----

----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549 **

**FORM      10-K**

**x**
**ANNUAL      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934**

**¨**
**TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934**

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

| **Florida**                             | **22-2671269**                           |
|-----------------------------------------|------------------------------------------|
| (State                of incorporation) | (IRS                employer Ident. No.) |

| **6531                NW 18th                Court, Plantation, FL.** | **33313**                 |
|-----------------------------------------------------------------------|---------------------------|
| (address                of principal office)                          | (Zip                Code) |

**Registrant's      telephone number, including area code: (954) 581-9800**

**None**

**Common      Stock, no par value**

| ¨                Large accelerated filer | x                Accelerated filer | ¨                Non Accelerated filer |
|-----------------------------------------------|------------------------------------|---------------------------------------------|

**[None]**

----

**IMAG**
**ING      DIAGNOSTIC SYSTEMS,      INC.**

**FORM      10-K**

**ANNUAL      REPORT**

**TABLE      OF CONTENTS**

| **PART                I**   |                                                                                                      | **Page                No** |
|-----------------------------|-----------------------------------------------------------------------------------------------------------|----------------------------|
|                        |                                                                                                      |                       |
| ITEM                1.      | Our                Business                                                                               | 3                          |
| ITEM                2.      | Description                of Our Property                                                                | 17                         |
| ITEM                3.      | Legal                Proceedings                                                                          | 17                         |
| ITEM                4.      | Submission                of Matters to a Vote of Securities                Holders                       | 17                         |
|                        |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| **PART                II**  |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| ITEM                5.      | Market                for Registrant’s Common Equity and Related                Stockholder Matters | 18                         |
| ITEM                6.      | Selected                Financial Data                                                                    | 23                         |
| ITEM                7.      | Management’s                Discussion and Analysis of Financial Conditions                and      |                       |
|                        | Results                of Operations                                                                      | 24                         |
| ITEM                7A.     | Quantitative                and Qualitative Disclosures About Market                Risk                  | 37                         |
| ITEM                8.      | Financial                Statements                                                                       | 38                         |
| ITEM                9.      | Changes                In and Disagreements with Accountants on Accounting                and             |                       |
|                        | Financial                Disclosure                                                                       | 98                         |
| ITEM                9A      | Controls                and Procedures                                                                    | 98                         |
| ITEM                9B      | Other                Information                                                                          | 102                        |
|                        |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| **PART                III** |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| ITEM                10.     | Directors                and Executive Officers of the                Registrant                          | 103                        |
| ITEM                11.     | Executive                Compensation                                                                     | 107                        |
| ITEM                12.     | Security                Ownership of Certain Beneficial Owners and                Management              | 110                        |
| ITEM                13.     | Certain                Relationships and Related                Transactions                              | 111                        |
| ITEM                14.     | Principal                Accounting Fees and Services                                                     | 112                        |
|                        |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| **PART                IV**  |                                                                                                      |                       |
|                        |                                                                                                      |                       |
| ITEM                15.     | Exhibits,                Financial Statement Schedules, and Reports on                Form 8-K            | 112                        |
|                        |                                                                                                      |                       |
| SIGNATURES                  |                                                                                                      | 114                        |

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*Table            of Contents*

**THIS      REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION 27A      OF      THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF      1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED      AS      A RESULT OF THE “KNOWN UNCERTAINTIES” AS SET FORTH IN ITEM 7“**
**MANAGEMENT’S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      OPERATIONS-CAUTIONARY STATEMENTS.”**

**PART      I**

**Item      1. **
**Our      Business**

**Overview**

**Breast      Cancer**

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*Table            of Contents*

**Screening      and Diagnostic Modalities**

**Mammography**

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*Table            of Contents*

**Digital      Mammography**

**Magnetic      Resonance Imaging**

**Ultrasound**

**CTLM®**

----

*Table            of Contents*

**Fluorescence**
**      I**
**maging**

**Laser      Imager for Lab Animals**

----

*Table            of Contents*

**Government      Regulation**

**United      States Regulation**

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*Table            of Contents*

**Foreign      Regulation**

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*Table            of Contents*

**Regulatory      and Clinical Status**

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*Table            of Contents*

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*Table            of Contents*

**Clinical      Collaboration Sites Update**

| 1. | Humboldt                University of Berlin, Charite Hospital, Berlin, Germany              |
|----|----------------------------------------------------------------------------------------------|
| 2. | The                Comprehensive Cancer Centre, Gliwice, Poland (Two                Systems) |
| 3. | Catholic                University Hospital, Rome, Italy                                     |
| 4. | Charles                University Hospital, Prague, Czech Republic                           |
| 5. | Friendship                Hospital, Beijing, Peoples Republic of                China        |

**Domestic      Sales and Marketing**

** **

**International      Sales**

**”.**

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*Table            of Contents*

**International      Distributors**

**Third-Party      Reimbursement; Health Care Reform**

**Product      Liability**

**Competition**

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*Table            of Contents*

**Patents**

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*Table            of Contents*

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*Table            of Contents*

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*Table            of Contents*

**Patent      Licensing Agreement**

| **ANNUAL                ADJUSTED SALES** | **PERCENTAGE** |
|------------------------------------------|----------------|
| $0                to $1,999,999          | 10%            |
| $2,000,000                to $3,999,999  | 9%             |
| $4,000,000                to $6,999,999  | 8%             |
| $7,000,000                to $9,999,99   | 7%             |
| Greater                than $10,000,000  | 6%             |

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*Table            of Contents*

**Employees**

**Item      2.**
**Description of Our      Property**

**Item      3. **
**Legal      Proceedings**

**Item      4. **
**Submission of Matters to a Vote of      Security Holders**

|   | 1. | To                elect six directors; |
|--------|----|----------------------------------------|

|   | 2. | To                ratify the appointment by the Board of Directors of Sherb and Co.,                LLP as                independent auditors of the Company for the fiscal year ending June                30,                2006. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Timothy                B, Hansen | FOR                    184,718,445 | WITHHELD                   10,188,566            |
|----------------------------------|--------------------------------------------------------|-----------------------------------------------------------------|
| Allan                L. Schwartz | FOR                    190,917,465 | WITHHELD                     3,989,546 |
| Sherman                Lazrus    | FOR                    191,370,991 | WITHHELD                     3,536,020 |
| Patrick                J. Gorman | FOR                    191,527,466 | WITHHELD                     3,379,545 |
| Edward                Rolquin    | FOR                    191,404,532 | WITHHELD                     3,502,479 |
| Jay                S. Bendis     | FOR                    191,499,207 | WITHHELD                     3,407,804 |

| FOR                        185,495,885 | AGAINST                       8,708,376 | ABSTAIN                         702,750 |
|--------------------------------------------------------------------------------|----------------------------------------------------------------------------|--------------------------------------------------------------------------------------|

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*Table            of Contents*

**PART      II**

**Item      5.**
**Market for Registrant's Common Equity      and Related Stockholder Matters**

| **QUARTER                ENDING**                         | **High                Bid** | **Low                Bid** |
|-----------------------------------------------------------|-----------------------------|----------------------------|
|                                                      |                        |                       |
| **FISCAL                YEAR 2005**                       |                        |                       |
| First                Quarter                              | $0.68                       | $0.27                      |
| Second                Quarter                             | $0.50                       | $0.38                      |
| Third                Quarter                              | $0.41                       | $0.28                      |
| Fourth                Quarter                             | $0.295                      | $0.195                     |
|                                                      |                        |                       |
| **FISCAL                YEAR 2006**                       |                        |                       |
| First                Quarter                              | $0.31                       | $0.17                      |
| Second                Quarter                             | $0.20                       | $0.121                     |
| Third                Quarter                              | $0.19                       | $0.125                     |
| Fourth                Quarter                             | $0.19                       | $0.129                     |
|                                                      |                        |                       |
| **FISCAL                YEAR 2007**                       |                        |                       |
| First                Quarter (through September 12, 2006) | $0.15                       | $0.113                     |

