UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-K


MARK ONE:






x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




Commission file number : 0-51170




IDO SECURITY INC.


(Exact name of registrant as specified in its charter)


Nevada

38-3762886(State or other Jurisdiction

of Incorporation or Organization)

(I.R.S. Employer

Identification No.)17 State Street

10004New York, New York

(Zip Code)(Address of Principal Executive Offices)




(646) 224-1234


(Registrant’s telephone number, including area code)




Securities registered under Section 12 (b) of the Exchange Act: None


Securities registered under Section 12 (g) of the Exchange Act: Common Stock, $.001 per share




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




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




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




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation  S-T ($232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes o No o




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o




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




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




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




The registrant had 2,294,029,844 shares of common stock, par value $0.001 per share, outstanding as of March 31, 2010. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of $0.00081 of the common stock on the OTC Bulletin Board on June 30, 2009, was approximately $1.4 million.










IDO SECURITY INC.


2009 FORM 10-K ANNUAL REPORT


TABLE OF CONTENTS


PagePART IItem 1.
Business

4Item 1a.
Risk Factors

9Item 1b.
Unresolved Staff Comments

14Item 2.
Properties

14Item 3.
Legal Proceedings

15Item 4.
Removed and Reserved

15PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15Item 6.
Selected Financial Data

16Item 7.
Management Discussion and Analysis of Financial Condition and Results of Operation.

16Item 7a.
Quantitative and qualitative disclosures about market risk.

20Item 8.
Financial Statements

20Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

20Item 9A(T).
Controls and Procedures

20Item 9b.
Other Information

21PART IIIItem 10.
Directors and Executive Officers and Corporate Governance

22Item 11.
Executive Compensation

24Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26Item 13.
Certain Relationships and Related Transactions and Director Independence

27Item 14.
Principal Accounting Fees and Services

27PART IVItem 15.
Exhibits and Financial Statement Schedules

28SIGNATURES


30


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FORWARD LOOKING STATEMENTS




THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. CERTAIN STATEMENTS MADE IN THIS DISCUSSION ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY’S INTENDED BUSINESS PLANS; EXPECTATIONS AS TO CONTINUING IN BUSINESS; ABILITY TO RAISE EXISTING FUNDS; 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.




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ITEM1. BUSINESS




OVERVIEW




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




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




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




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




We need to raise additional funds on an immediate basis in order to meet our on-going operating requirements and to realize our business plan. In response to the deteriorating global economic conditions that began in 2008, we have taken certain measures in an effort to reduce operating expenses and conserve our cash resources. Beginning in April 2008, we have significantly curtailed our non-essential product design and development, marketing activities. Our senior and other employees have agreed to defer, in part, salaries and benefits. As of March 31, 2010, we had 10 employees working on a full-time basis. If we are unable to raise capital on an immediate basis, it may be necessary to for us to take further measures to reduce our cash burn including laying-off additional personnel, further curtail marketing efforts or cease operations entirely. We have received from representatives of certain prospective investors a non-binding proposal with respect to convertible debt based financing in a significant amount, subject to due diligence and other conditions, which our board is currently studying. Presently, we do not have any financing commitment from any person, and there can be no assurance that additional capital will be available to us (from these or any other persons) on commercially acceptable terms or at all.These conditions raise substantial doubt about our ability to continue as a going concern.




The MagShoe has been deployed and is in operation in various countries including Israel, China, Spain, Poland, The Czech Republic, Australia, the Philippines and Germany.  Subject to raising additional capital, we expect to actively pursue certain Requests for Proposals ( RFP)and Requests for Information ( RFI) for footwear scanners that we are beginning to receive from sources in various countries.  We believe that these RFPs further validate the need for a footwear scanning device similar to the MagShoe. In addition, in January 2006, the MagShoe was approved for use by the Department for Transport in the United Kingdom, after field trials were conducted for the Home Office’s Police Scientific Development Branch. In addition, we have been certified by the International Organization for Standardization (“ISO”) under ISO 9001:2000 compliance for the design, development and manufacture of electronic, electro-optic and electro-mechanical systems. In December of 2008, we received our certification from the Underwriter’s Laboratory (UL) in the United States, which signifies that the MagShoe is safe for sale in the United States.





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




INDUSTRY BACKGROUND




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




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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.




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




The MagShoe is manufactured by our subsidiary, IDO Ltd., at its facilities presently located in Rishon Le Zion, Israel. Our manufacturing plant in Israel has been certified by the International Organization for Standardization (“ISO”). Subject to raising additional capital and identifying the appropriate source party, we anticipate that during 2010, the MagShoe will also be manufactured by an outside manufacturer, thereby enhancing our ability to turn out significant quantities of MagShoe as needed.




5




Status of the MagShoe




As noted above, the MagShoe has been deployed and is in operation in various countries including Israel, China, Spain, Poland, The Czech Republic, Australia, the Philippines and Germany.  Subject to raising additional capital, we expect to actively pursue certain Requests for Proposals (RFP) and Requests for Information (RFI) for footwear scanners that we are beginning to receive from sources in various countries.  We believe that these RFPs further validate the need for a footwear scanning device similar to the MagShoe. In addition, in January 2006, the MagShoe was approved for use by the Department for Transport in the United Kingdom, after field trials were conducted for the Home Office’s Police Scientific Development Branch. In addition, we have been certified by the International Organization for Standardization (“ISO”) under ISO 9001:2000 compliance for the design, development and manufacture of electronic, electro-optic and electro-mechanical systems. In December of 2008, the Company received its certification from the Underwriter’s Laboratory (UL) in the United States, which signifies that the MagShoe is safe for sale in the United States.




In July 2009, we introduced a Network Management Control System (NMC-3), facilitating secure, centralized management of multiple MagShoe devices across one or more facilities. The NMC-3 system remotely manages up to 300 MagShoe devices simultaneously from a single site via a secure Ethernet connection, while still allowing each device to be operated individually. This provides an accurate and up-to-date view of the entire system state, offering immediate status and oversight relating activity on all installed units, as well as personnel and usage statistics. NMC-3 collects measurement information across the network and stores it in a central database, offering a range of data analysis tools for users to evaluate unit performance over a given time period, up to a full year. The resulting reports can be exported in Microsoft Excel-compatible format for simple viewing and assessment. In August 2009, the Transportation Security Administration announced that its goal is to put out an RFP during the next calendar year and to test and evaluate technologies in order to decide on a procurement plan. We plan to follow this procedure closely and to attempt to demonstrate the technological advances made by the current MagShoe in metal and non ferrous metal weapons detection in addition to our record keeping capabilities and cost saving measures.




In September 2009, IDO demonstrated MagShoe to a delegate of U.S.A. and Canadian airport executives. In December of 2009, we entered into a partnership with Lotan security, an Isreali company specializing in security solutions for India and the Far East. This was followed with another joint marketing agreement with SJ Security of Switzerland. IDO is working diligently to establish sales through the efforts of it’s growing distributor network. Additionally, in December 2009, we were granted our second patent and our first from the State of Israel.




The failed attempt in December 2009 by the “underwear bomber” to detonate an explosive device on a United States commercial passenger aircraft bound for Detroit from the Netherlands, refocused attention on the still existing holes in the airport security screening process. As a result of this and other continuing security breaches, certain RFI’S and RFP’S have once again begun to be issued. These include an RFI from the TSA (Transportation Security Administration) as well as an RFP from Spain where, in March 2009, we demonstrated the latest model of MagShoe which increase its detection capabilities from 20 centimeters to 45 centimeters. This design development was requested by several countries.




Notwithstanding these developments, our marketing efforts have been hampered. Our subsidiary, IDO Security Ltd., has experienced unforeseen and lengthy delays in obtaining from the Ministry of Defense of the State of Israel the requisite approvals needed for shipment of our MagShoe devices in respect of orders received. These delays have prevented us from making timely deliveries on orders received.  We are working to obtain the needed approvals and to streamline the process in the future. No assurance can however be given that we will be successful in these efforts. The delay in shipments  have contributed, in part, to lack of revenues for the three months period covered by this report, as revenues are not recorded prior to shipment.




Subject to raising additional working capital, we intend to pursue our business plan over the next twelve months with respect to product development and enhancement and field testing, as well as initial marketing efforts. We have been expanding our contact base and are aggressively seeking collaborative arrangements worldwide for our MagShoe product. In May 2008, we selected a leading contract manufacturer for high volume production of MagShoe and in June 2008, we announced the availability of an elite network of industry leading distributors and systems integrators for the MagShoe device which, together with the high volume production capabilities that we established in the second quarter of 2008, significantly strengthens our infrastructure to commercially manufacture and distribute the MagShoe device. In July 2008, we announced our entry into a collaborative relationship with Bryant Integrated Technologies, a leading security and consulting firm, to lead our product distribution efforts in the United States, and with Hwan Technology and Trade Co., one of China’s largest distributors of walk-through metal detectors, to lead our distribution efforts in China. Shortly thereafter, we announced our initial sale of the MagShoe Unit (through Bryant) in the United States to a leading commercial cruise line which intends to use the MagShoe device to significantly reduce passenger waiting lines while improving security. In addition, as a result of the recent terror attacks in Mumbai, India, we have targeted that area for special attention by our marketing department. This follows a successful test of the MagShoe at both the Mumbai and New Delhi airport several months ago. Recently, in April 2009, we announced the delivery of multiple MagShoe devices to the Xinjiang Airport in Northwestern China as well as initial sales of MagShoe devices to a large United States based international cruise line where the devices are to be used in the cargo holders so as to primarily prevent theft of valuables. In August 2009, we announced a distribution arrangement in Italy with one of that nation’s recognized providers of system integration for physical and logistical security.




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.




6




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 need to raise additional capital in order to realize our business plan and effectuate the above strategy. See “Risk Factors.”




MARKETING PLAN AND SALES ORGANIZATION




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




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




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




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




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




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




According to our marketing plan, we have and will continue to run field trials and pilot demonstrations. These are directed toward a variety of goals including developing and demonstrating MagShoe’s capabilities and applications. As of March 2010, we have completed a series of pilot programs at strategic locations of the type mentioned above.




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




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




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SUPPLIERS




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




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




SERVICE AND SUPPORT




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




PATENTS AND PROPIETARY RIGHTS




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




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




We hold two patents. One patent was issued by the United States Patent and Trademark Office (“USPTO”) and the other by the State of Israel. Both these patents cove various aspects of our unique technology for the detection of metal objects in and around the areas of the shoes, ankles and lower extremities.




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




COMPETITION




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




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




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




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




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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




During our 2009 and 2008 fiscal years, we incurred $290,995 and $390,988, respectively, on the research and development of the MagShoe product.




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.





ITEM 1A. RISK FACTORS




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




RISKS CONCERNING OUR BUSINESS




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




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





Any additional equity based financing will likely require that we increase the number of our authorized but unissued common stock beyond the currently authorized 5,000,000,000 shares of common stock. Such increase in the number of authorized shares will require the approval or consent of a majority of our issued and outstanding common stock. No assurance can be provided that the requisite shareholder approval/consent will be obtained.




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. As of December 31, 2009, we have incurred losses totaling $29.5 million. We believe that we will continue to incur net losses for the foreseeable future as we continue to further develop and promote the MagShoe and related products. We cannot assure you that we will achieve or sustain profitability or that our operating losses will not increase in the future. If we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. We expect to expend substantial financial resources on research and development, marketing and administration as we continue to develop our products. These expenditures will necessarily precede the realization of substantial revenues from the sales of our single product line, if any, which may result in future operating losses.




The report of our independent registered public accounting firm for our financial statements for the year ended December 31, 2009 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.




9




FUTURE ECONOMIC CONDITIONS IN THE U.S. AND GLOBAL MARKETS MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION THAT WE CURRENTLY CANNOT PREDICT.




The U.S. and other global world economies are slowly recovering from a recession that began in 2008 and extended into 2009. Although economic growth has resumed, it remains modest and the timing of an economic recovery is uncertain. There are likely to be significant long-term effects resulting from the recession and credit market crisis, including a future global economic growth rate that is slower than what was experienced in recent years. Unemployment rates remain high and businesses and consumer confidence levels have not yet fully recovered to pre-recession levels. In addition, more volatility may occur before a sustainable, yet lower, growth rate is achieved. This could result in reductions in sales of our products and services, slower adoption of new technologies and increase price competition. Any of these events would likely harm our business, results of operations and financial conditions.




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




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




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




We currently have outstanding approximately $5 million of our 10% secured convertible promissory notes due December 2010 (the “2010 Notes”), $1.5 million of Convertible Promissory Notes due between October 2010 and August 2011 (“the “2011 Notes”; together with the December 2010 Notes, the “Investor Notes”) and approximately $6.5 million in stated value of Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). We are required to make monthly payments with respect to the accrued principal and interest on the notes (dividends, in the case of the Series A Preferred Stock). These payments may be made, at our option, in shares of our Common Stock at a rate equal to 75% of the average of the closing bid prices of the common stock for the five trading days preceding the payment date (which shall in no event exceed $0.15 per share).




There is an inverse relationship between our stock price and the number of shares issuable upon conversion of these securities. That is, the higher the market price of our Common stock at the time a Debenture is converted or a payment is made with respect to a Series A Preferred Stock, the fewer shares we would be required to issue, and the lower the market price of our Common Stock at the time payment is made with respect to a security, the more shares we would be required to issue. In 2009, we issued 1,936,834,520  shares of our common stock in payment of $1,203,254  in principal and accrued interest in respect of the convertible promissory notes, at a average per share price of $.00062. Between January 1, 2010 and March 31, 2010 we issued 183,742,190 shares of our common stock in payment of $339,923 in principal of 2010 Notes and 60,887,503 common shares for $112,642 of accrued interest on the Notes. In addition, between January 1, 2010 and  March 31, 2010, we issued 66,483,163 shares of our common stock for the conversion of Series A Preferred Stock.





