
                            
                            12,844Property and
      equipment
                            
                            
                            17,182Goodwill
                            
                            
                            1,955,002Accounts payable and accrued
      expenses
                            
                            
                            (77,672
                            )Amounts due from related
      parties
                            
                            
                            (943,251
                            )Accrued severance
      pay
                            
                            
                            (150,803
                            )$
                            1,025,695
  F-11
  Prior to the Acquisition Transaction,
IDO Ltd. received loans for working capital purposes from third parties,
including stockholders of IDO Inc. At the date of the Acquisition Transaction,
IDO Ltd. owed the parties the aggregate amount of $959,361. In connection with
the Acquisition Transaction, these third parties assigned their rights to the
loans to IDO Inc. As such, the loan balances were offset against
goodwill.
 
 In addition, prior to the Acquisition
Transaction, IDO Ltd. received working capital loans from certain non-management
related stockholders of IDO Inc. Following the consummation of the Acquisition
Transaction, the outstanding principal amount and accrued interest were repaid
from the proceeds of the private placement of Company’s securities referred to
in Note 6.
 
 The following table presents unaudited
pro forma revenue, net loss and loss per share giving effect to the Acquisition
Transaction as if it had been completed at the beginning of fiscal
2007
 
 2007Revenue
                    
                    $
                    69,080Net
      loss
                    
                    $
                    (15,168,002
                    )Net
      loss per share,basic
      and diluted
                    
                    $
                    (0.46
                    )
   NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts
payable and accrued expenses consist of the following at December 31, 2008 and
2007:
 
 2008
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  2007Accounts payable
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  463,071
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  348,818Accrued registration penalty (see Note
      6)
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  516,137
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —Accrued interest
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  512,124
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  38,539Accrued dividend
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  44,562
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —Accrued compensation costs
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  70,406
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  90,622Accrued professional fees
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  84,299
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  —Accrued other
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  36,841
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  38,983$
                                                                                                                                                  1,727,440
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  516,962
 
 NOTE
5 – BANK LINE OF CREDIT
 
 The
Company’s subsidiary has a line of credit for up to approximately
$250,000.  The line bears interest at rates ranging from 9.3% per
annum on amounts up to $200,000 of indebtedness and 12.55% on amounts over that.
The line is collateralized by substantially all the assets of the
subsidiary. As of December 31, 2008, $161,181 is outstanding under the line of
credit.
  F-12
  NOTE
6 - PRIVATE PLACEMENT OF CONVERTIBLE PROMISSORY NOTES
 
 Convertible
promissory notes consist of the following:
 
 December
      31,2008
                                                            
                                                            
                                                            20072008
      Notes - secured  and convertible - interest at 10% - see (iii)
      below
                                                            
                                                            $
                                                            4,963,050
                                                            
                                                            
                                                            $
                                                            3,916,160December
      2008 Notes - secured  and convertible - interest at 10% - see
      (v) below
                                                            
                                                            
                                                            1,066,540
                                                            
                                                            
                                                            
                                                            —2007
      Notes - secured  and convertible - see (i) below
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,578,200October
      2007 Notes – secured  and convertible - see (ii)
      below
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            260,483Total
                                                            
                                                            
                                                            6,029,590
                                                            
                                                            
                                                            
                                                            5,754,843Less:
      Discount
                                                            
                                                            
                                                            (2,473,205
                                                            )
                                                            
                                                            
                                                            (3,498,280
                                                            )3,556,385
                                                            
                                                            
                                                            
                                                            2,256,563Less
      Current Portion
                                                            
                                                            
                                                            (3,526,127)
                                                            
                                                            
                                                            
                                                            (2,256,563
                                                            )Total
                                                            
                                                            $
                                                            30,258
                                                            
                                                            
                                                            $
                                                            —
  The
maturities on the Notes are $5,762,952 payable in 2009 and $266,638 payable in
2010.
 
 (i)
Secured Convertible Notes
  On February 28, 2007 and
March 29, 2007, the Company raised gross proceeds of $1,050,000 and $1,250,000,
respectively, from the private placement of its 120 day Secured Convertible
Notes (the “2007 Notes”). The 2007 Notes were issued pursuant to a Subscription
Agreement, dated February 28, 2007 (the “Subscription Agreement”), between the
Company and certain investors (the “Investors”) pursuant to which the Company
was able to raise up to $3 million from the placement of its promissory notes.
On April 18, 2007, the Company raised an additional $700,000 under the
Subscription Agreement. In
connection with the issuance of the 2007 Notes, the Company issued warrants (the
“Investor Warrants”) to purchase up to 9,720,000 shares of the Company’s Common
Stock at a per share exercise price of $1.67. The warrants are exercisable
through the fifth anniversary of the effective date of a resale registration
statement relating to the Common Stock underlying the securities sold. Under the
terms of the Subscription Agreement, the Investors also received 1,770,000
restricted shares (the “Incentive Shares”) of the Company’s Common
Stock.
  Pursuant
to the Subscription Agreement, the Company issued the 2007 Notes to the
Investors in the aggregate principal amount of $3,240,000, which reflected an
original issue discount on the principal amount of the loan of 8% with respect
to the 120 day loan period and an effective annual interest rate of 23%. Each of
the 2007 Notes had an original term of 120 days and was convertible into shares
of the Company’s Common Stock at the holder’s option at any time at an initial
conversion price of $1.67 per share, subject to adjustment in the event of
certain capital adjustments or similar transactions, such as a stock split or
merger.
  For
financial reporting purposes, the Company recorded a discount of $2,042,361 to
reflect the value of the warrants and shares issued and in accordance with EITF
No. 00-27, an additional discount of $448,263 to reflect the beneficial
conversion feature of the 2007 Notes. The discounts are being amortized to the
date of maturity unless converted earlier.
  A
2007 Note in the aggregate principal amount of $1,134,000 (purchase price of
$1,050,000) was originally scheduled to mature on June 28, 2007. In July 2007,
the Company and the holder of such 2007 Note agreed to extend the maturity date
of this 2007 Note to August 31, 2007. In consideration of the extension, the
Company issued to the holder, warrants to purchase an additional 1,701,000
shares of the Company’s Common Stock on terms and conditions that are identical
to the Investor Warrants and also issued 315,000 Incentive Shares. For financial
reporting purposes, the Company recorded a discount of $897,902 to reflect the
value of the warrants and shares.  The discount is being amortized to
the date of maturity unless converted earlier.
  F-13
 
 On July 26, 2007, the maturity date for
2007 Notes in the aggregate principal amount of $1,350,000 (purchase price of
$1,250,000), which were originally scheduled to mature on July 29, 2007, have
also been extended to August 31, 2007. In consideration of this extension, the
Company issued to these holders, warrants to purchase an additional 1,217,199
shares of the Company’s Common Stock on terms and conditions that are identical
to the Investor Warrants and also issued 218,750 Incentive Shares. For financial
reporting purposes, the Company recorded a discount of $958,452 to reflect the
value of the warrants and shares. The discount is being amortized to the date of
maturity unless converted earlier.
 
 As of August 16, 2007, the maturity date
for Notes in the aggregate principal amount of $3,323,222, which were originally
scheduled to mature on August 31, 2007, were extended to November 29, 2007. At
that date, principal of $3,499,360 was due and payable, reflecting an annual
effective interest rate of approximately 20%.  In consideration of
this extension, the Company issued to these investors warrants to purchase an
additional 7,573,500 shares of the Company’s Common Stock on terms and
conditions that are identical to the Investor Warrants and also issued 1,402,500
Incentive Shares. For financial reporting purposes, the Company recorded a
discount of $2,832,514 to reflect the value of the warrants and shares. The
discount is being amortized to the date of maturity unless converted
earlier.
 