**Sale      of Unregistered Securities**

**Private      Placement of Preferred Stock**

**.      **

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*Table            of Contents*

**Series      K Preferred**

**Private      Placement of Common Stock**

**Issuance      of Stock for Services**

**Issuance      of Stock for Settlements In Lieu of Cash**

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*Table            of Contents*

**FINANCING/EQUITY      LINE OF CREDIT **

**Prior      Equity Agreements**

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*Table            of Contents*

**The      Fourth Private Equity Credit Agreement**

**The      Fifth Private Equity Credit Agreement**

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*Table            of Contents*

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*Table            of Contents*

| **ITEM                6.****SELECTED                FINANCIAL DATA**                                                                                                |   |                               |        |                         |   |                         |   |                         |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|------------------------------|--------|------------------------------|--------|------------------------------|-------------|
|                                                                                                                                                                |   |                          |        |                         |   |                         |   |                         |        |   |   |
| The                following selected financial data should be read in conjunction with                "Item                7. Management's Discussion and Analysis |   |
| of                Financial Condition and Results of Operations" and "Item 8. Financial                Statements"                                                  |   |                               |        |                         |   |
|                                                                                                                                                                |   |                          |        |                         |   |                         |   |                         |        |
|                                                                                                                                                                |   |  Year                Ended    |        | Year                Ended    |   | Year                Ended    |   | Year                Ended    |        | Year                Ended |   |
|                                                                                                                                                                |   |  June                30, 2006 |        | June                30, 2005 |   | June                30, 2004 |   | June                30, 2003 |        | June                30, 2002 |   |
|                                                                                                                                                                |   |                          |        |                         |   | (Restated)**                 |   | (Restated)*                  |        | (Restated)* |   |
|                                                                                                                                                                |   |                          |        |                         |   |                         |   |                         |        |   |   |
| Sales                                                                                                                                                               |   | $                                  | 675,844     |                         | $      | 374,952                      |   | $                            | 733,211     |   | $ | 184,085 |   | $ | - |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Cost                of Sales                                                                                                                                        |   |                               | 316,189     |                         |   | 166,685                      |   |                         | 284,682     |   |   | 79,189 |   |   | - |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Gross                Profit                                                                                                                                         |   |                               | 359,655     |                         |   | 208,267                      |   |                         | 448,529     |   |   | 104,896 |   |   | - |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Operating                Expenses                                                                                                                                   |   |                               | 6,984,057   |                         |   | 7,338,806                    |   |                         | 8,160,982   |   |   | 7,487,696 |   |   | 7,287,348 |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Operating                Loss                                                                                                                                       |   |                               | (6,624,402  | )                            |   | (7,130,539                   | )      |                         | (7,712,453  | ) |   | (7,382,800 | ) |   | (7,287,348 | ) |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Gain                (Loss) on sale of fixed assets                                                                                                                  |   |                               | (2,439      | )                            |   | -                            |   |                         | (5,669      | ) |   | 11,254 |   |   | - |   |
| Interest                income                                                                                                                                      |   |                               | 8,416       |                         |   | 5,680                        |   |                         | 9,305       |   |   | 689 |   |   | 1,031 |   |
| Other                income                                                                                                                                         |   |                               | 21,500      |                         |   | 409,962                      |   |                         | -           |   |   | - |   |   | - |   |
| Interest                expense                                                                                                                                     |   |                               | (565,797    | )                            |   | (598,021                     | )      |                         | (694,142    | ) |   | (987,917 | ) |   | (711,335 | ) |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Net                Loss                                                                                                                                             |   |                               | (7,162,722  | )                            |   | (7,312,918                   | )      |                         | (8,402,959  | ) |   | (8,358,774 | ) |   | (7,997,652 | ) |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Dividends                on cumulative Pfd. stock:                                                                                                                  |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| From                discount at issuance                                                                                                                            |   |                               | -           |                         |   | -                            |   |                         | -           |   |   | - |   |   | - |   |
| Earned                                                                                                                                                              |   |                               | -           |                         |   | -                            |   |                         | -           |   |   | - |   |   | - |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Net                loss applicable to                                                                                                                               |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| common                shareholders                                                                                                                                  |   | $                                  | (7,162,722  | )                            | $      | (7,312,918                   | )      | $                            | (8,402,959  | ) | $ | (8,358,774 | ) | $ | (7,997,652 | ) |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Net                Loss per common share                                                                                                                            |   | $                                  | (0.03       | )                            | $      | (0.04                        | )      | $                            | (0.05       | ) | $ | (0.06 | ) | $ | (0.06 | ) |
| Weighted                avg. no. of common shares,                                                                                                                  |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Basic                & Diluted                                                                                                                                  |   |                               | 218,846,738 |                         |   | 185,636,553                  |   |                         | 167,982,750 |   |   | 145,150,783 |   |   | 125,746,307 |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| Cash                and Cash Equivalents                                                                                                                            |   | $                                  | 1,467,687   |                         | $      | 765,523                      |   | $                            | 554,354     |   | $ | 1,361,507 |   | $ | 194,894 |   |
| Total                Assets                                                                                                                                         |   |                               | 6,250,909   |                         |   | 5,608,004                    |   |                         | 5,683,328   |   |   | 5,943,415 |   |   | 5,915,719 |   |
| Deficit                accumulated during                                                                                                                           |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| the                development stage                                                                                                                                |   |                               | (91,138,737 | )                            |   | (83,976,015                  | )      |                         | (76,663,097 | ) |   | (68,260,138 | ) |   | (59,901,364 | ) |
| Stockholders'                Equity                                                                                                                                 |   |                               | 5,651,916   |                         |   | 4,772,538                    |   |                         | 4,170,395   |   |   | 4,706,003 |   |   | 3,224,443 |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
|                                                                                                                                                                |   |                               |        |                         |   |                         |   |                         |        |   |   |   |   |   |   |   |
| *                See Notes 2(n) and 8 to the financial statements.                                                                                                  |   |                               |        |                         |   |                         |   |                         |        |   |   |   |
| **                Revision reflects restatements from prior fiscal years. See Note                3 to the                financial statements.                     |   |

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*Table            of Contents*

| **Item                7.** | **Management’s                Discussion and Analysis of Financial Condition and Results of                Operations** |
|----------------------------|-------------------------------------------------------------------------------------------------------------------------------|

**CRITICAL      ACCOUNTING POLICIES **

**Inventory      **

**Stock-Based      Compensation **

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*Table            of Contents*

**Results      of Operations**

**Twelve      Months Ended June 30, 2006 and June 30, 2005**

**SALES      AND COST OF SALES**

**GENERAL      AND ADMINISTRATIVE**

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*Table            of Contents*

**RESEARCH      AND DEVELOPMENT**

**SALES      AND MARKETING**

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*Table            of Contents*

**AGGREGATED      OPERATING EXPENSES**

**Twelve      Months Ended June 30, 2005 and June 30, 2004**

**SALES      AND COST OF SALES**

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*Table            of Contents*

**GENERAL      AND ADMINISTRATIVE**

**RESEARCH      AND DEVELOPMENT**

**SALES      AND MARKETING**

----

*Table            of Contents*

**AGGREGATED      OPERATING EXPENSES**

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*Table            of Contents*

**Balance      Sheet Data**

**Liquidity      and Capital Resources**

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*Table            of Contents*

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*Table            of Contents*

**CAUTIONARY      STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS**

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*Table            of Contents*

**CERTAIN      FACTORS THAT MAY AFFECT FUTURE RESULTS**

**Risks      associated with our business**

***We      must comply with extensive government regulation and have no assurance of      regulatory approvals or clearances, which could cause us to cut back or cease      operations.***

| · | FDA                approval of a pre-market approval application for the                CTLM®, |
|--------|-----------------------------------------------------------------------------------------------------|

| · | foreign                marketing clearances for the CTLM® or regulatory approvals or clearances                for other products that we may develop, on a timely basis, or at                all, |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | timely                receipt of approvals or clearances, |
|--------|-----------------------------------------------------------|

| · | continued                approval or clearance of previously obtained approvals and clearances,                and |
|--------|--------------------------------------------------------------------------------------------------------------------|

| · | compliance                with existing or future regulatory                requirements. |
|--------|-------------------------------------------------------------------------------------------|