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:




10




●
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.





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





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




WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY.




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




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




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




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




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




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




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.




11





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




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




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




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




We are independently developing, manufacturing, marketing and distributing our MagShoe product. Once our sales increase, these activities may require additional resources and skills that we will need to secure. There is no assurance that we will be able to raise sufficient capital or attract and retain skilled personnel to enable us to ramp up manufacturing, develop new products and market these products. Thus, there can be no assurance that we will be able to fully commercialize the MagShoe or any future products.




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




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




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.Our independent auditors will be required to issue an opinion on the effectiveness of our internal control over financial reporting for our annual report on Form 10-K for our fiscal year ending December 31, 2010. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. It is possible that 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 are uncertain as to what impact a conclusion that deficiencies exist in our internal control over financial reporting would have on the trading price of our common stock.




12




RISKS ASSOCIATED WITH OUR SECURITIES AND CAPITAL STRUCTURE




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




As of March 31, 2010, we had 5,000,000,000 authorized shares of Common Stock, of which 2,294,029,844 shares of our Common Stock were issued and outstanding as of such date. Except with respect to the Investor Notes and the Series A Preferred Stock, approximately 18,000,000 shares have been reserved for issuance upon exercise or conversion of outstanding options, warrants and convertible securities as of March 31, 2010. The effective conversion price of the Investor Notes and the Series A Preferred Stock is variable, and is based upon a 25% discount to the average of the closing bid prices for our common stock for the five trading days preceding the conversion date (not to exceed $0.15 per share). The occurrence of any such event or the exercise or conversion of any of the options, warrants or convertible securities described above would dilute the interest in our company represented by each share of Common Stock and may adversely affect the prevailing market price of our Common Stock.




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




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




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




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




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




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




OUR COMMON STOCK IS SUBJECT TO THE PENNY STOCK RULES, YOU MAY EXPERIENCE SUBSTANTIAL DIFFICULTY IN SELLING YOUR SHARES. ADDITIONAL BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON STOCK.




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




13




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




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




RISKS RELATED TO OPERATIONS IN ISRAEL




WE MAY BE ADVERSELY AFFECTED FROM FOREIGN CURRENCY MARKET FLUCTUATIONS.




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




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




Most of the subsidiary’s laboratory capacity, principal research and development and manufacturing facilities are located in the State of Israel and accordingly, all these may be affected by economic, political and military conditions in the State of Israel. In addition, fire, natural disaster or any other cause of material disruption in our operation in this location could have a material adverse effect on our business, financial condition and operating results. As discussed above, to remain competitive in the Homeland Security industry, we must respond quickly to technological developments. Damage to our facility in Israel could cause serious delays in the development of new products and services and, therefore, could adversely affect our business. In addition, the particular risks relating to our location in Israel are described below.




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




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




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.





ITEMIB. UNRESOLVED STAFF COMMENTS




Not Applicable.





ITEM2. PROPERTIES




We do not own any real property. Our corporate offices are located at 17 State Street, New York, NY 10004. We paid $40,000 for the use of the office space for fiscal years 2008 and 2009. Our payments for 2010 will also aggregate $40,000.




Through November 15, 2008, we leased office space comprised of 224 square meters in Rishon Le’Zion in Israel, for administrative offices for our subsidiary IDO Ltd., under a sub-lease at the monthly rental amount of $1,256. The sub-lessor was a private company whose sole shareholder is Mr. Gil Stiss, IDO Ltd.’s former Chief Scientist and a director of IDO Ltd.




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




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.





ITEM3. LEGAL PROCEEDINGS




(i) In our quarterly report on Form 10-Q for the three months ended September 30, 2009, we first disclosed  that on June 22, 2009, our wholly-owned subsidiary, IDO Ltd., filed an action in the Labor Court, in Tel Aviv, Israel, against one of its former officers and directors. The action asserts claims based on material non-compliance by the former officer with the terms of the employment agreement between him and our subsidiary.  The action seeks disgorgement of amounts remitted to the former officer by the subsidiary under the employment agreement in the approximate amount of  1,356,000 NIS (approximately $366,000 based on the exchange rate in effect at the time of the filing of this report on Form 10-K) voiding the agreement, other equitable relief, and costs and disbursements, including attorneys’ fees. Previously, on May 10, 2009, the former officer/director resigned from all positions held with the subsidiary purportedly for “just cause” under the employment agreement. The resignation followed a request by the subsidiary that the former officer/director attend a meeting with management relating to his performance under the agreement, which request was refused.




An answer was filed on April 13, 2010 on behalf of the former officer/director wherein he denied all allegations.




(ii) In our quarterly report on Form 10-Q for the three months ended September 30, 2009, we first disclosed that on October 10, 2009, the above referenced former officer/director filed an action in the Labor Court in Tel-Aviv against IDO Ltd., as well as a director and the General Manager of IDO Ltd.  The action seeks the payment of amounts purportedly due and payable to the officer/director under his employment agreement with IDO Ltd. in the approximate amount of 1,481,163 NIS  (approximately $393,000 based on the exchange rate in effect at the time of the filing of this report on Form 10-K). In connection with the suit, on November 5, 2009, IDO Ltd. received notice that a lien was placed on its assets by the former officer/director. The lien on the assets was released in November 2009 and in January 2010, we filed an answer whereby we denied all allegations. As of the date of the filing of this report on Form 10-K, no hearing date has yet been set.




The Company believes that these claims are without foundation and that it has meritorious defenses to them. The Company intends to aggressively defend its interests.





ITEM4. REMOVED AND RESERVED




P ART II





ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Our Common Stock is quoted on the OTC Bulletin Board under the symbol “IDOI.” Until May 2007, there was only sporadic trading in our stock. As of May 31, 2007, a more active though limited trading market developed. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our Common Stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future price performance.




The following table shows the quarterly high and low bid prices for our Common Stock over the last completed quarter of 2009 and 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.


LOW


HIGHYear Ended December 31, 2009First Quarter

$
0.06


$
0.005Second Quarter

$
0.00181


$
0.00031Third Quarter

$
0.00938


$
0.00113Fourth Quarter

$
0.0055


$
0.002Year Ended December 31, 2008First Quarter

$
1.41


$
3.02Second Quarter

$
1.30


$
1.84Third Quarter

$
0.15


$
1.75Fourth Quarter

$
0.06


$
0.35




15




As of March 31, 2010, there were 30 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.




Sales of Securities




The following paragraph sets forth certain information with respect to all securities sold by us during the three months ended December 31, 2009 without registration under the Securities Act:




We issued 18 month secured convertible promissory notes in the principal amount of $290,000, 7,250 shares of Series A Preferred Stock and five  year warrants to purchase, in the aggregate, 1,933,333 shares of our Common Stock at a per share price of $0.25.




The offering of  these securities was completed through a private placement and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.  In claiming the exemption under Section 4(2), the Company relied in part on the following facts: (1) the offers and sales involved existing investors; (2) the investors had access to information regarding the Company; (3) each investor represented that it (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risk of an investment in the Company, (b) was able to bear the economic risk of an investment in the Company and (c) acquired the shares for its own account in a transaction not involving any general solicitation or general advertising, and not with a view to the distribution thereof; and (4) a restrictive legend was placed on each certificate or other instrument evidencing these securities.





ITEM6. SELECTED FINANCIAL DATA




Not Applicable.





ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION




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




OVERVIEW




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




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




We need to raise additional funds on an immediate basis in order to meet our on-going operating requirements and to realize our business plan. In response to the deteriorating global economic conditions that began in 2008, we have taken certain measures in an effort to reduce operating expenses and conserve our cash resources. Beginning in April 2008, we have significantly curtailed our non-essential product design and development. Our senior and other employees have agrees to, defer, in part, salaries and benefits. As of March 31, 2010, we had 10 employees working on a full-time basis. If we are unable to raise capital on an immediate basis, it may be necessary to for us to take further cost cutting measures to reduce our cash burn including laying-off additional personnel. No assurance can be given that we will be able to raise the needed capital. These conditions raise substantial doubt about our ability to continue as a going concern.




16




Subject to raising additional working capital, we intend to pursue our business plan over the next twelve months with respect to product development and enhancement and field testing, as well as initial marketing efforts. We have been expanding our contact base and are aggressively seeking collaborative arrangements worldwide for our MagShoe product. In May 2008, we selected a leading contract manufacturer for high volume production of MagShoe and in June 2008, we announced the availability of an elite network of industry leading distributors and systems integrators for the MagShoe device which, together with the high volume production capabilities that we established in the second quarter of 2008, significantly strengthens our infrastructure to commercially manufacture and distribute the MagShoe device. In July 2008, we announced our entry into a collaborative relationship with Bryant Integrated Technologies, a leading security and consulting firm, to lead our product distribution efforts in the United States, and with Hwan Technology and Trade Co., one of China’s largest distributors of walk-through metal detectors, to lead our distribution efforts in China. Shortly thereafter, we announced our initial sale of the MagShoe Unit (through Bryant) in the United States to a leading commercial cruise line which intends to use the MagShoe device to significantly reduce passenger waiting lines while improving security. In addition, as a result of the recent terror attacks in Mumbai, India, we have targeted that area for special attention by our marketing department. This follows a successful test of the MagShoe at both the Mumbai and New Delhi airport several months ago. Recently, in April 2009, we announced the delivery of multiple MagShoe devices to the Xinjiang Airport in Northwestern China as well as initial sales of MagShoe devices to a large United States based international cruise line where the devices are to be used in the cargo holders so as to primarily prevent theft of valuables. In August 2009, we announced a distribution arrangement in Italy with one of that nation’s recognized providers of system integration for physical and logistical security.




CRITICAL ACCOUNTING POLICIES AND ESTIMATES




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




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




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




RESULTS OF OPERATIONS




COMPARISON OF THE YEAR ENDED DECEMBER 31, 2009 (the “2009 Period”) TO THE YEAR ENDED DECEMBER 31, 2008 (the “2008 Period”)





Revenues and cost of goods sold – Revenues for the 2009 Period were $82,721 compared to $326,780 for 2008 Period, all of which were derived from sales of the MagShoe units. Gross profit in 2009 was $14,529. In 2008 cost of goods sold exceeded sales resulting in gross losses of $12,483. Because we were a development stage company for most of the 2008 Period, the allocation of fixed manufacturing costs to cost of goods resulted in negative gross profit.




The decrease in revenues and cost of goods sold during the 2009 Period as compared to the 2008 Period is primarily attributable to delays experienced by our subsidiary in obtaining requisite approval from the Ministry of Defense of the State of Israel prior to shipment in respect of orders that we received. We are taking all commercially reasonable efforts to obtain the needed approvals and to avoid this problem in the future.  In addition, the Company is focusing its efforts on developing the next generation Magshoe which is scheduled to be launched during the second quarter of  2010, subject to our raising additional capital.




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 $290,995 and $390,988 in 2009 and 2008, respectively. The decrease in research and development expenses is principally attributable to The decrease in research and development expenses during the 2009 periods as compared to the corresponding periods in 2008 is principally attributable to our product, the MagShoe device, being substantially developed and needing less research and development..




Selling, general and administrative expenses - We incurred selling, general and administrative expenses of $1,310,676 and $2,148,752 for 2009 and 2008, respectively. These expenses primarily consist of salaries/fees and other related costs for personnel in executive and other administrative functions and consultants. Other significant costs include professional fees for legal, accounting and other services. The decrease in selling, general and administrative expenses during the 2009 period as compared to the corresponding period in 2008 is principally attributable to reduced costs for consultants as well as the liquidated damages totaling $516,137 in the 2008 Period that we incurred in respect of the non-filing of a registration statement.




17




Stock Based Compensation- Between March and September 2007, we granted stock options to employees and consultants valued at $8.4 million. In April 2008, we granted additional stock options to employees valued at $307,000. The value of these options was amortized over the vesting periods of each grant. Stock based compensation totaled 157,319 and $546,068 for the year ended December 31, 2009 and 2008, respectively. Stock-based compensation is non-cash and, therefore, has no impact on cash flow or liquidity.




Interest expense - Interest expense was $602,906 and $655,810 for 2009 and 2008, respectively. The interest related primarily to the interest on the convertible promissory notes.




Amortizations –Amortization costs 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, 2008 and 2009 and are included in interest expense in the statement of operations. These costs are amortized to the date of maturity of the debt unless converted earlier. We recorded amortization of $2,482,866 and $3,440,038, for 2009 and 2008, respectively




Loss on Extinguishment of Debt – We accounted for the modification of our 2008 Notes as an extinguishment of debt. We deemed the terms of the amendment to be substantially different and treated the Convertible Promissory Notes as extinguished and exchanged for new notes. As such, it was necessary to reflect the Convertible Promissory Notes at fair market value and record a loss on extinguishment of debt of approximately $991,000 in 2008.





