UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
  MARK
ONE
  x
              Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the Quarterly Period ended September 30, 2008;
  or
  o
                      Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from ________ to
________
  COMMISSION
FILE NUMBER: 0-51170
  IDO
SECURITY INC.
 (Exact
name of small business issuer 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
 New
York, New York 10004
 (Address
of principal executive offices, including zip code)
 
 646-214-1234
 (Issuer's
telephone number, including area code)
  Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes   x    No 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   (Do not
check if a smaller reporting company) Smaller reporting company x
 
 Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  o  No x
  As of
December 15, 2008, there were 46,109,000 shares of registrant’s common stock,
par value $0.001 per share outstanding.
 
 
 
 INDEX PAGE
 
  PAGEPART
      I -- FINANCIAL INFORMATIONItem
      1
              Financial
      Statements
              1Condensed
      Consolidated Balance Sheets September 30, 2008 (Unaudited) and December
      31, 2007 (Audited)
              1Unaudited
      Condensed Consolidated Statements of Operations for the nine and three
      months ended September 30, 2008 and 2007
              2Unaudited
      Condensed Consolidated Statements of Cash Flows for the nine and
      three months ended September 30, 2008 and 2007
              3Notes
      to Unaudited Condensed Consolidated Financial Statements
              4Item
      2
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12Item
      4T
              Controls
      and Procedures
              16PART
      II – OTHER INFORMATIONItem
      1
              Legal
      Proceedings
              16Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              16Item
      3
              Defaults
      upon Senior Securities
              17Item
      4
              Submission
      of Matters to a Vote of Security Holders
              17Item
      5
              Other
      Information
              17Item
      6
              Exhibits
              17SIGNATURES
              18
 
 
  IDO SECURITY INC. AND
      SUBSIDIARY(A Development Stage
      Company)CONDENSED CONSOLIDATED BALANCE
      SHEETSFOR THE PERIODS
      INDICATEDSeptember
                                                                      
                                                                      
                                                                      December
31,2008
                                                                      
                                                                      
                                                                      2007(Unaudited)ASSETSCURRENT
    ASSETSCash and cash
      equivalents
                                                                      
                                                                      $
                                                                      31,431
                                                                      
                                                                      
                                                                      $
                                                                      353,701Due from escrow
      agent
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      1,150,000Inventory
                                                                      
                                                                      
                                                                      341,325
                                                                      
                                                                      
                                                                      
                                                                      177,037Prepaid expenses and other current
      assets
                                                                      
                                                                      
                                                                      116,232
                                                                      
                                                                      
                                                                      
                                                                      75,678Total current
      assets
                                                                      
                                                                      
                                                                      488,988
                                                                      
                                                                      
                                                                      
                                                                      1,756,416Property and equipment,
      net
                                                                      
                                                                      
                                                                      30,735
                                                                      
                                                                      
                                                                      
                                                                      52,192Goodwill
                                                                      
                                                                      
                                                                      1,955,002
                                                                      
                                                                      
                                                                      
                                                                      1,955,002Deferred financing costs,
      net
                                                                      
                                                                      
                                                                      621,573
                                                                      
                                                                      
                                                                      
                                                                      718,106Total
assets
                                                                      
                                                                      $
                                                                      3,096,298
                                                                      
                                                                      
                                                                      $
                                                                      4,481,716LIABILITIES AND STOCKHOLDERS'
      EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts payable and accrued
      liabilities
                                                                      
                                                                      $
                                                                      1,409,054
                                                                      
                                                                      
                                                                      $
                                                                      516,962Bank line of
      credit
                                                                      
                                                                      
                                                                      208,250
                                                                      
                                                                      
                                                                      
                                                                      -Convertible promissory
      notes(net of discount of $2,417,603 and
      $855,758)
                                                                      
                                                                      
                                                                      2,436,673
                                                                      
                                                                      
                                                                      
                                                                      2,256,563Notes payable -
      other
                                                                      
                                                                      
                                                                      431,359
                                                                      
                                                                      
                                                                      
                                                                      -Loan payable - related
      party
                                                                      
                                                                      
                                                                      44,826
                                                                      
                                                                      
                                                                      
                                                                      44,826Total current
      liabilities
                                                                      
                                                                      
                                                                      4,530,162
                                                                      
                                                                      
                                                                      
                                                                      2,818,351NON-CURRENT
      LIABILITIESConvertible promissory
      notes(net of discount of $138,746 and
      $2,642,522)
                                                                      
                                                                      
                                                                      52,528
                                                                      
                                                                      
                                                                      
                                                                      -Accrued severance
      pay
                                                                      
                                                                      
                                                                      189,014
                                                                      
                                                                      
                                                                      
                                                                      155,681Total  liabilities
                                                                      
                                                                      
                                                                      4,771,704
                                                                      
                                                                      
                                                                      
                                                                      2,974,032STOCKHOLDERS'
      EQUITY  (DEFICIT)Preferred
    Stock20,000,000 shares authorized; none
      outstandingCommon stock, $.001 par
      value;100,000,000 shares authorized;
      45,114,464 and 34,361,250issued and outstanding,
      respectively
                                                                      
                                                                      
                                                                      45,114
                                                                      
                                                                      
                                                                      
                                                                      34,361Additional paid-in
      capital
                                                                      
                                                                      
                                                                      19,036,534
                                                                      
                                                                      
                                                                      
                                                                      16,431,941Stock subscription
      receivable
                                                                      
                                                                      
                                                                      (25
                                                                      )
                                                                      
                                                                      
                                                                      (25
                                                                      )Accumulated other comprehensive
      loss
                                                                      
                                                                      
                                                                      (331
                                                                      )
                                                                      
                                                                      
                                                                      (331
                                                                      )Deferred stock based
      compensation
                                                                      
                                                                      
                                                                      (66,332
                                                                      )
                                                                      
                                                                      
                                                                      -Deficit accumulated during the
      development stage
                                                                      
                                                                      
                                                                      (20,690,366
                                                                      )
                                                                      
                                                                      
                                                                      (14,958,262
                                                                      )Total stockholders' equity
      (deficit)
                                                                      
                                                                      
                                                                      (1,675,406
                                                                      )
                                                                      
                                                                      
                                                                      1,507,684Total liabilities and
      stockholders' equity (deficit)
                                                                      
                                                                      $
                                                                      3,096,298
                                                                      
                                                                      
                                                                      $
                                                                      4,481,716
  See
      Notes to Condensed Consolidated Financial
  Statements.
 1
  IDO SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSJanuary
      23,Nine
      Months
                  
