**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




FORM
      10-KSB




(Mark
      One)




[  
              ]
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF
                1934




[ X ]
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              for
                  the transition period from July 1, 2006 to December 31,
                  2006




For
      the
      transition period from _____________ to ____________




Commission
      file number 333-120936




THE
      MEDICAL EXCHANGE INC.


(Name
      of
      small business Issuer in its charter)





**NEVADA**
              **(State
                or other jurisdiction of incorporation or
                organization)**
            **71-0915825**
              **(I.R.S.
                Employer Identification
                No.)**





17
      State Street


New
      York, New York 10004


**(Address
      of principal executive offices, including zip code)**




**212-269-4051** ****


(Issuer's
      telephone number)




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




Securities
      registered under Section 12(g) of the Exchange
      Act: **Common
      Stock**




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




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




Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act of 1934). Yes [ X ] No [ 
].




The
        Company's revenues for the transitional period from July 1, 2006 to December
        31,
        2006 were $0.
  As
        of
        February 22, 2007, there were 10,200,000 outstanding shares of the issuer's
        common stock. The issuer's common stock is quoted on the over-the-counter
        Bulletin Board. The Company does not believe that its common stock is the
        subject of an active market. There have been no transactions in the issuer’s
        common stock during the past 60 days. Accordingly, the market value of the
        issuer's common stock held by non-affiliates was $0.
  Transitional
        Small Business Disclosure Format (check one) Yes [  ] No [ X ]
 
  
  
 **PART
        I**
 
 **Item
        1. Description of Business**
  The
        Medical Exchange Inc. was incorporated in the state of Nevada on January
        23,
        2004. Although we have previously been engaged in the research, develop and
        assembly of transcription factor library, we currently do not have any
        significant business operations.
 
 On
        December 29, 2006, our Board of Directors determined to change our fiscal
        year
        end from June 30 to December 31, effective immediately. Accordingly, we are
        reporting a transition period from July 1, 2006 through December 31, 2006
        (the
“Transitional Period”). We changed our fiscal year to correspond to the fiscal
        year currently used by IDO (defined below).
 
 On
        July
        19, 2006, we entered into a Securities Purchase Agreement (the “Agreement”) with
        IDO Securities Limited, a privately held company organized under the laws
        of the
        State of Israel (“IDO”) that is engaged in the homeland security business, and
        the holders of all of the issued and outstanding share capital of IDO
        (collectively the “Selling Shareholders”), pursuant to which we agreed to
        purchase all of the issued and outstanding share capital of IDO and certain
        specified IDO assets (the “Proposed Transaction”). IDO, based in Israel,
        develops and sells devices to detect metal and other materials which are
        incorporated in metal detector gates. IDO currently has one commercialized
        product called the ‘Magshoe’ which detects metals inside shoes as well as next
        to or above the ankles. Under the terms of the Proposed Transaction, we will
        be
        paying the Selling Shareholders $1,000,000. If the Proposed Transaction closes
        as contemplated, IDO will become our wholly-owned subsidiary and our current
        “shell company” status would terminate. Under the terms of the Agreement (until
        the earlier of the Closing or the termination of the Agreement), we undertook
        to
        use commercial efforts to advance $40,000 per month to finance the monthly
        business operations of IDO.
 
 **Item
        2. Description of Property**
  Our
        offices are located at 17 State Street, New York, NY 1004. The offices are
        provided to us at no charge. We do not own or lease any other real property.
 
 **Item
        3. Legal Proceedings**
  We
        are
        not currently engaged in any litigation or other legal proceedings.
 
 **Item
        4. Submission of Matters to a Vote of Security Holders**
  Not
        Applicable.
 
 **PART
        II**
  **Item
        5.  Market For Common Equity And Related Stockholders
        Matters**
  Currently
        there is no established public trading market for our common stock. There
        are
        currently 11 holders of record of our common stock.
  We
        have
        not declared any dividend on our common stock since the inception of our
        company
        on January 23, 2004. There is no restriction in our Articles of Incorporation
        and Bylaws that will limit our ability to pay dividends on our common stock.
        However, we do not anticipate declaring and paying dividends to our shareholders
        in the near future.
  We
        do not
        have any compensation plans under which equity securities are authorized
        for
        issuance.
 
 2


**Item
        6. Management's Discussion and Analysis or Plan of
        Operation**
 
 Although
        we have previously been engaged in the research, develop and assembly of
        transcription factor library, we currently do not have any significant business
        operations. On July 19, 2006, we entered into the Agreement with IDO, pursuant
        to which we agreed to purchase all of the issued and outstanding share capital
        of IDO and certain specified IDO assets. IDO, based in Israel, develops and
        sells devices to detect metal and other materials which are incorporated
        in
        metal detector gates. IDO currently has one commercialized product called
        the
‘Magshoe’ which detects metals inside shoes as well as next to or above the
        ankles. Under the terms of the Proposed Transaction, we will be paying the
        Selling Shareholders $1,000,000. If the Proposed Transaction closes as
        contemplated, IDO will become our wholly-owned subsidiary and our current
“shell
        company” status would terminate.
  Our
        independent auditors have issued an opinion about our ability to continue
        as a
        going concern in connection with our audited financial statements for the
        Transitional Period. Our accumulated deficit was $183,510 as of December
        31,
        2006.
  The
        following discussion should be read in conjunction with our financial statements
        and the related notes that appear elsewhere herein. The following discussion
        contains forward-looking statements that reflect our plans, estimates and
        beliefs. Our actual results could differ materially from those discussed
        in the
        forward-looking statements.
 