Preferred Stock Dividends –As part of our private placement of the December 2008 Notes, in 2009 and 2008 we issued 35,814 shares and 26,664 shares,  respectively of newly created Series A Preferred Stock. The shares accrue a dividend of 10% per annum. The dividends are cumulative commencing on the issue date whether or not declared. For 2009 and 2008, we declared dividends totaling $386,159 and $44,562, respectively.  For financial reporting purposes, we recorded a discount of $2,561,935 to reflect the difference in the amount of proceeds allocable to the Series A Preferred Stock in the offering based on relative fair values and the stated value.. The discounts were being amortized as deemed dividends on preferred stock to the date of maturity unless converted earlier. Commencing on July 1, 2009, the Series A Preferred Stock is now being classified as a liability. As such, all dividends accrued and/or paid and any accretions are now be classified as part of interest expense and are no longer classified as preferred stock dividends and deemed dividends.  For 2009, dividends and deemed dividends totaled $2,374,066, of which $1,518,882 is included in interest expense. For 2008, dividends and deemed dividends totaled $284,219.




Net Loss - We had a net loss of $6,403,416 for the year ended December 31, 2009 as compared to $8,103,960 for the year ended December 31, 2008




LIQUIDITY AND CAPITAL RESOURCES




We need to raise additional funds on an immediate basis in order to be able to satisfy our cash requirements and fulfill our business plan over the next twelve months. In response to the general deterioration in the general economic environment which began in 2008, we have taken several cost-cutting measures. We have laid-off a number of our employees and as of March 31, 2010, we have 10 full time remaining employees on staff. Additionally, we have been forced to delay payments to most of our vendors and defer salaries for management and employees. Nonetheless, without raising additional funds on an immediate basis, whether through the issuance of our securities, licensing fees for our technology or otherwise, we will also not be able to maintain operations as presently conducted. As previously disclosed in our periodic reports, we have been actively seeking additional capital. We have received from representatives of certain prospective investors a non-binding proposal with respect to convertible debt based financing in a significant amount, subject to due diligence and other conditions, which our board is currently studying. Presently, we do 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.At the present time, we have no commitments for financing and no assurance can be given that we will be able to raise capital (from these or any other persons) on commercially acceptable terms or at all. Even if we raise cash to meet our immediate working capital needs, our cash needs could be heavier than anticipated in which case we could be forced to raise additional capital. Our auditors included a “going concern” qualification in their auditors’ report for the year ended December 31, 2009. Such “going concern” qualification may make it more difficult for us to raise funds when needed. Moreover, the current economic situation may further complicate our capital raising efforts. If we are unable to raise additional capital on an immediate basis, we may be forced lay-off additional employees and either restructure or cease operations entirely.




As of December 31, 2009, we had a cash balance of $176,559 compared to $391,569 at December 31, 2008.




Cash used in operating activities was $1,353,360 for the year ended December 31, 2009. The decrease in cash was primarily attributable to funding the loss for the period.




Cash used in investing activities was $38,839 for the year ended December 31, 2009 attributable to the addition of property and equipment.




Cash provided by financing activities was $1,177,189 for the year ended December 31, 2009. We received proceeds of $1,332,500 from the issuance of the December 2008 Notes.  We repaid outstanding advances on our wholly-owned subsidiary’s line of credit totaling $155,311




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




18




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”) which were originally scheduled to mature in December 2009. We received net proceeds of $1million from the proceeds of the 2008 Notes, after the payment of offering related fees and expenses and after the repayment of bridge loans then due and owing. Holders of certain notes outstanding participated in the private placement and the gross proceeds raised include amounts that we owed to these investors in the approximate amount of $2.7 million that were offset against such investors’ respective purchases of the 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 are 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 average closing bid price of the Common Stock for the five trading days ending on the trading day immediately preceding the Scheduled Payment Date, provided that at the time of payment there is then in effect an effective Registration Statement (as defined below) or the shares so issued can be resold under Rule 144 promulgated under the Securities Act of 1933, as amended (“Rule 144”); provided, that, if such monthly amount is to be paid with shares of Common Stock, it will be automatically deferred unless the holder gives notice to the Company at least five (5) days before a repayment date that the holder will accept payment of such monthly amount in the form of Common Stock. During 2009, we repaid principal and accrued interest in the amount of $1,103,139 in the form of 1,732,727,414 shares of our Common Stock.  As of December 31, 2009, approximately $4.36 million remained outstanding on the 2008 Notes. Additionally, as of December 31, 2009, we owed approximately $516,000 to these investors as liquidated damages in respect of the non-filing of a registration statement in respect of the resale of the Common Stock underlying the 2008 Notes and the warrants issued in connection therewith.The 2008 Notes matured on December 31, 2009, without being paid out in accordance with the terms of the Notes. Subsequently, in March 2010, the holders of approximately 80% of the outstanding principal amount of the 2008 Notes extended to December 31, 2010 the maturity date of the 2008 Notes.  In consideration of their consents we have agreed to issue to them Series A Preferred Shares in a stated amount equal to 10% of the outstanding balance of their Notes. With respect to the holders of the remaining 20% of the principal amount of the 2008 Notes who did not agree to the extension of the maturity date, we issued 164,648,044 shares of the Company’s Common Stock to retire $304,599 of principal and interest. Due to the conversion caps contained in the notes, we cannot issue shares to a note holder if, following such issuance, such note holder (or its affiliates) will hold, in the aggregate, over 4.9% of our then issued and outstanding shares of Common Stock. Accordingly, $587,990 of principal amount held by non consenting holders currently remains payable.




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




Pursuant to an offering dated October 30, 2008 to the holders of the 2008 Notes, on December 17, 2008, the Company realized net proceeds of $548,474, before the payment of offering related fees and expenses, from a private placement of $1,066,540 in principal amount of Secured Convertible Promissory Note originally due April 20, 2010 (“collectively the “December 2008 Notes”) and Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). The amount raised included $478,816 in principal and accreted interest on the April-November 2008 Loans that were offset against such purchasers’ respective purchases of the Purchased Securities. Commencing on April 30, 2009, and thereafter on the last day of each subsequent calendar month until the principal amount of the December 2008 Notes has been paid in full (each a “Scheduled “Repayment Date”), we are required to prepay 8.33% of the aggregate principal amount of the December 2008 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date. The amount may be paid, at the Company’s election, either in (i) cash, at 110% of the principal amount due and 100% of all other amounts due or (ii) shares of Common Stock at a rate equal to the lower of (A) the Fixed Conversion Price of $0.15 or (B) 75% of the average of the closing bid price of the Common Stock for the five trading days ending on the trading day immediately preceding the Scheduled Repayment Date; provided, that, if such monthly amount is to be paid with shares of Common Stock, it will be automatically deferred unless the holder gives notice to the Company at least five (5) days before a repayment date that the holder will accept payment of such monthly amount in the form of Common Stock. Commencing on April 30, 2009, and thereafter on the last day of each subsequent calendar month, we are also required to redeem 8.33% of the aggregate outstanding stated value of the Series A Preferred Stock until the stated value and all accrued dividends have been paid in full. Redemption payments on the Series A Preferred Stock may be made, at our election, in cash or shares of Common Stock, in the same manner as provided above with respect to the December 2008 Notes, subject to automatic deferral in the case of payment in shares unless the holder gives notice to us of such holder’s agreement to accept payment in shares. During 2009, we repaid principal and accrued interest in the amount of $100,115 on the December 2008 Notes in the form of 204,107,106 shares of our Common Stock. As of December 31, 2009, approximately $1 million remains outstanding on the December 2008 Notes. None of the Series A Preferred Stock were redeemed.  The December 2008 Notes are scheduled to mature on April 30, 2010. Subsequently, in March 2010, the holders of approximately 72% of the outstanding principal amount of the December 2008 Notes extended the maturity date of the December 2008 Notes to December 31, 2010.




Between April 28, 2009 and December 31, 2009, we raised net proceeds of $1,432,500 from the private placement to certain holders of the December 2008 Notes of $1,432,500 in principal amount of Secured Convertible Promissory Notes due 18 months following issuance and 35,813 shares of Series A Preferred Stock. In connection with such investment, we issued to the providers of these funds warrants to purchase in the aggregate up to 9,550,000 shares of our Common Stock at per share exercise price equal to $0.25. The warrants are exercisable through the fifth anniversary of issuance. The placement of the notes, the Series A Preferred Stock and the warrants were effected on substantive terms and condition identical to the placement consummated in December 2008 and discussed above. In April 2009, the holders of the 2008 Notes and the December 2008 Notes consented to the placement of secured convertible notes, Series A Preferred Stock and warrants, all on the substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed above, for aggregate gross proceeds to not exceed $1.5 million. Proceeds of these funds were used to fund our continuing operations as well as pay down amounts outstanding under a line of credit with a commercial bank in the approximate amount of $267,000 for the benefit of our subsidiary IDO Ltd. In January 2010 and March 2010, we raised an additional net proceeds of $100,940, which included the repayment of certain accrued expenses, from the private placement to certain holders of the December 2008 Notes. We issued $100,940 in principal amount of notes and 2,524 shares of Series A Preferred Stock. In connection with such investment, we issued to the holders of the notes, warrants to purchase in the aggregate up to 672,933 shares of the Company’s Common Stock at per share exercise price equal to $0.25.




19




In February and March 2010, we received short-term loans from two of the 2008 Investors in the principal amount of $200,000. The outstanding balances bear interest at the rate of 10% per annum are due at the earlier of 150 days  or the closing of a new investment.




RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS




In October 2009, the Financial Accounting Standards Board (FASB) issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements




In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements.





In January 2010, the FASB issued amended standards that require additional fair value disclosures. These amended standards require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. We do not expect these new standards to significantly impact our consolidated financial statements.





Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.





ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not Applicable.





ITEM8. FINANCIAL STATEMENTS




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





ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.




None.





ITEM9A(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.




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




Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We carried out an evaluation, under the supervision and with participation of management, including our President and Acting Chief Executive Officer (who also serves as our principal financial and accounting officer), of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on his evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.




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, 2009, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, out internal control over financial reporting.





ITEM9B. OTHER INFORMATION




(i) We held our Annual Meeting of Stockholders on December 24, 2010. The following matters were voted on: (1) election of directors; (2) increase the number of authorized shares of Common Stock; (3) an increase in the number of shares of Common Stock reserved for issuance under our 2007 Equity Incentive Plan; (4) increase in the number of shares of Common Stock reserved for issuance under our 2007 Non-Employee Directors Stock Option Plan; and (5) appointment of auditors. The vote tally was as follows:




(1) Proposal to Elect Three Directors to Serve until the 2010 Annual Meeting of Stockholders.


FOR


WITHHELDMichael Goldberg


1,463,098,195



45,886,001Irit Reiner


1,465,944,114



43,020,082John Mitola


1,458,050,271



50,913,925




Mr. Ray Willenberg did not stand for re-election.




(2) Proposal to ratify the amendment to our certificate of incorporation to increase the number of shares of Common Stock that the Company is authorized to issue from time to time to 5,000,000,000 shares


FOR

AGAINST


ABSTAIN

BROKER NON VOTES1,202,920,210

280,406,130


25,637,855




(3) Proposal to increase the number of shares of Common Stock reserved for issuance under our 2007 Equity Incentive Plan from 3,000,000 shares to 100,000,000 shares.


FOR

AGAINST


ABSTAIN

BROKER NON VOTES407,992,321

34,637,614


4,954,012




(4) Proposal toincrease the number of shares of Common Stock reserved for issuance under our 2007 Non-Employee Directors Stock Option Plan from 1,000,000 shares to 50,000,000 shares.


FOR

AGAINST


ABSTAIN

BROKER NON VOTES450,514,356

33,381,934


3,597,655




(5) Proposal to ratify the appointment of Rotenberg, Meril Solomon Bertiger & Guttilla, PC as our auditors for the year ending December 31, 2009.


FOR

AGAINST


ABSTAIN

BROKER NON VOTES1,412,058,173

28,571,450


68,334,573




All proposals received the requisite number of votes and were approved.




(ii)  Between January 5 and March 3, 2010, we entered into definitive agreements relating to a private placement of $100,940 in principal amount of 18 month Secured Convertible Promissory Notes (collectively the “Notes”) and 2,524 shares of Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). In addition, in connection with the issuance of the Notes and the Series A Preferred Stock, we issued to the investors warrants (the “Warrants”; together with the Notes and the Series A Preferred Stock, the “Purchased Securities”) to purchase in the aggregate up to 672,933 shares of the Company’s common stock par value $0.001 (the “Common stock”) at a per share exercise price equal to $0.25. The warrants are exercisable through the fifth anniversary of issuance.




21




The placement of the Notes, the Series A Preferred Stock and the Warrants were effected on substantive terms and condition identical to the placement consummated in December 2008.




Commencing on the six month anniversary date of the Notes, and on the same day of each subsequent calendar month thereafter until the principal amount of the Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the 2009 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date.




The offering of the Purchased Securities was completed through a private placement and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.  In claiming the exemption under Section 4(2), the Company relied in part on the following facts: (1) the offers and sales involved existing investors; (2) the investors had access to information regarding the Company; (3) each investor represented that it (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risk of an investment in the Company, (b) was able to bear the economic risk of an investment in the Company and (c) acquired the shares for its own account in a transaction not involving any general solicitation or general advertising, and not with a view to the distribution thereof; and (4) a restrictive legend was placed on each certificate or other instrument evidencing the Purchased Securities.




(iii) In February and March 2010, we received short-term loans (“Short-Term Loans”) from investors in the principal amount of $200,000. The outstanding balances bear interest at the rate of 10% per annum are due at the earlier of 150 days or the closing of a new investment.  The Short Term Loans are evidenced by the Company’s promissory notes which are secured parri passue with the investors in the 2008 Private Placement.