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*Table            of Contents*

**We      may not be able to develop other products that are currently in the early stages      of development due to our need for additional capital.**

| · | be                found to be safe and effective, |
|--------|---------------------------------------------------|

| · | meet                applicable regulatory standards or receive necessary regulatory clearance, |
|--------|------------------------------------------------------------------------------------------------|

| · | be                safe and effective, developed into commercial products, manufactured                on a                large scale or be economical to market,                or |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | achieve                or sustain market acceptance. |
|--------|------------------------------------------------------|

***We      depend on market acceptance to sell our products, which have not been proven,      and a lack of acceptance of the CTLM® could cause our business to      fail.***

***We      depend upon suppliers with whom we have no contracts, which suppliers could      cause production disruption if they terminated or changed their relationships      with us.***

*We      have limited experience in sales, marketing and distribution, which could      negatively impact our ability to enter into collaborative arrangements or other      third party relationships which are important to the successful development      and      commercialization of our products and potential profitability.*

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*Table            of Contents*

***We      depend on qualified personnel to run and develop our specialized business who      we      may be unable to retain or hire.***

***We      have a limited manufacturing history that could cause delays in the production      and shipment of our product.***

***We      depend on third parties who may not be in compliance with the FDA's quality      system regulations which may delay the approval or decrease the sales of the      CTLM®.***

***We      will rely on international sales and may be subject to risks associated with      international commerce.***

| · | economical                and political instability, |
|--------|------------------------------------------------------|

| · | shipping                delays, |
|--------|---------------------------------|

| · | fluctuation                of foreign currency exchange rates, |
|--------|----------------------------------------------------------------|

| · | foreign                regulatory requirements, and |
|--------|-----------------------------------------------------|

| · | various                trade restrictions, all of which could have a significant impact                on our                ability to deliver products on a timely                basis. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

***Our      business has the risk of product liability claims, and preferred insurance      coverage may be expensive or unavailable, which may expose us to material      liabilities.***

**Risks      associated with our industry**

***Lack      of third-party reimbursement may have a negative impact on the sales of our      products, which would negatively impact our revenues.***

***There      are uncertainties regarding healthcare reform including possible legislation,      whereby our customers may not receive medical reimbursement for the use of      our      product on their patients, which may cause our customers to use other services      and products.***

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*Table            of Contents*

***Competition      in the medical imaging industry may result in competing products, superior      marketing and lower revenues and profits for us.***

**Item      7A. **
**Quantitative and Qualitative      Disclosures About Market Risk**

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*Table            of Contents*

**Item      8.**
**Financial      Statements**

| Index                to Financial Statements                           |                                                    |
|------------------------------------------------------------------------|---------------------------------------------------------|
|                                                                   |                                                    |   |
|                                                                   |                                                    | Page |
|                                                                   |                                                    |   |
| Report                of Independent Registered Public Accounting Firm | 39                                                      |
|                                                                   |                                                    |   |
| Financial                Statements                                    |                                                    |   |
|                                                                   |                                                    |   |
|                                                                   | Balance                Sheets                           | 41 |
|                                                                   |                                                    |   |
|                                                                   | Statements                of Operations                 | 42 |
|                                                                   |                                                    |   |
|                                                                   | Statements                of Stockholders’ Equity | 43 |
|                                                                   |                                                    |   |
|                                                                   | Statements                of Cash Flows                 | 53 |
|                                                                   |                                                    |   |
|                                                                   | Notes                to Financial Statements            | 55 |

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*Table            of Contents*

**REPORTS      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS**

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*Table            of Contents*

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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*Table            of Contents*

| IMAGING                  DIAGNOSTIC SYSTEMS, INC.                                     |   |
|---------------------------------------------------------------------------------------|--------|
| (a                  Development Stage Company)                                        |   |
|                                                                                  |   |   |   |   |   |
| Balance                  Sheets                                                       |   |
|                                                                                  |   |   |   |   |   |
| June                  30, 2006 and 2005                                               |   |
|                                                                                  |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |
| ASSETS                                                                                |   |
|                                                                                  |   | 2006 |   | 2005 |   |
|                                                                                  |   |   |   |   |   |
| Current                  assets:                                                      |   |   |   |   |   |
| Cash                  and cash equivalents                                            |   | $ | 1,467,687 |   | $ | 765,523 |   |
| Accounts                  receivable, net of allowances for doubtful accounts         |   |   |   |   |   |   |   |
|                     of $40,000 and $0, respectively                         |   |   | 432,084 |   |   | 264,535 |   |
| Loans                  receivable                                                     |   |   | 73,617 |   |   | 14,576 |   |
| Inventories,                  net of reserve of $108,000 and $0, respectively         |   |   | 1,891,904 |   |   | 2,020,498 |   |
| Prepaid                  expenses                                                     |   |   | 42,846 |   |   | 34,187 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Total                  current assets                                                 |   |   | 3,908,138 |   |   | 3,099,319 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Property                  and equipment, net                                          |   |   | 2,035,183 |   |   | 2,166,920 |   |
| Intangible                  assets, net                                               |   |   | 307,588 |   |   | 341,765 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Total                  assets                                                         |   | $ | 6,250,909 |   | $ | 5,608,004 |   |
|                                                                                  |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' EQUITY                                 |
|                                                                                  |   |   |   |   |   |   |   |
| Current                  liabilities:                                                 |   |   |   |   |   |   |   |
| Accounts                  payable and accrued expenses                                |   | $ | 558,993 |   | $ | 783,966 |   |
| Customer                  deposits                                                    |   |   | 40,000 |   |   | 30,000 |   |
| Short                  term debt                                                      |   |   | - |   |   | 21,500 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Total                  current liabilities                                            |   |   | 598,993 |   |   | 835,466 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Commitments                  and contingencies                                        |   |   | - |   |   | - |   |
|                                                                                  |   |   |   |   |   |   |   |
| Stockholders                  equity:                                                 |   |   |   |   |   |   |   |
| Common                  stock, no par value; authorized 300,000,000 shares,           |   |   |   |   |   |   |   |
| issued                  247,676,633 and 199,900,569 shares, respectively              |   |   | 94,560,316 |   |   | 87,150,773 |   |
| Additional                  paid-in capital                                           |   |   | 2,230,337 |   |   | 1,597,780 |   |
| Deficit                  accumulated during the development stage                     |   |   | (91,138,737 | ) |   | (83,976,015 | ) |
|                                                                                  |   |   |   |   |   |   |   |
| Total                  stockholders' equity                                           |   |   | 5,651,916 |   |   | 4,772,538 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Total liabilities                  and stockholders' equity                      |   | $ | 6,250,909 |   | $ | 5,608,004 |   |
|                                                                                  |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |
| See                  accompanying notes to the financial                  statements. |