                  
                  Nine
      Months
                  
                  
                  2004
      (Date of
                  
                  
                  Three
      Months
                  
                  
                  Three
      MonthsEnded
                  
                  
                  Ended
                  
                  
                  Inception)
      to
                  
                  
                  Ended
                  
                  
                  EndedSeptember
      30,
                  
                  
                  September
      30,
                  
                  
                  September
      30,
                  
                  
                  September
      30,
                  
                  
                  September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2007(UNAUDITED)
                  
                  
                  (UNAUDITED)
                  
                  
                  (UNAUDITED)
                  
                  
                  (UNAUDITED)
                  
                  
                  (UNAUDITED)Revenues
                  
                  $
                  136,759
                  
                  
                  $
                  -
                  
                  
                  $
                  185,854
                  
                  
                  $
                  103,075
                  
                  
                  $
                  -Cost
      of sales
                  
                  
                  58,039
                  
                  
                  
                  -
                  
                  
                  
                  165,226
                  
                  
                  
                  46,631
                  
                  
                  
                  -Gross
      profit
                  
                  
                  78,720
                  
                  
                  
                  -
                  
                  
                  
                  20,628
                  
                  
                  
                  56,444
                  
                  
                  
                  -Operating
      expensesResearch
      and development costs
                  
                  
                  306,709
                  
                  
                  
                  196,094
                  
                  
                  
                  585,886
                  
                  
                  
                  87,418
                  
                  
                  
                  96,933Selling,
      general and administrative expenses
                  
                  
                  1,821,615
                  
                  
                  
                  601,489
                  
                  
                  
                  2,996,813
                  
                  
                  
                  359,018
                  
                  
                  
                  289,180Stock
      based compensation - selling, general and administrative
      expenses
                  
                  
                  587,806
                  
                  
                  
                  2,567,829
                  
                  
                  
                  5,966,909
                  
                  
                  
                  21,621
                  
                  
                  
                  1,111,752Total
      operating expenses
                  
                  
                  2,716,130
                  
                  
                  
                  3,365,412
                  
                  
                  
                  9,549,608
                  
                  
                  
                  468,057
                  
                  
                  
                  1,497,865Loss
      from operations
                  
                  
                  (2,637,410
                  )
                  
                  
                  (3,365,412
                  )
                  
                  
                  (9,528,980
                  )
                  
                  
                  (411,613
                  )
                  
                  
                  (1,497,865
                  )Interest
      expense  (including amortizationsof
      debt discount, beneficial conversion featureand
      deferred finance costs)
                  
                  
                  (3,096,511
                  )
                  
                  
                  (5,881,112
                  )
                  
                  
                  (11,166,498
                  )
                  
                  
                  (1,314,587
                  )
                  
                  
                  (3,617,219
                  )Interest
      income
                  
                  
                  1,817
                  
                  
                  
                  2,578
                  
                  
                  
                  5,112
                  
                  
                  
                  14
                  
                  
                  
                  1,041Net
      loss
                  
                  
                  (5,732,104
                  )
                  
                  
                  (9,243,946
                  )
                  
                  
                  (20,690,366
                  )
                  
                  
                  (1,726,186
                  )
                  
                  
                  (5,114,043
                  )Other
      comprehensive lossForeign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (331
                  )
                  
                  
                  -
                  
                  
                  
                  -Comprehensive
      loss for the period
                  
                  $
                  (5,732,104
                  )
                  
                  $
                  (9,243,946
                  )
                  
                  $
                  (20,690,697
                  )
                  
                  $
                  (1,726,186
                  )
                  
                  $
                  (5,114,043
                  )Basic
      and diluted loss per share:
                  
                  $
                  (0.14
                  )
                  
                  $
                  (0.28
                  )
                  
                  
                  
                  
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.15
                  )Weighted
      average number of shares outstandingBasic
      and diluted
                  
                  
                  41,444,489
                  
                  
                  
                  32,588,493
                  
                  
                  
                  
                  
                  
                  
                  43,009,894
                  
                  
                  
                  34,187,935See
      Notes to Condensed Consolidated Financial Statements.
 2
  IDO
      SECURITY INC. AND SUBSIDIARY(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSJanuary
      23,Nine
      Months
                
                
                Nine
      Months
                
                
                2004
      (Date ofEnded
                
                
                Ended
                
                
                Inception)
      toSeptember
      30,
                
                
                September
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008(UNAUDITED)
                
                
                (UNAUDITED)
                
                
                (UNAUDITED)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (5,732,104
                )
                
                $
                (9,243,946
                )
                
                $
                (20,690,366
                )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                
                
                424,511
                
                
                
                186,128
                
                
                
                557,701Amortization
      of note discount
                
                
                1,938,773
                
                
                
                4,905,467
                
                
                
                8,843,944Amortization
      of beneficial conversion feature of convertible debt
                
                
                303,281
                
                
                
                448,264
                
                
                
                756,274Accretion
      of interest on notes payable
                
                
                22,334
                
                
                
                380,969
                
                
                
                532,176Stock
      based compensation
                
                
                587,806
                
                
                
                2,567,829
                
                
                
                5,966,909Stock
      issued in lieu of interest and other charges
                
                
                104,224
                
                
                
                -
                
                
                
                104,224Loss
      on sale of property and equipment
                
                
                22,415
                
                
                
                -
                
                
                
                22,415Increase
      in net liability for severance pay
                
                
                33,333
                
                
                
                6,347
                
                
                
                38,211Increase
      (decrease) in cash attributable to changes in operating assets and
      liabilitiesInventory
                
                
                (164,288
                )
                
                
                (110
                )
                
                
                (148,906
                )Prepaid
      expenses and other current assets
                
                
                (39,221
                )
                
                
                (37,764
                )
                
                
                (102,055
                )Accounts
      payable
                
                
                (20,634
                )
                
                
                (579
                )
                
                
                19,990Accrued
      expenses and other current liabilities
                
                
                911,393
                
                
                
                16,845
                
                
                
                1,095,059Net
      cash used in operating activities
                
                
                (1,608,177
                )
                
                
                (770,550
                )
                
                
                (3,004,424
                )CASH
      FLOWS FROM  INVESTING ACTIVITIESAcquisition
      of IDO Security Ltd., net of cash acquired of $19,974
                
                
                -
                
                
                
                (950,171
                )
                
                
                (950,171
                )Deferred
      acquisition costs
                
                
                -
                
                
                