Under the terms of the Short Term Loan, the occurrence of any of the following constitute events of default (each an “Event of Default”): (i) the Company’s failure to pay the principal, principal or other sum when due a, (ii) the assignment by the Company for the benefit of creditors or application for or consent to the appointment of a receiver or trustee, or such receiver or trustee shall otherwise be appointed, (iii) the entry of a monetary judgment or similar process in excess of $100,000 if such judgment remains unvacated for 30 days and (iv) the Company’s insolvency or liquidation or a bankruptcy event.




The offering of Short Term-Loans  was completed through a private placement and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.  In claiming the exemption under Section 4(2), the Company relied in part on the following facts: (1) the offers and sales involved existing investors; (2) the investors had access to information regarding the Company; (3) each investor represented that it (a) had the requisite knowledge and experience in financial and business matters to evaluate the merits and risk of an investment in the Company, (b) was able to bear the economic risk of an investment in the Company and (c) acquired the shares for its own account in a transaction not involving any general solicitation or general advertising, and not with a view to the distribution thereof; and (4) a restrictive legend was placed on each certificate or other instrument evidencing the Short-Term Loan.




(iv) In March 2010, our wholly owned Israeli based subsidiary was provided with a loan from an Israel based commercial bank in the amount of approximately $270,000. The loan is repayable on September 25, 2010. The loan is guaranteed by a stockholder of the Company. Interest is payable monthly at the rate of 1.9% per annum. The Company is also required to pay a fee to the guarantor of 1% of the loan amount per month, plus bank charges.




(v) On March 22, 2010, the Company’s certificate of incorporation was amended to increase the number of shares of preferred stock designated as Series A Convertible Preferred Stock to 115,000 shares (from 65,000 shares).





PART III





ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




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


Name

Age

PositionMichael Goldberg

60

President, Acting Chief Executive Officer and DirectorIrit Reiner

52

DirectorJohn Mitola

43

DirectorHenry Shabbat

69

Chief Operating Officer (IDO Security Ltd.)




22




Business Experience




The following is a brief account of the education and business experience of each director, executive officer and key employee 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. Mr. Goldberg’s experience in managing and overseeing a diversified business practice equip him with the skill set needed to meet the challenges that we expect our board to face.




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. Ms. Reiner’s background and business experience furnishes to our board access to a greater understanding of investor relations issues.




John Mitola  has 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. Mr. Mitola’s background and experience in related industries furnishes to our board access to a greater understanding of financial and investor relations issues.




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 Compliance




Section 16(a) of the Securities Exchange Act of 1934 , as amended, requires each of our officers and directors and each person who owns more than 10% of a registered class of our equity securities to file with the SEC an initial report of ownership and subsequent reports of changes in such ownership. Such persons are further required by SEC regulation to furnish us with copies of all Section 16(a) forms (including Forms 3, 4 and 5) that they file. Based solely on our review of the copies of such forms received by us with respect to fiscal year 2009, 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, 2009, except that, Ms. Irit Reiner, one of our non-employee directors, did not timely file a Form 4 for issuances made to her husband between February 26, 2009 and June 8, 2009 in payment of principal and interest due periodically on convertible debentures issued as of December 2007, at the specified conversion rate. The Form 4 was filed on July 7, 2009.




Code of Ethics




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




Audit Committee and Audit Committee Financial Expert




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





23





ITEM11. EXECUTIVE COMPENSATION





Summary Compensation Table




The following table sets forth all compensation for each of the last two fiscal years awarded to, or earned by, our Chief Executive Officer and the most highly compensated executive officer other than the Chief Executive Officer serving as such at the end of 2008 whose total compensation exceeded $100,000 for the year ended December 31, 2009.




Name and




OptionPrincipal




Awards

All OtherPosition(s)
Year

Salary

(1)

Compensation


TotalMichaelGoldberg,
2009

$
198,000
(2)
$
69,406

$
-


$
267,406President andActing Chief
2008

$
198,000
(3)
$
565,033

$
-


$
763,033ExecutiveOfficer(and PrincipalFinancialOfficer)Henry Shabbat,ChiefOperating
2009

$
72,000
(4)
$
23,506

$
-


$
95,506Officer of IDOSecurityLtd.
2008

$
72,000

$
216,572

$
-


$
288,572




1. Amounts shown in this column do not reflect compensation actually received by the named executive officer. The amounts in the Option Awards column reflect the dollar amount recognized as compensation cost for financial statement reporting purposes for the fiscal years ended December 31, 2009 and December 31, 2008, in accordance with ASC 718 for all stock options granted in such fiscal years. There can be no assurance that the amounts set forth in the Option Awards column will ever be realized. A forfeiture rate of zero was used in the expense calculation in the financial statements.




2. Of the amount earned, approximately $80,000 was paid and $118,000 was deferred as of December 31, 2009.  See “Michael Goldberg”, below




3. Of the amount earned, approximately $95,000 was paid and $103,000 was deferred as of December 31, 2008. See “Michael Goldberg”, below




4. Of the amount earned, approximately $60,000 was paid and $12,000 was deferred as of December 31, 2009.  See “Henry Shabbat”, below




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. 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 is entitled to an annual salary of $198,000, payable monthly.  However, in order to reduce operating expenses and conserve cash, since October 2008, Mr. Goldberg has been deferring a part of his salary until such time as our cash position permits payment of salary in full without interfering with our ability to pursue our plan of operations, and, as of December 31, 2009, such deferred amount totaled an aggregate of $214,375. 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.




Henry Shabbat. On July 1, 2007, IDO Ltd. and Henry Shabat Ltd., a company owned by Mr. Henry Shabat, entered into a Management Agreement pursuant to which Mr. Shabat is to serve as IDO Ltd.’s Chief Operating Officer. Under the management agreement, Mr. Shabat is to be paid a monthly fee of $6,000. However, in order to reduce operating expenses and conserve cash, since December, 2008] Mr. Shabbat has been deferring a part of his salary until such time as our cash position permits payment of salary in full without interfering with our ability to pursue our plan of operations, and, as of December 31, 2009, such deferred amount totaled an aggregate of $12,000. The management agreement has an initial term of one year; thereafter, the management agreement provides that it is to be renewed automatically for additional one year periods unless either party shall advise the other 90 days before expiration of the initial (or a renewal term) of its intention to not renew the agreement beyond its then scheduled expiration date. Mr. Shabat was awarded options to purchase 240,000 shares of the Company’s common stock, which are scheduled to vest in equal installments of 30,000 shares at the end of each 90 day period following the execution of the management agreement. The per share exercise price range between $0.17 and $1.67 (post split level). The employment agreement also includes certain customary confidentiality and non-compete provisions that prohibit the executive from competing with the Company or soliciting the Company’s employees for 12 months following the termination of his retention.





24


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END — DECEMBER 31, 2009




The following table sets forth information as of December 31, 2009, concerning unexercised options for the purchase of common stock held by the named executive officers.




Name

Number of

Securities

Underlying

Unexercised

Options

Exercisable


Number

of Securities

Underlying

Unexercised

Options

Unexercisable


Option

Exercise
Price

Option

Expiration DateMichael Goldberg


525,000



—


$
0.17

6/20/1484,375



—



0.25

9/30/1484,375



—



0.42

12/30/1484,375



—



0.58

3/31/1584,375



—



0.72

6/30/1584,375



—



0.95

9/30/1584,375



—



1.08

12/30/1584,375



—



1.17

3/31/1684,375



—



1.25

6/30/16Henry Shabat


30,000



—


$
0.17

9/30/1430,000



—



0.25

12/31/1430,000



—



0.42

3/31/1530,000



—



0.58

6/30/1530,000



—



0.72

9/30/1530,000



—



0.95

12/31/1530,000



—



1.08

3/31/1630,000



—



1.17

6/30/16




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 (1)


Option

Awards


TotalIrit Reiner

$
3,000


$
----


$
3,000John Mitola

$
3,000


$
—


$
3,000
 
 For 2009, our non-employee directors were entitled to $1,000 per meeting. However, none of these amounts were in fact paid, in an effort to conserve cash resources.





25





ITEM12. 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, 2010, 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, 2010. 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 2,294,029,844 shares of common stock outstanding at March 31, 2010.





Name and Address of

Beneficial Owner

Common Stock

Beneficially

Owned


Percentage of

Common

StockMichael Goldberg

President and acting Chief Executive Officer

c/o 17 State Street

New York, NY


1,115,625
(1)


*Henry Shabat

Chief Operating Officer of IDO Security Ltd.

c/o 17 State Street

New York,, NY


240,000
(2)


*Irit Reiner

Director

c/o 17 State Street

New York,, NY


4,680,000
(3)


*John Mitola

Director

c/o 17 State Street

New York, NY


100,000
(4)


*All directors and officers as a group


6,135,625



*




* Less than 1%.


(1)
Represent shares of Common stock issuable upon exercise of employee stock options.(2)
Represent shares of Common stock issuable upon exercise of employee stock options.(3)
Comprised of (i) 4,580,000 shares of Common Stock held by Ms. Reiner’s husband and (ii) 100,000 shares issuable upon exercise of stock options issued to Ms. Reiner for services rendered as a director of our company. Does not include warrants to purchase an additional 200,000 shares of Common Stock issuable upon conversion of convertible debt securities and warrants held by Ms. Reiner husband. The warrants and convertible debt instruments contain provisions that prohibit the exercise of such warrants and/or conversion of the convertible debt instruments if following such exercise or conversion the aggregate holdings of such person would exceed 4.9% of the then issued and outstanding shares of our Common Stock.(4)
Represent shares of Common stock issuable upon exercise of employee stock options.




Securities Authorized for Issuance Under Equity Compensation Plans




We have two compensation plans (excluding individual stock option grants outside of such plans) under which our equity securities are authorized for issuance to employees, directors and consultants in exchange for services - the 2007 Equity Incentive Plan (the “2007 Plan”) and the 2007 Non-Employee Directors Stock Option Plan (the “2007 Directors Plan”; together with the 2007 Plan, the “Plans”). Our shareholders have approved these Plans.




26




The following table sets forth certain information with respect to securities authorized for issuance under equity compensation plans as of December 31, 2009.




Plan Category

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

(a)

Weighted-average

exercise price of

outstanding options,

warrants and rights

(b)


Number of securities

remaining available for future

issuance under equity

compensation plans

(excluding securities reflected

in column (a))

(c)Equity compensation plans approved by security holders:

3,490,000

$
1.47


510,000Equity compensation plans not approved by security holders:

—


—


—TOTAL

3,490,000

$
1.47


510,000




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




Certain Relationships and Related Transactions




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




Director Independence




The Board believes that John Mitola meets the independence criteria set out in Rule 4200(a)(14) of the Marketplace Rules of the National Association of Securities Dealers and the rules and other requirements of the SEC.





ITEM14. PRINCIPAL ACCOUNTING FEES AND SERVICES





Audit and Non-Audit Fees




Aggregate fees for professional services rendered for the Company by Rotenberg Meril Solomon Bertiger & Guttilla, P.C., our independent registered public accounting firm, for the fiscal years ended December 31, 2009 and 2008 are set forth below.




Fiscal Year Ended

December 31, 2009


Fiscal Year Ended

December 31, 2008Audit Fees

$
82,500


$
82,500Audit Related Fees

$
—


$
—Tax Fees

$
—


$
—All Other Fees

$
8,320


$
—Total

$
90,820


$
97,500




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





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.




All Other Feesinclude professional advisory fees relating tour efforts to raise funds through a private placement of our securities.




27




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.




PART IV




ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




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


EXHIBIT NO.

EXHIBIT2.1

Securities Purchase Agreement dated as of July 19, 2006 among The Medical Exchange Inc., IDO Security Ltd. and the selling shareholders identified therein, filed as an Exhibit to the Current Report filed on March 14, 2007 and incorporated herein by reference.3.1

Amended and Restated Certificate of Incorporation of the Company filed as an exhibit to IDO’s annual report on Form 10-KSB for the year ended December 31, 20073.2*

Amendment to Amended and Restated Certificate of Incorporation3.3

Bylaws of the Company, filed as an exhibit to IDO’s annual report on Form 10-KSB for the year ended December 31, 20073.4

Certificate of Designation of Series A Preferred Stock filed December 11, 2008, filed as an exhibit to IDO’s current report on Form 8-K filed on December 23, 20084.1

Form of Promissory Note issued to certain investors, filed as an exhibit to IDO’s annual report on Form 10-KSB for the year ended December 31, 20084.2

Form of Class A Common Stock Purchase Warrant, filed as an exhibit to the Current Report on Form 8-K filed on April 6, 20074.3

Form of Warrant filed as an exhibit to IDO’s annual report on Form 10-KSB for the year ended December 31, 20084.4

Form of Promissory Note issued on July 30, 2008, filed as an exhibit to IDO’s quarterly report on Form 10-Q for the three months ended June 30, 20084.5

Form of Secured Convertible Promissory Note due April 30, 2010, filed as an exhibit to IDO’s current report on Form 8-K filed on December 23, 20084.6

Form of Warrant issued as of October 31, 2008, filed as an exhibit to IDO’s current report on Form 8-K filed on December 23, 20084.7*

Form of Secured Promissory Note10.1

Form of subscription Agreement, dated as of December 24, 2007, with certain investors filed as an exhibit to IDO’s annual report on Form 10-K for the year ended December 31, 2008.10.2

Form of Security Interest Agreement filed as an exhibit to IDO’s annual report on Form 10-KSB for the year ended December 31, 2008.10.3

Subscription Agreement dated as of October 31, 2008 by and between IDO Security Inc and the investors, filed as an exhibit to IDO’s quarterly report on Form 10-Q for the three months ended June 30, 2008.