----

*Table            of Contents*

| IMAGING                  DIAGNOSTIC SYSTEMS, INC.                                     |   |
|---------------------------------------------------------------------------------------|--------|
| (a                  Development Stage Company)                                        |   |
|                                                                                  |   |   |   |
| Statements                  of Operations                                             |   |
|                                                                                  |   |    |   |   |   |   |   | From                  Inception |   |
|                                                                                  |   |    |   |   |   | (December                  10, |   |
|                                                                                  |   |  Year                  Ended |   | Year                  Ended |   | Year                  Ended |   | 1993)                  to |   |
|                                                                                  |   |  June                  30, 2006 |   | June                  30, 2005 |   | June                  30, 2004 |   | June                  30, 2006 |   |
|                                                                                  |   |    |   |   |   | (Restated)* |   | (Restated)* |   |
|                                                                                  |   |    |   |   |   |   |   |   |   |
| Net                  Sales                                                            |   | $ | 675,844 |   | $ | 374,952 |   | $ | 733,211 |   | $ | 1,968,092 |   |
| Cost                  of Sales                                                        |   |   | 316,189 |   |   | 166,685 |   |   | 284,682 |   |   | 846,745 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross                  Profit                                                         |   |   | 359,655 |   |   | 208,267 |   |   | 448,529 |   |   | 1,121,347 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses:                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     General and administrative                              |   |   | 3,366,426 |   |   | 3,014,800 |   |   | 6,449,759 |   |   | 46,953,170 |   |
|                     Research and development                                |   |   | 2,046,688 |   |   | 2,553,567 |   |   | 537,719 |   |   | 16,297,535 |   |
|                     Sales and marketing                                     |   |   | 1,210,917 |   |   | 1,083,706 |   |   | 411,279 |   |   | 5,738,197 |   |
|                     Inventory valuation adjustments                         |   |   | 184,219 |   |   | 499,194 |   |   | 586,510 |   |   | 3,918,414 |   |
|                     Depreciation and amortization                           |   |   | 175,807 |   |   | 187,539 |   |   | 175,715 |   |   | 2,596,915 |   |
|                     Amortization of deferred compensation                   |   |   | - |   |   | - |   |   | - |   |   | 4,064,250 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  Operating Expenses                                             |   |   | 6,984,057 |   |   | 7,338,806 |   |   | 8,160,982 |   |   | 79,568,481 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  Loss                                                       |   |   | (6,624,402 | ) |   | (7,130,539 | ) |   | (7,712,453 | ) |   | (78,447,134 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain                  (Loss) on sale of fixed assets                                  |   |   | (2,439 | ) |   | - |   |   | (5,669 | ) |   | 3,146 |   |
| Interest                  income                                                      |   |   | 8,416 |   |   | 5,680 |   |   | 9,305 |   |   | 282,933 |   |
| Other                  income                                                         |   |   | 21,500 |   |   | 409,962 |   |   | - |   |   | 431,462 |   |
| Interest                  expense                                                     |   |   | (565,797 | ) |   | (598,021 | ) |   | (694,142 | ) |   | (6,561,384 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  Loss                                                             |   |   | (7,162,722 | ) |   | (7,312,918 | ) |   | (8,402,959 | ) |   | (84,290,977 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                  on cumulative preferred stock:                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From                  discount at issuance                                            |   |   | - |   |   | - |   |   | - |   |   | (5,402,713 | ) |
| Earned                                                                                |   |   | - |   |   | - |   |   | - |   |   | (1,445,047 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  loss applicable to                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                  shareholders                                                  |   | $ | (7,162,722 | ) | $ | (7,312,918 | ) | $ | (8,402,959 | ) | $ | (91,138,737 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  loss per common share:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted                                                    |   | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.96 | ) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                  average number of                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                  shares outstanding:                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted                                                    |   |   | 218,846,738 |   |   | 185,636,553 |   |   | 167,982,750 |   |   | 94,913,927 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                  See Notes 2(n) and 8                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                  accompanying notes to the financial                  statements. |

----

*Table              of Contents*

| **IMAGING                    DIAGNOSTIC SYSTEMS,                    INC.**                            |   |
|-------------------------------------------------------------------------------------------------------|--------|
| **(a                    Development Stage Company)**                                                  |   |
|                                                                                                  |   |
| **Statements                    of Stockhoders' Equity**                                              |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                    December 10, 1993 (date of inception) to June 30,                    2006** |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |
|                                                                                                  |   | Preferred                    Stock (**) |   | Common                    Stock |   | Additional |   | During                    the |   |   |   |   |   |   |   |
|                                                                                                  |   | Number                    of |   | Number                    of |   | Paid-in |   | Development |   | Subscriptions |   | Deferred |   |   |   |
|                                                                                                  |   | Shares |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   | Receivable |   | Compensation |   | Total |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                    at December 10, 1993 (date of inception)                                   |   |   | 0 |   | $ | - |   |   | 0 |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                    of common stock, restated for reverse                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stock                    split                                                                        |   |   | - |   |   | - |   |   | 510,000 |   |   | 50,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 50,000 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition                    of public shell                                                        |   |   | - |   |   | - |   |   | 178,752 |   |   | - |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    issuance of additional shares of stock                                         |   |   | - |   |   | - |   |   | 15,342,520 |   |   | 16,451 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | 16,451 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock sold                                                                  |   |   | - |   |   | - |   |   | 36,500 |   |   | 36,500 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | 36,500 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    loss                                                                           |   |   | - |   |   |  |   |   | - |   |   | - |   |   | - |   |   | (66,951 | ) |   |  |   |   | - |   |   | (66,951 | ) |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                    at June 30, 1994                                                           |   |   | - |   |   | - |   |   | 16,067,772 |   |   | 102,951 |   |   | - |   |   | (66,951 | ) |   | - |   |   | - |   |   | 36,000 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock sold                                                                  |   |   | - |   |   | - |   |   | 1,980,791 |   |   | 1,566,595 |   |   | - |   |   | - |   |   | (523,118 | ) |   | - |   |   | 1,043,477 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock issued in exchange for services                                       |   |   | - |   |   | - |   |   | 115,650 |   |   | 102,942 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 102,942 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock issued with employment agreements                                     |   |   | - |   |   | - |   |   | 75,000 |   |   | 78,750 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 78,750 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                    stock issued for compensation                                               |   |   | - |   |   | - |   |   | 377,500 |   |   | 151,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 151,000 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                    options granted                                                              |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 622,500 |   |   | - |   |   | - |   |   | (622,500 | ) |   | - |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                    of deferred compentsation                                             |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 114,375 |   |   | 114,375 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forgiveness                    of officers' compensation                                              |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 50,333 |   |   | - |   |   | - |   |   | - |   |   | 50,333 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    loss                                                                           |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (1,086,436 | ) |   | - |   |   | - |   |   | (1,086,436 | ) |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                    at June 30, 1995                                                           |   |   | - |   |   | - |   |   | 18,616,713 |   |   | 2,002,238 |   |   | 672,833 |   |   | (1,153,387 | ) |   | (523,118 | ) |   | (508,125 | ) |   | 490,441 |   |

