UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-KSB
 
 MARK
ONE:
 
 [X] ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934for the fiscal year ended
December 31, 2007
 
 [
  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 COMMISSION
FILE NUMBER: 0-51170
 
 IDO
      SECURITY INC.(Name
      of Small Business Issuer in its charter)
 
 Nevada
              
              38-3762886(State
      or Other Jurisdiction
                of
      Incorporation)
              
              (IRS
      Employer
                Identification
      No.)
 
 17
      State Street, New York, New York 10004(Address
      of Principal Executive Offices)
 
 646-214-1234(Issuer's
      Telephone Number)
 
 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.
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.[  ]
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X]   No [  ]
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained  in this form, and no disclosure will  be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [  ]
 
 Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes [ ]   No
[X].
 
 The
issuer's revenues for the year ended December 31, 2007: $49,095
 
 As of
April 10, 2008, there were 42,702,198 outstanding shares of the issuer's Common
Stock. The aggregate market value of the shares of the issuer's Common Stock
held by non-affiliates on March 31, 2008  date was approximately $57
million, based on the closing price of such Common Stock on such date, as quoted
on the OTC Bulletin Board.
 
 Transitional
Small Business Disclosure Format (Check one): Yes [  ] No [X]
 
 
 IDO
SECURITY INC.
 2007
FORM 10-KSB ANNUAL REPORT
 
 TABLE
      OF CONTENTSPART
    IITEM
      1.
              DESCRIPTION
      OF BUSINESS
              1ITEM
      2.
              DESCRIPTION
      OF PROPERTY
              14ITEM
      3.
              LEGAL
      PROCEEDINGS
              15ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              15PART
      IIITEM
      5.
              MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES
              15ITEM
      6.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              15ITEM
      7.
              FINANCIAL
      STATEMENTS
              19ITEM
      8.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              19ITEM
      8A (T).
              CONTROLS
      AND PROCEDURES
              19ITEM
      8B.
              OTHER
      INFORMATION
              20PART
      IIIITEM
      9.
              DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS CONTROL PERSONS, AND CORPORATEE GOVERNANCE
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
              20ITEM
      10.
              EXECUTIVE
      COMPENSATION
              22ITEM
      11.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              24ITEM
      12.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
              27ITEM
      13.
              EXHIBITS
              27ITEM 14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              28
  
 
 
 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. DESCRIPTION OF BUSINESS
  OVERVIEW
 
 IDO
Security Inc. is engaged in the design, development and marketing of technology
based security systems for the homeland security and loss prevention markets.
Our primary target markets include 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.
 
 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, we, 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.
 
 Through
our subsidiary, 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.
 
 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.
  1
 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.
 
 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.
 
 2
 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”). We
anticipate that during 2008, 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.
  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.
 
 3
 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 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 specifically targets the security market and is based upon a
five phase corporate strategy  that defines both the short term and
the long term  goals of our company. The five phases of our plan are:
(i) determination of short term goals, (ii) determination of the tactics (action
tasks) in order to achieve our goals, (iii) determination of aims on a long term
perspective, (iv) implementing a strategy in order to achieve our aims, and (v)
establishing monitoring and control procedures, which will serve as our metrics
for success
 
 We are
initially focusing our marketing and sales efforts on sites where these metal
detecting devices are currently in use. Security procedures and protocols which
relate to metal detection are primarily based on the following devices: (i)
walk-through metal detectors (WTMD) and (ii) Hand-held metal detectors. We have
based our strategies on a complementary approach, where MagShoe products are to
complement the existing security procedures, protocols and equipment that screen
for metals.
 
 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..
 
 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 today, we have
completed a series of pilot programs at strategic locations of the type
mentioned above. We expect to both continue and accelerate our activities at
Pilot sites,   which will enable us to accomplish  the
following: (i) our potential end-users’ understanding of MagShoe products’
benefits under real time operating conditions, (ii) the gathering of statistical
data which should yield great value at the time security protocols demand a
change, and (iii) create independent performance credentials,
which  will serve MagShoe  its efforts for further
certification.
 
 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.
 
 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.
 
 4
 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.
 
 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.
  5
 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.
  RESEARCH
AND DEVELOPMENT
 
 Since the
Acquisition Transaction in March 2007, we incurred $279,177 on the research and
development of the MagShoe product.
  POST
QUARTER EVENT
 
 Effective
February 21, 2008, we issued a total of 8,340,948 shares of our common stock to
six accredited investors, upon such investors’ ‘cashless exercise’ of 19,514,250
outstanding common stock purchase warrants  held by them.
 
 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.
 
  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.
 
 6
 RISKS
CONCERNING OUR BUSINESS
  OUR
NEED FOR ADDITIONAL FINANCING IS ACUTE AND FAILURE TO OBTAIN ADEQUATE FINANCING
COULD LEAD TO THE FINANCIAL FAILURE OF OUR COMPANY IN THE FUTURE.
  We
believe that our existing cash resources are insufficient to enable us to
maintain operations as presently conducted and meet our obligations as they come
due beyond the second quarter of 2008.  Since the Acquisition
Transaction and through January 2008, we have been financing our business
primarily through the proceeds of short-term working capital loans. 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 “2008 Notes”, each
a  “ 2008 Note”). We are required to make amortizing payments on the
2008 Notes beginning April 2008.
  We need
to raise additional working capital on an immediate basis in order to meet our
operating requirements and satisfy our business plans as well as repay amounts
that will come due on the 2008 Notes. We will most likely have to obtain such
capital from additional sales of our equity, convertible equity and/or debt
securities. At the present time, we have no commitments for any additional
financing, and there can be no assurance that additional 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. In connection with
the most recent financing, we granted to the holders of the 2008 Notes a
security interest in all of our assets in order to secure our obligation to
them. 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 the 2008 Notes will also need to approve any additional financing
in our company.
  Additional
equity financings are likely to be dilutive to holders of our Common Stock and
debt financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business or contain rights,
preferences and privileges senior to our Common Stock.
  Even if
we raise funds to address our immediate working capital requirements, we also
may be required to seek additional financing in the future to respond to
increased expenses or shortfalls in anticipated revenues, accelerate product
development and deployment, respond to competitive pressures, develop new or
enhanced products, or take advantage of unanticipated acquisition opportunities.
We cannot be certain we will be able to find such additional financing on
commercially reasonable terms, or at all.
  If we are
unable to obtain additional financing when needed, we could be required to
modify our business plan in accordance with the extent of available financing.
We also may not be able to accelerate the development and deployment of our
products, respond to competitive pressures, develop new or enhanced products or
take advantage of unanticipated acquisition opportunities. Finally, we may be
required to sell our assets or shut down the company and cease operations.
  These
conditions raise substantial doubt as to our ability to continue as a going
concern and may make it more difficult for us to raise additional capital when
needed. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability of reported assets or liabilities
should we be unable to continue as a going concern.
  A
DEFAULT BY US UNDER OUR 8% SENIOR SECURED CONVERTIBLE DEBENTURES ISSUED IN MAY
2006 WOULD ENABLE THE DEBENTURE HOLDERS TO TAKE CONTROL OF OUR INTELLECTUAL
PROPERTY ASSETS.
 
 Between
December 5, 2007 and January 24, 2008, we issued $5,404,550 in aggregate
principal amount of our 2008 Notes. The 2008 Notes are scheduled to mature
between December 2008 and January 2009 and, beginning in April 2008 and on the
first business day of each month thereafter, we will be required to prepay 5% of
the principal amount of the notes originally issued, but not more than the then
outstanding principal amount, together with all interest then due and
payable. At this time, we are required to pay this amount in
cash.  To secure our obligations under the 2008 Notes, we granted the
holders a security interest in all of our assets, including intellectual
property. The security interest terminates upon payment or satisfaction of all
of Company’s obligations under the 2008 Notes. A default by us under the notes
would enable the holders to foreclose on our assets. Any foreclosure could force
us to substantially curtail or cease our operations.
  7
 We
undertook to file by February 22, 2008 a registration statement relating to the
resale of the Common Stock underlying the 2008 Notes and 2008 Investor Warrants
and to use reasonable efforts to cause such registration statement to be
declared effective by April 22, 2008 or, in case of a full review of such
registration statement, by May 22, 2008. As of the filing of this annual report
on Form 10-KSB, the registration statement has not been filed. Accordingly, we
owe to the holders of these notes, as of March 23, 2008 approximately $108,000
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.
For each 30 day period thereafter (or any part thereof), we will owe an
additional $108,000 in liquidated damages. If any one of the Debenture holders
were to deliver to us notice demanding payment of amounts due, then there would
be an Event of Default under the agreements with the holders of these
debentures, enabling them to foreclose.
 