10.4

Modification, Waiver and Consent Agreement dated as of December 17, 2008 between IDO Security Inc. and certain of the holders of certain of the Company’s previously issued notes, filed as an exhibit to IDO’s quarterly report on Form 10-Q for the three months ended June 30, 2008.10.5

Employment Agreement dated as of June 1, 2007 between IDO Security Inc. and Michael Goldberg, filed as an exhibit to the Quarterly Report on Form 10-QSB for the three months ended June 30, 2007 +10.6

Management Agreement dated as of July 1, 2007 between IDO Security Ltd. and Henry Shabat Ltd., filed as an exhibit to the Quarterly Report on Form 10-QSB for the three months ended June 30, 2007 +10.7

Company’s 2007 Equity Incentive plan, filed as an exhibit to the Company’s information statement filed on February 26, 200810.8

Company’s 2007 Non-Employee Directors Stock option Plan, filed as an exhibit to the Company’s information statement filed on February 26, 2008  28
  31

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Attached hereto.





29





SIGNATURES




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


DATE: April 15, 2010IDO SECURITY INC./s/ MICHAEL GOLDBERGMICHAEL GOLDBERGACTING CHIEF EXECUTIVE OFFICER (PRINCIPALEXECUTIVE OFFICER AND PRINCIPAL FINANCIAL

AND ACCOUNTING OFFICER) AND PRESIDENT




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


SIGNATURE

TITLE

DATE/s/ Irit Reiner

Chairman, Director

April 15, 2010Irit Reiner/s/ Michael Goldberg

President, Acting Chief Executive Officer and Director

April 15, 2010Michael Goldberg/s/ John Mitola

Director

April 15, 2010John Mitola




30





IDO SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 Report of Independent Registered Public Accounting Firms
F-1Consolidated Balance Sheet
F-2Consolidated Statements of Operations
F-3Consolidated Statements of Changes in Shareholders’ (Deficiency) Equity
F-4Consolidated Statements of Cash Flows
F-5Notes to Consolidated Financial Statements
F-6







REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
  To the Board of Directors and Stockholders of
 IDO Security, Inc.
 
 We have audited the accompanying consolidated balance sheets of IDO Security, Inc. and Subsidiary (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders’ (deficiency) equity and cash flows for the years then ended.  The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008 and the results of their operations and cash flows for the years ended December 31, 2009 and 2008, 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 15, 2010
 F-1





IDO SECURITY INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS





December 31,


December 31,ASSETS

2009


2008CURRENT ASSETSCash and cash equivalents

$
176,559


$
391,569Accounts receivable


4,360



-Inventories


62,219



124,708Prepaid expenses and other current assets


65,613



81,840Total current assets


308,751



598,117Property and equipment, net


62,076



44,875Goodwill


1,955,002



1,955,002Deferred financing costs, net


4,223



17,068Total assets

$
2,330,052


$
2,615,062LIABILITIES AND STOCKHOLDERS’ DEFICIENCYCURRENT LIABILITIESAccounts payable and accrued liabilities

$
2,265,491


$
1,727,440Bank line of credit


-



161,181Convertible promissory notes(net of discount of $909,264 and $2,236,792)


5,724,747



3,526,160Redeemable Series A Cumulative Convertible Preferred Stock(net of discount of $2,283,422 and $0)


3,461,831



-Loan payable, related party


44,826



44,826Total current liabilities


11,496,895



5,459,607NON-CURRENT LIABILITIESConvertible promissory notes(net of discount of $118,651 and $236,413)


71,141



30,225Redeemable Series A Cumulative Convertible Preferred Stock(net of discount of $165,326 and $0)


337,201



-Accrued severance pay


162,211



178,205Total  liabilities


12,067,448



5,668,037Redeemable Series A Cumulative Convertible Preferred Stock(net of discount of $0 and $1,874,740)


-



791,660ContingencySTOCKHOLDERS’ DEFICIENCYPreferred Stock19,935,000 shares authorized; none outstanding


-



-Common stock, $.001 par value;5,000,000,000 and 100,000,000 shares authorized; 1,982,917,590and 46,083,070 issued and outstanding, respectively


1,982,918



46,083Additional paid-in capital


17,825,656



19,306,867Stock subscription receivable


-



(25
)Accumulated other comprehensive loss


(331
)


(331
)Deferred stock based compensation


-



(55,007
)Accumulated deficit


(29,545,638
)


(23,142,222
)Total stockholders’ deficiency


(9,737,396
)


(3,844,635
)Total liabilities and stockholders’ deficiency

$
2,330,052


$
2,615,062
 See Notes to Consolidated Financial Statements.




F-2


IDO SECURITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS


Year


YearEnded


EndedDecember 31,


December 31,2009


2008Revenues

$
82,721


$
326,780Cost of sales


68,192



339,263Gross profit


14,529



(12,483
)Operating expensesResearch and development expenses


290,995



390,988Selling, general and administrative expenses


1,310,676



2,148,752Inventory write-down


71,000



-Stock based compensation - selling, general and administrative


157,319



546,068Total operating expenses


1,829,990



3,085,808Loss from operations


(1,815,461
)


(3,098,291
)Interest expense (including amortization of debt and preferred stock discount,beneficial conversion features, dividends and deferred finance costs)


(4,604,654
)


(4,106,436
)Interest income


19,116



1,828Loss on extinguishment of debt


-



(991,649
)Foreign currency translation


(2,417
)


10,588Net loss


(6,403,416
)


(8,183,960
)Preferred stock dividends and deemed dividends


(855,184
)


(284,219
)Net loss attributable to common stockholders

$
(7,258,600
)

$
(8,468,179
)Basic and diluted loss per share:

$
(0.01
)

$
(0.20
)Weighted average number of shares outstandingBasic and diluted


1,188,026,095



42,479,287
 See Notes to Consolidated Financial Statements.
  F-3
  IDO SECURITY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY
  AccumulatedAdditional





Other


Common


DeferredPreferred Stock





Common Stock





Paid-in


Accumulated


Comprehensive


Stock


Stock BasedShares


Amount


Shares


Amount


Capital


Deficit


Income


Subscribed


Compensation


TotalBalances at January 1, 2008


-


$
-



34,361,250


$
34,361



16,431,941


$
(14,958,262
)

$
(331
)

$
(25
)

$
-


$
1,507,684Exercise of warrants


-



-



8,340,948



8,341



(8,341
)


-



-



-



-



-Common stock issued for services


-



-



30,000



30



90,570



-



-



-



(90,600
)


-Conversion of convertiblepromissory notes and accrued interest and fees


-



-



3,350,872



3,351



629,920



-



-



-



-



633,271Warrants issued in connection with debt placement


-



-



-



-



1,551,310



-



-



-



-



1,551,310Beneficial conversion feature ofof convertible debt issued


-



-



-



-



385,211



-



-



-



-



385,211Stock based compensation


-



-



-



-



510,475



-



-



-



35,593



546,068Preferred stock dividends


-



-



-



-



(284,219
)


-



-



-



-



(284,219
)Net loss


-



-



-



-



-



(8,183,960
)


-



-



-



(8,183,960
)Balances at December 31, 2008


-



-



46,083,070



46,083



19,306,867



(23,142,222
)


(331
)


(25
)


(55,007
)


(3,844,635
)Conversion of convertible promissory notes and accrued interest and fees


-



-



1,936,834,520



1,936,835



(733,581
)


-



-



-



-



1,203,254Warrants issued in connection with debt placement


-



-



-



-



5,266



-



-



-



-



5,266Cancellation of stock subscription


-



-



-



-



(25
)


-



-



25







-Stock based compensation


-



-



-



-



102,312



-



-



-



55,007



157,319Preferred stock dividends


-



-



-



-



(855,184
)


-



-



-



-



(855,184
)Net loss


-



-



-



-



-



(6,403,416
)


-



-



-



(6,403,416
)Balances at December 31, 2009


-


$
-



1,982,917,590


$
1,982,918



17,825,656


$
(29,545,638
)

$
(331
)

$
-


$
-


$
(9,737,396
)
 See Notes to Consolidated Financial Statements.
  F-4




IDO SECURITY INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year


YearEnded


EndedDecember 31,


December 31,2009


2008CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(6,403,416
)

$
(8,183,960
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


34,483



528,606Loss on extinguishment of debt






991,649Amortization of note discount


3,841,570



2,525,906Amortization of beneficial conversion feature of convertible debt


147,333



396,777Accretion of interest on notes payable


24,000



41,936Stock based compensation


157,319



546,068Stock issued in lieu of interest and other charges


622,273



135,771Inventory write-down


71,000Interest related to note payable settlement


18,694



-Loss on sale of property and equipment


-



22,415(Decrease) increase in net liability for severance pay


(15,994
)


22,524Increase (decrease) in cash attributable to changes in operating assets and liabilitiesAccounts receivable


(4,360
)


-Inventory


(8,511
)


52,329Prepaid expenses and other current assets


16,227



(6,162
)Accounts payable


228,919



408,881Accrued expenses and other current liabilities


(82,897
)


757,035Net cash used in operating activities


(1,353,360
)


(1,760,225
)CASH FLOWS FROM  INVESTING ACTIVITIESProceeds from sale of property and equipment


-



1,006Purchases of property and equipment


(38,839
)


(27,355
)Net cash used in investing activities


(38,839
)


(26,349
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of secured convertible notes


-



750,000Proceeds from issuance of convertible notes and preferred stock


1,332,500



567,724Proceeds from escrow agent


-



1,150,000Payments of deferred finance costs


-



(217,051
)Proceeds from short-term debt






442,355Proceeds from bank line of credit


(155,311
)


161,181Repayment of notes payable


-



(1,029,767
)Net cash provided by financing activities


1,177,189



1,824,442(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(215,010
)


37,868CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR


391,569



353,701CASH AND CASH EQUIVALENTS - END OF YEAR

$
176,559


$
391,569Supplemental disclosures of cash flow information:Cash paid for interest

$
-


$
49,546Non-cash activitiesIssuance of common stock for the conversion ofconvertible promissory notes and acrued interest

$
1,203,254


$
633,271Issuance of common stock for cashless exercise of warrants

$
-


$
8,341Preferred stock dividends and deemed dividends

$
855,184


$
284,219
  See Notes to Consolidated Financial Statements.
  F-5




IDO SECURITY INC. AND SUBSIDIARY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - GENERAL
 
 Overview
 
 IDO Security Inc. (hereinafter, “IDO”) is engaged in the design, development and marketing of devices for the homeland security and loss prevention markets that are intended for use in security screening procedures and are designed to detect concealed metallic objects through the use of electro-magnetic fields. These devices were designed specifically for applications in the security screening and detection market to complement the current detection methods for detecting metallic items during security screenings at security checkpoints in venues such as airports, prisons, schools, stadiums and other public locations requiring individual security screening. The consolidated financial statements include the accounts of IDO and IDO Security Ltd. (“IDO Ltd.”), its wholly-owned subsidiary (collectively the “Company”).
 
 IDO was incorporated in the State of Nevada on January 23, 2004 under the name “The Medical Exchange, Inc.”  On July 25, 2006, IDO Ltd. and the holders of all of the issued and outstanding share capital of IDO Ltd. (collectively the “IDO Selling Shareholders”) entered into a Securities Purchase Agreement pursuant to which The Medical Exchange Inc. (“Med Ex”) agreed to purchase all of the issued and outstanding share capital of IDO Ltd. (the “Acquisition Transaction”). On March 8, 2007, the Acquisition Transaction was consummated. Following the consummation of the Acquisition Transaction, IDO Ltd. became a wholly-owned subsidiary of Med Ex and Med Ex adopted the business of IDO Ltd.  In June 2007, Med Ex changed its name to “IDO Security Inc.”
 
 IDO conducts its principal design and production operations in Israel and revenues are derived principally from shipments to Asian and European countries.
 
 Basis of presentation
 
 The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At December 31, 2009, the Company had not achieved profitable operations, had accumulated losses of $29.5 million (since inception), a working capital deficiency of $11.2 million and expects to incur further losses in the development of its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations or management’s ability to find sources of additional equity capital. The Company needs to raise additional funds on an immediate basis in order to continue to meet its liquidity needs, realize its business plan and maintain operations.  The Company’s current cash resources are not sufficient to support its operations as presently conducted or permit it to take advantage of business opportunities that may arise. Management of the Company is continuing its efforts to secure funds through equity and/or debt instruments for its operations.The Company has received from representatives of certain prospective investors a non-binding proposal with respect to convertible debt based financing in a significant amount, subject to due diligence and other conditions, which our board is currently studying. 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 Company has been funding its operations from the net proceeds from the private placement of its convertible securities. In December 2007 and January 2008, the Company received net proceeds of approximately $1 million from the proceeds of the private placement to certain accredited investors (the “2008 Investors”) of its 10% Secured Convertible Promissory Notes. Between April 2008 and November 2008, the Company received from two previous investors and one stockholder, gross loan proceeds totaling $442,355.  In December 2008, the Company raised net proceeds of $548,474 from certain 2008 Investors in a private placement of convertible notes and preferred stock. Between April 2009 and December 2009, the Company raised net proceeds of $1,332,500 from certain of its existing investors. Finally, in January 2010 and March 2010, the Company raised net proceeds of approximately $301,000 from certain of its existing investors.  See Note 5 below.
  F-6
  The financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing a business plan or that the successful implementation of a business plan will actually improve the Company’s operating results.
 
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Adoption of FASB Accounting Standards Codification
 Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.
 