 **RESULTS
        OF OPERATIONS**
 
 *From
        July 1, 2006 to December 31, 2006*
 
 For
        the
        transition period from July 1, 2006 to December 31, 2006, we did not generate
        any revenue. During this period we did not conduct any significant business
        operations.
  Total
        operating expenses for the transition period from July 1, 2006 to December
        31,
        2006 were $60,470. Out of these total expenses, professional fees paid to
        our
        independent auditors and legal counsel for the transition period from July
        1,
        2006 to December 31, 2006 were $55,377. Bank charges and other office charges
        for the period from July 1, 2006 to December 31, 2006 were $1,014. Other
        operating expenses for the transition period from July 1, 2006 to December
        31,
        2006 were $4,079.
 
 **PLAN
        OF OPERATION**
 
 Although
        we have previously been engaged in the research, develop and assembly of
        transcription factor library, we currently do not have any significant business
        operations. On July 19, 2006, we entered into the Agreement with IDO, pursuant
        to which we agreed to purchase all of the issued and outstanding share capital
        of IDO and certain specified IDO assets. IDO, based in Israel, develops and
        sells devices to detect metal and other materials which are incorporated
        in
        metal detector gates. IDO currently has one commercialized product called
        the
‘Magshoe’ which detects metals inside shoes as well as next to or above the
        ankles. Under the terms of the Proposed Transaction, we will be paying the
        Selling Shareholders $1,000,000. If the Proposed Transaction closes as
        contemplated, IDO will become our wholly-owned subsidiary and our current
“shell
        company” status would terminate.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
  Presently,
        we do not have any revenues. On June 19, 2006, pursuant to share purchase
        agreements, we issued to 11 institutional and private investors an aggregate
        of
        8,037,500 shares of common stock, par value $0.001 per share (hereinafter
        the
“Common Stock”), for aggregate gross consideration to us of $80,375. On October
        16, 2006, we issued to an investor an additional 50,000 shares of our Common
        Stock for aggregate gross consideration to us of $500 We intend to continue
        using the proceeds from that sale of stock to fund the operation of our business
        until the closing of the Proposed Transaction. However, our cash and working
        capital is not sufficient to enable us to carry out our operations for the
        next
        12 months without additional financing. There is no assurance that we will
        obtain any additional financing.
  Due
        to
        the uncertainty of our ability to meet our current operating and capital
        expenses, in their report on the annual financial statements for the transition
        period from July 1, 2006 to December 31, 2006, our independent auditors included
        an explanatory paragraph regarding concerns about our ability to continue
        as a
        going concern. Our financial statements contain additional note disclosures
        describing the circumstances that lead to this disclosure by our independent
        auditors.
 
 **Item
        7. Financial Statements**
  The
        information called for by this Item 7 is included following the "Index to
        Financial Statements" contained in this Transition Report on Form
        10-KSB.
 
 **Item
        8.  Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure**




None.





3




**Item
        8A.  Controls and Procedures**
  Based
        on
        the most recent evaluation, which was completed within 90 days of filing
        of this
        Transition Report on Form 10-KSB, our principal executive officer and principal
        accounting officer believe our disclosure controls and procedures (as defined
        in
        Exchange Act Rule 13a-14 and 15d-14) are effective. There were no significant
        changes in our internal controls, nor other facts that would significantly
        affect these controls subsequent to the date of this evaluation, including
        any
        corrective actions with regard to significant deficiencies and material
        weaknesses.
 
 **Item
        8B.**  **Other
        Information**
  None.
 **PART
        III**
 
 **Item
        9.  Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(A) of The Exchange Act.**
  Set
        forth
        below is certain information relating to the members of our Board of Directors
        and executive officers during the transition period from July 1, 2006 to
        December 31, 2006.
  **Name**
              **Position
                  Held with**
                **the
                  Company**
              **Age**Irit
                  Reiner
              Director
              47Michael
                  Goldberg
              Director
                  and Acting Chief Executive Officer
              56
  *Business
        Experience*
  The
        following is a brief account of the education and business experience of
        each
        director and executive officer during at least the past five years, indicating
        each person's business experience, principal occupation during the period,
        and
        the name and principal business of the organization by which he was
        employed.
  ***Irit
        Reiner*** has
        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.
 
 ***Michael
        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 to both private
        and
        public companies.
 