 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.
  8
 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, 2007, we have incurred
$6,808,060 in operating losses. Prior to the Acquisition Transaction, our
subsidiary IDO Ltd. incurred operating losses of $60,646 and $501,071 for
the two months ended February 2007 and the year ended December 2006,
respectively. As of December 31, 2007, we had an accumulated deficit of
$15,058,262. 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. Our ability to generate and sustain significant additional
revenues or achieve profitability will depend upon the factors discussed
elsewhere in this “Risk Factors” section. 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, 2007 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.
  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.
 
 9
 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.
  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.
  10
 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.
 
 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, 2007. Our
independent auditors will be required to issue an opinion on management’s
assessment of those matters for our annual report on Form 10-K for our fiscal
year ending December 31, 2009. The rules governing the standards that must be
met for management to assess our internal controls over financial reporting are
relatively new and complex and require significant documentation, testing and
possible remediation to meet the detailed standards under the
rules.  It is possible that, as we prepare for this audit, we could
discover certain deficiencies in the design and/or operation of our internal
controls that could adversely affect our ability to record, process, summarize
and report financial data.  We have invested and will continue to
invest significant resources in this process.  Because an audit of our
internal controls has not been required to be reported in the past, we are
uncertain as to what impact a conclusion that deficiencies exist in our internal
controls over financial reporting would have on the trading price of our common
stock.
  RISKS
ASSOCIATED WITH OUR SECURITIES AND CAPITAL STRUCTURE
 
 CERTAIN
OF THE FORMER PRINCIPAL STOCKHOLDERS OF IDO LTD. MAY HAVE SIGNIFICANT INFLUENCE
OVER THE COMPANY.
 
 Gil
Stiss, IDO’s former President and currently the Chief Technology Officer of IDO
Ltd., currently holds a proxy to vote 25.64% of our outstanding voting stock. As
a result, he may possess significant influence, giving him the ability, among
other things, to elect a majority of the Board of Directors and to approve
significant corporate transactions. Such stock ownership and control may also
have the effect of delaying or preventing a future change in control, impeding a
merger, consolidation, takeover or other business combination or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of its company.
  11
 FUTURE
SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING
MARKET PRICES FOR OUR COMMON STOCK.
  As of
March 31, 2008, we had 100 million authorized shares of Common Stock, of which
42,702,198 shares of our Common Stock were issued and outstanding as of such
date. Approximately 15 million shares have been reserved for issuance upon
exercise or conversion of outstanding options, warrants and convertible
securities. 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.
 
 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.
 
 FUTURE
SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT MARKET
PRICES FOR OUR COMMON STOCK.
 
 We are
authorized to issue 100,000,000 shares of Common Stock and, as of March 31,
2008, 42,702,189 shares were issued and outstanding.The authorized and
unissued shares of our Common Stock may be issued by our board of directors
without the approval of the holders of our Common Stock. Availability of a
significant number of additional shares of our Common Stock for future sale and
issuance could depress the market price of our Common 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
its 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;
  12
  ·
              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.
 
 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. The recent weakness of the US Dollar in
the international markets has been equally reflected against NIS and this may
continue in the future. Since December 31, 2007, the U.S. Dollar has devalued by
approximately 12% against NIS. Continuing devaluation of the US dollar against
the NIS will result in higher operating costs from NIS denominated
expenses.
  13
 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.
  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
2.         DESCRIPTION OF
PROPERTIES
 
 We do not
own any real property. Our corporate offices are located at 17 State Street, New
York, NY 10004. The offices are currently provided to us at no
charge.
 
 We lease
office space comprised of 224 square meters in Rishon Le’Zion in Israel. The
office space is used for administrative offices for our subsidiary IDO Ltd.,
under a sub-lease that had an initial term that commenced in March 2007 and
expired in March 2008.  The sub-lease has a renewal option for four
successive one year periods.  As of the filing of this report, we are
leasing the premises on a month-to-month basis at the monthly rental amount of
$1,256. We are currently exploring alternative premises. Through March 2008, the
rent for the office premises was $1,200 per month, not including municipal taxes
and management fees. As of April 2008, the amount increased to $1,256 per month.
  The sub-lessor is a private company whose sole shareholder is Mr. Gil
Stiss, IDO Ltd.’s Chief Scientist and a director of IDO Ltd.
 
 14
 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, 2007.
 
 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 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.
 
 The
following table shows the quarterly high and low bid prices for our Common Stock
over the last completed quarter of 2007 and the first quarter of 2008 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. The closing price of our Common Stock on the last reported
sale on March 31, 2008 was $1.80.
 
 LOW
              
              
              HIGH2008First
      Quarter
              
              $
              1.41
              
              
              $
              3.02Year
      Ended December 31, 2007Second
      Quarter
              
              $
              1.00
              
              
              $
              2.43Third
      Quarter
              
              $
              2.43
              
              
              $
              2.50Fourth
      Quarter
              
              $
              2.05
              
              
              $
              3.70
 
 As of
April 4, 2008, there were 22 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.
 
 We do not
have any compensation plans under which equity securities are authorized for
issuance.
 
 ITEM
6.         MANAGEMENT DUSCUSSION AND
ANALYSYS OR PLAN OF OPERATIONS.
 
 THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS
AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THIS ANNUAL REPORT.
 
 15
 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.
 
 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, we, IDO Security
Ltd. (“IDO Ltd.”) and IDO Ltd.’s Selling Shareholders entered into a Securities
Purchase Agreement (the “Purchase Agreement”) pursuant to which we 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 the Company and Med Ex adopted the business
of IDO Ltd. In June 2007, the Company changed its name to “IDO Security
Inc.”
 
 We have
designed and developed a security screening device containing proprietary
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, while ignoring those
metal objects that are normally found inside shoes. 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.
 
 A patent
has been issued to us by the United States Patent and Trademark Office in
November 2005 covering various aspects of the unique technology contained in the
MagShoe and there is one patent application pending in Israel. In January 2006,
the MagShoe was approved for use by the Department for Transport in the United
Kingdom, after fields 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.
 
 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 on security, in general, will bring to an increasing
awareness on available products and methods, such ours, for anti-crime and loss
prevention fields.
 
 Following
the Acquisition Transaction, we reorganized the management and operational
activities of the Company. Our acting Chief Executive Officer was appointed
President. We retained a Chief Operating Officer for IDO Ltd. as well as other
personnel and outside consultants. We have been seeking to expand our contact
base and are aggressively seeking collaborative arrangements worldwide for our
MagShoe product. We will need to raise additional working capital to accelerate
our sales, marketing, manufacturing and customer service activities. We
presently do not have the capital resources to undertake any of these steps or
to repay these debts. We have a non-binding financing proposal from several
entities that is subject to the completion of due diligence and no assurance can
be provided that we will be able to raise funds on commercially acceptable terms
(or at all)
 
 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.
 
 16
 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.
 
 Plan
of Operations
 
 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 currently have 10
full time employees and consultants. Through December 31, 2008, we intend to
expand our internal management and administrative capacities. We expect to
continue making substantial investment in equipment and to acquire inventory to
facilitate the expansion of pilot projects and to
accelerate commercialization efforts.
  All
references to financial results prior to the date of the Acquisition Transaction
(e.g., March 8, 2007) shall mean and refer to the financial results of IDO Ltd.
All references to results following the date of the Acquisition Transaction
shall mean and refer to the financial results of the IDO Security Inc. and its
consolidated subsidiary, IDO Security Ltd.
 
 On
December 29, 2006, the Board of Directors of the Company determined to change
our fiscal year end from June 30 to December 31. On February 23, 2007, the
Company filed an annual report on Form 10-KSB covering the transition
period.
 
 Revenues and costs of good
sold- We had revenues of $49,095 for the year ended December 31, 2007,
all of which were derived from sales of the MagShoe Units. Cost of goods sold in
the amount of $107,187 for the year ended December 31, 2007 exceeded sales
resulting in gross loss of $58,092.Because we are still a
development stage company, the allocation of fixed manufacturing costs to cost
of goods sold may continue to result in a 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 $279,177 for the
year ended December 31, 2007.
 
 Selling, general and administrative
expenses - Selling, general and administrative 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. We incurred selling,
general and administrative expenses of $991,688 and $60,470 for the year ended
December 31, 2007 and for the transition period ended December 31, 2006,
respectively. The increase in selling, general and administrative expenses is
principally attributable to the intensified activities following the Acquisition
Transaction.
 