 At December 31, 2007, the Company owed
principal and accreted interest of $1,578,200 and was in
default.  Although no action was taken by the debt holder, the Company
incurred default interest at an annual rate of 15%.  The default was
cured in January 2008 as the Company paid $902,200 and the balance was
re-invested in the Company’s private placement of its two-year 10% secured
convertible promissory notes discussed below.
 
 In
December 2007 and January 2008, principal balances including accreted interest
totaling $2,467,160 were re-invested in the Company’s private placement of its
two-year 10% secured convertible promissory notes discussed below in (iii) and
the remaining balance of $902,200 was repaid.
 
 Interest incurred on the 2007 Notes
amounted to $15,566 and $499,360 for the years ended December 31, 2008 and 2007,
respectively. Amortization of debt discount and beneficial conversion for the
years ended December 31, 2008 and 2007 amounted to $0 and $7,179,492,
respectively.
 
 (ii)
Promissory Notes
 
 On
October 11, 2007, the Company raised gross proceeds of $250,000 from the private
placement to institutional investors  of its 90 day Promissory Notes
(collectively, the “October 2007 Notes”). The loan was advanced pursuant to a
Subscription Agreement, dated as of October 11, 2007 (the “October 2007
Subscription Agreement”), between the Company and the investors. Pursuant to the
October 2007 Subscription Agreement, the Company issued to the investors the
October 2007 Notes, originally scheduled to mature on January 11, 2008, in the
aggregate principal amount of $265,957.  The effective annual interest rate of the
October 2007 notes is 25%.In connection with the issuance of these
notes, the Company issued to the investors five-year warrants  to
purchase up to 265,957 shares of the Company’s Common Stock at a per share
exercise price of $1.77. In connection with their investment, the investors also
received an aggregate of 25,000 restricted shares of the Company’s Common
Stock.
 
 Out of
the gross proceeds received, the Company paid a due diligence fee of $25,000 and
other offering related fees and expenses totaling $2,500.
 
 For financial reporting purposes, the
Company recorded a discount of $177,019 to reflect the value of the warrants and
shares. The discount is being amortized to the date of maturity unless converted
earlier.
 
 At December 31, 2007, principal and
accreted interest of $260,482 was due.Upon maturity in
January 2008, principal balances including accreted interest totaling $138,390
were re-invested in the Company’s private placement of its two-year 10% secured
convertible promissory notes discussed below in (iii) and the remaining balance
of $122,092 was repaid.
   F-14
 
 Interest incurred on the October 2007
Notes amounted to $5,475 and $10,482 for the years ended December 31, 2008 and
2007, respectively. Amortization of debt discount for the years ended December
31, 2008 and 2007 amounted to $32,584 and $145,157,
respectively.
  (iii)
10% Secured Convertible Promissory Notes
 
 Between
December 5, 2007 and January 24, 2008, the Company raised gross proceeds of
$5,404,550 from the private placement  to certain accredited
institutional and individual investors (the “2008 Investors”) of its two-year
10% Secured Convertible Promissory Notes (collectively, the “2008 Notes”, each
a “2008 Note”). Of such amount, $3,916,160 was raised in December 2007 and
$1,488,390 was raised in January 2008.    The transactions
were effected pursuant to a Subscription Agreement, dated as of December 5,
2007, between the Company and the 2008 Investors.  The Company
received net proceeds of $1 million from the proceeds of the 2008 Notes, after
the payment of offering related fees and expenses and after the repayment of
bridge loans that that came due in November 2007. Certain remaining note holders
from a private placement of 2007 Notes and the October 2007 note holders
participated in the private placement and the gross proceeds raised include
amounts the Company owed to these investors in the approximate amount of $2.6
million that were offset against such investors’ respective purchases of the
2008 Notes.
  In
connection with the issuance of the 2008 Notes, the Company issued to the 2008
Investors, warrants (the “2008 Investor Warrants”) to purchase up to 5,404,550
shares of the Company’s Common Stock, of which warrants for 2,702,275 shares are
exercisable at a per share exercise price of $2.00 and warrants for 2,702,275
shares are exercisable at a per share exercise price of $3.00. The per share
exercise price of the 2008 Investor Warrants were subsequently reduced to $0.15
in connection with the investment in December 2008 Notes discussed below in (v).
 
 The 2008
Notes are scheduled to mature on December 31, 2009 and were originally
convertible into shares of Common Stock at the holder’s option at any time at an
initial conversion price of $1.00 per share (the “Fixed Conversion Price”),
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger and as further described below.
Interest on the 2008 Notes accrues at the rate of 10% per annum and is payable
upon a required monthly repayment or upon maturity, whichever occurs first, and
will continue to accrue until the 2008 Notes are fully converted and/or paid in
full. The per share Fixed Conversion Price of the 2008 Notes was
subsequently reduced to $0.15 in connection with the investment in December 2008
Notes discussed below in (v).
 
 Commencing
on the fourth month anniversary of the issuance of the 2008 Notes and on the
same day of each month thereafter until the principal amount of the 2008 Notes
has been paid in full, the Company is required to prepay 5% of the aggregate
principal amount of the 2008 Notes originally issued, together with all accrued
interest due and payable on the entire outstanding amount up to such repayment
date (each such date, a “Scheduled Payment Date”). The amount may be paid either
in (i) cash, at 110% of the principal amount due and 100% of all other amounts
due or (ii) shares of Common Stock at a rate equal to the lower of (A) the Fixed
Conversion Price or (B) 75% of the average of the closing bid price of the
Common Stock for the five trading days ending on the trading day immediately
preceding the Scheduled Payment Date, provided, that, if such monthly amount is
to be paid with shares of Common Stock, it will be automatically deferred unless
the holder gives notice to the Company at least five (5) days before a repayment
date that the holder will accept payment of such monthly amount in the form of
Common Stock. In addition, under certain conditions, the Company may prepay the
amounts outstanding on the 2008 Notes by giving advance notice and paying an
amount equal to 115% of the sum of (x) the principal being prepaid plus (y) the
accrued interest thereon. Holders will continue to have the right to convert
their 2008 Notes prior to the actual prepayment. As of December 31, 2008,
principal in the total amount of $517,500 and accrued interest totaling $91,171
was repaid in the form of 3,326,272 shares of the Company’s Common
Stock.   For the period January 1, 2009 through April 6, 2009,
principal and accrued interest totaling $138,558 was repaid in the form of
83,158,089 shares of the Company’s Common Stock.
  F-15
 
 The
Investor Warrants are exercisable through the fifth anniversary of the effective
date of the Registration Statement. Holders of the Investor Warrants are
entitled to exercise their warrants on a cashless basis if the Registration
Statement is not in effect at the time of exercise.
  The Fixed
Conversion Price of the 2008 Notes and the exercise price of the Investor
Warrants are subject to adjustment. Under the agreements with the holders of
2008 Notes, the Company agreed that if the Company made certain sales of its
Common Stock (or securities convertible into Common Stock) to any third party at
per share conversion price or exercise price less than the conversion price of
the 2008 Notes and/or the exercise price of the 2008 Investor Warrants,
adjustments would be made to the conversion price of the then unconverted Notes
and to the exercise price of the then unexercised Investor Warrants. The above
adjustments do not apply to certain specified transactions, such as the exercise
of outstanding options, warrants, or convertible securities, the issuance of
securities pursuant to a Company option plans or a non-employee director option
plan, or the issuance of options to the Company’s directors, officers, and
employees, and advisors or consultants, and transactions with strategic
investors.
 