 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.
  **Conflicts
        of Interest**
  We
        believe that none of our officers or directors will be subject to conflicts
        of
        interest.
  **Involvement
        in Certain Legal Proceedings**
  To
        our
        knowledge, during the past five years, our officer and director has: (1)
        not
        filed a petition under the federal bankruptcy laws or any state insolvency
        law,
        nor had a receiver, fiscal agent or similar officer appointed by a court
        for the
        business or present of such a person, or any partnership in which he was
        a
        general partner at or within two yeas before the time of such filing, or
        any
        corporation or business association of which he was an executive officer
        within
        two years before the time of such filing; (2) were convicted in a criminal
        proceeding or named subject of a pending criminal proceeding (excluding traffic
        violations and other minor offenses); (3) were the subject of any order,
        judgment or decree, not subsequently reversed, suspended or vacated, of any
        court of competent jurisdiction, permanently or temporarily enjoining him
        from
        or otherwise limiting the following activities: (i) acting as a futures
        commission merchant, introducing broker, commodity trading advisor, commodity
        pool operator, floor broker, leverage transaction merchant, associated person
        of
        any of the foregoing, or as an investment advisor, underwriter, broker or
        dealer
        in securities, or as an affiliated person, director of any investment company,
        or engaging in or continuing any conduct or practice in connection with such
        activity; (ii) engaging in any type of business practice; (iii) engaging
        in any
        activity in connection with the purchase or sale of any security or commodity
        or
        in connection with any violation of federal or state securities laws or federal
        commodity laws; (4) were the subject of any order, judgment or decree, not
        subsequently reversed, suspended or vacated, of any federal or state authority
        barring, suspending or otherwise limiting for more than 60 days the right
        of
        such person to engage in any activity described above under this Item, or
        to be
        associated with persons engaged in any such activity; (5) were found by a
        court
        of competent jurisdiction in a civil action or by the Securities and Exchange
        Commission to have violated any federal or state securities law and the judgment
        in subsequently reversed, suspended or vacate; (6) were found by a court
        of
        competent jurisdiction in a civil action or by the Commodity Futures Trading
        Commission to have violated any federal commodities law, and the judgment
        in
        such civil action or finding by the Commodity Futures Trading Commission
        has not
        been subsequently reversed, suspended or vacated.


4




**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 Transition
        Report on Form 10-KSB.
  **Audit
        Committee and Audit Committee Financial Expert**
  At
        present we do not have a separately designated standing audit committee.
        The
        entire board of directors is acting as our Company's Audit Committee, as
        specified in section 3(a)(58)(b) of the Exchange Act. The board of directors
        has
        determined that at present we have no audit committee financial expert serving
        on the Audit Committee. Our company, at present, does not have any operations.
        We are seeking, however, to have a financial expert in our Audit Committee.
 
 **Item
        10. Executive Compensation**
  **Compensation**
  We
        have
        not paid any compensation to our acting Chief Executive Officer, or to any
        other
        executive officer or director, during the transition period from July 1,
        2006 to
        December 31, 2006.
  **Employment
        Agreements**
  We
        have
        not entered into any employment agreement or consulting agreement with our
        directors and executive officers. There are currently no arrangements or
        plans
        in which we provide pension, retirement or similar benefits for directors
        or
        executive officers. Our directors and executive officers may receive stock
        options at the discretion of our board of directors in the future. We do
        not
        have any material bonus or profit sharing plans pursuant to which cash or
        non-cash compensation is or may be paid to our directors or executive officers,
        except that stock options may be granted at the discretion of our board of
        directors.
  At
        the
        closing of the Proposed Transaction, Mr. Gill Stiss (“Stiss”), the current
        president of IDO and one our stockholders, is to be appointed to our Board
        of
        Directors. Stiss will continue to serve as a director of IDO post closing.
        In
        addition, at closing, IDO, as our wholly-owned subsidiary, and Stiss will
        enter
        into an employment agreement pursuant to which Stiss is to be retained as
        IDO’s
        Chief Technology Officer. The initial term of the employment agreement is
        to be
        three years which will be automatically renewable for successive two year
        terms
        unless IDO or Stiss indicate in writing, upon 120 days prior to the scheduled
        termination of the initial term or any renewal term, that such party does
        not
        intend to renew the agreement. The gross monthly salary which Stiss shall
        be
        entitled to under the employment agreement, including all fringe benefits
        (insurance, cell phone, car lease), will be NIS 60,000 (approximately $13,400).
        Under the terms of the employment agreement, Stiss will be entitled to spend
        up
        to 10% of his working time working for another company he currently owns.
        The
        employment agreement may be terminated by Stiss for any reason on 90 days
        written notice or for Good Reason (as defined in the employment agreement)
        or by
        IDO for Just Cause (as defined in the employment agreement) or for any other
        reason. In the event of a termination by Stiss for Good Reason or by IDO
        for any
        reason other than Just Cause, IDO is to pay Stiss an amount equal to Stiss’
salary then payable from the date of such termination to the end of the term.
        Termination of Stiss’ employment for cause shall automatically be deemed as
        Stiss’ resignation from the Board of Directors of IDO and the
        Company.
 
 *Directors
        Compensation*
  We
        reimburse our directors for expenses incurred in connection with attending
        board
        meetings but did not pay director's fees or other cash compensation for services
        rendered as a director during the transition period from July 1, 2006 to
        December 31, 2006.


5




We
        have
        no formal plan for compensating our directors for their service in their
        capacity as directors. We may grant to our directors in the future options
        to
        purchase shares of common stock as determined by our Board of Directors or
        a
        compensation committee which may be established in the future. Directors
        are
        entitled to reimbursement for reasonable travel and other out-of-pocket expenses
        incurred in connection with attendance at meetings of our board of directors.
        The board of directors may award special remuneration to any director
        undertaking any special services on behalf of the Company other than services
        ordinarily required of a director. Other than indicated in this report, no
        director received and/or accrued any compensation for his or her services
        as a
        director, including committee participation and/or special
        assignments.
 