 Stock Based Compensation .
Between March and September  2007, we granted stock options to
employees and consultants valued at $8.4 million. The value of these options are
being amortized over the vesting periods of each grant. Stock based compensation
totaled $5.4 million  for the year ended December 31, 2007. Stock-based
compensation is non-cash and, therefore, has no impact on cash flow or
liquidity.
 
 17
 Interest expense - Interest
expense for the years ended December 31, 2007 and 2006 was $585,001 and $0,
respectively. For the year ended December 31, 2007, interest included $548,672
related to the convertible promissory notes and $36,329 to related parties.
 
 Amortization - During the year
ended December 31, 2007, we recorded amortization of $7,484,986. Amortization
for the 2007 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 2007. These costs are
amortized to the date of maturity of the debt unless converted
earlier.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 To date
we have financed our operations primarily from the sale of our
securities.
 
 As of
December 31, 2007, we had a cash balance of $353,701.
 
 Between
February 28 and April 18, 2007, we raised $3,000,000 from the private placement
to certain institutional and private investors (collectively, the “Investors”)
of our 120 day Secured Convertible Notes (collectively, the “Notes”). The loans
were advanced pursuant to a Subscription Agreement, dated as of February 28,
2007 (the “Subscription Agreement”). Pursuant to the Subscription Agreement, we
issued to the Investors its Notes in the aggregate principal amount of
$3,240,000, reflecting an original issue discount on the principal amount of the
loans of 8% over the 120 day loan period. Notes in the aggregate principal
amount of $1,134,000, $1,350,000 and $756,000 were or are scheduled to mature,
respectively, on June 28, 2007, July 29, 2007 and August 16, 2007. The maturity
dates of Notes totaling $2,484,000 that were scheduled to mature on June 28,
2007 and July 29, 2007 were extended to August 31, 2007. These Notes, as well as
Notes in the principal amount of $756,000 that were scheduled to mature on
August 16, 2007, were extended to November 29, 2007. Following these extensions,
the aggregate principal amount of $3,499,360 payable in respect of the Notes was
due and payable by November 29, 2007. Most of the outstanding amounts were
rolled into the financing that we completed in January 2008 and discussed below
and were thus applied to these investors’ purchase of the securities that we
placed in such financing.
 
 On
October 11, 2007, we raised gross proceeds of $250,000 from the private
placement to institutional investors (the “October  07 Investors”) of
our 90 day Promissory Notes (collectively, the “Notes”, each
a  “Note”). The loan was advanced pursuant to a Subscription
Agreement, dated as of October 11, 2007 (the “Subscription Agreement”), between
the Company and the Investors. Pursuant to the Subscription Agreement, the
Company issued to the October 07 Investors its Notes, scheduled to mature on
January 11, 2008, in the aggregate principal amount of $265,957. Certain of the
outstanding amounts were rolled into the 2008 Financing discussed below and were
thus applied to these investors purchase of the securities that we placed in the
2008 Financing.
 
 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 “2008 Notes”, each
a  “ 2008 Note”). The transactions were effected pursuant to a
Subscription Agreement, dated as of December 5, 2007 (the “2008 Subscription
Agreement”), 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. All of the holders of the 2007
Notes and the October 2007 Notes participated in the private placement and the
gross proceeds raised include amounts the Company owed to these investors in the
approximate amount of $2.7 million that were offset against such investors’
respective purchases of the 2008 Notes. 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,
we will be required to prepay 5% of the aggregate principal amount of the 2008
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 value weighted average
price (VWAP) of the Common Stock for the ten 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”) or (ii).
  18
 Cash used in operating activities was $1.3
million for the year ended December 31, 2007. The decrease in cash was primarily
attributable to funding the loss for the period.
 
 Cash used
in investing activities was $991,549 for the year ended December 31, 2007 and
was primarily attributable to the consummation of the Acquisition
Transaction.
 
 Cash
provided by financing activities was $2.65 million for the year ended December
31, 2007. We received proceeds of $4.2 million from the issuance of the Notes,
$36,475 from the collections of subscriptions receivable and proceeds from
short-term debt incurred by IDO Ltd. of $12,735. In connection with the issuance
of the Notes, the Company incurred financing costs of $554,103. In addition, the
Company repaid short-term debt incurred by IDO Ltd. totaling $938,056 and repaid
Notes totaling $130,000.
 
 We need
to raise additional funds to be able to satisfy our cash requirements over the
next twelve months, including satisfying our obligations as they come due.
Product development, corporate operations and marketing expenses will continue
to require additional capital. Our current revenue from operations is
insufficient to cover our current operating expenses and projected expansion
plans which include the repayment of the Notes. We therefore are aggressively
seeking additional financing through the sale of our equity and/or debt
securities. No assurance can be provided that additional capital will be
available to us on commercially acceptable or at all. Our auditors included a
"going concern" qualification in their report for the year ended December 31,
2007. Such "going concern" qualification may make it more difficult for us to
raise funds when needed. Additional equity financings may be dilutive to holders
of our Common Stock.
  ITEM
7.         FINANCIAL
STATEMENTS
 
 The
information called for by this Item 7 is included following the "Index to
Financial Statements" contained in this Annual Report on Form
10-KSB.
 
 ITEM
8.         CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND FINANCIAL
DISCLOSURE
 
 None
 
 ITEM
8A(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.
 
 19
 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.
Our management has [with the assistance of external advisor] conducted an
evaluation of the effectiveness of our internal control over financial
reporting. Based on our evaluation, our management has concluded that our
internal control over financial reporting was effective as of December 31,
2007.
  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, 2007, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.
 
 ITEM
8B.      OTHER INFORMATION
 
 As of
March 10, 2008, Mr. Wolf ceased performing services as the companies' Manager of
Business Development. Mr. Wolf continued to provide services to the companies as
an outside consultant at the monthly rate at which he was paid under the
agreements with him while we and Mr. Wolf attempted to negotiate an agreement
relating to the termination of his services and related matters. On April
10, 2008, Mr. Wolf advised us that he intends to commence legal action with
respect to purported breaches by the companies of contractual obligations to
him. We believe that Mr. Wolf's position is without merit and it is our
intention to vigorously defend ourselves againt any claim by Mr.
Wolf.
  PART III
 
 ITEM 9.  DIRECTORS AND
EXECUTIVE OFFICERS , PROMOTERS AND CONTROLPERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
  Directors and Executive
Officers, Promoters and Control Persons
  The
names, ages and positions of our directors, executive officers and key employees
are as follows:
 
 Name
              
              Age
              
              PositionMichael
      Goldberg
              
              57
              
              President,
      Acting Chief Executive Officer and DirectorIrit
      Reiner
              
              49
              
              DirectorJohn
      Mitola
              
              40
              
              DirectorHenry
      Shabbat
              
              67
              
              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
Goldberg has 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.
 
 20
 Irit Reiner has 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 Shabat has 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.
 
 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 C ompliance
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires each of our
officers and directors and each person who owns more than 10% of a registered
class of our equity securities to file with the SEC an initial report of
ownership and subsequent reports of changes in such ownership.  Such
persons are further required by SEC regulation to furnish us with copies of all
Section 16(a) forms (including Forms 3, 4 and 5) that they file.  Based
solely on our review of the copies of such forms received by us with respect to
fiscal year 2007, or written representations from certain reporting persons, we
believe all of our directors and executive officers met all applicable filing
requirements for the fiscal year ended December 31, 2007, except that each
of Messrs. Goldberg and Mitola filed a late Form 3 with respect to their
election as directors and Ms. Reiner has not yet filed a Form 3.
  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-KSB.
  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. We are seeking, however, to have a financial expert in our Audit
Committee.
  21
 ITEM
10.  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 2007 whose total compensation exceeded $100,000 for the year
ended December 31, 2007.
 
 Name
      and
                Principal
                Position(s)
              Year
              Salary
              Bonus
              Option
      Awards (1)
              TotalMichael
      Goldberg, President and
                Acting
      Chief
                Executive
      Officer
                (and
      Principal
                Financial
      Officer) (2)
              2007
              $115,500
              ---
              $1,997,677
      (3)
              $2,113,177Jorge
      Wolf,
                former
      Manager
                of
      Business Development
                (IDO
      Ltd). (4)
              2007
              $109,291
              --
              1,568,569
      (5)
              $1,677,860
 
 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
4.69%, no dividend yield and volatility of 134.97%.
 
 2. 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).
 