                -
                
                
                
                (55,550
                )Proceeds
      from sale of property and equipment
                
                
                1,006
                
                
                
                -
                
                
                
                1,006Purchases
      of property and equipment
                
                
                (10,281
                )
                
                
                (15,778
                )
                
                
                (51,659
                )Net
      cash used in investing activities
                
                
                (9,275
                )
                
                
                (965,949
                )
                
                
                (1,056,374
                )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common shares
                
                
                -
                
                
                
                -
                
                
                
                123,125Stock
      subscription receivable
                
                
                -
                
                
                
                36,475
                
                
                
                (25
                )Proceeds
      from issuance of secured convertible notes
                
                
                750,000
                
                
                
                3,000,000
                
                
                
                6,125,000Proceeds
      from escrow agent
                
                
                1,150,000
                
                
                
                -
                
                
                
                -Payments
      of deferred finance costs
                
                
                (197,801
                )
                
                
                (325,000
                )
                
                
                (751,904
                )Proceeds
      from related party loans
                
                
                -
                
                
                
                12,735
                
                
                
                44,541Proceeds
      from short-term debt
                
                
                414,500
                
                
                
                47,738
                
                
                
                441,396Proceeds
      from line of credit
                
                
                208,250
                
                
                
                -
                
                
                
                208,250Repayment
      of notes payable
                
                
                (1,029,767
                )
                
                
                -
                
                
                
                (1,159,767
                )Repayment
      of short-term debt
                
                
                -
                
                
                
                (985,794
                )
                
                
                (938,056
                )Net
      cash provided by financing activities
                
                
                1,295,182
                
                
                
                1,786,154
                
                
                
                4,092,560Effect
      of foreign currency translation on cash
                
                
                -
                
                
                
                -
                
                
                
                (331
                )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (322,270
                )
                
                
                49,655
                
                
                
                31,431CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                
                
                353,701
                
                
                
                7,484
                
                
                
                -CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                
                $
                31,431
                
                
                $
                57,139
                
                
                $
                31,431Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                
                $
                49,266
                
                
                $
                -Non-cash
      activitiesIssuance
      of common stock and warrants relatingto
      convertible promissory notes
                
                $
                539,224
                
                
                $
                1,261,435Issuance
      of common stock for cashless exercise of warrants
                
                $
                8,341
                
                
                $
                -See
      Notes to Condensed Consolidated Financial Statements.
 3
  IDO
SECURITY INC.
 (A
development stage company)
  NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   NOTE
1 - BASIS OF PRESENTATION
  The
accompanying unaudited condensed consolidated financial statements of IDO
Security Inc. (hereinafter, “IDO” or the “Company”) have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with Rule 8.03of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008. These unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2007, as filed with the Securities and Exchange
Commission.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. At September 30, 2008, the
Company had not achieved profitable operations, had accumulated losses of $20.7
million (since inception), a working capital deficiency of $4.0 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 funds on an immediate
basis in order to continue to meet its liquidity needs and realize its business
plan and maintain operations. Management of the Company is continuing its
efforts to secure funds through equity and/or debt instruments for its
operations. Presently, the Company does not have any financing commitment from
any person, and there can be no assurance that additional capital will be
available to the Company on commercially acceptable terms or at
all.
  The
Company has been funding its operations from February to September 2007 from the
net proceeds of approximately $2.675 million from the private placement of its
short-term convertible debentures. In October 2007, the Company raised net
proceeds of $223,000 from the private placement of its 90 day promissory notes.
In December 2007 and January 2008, the Company received net proceeds of
approximately $1 million from the proceeds of the private placement to certain
accredited investors (the “December 2007 Investors”) its two-year 10% Secured
Convertible Promissory Notes, after the payment of offering related fees and
expenses and after the repayment of short-term debentures and bridge loans that
came due. Additionally, between April and November 2008, the Company received
from two previous investors and one stockholder, gross loan proceeds totaling
$442,355, which is discussed below in Note 5.  Finally, as of close of
business on December 15, 2008, certain of the December 2007 Investors have
deposited approximately $600,000 into an escrow account in subscription of a
private placement of convertible notes and preferred stock, the details of which
are discussed below in Note 8. The Company has been advised that the funds will
be available for release from escrow following the satisfaction of certain
conditions, including the filing of this quarterly report on Form 10-Q for the
quarter ended September 30, 2008.
  4
 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 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
 On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”) which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements, but it does not
require any new fair value measurements. SFAS 157 could impact how fair values
are determined and assigned to assets and liabilities in any future
acquisition.  The adoption of this pronouncement did not have a
material effect on the financial condition or results of operations of the
Company.
  On
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows
entities the option to measure eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. The Company has not
elected to measure any financial assets and financial liabilities at fair value
which were not previously required to be measured at fair value.. The adoption
of this pronouncement did not have a material effect on the financial condition
or results of operations of the Company.
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
FAS 141(R), "Business Combinations - a replacement of FASB Statement
No. 141", which significantly changes the principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquire. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This statement is effective prospectively, except for certain
retrospective adjustments to deferred tax balances, for fiscal years beginning
after December 15, 2008. This statement will be effective for the Company
beginning in fiscal 2009. The Company is currently evaluating FAS 141(R), and
has not yet determined the impact if any, FAS 141(R) will have on its
consolidated results of operations or financial position.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“FAS 161”).  FAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. The objective of the guidance is to provide users of
financial statements with an enhanced understanding of how and why an entity
uses derivative instruments; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
FAS 161 is effective for fiscal years beginning after November 15, 2008.
Management is currently evaluating the impact FAS 161 will have on the Company’s
consolidated financial statements, but it currently does not expect the effect
to be material.
  5
  In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States (commonly referred to as the
GAAP hierarchy). The statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company is currently evaluating the
potential impact, if any, the adoption of SFAS No. 162 will have on its
financial position, results of operations, cash flows, and
disclosures.
 