 **Item
        11.  Security Ownership of Certain Beneficial Owners and Management
        and Related Stockholder Matters**
 
 The
        following table sets forth certain information as of February 21, 2007, with
        respect to the ownership of Common Stock by of more than five percent of
        any
        class of the Company's voting securities. None of our directors or officers
        owned any shares of our Common Stock as of such date.
  **Name
                    and Address of**
                  **Beneficial
                    Owner**
                
                **Common
                    Stock**
                  **Beneficially**
                  **Owned**
                
                
                
                **Percentage
                    of**
                  **Common**
                  **Stock**Mr.
                    Gil Stiss
                  41/13
                    Nahal Lachish St., Ashdod, Israel 77707
                
                
                1,700,000
                (1)
                
                
                
                16.75
                %Rolfe
                    Investment Ltd.
                  Chamerstrasse
                    12cPOB 4436 Zug.
                  Switzerland
                    6304
                
                
                916,667
                
                
                
                
                9.03
                %Mr.
                    Zeev Bronfeld
                  6
                    Uri Street
                  Tel
                    Aviv, Israel
                
                
                916,667
                
                
                
                
                9.03
                %EDA
                    Capital Corporation
                  1685
                    - 54th Street, Brooklyn NY 11204
                
                
                916,667
                
                
                
                
                9.03
                %ACC
                    Holdings Ltd.
                  Pasea
                    Estate, Road Town, Tortola, British Virgin Island
                
                
                916,667
                
                
                
                
                9.03
                %Pentium
                    Management Ltd.
                  12
                    Parnes Str, Apt 10
                  Har
                    Nof, Jerusalem
                  Israel
                
                
                916,666
                
                
                
                
                9.03
                %Zegal
                    & Ross Capital LLC
                  20
                    Robert Pitt Drive, Suite 214
                  Monsey,
                    New York 10952
                
                
                916,666
                
                
                
                
                9.03
                %Ms.
                    Adi Levy
                  7
                    Sapir St., Gedera, Israel 70700
                
                
                900,000
                (2)
                
                
                
                8.87
                %Melton
                    Management LimitedP.O. Box 3161
                  Road
                    Town, Tortola, British Virgin Islands
                
                
                847,000
                
                
                
                
                8.34
                %Mr.
                    Yoav Hirsch
                  POB
                    4056 Caesarea, Israel 38900
                
                
                750,000
                (2)
                
                
                
                7.40
                %
 **(1)**
                The
                    stockholder holds an irrevocable proxy from the holders of an
                    additional
                    1,950,000 shares of Common Stock to vote their shares on all
                    matters
                    submitted to stockholders. The selling stockholder disclaims
                    any
                    beneficial interest in the shares to which he holds a
                    proxy.
  **(2)**
                The
                    stockholder gave an irrevocable proxy to the stockholder referred
                    to in
                    footnote (1) to vote its shares on all matters submitted to
                    stockholders.


6


**Item
        12.  Certain Relationships and Related
        Transactions**
  Other
        than the Proposed Transaction, the details of which are provided above and
        incorporated herein by reference, we have not been a party to any transaction,
        proposed transaction, or series of transactions in which the amount involved
        exceeds $60,000, and in which, to our knowledge, any of our directors, officers,
        five percent beneficial security holder, or any member of the immediate family
        of the foregoing persons has had or will have a direct or indirect material
        interest.
  **Item
        13. Exhibits**
  Exhibits
  Exhibit
                    No.
                
                Document
                    Description3.1*
                
                Articles
                    of Incorporation3.2*
                
                Bylaws4.1*
                
                Specimen
                    ordinary share certificate31.1
                
                Rule
                    13a-14(a)/15d-14(a) Certification32.1
                
                Section
                    1350 Certification
  *  Incorporated
        by reference to same exhibit filed with the Company's Registration Statement
        on
        Form SB-2 dated December 1, 2004.


7


**Item
        14. Principal Accountant Fees and Services**
  (1)
        Audit
        Fee (including review of interim financial statements).
  Audit
        Fees consist of fees for professional services rendered for the audit of
        our
        consolidated financial statements included in the Annual and Transition Reports
        on Form 10-KSB and the review of the interim financial statements included
        in
        the Quarterly Reports on Form 10-QSB, and for the services that are normally
        provided in connection with regulatory filings or engagements.
 
 The
        aggregate fees billed by our accountant, Amisano Hanson, for professional
        services rendered for the audit of our financial statements included in the
        Annual and Transition Reports on Form 10-KSB and the review of the interim
        financial statements included in the Quarterly Reports on Form 10-QSB for
        the
        year ended June 30, 2005, the year ended June 30, 2006, and the Transition
        Period were $12,809 (which amount is comprised of $7,138 in respect of the
        year-end audit and $5,167 for review of interim financial statements), $10,021
        (which amount is comprised of $4,710 in respect of the year-end audit and
        $5,311
        in respect of the review of interim financial statements) and $6,100 (which
        amount is comprised of $4,500 in respect of the audit for the full Transition
        Period and $1,600 in respect of the review of interim financial statements),
        respectively.
  (2)
        Audit-Related Fees.
  There
        have been no audit-related fees billed by our accountants in each of the
        last
        two fiscal years of our Company.
  (3)
        Tax
        Fees.
  There
        have been no tax fees billed by our accountants in each of the last two fiscal
        years of our Company.
  (4)
        All
        Other Fees.
  There
        have been no other fees billed by our accountants in each of the last two
        fiscal
        years of our Company.
  (5)
        It is
        the policy of our board of directors that before the accountant is engaged
        to
        render audit or non-audit services, the engagement is approved by the Board
        of
        Directors that is at present acting as the Audit Committee.
  (6)
        Not
        applicable.


8


In
        accordance with Section 13 or 15(d) of the Securities and Exchange Act of
        1934,
        the Registrant has duly caused this report to be signed on its behalf by
        the
        undersigned, thereunto duly authorized, on this 23rd day of February,
        2007.