 3. As of
December 31, 2007, of the 1,200,000 total option shares that were awarded in
June 2007, 693,750 were vested.
 
 4. Of
this amount, $43,588 represents amounts that were paid to Mr. Wolf under his
agreement with our subsidiary IDO Ltd. Mr. Wolf’s appointment as Manager of
Business Development of our wholly-owned subsidiary IDO Ltd. and his retention
by both companies commenced as of June 29, 2007. As of March 10, 2008, Mr. Wolf
ceased performing services as the companies' Manager of Business Development.
See Item 8b (Other Information).
  5.  As
of December 31, 2007, of the 1,200,000 total option shares, 450,000 were
vested.
 
 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.
 
 22
 Jorge Wolf.  On June
29, 2007, we and our subsidiary IDO Ltd. entered into consultancy agreements
with Mr. Jorge Wolf pursuant to which Mr. Wolf was retained as Manger of
Business Development for each of IDO Security Inc. and IDO Security Ltd. at a
monthly fee of $5,286 under each agreement. Each of the consulting agreements
had an initial term of two years; thereafter, each agreement provides that it is
to be renewed automatically for successive two 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 consulting agreement with the Company, Mr. Wolf
is entitled to options to purchase 1,200,000 shares (post split) of the
Company’s common stock, which are scheduled to vest in equal installments of
150,000 shares at the end of each 90 day period following the execution of the
consulting agreement. The per share exercise prices range between $0.17 and
$1.17. As of March 10, 2008, Mr. Wolf ceased performing services as the
companies' Manager of Business Development. Mr Wolf continued to provide
services to the companies as an outside consultant at the monthly rate at which
he was paid under the agreements with him while we and Mr. Wolf attempted to
negotiate an agreement relating to the termination of his services and related
matters. On April 10, 2008, Mr. Wolf advised that breaches by the companies of
contractual obligations to him. We believe that Mr. Wolf's position is without
merit and it is our intention to vigorously defend ourselves against any claim
by Mr. Wolf.
  OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END -- DECEMBER 31, 2007
 
 The following table sets forth
information as of December 31, 2007, 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
              6/30/16Jorge
      Wolf (1)
              150,000
              
              0.17
              6/1/14150,000
              
              0.25
              8/30/14150,000
              
              0.42
              11/28/14150,000
              0.58
              2/26/15150,000
              0.72
              5/26/15150.000
              0.95
              8/24/15150.000
              1.08
              11/28/15150.000
              1.17
              2/20/16
  23
  As of
March 10, 2008, Mr. Wolf ceased performing services as the companies' Manager of
Business Development. See Item 8b (Other Information).
 
 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
                or
      Paid in
                Cash
              
              
              Option
                Awards(1)
              
              
              TotalIrit
      Reiner
              
              $
              1,000(2)
              
              
              $
              --
              
              
              $
              1,000John
      Mitola
              
              $
              --
              
              
              $
              247,646(3)
              
              
              $
              247,646
 
 1.
              Amounts
      in this column reflect the expense recognized by the Company for
      accounting purposes calculated in accordance with FASB Statement of
      Financial Accounting Standards No. 123R (“FAS 123R”) with respect to
      employee stock options issued under the Company's 2005 Incentive Plan in
      2005.  For
      information on the assumptions used to calculate the value of stock option
      grants under FAS 123R, see Note 6 of the Company’s financial statements
      for the year ended December 31, 2007 included elsewhere in this report.
      Options are discussed in further detail in the Outstanding Equity Awards
      at Fiscal Year End Table. The assumptions used to calculate the fair value
      of stock option grants under FAS 123R, were: expected holding period
      of 3.68 years, risk free interest rate of 3.07%, no dividend yield
      and volatility of 134.97%.
 
 2.
              Represents
      payment to Ms. Reiner for attendance at Board
  meetings.
 
 3.
              Represents
      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, 2007, of the
      100,000 option shares, 25,000 were
vested.
 
 ITEM
11.  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 March 31,
2008, 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 March 31, 2008. 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 42,702,198 shares of common stock outstanding
at March 31, 2008.
  24
  Name
      and Address of
                Beneficial
      Owner
              Common
      Stock
                Beneficially
                Owned
              Percentage
      of Common StockMichael
      Goldberg
                President
      and acting Chief Executive Officer
                c/o
      IDO Security Inc.
                17
      State Street
                New
      York, NY
              778,125
      (1)
              1.79%Henry
      Shabat
                Chief
      Operating Officer of IDO Security Ltd.
                c/o
      IDO Security Inc.
                17
      State Street
                New
      York,, NY
              90,000(2)
              *Jorge
      Wolf
                Former
      Manager of Business Development
                c/o
      IDO Security Inc.
                17
      State Street
                New
      York,, NY
              750,000
      (3)
              1.73%Irit
      Reiner
                Director
                c/o
      IDO Security Inc.
                17
      State Street
                New
      York,, NY
              624,326
      (4)
              1.46%John
      Mitola
                Director
                c/o
      IDO Security Inc.
                17
      State Street
                New
      York,, NY
              50,000
      (5)
              *Mr.
      Gil Stiss
                Chief
      Technology Officer of IDO Security Ltd.
                41/13 Nahal
      Lachish St., Ashdod, Israel 77707
              10,950,000
      (6)
              25.64%Mr.
      Zeev Bronfeld
                6
      Uri Street
                Tel Aviv, Israel
              2,750,001
              6.44%EDA
      Capital Corporation
                1685 - 54th Street, Brooklyn NY 11204
              2,750,001
              6.44%ACC
      Holdings Ltd.
                Pasea
      Estate, Road Town, Tortola, British Virgin Island
              2,750,001
              6.44%Adi
      Levy
                7
      Sapir St.
                Gedera,
      Israel 70700
              2,700,000
              6.32%
  25
  Rolfe
      Investments Ltd.
                Trustco
      Services Ltd.
                POB
      4436 Zug CH-6304
                Switzerland
              2,750,001
              6.44%Yoav
      Hirsh
                41/13
      Nahal Lachish St.
                Ashdod
      77707
                Israel
              2,250,000
              5.26%Double
      U Master Fund LP
                Harbor
      House Waterfront DR
                PO
      Box 972
                Tortola
      BVI
              2,826,250
              6.62%All
      directors and officers as a group
              1,542,451
      (7)
              3.54%All
      directors and officers and 5% stockholders
              32,018,705
      (8)
              72.15%
  * Less
than 1%.
 
 1.   Represent
shares of Common Stock issuable upon exercise of employee stock options. Does
not include an additional 421,875 shares issuable upon exercise of employee
stock options scheduled to vest through September 2009.
 
 2.   Represent
shares of Common Stock issuable upon exercise of employee stock options. Does
not include an additional 150,000 shares issuable upon exercise of employee
stock options scheduled to vest through September 2009.
 
 3.   Represent
shares of Common Stock issuable upon exercise of  stock options. As of
March 10, 2008, Mr. Wolf ceased performing services as the companies' Manager of
Business Development. See Item 8b (Other Information).
  4.  Comprised
of 624,326 shares of Common Stock held by Ms. Reiner’s husband. Does not include
warrants to purchase an additional 1,315,000 shares of Common Stock and 100,000
shares of Common Stock issuable upon conversion of convertible debt securities,
in each case also 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.
 
 5.
Represent shares of Common Stock issuable upon exercise of employee stock
options. Does not include an additional 50,000 shares issuable upon exercise of
employee stock options scheduled to vest through September 2008.
 
 6.  Includes
5,850,000 shares of Common Stock held by other entities for which the holder
holds an irrevocable proxy to vote such shares on all matters submitted to
stockholders. The selling stockholder disclaims any beneficial interest in the
shares to which he holds a proxy.
 
 7.  Includes
918,125 shares of Common Stock issuable upon the exercise of stock options. See
Note 4 above.
 
 8.  Includes
5,850,000 shares of Common Stock held by other entities for which an irrevocable
proxy to vote such shares on all matters submitted to stockholders and 1,668,125
shares of Common Stock issuable upon the exercise of stock options. See Note 6
above.
 
 26
 In November 2007, the Board and the
requisite number of stockholders approved the establishment of the Company’s
2007 Equity Incentive Plan and the 2007 Non-Employee Directors Stock Option
Plan. These plans became effective in March 2008. As of December 31, 2007, there
were no option issued and outstanding under these plans.
  ITEM
12.  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-leases 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 has a renewal option for four successive one
year periods.  As of the filing of this report, we are leasing the
premises on a month-to-month basis. Through March 2008, the rent for the office
premises was $1,200 per month, not including municipal taxes and management
fees. As of April 2008, the amount increased to $1,256 per month.
 