 In May
2008, FASB issued FSP Accounting Principles Board No. 14−1Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)  (“FSP APB 14−1”).  FSP APB 14−1 requires
the issuer of certain convertible debt instruments that may be settled in cash
(or other assets) on conversion (including partial cash settlement) to
separately account for the liability and equity components of the instrument in
a manner that reflects the issuer's non−convertible debt borrowing rate when
interest cost is recognized in subsequent periods.  FSP APB 14−1 is
effective for us beginning after January 1, 2009.  The Company
is  evaluating the effect of adopting FSP APB 14−1 on its financial
statements.
  In June
2008, FASB ratified EITF Issue No. 08-4,Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”).  Per EITF No. 08-4,
conforming changes made to EITF Issue No. 98-5,Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios , that result from EITF Issue No. 00-27,Application of Issue No.
98-5 to Certain Convertible Instruments , and SFAS No. 150,Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
, shall be effective for us beginning after January 1, 2009.  The
Company is  evaluating the effect of adopting FSP APB 14−1 on its
financial statements.
  NOTE
3 - NET LOSS PER SHARE
 
 Basic
loss per share is computed by dividing net loss by the weighted-average number
of shares of common stock outstanding during the period. Diluted loss per share
give effect to dilutive convertible securities, options, warrants and other
potential common stock outstanding during the period, only in periods in which
such effect is dilutive. The following securities have been excluded from the
calculation of net loss per share, as their effect would be
anti-dilutive:
  Shares
      of Common StockIssuable
      upon Conversion/Exerciseof
      asSeptember
      302008
                
                
                2007Warrants
                
                
                7,448,866
                
                
                
                20,211,000Options
                
                
                3,490,000
                
                
                
                2,750,000Convertible
      notes
                
                
                35,552,907
                
                
                
                2,028,557
  6
 
 NOTE
4 – GOODWILL
 
 Goodwill
consists of the excess of cost over net assets acquired of its subsidiary, IDO
Security Ltd. on March 8, 2007. Under the provisions of SFAS no. 142, "Goodwill
and Other Intangible Assets", goodwill is not amortized, but is tested at least
annually for impairment, or if circumstances change that will more likely than
not reduce the fair value of the reporting unit below its carrying
amount. The Company performed its impairment test during the quarter ended
March 31, 2008 and determined that there was no impairment.
  NOTE
5 - PRIVATE PLACEMENT OF DEBT SECURITIES
 
 (i)
Promissory Notes
 
 On
October 11, 2007, the Company raised gross proceeds of $250,000 from the private
placement to institutional investors of its 90 day Promissory Notes
(collectively, the “October 2007 Notes”). The loan was advanced pursuant to a
Subscription Agreement, dated as of October 11, 2007 (the “Subscription
Agreement”), between the Company and the investors. Pursuant to the Subscription
Agreement, the Company issued to the investors the October 2007 Notes,
originally scheduled to mature on January 11, 2008, in the aggregate principal
amount of $265,957.  The effective annual interest rate of the October
2007 notes is 25%. In connection with the issuance of these notes, the
Company issued to the investors five-year warrants  to purchase up to
265,957 shares of the Company’s Common Stock at a per share exercise price of
$1.77. In connection with their investment, the investors also received an
aggregate of 25,000 restricted shares of the Company’s Common
Stock.
 
 Out of
the gross proceeds received, the Company paid a due diligence fee of $25,000 and
other offering related fees and expenses totaling $2,500.  These fees and
expenses were amortized to the date of maturity.
  For
financial reporting purposes, the Company recorded a discount of $177,019 to
reflect the value of the warrants and shares. The discount was amortized to the
date of maturity.
 
 Upon
maturity in January 2008, principal balances including accreted interest
totaling $138,390 were re-invested in the Company's private placement of its
two-year 10% secured convertible promissory notes discussed below and the
remaining balance of $122,092 was repaid.
 
 (ii)
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 $1,564,390 was raised in January 2008.  The transactions were
effected pursuant to a Subscription Agreement, dated as of December 5, 2007 (the
“2008 Subscription Agreement”), between the Company and the 2008
Investors.  The Company received net proceeds of $1 million from the
proceeds of the 2008 Notes, after the payment of offering related fees and
expenses and after the repayment of bridge loans that that came due in November
2007. All of the holders of the 2007 Notes and the October 2007 Notes
participated in the private placement and the gross proceeds raised include
amounts the Company owed to these investors in the approximate amount of $2.6
million that were offset against such investors’ respective purchases of the
2008 Notes.
  7
  In
connection with the issuance of the 2008 Notes, the Company issued to the 2008
Investors, warrants (the “2008 Investor Warrants”) to purchase up to 5,404,550
shares of the Company’s Common Stock, of which warrants for 2,702,275 shares are
exercisable at a per share exercise price of $2.00 and warrants for 2,702,275
shares are exercisable at a per share exercise price of $3.00.
  The 2008
Notes are scheduled to mature on December 31, 2009 and are convertible into
shares of Common Stock at the holder's option at any time at an initial
conversion price of $1.00 per share (the “Fixed Conversion Price”), subject to
adjustment in the event of certain capital adjustments or similar transactions,
such as a stock split or merger and as further described below. Interest on the
Notes accrues at the rate of 10% per annum and is payable upon conversion, a
required repayment or upon maturity, whichever occurs first, and will continue
to accrue until the Notes are fully converted and/or paid in
full.
 
 Commencing
on the fourth month anniversary of the issuance of the 2008 Notes and on the
same day of each month thereafter until the principal amount of the 2008 Notes
has been paid in full, the Company 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 ten trading days ending on the trading day immediately
preceding the Scheduled Payment Date, provided that at the time of payment there
is then in effect an effective Registration Statement (as defined below) or the
shares so issued can be resold under Rule 144 promulgated under the Securities
Act of 1933, as amended. In addition, provided the Registration Statement is
effective, the Company may prepay the amounts outstanding on the 2008 Notes by
giving advance notice and paying an amount equal to 115% of the sum of (x) the
principal being prepaid plus (y) the accrued interest thereon. Holders will
continue to have the right to convert their 2008 Notes prior to the actual
prepayment. From July to September 2008, investors converted a total of $435,000
of principal and accrued interest totaling $79,624 into 2.358 million shares of
the Company’s Common Stock. In October and November 2008, investors
converted an additional total of $82,500 of principal and accrued interest
totaling $11,547 into 969,000 shares of the Company’s Common Stock.
 
 As of the
filing of this Quarterly Report on Form 10-Q, the Company has not made any
other payments in respect of the amounts due. The continuing non-payment of
these amounts constitutes an Event of Default under the transaction documents
with the 2008 Investors. However, the pertinent documents provide that any
action by the investors upon such default (ie., acceleration of the debt and
other remedies) can only be initiated by the holder of 65% or more of the
outstanding principal amount of the notes. In connection with the potential
transaction discussed in Note 8 below, the holders of the requisite principal
amount of the December 2008 Notes have agreed to waive, through December 31,
2008, existing Events of Default under such documents. However, no assurance can
be provided that such transaction will in fact close.
 