----

*Table              of Contents*

| **IMAGING                      DIAGNOSTIC SYSTEMS, INC.**                                                 |   |
|-----------------------------------------------------------------------------------------------------------|--------|
| **(a                      Development Stage Company)**                                                    |   |
|                                                                                                      |   |
| **Statements                      of Stockhoders' Equity (Continued)**                                    |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                      December 10, 1993 (date of inception) to June 30,                      2006** |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |
|                                                                                                      |   | Preferred                      Stock (**) |   | Common                      Stock |   | Additional |   | During                      the |   |   |   |   |   |   |   |
|                                                                                                      |   | Number                      of |   | Number                      of |   | Paid-in |   | Development |   | Subscriptions |   | Deferred |   |   |   |
|                                                                                                      |   | Shares |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   | Receivable |   | Compensation |   | Total |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                      at June 30, 1995                                                             |   |   | - |   |   | - |   |   | 18,616,713 |   |   | 2,002,238 |   |   | 672,833 |   |   | (1,153,387 | ) |   | (523,118 | ) |   | (508,125 | ) |   | 490,441 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred                      stock sold, including dividends                                            |   |   | 4,000 |   |   | 3,600,000 |   |   | - |   |   | - |   |   | 1,335,474 |   |   | (1,335,474 | ) |   | - |   |   | - |   |   | 3,600,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock sold                                                                    |   |   | - |   |   | - |   |   | 700,471 |   |   | 1,561,110 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 1,561,110 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cancellation                      of stock subscription                                                   |   |   | - |   |   | - |   |   | (410,500 | ) |   | (405,130 | ) |   | - |   |   | - |   |   | 405,130 |   |   | - |   |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued in exchange for services                                         |   |   | - |   |   | - |   |   | 2,503,789 |   |   | 4,257,320 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 4,257,320 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued with exercise of stock options                                   |   |   | - |   |   | - |   |   | 191,500 |   |   | 104,375 |   |   | - |   |   | - |   |   | (4,375 | ) |   | - |   |   | 100,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued with exercise of options                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| for                      compensation                                                                     |   |   | - |   |   | - |   |   | 996,400 |   |   | 567,164 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 567,164 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                      of preferred stock to common stock                                        |   |   | (1,600 | ) |   | (1,440,000 | ) |   | 420,662 |   |   | 1,974,190 |   |   | (534,190 | ) |   | - |   |   | - |   |   | - |   |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued as payment of preferred                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stock                      dividends                                                                      |   |   | - |   |   | - |   |   | 4,754 |   |   | 14,629 |   |   | - |   |   | (14,629 | ) |   | - |   |   | - |   |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                      accrued on preferred stock not                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| yet                      converted                                                                        |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (33,216 | ) |   | - |   |   | - |   |   | (33,216 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collection                      of stock subscriptions                                                    |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 103,679 |   |   | - |   |   | 103,679 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                      of deferred compentsation                                               |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 232,500 |   |   | 232,500 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forgiveness                      of officers' compensation                                                |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 100,667 |   |   | - |   |   | - |   |   | - |   |   | 100,667 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      loss (restated)                                                                  |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (6,933,310 | ) |   | - |   |   | - |   |   | (6,933,310 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                      at June 30, 1996 (restated)                                                  |   |   | 2,400 |   |   | 2,160,000 |   |   | 23,023,789 |   |   | 10,075,896 |   |   | 1,574,784 |   |   | (9,470,016 | ) |   | (18,684 | ) |   | (275,625 | ) |   | 4,046,355 |   |
| See                      accompanying notes to the financial                      statements.             |

----

*Table              of Contents*

| **IMAGING                      DIAGNOSTIC SYSTEMS, INC.**                                                 |   |
|-----------------------------------------------------------------------------------------------------------|--------|
| **(a                      Development Stage Company)**                                                    |   |
|                                                                                                      |   |
| **Statements                      of Stockhoders' Equity (Continued)**                                    |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                      December 10, 1993 (date of inception) to June 30,                      2006** |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |
|                                                                                                      |   | Preferred                      Stock (**) |   | Common                      Stock |   | Additional |   | During                      the |   |   |   |   |   |   |   |
|                                                                                                      |   | Number                      of |   | Number                      of |   | Paid-in |   | Development |   | Subscriptions |   | Deferred |   |   |   |
|                                                                                                      |   | Shares |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   | Receivable |   | Compensation |   | Total |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                      at June 30, 1996 (restated)                                                  |   |   | 2,400 |   |   | 2,160,000 |   |   | 23,023,789 |   |   | 10,075,896 |   |   | 1,574,784 |   |   | (9,470,016 | ) |   | (18,684 | ) |   | (275,625 | ) |   | 4,046,355 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred                      stock sold, including dividends                                            |   |   | 450 |   |   | 4,500,000 |   |   | - |   |   | - |   |   | 998,120 |   |   | (998,120 | ) |   | - |   |   | - |   |   | 4,500,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                      of preferred stock to common stock                                        |   |   | (2,400 | ) |   | (2,160,000 | ) |   | 1,061,202 |   |   | 2,961,284 |   |   | (801,284 | ) |   | - |   |   | - |   |   | - |   |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued in exchange for services                                         |   |   | - |   |   | - |   |   | 234,200 |   |   | 650,129 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 650,129 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued for compensation                                                 |   |   | - |   |   | - |   |   | 353,200 |   |   | 918,364 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 918,364 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued with exercise of stock options                                   |   |   | - |   |   | - |   |   | 361,933 |   |   | 1,136,953 |   |   | - |   |   | - |   |   | (33,750 | ) |   | - |   |   | 1,103,203 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued to employee                                                      |   |   | - |   |   | - |   |   | (150,000 | ) |   | (52,500 | ) |   | - |   |   | - |   |   | - |   |   | - |   |   | (52,500 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                      stock issued as payment of preferred                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stock                      dividends                                                                      |   |   | - |   |   | - |   |   | 20,760 |   |   | 49,603 |   |   | - |   |   | (16,387 | ) |   | - |   |   | - |   |   | 33,216 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                      accrued on preferred stock not                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| yet                      converted                                                                        |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (168,288 | ) |   | - |   |   | - |   |   | (168,288 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                      options granted                                                                |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 1,891,500 |   |   | - |   |   | - |   |   | (1,891,500 | ) |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collection                      of stock subscriptions                                                    |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 16,875 |   |   | - |   |   | 16,875 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                      of deferred compentsation                                               |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 788,000 |   |   | 788,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      loss (restated)                                                                  |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (7,646,119 | ) |   | - |   |   | - |   |   | (7,646,119 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                      at June 30, 1997 (restated)                                                  |   |   | 450 |   |   | 4,500,000 |   |   | 24,905,084 |   |   | 15,739,729 |   |   | 3,663,120 |   |   | (18,298,930 | ) |   | (35,559 | ) |   | (1,379,125 | ) |   | 4,189,235 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                      accompanying notes to the financial                      statements.             |

----

*Table                of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |
|---------------------------------------------------------------------------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |
|                                                                                                          |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |
|                                                                                                          |   | Shares |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 1997 (restated)                                                    |   |   | 450 |   |   | 4,500,000 |   |   | 24,905,084 |   |   | 15,739,729 |   |   | 3,663,120 |   |   | (18,298,930 | ) |   |   |   |   | (35,559 | ) |   | (1,379,125 | ) |   | 4,189,235 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred                        stock sold, including dividends                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        placement fees                                                                     |   |   | 501 |   |   | 5,010,000 |   |   | - |   |   | - |   |   | 1,290,515 |   |   | (1,741,015 | ) |   |   |   |   | - |   |   | - |   |   | 4,559,500 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                        of preferred stock to common stock                                          |   |   | (340 | ) |   | (3,400,000 | ) |   | 6,502,448 |   |   | 4,644,307 |   |   | (1,210,414 | ) |   | - |   |   |   |   |   | - |   |   | - |   |   | 33,893 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock sold                                                                      |   |   | - |   |   | - |   |   | 500,000 |   |   | 200,000 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 200,000 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued in exchange for services                                           |   |   | - |   |   | - |   |   | 956,000 |   |   | 1,419,130 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 1,419,130 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued for compensation                                                   |   |   | - |   |   | - |   |   | 64,300 |   |   | 54,408 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 54,408 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of stock options                                     |   |   | - |   |   | - |   |   | 65,712 |   |   | 22,999 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 22,999 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued in exchange for                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| licensing                        agreement                                                                    |   |   | - |   |   | - |   |   | 3,500,000 |   |   | 1,890,000 |   |   | (3,199,000 | ) |   | - |   |   |   |   |   | - |   |   | - |   |   | (1,309,000 | ) |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                        accrued on preferred stock not                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| yet                        converted                                                                          |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (315,000 | ) |   |   |   |   | - |   |   | - |   |   | (315,000 | ) |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                        options granted                                                                  |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 1,340,625 |   |   | - |   |   |   |   |   | - |   |   | (1,340,625 | ) |   | - |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collection                        of stock subscriptions                                                      |   |   | - |   |   | - |   |   | - |   |   | 12,500 |   |   | - |   |   | - |   |   |   |   |   | 21,250 |   |   | - |   |   | 33,750 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                        of deferred compentsation                                                 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   |   |   |   | - |   |   | 1,418,938 |   |   | 1,418,938 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (6,715,732 | ) |   | * |   |   | - |   |   | - |   |   | (6,715,732 | ) |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 1998 (restated)*                                                   |   |   | 611 |   |   | 6,110,000 |   |   | 36,493,544 |   |   | 23,983,073 |   |   | 1,884,846 |   |   | (27,070,677 | ) |   | * |   |   | (14,309 | ) |   | (1,300,812 | ) |   | 3,592,121 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial                        statements.             |