 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
13.  EXHIBITS
 
 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.
  *3.2
              
              Bylaws
      of the Company *4.1
              
              Form
      of Promissory Note issued to certain investors. *4.2
              
              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 *10.1
              
              Form
      of subscription Agreement with certain investors.*10.2
              
              Form
      of Security Interest Agreement. *10.3
              
              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 +10.4
              
              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 +10.6
              
              Company's
      2007 Equity Incentive plan, filed as an exhibit to the Company’s
      information statement filed on February 26, 200810.7
              
              Company's
      2007 Non-Employee Directors Stock option Plan, filed as an exhibit to the
      Company’s information statement filed on February 26,
  200831.1
              
              Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
  27
  ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 On
December 29, 2006, the Board of Directors of the Company determined to change
the Company’s fiscal year end from June 30 to December 31. On February 23, 2007,
the Company filed an annual report on Form 10-KSB covering the
transition period. Thereafter, on February 26, 2007, we engaged Rotenberg
Meril Solomon Bertiger & Guttilla, P.C. (“RMSB&G”) as our principal
independent accountant to audit our financial statements, replacing Amisano
Hanson (“Amisano-Hanson”), who until such date served as our
auditors.
 
 Aggregate fees for professional
services rendered for the Company by RMSB&G, our independent registered
public accounting firm, for the fiscal year ended December 31, 2007 are set
forth below. Additionally, amounts charged by our previous accountants Amisano
Hanson, Chartered Accountants for the transition period ended December 31, 2006
are also set forth below.
  Fiscal Year Ended
                December 31, 2007
              
              
              Transition
                Period Ended
                December 31, 2006Audit
      Fees
              
              $
              74,000
              
              
              $
              6,100Audit
      Related Fees
              
              $
              5,000
              
              
              $
              --Tax
      Fees
              
              $
              --
              
              
              $
              --All
      Other Fees
              
              $
              ---
              
              
              $
              --Total
              
              $
              79,000
              
              
              $
              6,100
  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-QSB, consents, and other assistance required to complete the
year-end audit of the consolidated financial statements.  Audit-Related Fees were for
assurance and related services reasonably related to the performance of the
audit or review of financial statements and not reported under the caption Audit
Fees. Tax Fees were for
professional services related to tax compliance, tax authority audit support and
tax planning.  All Other Fees include any other fees charged by 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.
 
 28
 In
accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed by the undersigned thereunto duly authorized.
 
 
  DATE: 
      April 15, 2008IDO
      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
      15, 2008Irit
      Reiner/s/
      Michael Goldberg
              
              President,
      Acting Chief Executive Officer and Director
              
              April
      15, 2008Michael
      Goldberg/s/
      John Mitola
              
              Director
              
              April
      15, 2008John
      Mitola
 
 29
  IDO
SECURITY INC.
 (A developmentstage
company)
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 
 
 
  Reports
      of Independent Registered Public Accounting Firms
                F-1Consolidated Balance
      Sheet
                F-3Consolidated
      Statements of Operations
                F-4Consolidated
      Statements of Changes in Shareholders’ Equity (Deficiency)
                F-5Consolidated
      Statements of Cash Flows
                F-6Notes to
      Consolidated Financial Statements
                F-7
 REPORT
OF INDEPENDENT REGISTERED ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 IDO
Security, Inc.
 
 We have
audited the accompanying consolidated balance sheet of IDO Security, Inc.
and  Subsidiary (a development stage company) (the “Company”) as of
December 31, 2007 and the related consolidated statements of operations, changes
in stockholders’ equity (deficiency) and cash flows for the year then ended and
for the period from January 23, 2004 (date of inception) through December 31,
2007.  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.  The consolidated statements
of operations, changes in stockholders’ deficit and cash flows of the Company
for the year ended December 31, 2006 and the cumulative statements of
operations, stockholders’ equity (deficit), and cash flows for the period
January 23, 2004 (date of inception) to December 31, 2006 which are included in
the  amounts for the period from January 23, 2004 (date of inception)
to December 31, 2007, were audited by other auditors whose report dated February
14, 2007 on those statements included an explanatory paragraph describing
conditions that raised substantial doubt about the Company's ability to continue
as a going concern.
 
 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.  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
audit provides a reasonable basis for our opinion.
 
 In our
opinion, based on our audit and the report of otherauditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2007 and the results of their operations and cash flows for
the years ended December 31, 2007 and 2006 and for the period from January 23,
2004 (date of inception) to December 31, 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.
  
 
 /s/Rotenberg
Meril Solomon Bertiger & Guttilla, P.C.
 ROTENBERG
MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
 
 Saddle
Brook, New Jersey
 April 11,
2008
 
 
 
  F-1
 REPORT
OF INDEPENDENT REGISTERED ACCOUNTING FIRM
 
 To the
Stockholders,
 The
Medical Exchange, Inc.
 (A
development Stage Company)
 
 We have
audited the accompanying statements of operations, changes in stockholders’
equity (deficiency) and cash flows of The Medical Exchange, Inc. (a development
stage company) for the six months ended December 31, 2006 and for the period
from January 23, 2004 (date of inception) through December 31,
2006.  These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). These standards require
that we plan and perform an audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
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
audit provides a reasonable basis for our opinion.
 
 In our
opinion, these financial statements referred to above present fairly, in all
material respects, the results of the operations and cash flows of The Medical
Exchange, Inc. for the six months ended December 31, 2006 and for the period
from January 23, 2004 (date of inception) to December 31, 2006, in conformity
with accounting principles generally accepted in the United States of
America.
 
 The
accompanying 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
financial statements, the Company is in the development stage, has no
established source of revenue and is dependent on its ability to raise capital
from stockholders or other sources to sustain operations.  These
factors, along with other matters as set forth in Note 1, raise substantial
doubt that the Company will be able to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
  
 
 /s/Amisano
Hanson, Chartered Accountants
 AMISANO
HANSON, CHARTERED ACCOUNTANTS
 
 Vancouver,
Canada
 February
14, 2007
 F-2
 
  IDO
      SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONSOLIDATED
      BALANCE SHEETDECEMBER
      31, 2007ASSETSCURRENT
      ASSETSCash
      and  cash equivalents
                  
                  $
                  353,701Due
      from escrow agent
                  
                  
                  1,150,000Inventory
                  
                  
                  177,037Prepaid
      expenses and other current assets
                  
                  
                  75,678Total
      current assets
                  
                  
                  1,756,416Property
      and equipment, net
                  
                  
                  52,192Goodwill
                  
                  
                  1,955,002Deferred
      financing costs, net
                  
                  
                  718,106Total
      assets
                  
                  $
                  4,481,716LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
                  
                  $
                  516,962Convertible
      promissory notes (net of discount of $855,758)
                  
                  
                  2,256,563Loan
      payable, related party
                  
                  
                  44,826Total
      current liabilities
                  
                  
                  2,818,351NON-CURRENT
      LIABILITIESConvertible
      promissory notes (net of discount of $2,642,522)
                  
                  
                  -Accrued
      severance pay
                  
                  
                  155,681Total  liabilities
                  
                  
                  2,974,032STOCKHOLDERS'
      EQUITYPreferred
      Stock20,000,000
      shares authorized; none outstanding
                  
                  
                  -Common
      stock, $.001 par value;50,000,000
      shares authorized; 34,361,250 and 30,600,000issued
      and outstanding, respectively
                  
                  
                  34,361Additional
      paid-in capital
                  
                  
                  16,431,941Stock
      subscription receivable
                  
                  
                  (25
                  )Accumulated
      other comprehensive loss
                  
                  
                  (331
                  )Deficit
      accumulated during the development stage
                  
                  
                  (14,958,262
                  )Total
      stockholders' equity
                  
                  
                  1,507,684Total
      liabilities and stockholders' equity
                  
                  $
                  4,481,716
  See Notes
to Consolidated Financial Statements.
  F-3
  IDO
      SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF OPERATIONSJanuary
      23,Year
                
                
                Six
      Months
                
                
                2004
      (Date ofEnded
                
                
                Ended
                
                
                Inception)
      toDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2007Revenues
                
                $
                49,095
                
                
                $
                -
                
                
                $
                49,095Cost
      of sales
                
                
                107,187
                
                
                
                -
                
                
                
                107,187Gross
      loss
                
                
                (58,092
                )
                
                
                -
                
                
                