 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
 From inception through the third quarter of 2008, the Company was in the development stage and had insignificant recurring revenues.  In the fourth quarter of 2008, management determined that the Company was no longer in the development stage as the Company’s generated significant revenues.
 
 Cash Equivalents
 The Company considers all highly liquid investments purchased with a maturity date of three months or less at the date acquired to be cash equivalents.  Cash equivalents consist of a money market account.
 
 Use of Estimates
 These financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates we use to prepare the consolidated financial statements. The Company bases its estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.
 
 Functional Currency
 The majority of Company’s sales are in United States dollars. In addition, the majority of the Company’s investing and financing activities are in United States dollars. Accordingly, the Company has determined the United States dollar as the currency of its primary economic environment and thus, its functional and reporting currency. Non-dollar transactions and balances have been measured in United States dollars in accordance with FASB ASC 830 “Foreign Currency Matters.”  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 shipment of the product to the customer, subject to the following criteria: (i) persuasive evidence of an arrangement exists, (ii) the selling price is fixed and determinable and (iii) no significant obligations remain to the Company and collection of the related receivable is reasonable assured. When the above stated revenue recognition criteria are not met, the Company will record deferred revenue.
 
 F-7
  Concentrations
 
 Cash
 IDO maintained cash in bank accounts with Liberty Pointe Bank (“Liberty”), which may, at times, have exceed federally insured limits. At December 31, 2009 and 2008, amounts in excess of insurance amounted to approximately $0 and $171,000, respectively.
 
 On March 11, 2010, New York State banking regulators shut down Liberty and the FDIC was appointed as receiver.  Valley National Bank agreed to assume the assets and deposits of Liberty.  IDO did not experience any losses on these accounts as the balances were fully insured.
 
 Revenue
 For the year ended December 31, 2009, 50% of the Company’s revenue was derived from shipments to the United States.  For the year ended December 31, 2008, 62% of the Company’s revenue was derived from shipments to China.
 
 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.
 
 The Company wrote down inventory by $71,000 for items that it does not expect to utilize. Management does not anticipate that these identified items will be used in manufacturing the company’s products. In accordance with FASB ASC 330, “Inventory”, this reduction of inventory has been segregated from cost of goods sold and included in operating expenses
 
 Inventories at December 31, 2009 consisted of partially completed and completed devices totaling $62,219.   Inventories at December 31, 2008 consisted of components totaling $65,100 and partially completed and completed devices totaling $59,608.
 
 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
 Property and equipment are stated at cost.  Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Long-lived assets are reviewed for impairment 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. Goodwill is not amortized, but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value of the reporting unit below its carrying amount.   The Company has performed its first impairment test in the first quarter of 2008.  The Company currently performs annual impairment testing on a recurring basis in the last quarter of each year. Impairments, if any, will be expensed in the year incurred. As of December 31, 2009 and 2008, there was no impairment to goodwill.
 
 F-8
 
 Research and Development
 Costs incurred in connection with the research and development of the Company’s products is expensed as incurred.
 
 Advertising and Marketing
 
 The Company recognizes advertising and marketing expenses in the period incurred.  Advertising amounted to $37,427 and $9,494 for the years ended December 31, 2009 and 2008.
 
 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, 2009. 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
  The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
  The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes.”The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.  The ASC 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.  The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
  Stock-Based Compensation
 The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model.
 
 Earning (loss) per Share
 Basic earnings (loss) per share are computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share give effect to dilutive convertible securities, options, warrants and other potential Common Stock outstanding during the period, only in periods in which such effect is dilutive. The following securities have been excluded from the calculation of net loss per share, as their effect would be anti-dilutive:
 
 F-9
  Shares of Common StockIssuable upon Conversion/Exerciseof asDecember 312009


2008Warrants


24,109,154



14,559,154Convertible notes


48,424,187



43,611,427Stock options


3,490,000



3,490,000Convertible preferred stock


44,523,473



18,073,080
 
 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 October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements
 
 In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements.
 In January 2010, the FASB issued amended standards that require additional fair value disclosures. These amended standards require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. We do not expect these new standards to significantly impact our consolidated financial statements.
 
 Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.
  NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts payable and accrued expenses consist of the following at December 31, 2009 and 2008:
 
 2009


2008Accounts payable

$
483,484


$
463,071Accrued registration penalty (see Note 5)


516,137



516,137Accrued interest


439,827



512,124Accrued dividend


430,721



44,562Accrued compensation costs


257,220



70,406Accrued professional fees


66,504



84,299Accrued other


71,598



36,841$
2,265,491


$
1,727,440
  F-10
  NOTE 4 – BANK DEBT
 
 Line of Credit
 The Company’s subsidiary had a line of credit for up to approximately $250,000 from a commercial bank.  Interest accrued at rates ranging from 9.3% per annum on amounts up to $200,000 of indebtedness and 12.55% on amounts over that. The line was collateralized by substantially all the assets of the subsidiary. In October 2009, amounts outstanding under this credit line were repaid in full.As of December 31, 2008, $161,181 was outstanding under the line of credit.
 
 Loans Payable
 In March 2010, the Company’s subsidiary was provided with a loan from this commercial bank in the amount of approximately $270,000. The loan is repayable on September 25, 2010. The loan is guaranteed by a stockholder of the Company. Interest is payable monthly at the rate of 1.9% per annum. The Company is also required to pay a fee to the guarantor of 1% of the loan amount per month, plus bank charges.
 
 NOTE 5 - PRIVATE PLACEMENT OF CONVERTIBLE SECURITIES
 
 Convertible promissory notes consist of the following:
 
 December 31,2009


20082008 Notes - secured  and convertible - interest at 10% - see (i)  below

$
4,362,954


$
4,963,050December 2008 Notes - secured  and convertible - interest at 10% - see (iii) below


1,028,349



1,066,5402009 Notes - secured  and convertible - interest at 10% - see (iv) below


1,432,500



—Total


6,823,803



6,029,590Less: Discount


(1,027,915
)


(2,473,205
)5,795,888



3,556,385Less Current Portion


(5,724,747
)


(3,526,127
)Total

$
71,141


$
30,258
 
 The maturities on the Notes are $6,634,011 payable in 2010 and $189,792 payable in 2011.
 
 (i) 10% Secured Convertible Promissory Notes
 
 Between December 5, 2007 and January 24, 2008, the Company raised gross proceeds of $5,404,550 from the private placement  to certain accredited institutional and individual investors (the “2008 Investors”) of its two-year 10% Secured Convertible Promissory Notes (collectively, the “2008 Notes”, each a ”2008 Note”). Of such amount, $3,916,160 was raised in December 2007 and $1,488,390 was raised in January 2008.    The transactions were effected pursuant to a Subscription Agreement, dated as of December 5, 2007, between the Company and the 2008 Investors.  The Company received net proceeds of $1 million from the proceeds of the 2008 Notes, after the payment of offering related fees and expenses and after the repayment of bridge loans that that came due in November 2007. Certain remaining note holders from a private placement of 2007 Notes and the October 2007 note holders participated in the private placement and the gross proceeds raised include amounts the Company owed to these investors in the approximate amount of $2.6 million that were offset against such investors’ respective purchases of the 2008 Notes.
 
 F-11
  In connection with the issuance of the 2008 Notes, the Company issued to the 2008 Investors, warrants (the “2008 Investor Warrants”) to purchase up to 5,404,550 shares of the Company’s Common Stock, of which warrants for 2,702,275 shares are exercisable at a per share exercise price of $2.00 and warrants for 2,702,275 shares are exercisable at a per share exercise price of $3.00. The per share exercise price of the 2008 Investor Warrants were subsequently reduced to $0.15 in connection with the investment in December 2008 Notes discussed below in (iii).
 
 The 2008 Notes were originally convertible into shares of Common Stock at the holder’s option at any time at an initial conversion price of $1.00 per share (the “Fixed Conversion Price”), subject to adjustment in the event of certain capital adjustments or similar transactions, such as a stock split or merger and as further described below. Interest on the 2008 Notes accrues at the rate of 10% per annum and is payable upon a required monthly repayment or upon maturity, whichever occurs first, and will continue to accrue until the 2008 Notes are fully converted and/or paid in full. The per share Fixed Conversion Price of the 2008 Notes was subsequently reduced to $0.15 in connection with the investment in December 2008 Notes discussed below in (iii). The 2008 Notes matured on December 31, 2009 without being paid out in accordance with the terms of the Notes. The failure to repay the 2008 Notes constitutes an Event of Default under the transaction documents with the 2008 Investors. Subsequently, in March 2010, the holders of approximately 80% of the outstanding principal amount of the 2008 Notes extended the maturity date of the 2008 Notes to December 31, 2010 and waived all existing defaults. In consideration of these actions, the Company agreed to issue to each consenting investor shares of the Series A Preferred Stock discussed below in a stated value equal to 10% of the principal amount of the 2008 Notes then held by such investor. With respect to the remaining 20% of the principal amount of the 2008 Notes who did not agree to the extension of the maturity date, the Company issued 164,648,044 shares of the Company’s Common Stock, in full satisfaction of principal and accrued interest of $304,599.  Due to the conversion caps contained in the notes whereby we cannot issue shares to a note holder if, following such issuance, such note holder (or its affiliates) will hold, in the aggregate, over 4.9% of our then issued and outstanding shares of Common Stock. Accordingly, $587,990 of principal amount held by non consenting holders currently remains payable.
 
 Commencing on the fourth month anniversary of the issuance of the 2008 Notes and on the same day of each month thereafter until the principal amount of the 2008 Notes has been paid in full, the Company is required to prepay 5% of the aggregate principal amount of the 2008 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date (each such date, a “Scheduled Payment Date”). The amount may be paid either in (i) cash, at 110% of the principal amount due and 100% of all other amounts due or (ii) shares of Common Stock at a rate equal to the lower of (A) the Fixed Conversion Price or (B) 75% of the average of the closing bid price of the Common Stock for the five trading days ending on the trading day immediately preceding the Scheduled Payment Date, provided, that, if such monthly amount is to be paid with shares of Common Stock, such payment in shares will be automatically deferred unless the holder gives notice to the Company at least five (5) days before a repayment date that the holder will accept payment of such monthly amount in the form of Common Stock. In addition, under certain conditions, the Company may prepay the amounts outstanding on the 2008 Notes by giving advance notice and paying an amount equal to 115% of the sum of (x) the principal being prepaid plus (y) the accrued interest thereon. Holders will continue to have the right to convert their 2008 Notes prior to the actual prepayment. For the period January 1, 2009 to September 30, 2009, principal in the total amount of $542,790 and accrued interest totaling $560,349 was repaid in the form of 1,732,727,414, shares of the Company’s Common Stock.  There were no repayments for the period October 1, 2009 through December 31, 2009. Following the effectiveness in March 2010 of the increase in the number of authorized shares of the Company’s Common Stock, the Company resumed making periodic payments of principal and accrued interest. In March, 2010, principal and accrued interest totaling $147,966 was repaid in the form of 79,981,649 shares of the Company’s Common Stock.
 
 The 2008 Investor Warrants are exercisable through the fifth anniversary of the effective date of the Registration Statement. Holders of the Investor Warrants are entitled to exercise their warrants on a cashless basis if the Registration Statement is not in effect at the time of exercise.
 
 F-12
  The Fixed Conversion Price of the 2008 Notes and the exercise price of the 2008 Investor Warrants are subject to adjustment. Under the agreements with the holders of 2008 Notes, the Company agreed that if the Company made certain sales of its Common Stock (or securities convertible into Common Stock) to any third party at per share conversion price or exercise price less than the conversion price of the 2008 Notes and/or the exercise price of the 2008 Investor Warrants, adjustments would be made to the conversion price of the then unconverted Notes and to the exercise price of the then unexercised Investor Warrants. The above adjustments do not apply to certain specified transactions, such as the exercise of outstanding options, warrants, or convertible securities, the issuance of securities pursuant to a Company option plans or a non-employee director option plan, or the issuance of options to the Company’s directors, officers, and employees, and advisors or consultants, and transactions with strategic investors.
 
 To secure the Company’s obligations to the 2008 Investors, the Company granted a security interest in substantially all of its assets, including without limitation, its intellectual property. The security interest terminates upon payment or satisfaction of all of Company’s obligations under the 2008 Notes.
 
 For financial reporting purposes, the Company recorded a discount of $4,141,838 ($3,006,128 in 2007) to reflect the value of the 2008 Investor Warrants issued and an additional discount of $658,219 ($493,804 in 2007) to reflect the beneficial conversion feature of the 2008 Notes. The estimated value of the warrants was determined using the Black-Scholes option pricing model under the following assumptions: life of 5 years, risk free interest rate of 2.85%, (3.65% in 2007) a dividend yield of 0% and volatility of 135%. As discussed above, the term of the 2008 Notes were modified. As a result, all of the remaining unamortized discounts were expensed. The Company incurred finder’s fees of $540,455 ($391,616 in 2007), other offering related fees and expenses totaling $25,000 in 2007 and issued five-year warrants to purchase up to 1,080,930 shares (783,332 shares in 2007) of Common Stock at an per share exercise price of $0.15.
 
 The Company accounted for the modification of the 2008 Notes, as described above, as an extinguishment of debt. The Company deemed the terms of the amendment to be substantially different and treated the Convertible Promissory Notes as extinguished and exchanged for new notes. As such, it was necessary to reflect the Convertible Promissory Notes at fair market value and record a loss on extinguishment of debt of approximately $991,000.
 