**THE
                MEDICAL EXCHANGE INC.**
              **(Registrant)**
              
              BY:/s/
                Michael Goldberg**
              Michael
                Goldberg
              Acting
                CEO (principal executive officer and principal accounting
              and financial officer)






Pursuant
      to the requirements of the Securities 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.





/s/
                Michael Goldberg**
              Michael
                Goldberg
              principal
                executive officer, principal accounting officer and director
              February
                23, 2007/s/
                Irit Reiner
              Irit
                Reiner
              Director
              February
                  23, 2007




9







**THE
      MEDICAL EXCHANGE INC.**




(A
      Development Stage Company)




REPORT
      AND FINANCIAL STATEMENTS




December
      31, 2006




( Stated
      in US Dollars )











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Stockholders,


The
      Medical Exchange Inc.


(A
      Development Stage Company)





We
      have
      audited the accompanying balance sheets of The Medical Exchange Inc. (a
      Development Stage Company) as of December 31, 2006 and June 30, 2006 and the
      related statements of operations, stockholders' equity (deficiency) and cash
      flows for the six months ended December 31, 2006, the year ended June 30, 2006
      and the period January 23, 2004 (Date of Inception) to December 31, 2006.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America). Those standards require
      that we plan and perform an audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, these financial statements referred to above present fairly, in all
      material respects, the financial position of The Medical Exchange Inc. as of
      December 31, 2006 and June 30, 2006 and the results of its operations and its
      cash flows for the six months ended December 31, 2006, the year ended June
      30,
      2006 and the period from January 23, 2004 (Date of Inception) to December
      31, 2006, in conformity with accounting principles generally accepted in the
      United States of America.





The
      accompanying financial statements referred to above have been prepared assuming
      that the Company will continue as a going concern. As discussed in Note 1 to
      the
      financial statements, the Company is in the development stage, has no
      established source of revenue and is dependent on its ability to raise capital
      from stockholders or other sources to sustain operations. These factors, along
      with other matters as set forth in Note 1, raise substantial doubt that the
      Company will be able to continue as a going concern. The financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.




Vancouver,
                CanadaFebruary
                14, 2007
            **C**hartered**A**ccountants









**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


BALANCE
      SHEETS


December
      31, 2006 and June 30, 2006


( Stated
      in US Dollars )




December
                31,
            
            June
                30,2006
            
            2006**ASSETS**CurrentCash
            
            $
            7,484
            
            $
            9,422Deferred
                acquisition costs
            
            
            55,550
            
            
            9,000$
            63,034
            
            $
            18,422**LIABILITIES**CurrentAccounts
                payable and accrued liabilities
            
            $
            101,548
            
            $
            19,466Loan
                payable - Note 3
            
            
            26,896
            
            
            4,396128,444
            
            
            23,862**STOCKHOLDERS’
                DEFICIENCY**Capital
                stock - Note 4Authorized:25,000,000
                common shares, par value $0.001 per shareIssued
                and outstanding:10,200,000
                common shares (June 30, 2006: 10,150,000)
            
            
            10,200
            
            
            10,150Additional
                paid-in capital
            
            
            144,731
            
            
            144,281Share
                subscriptions receivable
            
            
            (36,500
            )
            
            (36,500
            )Accumulated
                other comprehensive loss
            
            
            (331
            )
            
            (331
            )Deficit
                accumulated during the development stage
            
            
            (183,510
            )
            
            (123,040
            )(65,410
            )
            
            (5,440
            )$
            63,034
            
            $
            18,422


Commitment
      - Note 5






SEE
      ACCOMPANYING NOTES









**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


STATEMENTS
      OF OPERATIONS


for
      the
      six months ended December 31, 2006, the year ended June 30, 2006 and


for
      the
      period from January 23, 2004 (Date of Inception) to December 31,
      2006


( Stated
      in US Dollars )




January
                  23,Six
                  Months
              
              Year
              
              2004
                  (Date ofEnded
              
              Ended
              
              Inception)
                  toDecember
                  31,
              
              June
                  30,
              
              December
                  31,2006
              
              2006
              
              2006ExpensesAccounting
                  and audit fees
              
              $
              9,100
              
              $
              13,972
              
              $
              39,243Bank
                  charges and interest
              
              
              410
              
              
              426
              
              
              973Legal
                  fees
              
              
              46,277
              
              
              34,866
              
              
              117,572Office
                  and miscellaneous
              
              
              604
              
              
              -
              
              
              604Registration
                  and filing fees
              
              
              4,079
              
              
              9,632
              
              
              20,690Website
                  design and maintenance
              
              
              -
              
              
              -
              
              
              2,928Loss
                  for the period before other item
              
              
              (60,470
              )
              
              (58,896
              )
              
              (182,010
              )Other
                  itemWrite-off
                  of advance receivable
              
              
              -
              
              
              -
              
              
              (1,500
              )Net
                  loss for the period
              
              
              (60,470
              )
              
              (58,896
              )
              
              (183,510
              )Other
                  comprehensive lossForeign
                  currency translation adjustment
              
              
              -
              
              
              (113
              )
              
              (331
              )Comprehensive
                  loss for the period
              
              $
              (60,470
              )
              $
              (59,029
              )
              $
              (183,841
              )Basic
                  and diluted loss per share
              
              $
              (0.01
              )
              $
              (0.02
              )Weighted
                  average number of shares outstanding
              
              
              10,200,000
              
              
              2,685,034






SEE
        ACCOMPANYING NOTES









**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIENCY)


for
      the
      period from January 23, 2004 (Date of Inception) to December 31,
      2006