                (58,092
                )Operating
      expensesResearch
      and development costs
                
                
                279,177
                
                
                
                -
                
                
                
                279,177Selling,
      general and administrative expenses
                
                
                991,688
                
                
                
                60,470
                
                
                
                1,275,198Stock
      based compensation
                
                
                5,379,103
                
                
                
                -
                
                
                
                5,379,103Total
      operating expenses
                
                
                6,649,968
                
                
                
                60,470
                
                
                
                6,933,478Loss
      from operations
                
                
                (6,708,060
                )
                
                
                (60,470
                )
                
                
                (6,991,570
                )Interest
      expense (including related partiesof
      $36,329 and $0)
                
                
                (585,001
                )
                
                
                -
                
                
                
                (585,001
                )Interest
      income
                
                
                3,295
                
                
                
                -
                
                
                
                3,295Amortization
      of debt discount
                
                
                (6,905,171
                )
                
                
                -
                
                
                
                (6,905,171
                )Amortization
      of beneficial conversion feature
                
                
                (452,993
                )
                
                
                -
                
                
                
                (452,993
                )Amortization
      of deferred finance costs
                
                
                (126,822
                )
                
                
                -
                
                
                
                (126,822
                )Net
      loss
                
                
                (14,774,752
                )
                
                
                (60,470
                )
                
                
                (15,058,262
                )Other
      comprehensive lossForeign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                (331
                )Comprehensive
      loss for the period
                
                $
                (14,774,752
                )
                
                $
                (60,470
                )
                
                $
                (15,058,593
                )Basic
      and diluted loss per share:
                
                $
                (0.45
                )
                
                $
                (0.00
                )Weighted
      average number of shares outstandingBasic
      and diluted
                
                
                32,779,589
                
                
                
                30,600,000
  See Notes
to Consolidated Financial Statements.
 
 F-4




IDO
      SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
  (DEFICIENCY)AccumulatedAdditional
              
              
              
              
              
              Other
              
              
              CommonCommon
      Stock
              
              
              
              
              
              Paid-in
              
              
              Accumulated
              
              
              Comprehensive
              
              
              StockShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              Income
              
              
              Subscribed
              
              
              TotalBalances
      at January 23, 2004(Date
      of Inception)
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Common
      stock issued for cash
              
              
              6,337,500
              
              
              
              6,338
              
              
              
              35,913
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              42,250Foreign
      Currency TranslationAdjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (154
              )
              
              
              
              
              
              
              (154
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,893
              )
              
              
              
              
              
              
              
              
              
              
              (6,893
              )Balances
      at June 30,  2004
              
              
              6,337,500
              
              
              
              6,338
              
              
              
              35,913
              
              
              
              (6,893
              )
              
              
              (154
              )
              
              
              -
              
              
              
              35,203Foreign
      Currency Translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (44
              )
              
              
              
              
              
              
              (44
              )AdjustmentNet
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (57,251
              )
              
              
              
              
              
              
              
              
              
              
              (57,251
              )Balances
      at June 30,  2005
              
              
              6,337,500
              
              
              
              6,338
              
              
              
              35,913
              
              
              
              (64,144
              )
              
              
              (198
              )
              
              
              -
              
              
              
              (22,092
              )Common
      stock issued for cash
              
              
              24,112,500
              
              
              
              24,113
              
              
              
              56,263
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,375Common
      stock subscriptions
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (36,500
              )
              
              
              (36,500
              )Director's
      forgiveness of debt
              
              
              
              
              
              
              
              
              
              
              31,806
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              31,806Foreign
      Currency TranslationAdjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (133
              )
              
              
              
              
              
              
              (133
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (58,896
              )
              
              
              
              
              
              
              
              
              
              
              (58,896
              )Balances
      at June 30, 2006
              
              
              30,450,000
              
              
              
              30,450
              
              
              $
              123,981
              
              
              $
              (123,040
              )
              
              $
              (331
              )
              
              $
              (36,500
              )
              
              $
              (5,440
              )Common
      stock issued for cash
              
              
              150,000
              
              
              
              150
              
              
              
              350
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              500Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (60,470
              )
              
              
              
              
              
              
              
              
              
              
              (60,470
              )Balances
      at December 31, 2006
              
              
              30,600,000
              
              
              
              30,600
              
              
              
              124,331
              
              
              
              (183,510
              )
              
              
              (331
              )
              
              
              (36,500
              )
              
              
              (65,410
              )Common
      stock subscriptions
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              36,475
              
              
              
              36,475Common
      stock and warrantsissued
      in connectionwith
      debt placement
              
              
              3,761,250
              
              
              
              3,761
              
              
              
              9,986,440
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,990,201Beneficial conversion feature of
              
              
              
              
              
              
              
              942,067
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              942,067of convertible debt issuedStock
      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
              )
              
              $
              1,507,684




See Notes
to Consolidated Financial Statements.




F-5




IDO
      SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF CASH FLOWSJanuary
      23,Year
              
              
              Six
      Months
              
              
              2004
      (Date ofEnded
              
              
              Ended
              
              
              Inception)
      toDecember
      31,
              
              
              December
      31,
              
              
              December
      31,2007
              
              
              2006
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (14,774,752
              )
              
              $
              (60,470
              )
              
              $
              (15,058,262
              )Adjustments
      to reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
      and amortization
              
              
              133,190
              
              
              
              -
              
              
              
              233,190Amortization
      of note discount
              
              
              6,905,171
              
              
              
              -
              
              
              
              6,905,171Amortization
      of beneficial conversion feature of convertible debt
              
              
              452,993
              
              
              
              -
              
              
              
              452,993Accretion
      of interest on notes payable
              
              
              509,842
              
              
              
              -
              
              
              
              509,842Stock
      based compensation
              
              
              5,379,103
              
              
              
              -
              
              
              
              5,379,103Increase
      in net liability for severance pay
              
              
              4,878
              
              
              
              -
              
              
              
              4,878Increase (decrease) in cash attributable to changes in assets and
      liabilitiesInventory
              
              
              15,382
              
              
              
              -
              
              
              
              15,382Prepaid
      expenses and other current assets
              
              
              (62,834
              )
              
              
              -
              
              
              
              (62,834
              )Accounts
      payable
              
              
              40,624
              
              
              
              -
              
              
              
              40,624Accrued
      expenses and other current liabilities
              
              
              82,118
              
              
              
              82,082
              
              
              
              183,666Net
      cash provided by (used in) operating activities
              
              
              (1,314,285
              )
              
              
              21,612
              
              
              
              (1,396,247
              )CASH
      FLOWS FROM  INVESTING ACTIVITIESAcquisition
      of IDO Security Ltd., net of cash acquired of $19,974
              
              
              (950,171
              )
              
              
              -
              
              
              
              (950,171
              )Deferred
      acquisition costs
              
              
              -
              
              
              
              (46,550
              )
              
              
              (55,550
              )Purchases
      of property and equipment
              
              
              (41,378
              )
              
              
              -
              
              
              
              (41,378
              )Net
      cash used in investing activities
              
              
              (991,549
              )
              
              
              (46,550
              )
              
              
              (1,047,099
              )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common shares
              
              
              -
              
              
              
              500
              
              
              
              123,125Stock
      subscription receivable
              
              
              36,475
              
              
              
              -
              
              
              
              (25
              )Proceeds
      from issuance of secured convertible notes
              
              
              5,375,000
              
              
              
              -
              
              
              
              5,375,000Due
      from escrow agent
              
              
              (1,150,000
              )
              
              
              -
              
              
              
              (1,150,000
              )Payments
      of deferred finance costs
              
              
              (554,103
              )
              
              
              -
              
              
              
              (554,103
              )Proceeds
      from related party loans
              
              
              12,735
              
              
              
              -
              
              
              
              44,541Proceeds
      from short-term debt
              
              
              -
              
              
              
              22,500
              
              
              
              26,896Repayment
      of notes payable
              
              
              (130,000
              )
              
              
              -
              
              
              
              (130,000
              )Repayment
      of short-term debt
              
              
              (938,056
              )
              
              
              -
              
              
              
              (938,056
              )Net
      cash provided by financing activities
              
              
              2,652,051
              
              
              
              23,000
              
              
              
              2,797,378Effect
      of foreign currency translation on cash
              
              
              -
              
              
              
              -
              
              
              
              (331
              )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              346,217
              
              
              
              (1,938
              )
              
              
              353,701CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
              
              
              7,484
              
              
              
              9,422
              
              
              
              -CASH
      AND CASH EQUIVALENTS - END OF PERIOD
              
              $
              353,701
              
              
              $
              7,484
              
              
              $
              353,701Supplemental
      disclosures of cash flow information:Cash
      paid for interest
              
              $
              -Non-cash
      activitiesIssuance
      of common stock relating to convertible promissory notes
              
              $
              1,194,931




See Notes
to Consolidated Financial Statements.