 To secure
the Company’s obligations to the 2008 Investors, the Company granted a security
interest in substantially all of its assets, including without limitation, its
intellectual property. The security interest terminates upon payment or
satisfaction of all of Company’s obligations under the 2008 Notes.
 
 For financial reporting purposes, the
Company recorded a discount of $4,141,838 ($3,006,128 in 2007) to reflect the
value of the 2008 Investor Warrants issued and in accordance with EITF No.
00-27, an additional discount of $658,219 ($493,804 in 2007) to reflect the
beneficial conversion feature of the 2008 Notes.  The estimated value
of the warrants was determined using theBlack-Scholes option pricing model under
the following assumptions: life of 5 years, risk free interest rate of 2.85%,
(3.65% in 2007) a dividend yield of 0% and volatility of 135%. As discussed
below, the term of the 2008 Notes were modified.  As a result, all of
the remaining unamortized discounts were expensed.
 
 The
Company incurred finder’s fees of  $540,455 ($391,616 in 2007),
other offering related fees and expenses totaling $25,000 in 2007 and issued
five-year warrants to purchase up to 1,080,930 shares (783,332 shares in 2007)
of Common Stock at an original per share exercise price of $1.
 
 The
Company has not made any other payments in respect of the amounts due to on
the 2008 Notes. The continuing non-payment of these amounts constitutes an Event
of Default under the transaction documents with the 2008
Investors. However, the pertinent documents provide that any action by the
investors upon such default (i.e., acceleration of the debt and other remedies)
can only be initiated by the holders of 65% or more of the outstanding principal
amount of the notes. In connection with the December 2008 Private Placement
(discussed below in (v)), the holders of the requisite amount of outstanding
2008 Notes have waived all existing defaults through December 31, 2008. In
addition, the per share conversion price in principal amount of the December
2007 Notes outstanding as of the date hereof, as well as the per share exercise
price with respect to the warrants issued in connection therewith the December
2007 Notes, has been adjusted to $0.15.
 
 The
Company accounted for the modification of the 2008 Notes, as described above, as
an extinguishment of debt in accordance with EITF 05-7 “Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues” and EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”, (“EITF 96-19”).” The Company deemed the terms of the
amendment to be substantially different and treated the Convertible Promissory
Notes as extinguished and exchanged for new notes. As such, it was necessary to
reflect the Convertible Promissory Notes at fair market value and record a loss
on extinguishment of debt of approximately $991,000.
 
 In
accordance with FAS 157, the fair value of the 2008 Notes was determined
utilizing level 3 inputs.  The fair value of the 2008 Notes was calculated
utilizing the fully diluted market value of the invested capital of the Company
immediately before and after the date of the debt modification. As a result, the
face amount of the remaining principal balance of $4,963,050 was written down to
its fair market value of $3,925,963. This discount is being amortized to the
date of maturity unless converted earlier.
  F-16
 
 Interest incurred on the 2008 Notes
amounted to $577,961 and $7,510 for the years ended December 31, 2008 and 2007,
respectively. Amortization of debt discount for the years ended December 31,
2008 and 2007 amounted to $3,186,748 and $40,451,
respectively.
 
 The Company undertook to file a
registration statement by a prescribed period under the Securities Act of 1933,
as amended (the “Registration Statement”) with respect to the resale of the
Common Stock underlying the 2008 Notes and 2008 Investor Warrants. The Company
has not filed the Registration Statement and accordingly, the Company owed to
the holders of these notes approximately $540,000 in liquidated damages in
respect of the delay in the filing of the Registration Statement beyond the time
frame specified in the agreements with such holders. In July 2008, the Company
issued to an investor 24,600 shares of Common Stock in respect of liquidated
damages of $24,600. At December 31, 2008, the Company owed to the holders of
these notes $516,137 in liquidated damages. The non-payment of liquidated
damages constitutes an Event of Default under the 2008 Notes. However, the
pertinent documents provide that any action by the investors upon such default
(i.e., acceleration of the debt and other remedies) can only be initiated by the
holders of 65% or more of the outstanding principal amount of the notes. In
connection with the transaction discussed in (v)  below, the holders
of the requisite principal amount of the December 2008 Notes have agreed to
waive, through December 31, 2008, existing Events of Default under such
documents. In addition, the Company does not currently intend to file such
registration statement as the shares issuable upon conversion of the 2008 Notes
and/or the 2008 Investor Warrants are eligible to be resold under Rule
144.
 
 (iv)
Short-Term Promissory Notes
 
 From
April through November 2008, the Company received short-term loans from two
of the 2008 Investors in the principal amount of $442,055. The outstanding
balances bore interest at rates ranging from 18%- 28% per
annum.  These proceeds from these loans were used for general
corporate purposes.  The Company incurred issuance costs of
$37,346.
 
 In
December 2008, principal balances including accreted interest totaling $478,816
were re-invested in the Company’s private placement of its secured convertible
promissory notes and Series A Preferred Stock discussed below.
 
 Interest incurred amounted to $36,461
for the year ended December 31, 2008. Amortization of debt discount for the year
ended December 31, 2008 amounted to $37,346.
 
 (v)  Secured
Convertible Promissory Note and Series A Convertible Preferred
Stock
 
 Pursuant
to an offering dated October 31, 2008 (the “December 2008 Private Placement”) to
the holders of the 2008 Notes, on December 17, 2008, the Company realized net
proceeds of $548,474, after the payment of offering related fees and expenses of
$19,250, from a private placement of $1,066,540 in principal amount of Secured
Convertible Promissory Notes due April 20, 2010 (“collectively the “December
2008 Notes”) and Series A Convertible Preferred Stock, par value $0.001 per
share (the “Series A Preferred Stock”). In addition, in connection with the
issuance of the December 2008 Notes and the Series A Preferred Stock, the
Company issued to the investors warrants (the “Warrants”; together with the
December 2008 Notes and the Series A Preferred Stock, the “Purchased
Securities”) to purchase in the aggregate up to 7,110,268 shares of the
Company’s Common Stock at a per share exercise price equal to $0.25. The
Warrants are exercisable through October 31, 2013 at a per share exercise price
of $0.25.  The warrants include a ‘cashless exercise’
provision.  The amount raised included $478,816 in principal and
accreted interest on loans advanced to the Company between April and November
2008 by two purchasers that were offset against such purchasers’ respective
purchases of the Purchased Securities.
 