 The
Investor Warrants are exercisable through the fifth anniversary of the effective
date of the Registration Statement. Holders of the Investor Warrants are
entitled to exercise their warrants on a cashless basis if the Registration
Statement is not in effect at the time of exercise.
  8
  The
conversion price of the 2008 Notes and the exercise price of the Investor
Warrants are subject to adjustment. Under the agreements with the holders of
2008 Notes, the Company agreed that if the Company made certain sales of its
Common Stock (or securities convertible into Common Stock) to any third party at
per share conversion price or exercise price less than the conversion price of
the 2008 Notes and/or the exercise price of the 2008 Investor Warrants,
adjustments would be made to the conversion price of the then unconverted Notes
and to the exercise price of the then unexercised Investor Warrants. The above
adjustments do not apply to certain specified transactions, such as the exercise
of outstanding options, warrants, or convertible securities, the issuance of
securities pursuant to a Company option plans or a non-employee director option
plan, or the issuance of options to the Company's directors, officers, and
employees, and advisors or consultants, and transactions with strategic
investors.
 
 To secure
the Company’s obligations to the 2008 Investors, the Company granted a security
interest in substantially all of its assets, including without limitation, its
intellectual property. The security interest terminates upon payment or
satisfaction of all of Company’s obligations under the 2008 Notes.
 
 For
financial reporting purposes, the Company recorded a discount of $4,141,838
($3,006,128 in 2007) to reflect the value of the 2008 Investor Warrants issued
and in accordance with EITF No. 00-27, an additional discount of $658,219
($493,804 in 2007) to reflect the beneficial conversion feature of the 2008
Notes. The discounts are being amortized to the date of maturity unless
converted earlier.
 
 The
Company incurred finder's fees of  $540,455 ($391,616 in 2007),
other offering related fees and expenses totaling $25,000 in 2007 and issued
five-year warrants to purchase up to 1,080,930 shares (783,332 shares in 2007)
of Common Stock at a per share exercise price of $1. The shares underlying these
warrants will not be included in the Registration Statement.
 
 The
Company undertook to file by February 22, 2008, a registration statement under
the Securities Act of 1933, as amended (the “Registration Statement”) with
respect to the resale of the Common Stock underlying the 2008 Notes and 2008
Investor Warrants and to use reasonable efforts to cause such registration
statement to be declared effective by April 22, 2008 or, in case of a full
review of such registration statement, by May 22, 2008. If (i) the Registration
Statement is not timely filed or declared effective or, if following
effectiveness, the Registration Statement cease to be effective without being
succeeded within 20  business days by an effective replacement for a
period of time which shall exceed 45 days per year, the Investors are entitled
receive an amount equal to two percent (2%) of the aggregate principal amount of
the Notes remaining unconverted and purchase price of shares issued upon
conversion of the 2008 Notes and exercise of the 2008 Investor Warrants for each
thirty (30) days (or part thereof), payable in cash or shares (so long as such
shares can be resold under Rule 144), at the Company’s option. As of the date of
the filing of this Quarterly Report on Form 10-Q, the Company has not filed the
Registration Statement. Accordingly, the Company owed to the holders of these
notes approximately $540,000 in liquidated damages in respect of the delay in
the filing of the Registration Statement beyond the time frame specified in the
agreements with such holders. In July 2008, we issued to an investor 24,600
shares of Common Stock in respect of liquidated damages of $24,600. At September
30, 2008, the Company owed to the holders of these notes approximately $515,400
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 (ie., acceleration of the
debt and other remedies) can only be initiated by the holder of 65% or more of
the outstanding principal amount of the notes. In connection with the potential
transaction discussed in Note 8 below, the holders of the requisite principal
amount of the December 2008 Notes have agreed to waive, through December 31,
2008, existing Events of Default under such documents.  However, no
assurance can be provided that the transaction will in fact close. In addition,
the Company does not currently intend to file such registration statement as the
shares issuable upon conversion of the 2008 Notes and/or the 2008 Investor
Warrants are eligible to be resold under Rule 144.
 
 9
 
 (iii)
Promissory Notes
 
 On each
of April 29, May 29 and June 17, 2008, the Company received  90-day
loans from one of the 2008 Investors in the principal amount of $14,000, $42,500
and $45,700, respectively. These advances were originally evidenced by notes
payable on the 90th day following issuance, with interest accruing at a per
annum rate of 10%. As of July 30, 2008, the outstanding principal and then
accrued interest were consolidated into one promissory note (the "Note"), in the
total principal amount of $113,400, representing an original issue discount of
approximately 23%. The Note is payable at the earlier of  (i) the
date the Company consummates a financing where it raise minimum gross proceeds
of $2 million or (ii) January 14, 2009. This investor also loaned the Company an
additional $27,855 in November 2008, reflected in a promissory note (the
"November 2008 Note") to such investor as of November 25, 2008 in the principal
amount of $29,504.  The November 2008 Note is due on February 23, 2009
and represents an original issue discount of approximately 23%.
 
 From April through July
2008, the Company received from another 2008 Investor and a separate
stockholder, loans totaling $312,300. These loans are evidenced by two
promissory notes issued by the Company on July 30, 2008, in the aggregate
principal amount of $350,000 (the “Notes”), reflecting an original issue
discount of approximately 25%. The Notes are also due at the earlier to occur of
(i) the date the Company consummates a financing where it raises minimum gross
proceeds of $2 million or (ii) January 14, 2009. Out of the gross proceeds
received, the Company paid offering related fees and expenses totaling
$47,500.
 
 These
proceeds from the above loans were used for general corporate
purposes.
 
 NOTE
6 – BANK LINE OF CREDIT
 
 The
Company’s subsidiary has a line of credit for up to approximately
$300,000.  The line bears interest of 6.75% per annum and is
collateralized by substantially all the assets of the
subsidiary.
 
 NOTE
7 - CAPITAL TRANSACTIONS
 
 Authorized
Shares
 
 On
November 15, 2007, Company’s Board of Directors and the majority of Company’s
stockholders authorized an increase the number of shares of Common Stock from 50
million to 100 million. The increase became effective in March
2008.
 
 Stock
Issuances
 
 In April
2008, the Company issued 30,000 shares of common stock to a consultant for
services to be rendered through December 31, 2009.
 
 From July
to September 2008, the Company issued 2.38 million shares to 2008 Investors in
connection with the conversions of a total of $435,000 of principal on the 2008
Notes and accrued interest and fees totaling $104,224.
 