F-6
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - GENERAL
 
 Overview
 
 IDO
Security Inc. (hereinafter, “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
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 6 (Capital Transactions). 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-KSB are reflected on a post-split basis.
 
 All fixed
assets are located in Israel and all revenues are derived from shipments to
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, 2007, the Company
had not achieved profitable operations, had accumulated losses of $15,058,262
(since inception), a working capital deficiency of $1,061,935 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. 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.
 
 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.
 
 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.
 
 F-7
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 The
Company has been funding its operating from February to September 2007 from the
net proceeds of approximately $2.675 million from the private placement of its
short-term convertible debentures. In October 2007, the Company raised net
proceeds of $223,000 from the private placement of its 90 day promissory notes.
In December 2007 and January 2008, the Company received net proceeds of
approximately $1 million from the proceeds of the private placement 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.
  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
 The
Company is 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.
 
 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 or in United States
dollar linked currencies. 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 Companyand collection of the
related receivable is reasonable assured. When the above stated revenue
recognition criteria are not met, the Company will record deferred
revenue.
 
 Concentrations
 The
Company maintains cash in a bank account which may, at times, exceed federally
insured limits. The Company has not experienced any loss on these accounts. At
December 31, 2007, amounts in excess of insurance amounted to approximately
$229,000.
 
 F-8
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 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, 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
evaluation will take place in the first quarter
of 2008.
  Research and
Development
 Costs
incurred in connection with the research and development of the Company's
products are 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,
2007. 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.
 
 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.
 
 F-9
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 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) perShare
 Basic
earnings (loss) per share are computed by dividing net income (loss) 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
      312007
              
              2006Warrants
              
              
              23,797,048
              
              ---Convertible
      notes
              
              
              4,863,065
              
              ---Stock
      options
              
              
              3,890,000
              
              --
  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.
 
 Recently
Issued Accounting Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements -- an
amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires that ownership interests
in subsidiaries held by parties other than the parent, and the amount of
consolidated net income, be clearly identified, labeled, and presented in the
consolidated financial statements within equity, but separate from the parent's
equity. It also requires once a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value. Sufficient disclosures are required to clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 will be effective for the Company beginning
January 1, 2009. The Company is currently evaluating the impact of the
provisions of SFAS 160 on its financial position, results of operations and cash
flows and does not believe the impact of the adoption will be
material.
  F-10
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 110, Share-Based Payment(“SAB
110”). SAB 110 amends SAB 107, and allows for the continued use, under certain
circumstances, of the “simplified method” in developing an estimate of the
expected term on stock options accounted for under SFAS 123R. SAB 110 is
effective for stock options granted after December 31, 2007. The Company is
currently evaluating the impact of the new provisions of SAB 110 for stock
option awards granted in the future.
 
 In
December 2007, the FASB issued SFAS No. 141(revised) “Business
Combinations” ("SFAS No. 141 (R)"). SFAS No. 141(R) applies to all
business combinations. Under SFAS No. 141(R) an entity is required to recognize
the assets acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair values on the acquisition date. SFAS No.
141(R) is effective for all transactions entered into, on or after January 1,
2009. The Company does not believe that the adoption of this standard on January
1, 2009, will have a material effect on it's consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of SFAS No.
115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. This Statement applies to all entities, including not-for-
profit organizations. SFAS No. 159 is effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. The Company is
currently evaluating the impact of SFAS No. 159 on its consolidated financial
statements.
 
 In
September 2006, the SEC issued SAB No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB 108 provides guidance on the consideration of effects
of the prior year misstatements in quantifying current year misstatements for
the purpose of a materiality assessment. The SEC staff believes registrants must
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 was effective for the first annual period ending after
November 15, 2006 with early application encouraged. The Company adopted
the provisions of SAB 108 on December 31, 2006 and there was no impact of
adoption to its consolidated financial statements.
 
 In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which
applies under most other accounting pronouncements that require or permit fair
value measurements. SFAS No. 157 provides a common definition of fair value as
the price that would be received to sell or paid to transfer a liability in a
transaction between market participants. The new standard also provides guidance
on the methods used to measure fair value and requires expanded disclosures
related to fair value measurements. SFAF No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company does not expect this guidance to have a material impact on the financial
statements.
 
 In June
2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” FIN 48 prescribes 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. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The application of this standard did not have
a material effect on the Company's results of operations or its financial
condition.
 
 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.
  F-11
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED 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
  During
the fourth quarter of 2007, the Company completed its valuation of the
Acquisition Transaction and allocated the value of its intangible assets to
goodwill.  As such, goodwill, which originally was recorded at
$755,005, was increased to $1,955,002.
 
 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 5.  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 each period presented:
 
 Year Ended
                EndedDecember 31,2007
              
              
              2006Revenue
              $
              69,080
              
              $
              47,891Net
      loss
              $
              (15,168,002
              )
              $
              (1,581,015
              )Net
      loss per share,basic
      and diluted
              $
              (0.46
              )
              $
              (.08
              )
  F-12
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts
payable and accrued expenses consist of the following at December 31,
2007:
 
 Accounts
      payable
              
              $
              348,818Accrued
      interest
              
              
              38,539Accrued
      compensation costs
              
              
              90,622Accrued
      other
              
              
              38,983$
              516,962
 
 NOTE
5 - PRIVATE PLACEMENT OF DEBT SECURITIES
 
 (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 (post split) of the Company’s
common stock, par value $0.001 (the “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 (post
split) (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 reflects 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 (post split) of the Company’s Common Stock on terms and conditions that
are identical to the Investor Warrants and also issued 315,000 Incentive Shares
(post split). 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.
 
 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 (post split) of the Company’s Common
Stock on terms and conditions that are identical to the Investor Warrants and
also issued 218,750 Incentive Shares (post split). 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.
 
 F-13
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 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 (post split) 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 (post split). 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 and the
remaining balance of $902,200 was repaid.
 
 Interest
incurred on the 2007 Notes amounted to $499,360 for the year ended December 31,
2007. Amortization of debt discount and beneficial conversion for the year ended
December 31, 2007 amounted to $7,179,492.
 
 (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 “Subscription
Agreement”), between the Company and the investors. Pursuant to the 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 and the remaining balance of $122,092 was repaid.
 
 Interest
incurred on the October 2007 Notes amounted to $10,482 for the year ended
December 31, 2007. Amortization of debt discount for the year ended December 31,
2007 amounted to $145,157.
 
 F-14
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (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.  Certain monies
totaling $1.15 million raised in December 2007 were not released by the escrow
agent until January 2008. Such funds have been classified as Due from Escrow
Agent in the consolidated balance sheet.  The transactions were
effected pursuant to a Subscription Agreement, dated as of December 5, 2007 (the
“2008 Subscription Agreement”), 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. All of the holders of the 2007 Notes and the October 2007 Notes
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 2008
Notes have a term of two years and are 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 Notes accrues at the rate
of 10% per annum and is payable upon conversion, a required repayment or upon
maturity, whichever occurs first, and will continue to accrue until the Notes
are fully converted and/or paid in full.
  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 will be required to prepay 5% of the
aggregate principal amount of the 2008 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 value weighted average price (VWAP) of the Common Stock for the
ten 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”). In addition, provided the Registration Statement is
effective, 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.
   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 following the first
anniversary of issuance if the Registration Statement is not in effect at the
time of exercise.
  The
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.
  F-15
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 To secure
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 $3,006,128 to
reflect the value of the 2008 Investor Warrants issued and in accordance with
EITF No. 00-27, an additional discount of $493,804 to reflect the beneficial
conversion feature of the 2008 Notes. The discounts are being amortized to the
date of maturity unless converted earlier.
 
 At
December 31, 2007, principal of $3,916,160 was due.  Interest incurred
on the 2008 Notes amounted to $7,510 for the year ended December 31, 2007.
Amortization of debt discount and beneficial conversion for the year ended
December 31, 2007 amounted to $33,515.
 
 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 a per share exercise price of $1. The shares underlying these
warrants will not be included in the Registration Statement.
 
 The
annual maturities of long-term debt as of December 31, 2007 are as follows: 2008
- $3,112,320 and 2009 - $2,642,522.
 