----

*Table                of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |                                        |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of            |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |   |   |
|                                                                                                          |   | Shares                                      |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 1998 (restated)*                                                   |   |                                        | 611    |   |   | 6,110,000 |   |   | 36,493,544 |   |   | 23,983,073 |   |   | 1,884,846 |   |   | (27,070,677 | ) |   | * |   |   | (14,309 | ) |   | (1,300,812 | ) |   | 3,592,121 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred                        stock issued - satisfaction of debt                                          |   |                                        | 138    |   |   | 1,380,000 |   |   | - |   |   | - |   |   | (161,348 | ) |   | (492,857 | ) |   |   |   |   | - |   |   | - |   |   | 725,795 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                        of preferred stock to common stock                                          |   |                                        | (153   | ) |   | (1,530,000 | ) |   | 4,865,034 |   |   | 1,972,296 |   |   | (442,296 | ) |   | - |   |   |   |   |   | - |   |   | - |   |   | - |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock sold                                                                      |   |                                        | -      |   |   | - |   |   | 200,000 |   |   | 60,000 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 60,000 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 719,442 |   |   | 301,210 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 301,210 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - repayment of debt                                                |   |                                        | -      |   |   | - |   |   | 2,974,043 |   |   | 1,196,992 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 1,196,992 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued in exchange for loan fees                                          |   |                                        | -      |   |   | - |   |   | 480,000 |   |   | 292,694 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 292,694 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of stock options                                     |   |                                        | -      |   |   | - |   |   | 65,612 |   |   | 124,464 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 124,464 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued in satisfaction of                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| licensing                        agreement payable                                                            |   |                                        | -      |   |   | - |   |   | 3,500,000 |   |   | 1,890,000 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 1,890,000 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Redeemable                        preferred stock sold, deemed dividend                                       |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (127,117 | ) |   |   |   |   | - |   |   | - |   |   | (127,117 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                        accrued-preferred stock not yet converted                                    |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (329,176 | ) |   |   |   |   | - |   |   | - |   |   | (329,176 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                        options granted                                                                  |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | 209,625 |   |   | - |   |   |   |   |   | - |   |   | (209,625 | ) |   | - |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization                        of deferred compentsation                                                 |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   |   |   |   | - |   |   | 1,510,437 |   |   | 1,510,437 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (6,543,292 | ) |   | * |   |   | - |   |   | - |   |   | (6,543,292 | ) |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 1999 (restated)*                                                   |   |                                        | 596    |   |   | 5,960,000 |   |   | 49,297,675 |   |   | 29,820,729 |   |   | 1,490,827 |   |   | (34,563,119 | ) |   | * |   |   | (14,309 | ) |   | - |   |   | 2,694,128 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial statements.                                    |   |                                        |   |

----

*Table                  of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |                                        |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of            |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |   |   |
|                                                                                                          |   | Shares                                      |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 1999 (restated)*                                                   |   |                                        | 596    |   |   | 5,960,000 |   |   | 49,297,675 |   |   | 29,820,729 |   |   | 1,490,827 |   |   | (34,563,119 | ) |   | * |   |   | (14,309 | ) |   | - |   |   | 2,694,128 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                        of convertible debentures                                                   |   |                                        | -      |   |   | - |   |   | 4,060,398 |   |   | 3,958,223 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 3,958,223 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                        of preferred stock to common, net                                           |   |                                        | (596   | ) |   | (5,960,000 | ) |   | 45,415,734 |   |   | 7,313,334 |   |   | (648,885 | ) |   | - |   |   |   |   |   | - |   |   | - |   |   | 704,449 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock sold                                                                      |   |                                        | -      |   |   | - |   |   | 100,000 |   |   | 157,000 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 157,000 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation, net of cancelled shares                                              |   |                                        | -      |   |   | - |   |   | 137,000 |   |   | (18,675 | ) |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | (18,675 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - repayment of debt                                                |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        accrued interest                                                                   |   |                                        | -      |   |   | - |   |   | 5,061,294 |   |   | 1,067,665 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 1,067,665 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued in exchange for                                                    |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| interest                        and loan fees                                                                 |   |                                        | -      |   |   | - |   |   | 7,297 |   |   | 2,408 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 2,408 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of stock options                                     |   |                                        | -      |   |   | - |   |   | 1,281,628 |   |   | 395,810 |   |   | 157,988 |   |   | - |   |   |   |   |   | (13,599 | ) |   | - |   |   | 540,199 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of warrants                                          |   |                                        | -      |   |   | - |   |   | 150,652 |   |   | 121,563 |   |   | 97,850 |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 219,413 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                        of note payable with warrants at a discount                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | 500,000 |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 500,000 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                        accrued-preferred stock not yet converted                                    |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (145,950 | ) |   |   |   |   | - |   |   | - |   |   | (145,950 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (6,531,662 | ) |   | * |   |   | - |   |   | - |   |   | (6,531,662 | ) |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2000 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 105,511,678 |   |   | 42,818,057 |   |   | 1,597,780 |   |   | (41,240,731 | ) |   | * |   |   | (27,908 | ) |   | - |   |   | 3,147,198 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial statements.                                    |   |                                        |   |

----

*Table                of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |                                        |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of            |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |   |   |
|                                                                                                          |   | Shares                                      |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2000 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 105,511,678 |   |   | 42,818,057 |   |   | 1,597,780 |   |   | (41,240,731 | ) |   | * |   |   | (27,908 | ) |   | - |   |   | 3,147,198 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred                        stock sold, including dividends                                              |   |                                        | 500    |   |   | 5,000,000 |   |   | - |   |   | - |   |   | 708,130 |   |   | (708,130 | ) |   |   |   |   | - |   |   | - |   |   | 5,000,000 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                        of preferred stock to common, net                                           |   |                                        | (500   | ) |   | (5,000,000 | ) |   | 5,664,067 |   |   | 5,580,531 |   |   | (708,130 | ) |   | - |   |   |   |   |   | - |   |   | - |   |   | (127,599 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |                                        | -      |   |   | - |   |   | 3,407,613 |   |   | 3,143,666 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 3,143,666 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 153,500 |   |   | 227,855 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 227,855 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - repayment of debt                                                |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        accrued interest                                                                   |   |                                        | -      |   |   | - |   |   | 810,000 |   |   | 1,393,200 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 1,393,200 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of stock options                                     |   |                                        | -      |   |   | - |   |   | 3,781,614 |   |   | 1,868,585 |   |   | - |   |   | - |   |   |   |   |   | 13,599 |   |   | - |   |   | 1,882,184 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued with exercise of warrants                                          |   |                                        | -      |   |   | - |   |   | 99,375 |   |   | 119,887 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 119,887 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                        accrued-preferred stock                                                      |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (422,401 | ) |   |   |   |   | - |   |   | - |   |   | (422,401 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (9,532,450 | ) |   | * |   |   | - |   |   | - |   |   | (9,532,450 | ) |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2001 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 119,427,847 |   |   | 55,151,781 |   |   | 1,597,780 |   |   | (51,903,712 | ) |   | * |   |   | (14,309 | ) |   | - |   |   | 4,831,540 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial statements.                                    |   |                                        |   |