( Stated
      in US Dollars )








DeficitAccumulated
            
            
            
            AccumulatedCommon
                Stock
            
            Additional
            
            Other
            
            Common
            
            During
                theNumber
                of
            
            
            
            Paid-in
            
            Comprehensive
            
            Stock
            
            DevelopmentShares
            
            Amount
            
            Capital
            
            Loss
            
            Subscriptions
            
            Stage
            
            TotalBalance,
                January 23, 2004
              (Date
                of Inception)
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Common
                stock issued for cash
              -
                at $0.02 per share
            
            
            2,112,500
            
            
            2,113
            
            
            40,137
            
            
            -
            
            
            -
            
            
            -
            
            
            42,250Foreign
                currency translation
              adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (154
            )
            
            -
            
            
            -
            
            
            (154
            )Net
                loss for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,893
            )
            
            (6,893
            )Balance,
                June 30, 2004
            
            
            2,112,500
            
            
            2,113
            
            
            40,137
            
            
            (154
            )
            
            -
            
            
            (6,893
            )
            
            35,203Foreign
                currency translation
              adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (44
            )
            
            -
            
            
            -
            
            
            (44
            )Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (57,251
            )
            
            (57,251
            )Balance,
                June 30, 2005
            
            
            2,112,500
            
            
            2,113
            
            
            40,137
            
            
            (198
            )
            
            -
            
            
            (64,144
            )
            
            (22,092
            )Common
                stock issued for cash
              -
                at $0.01 per share
            
            
            8,037,500
            
            
            8,037
            
            
            72,338
            
            
            -
            
            
            -
            
            
            -
            
            
            80,375Common
                stock subscriptions
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (36,500
            )
            
            -
            
            
            (36,500
            )Director’s
                forgiveness of debt
            
            
            -
            
            
            -
            
            
            31,806
            
            
            -
            
            
            -
            
            
            -
            
            
            31,806Foreign
                currency translation
              adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (133
            )
            
            -
            
            
            -
            
            
            (133
            )Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (58,896
            )
            
            (58,896
            )Balance,
                June 30, 2006
            
            
            10,150,000
            
            
            10,150
            
            
            144,281
            
            
            (331
            )
            
            (36,500
            )
            
            (123,040
            )
            
            (5,440
            )


.../cont’d






SEE
      ACCOMPANYING NOTES







Continued


**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIENCY)


for
      the
      period from January 23, 2004 (Date of Inception) to December 31,
      2006


( Stated
      in US Dollars )








DeficitAccumulated
            
            
            
            AccumulatedCommon
                Stock
            
            Additional
            
            Other
            
            Common
            
            During
                theNumber
                of
            
            
            
            Paid-in
            
            Comprehensive
            
            Stock
            
            DevelopmentShares
            
            Amount
            
            Capital
            
            Loss
            
            Subscriptions
            
            Stage
            
            TotalBalance,
                June 30, 2006
            
            
            10,150,000
            
            
            10,150
            
            
            144,281
            
            
            (331
            )
            
            (36,500
            )
            
            (123,040
            )
            
            (5,440
            )Common
                stock issued for cash
              -
                at $0.01 per share
            
            
            50,000
            
            
            50
            
            
            450
            
            
            -
            
            
            -
            
            
            -
            
            
            500Net
                loss for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (60,470
            )
            
            (60,470
            )Balance,
                December 31, 2006
            
            
            10,200,000
            
            $
            10,200
            
            $
            144,731
            
            $
            (331
            )
            $
            (36,500
            )
            $
            (183,510
            )
            $
            (65,410
            )




SEE
        ACCOMPANYING NOTES










**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


STATEMENTS
      OF CASH FLOWS


for
      the
      six months ended December 31, 2006, the year ended June 30, 2006, and




for
      the
      period from January 23, 2004 (Date of Inception) to December 31,
      2006


( Stated
      in US Dollars )







January
                  23,Six
                  Months
              
              Year
              
              2004
                  (Date ofEnded
              
              Ended
              
              Inception)
                  toDecember
                  31,
              
              June
                  30,
              
              December
                  31,2006
              
              2006
              
              2006Cash
                  Flows from Operating ActivitiesNet
                  loss for the period
              
              $
              (60,470
              )
              $
              (58,896
              )
              $
              (183,510
              )Adjustments
                  to reconcile net loss to net cash
                used
                  by operating activities:Accounts
                  payable and accrued liabilities
              
              
              82,082
              
              
              6,679
              
              
              101,548Net
                  cash provided by (used in) operating activities
              
              
              21,612
              
              
              (52,217
              )
              
              (81,962
              )Cash
                  Flows from Investing ActivityDeferred
                  acquisition costs
              
              
              (46,550
              )
              
              (9,000
              )
              
              (55,550
              )Net
                  cash used in investing activity
              
              
              (46,550
              )
              
              (9,000
              )
              
              (55,550
              )Cash
                  Flows from Financing ActivitiesIssuance
                  of common shares
              
              
              500
              
              
              80,375
              
              
              123,125Share
                  subscriptions receivable
              
              
              -
              
              
              (36,500
              )
              
              (36,500
              )Loan
                  payable
              
              
              22,500
              
              
              4,396
              
              
              26,896Increase
                  in due to related party
              
              
              -
              
              
              21,238
              
              
              31,806Net
                  cash provided by financing activities
              
              
              23,000
              
              
              69,509
              
              
              145,327Effect
                  of foreign currency translation on cash
              
              
              -
              
              
              (133
              )
              