 For
financial reporting purposes, the Company recorded a discount of $845,743 to
reflect the value of the Warrants and Preferred Stock issued and in accordance
with EITF No. 00-27, an additional discount of $220,797 to reflect the
beneficial conversion feature of the December 2008 Notes.  The
estimated value of the warrants was determined using the Black-Scholes option
pricing model under the following assumptions: life of 5 years, risk free
interest rate of 1.35%, a dividend yield of 0% and volatility of 135%. The
discounts are being amortized to the date of maturity unless converted
earlier.
  F-17
 
 The
December 2008 Notes are convertible into shares of Common Stock at the holder’s
option at any time at an initial conversion price of $0.15 per share (the “Fixed
Conversion Price”), subject to adjustment in the event of certain capital
adjustments or similar transactions, such as a stock split or merger and as
further described below. Interest on the December 2008 Notes accrues at the rate
of 10% per annum and is payable upon a required repayment (discussed below) or
upon maturity, whichever occurs first, and will continue to accrue until the
December 2008 Notes are fully converted and/or paid in full. From and after an
event of default under the December 2008 Notes and for so long as the event of
default is continuing, the December 2008 Notes will bear default interest at a
rate of the lesser of 15% per annum or the maximum rate permitted by applicable
law.
 
 Commencing
on April 30, 2009, and thereafter on the last day of each subsequent calendar
month until the principal amount of the December 2008 Notes has been paid in
full, the Company is required to prepay 8.33% of the aggregate principal amount
of the December 2008 Notes originally issued, together with all accrued interest
due and payable on the entire outstanding amount up to such repayment date. The
amount may be paid, at the Company’s election, either in (i) cash, at 110% of
the principal amount due and 100% of all other amounts due or (ii) shares of
Common Stock at a rate equal to the lower of (A) the Fixed Conversion Price of
$0.15 or (B) 75% of the average of the closing bid price of the Common Stock for
the ten trading days ending on the trading day immediately preceding the
Scheduled Payment Date;provided, that, if such
monthly amount is to be paid with shares of Common Stock, it will be
automatically deferred unless the holder gives notice to the Company at least
five (5) days before a repayment date that the holder will accept payment of
such monthly amount in the form of Common Stock.
 
 The
Company’s obligations under the December 2008 Notes are secured by a security
interest in substantially all of its assets pursuant to a prior Security
Agreement dated as of December 24, 2007 between it and the purchasers of the
2008 Notes.
 
 Holders
of the Purchased Securities are subject to certain limitations on their rights
to convert the securities. The principal limitation is that the holder may not,
with certain limited exceptions, convert into a number of shares that would,
together with other shares held by the holder, exceed 4.99% or 9.99% of the then
outstanding shares of the Company after such conversion and/or
exercise.
 
 Under the
subscription agreement of the December 2008 Private Placement, the Company also
agreed that other than in connection with certain excepted issuances, if at any
time any of the Purchased Securities are outstanding, the Company shall offer,
issue or agree to issue (the “Lower Price Issuance”) any Common Stock or
securities convertible into or exercisable for shares of Common Stock (or modify
any of the foregoing which may be outstanding) to any person or entity at a
price per share or conversion or exercise price per share which shall be less
than the conversion or exercise price in respect of the Purchased Securities,
without the consent of Subscribers holding 66.67% of the outstanding principal
amount of the December 2008 Notes, then the Company shall issue, for each such
occasion, additional shares of Common Stock to each subscriber respecting each
of the Purchased Securities that remain outstanding at the time of the Lower
Price Issuance so that the average per share purchase price of the shares of
Common Stock issued to the subscriber (of only the Common Stock or Warrant
Shares still owned by the Subscriber) is equal to such other lower price per
share and the conversion price and exercise price, as the case may be, of each
of the outstanding Purchased Securities shall automatically be reduced to such
other lower price.
 
 The
Company also agreed that until the expiration of the Exclusion Period (defined
below) and during the pendency of an Event of Default, except for certain
excepted issuances, the Company agreed to not enter into an agreement to nor
issue any equity, convertible debt or other securities convertible into common
stock or equity of the Company nor modify any of the foregoing which may be
outstanding at anytime, without the prior written consent of investors, which
consent may be withheld for any reason.   For so long as any of the
Purchased Securities is outstanding, except for such excepted issuances, the
Company will not enter into any equity line of credit or similar agreement, nor
issue nor agree to issue any floating or variable priced equity linked
instruments nor any of the foregoing or equity with price reset rights. 
The “Exclusion Period” ends on the first to occur of (i) April 30, 2009, or (ii)
until all the shares issuable upon exercise of the December 2008 Notes and
Warrants have been resold or transferred by the subscribers pursuant to Rule
144, without regard to volume limitations.  Under certain circumstances,
the Exclusion Period will be tolled.
  F-18
 
 In
addition, for a period of one year, investors will have a right of first refusal
to participate, in proportion to the their holdings in any proposed sale by the
Company of its common stock or other securities or debt obligations, other than
with respect to shares issued in connection with mergers, employee stock option
plans and capital raises where the shares issued will not be
registered.
 
 Interest incurred amounted to $17,824
for the year ended December 31, 2008.Amortization of debt discount for the
year ended December 31, 2008 amounted to $143,838.
 
 NOTE 7 - STOCKHOLDERS’ (DEFICIENCY)
EQUITY
  Authorized
Shares
 
 On
November 15, 2007, Company’s Board of Directors and the majority of Company’s
stockholders authorized an increase the number of shares of Common Stock from
50,000,000 to 100,000,000. The increase became effective in March
2008.
 
 On
December 29, 2008, Company’s Board of Directors and the majority of Company’s
stockholders authorized an increase the number of shares of Common Stock from
100,000,000 to 2,000,000,000. The increase became effective in March
2009.
 
 The
Company’s Board of Directors is authorized to issue from time to time up to 20
million shares of preferred stock in one or more series, and to fix for each
such series such voting power and such designations, preferences, relative
participating or other rights, redemption rights, conversion privileges and such
qualifications or restrictions thereof as shall be adopted by the board and set
forth in an amendment to the Company’s Certificate of Incorporation. Unless a
vote of any shareholders is required pursuant to the rights of the holders of
preferred stock then outstanding, the board may form time to time increase or
decrease (but not below the number of shares of such series outstanding) the
number of shares of any series of Preferred Stock subsequent to the issuance of
shares of that series.
 
 The Board of Directors of the Company
approved a three-for-one forward stock split. The forward stock split was
effected in June 2007.
 
 On
December 29, 2008, Company’s Board of Directors and the majority of Company’s
stockholders approved an amendment to the Company’s certificate of incorporation
to effect a reverse stock split at any ratio within an approved range (defined
as between 10-to-1 to 50-to-1) at any time on or before December 31,
2009.  The board of directors has the sole discretion to determine
whether or not to effect the reverse stock split and if so, at what ratio within
the approved range.
 
 Stock
Issuances
 
 Common
Stock
 
 At
various times in 2008 and 2007, a total of 3,350,872 and 3,761,250 shares of
Common Stock, respectively, were issued in connection with the private
placements of convertible securities as discussed in Note 6.  For the
period January 1, 2009 through April 6, 2009, principal and accrued interest
totaling $138,558 was repaid in the form of 83,158,089 shares of the Company’s
Common Stock.
 
 On
February 14, 2008, a total of 19,514,250 warrants issued in connection with the
private placement of convertible securities were converted into 8,340,948 of the
Company’s Common Stock under the cashless exercise provision.
  F-19
 
 In April
2008, the Company issued 30,000 shares of common stock to a consultant pursuant
to a consulting agreement for services to be rendered through December 31,
2009.  For the year ended December 31, 2008, the Company recognized
compensation expense of $35,593 and $55,007 as deferred compensation based on a
market value of $3.02 per share on the date of the agreement.
 