 The fair value of the 2008 Notes was determined utilizing level 3 inputs. The fair value of the 2008 Notes was calculated utilizing the fully diluted market value of the invested capital of the Company immediately before and after the date of the debt modification. As a result, the face amount of the remaining principal balance of $4,963,050 was written down to its fair market value of $3,925,963. This discount is being amortized to the date of maturity unless converted earlier.
 
 Amortization of debt discount for the years ended December 31, 2009 and 2008 amounted to $1,527,552 and $3,186,758, respectively.
 
 The Company undertook to file a registration statement by a prescribed period under the Securities Act of 1933, as amended (the “Registration Statement”) with respect to the resale of the Common Stock underlying the 2008 Notes and 2008 Investor Warrants. The Company has not filed the Registration Statement and accordingly, the Company owed to the holders of these notes approximately $540,000 in liquidated damages in respect of the delay in the filing of the Registration Statement beyond the time frame specified in the agreements with such holders. At December 31, 2009, the Company owed to the holders of these notes $516,137 in liquidated damages. The non-payment of liquidated damages constitutes an Event of Default under the 2008 Notes. However, the pertinent documents provide that any action by the investors upon such default (i.e., acceleration of the debt and other remedies) can only be initiated by the holders of 65% or more of the outstanding principal amount of the notes.Such action has not been commenced by the note holders.  The Company does not currently intend to file such registration statement as the shares issuable upon conversion of the 2008 Notes and/or the 2008 Investor Warrants are eligible to be resold under Rule 144.
  F-13
  (ii) Short-Term Promissory Notes
 
 From April 2008 through November 2008, the Company received short-term loans from two of the 2008 Investors in the principal amount of $442,055. The outstanding balances bore interest at rates ranging from 18% - 28% per annum.  These proceeds from these loans were used for general corporate purposes.  The Company incurred issuance costs of $37,346.
 
 In December 2008, principal balances including accreted interest totaling $478,816 were re-invested in the Company’s private placement of its secured convertible promissory notes and Series A Preferred Stock discussed below.
 
 Amortization of debt discount for the year ended December 31, 2008 amounted to $37,346.
 
 (iii)  Secured Convertible Promissory Note and Series A Convertible Preferred Stock
 
 Pursuant to an offering dated October 31, 2008 (the “December 2008 Private Placement”) to the holders of the 2008 Notes, on December 17, 2008, the Company realized net proceeds of $548,474, after the payment of offering related fees and expenses of $19,250, from a private placement of $1,066,540 in principal amount of Secured Convertible Promissory Notes due April 20, 2010 (“collectively the “December 2008 Notes”) and 26,664 shares of Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). In addition, in connection with the issuance of the December 2008 Notes and the Series A Preferred Stock, the Company issued to the investors warrants (the “Warrants”; together with the December 2008 Notes and the Series A Preferred Stock, the “Purchased Securities”) to purchase in the aggregate up to 7,110,268 shares of the Company’s Common Stock at a per share exercise price equal to $0.25. The Warrants are exercisable through October 31, 2013 at a per share exercise price of $0.25.  The warrants include a ‘cashless exercise’ provision.  The amount raised included $478,816 in principal and accreted interest on loans advanced to the Company between April and November 2008 by two purchasers that were offset against such purchasers’ respective purchases of the Purchased Securities.
 
 For financial reporting purposes, the Company recorded a discount of $845,743 to reflect the value of the Warrants and Preferred Stock issued and an additional discount of $220,797 to reflect the beneficial conversion feature of the December 2008 Notes. The estimated value of the warrants was determined using the Black-Scholes option pricing model under the following assumptions: life of 5 years, risk free interest rate of 1.35%, a dividend yield of 0% and volatility of 135%. The discounts are being amortized to the date of maturity unless converted earlier.
 
 The December 2008 Notes are convertible into shares of Common Stock at the holder’s option at any time at an initial conversion price of $0.15 per share (the “Fixed Conversion Price”), subject to adjustment in the event of certain capital adjustments or similar transactions, such as a stock split or merger and as further described below. Interest on the December 2008 Notes accrues at the rate of 10% per annum and is payable upon a required repayment (discussed below) or upon maturity, whichever occurs first, and will continue to accrue until the December 2008 Notes are fully converted and/or paid in full. From and after an event of default under the December 2008 Notes and for so long as the event of default is continuing, the December 2008 Notes will bear default interest at a rate of the lesser of 15% per annum or the maximum rate permitted by applicable law.
 
 Commencing on April 30, 2009, and thereafter on the last day of each subsequent calendar month until the principal amount of the December 2008 Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the December 2008 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date. The amount may be paid, at the Company’s election, either in (i) cash, at 110% of the principal amount due and 100% of all other amounts due or (ii) shares of Common Stock at a rate equal to the lower of (A) the Fixed Conversion Price of $0.15 or (B) 75% of the average of the closing bid price of the Common Stock for the ten trading days ending on the trading day immediately preceding the Scheduled Payment Date;provided, that , if such monthly amount is to be paid with shares of Common Stock, it will be automatically deferred unless the holder gives notice to the Company at least five (5) days before a repayment date that the holder will accept payment of such monthly amount in the form of Common Stock.
  F-14
  The Company’s obligations under the December 2008 Notes are secured by a security interest in substantially all of its assets pursuant to a prior Security Agreement dated as of December 24, 2007 between it and the purchasers of the 2008 Notes.
 
 Holders of the Purchased Securities are subject to certain limitations on their rights to convert the securities. The principal limitation is that the holder may not, with certain limited exceptions, convert into a number of shares that would, together with other shares held by the holder, exceed 4.99% or 9.99% of the then outstanding shares of the Company after such conversion and/or exercise.
 
 The December 2008 Notes are scheduled to mature on April 30, 2010. However, in March 2010, the holders of approximately 72% of the outstanding principal amount of the December 2008 Notes extended the maturity date of the December 2008 Notes to December 31, 2010. In consideration of the extension, the Company agreed to issue to each consenting investor shares of the Series A Preferred Stock discussed below in a stated value equal to 10% of the principal amount of the December 2008 Notes then held by such investor.
 
 Under the subscription agreement of the December 2008 Private Placement, the Company also agreed that other than in connection with certain excepted issuances, if at any time any of the Purchased Securities are outstanding, the Company shall offer, issue or agree to issue (the “Lower Price Issuance”) any Common Stock or securities convertible into or exercisable for shares of Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per share or conversion or exercise price per share which shall be less than the conversion or exercise price in respect of the Purchased Securities, without the consent of Subscribers holding 66.67% of the outstanding principal amount of the December 2008 Notes, then the Company shall issue, for each such occasion, additional shares of Common Stock to each subscriber respecting each of the Purchased Securities that remain outstanding at the time of the Lower Price Issuance so that the average per share purchase price of the shares of Common Stock issued to the subscriber (of only the Common Stock or Warrant Shares still owned by the Subscriber) is equal to such other lower price per share and the conversion price and exercise price, as the case may be, of each of the outstanding Purchased Securities shall automatically be reduced to such other lower price.
 
 The Company also agreed that until the expiration of the Exclusion Period (defined below) and during the pendency of an Event of Default, except for certain excepted issuances, the Company agreed to not enter into an agreement to nor issue any equity, convertible debt or other securities convertible into common stock or equity of the Company nor modify any of the foregoing which may be outstanding at anytime, without the prior written consent of investors, which consent may be withheld for any reason.   For so long as any of the Purchased Securities is outstanding, except for such excepted issuances, the Company will not enter into any equity line of credit or similar agreement, nor issue nor agree to issue any floating or variable priced equity linked instruments nor any of the foregoing or equity with price reset rights.  The “Exclusion Period” ends on the first to occur of (i) April 30, 2009, or (ii) until all the shares issuable upon exercise of the December 2008 Notes and Warrants have been resold or transferred by the subscribers pursuant to Rule 144, without regard to volume limitations.  Under certain circumstances, the Exclusion Period will be tolled.
 
 For the period January 1, 2009 to September 30, 2009, principal in the total amount of $38,191 and accrued interest totaling $61,924 was repaid in the form of 204,107,106 shares of the Company’s Common Stock. There were no repayments for the period October 1, 2009 through December 31, 2009 nor for the period from January 1, 2010 through March 31, 2010.
 
 Amortization of debt discounts for the years ended December 31, 2009 and 2008 amounted to $724,522 and $143,838, respectively.
  F-15
  (iv) 2009 Notes and Series A Convertible Preferred Stock
 
 In April 2009, the holders of the 2008 Notes and the December 2008 Notes consented to the placement of secured convertible promissory notes (the “2009 Notes”), Series A Preferred Stock and warrants, all on the substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed at further length in Note 7(iii) above, for aggregate gross proceeds to not exceed $1.5 million.  Between April 28, 2009 and December 31, 2009, the Company raised net proceeds of $1,332,500 ($100,000 was rolled over from the 2008 financing) from the private placement to certain holders of the December 2008 Notes of $1,432,500 in principal amount of 2009 Notes and 35,814 shares of Series A Preferred Stock. Commencing on the six month anniversary date of the 2009 Notes, and on the same day of each subsequent calendar month thereafter until the principal amount of the 2009 Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the 2009 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date.
 
 In connection with such investment, the Company issued to the holders of the 2009 Notes, warrants to purchase in the aggregate up to 9,550,000 shares of the Company’s Common Stock at per share exercise price equal to $0.25. The warrants are exercisable through the fifth anniversary of issuance. Proceeds of these funds were used to fund the Company’s continuing operations.
 
 For financial reporting purposes, the Company recorded a discount of $1,024,732 to reflect the value of the Warrants and Preferred Stock issued. The estimated value of the warrants was determined using the Black-Scholes option pricing model under the following assumptions: life of 5 years, risk free interest rate of 2.41% - 2.71%, a dividend yield of 0% and volatility of 135%. The discounts are being amortized to the date of maturity unless converted earlier.
 
 There were no repayments made on the 2009 Notes during 2009.
 
 Amortization of debt discount for the year ended December 31, 2009 amounted to $230,792.
 
 In January 2010 and March 2010, the Company raised net proceeds of $100,940, which included the repayment of certain accrued expenses, from the private placement to certain holders of the December 2008 Notes. The Company issued $100,940 in principal amount of 2009 Notes and 2,524 shares of Series A Preferred Stock.Commencing on the six month anniversary date of the 2009 Notes, and on the same day of each subsequent calendar month thereafter until the principal amount of the 2009 Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the 2009 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date.
 
 In connection with such investment, the Company issued to the holders of the 2009 Notes, warrants to purchase in the aggregate up to 672,933 shares of the Company’s Common Stock at per share exercise price equal to $0.25. The warrants are exercisable through the fifth anniversary of issuance. Proceeds of these funds were used to fund the Company’s continuing operations
  (v) Short-Term Promissory Notes
 
 In February 2010 and March 2010, the Company received short-term loans from two of the 2008 Investors in the principal amount of $200,000. The outstanding balances bear interest at the rate of 10% per annum are due at the earlier of 150 days or the closing of a new investment.
 
 NOTE 6 - STOCKHOLDERS’ DEFICIENCY
 
 Authorized Shares
 
 On December 29, 2008, the Company’s Board of Directors and the majority of the Company’s stockholders authorized an increase the number of shares of Common Stock from 100,000,000 to 2,000,000,000. The increase became effective in March 2009.
  F-16
  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.
 
 On December 29, 2008, the Company’s Board of Directors and the majority of the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split at any ratio within an approved range (defined as between 10-to-1 to 50-to-1) at any time on or before December 31, 2009.  The board of directors had the sole discretion to determine whether or not to effect the reverse stock split and if so, at what ratio within the approved range. A reverse split was not authorized by the Board of Directors in 2009.
 
 On December 24, 2009, the Company’s Board of Directors and the majority of the Company’s stockholders authorized an increase in the number of shares of Common Stock from 2,000,000,000 to 5,000,000,000. The increase became effective on March 22, 2010.
 
 Stock Issuances
 
 Common Stock
 
 On February 14, 2008, a total of 19,514,250 warrants issued in connection with the private placement of convertible securities were converted into 8,340,948 of the Company’s Common Stock under the cashless exercise provision.
 
 In April 2008, the Company issued 30,000 shares of common stock to a consultant pursuant to a consulting agreement for services to be rendered through December 31, 2009.  For the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $55,007 and $35,593, respectively, as deferred compensation based on a market value of $3.02 per share on the date of the agreement.
 
 At various times in 2009 and 2008, a total of 1,936,834,520 and 3,350,872 shares of Common Stock, respectively, were issued in connection with the private placements of convertible securities.In March 2010, an additional 244,629,693 shares of the Company’s Common Stock were issued.  See Note 5.
 
 In March 2010, 1,223 shares of Series A Preferred Stock were converted into 66,483,163 shares of Common Stock.
  Convertible Preferred Stock
 
 The Series A Preferred Stock was authorized in accordance with a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock filed with the Nevada Secretary of State, effective as of December 11, 2008.   As of June 30, 2009, 34,000 shares of $0.001 par value Series A Preferred Stock was authorized.  On July 30, 2009, the Company’s certificate of incorporation was amended to increase the number of shares of preferred stock designated as Series A Convertible Preferred Stock to 65,000 shares.  At December 31, 2009 and 2008, 62,478 and 26,664 shares of Series A Preferred Stock were issued and outstanding. In March 2010, the Company’s certificate of incorporation was amended to increase the number of shares of preferred stock designated as Series A Convertible Preferred Stock to 115,000 shares.
 