              (331
              )Increase
                  (decrease) in cash during the period
              
              
              (1,938
              )
              
              8,159
              
              
              7,484Cash,
                  beginning of period
              
              
              9,422
              
              
              1,263
              
              
              -Cash,
                  end of period
              
              $
              7,484
              
              $
              9,422
              
              $
              7,484


SEE
        ACCOMPANYING NOTES







**THE
      MEDICAL EXCHANGE INC.**


(A
      Development Stage Company)


NOTES
      TO
      THE FINANCIAL STATEMENTS


December
      31, 2006 and June 30, 2006


( Stated
      in US Dollars )








Note
      1 Nature
      and Continuance of Operations





a) Organization





The
      Medical Exchange Inc. (the “Company”) was incorporated in the State of Nevada,
      United States of America on January 23, 2004. On December 29, 2006, the
      Company’s Board of Directors changed the fiscal year-end of the Company from
      June 30 to December 31. Accordingly, the Company is reporting a six-month
      transition period from July 1, 2006 through December 31, 2006.





b) Development
      Stage Activities





The
      Company is in the development stage. Since its formation, the Company has not
      yet realized any revenues from its planned operations. During the period ended
      December 31, 2006, the Company entered into an agreement to purchase a private
      company based in Israel that is engaged in the homeland security field and
      which
      develops and sells devices to detect metal and other materials which are
      incorporated in metal detection gates (Refer to Note 5).


c)    
        Going Concern


These
      financial statements have been prepared in accordance with generally accepted
      accounting principles applicable to a going concern, which assumes that the
      Company will be able to meet its obligations and continue its operations for
      its
      next fiscal year. Realization values may be substantially different from
      carrying values as shown and these financial statements do not give effect
      to
      adjustments that would be necessary to the carrying values and classification
      of
      assets and liabilities should the Company be unable to continue as a going
      concern. At December 31, 2006, the Company had not yet achieved profitable
      operations, has accumulated losses of $183,510 since its inception, has a
      working capital deficiency of $120,960 and expects to incur further losses
      in
      the development of its business, all of which casts substantial doubt about
      the
      Company’s ability to continue as a going concern. The Company’s ability to
      continue as a going concern is dependent upon its ability to generate future
      profitable operations and/or to obtain the necessary financing to meet its
      obligations and repay its liabilities arising from normal business operations
      when they come due. Management has no formal plan in place to address this
      concern but considers that the Company will be able to obtain additional funds
      by equity financing and/or related party advances, however there is no assurance
      of additional funding being available.










The
        Medical Exchange Inc.
 (A
        Development Stage Company)
 Notes
        to
        the Financial Statements
 December
        31, 2006 and June 30, 2006
 ( Stated
        in US Dollars )
        - Page
        2


Note
      2 Significant
      Accounting Policies





The
      financial statements of the Company have been prepared in accordance with
      generally accepted accounting principles in the United States of America.
      Because a precise determination of many assets and liabilities is dependent
      upon
      future events, the preparation of financial statements for a period necessarily
      involves the use of estimates, which have been made using careful judgement.
      Actual results may vary from these estimates.





The
      financial statements have, in management’s opinion, been properly prepared
      within the framework of the significant accounting policies summarized
      below:





a) Organizational
      and Start-up Costs





Costs
      of
      start-up activities, including organizational costs, are expensed as
      incurred.





b) Development
      Stage Company





The
      Company is a development stage company as defined in the Statements of Financial
      Accounting Standards (“SFAS”) No. 7. The Company is devoting substantially all
      of its present efforts to establish a new business and none of its planned
      principal operations have commenced. All losses accumulated since inception
      have
      been considered as part of the Company’s development stage
      activities.





c) Income
      Taxes





The
      Company has adopted the SFAS No. 109 - “Accounting for Income Taxes”. SFAS No.
      109, requires the use of the asset and liability method of accounting of income
      taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets
      and liabilities are recognized for the future tax consequences attributable
      to
      temporary differences between the financial statements carrying amounts of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled.





d) Basic
      and Diluted Loss Per Share





In
      accordance with SFAS No. 128 - “Earnings Per Share”, the basic loss per common
      share is computed by dividing net loss available to common stockholders by
      the
      weighted average number of common shares outstanding. Diluted loss per common
      share is computed similar to basic loss per common share except that the
      denominator is increased to include the number of additional common shares
      that
      would have been outstanding if the potential common shares had been issued
      and
      if the additional common shares were dilutive. At December 31, 2006, the Company
      had no stock equivalents that were anti-dilutive and excluded in the loss per
      share computation.