----

*Table                  of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |                                        |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of            |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |   |   |
|                                                                                                          |   | Shares                                      |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2001 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 119,427,847 |   |   | 55,151,781 |   |   | 1,597,780 |   |   | (51,903,712 | ) |   | * |   |   | (14,309 | ) |   | - |   |   | 4,831,540 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |                                        | -      |   |   | - |   |   | 11,607,866 |   |   | 6,213,805 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 6,213,805 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 560,000 |   |   | 294,350 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | (117,600 | ) |   | 176,750 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (7,997,652 | ) |   | * |   |   | - |   |   | - |   |   | (7,997,652 | ) |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2002 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 131,595,713 |   |   | 61,659,936 |   |   | 1,597,780 |   |   | (59,901,364 | ) |   | * |   |   | (14,309 | ) |   | (117,600 | ) |   | 3,224,443 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |                                        | -      |   |   | - |   |   | 29,390,708 |   |   | 8,737,772 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 8,737,772 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 2,007,618 |   |   | 970,653 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | 117,600 |   |   | 1,088,253 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payment                        of subscriptions receivable                                                    |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   |   |   |   | 14,309 |   |   | - |   |   | 14,309 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss (restated)*                                                                   |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,358,774 | ) |   | * |   |   | - |   |   | - |   |   | (8,358,774 | ) |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2003 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 162,994,039 |   |   | 71,368,361 |   |   | 1,597,780 |   |   | (68,260,138 | ) |   | * |   |   | - |   |   | - |   |   | 4,706,003 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial statements.                                    |   |                                        |   |

----

*Table                  of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |                                        |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |                                        |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of            |   | Number                        of |   | Paid-in |   | Development |   |   |   | Subscriptions |   | Deferred |   |   |   |   |   |
|                                                                                                          |   | Shares                                      |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   |   |   | Receivable |   | Compensation |   | Total |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2003 (restated)*                                                   |   |                                        | -      |   |   | - |   |   | 162,994,039 |   |   | 71,368,361 |   |   | 1,597,780 |   |   | (68,260,138 | ) |   | * |   |   | - |   |   | - |   |   | 4,706,003 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |                                        | -      |   |   | - |   |   | 8,630,819 |   |   | 6,541,700 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 6,541,700 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 734,785 |   |   | 832,950 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 832,950 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exercise of stock options                                        |   |                                        | -      |   |   | - |   |   | 967,769 |   |   | 492,701 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 492,701 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss                                                                               |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,402,959 | ) |   |   |   |   | - |   |   | - |   |   | (8,402,959 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2004 (Restated)                                                    |   |                                        | -      |   |   | - |   |   | 173,327,412 |   |   | 79,235,712 |   |   | 1,597,780 |   |   | (76,663,097 | ) |   | * |   |   | - |   |   | - |   |   | 4,170,395 |   |   | * |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |                                        | -      |   |   | - |   |   | 26,274,893 |   |   | 7,797,807 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 7,797,807 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exchange for services                                            |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        compensation                                                                       |   |                                        | -      |   |   | - |   |   | 285,000 |   |   | 113,850 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 113,850 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - exercise of stock options                                        |   |                                        | -      |   |   | - |   |   | 13,264 |   |   | 3,404 |   |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   | 3,404 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss                                                                               |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (7,312,918 | ) |   |   |   |   | - |   |   | - |   |   | (7,312,918 | ) |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2005                                                               |   |                                        | -      |   | $ | - |   |   | 199,900,569 |   | $ | 87,150,773 |   | $ | 1,597,780 |   | $ | (83,976,015 | ) |   |   |   | $ | - |   | $ | - |   |   | 4,772,538 |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *                        See Notes 2(n) and 8                                                                 |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                               |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial statements.                                    |   |                                        |   |

----

*Table                  of Contents*

| **IMAGING                        DIAGNOSTIC SYSTEMS, INC.**                                                   |   |
|---------------------------------------------------------------------------------------------------------------|--------|
| **(a                        Development Stage Company)**                                                      |   |
|                                                                                                          |   |
| **Statements                        of Stockhoders' Equity (Continued)**                                      |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **From                        December 10, 1993 (date of inception) to June 30,                        2006** |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   | Deficit |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |
|                                                                                                          |   | Preferred                        Stock (**) |   | Common                        Stock |   | Additional |   | During                        the |   |   |   |   |   |   |   |
|                                                                                                          |   | Number                        of |   | Number                        of |   | Paid-in |   | Development |   | Subscriptions |   | Deferred |   |   |   |
|                                                                                                          |   | Shares |   | Amount |   | Shares |   | Amount |   | Capital |   | Stage |   | Receivable |   | Compensation |   | Total |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2005                                                               |   |   | - |   |   | - |   |   | 199,900,569 |   |   | 87,150,773 |   |   | 1,597,780 |   |   | (83,976,015 | ) |   | - |   |   | - |   |   | 4,772,538 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                        stock issued - line of equity transactions                                      |   |   | - |   |   | - |   |   | 47,776,064 |   |   | 7,409,543 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 7,409,543 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                        Value of Stock Option Expenses                                                    |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 632,557 |   |   | - |   |   | - |   |   | - |   |   | 632,557 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        loss                                                                               |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (7,162,722 | ) |   | - |   |   | - |   |   | (7,162,722 | ) |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                        at June 30, 2006                                                               |   |   | - |   | $ | - |   |   | 247,676,633 |   | $ | 94,560,316 |   | $ | 2,230,337 |   | $ | (91,138,737 | ) | $ | - |   | $ | - |   |   | 5,651,916 |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **                        See Note 16 for a detailed breakdown by Series.                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial                        statements.             |