 Convertible
Preferred Stock
 
 In
December 2008, in connection with the issuance of the December 2008 Notes more
fully discussed above in Note 6(v), the Company issued to the purchasers of the
December 2008 Notes 26,664 shares of its newly created Series A Preferred Stock.
Each purchaser of the December 2008 Notes received shares of the Company’s
Series A Preferred Stock with a stated value of $100 equal to 250% of the
principal amount of the December 2008 Notes issued to such
investor.
 
 The
Series A Preferred Stock was authorized in accordance with a Certificate of
Designation of Preferences, Rights and Limitations of Series A Convertible
Preferred Stock filed with the Nevada Secretary of State, effective as of
December 11, 2008. A total of 34,000 shares of Series A Preferred Stock
were so authorized.
 
 Shares of
Preferred Stock have not been registered and are restricted under the securities
laws and pay a dividend of 10% per annum on the stated value. So long as the
Series A Preferred Stock is outstanding, unless waived by the holders of 66 2/3%
of the Series A Preferred Stock then outstanding, the dividend rate shall
increase to 15%. In addition, shares of the Series A Preferred Stock do not vote
separately as a class (but do vote on an “as-converted” to common stock basis)
and have a liquidation preference equal to the stated value of the shares. Each
share of Preferred Stock has a stated value of $100 and is convertible into
shares of the Company’s common stock at $.15 per share.  The dividends
are cumulative commencing on the issue date whether or not
declared.  For the year ended December 31, 2008, the Company declared
dividends totaling $44,562.
 
 Commencing
on April 30, 2009, and thereafter on the last day of each subsequent calendar
month, the Company is required to redeem 8.33% of the aggregate outstanding
stated value of the Series A Preferred Stock until the stated value and all
accrued dividends have been paid in full. Redemption payments on the Series A
Preferred Stock may be made, at the election of the Company, in cash or shares
of Common Stock, in the same manner as provided above with respect to the
December 2008 Notes, subject to automatic deferral in the case of payment in
shares unless the holder gives notice to the Company of such holder’s agreement
to accept payment in shares.  As a result of the redemption
provisions, the Series A Preferred Stock was not classified as permanent
equity.
 
 For financial reporting purposes, the
Company recorded a discount of $1,562,394 to reflect the difference in the
amount of proceeds allocable to the Preferred Stock in the offering based on
relative fair values and the stated value. Also in accordance with EITF No.
00-27, an additional discount of $552,003 was recorded to reflect the beneficial
conversion feature.  The discounts are being amortized as deemed
dividends on preferred stock to the date of maturity unless converted
earlier.Amortization of discounts
for the year ended December 31, 2008 amounted to
$239,657.
  Stock
Option Plan
 
 On
November 15, 2007, the Company adopted the Equity Incentive Plan for employees
and consultants initially reserving for issuance 3,000,000 shares of Common
Stock; and the 2007 Non-Employee Directors Stock Option Plan for non-employee
initially reserving for issuance 1,000,000 shares of Common Stock.
  F-20
 
 Stock
Option Activity
 
 In
June and September 2007, the Company’s board of directors approved grants
of stock options to employees and consultants to purchase an aggregate of 3.89
million shares of its common stock with exercise prices ranging from $0.17 to
$7.50. The options have terms ranging from five to seven years and vest at
various times over a two-year period.
 
 In April
2008, the Company’s board of directors approved grants of stock options to
employees to purchase an aggregate of 200,000 shares of its common stock at an
exercise prices $1.00. The options have a five-year term and vested upon
issuance.
  Option
activity for 2008 and 2007 is summarized as follows:
  Options
                          
                          
                          WeightedAverageExercise
      PriceOptions outstanding, January 1,
      2007
                          
                          
                          —Granted
                          
                          
                          3,890,000
                          
                          
                          $
                          1.65Options outstanding, December 31,
      2007
                          
                          
                          3,890,000
                          
                          
                          
                          1.65Granted
                          
                          
                          200,000
                          
                          
                          
                          1.00Forfeited
                          
                          
                          (600,000
                          )
                          
                          
                          0.98Options outstanding, December 31,
      2008
                          
                          
                          3,490,000
                          
                          
                          $
                          1.47Aggregate intrinsic
      value
                          
                          $
                          0
  The aggregate
intrinsic value was calculated based on the positive difference between the
closing market price of the Company’s Common Stock and the exercise price of the
underlying options. There were no option exercises in fiscal
2008.
  The
following table summarizes information regarding stock options outstanding at
December 31, 2008:
 
 Weighted
      AverageRemaining
                          
                          
                          Options
      ExercisableWeighted
      AverageRanges of
      prices
                          
                          NumberOutstanding
                          
                          
                          ContractualLife
                          
                          
                          ExercisePrice
                          
                          
                          NumberExercisable
                          
                          
                          ExercisePrice$0.167
      - $0.25
                          
                          
                          1,006,875
                          
                          
                          
                          5.24
                          
                          
                          
                          0.19
                          
                          
                          
                          1,006,875
                          
                          
                          $
                          0.19$0.417
      - $0.583
                          
                          
                          566,250
                          
                          
                          
                          5.07
                          
                          
                          
                          0.50
                          
                          
                          
                          566,250
                          
                          
                          
                          0.50$0.717
      - $1.083
                          
                          
                          699,375
                          
                          
                          
                          4.32
                          
                          
                          
                          0.95
                          
                          
                          
                          650,625
                          
                          
                          
                          0.94$1.167
      - $1.250
                          
                          
                          217,500
                          
                          
                          
                          5.02
                          
                          
                          
                          1.20
                          
                          
                          
                          —
                          
                          
                          
                          —$2.50
      - $3.50
                          
                          
                          500,000
                          
                          
                          
                          3.67
                          
                          
                          
                          3.00
                          
                          
                          
                          500,000
                          
                          
                          
                          3.00$5.00
      - $7.50
                          
                          
                          500,000
                          
                          
                          
                          3.67
                          
                          
                          
                          6.25
                          
                          
                          
                          250,000
                          
                          
                          
                          5.00$0.167-$7.50
                          
                          
                          3,490,000
                          
                          
                          
                          4.57
                          
                          
                          $
                          1.73
                          
                          
                          
                          2,723,750
                          
                          
                          $
                          1.29
  F-21
  The
weighted average per share fair value of options granted in 2008 and 2007 was
$1.53 and $2.16, respectively. The fair value of the options granted was
estimated using the Black-Scholes option-pricing model utilizing the following
assumptions; volatility - 134.97%, expected life of options - four -seven years,
risk free interest rate - 2.98%-5.09% and a dividend yield of 0%.
  The
Company recognized stock compensation expense of $510,475 and $5,379,103 for the
years ended December 31, 2008 and 2007, respectively. As of December 31,
2008, there was $107,718 of total unrecognized compensation cost related to
nonvested options granted. That cost is expected to be recognized over a
weighted-average period of .39 years.
 
 Warrants
 
 A summary
of the warrants outstanding at December 31, 2008 is as follows:
 
 Warrants
                      
                      
                      ExercisePrice
                      
                      
                      ExpirationDate13,595,748
                      
                      
                      $
                      0.25
                      
                      
                      2012-2013963,406
                      
                      
                      
                      1.67
                      
                      
                      201214,559,154
  NOTE
8 - INCOME TAXES
 
 At
December 31, 2008, the Company had available approximately $5.1 million of net
operating loss carry forwards, for U.S. income tax purposes which expire in the
years 2024 through 2028.  The Company has foreign net operating loss
carryforwards of $3.7 million with no expiration date.
 