 The
Company undertook to file by February 22, 2008, a registration statement 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 and to use reasonable efforts to cause such registration
statement to be declared effective by April 22, 2008 or, in case of a full
review of such registration statement, by May 22, 2008. If (i) the Registration
Statement is not timely filed or declared effective or, if following
effectiveness, the Registration Statement cease to be effective without being
succeeded within 20  business days by an effective replacement for a
period of time which shall exceed 45 days per year, the Investors are entitled
receive an amount equal to two percent (2%) of the aggregate principal amount of
the Notes remaining unconverted and purchase price of shares issued upon
conversion of the 2008 Notes and exercise of the 2008 Investor Warrants for each
thirty (30) days (or part thereof), payable in cash or shares (so long as such
shares can be resold under Rule 144), at the Company’s option. As of the date of
the filing of this annual report on Form 10-KSB, the Company has not filed the
registration statement.
  NOTE 6 - STOCKHOLDERS EQUITY
  On March
9, 2007, the Company’s Board of Directors and the majority of Company’s
stockholders authorized:
 
 ·
              An
      increase in the number of authorized shares of the Company’s Common Stock
      from 25,000,000 to 50,0000 shares;
and
 
  F-16
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  ·
                the
      designation of 20 million shares of the Company’s authorized capital stock
      as preferred stock with the Board of Directors authorized to fix the
      number of shares of any series of preferred stock and to determine the
      designation of any such series, including the authority to determine the
      designation of any such series, including the authority to determine the
      rights, preferences, privileges and restrictions on any such series of
      preferred stock.
 In
conjunction with the above, the Board of Directors of the Company approved a
three-for-one forward stock split. The increase in the number of authorized
shares of Common Stock and designation of preferred stock referred to above
became effective in June 2007. The forward stock split was effected in June
2007
 
 On
November 15, 2007, Company’s Board of Directors and the majority of Company’s
stockholders authorized to further increase the number of shares of Common Stock
from 50 million to 100 million. The increase became effective in March
2008.
 
 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.
 
 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
 
 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.
 
 Option
activity for 2007 is summarized as follows:
 
 WeightedAverageOptions
              
              
              Exercise
      PriceOptions
      outstanding, January 1, 2007
              
              
              --Granted
              
              
              3,890,000
              
              
              $
              1.65Options
      outstanding, December 31, 2007
              
              
              3,890,000
              
              
              $
              1.65Aggregate
      intrinsic value
              
              $
              7,066,863
  F-17
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  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
2007.
 
 
 The
following table summarizes information regarding stock options outstanding at
December 31, 2007:
 
 Weighted
      Average
              
              Options
      ExercisableRemaining
              
              Weighted
      AverageNumber
              
              Contractual
              
              Exercise
              
              Number
              
              ExerciseRanges
      of prices
              
              Outstanding
              
              Life
              
              Price
              
              Exercisable
              
              Price$0.167
      - $0.25
              
              1,006,875
              
              6.25
              
              0.19
              
              1,006,875
              
              $0.19$0.417
      - $0.583
              
              566,250
              
              6.08
              
              0.50
              
              264,375
              
              0.44$0.717
      - $1.083
              
              949,375
              
              5.82
              
              0.93
              
              25,000
              
              1.00$1.167
      - $1.250
              
              367,500
              
              6.17
              
              1.19
              
              -
              
              -$2.50
      - $3.50
              
              500,000
              
              4.68
              
              3.00
              
              250,000
              
              2.50$5.00
      - $7.50
              
              500,000
              
              4.68
              
              6.25
              
              -
              
              -$0.167-$7.50
              
              3,890,000
              
              5.71
              
              $1.65
              
              1,546,250
              
              $0.62
 
 The
weighted average per share fair value of options granted in 2007 was $2.16. 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 -
3.07%-5.09% and a dividend yield of 0%.
  The
Company recognized stock compensation expense of $5,379,103 for the year ended
December 31, 2007. As of December 31, 2007, there was $3,025,618 of total
unrecognized compensation cost related to nonvested options granted. That cost
is expected to be recognized over a weighted-average period of .89
years
 
 Warrants
 
 All of
the warrants were issued in 2007 and no warrants were exercised in
2007.  A summary of the warrants outstanding at December 31, 2007 is
as follows:
 
 Exercise
              ExpirationWarrants
              
              Price
              Date553,232
              
              
              $1.00
              201220,477,656
              
              
              1.67
              20121,383,080
              
              
              2.00
              20121,383,080
              
              
              3.00
              201223,797,048
    F-18
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
6 - INCOME TAXES
 
 At
December 31, 2007, the Company had available approximately $1.39 million of net
operating loss carry forwards, for U.S. income tax purposes which expire in the
years 2024 through 2027.  The Company has foreign net operating loss
carryforwards of $2.2 million with no expiration date.
 
 
 Significant
components of the Company's deferred tax assets at December 31, 2007 are as
follows:
 
 Net
      operating loss carryforwards
              
              $
              983,887Stock
      based compensation
              
              
              1,828,895Patent
              
              
              (275,000
              )Total
      deferred tax assets
              
              
              2,812,782Valuation
      allowance
              
              
              (2,812,782
              )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, 2006, the Company had a valuation allowance of
$62,293.  The increase in the valuation allowance was the result of
increased net operating losses and stock based compensation.
 
 As a
result of the implementation of FIN 48, we recognized no material adjustment to
unrecognized tax benefits. At the adoption date of January 1, 2007, we had
$62,393 of unrecognized tax benefits, all of which would affect our effective
tax rate if recognized. At December 31, 2007 we have $ 2.8 million of
unrecognized tax benefits.
 
 We
recognize interest and penalties related to uncertain tax positions in general
and administrative expense. As of
December 31, 2007, we have not recorded any provisions for accrued interest and
penalties related to uncertain tax positions.
 
 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 2004 through
2006 remain open to examination.
 
 NOTE
7 - RELATED PARTY TRANSACTIONS
 
 The
Company received working capital loans from certain non-management affiliated
stockholders of IDO Inc. (see Note 3).  Amounts owed on the loans
aggregated to $44,826 at December 31, 2007. Interest incurred on the loans
amounted to $36,329 for the year ended December 31, 2007.
 
 IDO Ltd.
rents office space from a company wholly-owned by one of its directors, who is
also its chief scientist.  See Note 8.
  One of
the individual investors who advanced the Company $200,000 in connection with
the private placement of the notes referred to in Note 3 above is the spouse of
Ms. Irit Reiner, one of the Company’s non-employee directors.
 
 F-19
 IDO
SECURITY INC.
 (formerly
The Medical Exchange, Inc.)
 (A
development stage company)
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
8 - COMMITMENTS
 
 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 will be paid
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.  Such deferral of salary ended
effective January 1, 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
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 will be 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 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. Under the agreement, Mr. Shabat will be 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).
  Consulting
Agreements
  On June
29, 2007, Mr. Jorge Wolf was appointed as Manager of Business Development for
the Company and IDO Ltd. In connection with his appointment, the Company
and IDO Ltd. each entered into a consultancy agreement with Wolf pursuant to
which he was to be paid a monthly fee of $5,286 under each agreement. Each of
the consulting agreements originally had an initial term of two years. Under the
agreements with the Company, Mr. Wolf is entitled to options to purchase up to
1,250,000 shares of the Company’s Common Stock at per share exercise prices
ranging from $0.167 to $1.167. As of March 10, 2008, Mr. Wolf ceased
performing services as the companies' Manager of Business
Development.  Mr. Wolf continued to perform services to the companies
as an outside consultant at a monthly rate at which he was paid under the
agreements with him while we and Mr. Wolf attempted to negotiate an agreement
relating to the termination of his services and related matters.  On
April 10, 2008, Mr. Wolf advised the Company that he intended to commence legal
action with respect to purported breaches by the companies of contractual
obligations to him.   We believe that Mr. Wolf's position is
without merit and it is our intention to vigorously defend ourselves against any
claim by Mr. Wolf.
  Operating
Lease
 
 IDO
Ltd.  leases office space under a sub-lease for a one-year period
expiring in March 2008 with a renewal option for four successive one year
periods. As of the filing of the annual report, the Company is leasing the
premises on a month-to-month basis and is currently exploring alternative
premises. Rental fees per
month through March 2008 were in the amount of $1,200 with the addition of
municipal taxes and management fees.  The monthly rent increased to
$1,256 starting in April 2008.
 
 Aggregate
rent expenses amounted to $ 17,363 for the year ended December 31,
2007.
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