 10
 
 In
October and November 2008, the Company issued an additional 968,606 shares to
2008 Investors in connection with the conversions of a total of $82,500 of
principal on the 2008 Notes and accrued interest totaling $11,547.
 
 Warrants
 
 On
February 14, 2008, a total of 19,514,250 warrants issued in connection with the
private placement of convertible debt were converted into 8,340,948 of the
Company's Common Stock under the cashless exercise provision.
 
 Options
 
 In April
2008, the Company issued stock options to each of two employees of the Company's
subsidiary for the purchase of up to 100,000 shares of the Company’s Common
Stock. The options are exercisable over five years from issuance at $1 per share
and vested upon issuance.
 
 NOTE
8 - SUBSEQUENT EVENT
 
 As of
close of business on December 15, 2008, certain of the holders of the 2008 Notes
have deposited into an escrow account the aggregate amount of approximately
$600,000 in subscription of the private placement of convertible notes and
preferred stock of the Company. The Company has been advised that the funds will
be available for release from escrow following the satisfaction of certain
conditions, including the filing of this quarterly report on Form 10-Q for
the quarter ended September 30, 2008. In addition, until the Company
formally accepts each subscriber’s subscription documents, the investors may
pull its funds out of the escrow account. Accordingly, no assurance can be
provided that the transaction will in fact close and the funds will be released
to the Company.
 
 The
investors’ executed subscription documents, all of which have been also
deposited into escrow, provide for the waiver, through December 31, 2008, by the
holders of the requisite amount of outstanding 2008 Notes of all existing
defaults under such 2008 Notes.
 
 Upon (and
subject to the closing) of the transaction, the Company will file a current
report on Form 8-K disclosing the principal terms of the
transaction.
 11
  ITEM
      2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATION
 
 We urge
you to read the following discussion in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
herein.
  CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
  Our
prospects are subject to uncertainties and risks. In this Quarterly Report on
Form 10-Q, we make forward-looking statements in this Item 2 and elsewhere that
also involve substantial uncertainties and risks. These forward-looking
statements are based upon our current expectations, estimates and projections
about our business and our industry, and reflect our beliefs and assumptions
based upon information available to us at the date of this report. In some
cases, you can identify these statements by words such as “if,” “may,” “might,”
“will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” and other similar terms. These
forward-looking statements include, among other things, projections of our
future financial performance and our anticipated growth, descriptions of our
strategies, our product and market development plans, the trends we anticipate
in our business and the markets in which we operate, and the competitive nature
and anticipated growth of those markets.
  We
caution readers that forward-looking statements are predictions based on our
current expectations about future events. These forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict. Our actual results, performance or
achievements could differ materially from those expressed or implied by the
forward-looking statements as a result of a number of factors, including but not
limited to the risks and uncertainties discussed in our other filings with the
SEC, including the risk factors section of the Company’s Annual Report on Form
10-KSB for the year ended December 31, 2007 filed with the Securities and
Exchange Commission on April 15, 2008. We undertake no obligation to revise
or update any forward-looking statement for any reason.
  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.
 
 IDO
Security Inc. (formerly knows as “The Medical Exchange Inc.”) was incorporated
in the State of Nevada on January 23, 2004. On July 25, 2006, we, IDO Security
Ltd. (“IDO Ltd.”) and IDO Ltd.’s Selling Shareholders entered into a Securities
Purchase Agreement (the “Purchase Agreement”) pursuant to which we purchased, in
March 2007, all of the issued and outstanding share capital of IDO Ltd. (the
“Acquisition Transaction”). Following the Acquisition Transaction, IDO Ltd.
became a wholly-owned subsidiary of the Company and Med Ex adopted the business
of IDO Ltd. In June 2007, the Company changed its name to “IDO Security
Inc.”
 
 We have
designed and developed a security screening device containing proprietary
technology known as the MagShoe. The MagShoe creates specific electro-magnetic
fields that can intelligently detect the presence of metallic objects inside a
person’s footwear, as well as next to or above the ankles, while ignoring those
metal objects that are normally found inside shoes. The proprietary software
included in the MagShoe provides for the collation and delivery of the screening
data to the operator for immediate analysis. The MagShoe obviates the need to
remove the footwear being inspected.
 
 A patent
has been issued to us by the United States Patent and Trademark Office in
November 2005 covering various aspects of the unique technology contained in the
MagShoe and there is one patent application pending in Israel. In January 2006,
the MagShoe was approved for use by the Department for Transport in the United
Kingdom, after 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.
  12
  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. In fact, based on an article published by TRIPSO.com, Los Angeles
International Airport is utilizing, on a test basis, a footwear screening
device, dubbed the “PassPort”, designed to detect the presence of explosives
that might be used in a shoe bomb. The device takes samples from hands, torso
and feet, possibly without the need for passengers to remove their footwear.
Unlike the MagShoe, however, the device does not test for or detect metals that
can and have been used as weapons. Accordingly, we believe that this deficiency
in the device will not allow security personnel to dispense with the need for
passengers to remove their footwear.  According to this same source,
last year the TSA tested a shoe scanning device, manufactured by General
Electric, at the Orlando International Airport, although the device did not meet
the TSA’s minimum detection standards and was discontinued later in the
year.
  Subject
to raising additional working capital, we intend to pursue our business plan
over the next twelve months with respect to product development and enhancement
and field testing, as well as initial marketing efforts. We currently have 10
full time employees and consultants. 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.
 
 We will,
however, need to raise additional working capital to accelerate our sales,
marketing, manufacturing and customer service activities. We presently do not
have the capital resources to undertake any of these steps.  Subject
to raising additional capital resources, we expect to make substantial
investments in equipment and to acquire inventory to facilitate the expansion of
pilot projects and to accelerate commercialization
efforts.
  RESULTS
OF OPERATIONS
 
 COMPARISON
OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008 TO THE NINE AND THREE
MONTHS ENDED SEPTEMBER 30, 2007
 
 All
references to financial results prior to the date of the Acquisition Transaction
(e.g., March 8, 2007) shall mean and refer to the financial results of IDO Ltd.
All references to results following the date of the Acquisition Transaction
shall mean and refer to the financial results of the IDO Security Inc. and its
consolidated subsidiary, IDO Ltd.
 