 Significant
components of the Company’s deferred tax assets at December 31, 2008 are as
follows:
 
 Net
      operating loss carryforwards
                                  
                                  $
                                  2,651,095Stock
      based compensation
                                  
                                  
                                  1,905,593Total
      deferred tax assets
                                  
                                  
                                  4,556,688Valuation
      allowance
                                  
                                  
                                  (4,556,688
                                  )Net
      deferred tax assets
                                  
                                  $
                                  —
  Due to
the uncertainty of their realization, no income tax benefit has been recorded by
the Company for these loss carry forwards as valuation allowances have been
established for any such benefits. At December 31, 2007, the Company had a
valuation allowance of $2,812,782.  The increase in the valuation
allowance was the result of increased net operating losses and stock based
compensation.
  The
provisions of FIN 48 were adopted by the Company on January 1, 2007 and had
no effect on the Company’s financial position, cash flows or results of
operations upon adoption, as the Company did not have any unrecognized tax
benefits. The Company also evaluated its tax positions as of December 31,
2008 and 2007 and reached the same conclusion.
  The
Company does not currently expect any significant changes to unrecognized tax
benefits during the fiscal year ended December 31, 2009. We recognize
interest and penalties related to uncertain tax positions in general and
administrative expense. As of December 31, 2008, we have not recorded any
provisions for accrued interest and penalties related to uncertain tax
positions.
  F-22
 
 IDO Inc.
has not filed its U.S. federal returns since its inception.  Due to
recurring losses, management believes that once such returns are filed, the
Company would not incur an income tax liability. By statute, as IDO Inc. has not
filed its federal returns, all such years remain open to examination by the
major taxing jurisdictions to which it is subject.  In addition, by
statute, the Israeli income tax returns of IDO Ltd. for the years 2005 through
2007 remain open to examination.
 
 NOTE
9 - RELATED PARTY TRANSACTIONS
 
 The
Company received working capital loans from certain non-management affiliated
stockholders of IDO. (see Note 3).  Amounts owed on the loans
aggregated to $44,826 at both December 31, 2008 and 2007.
 
 IDO Ltd.
rented office space from a company wholly-owned by one of its directors, who is
also its chief scientist.  The Company moved to new premises in
November 2008.  Rent expense incurred approximated $21,000 and $12,000
for the years ended December 31, 2008 and 2007, respectively.  See
Note 10.
 
 NOTE
10 - COMMITMENTS AND CONTINGENCIES
 
 Employment
Agreements
  On June
20, 2007, the Board of Directors of the Company appointed Michael Goldberg, the
Company’s acting Chief Executive Officer since July 2006, to the position of
President. Mr. Goldberg’s appointment became effective on July 2, 2007. In
connection with his appointment as President, the Company and Mr. Goldberg
entered into an employment agreement pursuant to which Mr. Goldberg is paid an
annual salary of $198,000, payable monthly. The employment agreement has an
initial term of one year; thereafter, the employment agreement provides that it
is to be renewed automatically for additional one year periods unless either
party shall advise the other 90 days before expiration of the initial (or a
renewal term) of its intention to not renew the agreement beyond its then
scheduled expiration date. Mr. Goldberg can terminate the employment agreement
and the relationship there under at any time upon 60 days’ notice. If
during the initial term the Company were to terminate the agreement for any
reason other than “Just Cause” (as defined the employment agreement), then the
Company is to pay to Mr. Goldberg the salary then payable under the agreement
through the scheduled expiration of the initial term; if such termination for
any reason other than “Just Cause” were to take place during a renewal period,
then the Company is to pay to Mr. Goldberg an amount equal to three months’
salary. Under the agreement, Mr. Goldberg was awarded options to purchase
1,200,000 shares (post split) of the Company’s common stock, of which options
for 525,000 shares, at a per share purchase price of $0.17, shall be fully
vested at the time of grant and options for the remaining shares are to vest in
equal installments of 84,375 shares at the end of each calendar quarter,
beginning September 30, 2007, at per share exercise prices ranging between $0.25
and $1.25.
  On July
1, 2007, Mr. Henry Shabat was appointed Chief Operating Officer of IDO Ltd. In
connection with Mr. Shabat’s retention as IDO Ltd.’s Chief Operating Officer, on
July 1, 2007, IDO Ltd. and Henry Shabat Ltd., a company owned by Mr. Henry
Shabat, entered into a management agreement pursuant to which Mr. Shabat is to
serve as IDO Ltd.’s Chief Operating Officer. Under the management agreement, Mr.
Shabat is to be paid a monthly fee of $6,000. The management agreement had an
initial term of one year; thereafter, the management agreement provides that it
is to be renewed automatically for additional one year periods unless either
party shall advise the other 90 days before expiration of the initial (or a
renewal term) of its intention to not renew the agreement beyond its then
scheduled expiration date. Under the agreement, Mr. Shabat was awarded
options to purchase 240,000 shares (post split) of the Company’s common stock,
which are scheduled to vest in equal installments of 30,000 shares at the end of
each 90 day period following the execution of the management agreement. The per
share exercise price range between $0.17 and $1.67 (post split).
  Lawsuit
 
 In May
2008, a stockholder of the Company who holds 2,250,000 of common stock
initiated a suit against the Company and  an officer/director of its
subsidiary in the District Court in Petah Tikva, Israel.
 
 The
Company is in settlement negotiations under the auspices of the court. If these
negotiations are unsuccessful, the Company will initiate mediation proceedings.
In the event that the mediation proceedings do not produce a resolution, then
the court will address the issues. The Company believes that it has meritorious
defenses to this lawsuit and intends to aggressively defend its
interests.
 F-23
  Operating
Leases
 
 The
Company has entered into various operating lease agreements.  As of
December 31, 2008, minimum future rental payments under such non-cancelable
operating leases are as follows:
  Year
      EndingDecember 31,
                          
                          U.S.
      dollars2009
                          
                          $
                          65,1442010
                          
                          
                          26,856$
                          92,000
  Aggregate
rent expenses amounted to $41,373, and $17,363 for the year ended December 31,
2008 and 2007, respectively.
 F-24


IDO
SECURITY LTD.
  Financial
Statements
  As
of March 7, 2007
  
  IDO
SECURITY LTD.
  Financial
Statements
  As
of March 7, 2007
  INDEX
TO FINANCIAL STATEMENTS
 PageReport
      of Independent Auditors
                  
                  2Financial
      Statements:Statement
      of Operations
                  
                  3Statement
      of Cash Flows
                  
                  4Notes
      to the Financial Statements
                  
                  5 - 13
  1
  REPORT
OF INDEPENDENT AUDITORS
  to
the Shareholders of
  IDO
SECURITY LTD.
  We have
audited the accompanying statements of operations and cash flows for the period
from January 1, 2007 through March 7, 2007. The financial statements are the
responsibility of the company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
  In our
opinion, based on our audit, the aforementioned financial statements present
fairly, in all material respects, the result of the operations and cash flows
for the period from January 1, 2007 through March 7, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
  The
financial statements referred to above have been prepared assuming that the
Company will continue as a “going concern.” As discussed in Note 1d to the
financial statements, the Company’s recurring losses and negative cash flows
from operations raise substantial doubt about the Company’s ability to continue
as a “going concern.” The Company expects to incur additional losses for the
foreseeable future and will need to raise additional funds in order to realize
its business plan. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 /s/
      Barzily & Co.Jerusalem,
      Israel
                  Barzily
      & Co.April
      5, 2009
                  Certified
      Public Accountants
  2
  IDO
SECURITY LTD.
 STATEMENT
OF OPERATIONS
 For
      the period
                        from
      January
                        1,
      2007
                        through
                        March
      7,
                        2007U.S.
      dollarsRevenues:Sales
      of products
                      