 In December 2008, in connection with the issuance of the December 2008 Notes more fully discussed above in Note 5(iii), the Company issued to the purchasers of the December 2008 Notes, 26,664 shares of its newly created Series A Preferred Stock. Each purchaser of the December 2008 Notes received shares of the Company’s Series A Preferred Stock with a stated value of $100 equal to 250% of the principal amount of the December 2008 Notes issued to such investor.
  F-17
  In April 2009 through December 2009, in connection with the issuance of the 2009 Notes more fully discussed above in Note 5(iv), the Company issued 35,814 shares of Series A Preferred Stock.
 
 In January and March 2010, in connection with the issuance of the 2009 Notes more fully discussed above in Note 5(iv), the Company issued 2,524 shares of Series A Preferred Stock.
 
 In March 2010, 1,223 shares of Series A Preferred Stock were converted into 66,483,163 shares of Common Stock.
 
 Shares of Preferred Stock have not been registered and are restricted under the securities laws and pay a dividend of 10% per annum on the stated value. So long as the Series A Preferred Stock is outstanding, unless waived by the holders of 66 2/3% of the Series A Preferred Stock then outstanding, the dividend rate shall increase to 15%. In addition, shares of the Series A Preferred Stock do not vote separately as a class (but do vote on an “as-converted” to common stock basis) and have a liquidation preference equal to the stated value of the shares. Each share of Preferred Stock has a stated value of $100 and is convertible into shares of the Company’s common stock at $.15 per share.  The dividends are cumulative commencing on the issue date whether or not declared.  For the years ended December 31, 2009 and 2008, the Company declared dividends totaling $386,159 and $44,562, respectively. At December 31, 2009 and 2008, dividends payable total $430,721 and $44,562, respectively, and are included in accounts payable and accrued liabilities.
 
 Commencing on April 30, 2009, and thereafter on the last day of each subsequent calendar month, the Company is required to redeem 8.33% of the aggregate outstanding stated value of the Series A Preferred Stock until the stated value and all accrued dividends have been paid in full. Redemption payments on the Series A Preferred Stock may be made, at the election of the Company, in cash or shares of Common Stock, in the same manner as provided above with respect to the December 2008 Notes, subject to automatic deferral in the case of payment in shares unless the holder gives notice to the Company of such holder’s agreement to accept payment in shares.  As a result of the redemption provisions, the Series A Preferred Stock was not classified as permanent equity. To date, no shares of the Series A Preferred Stock have been redeemed or converted into shares of the Company’s Common Stock.The maturities on the Series A Preferred Stock are $5,745,273 payable in 2010 and $502,527 payable in 2011.
  Commencing on July 1, 2009, the Series A Preferred Stock is now being classified as a liability. As such, all dividends accrued and/or paid and any accretions will now be classified as part of interest expense and will no longer be classified as preferred stock dividends and deemed dividends.  For the years ended December 31, 2009 and 2008, dividends and deemed dividends totaled $855,184 and $284,219, respectively.
 
 For financial reporting purposes, the Company recorded a discount of $2,561,935 to reflect the difference between the stated value of the shares issued and the fair value of the shares issued. The discount is being amortized to the redemption dates unless converted earlier.
 
 Amortization of the discount for the year ended December 31, 2008 amounted to $239,657 and was included in preferred stock dividends and deemed dividends. Amortization of the discount for the year ended December 31, 2009 amounted to $1,987,907.  For the period January 1, 2009 through June 30, 2009, amortization totaled $718,929 and was included inpreferred stock dividends anddeemed dividends.  For the period July 1, 2009 through December 31, 2009, amortization totaled $1,268,978 and was included in interest expense.
 
 Derivative Liabilities
 
 In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, “Derivatives and Hedging.”
  F-18
  During 2009, the Company issued warrants, Series A Preferred Stock and convertible notes under various private placements.  Due to the various issuances, the Company did not have enough available shares of authorized common stock to issue to the various security holders had all of the convertible securities been exercised.  As a result, the value of some of the warrants would have to be recognized as a liability.  In addition, the Company evaluated the conversion terms of the notes and Series A Preferred Stock to determine if such terms gave rise to embedded derivatives that would need to be accounted for separately.   The Company determined that the lack of authorized shares to issue if all of the securities were converted resulted in the conversion features being embedded derivatives that must be bifurcated and recorded as derivative liabilities. In addition, the Company would be required to revalue the derivative liabilities at the end of each reporting period with the change in value reported on the statement of operations. The Company did not account for the derivative liabilities in its financial statements as it was determined to not be material.
  Stock Option Plans
 
 On November 15, 2007, the Company adopted the Equity Incentive Plan (“EIP”) for employees and consultants initially reserving for issuance 3,000,000 shares of Common Stock and the 2007 Non-Employee Directors Stock Option Plan “(SOP”) for non-employee initially reserving for issuance 1,000,000 shares of Common Stock. On December 24, 2009, Company’s Board of Directors and the majority of Company’s stockholders amended the EIP to increase the number of shares of Common Stock issuable from 3,000,000 to 100,000,000 and to amend the SOP to increase the number of shares of Common Stock issuable from 1,000,000 to 50,000,000.
 
 Stock Option Activity
 
 In April 2008, the Company’s board of directors approved grants of stock options to employees to purchase an aggregate of 200,000 shares of its common stock at an exercise prices $1.00. The options have a five-year term and vested upon issuance.
 
 Option activity for 2009 and 2008 is summarized as follows:
 
 Options


Weighted

Average

Exercise PriceOptions outstanding, January 1, 2008


3,890,000


$
1.65Granted


200,000



1.00Forfeited


(600,000
)


(0.98
)Options outstanding, December 31, 2008


3,490,000



1.47Granted


-



-Forfeited


-



-Options outstanding, December 31, 2009


3,490,000


$
1.47Aggregate intrinsic value

$
-
 
 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 2009.
 
 F-19
  The following table summarizes information regarding stock options outstanding at December 31, 2009:
 
 Weighted Average

Remaining


Options Exercisable

Weighted AverageRanges of prices

Number

Outstanding


Contractual

Life


Exercise

Price


Number

Exercisable


Exercise

Price$0.167 - $0.25


1,006,875



4.24



0.19



1,006,875


$
0.19$0.417 - $0.583


566,250



4.07



0.50



566,250



0.50$0.717 - $1.083


699,375



3.32



0.95



699,375



0.95$1.167 - $1.250


217,500



4.02



1.20



217,500



1.20$2.50 - $3.50


500,000



2.67



3.00



500,000



3.00$5.00 - $7.50


500,000



2.67



6.25



250,000



6.25$0.167-$7.50


3,490,000



3.57


$
1.73



3,490,000


$
1.73
 
 The weighted average per share fair value of options granted in 2008 was $1.53. 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 - five years, risk free interest rate - 2.98% and a dividend yield of 0%.
 
 The Company recognized stock compensation expense of $204,624 and $510,475 for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, there was no unrecognized compensation cost related to nonvested options granted.
 
 Warrants
 
 A summary of the warrants outstanding at December 31, 2009 is as follows:
 
 Warrants


Exercise

Price

Expiration

Date23,145,748


$
0.25

2012-2014963,406



1.67

201224,109,154
 
 NOTE 7 - INCOME TAXES
 
 Components of loss before income taxes for the years ended December 31, 2009 and 2008 are as follows:
 
 United States

$
(5,134,420
)

$
(6,374,852
)Israel


(1,268,996
)


(1,809,108
)Total

$
(6,403,416
)

$
(8,183,960
)
 
 At December 31, 2009, the Company had available approximately $3.7 million of net operating loss carry forwards, for U.S. income tax purposes which expire in the years 2024 through 2029.  The Company has foreign net operating loss carryforwards of $4.9 million with no expiration date.
 
 F-20
 
 Significant components of the Company’s deferred tax assets at December 31, 2009 and 2008 are as follows:
 
 Net operating loss carryforwards

$
2,495,822


$
2,651,095Stock based compensation


1,963,737



1,905,593Accrued expenses


349,185



—Total deferred tax assets


4,808,744



4,556,688Valuation allowance


(4,808,744
)


(4,556,688
)Net deferred tax assets

$
—


$
—
 
 Due to the uncertainty of their realization, no income tax benefit has been recorded by the Company for these loss carry forwards as valuation allowances have been established for any such benefits. The increase in the valuation allowance was the result of increases in the above stated items.
 
 At December 31, 2009 and 2008, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months.We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2009 and 2008, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions.
  F-21
  IDO Inc. has not filed its U.S. federal returns since its inception.  Due to recurring losses, management believes that once such returns are filed, the Company would not incur an income tax liability. By statute, as IDO Inc. has not filed its federal returns, all such years remain open to examination by the major taxing jurisdictions to which it is subject.  In addition, by statute, the Israeli income tax returns of IDO Ltd. for the years 2005 through 2008 remain open to examination.
 
 NOTE 8 - RELATED PARTY TRANSACTIONS
 
 The Company received working capital loans from certain non-management affiliated stockholders of IDO. (see Note 3).  Amounts owed on the loans aggregated to $44,826 at both December 31, 2009 and 2008.
 
 IDO Ltd. rented office space from a company wholly-owned by one of its directors, who is also its chief scientist.  The Company moved to new premises in November 2008.  Rent expense incurred approximated $21,000 for the year ended December 31, 2008.  See Note 10.
 
 NOTE 9 - COMMITMENTS AND CONTINGENCIES
 
 Employment Agreements
 
 On June 20, 2007, the Board of Directors of the Company appointed Michael Goldberg, the Company’s acting Chief Executive Officer since July 2006, to the position of President. Mr. Goldberg’s appointment became effective on July 2, 2007. In connection with his appointment as President, the Company and Mr. Goldberg entered into an employment agreement pursuant to which Mr. Goldberg is paid an annual salary of $198,000, payable monthly.However, in order to reduce operating expenses and conserve cash, since October 2008, Mr. Goldberg has been deferring a part of his salary and, as of December 31, 2009, such deferred amount totaled an aggregate of $214,375. The employment agreement has an initial term of one year; thereafter, the employment agreement provides that it is to be renewed automatically for additional one year periods unless either party shall advise the other 90 days before expiration of the initial (or a renewal term) of its intention to not renew the agreement beyond its then scheduled expiration date. Mr. Goldberg can terminate the employment agreement and the relationship there under at any time upon 60 days’ notice. If during the initial term the Company were to terminate the agreement for any reason other than “Just Cause” (as defined the employment agreement), then the Company is to pay to Mr. Goldberg the salary then payable under the agreement through the scheduled expiration of the initial term; if such termination for any reason other than “Just Cause” were to take place during a renewal period, then the Company is to pay to Mr. Goldberg an amount equal to three months’ salary. Under the agreement, Mr. Goldberg was awarded options to purchase 1,200,000 shares 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 were to vest in equal installments of 84,375 shares at the end of each calendar quarter, beginning September 30, 2007 through June 30, 2009.  The per share exercise price ranges 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. However, in order to reduce operating expenses and conserve cash, since December, 2008, Mr. Shabbat has been deferring a part of his salary and, as of December 31, 2009, such deferred amount totaled an aggregate of $12,000. The management agreement had an initial term of one year; thereafter, the management agreement provides that it is to be renewed automatically for additional one year periods unless either party shall advise the other 90 days before expiration of the initial (or a renewal term) of its intention to not renew the agreement beyond its then scheduled expiration date. Under the agreement, Mr. Shabat was awarded options to purchase 240,000 shares of the Company’s common stock, which were 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. All of the options granted are vested as of June 30, 2009.  The per share exercise prices range between $0.17 and $1.67.
 
 F-22
  Lawsuits
 
 On October 10, 2009, a former officer/director filed an action in the Labor Court in Tel-Aviv against IDO IDO Ltd, as well as a director and the General Manager of IDO Ltd.  The action seeks the payment of amounts purportedly due and payable to the officer/director under his employment agreement with IDO Ltd. in the approximate amount of 1,481,163 NIS  (approximately $393,000 based on the exchange rate in effect at the time of the filing of this report on Form 10-K).In connection with the suit, on November 5, 2009, IDO Ltd. received notice that a lien was placed on its assets by the former officer/director. The lien on the assets was released in November 2009 and in January 2010, IDO filed an answer whereby it denied all allegations. As of the date of the filing of this report on Form 10-K, no hearing date has yet been set.
 
 In June 2009, IDO Ltd. filed an action in the Labor Court in Tel-Aviv, Israel, against the officer based on material non-compliance by the officer with the terms of the employment agreement between the former officer and IDO Ltd. The action seeks disgorgement of amounts remitted to the former officer by the subsidiary under the employment agreement in the approximate amount of  1,356,000 NIS (approximately $366,000 based on the exchange rate in effect at the time of the filing of this report on Form 10-K) voiding the agreement, other equitable relief, and costs and disbursements, including attorneys’ fees. Previously, on May 10, 2009, the former officer/director resigned from all positions held with the subsidiary purportedly for “just cause” under the employment agreement. The resignation followed a request by IDO Ltd. that the former officer/director attend a meeting with management relating to his performance under the agreement, which request was refused. An answer was filed on April 13, 2010 on behalf of the former officer/director wherein he denied all allegations.
 
 The Company believes that these claims are without foundation and that it has meritorious defenses to them. The Company intends to aggressively defend its interests.
 
 Operating Leases
 
 The Company has entered into various operating lease agreements.  As of December 31, 2009, minimum future rental payments under such non-cancelable operating leases totaled $26,856 for the year ending December 31, 2010.
 
 Aggregate rent expenses amounted to $39,211 and $41,373 for the years ended December 31, 2009 and 2008, respectively.