 Revenues and costs of goods
sold – Revenues for each of the nine and three months ended September 30,
2008 were $136,759 and $103,075, respectively, all of which were derived from
sales of our MagShoe device. No revenues were recorded during the 2007
periods.  Costs of goods sold were $58,039 and $46,631 for the nine
months and three months ended September 30, 2008, respectively. Resulting gross
margin was 57.6% and 54.8% for the nine and three months ended September 30,
2008, respectively. These gross margin rates were achieved primarily as a result
of a limited number of units being sold outside of the normal distribution
channels. Management does not anticipate that these high gross margins are
sustainable for the foreseeable future.
 
 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 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 for the nine and three months
ended September 30, 2008 in the amount of $306,709 and $87,418, respectively,
compared to $196,094 and $96,933 for the corresponding periods in 2007. The
increase in research and development expenses during the nine-month 2008 period
is principally attributable to the intensified research and design and
development activities following the Acquisition Transaction. The decrease in
research and development expenses during the three-month 2008 period is
principally attributable to the product being substantially developed and
needing less research and development.
 
 13
  Selling, general and administrative
expenses - Selling, general and administrative expenses primarily consist
of salaries, consulting and other professional fees, and other costs related to
administrative functions.  The nine-month 2008 period also include
liquidated damages attributable to the delay by us in the filing of a
registration statement as required under certain investment agreements.
Liquidated damages amounted to approximately $540,000.  No liquidating
damages were incurred for the three months ended September 30,
2008.  We incurred selling, general and administrative expenses for
the nine and three months ended September 30, 2008 of $1,821,615 and $359,018,
respectively, compared to $601,489 and $289,180 for the corresponding periods in
2007. The increase in selling, general and administrative expenses during the
nine-month 2008 period is principally attributable to the charge for the
liquidated damages as well intensified activities following the Acquisition
Transaction.  The increase in selling, general and administrative
expenses during the three-month 2008 period is principally attributable to the
intensified activities following the Acquisition Transaction.
 
 Stock based compensation
- Between June 2007 and April 2008, we granted stock options to
employees and consultants initially valued at $7.6 million. The value of these
options is being amortized over the vesting periods of each grant. The value of
options granted to consultants are periodically marked-to-market until such
options vest.  Stock based compensation expense for the nine months
ended September 30, 2008 totaled $587,806. For the three months ended September
30, 2008, stock based compensation was $21,621. For each of the nine and three
months ended September 30, 2007, the stock based compensation charge totaled
$2,567,829 and $1,111,752, respectively..  Stock-based compensation is
non-cash and, therefore, has no impact on cash flow or liquidity.
 
 Interest expense - Interest
expense for the nine and three months ended September 30, 2008 was $438,263 and
$126,426, respectively, compared to $414,798 and $213,732  for the
corresponding periods in 2007. Interest expense relates primarily to the
placement of our convertible promissory notes.
 
 Amortization - During the nine
and three months ended September 30, 2008, we recorded amortization of
$2,658,248 and $1,188,161, respectively, compared to $5,466,314 and
$3,403,487 for the corresponding periods in 2007. Amortization costs relate to
the debt discount, beneficial conversion feature and deferred finance costs
incurred in connection with the placement of our convertible promissory notes,
which were issued in 2008 and 2007. These costs are amortized to the date
of maturity of the debt unless converted earlier.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
September 30, 2008, we had a cash balance of $31,431 compared to $353,701 at
December 31, 2007.
 
 Cash used
in operating activities was $1,608,177 for the nine months ended September 30,
2008. The decrease in cash was primarily attributable to funding the loss for
the period.
 
 Cash used
in investing activities was $9,275 for the nine months ended September 30, 2008
primarily attributable to the addition of property and equipment.
 
 Cash
provided by financing activities was $1,295,182 for the nine months ended
September 30, 2008.  We received proceeds of $1,900,000 from the
issuance of the 2008 Notes (as hereinafter defined) and in connection therewith,
we incurred financing costs of $160,455. In addition, we repaid outstanding
promissory notes totaling $1,029,767. We also received proceeds totaling
$414,500 in short-term financing from certain of our shareholders and
investors.  We incurred financing costs of $37,346. Our wholly-owned
subsidiary obtained a line of credit totaling approximately $300,000 of which
$208,250 had been drawn down as of September 30, 2008
 
 To date
we have financed our operations primarily from the sale of our securities. Our
recent financings are discussed below.
 
 Between
December 5, 2007 and January 24, 2008, we raised gross proceeds of $5,404,550
from the private placement  to certain accredited institutional and
individual investors (the “2008 Investors”) of our two-year 10% Secured
Convertible Promissory Notes (collectively, the “2008 Notes”, each
a  “ 2008 Note”). The transactions were effected pursuant to a
Subscription Agreement, dated as of December 5, 2007 (the “2008 Subscription
Agreement”), between the Company and the 2008 Investors.  The Company
received net proceeds of $1 million from the proceeds of the 2008 Notes, after
the payment of offering related fees and expenses and after the repayment of
bridge loans that that came due in November 2007. All of the holders of the 2007
Notes and the October 2007 Notes participated in the private placement and the
gross proceeds raised include amounts the Company owed to these investors in the
approximate amount of $2.7 million that were offset against such investors’
respective purchases of the 2008 Notes. Commencing on the fourth month
anniversary of the issuance of the 2008 Notes and on the same day of each month
thereafter until the principal amount of the 2008 Notes has been paid in full,
we 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 price of the
Common Stock for the ten trading days ending on the trading day immediately
preceding the Scheduled Payment Date, provided that at the time of payment there
is then in effect an effective Registration Statement (as defined below) or the
shares so issued can be resold under Rule 144 promulgated under the Securities
Act of 1933, as amended (“Rule 144”). From July to November, 2008, we
issued 3.326 million shares of our common stock in payment of principal and
interest then due. As of September 30, 2008, approximately $1.339 million in
required principal and interest payments have not been made. While the
non-payment of these amounts constituted an Event of Default under the
transaction documents with the 2008 Investors, the remedies available to the
holders upon such Event of Default can be exercised only by the affirmative
action of the holders of 65% of the outstanding principal amount of the 2008
Notes. In connection with the possible transaction discussed below, the holders
of the requisite amount of principal thereunder have agreed to waive, through
December 31, 2008, all such defaults.
 