                      
                      19,985Cost
      of revenues:Cost
      of products sold
                      
                      
                      (18,043
                      )Gross
      profit
                      
                      
                      1,942Research
      and development costs
                      
                      
                      25,076Selling,
      general and administrative expenses
                      
                      
                      39,616Total
      operating expenses
                      
                      
                      64,692Operating
      loss
                      
                      
                      (62,750
                      )Financial
      expenses, net
                      
                      
                      (21,085
                      )Net
      loss for the period
                      
                      
                      (83,835
                      )
  The
accompanying notes to these financial statements are an integral part
thereof.
  3
  IDO
SECURITY LTD.
 STATEMENT
OF CASH FLOWS
 For
      the period
                  from
      January
                  1,
      2007 through
                  March
      7,
                  2007U.S.
      dollarsCash
      flows from operating activities:Net
      loss
                
                
                (83,835
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                1,500Severance
      pay
                
                
                (11,617
                )Interest
      and exchange rate differences
                
                
                22,807Increase
      / decrease attributable to changes in assets and
    liabilities:Inventories
                
                
                3,809Due
      from related parties
                
                
                (460
                )Other
      current assets
                
                
                (325
                )Accounts
      payable
                
                
                5,515Other
      current liabilities
                
                
                7,341Net
      cash used in operating activities
                
                
                (55,265
                )Cash
      flows from investing activities:Additions
      to property and equipment
                
                
                (648
                )Net
      cash used in investing activities
                
                
                (648
                )Cash
      flows from financing activities:Decrease
      in short-term credit
                
                
                (9,836
                )Proceeds
      from short-term loans
                
                
                45,000Net
      cash provided by financing activities
                
                
                35,164Decrease
      in cash and cash equivalents
                
                
                (20,749
                )Cash
      and cash equivalents - beginning of period
                
                
                74,088Cash
      and cash equivalents - end of period
                
                
                53,339
  The
accompanying notes to these financial statements are an integral part
thereof.
  4
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      1  -
                DESCRIPTION
      OF BUSINESSa.
                IDO
      SECURITY Ltd. (hereinafter “IDO” or the “Company”) was incorporated in
      Israel in 2002.The
      Company is primarily engaged in the design, development and marketing of
      devices for the homeland security market that are used in security
      screening to detect metallic objects concealed on or in shoes, ankles and
      feet through the use of electro-magnetic fields. The Company’s sole
      commercial product has been granted patent protection in the United States
      and has a patent pending in Israel. The Company has been certified by the
      International Organization for Standardization (“ISO”) under ISO 9001:2000
      compliance.b.
                The
      Company’s success is subject to risks and uncertainties frequently
      encountered by companies in new and rapidly evolving markets, such as
      demand and market acceptance of its products, the effects of technological
      change, competition and the development of new
products.c.
                As
      of March 7, 2007 and December 31, 2006, substantially all of the Company’s
      assets were located in Israel and substantially all of its operations were
      conducted in and from Israel.d.
                The
      financial statements are prepared in accordance with United States of
      America generally accepted accounting principles. The accompanying
      financial statements have been prepared assuming that the Company will
      continue as a “going concern.” The Company has a limited operating history
      and has sustained significant losses since its inception. These losses
      have produced operating cash flow deficiencies. The Company expects to
      incur additional losses for the foreseeable future and will need to raise
      additional funds in order to realize its business plan. These conditions
      raise substantial doubt about the Company’s ability to continue operations
      as a “going concern.” The financial statements do not include any
      adjustments that might result from the outcome of this
      uncertainty.Future
      operations of the Company are dependent upon management’s ability to find
      sources of additional equity capital. The Company needs to raise
      additional funds to continue to meet its liquidity needs, repay short-term
      loans, realize its current business plan and maintain operations.
      Management is continuing its efforts to secure funds through equity and/or
      debt instruments for its
operations.
  5
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      2   -
                SIGNIFICANT
      ACCOUNTING POLICIESThe
      following accounting policies have been identified as critical to the
      Company’s business operations and the understanding of its results of
      operations.a.
                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.b.
                Financial
      statements in US dollars:The
      majority of the Company’s sales is in US dollars or in US dollar linked
      currencies. In addition, the majority of the Company’s financing is
      received in US dollars. Accordingly, the Company has determined the US
      dollar as the currency of its primary economic environment and thus, its
      functional and reporting currency. Non-dollar transactions and balances
      have been measured into US dollars in accordance with Statement of
      Financial Accounting Standard No. 52 “Foreign Currency Translation” (“SFAS
      No. 52”). All transaction gains and losses from the measurement of
      monetary balance sheet items denominated in non-dollar currencies are
      reflected in the statement of operations as financial income or expenses,
      as appropriate.c.
                Inventories:Inventories,
      consisting of completed devices, devices partially completed and
      components, are valued at the lower of cost determined by the moving -
      average basis or market. The value of the inventory is adjusted for
      estimated obsolescence or unmarketable inventory equal to the difference
      between the cost of inventory and the estimated market value based upon
      assumptions about future demand and market conditions.d.
                Property
      and equipment:Property
      and equipment are stated at cost net of accumulated depreciation.
      Depreciation is computed using the straight-line method over the estimated
      useful lives of the assets, at the following annual
  rates:
  %Machinery
      and Equipment
                            