The
        Medical Exchange Inc.
 (A
        Development Stage Company)
 Notes
        to
        the Financial Statements
 December
        31, 2006 and June 30, 2006
 ( Stated
        in US Dollars )
        - Page
        3





Note
      2 Significant
      Accounting Policies -
      (cont’d)





e) Financial
      Instruments





The
      carrying value of the Company’s financial instruments, consisting of cash and
      accounts payable and accrued liabilities approximate their fair value due to
      the
      short-term maturity of such instruments. Loan payable also approximates fair
      value. Unless otherwise noted, it is management’s opinion that the Company is
      not exposed to significant interest, currency or credit risks arising from
      these
      financial instruments.





f) Foreign
      Currency Translation




During
        the six months ended December 31, 2006, the Company’s functional currency is the
        United States dollar as substantially all of the Company’s operations are in the
        United States. During the year ended June 30, 2006, the Company’s functional
        currency was the Canadian dollar as substantially all of the Company’s
        operations are in Canada. The Company uses the United States dollar as its
        reporting currency for consistency with registrants of the Securities and
        Exchange Commission and in accordance with SFAS No. 52.
  Assets
        and liabilities that are denominated in a foreign currency are translated
        at the
        exchange rate in effect at the period end and capital accounts are translated
        at
        historical rates. Income statement accounts are translated at the average
        rates
        of exchange prevailing during the period. Translation adjustments from the
        use
        of difference exchange rates from period to period are included in the
        comprehensive loss account in stockholders’ equity, if applicable.
  Transactions
        undertaken in currencies other than the functional currency of the entity
        are
        translated using the exchange rate in effect as of the transaction date.
        Any
        exchange gains and losses are included in the statement of
        operations.


g) Website
      Costs





The
      Company recognizes the costs incurred in the development of the Company's
      website in accordance with EITF 00-2 "Accounting for Website Development Costs"
      and, with the provisions of AICPA Statement of Position No. 98-1, "Accounting
      for the Costs of Computer Software Developed or Obtained for Internal Use".
      Accordingly, direct costs incurred during the application stage of development
      are capitalized and amortized over the estimated useful life. Fees incurred
      for
      web site hosting are expensed over the period of the benefit. Costs of operating
      a web site are expensed as incurred.





h) Deferred
      Acquisition Costs





Deferred
      acquisition costs consist of costs incurred in connection with the proposed
      business acquisition (refer to Note 5). These costs will be included in the
      purchase price on the completion of the acquisition or expensed if the
      acquisition does not complete.







The
        Medical Exchange Inc.
 (A
        Development Stage Company)
 Notes
        to
        the Financial Statements
 December
        31, 2006 and June 30, 2006
 ( Stated
        in US Dollars )
        - Page
        4





Note
      2 Significant
      Accounting Policies -
      (cont’d)





i) New
      Accounting Standards





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





Note
      3 Loan
      Payable




The
        loan payable is
        unsecured, non-interest bearing and has no specific terms for
        repayment.




Note
      4 Capital
      Stock





On
      February 6, 2004, the Company issued 2,112,500 shares of common stock at $0.02
      per share for proceeds of $42,250. Included in this amount is 450,000 shares
      issued to persons who were then directors of the Company.





On
      June
      19, 2006, the Company issued 8,037,500 shares of common stock at $0.01 per
      share
      for proceeds of $80,375. As at December 31, 2006 and June 30, 2006, there were
      subscriptions receivable of $36,500 in respect to the issuance.





On,
      July
      1, 2006, the Company issued 50,000 shares of common stock at $0.01 per share
      for
      proceeds of $500.





Note
      5 Agreement
      for Business Acquisition





On
      July
      19, 2006, the Company and a privately held company organized under the laws
      of
      the State of Israel (“IDO”) and the shareholders of IDO (collectively the
“Selling Shareholders”) entered into a Securities Purchase Agreement (the
“Agreement”) pursuant to which the Company agreed to purchase all of the issued
      and outstanding share capital of IDO and certain specified IDO assets (the
      “Proposed Transaction”). IDO, based in Israel, is engaged in the homeland
      security field and develops and sells devices to detect metal and other
      materials which are incorporated in metal detector gates. IDO currently has
      one
      commercialized product called the ‘Magshoe’ which detects metals inside shoes as
      well as next to or above the ankles.





Under
      the
      terms of the Proposed Transaction, the Company will pay the selling shareholders
      $1,000,000. If the Proposed Transaction closes as contemplated, IDO will become
      a wholly-owned subsidiary of the Company.









The
        Medical Exchange Inc.
 (A
        Development Stage Company)
 Notes
        to
        the Financial Statements
 December
        31, 2006 and June 30, 2006
 ( Stated
        in US Dollars )
        - Page
        5
  Note
        5 Business
        Acquisition -
        (cont’d)





The
      Company agreed to provide IDO with sufficient funds post closing to repay debts
      owing by IDO under certain promissory notes, according to the terms of such
      notes, which principal amount is approximately $861,000. At closing of the
      proposed transaction, the Company shall enter an employment agreement for a
      term
      of three years, renewable in successive two year terms, at New Israeli Shekels
      (NIS) 60,000 per month (approximately USD$13,400 per month).





Note
      6 Deferred
      Tax Assets





The
      following table summarizes the significant components of the Company’s deferred
      tax assets:





December
                31,
            
            June
                30,2006
            
            2006Deferred
                tax assetsNon-capital
                loss carryforward
            
            $
            54,948
            
            $
            31,236Valuation
                allowance for deferred tax asset
            
            
            (54,948
            )
            
            (31,236
            )$
            -
            
            $
            -




The
        amount taken into income as deferred tax assets must reflect that portion
        of the
        income tax loss carryforwards that is likely to be realized from future
        operations. The Company has chosen to provide an allowance of 100% against
        all
        available income tax loss carryforwards, regardless of their time of
        expiry.


At
      December 31, 2006, the Company has accumulated non-capital losses totaling
      $183,510, which is available to reduce taxable income in future taxation years.
      These losses expire beginning in the year ended June 30, 2024.





Note
      7 Subsequent
      Event




On
        February 14, 2007, the Company received $20,000 in respect to a note payable
        which is unsecured, bears interest at 8% per annum and is due on August 14,
        2007.