 14
  In
addition, we undertook to file, by February 22, 2008, a registration statement
in respect of the resale of the 2008 Notes and the warrants that we issued in
connection therewith. As of the filing of this quarterly report on Form 10-Q, we
have not filed such registration statement and we do not expect to file such
registration statement until following the conclusion, if any, by us of an
additional capital raise. However, as we did not file such registration
statement by the required filing date of February 22, 2008, we owe to the 2008
Investors, as liquidated damages, 2% of the principal amount of the 2008 Notes.
We owe an additional 2% for each 30 days (or any part thereof) that such
registration statement is not filed after such date. Accordingly, we owed
approximately $540,000 to these investors as liquidated damages. The liquidated
damages, are payable, by the 10th day following each 30 day period, at our
option, in cash or shares that may be freely tradable under Rule 144. In July
2008, we issued a total of 24,600 shares to the 2008 Investors in payment of
liquidated damages of $24,600. At
September 30, 2008, the Company owed to the holders of these notes approximately
$515,400in liquidated
damages.While the continuing
non-payment of these amounts constitutes an Event of Default under the
transaction documents with the 2008 Investors, the remedies available to the
holders upon such Event of Default can be exercised only by the affirmative
action of the holders of 65% of the outstanding principal amount of the 2008
Notes. We currently do not intend to file such Registration Statement as the
shares of Common Stock issuable upon conversion of the 2008 Notes or exercise of
the warrants issued in connection with the notes would be eligible to be resold
under Rule 144.
 
 Between
April 29, 2008 and November 25, 2008, we received gross loan proceeds of
$414,500 from two 2008 investors and one stockholder. The Company issued on July
30, 2008 notes in the aggregate principal gross amount of $463,400, representing
a original issue discount ranging from  approximately 23% and on
November 25, 2008 an additional note in the principal gross amount of $29,504.
All of these loans were rolled into the financing discussed below. The proceeds
of these loans have been used by us to meet operating expenses.
  We need to raise
additional funds on an immediate basis to be able to satisfy our cash
requirements over the next twelve months, including satisfying our obligations
as they come due, and maintain operations. Product development, corporate
operations and marketing expenses will continue to require additional capital.
Our current revenue from operations is insufficient to cover our current
operating expenses and projected expansion plans which include the repayment of
the Notes. We therefore will need to raise additional working capital through
the sale of our equity and/or debt securities. No assurance can be provided that
additional capital will be available to us on commercially acceptable terms, or
at all. Our auditors included a "going concern" qualification in their report
for the year ended December 31, 2007. Such "going concern" qualification may
make it more difficult for us to raise funds when needed. Additional equity
financings may be dilutive to holders of our Common Stock.
 
 As of
close of business on December 15, 2008, certain of the holders of the 2008 Notes
have deposited into an escrow account the aggregate amount of approximately
$600,000 in subscription of the private placement of certain of our convertible
notes and preferred stock. We have been advised that the funds will be available
for release from escrow following the satisfaction of certain conditions,
including the filing of this quarterly report on Form 10-Q for the quarter ended
September 30, 2008. Until we formally accepts each subscriber’s subscription
documents, the investors may pull its funds out of the escrow account.
Accordingly, no assurance can be provided that the transaction will in fact
close and the funds will be released to us. The investors’ executed subscription
documents, all of which have been also deposited into escrow, provide for the
waiver, through December 31, 2008, by the holders of the requisite amount of
outstanding 2008 Notes of all existing defaults under such 2008
Notes.
 
 15
  ITEM
      4T.
              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 acting Chief Executive Officer (and 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-14(c).
  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 acting Chief
Executive Officer (and Principal Financial and Accounting Officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our acting Chief Executive Officer (and
Principal Financial and Accounting Officer) concluded that our disclosure
controls and procedures were effective.
  During
the quarter ended September 30, 2008, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.
 
 PART
II - OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS.
  In our
quarterly report on Form 10-Q for the three months ended June 30, 2008, we
disclosed that a certain stockholder the “Stockholder”) who holds 2,250,000 of
our issued and outstanding shares of Common Stock (representing approximately
5.2% of our currently issued and outstanding holdings) initiated a suit against
Company and an officer and director of its Subsidiary (the “Affiliate”) in the
District Court in Petah Tikva, Israel.
 
 We and
the stockholder are currently in settlement negotiations under the auspices of
the court. If these negotiations are unsuccessful, we will initiate mediation
proceedings. In the event that the mediation proceedings do not produce a
resolution, then the Court will address the issues. We believe that we have
meritorious defenses to this lawsuit and intend to aggressively defend our
interests.
  ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  The
following paragraph sets forth certain information with respect to all
securities sold by us during the three months ended September 30, 2008 without
registration under the Securities Act:
 
 BetweenJulyandSeptember30,2008,weissued2,382,266 shares of restricted stock to
the holders of the 2008 notes in respect of principal and accrued interest as
well as liquidated damages in the aggregate amount of
$539,224.
 
 16
  ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES.
  We
disclosed in the Quarterly Report for the three months ended June 30,
2008, that in respect of the 2008 Notes, we had not repaid principal and
accrued interest that was due as of such date in the aggregate amount of
$1,083,578. We also disclosed in such report that we had not made payments to
the holders of the 2008 Notes in respect of liquidated damages owed as of such
date in the aggregate amount of $540,000.
 
 From July
through September 2008, we issued 2,382,266 shares of our Common Stock in
respect of principal, interest and liquidating damages in the aggregate amount
of $514,624 that was due as of such date. As of September 30, 2008, we owed in
respect of principal and interest approximately $1.339 million in the aggregate.
Additionally, as of September 30, 2008, we owed approximately $515,400 to the
holders of these notes as liquidated damages.
 
 The continuing non-payment of liquidated
damages constitute an Event of Default under the 2008 Notes.However, the pertinent documents
provide that any action by the investors upon such default (ie., acceleration of
the debt and other remedies) can only be initiated by the holder of 65% or more
of the outstanding principal amount of the notes.
  ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
  None.
  ITEM
      5.
              OTHER
      INFORMATION.
  None
  ITEM
      6.
              EXHIBITS.
 
 Exhibit
                        Number
                      
                      Description31
                      
                      Certification
      Pursuant to Rule 13a-14a of the Securities Exchange Act of 1934, as
      amended32
                      
                      Certification
      Pursuant to Section 906 of  Sarbanes-Oxley Act of
  2002
 
 17
  SIGNATURES
  Pursuant
to the requirements 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: December
      16, 2008IDO
      SECURITY INC./s/
      MICHAEL GOLDBERGMICHAEL
      GOLDBERGACTING
      CHIEF EXECUTIVE OFFICER (PRINCIPALEXECUTIVE
      OFFICER AND PRINCIPAL FINANCIAL ANDACCOUNTING
      OFFICER) AND PRESIDENT
    18