                            
                            10Computers
      and electronic equipment
                            
                            
                            15
      – 33Office
      furniture and equipment
                            
                            
                            7 –
      15Vehicles
                            
                            
                            15
  6
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      2   -
                  SIGNIFICANT
      ACCOUNTING POLICIES (continued)e.
                  Impairment
      of long-lived assets:The
      Company’s long-lived assets and certain identifiable intangibles are
      reviewed for impairment in accordance with Statement of Financial
      Accounting Standard No. 144 “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS No. 144”) whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to the future undiscounted
      cash flows expected to be generated by the assets. If such assets are
      considered to be impaired, the impairment to be recognized is measured by
      the amount by which the carrying amount of the assets exceeds the fair
      value of the assets. At December 31, 2006, management believes that all of
      the Company’s long-lived assets are recoverable.f.
                  Revenue
      recognition:The
      Company recognizes revenue in accordance with Staff Accounting Bulletin
      (“SAB”) No. 104, “Revenue Recognition in Financial Statements”. Under SAB
      No.104, the Company recognizes revenue from the sale of product upon
      shipment to the customer, and the following criteria have been met:
      persuasive evidence of an arrangement exists, title has been transferred,
      price is fixed and determinable, no significant Company obligations remain
      and collection of the related receivable is reasonable
      assured.When
      the above revenue recognition criteria are not met at the time products
      are shipped, the Company records deferred revenue.g.
                  Research
      and Development:Costs
      incurred in connection with the research and development of the Company’s
      products are expensed as incurred.h.
                  Marketing
      and Advertising:Marketing
      and advertising costs are expensed as
incurred.
  7
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      2  -
                          SIGNIFICANT
      ACCOUNTING POLICIES (continued)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 the
      amount of deferred tax assets to their estimated realizable
      value.j.
                          Severance
      pay:The
      Company’s liability for severance pay is calculated pursuant to Israeli
      severance pay law based on the most recent salary of the employees
      multiplied by the number of years of employment as of balance sheet date.
      Employees are entitled to one month’s salary for each year of employment,
      or a portion thereof. The Company’s liability in Israel is fully provided
      by monthly deposits with insurance policies and by an
    accrual.The
      deposited funds include profits accumulated up to the balance sheet date.
      The deposited funds may be withdrawn only upon the fulfillment of the
      obligation pursuant to Israeli severance pay law or labor agreements. The
      value of the deposited funds is based on the cash surrendered value of
      these policies, and includes immaterial profits.k.
                          Recent
      accounting pronouncements:In
      December 2007, the Financial Accounting Standards Board (the “FASB”)
      issued SFAS No. 141(R), “Business Combinations (revised 2007).” SFAS
      No. 141(R) applies the acquisition method of accounting for business
      combinations established in SFAS No. 141 to all acquisitions where
      the acquirer gains a controlling interest, regardless of whether
      consideration was exchanged. Consistent with SFAS No. 141, SFAS
      No. 141(R) requires the acquirer to fair value the assets and
      liabilities of the acquiree and record goodwill on bargain purchases, with
      main difference the application to all acquisitions where control is
      achieved. SFAS No. 141(R) is effective for financial statements
      issued for fiscal years beginning after December 15, 2008. The
      Company will adopt SFAS No. 141(R) on January 1, 2009; however,
      the Company does not anticipate that the adoption will have a material
      impact on its financial condition or results of its
      operations.
  8
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      2  -
                SIGNIFICANT
      ACCOUNTING POLICIES (continued)In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling
      Interests in Consolidated Financial Statements - an amendment of ARB
      No. 51.” SFAS No. 160 requires companies with noncontrolling
      interests to disclose such interests clearly as a portion of equity but
      separate from the parent’s equity. The noncontrolling interest’s portion
      of net income must also be clearly presented on the income statement. SFAS
      No. 160 is effective for financial statements issued for fiscal years
      beginning after December 15, 2008. The Company will adopt SFAS
      No. 160 as of January 1, 2009; however, it does not anticipate
      that the adoption will have a material impact on its financial condition
      or results of its operations.In
      February 2008, the FASB issued FASB Staff Position 157-2, “Effective
      Date of FASB Statement No. 157,” which delays the effective date of
      SFAS No. 157 until January 1, 2009 for all nonfinancial assets
      and nonfinancial liabilities, except for items that are recognized or
      disclosed at fair value in the financial statements on a recurring basis
      (at least annually). The Company believes the adoption of the delayed
      items of SFAS No. 157 will not have a material impact on its
      financial statements.In
      June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities.” This FSP provides that unvested share-based
      payment awards that contain nonforfeitable rights to dividends or dividend
      equivalents (whether paid or unpaid) are participating securities and
      shall be included in the computation of earnings per share pursuant to the
      two-class method. This FSP is effective for financial statements issued
      for fiscal years beginning after December 15, 2008, and interim
      periods within those years. Upon adoption, a company is required to
      retrospectively adjust its earnings per share data (including any amounts
      related to interim periods, summaries of earnings and selected financial
      data) to conform with the provisions in this FSP. Early application of
      this FSP is prohibited. We have not issued any share-based payment awards
      that contain nonforfeitable rights to dividends or dividend
      equivalents.
  9
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      3  -
                COMMITMENTS
      AND CONTINGENT LIABILITIESOperating
      leases:The
      Company has entered into various operating rental lease agreements. In
      March 2007, minimum future rental payments under this lease amounted to
      $13,200. In May 2004, the Company entered into an operating lease for
      vehicles for a period of 36 months. As of March 7, 2007, the minimum
      future rental payments were approximately $5,400.As
      of March 7, 2007, minimum future rental payments under such noncancelable
      operating leases are as
follows:
  For
      the period fromJanuary
      1, 2007
                                            through
                                            March
      7,2007
                                          
                                          US
      dollars2007
                                          
                                          
                                          16,2002008
                                          
                                          
                                          2,40018,600
  Aggregate
      rent expense for the period from January 1, 2007 through March 7, 2007
      amounted to $7,467.NOTE
      4 -
                            TAXES
      ON INCOMEa.
                            Tax
      under various laws:The
      Company is assessed under the provisions of the Income Tax Law
      (Inflationary Adjustments), 1985, pursuant to which the results for tax
      purposes are measured in Israeli currency in real terms in accordance with
      changes in the Israeli Consumer Price Index (“CPI”).b.
                            Tax
      benefits under the Law for the Encouragement of Industry (Taxes),
      1969:The
      Company is an “industrial company” as defined by this law and as such is
      entitled to certain tax benefits, mainly accelerated depreciation as
      prescribed by regulations published under the Inflationary Adjustments
      Law.
  10
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      4  -
                    TAXES
      ON INCOME (continued)c.
                    Taxes
      on income included in the statements of operations:The
      following is a reconciliation of the theoretical tax expense (benefit),
      assuming all income is taxed at the regular tax rate applicable to Israeli
      companies, and the actual tax
expense:
  For
      the period
                                from
      January 1, 2007
                                through
                                March
      7,2007U.S.
      dollarsLoss
      before income taxes
                              
                              
                              83,835Theoretical
      tax provision (benefit) on the above amount at 29% and 31% in 2007 and
      2006, respectively.
                              
                              
                              (24,312
                              )Increase
      in taxes resulting from:Losses
      for which no tax benefit has been recorded
                              
                              
                              23,825Permanent
      differences and nondeductible expenses, including difference between
      Israeli CPI-adjusted tax returns and dollar-adjusted financial
      statements-net
                              
                              
                              487Actual
      tax expenses
                              
                              
                              —
  Under
      SFAS No. 109, deferred tax assets are to be recognized for the anticipated
      tax benefits associated with net operating loss carry forwards and
      deductible temporary differences, unless it is more likely than not that
      some or all of the deferred tax assets will not be realized. The
      adjustment is made by a valuation allowance.Since
      the realization of the net operating loss carry forwards and deductible
      temporary differences is uncertain and not considered more likely than
      not, a valuation allowance has been established for the full amount of the
      tax benefits.As
      of March 7, 2007, the Company has net operating loss (“NOL”) carry
      forwards for Israeli tax purposes of approximately $1,300 thousand, which
      may be used to offset taxable income, subject to annual limitations. Such
      NOL has no expiration
date.
  11
  IDO
SECURITY LTD.
 NOTES
TO THE FINANCIAL STATEMENTS
 March
7, 2007
 NOTE
      4  -
                                TAXES
      ON INCOME (continued)d.
                                Reduction
      in corporate income tax rate in Israel:On
      July 25, 2005 an amendment to the Israeli tax law was approved by the
      Israeli parliament, which reduces the tax rates imposed on Israeli
      companies to 31% for 2006, This amendment states that the corporate tax
      rate will be further reduced in subsequent tax years as follows: in 2007
      29%, in 2008 27%, in 2009 26% and thereafter 25%. This change does not
      have a material effect on the Company’s financial
    statements.NOTE
      5  -
                                TRANSACTIONS
      AND LOANS WITH RELATED
PARTIES
  For
      the
                                  period
      from
                                  January
      1,2007
                                  through
                                  March
      7,2007U.S.
      dollarsSalary
      expenses to related parties – approximately
                                
                                
                                26,000
  12