----

*Table              of Contents*

| IMAGING                        DIAGNOSTIC SYSTEMS, INC.                                                   |   |
|-----------------------------------------------------------------------------------------------------------|--------|
| (A                        Development Stage Company)                                                      |   |
|                                                                                                      |   |    |   |   |   |   |   |   |   |
| Statement                        of Cash Flows                                                            |   |
|                                                                                                      |   |    |   |   |   |   |   |   |   |
|                                                                                                      |   |    |   |   |   |   |   | From                        Inception |   |
|                                                                                                      |   |    |   |   |   |   |   | (December                        10, |   |
|                                                                                                      |   |  Year                        Ended |   | Year                        Ended |   | Year                        Ended |   | 1993)                        to |   |
|                                                                                                      |   |  June                        30, 2006 |   | June                        30, 2005 |   | June                        30, 2004 |   | June                        30, 2006 |   |
|                                                                                                      |   |    |   |   |   | (Restated)* |   | (Restated)* |   |
|                                                                                                      |   |    |   |   |   |   |   |   |   |
| Net                        loss                                                                           |   | $ | (7,162,722 | ) | $ | (7,312,918 | ) | $ | (8,402,959 | ) | $ | (84,290,977 | ) |
| Adjustments                        to reconcile net loss to net cash                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           used for operating activities:                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Depreciation                        and** **amortization                     |   |   | 183,450 |   |   | 187,539 |   |   | 175,715 |   |   | 2,604,558 |   |
|     (Gain)                        Loss on sale of fixed assets                        |   |   | 2,439 |   |   | - |   |   | 5,669 |   |   | (3,146 | ) |
|     Extinguishment                        of debt                                     |   |   | (21,500 | ) |   | (409,962 | ) |   |   |   |   | (431,462 | ) |
|     Inventory                        valuation adjustment                             |   |   | 184,219 |   |   | 499,194 |   |   | 586,510 |   |   | 3,918,414 |   |
|     Amoritization                        of deferred compensation                     |   |   | - |   |   | - |   |   | - |   |   | 4,064,250 |   |
|     Noncash                        interest, compensation and consulting services     |   |   | 565,373 |   |   | 711,740 |   |   | 1,521,346 |   |   | 18,571,871 |   |
|     Fair                        Value of Stock Option Expenses                        |   |   | 632,557 |   |   | - |   |   | - |   |   | 632,557 |   |
|     (Increase)                        decrease in accounts and                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 loans receivable - employees, net |   |   | (266,590 | ) |   | (249,616 | ) |   | (28,040 | ) |   | (584,387 | ) |
|     Increase                        (decrease) in allowance for                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                doubful account                         |   |   | 40,000 |   |   | - |   |   | - |   |   | 40,000 |   |
|     (Increase)                        decrease in inventories, net                    |   |   | (55,625 | ) |   | (161,828 | ) |   | (932,099 | ) |   | (2,752,055 | ) |
|     (Increase)                        decrease in prepaid expenses                    |   |   | (8,659 | ) |   | 30,392 |   |   | (35,857 | ) |   | (42,846 | ) |
|     (Increase)                        decrease in other assets                        |   |   | - |   |   | - |   |   | - |   |   | (306,618 | ) |
|     Increase                        (decrease) in accounts payable and                |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 accrued expenses                  |   |   | (224,973 | ) |   | (257,506 | ) |   | 235,522 |   |   | 724,428 |   |
|     Increase                        (decrease) in other current liabilities           |   |   | 10,000 |   |   | (10,000 | ) |   | 40,000 |   |   | 40,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                        adjustments                                                                  |   |   | 1,040,691 |   |   | 339,953 |   |   | 1,568,766 |   |   | 26,475,564 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        cash used for operating activities                                             |   |   | (6,122,031 | ) |   | (6,972,965 | ) |   | (6,834,193 | ) |   | (57,815,413 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                        flows from investing activities:                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           Proceeds from sale of property & equipment                        |   |   | 104 |   |   | - |   |   | 18,603 |   |   | 29,961 |   |
|                           Prototype equipment                                                   |   |   | - |   |   | - |   |   | - |   |   | (2,799,031 | ) |
|                           Capital expenditures                                                  |   |   | (20,079 | ) |   | (23,641 | ) |   | (334,264 | ) |   | (4,450,220 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        cash used for investing activities                                             |   |   | (19,975 | ) |   | (23,641 | ) |   | (315,661 | ) |   | (7,219,290 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                        flows from financing activities:                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           Repayment of capital lease obligation                                 |   |   | - |   |   | - |   |   | - |   |   | (50,289 | ) |
|                           Proceeds from convertible debenture                                   |   |   | - |   |   | - |   |   | - |   |   | 3,240,000 |   |
|                           Proceeds from (repayments) loan payable, net                          |   |   | - |   |   | - |   |   | - |   |   | 2,595,029 |   |
|                           Proceeds from issuance of preferred stock                             |   |   | - |   |   | - |   |   | - |   |   | 18,039,500 |   |
|                           Proceeds from exercise of stock options                               |   |   | - |   |   | 3,404 |   |   | 492,701 |   |   | 903,989 |   |
|                           Net proceeds from issuance of common stock                            |   |   | 6,844,171 |   |   | 7,204,370 |   |   | 5,850,000 |   |   | 41,774,161 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        cash provided by financing activities                                          |   |   | 6,844,171 |   |   | 7,207,774 |   |   | 6,342,701 |   |   | 66,502,390 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        increase (decrease) in cash and cash equivalents                               |   |   | 702,164 |   |   | 211,169 |   |   | (807,153 | ) |   | 1,467,687 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                        and cash equivalents at beginning of period                                   |   |   | 765,523 |   |   | 554,354 |   |   | 1,361,507 |   |   | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                        and cash equivalents at end of period                                         |   | $ | 1,467,687 |   | $ | 765,523 |   | $ | 554,354 |   | $ | 1,467,687 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |  |   |   |   |   |   |   |   |   |   |   |
| See                        Notes 2(n) and 8                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |  |   |   |   |   |   |   |   |   |   |   |
| See                        accompanying notes to the financial                        statements.         |

----

*Table            of Contents*

| IMAGING                  DIAGNOSTIC SYSTEMS, INC.                                     |   |
|---------------------------------------------------------------------------------------|--------|
| (A                  Development Stage Company)                                        |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |
| Statement                  of Cash Flows (Continued)                                  |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   | From                  Inception |   |
|                                                                                  |   |   |   |   |   |   |   | (December                  10, |   |
|                                                                                  |   | Year                  Ended |   | Year                  Ended |   | Year                  Ended |   | 1993)                  to |   |
|                                                                                  |   | June                  30, 2006 |   | June                  30, 2005 |   | June                  30, 2004 |   | June                  30, 2006 |   |
| Supplemental                  disclosures of cash                                     |   |   |   |   |   |   |   |   |   |
| flow                  information:                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |
| Cash                  paid for interest                                               |   | $ | - |   | $ | 78 |   | $ | 5,916 |   | $ | 215,962 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Supplemental                  disclosures of noncash                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| investing                  and financing activities:                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock and options                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                  exchange for services                                             |   | $ | - |   | $ | - |   | $ | 450,000 |   | $ | 6,306,350 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock as loan fees in                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| connection                  with loans to the Company                                 |   | $ | - |   | $ | - |   | $ | - |   | $ | 293,694 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock as satisfaction of                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| loans                  payable and accrued interest                                   |   | $ | - |   | $ | - |   | $ | - |   | $ | 3,398,965 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock as satisfaction of                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| certain                  accounts payable                                             |   | $ | - |   | $ | - |   | $ | - |   | $ | 257,892 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock in                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| exchange                  for property and equipment                                  |   | $ | - |   | $ | - |   | $ | - |   | $ | 89,650 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock and other current liability                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                  exchange for patent liceensing agreement                          |   | $ | - |   | $ | - |   | $ | - |   | $ | 581,000 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock for                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| compensation                                                                          |   | $ | - |   | $ | 113,850 |   | $ | 382,950 |   | $ | 2,691,788 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock through                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| exercise                  of incentive stock options                                  |   | $ | - |   | $ | - |   | $ | - |   | $ | 3,117,702 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance                  of common stock as                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| payment                  for preferred stock dividends                                |   | $ | - |   | $ | - |   | $ | - |   | $ | 507,645 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition                  of property and equipment                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| through                  the issuance of a capital                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| lease                  payable                                                        |   | $ | - |   | $ | - |   | $ | - |   | $ | 50,289 |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See                  accompanying notes to the financial                  statements. |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements**

**(1)**
**BACKGROUND**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

|                                                                |   |                         |       |                         |   | From                Inception |   |
|---------------------------------------------------------------------|--------|------------------------------|------------|------------------------------|--------|-------------------------------|--------|
|                                                                |   |                         |       |                         |   | (December                10,  |   |
|                                                                |   | Year                Ended    |       | Year                Ended    |   | 1993)                to       |   |
|                                                                |   | June                30, 2005 |       | June                30, 2004 |   | June                30, 2005  |   |
|                                                                |   |                         |       | (Restated)*                  |   | (Restated)*                   |   |
| Net                loss to common shareholders,                     |   |                         |       |                         |   |                          |   |
|                   as reported                             |   | $                            | (7,312,918 | )                            | $      | (8,402,959                    | )      | $ | (83,976,015 | ) |
|                                                                |   |                         |       |                         |   |                          |   |   |   |   |
| Less:                stock-based employee compensation              |   |                         |       |                         |   |                          |   |   |   |   |
|                   determined under the fair value method, |   |                         |       |                         |   |                          |   |   |   |   |
|                   net of income tax effect                |   |                         | 620,907    |                         |   | 985,166                       |   |   | 5,537,149 |   |
|                                                                |   |                         |       |                         |   |                          |   |   |   |   |
| Net                loss to common shareholders,                     |   |                         |       |                         |   |                          |   |   |   |   |
|                   pro forma                               |   | $                            | (7,933,825 | )                            | $      | (9,388,125                    | )      | $ | (89,513,164 | ) |
|                                                                |   |                         |       |                         |   |                          |   |   |   |   |
| Basic                and diluted loss per share -                   |   |                         |       |                         |   |                          |   |   |   |   |
|                   As reported                             |   | $                            | (.04       | )                            | $      | (.05                          | )      | $ | (1.02 | ) |
|                                                                |   |                         |       |                         |   |                          |   |   |   |   |
|                   Pro forma                               |   | $                            | (.04       | )                            | $      | (.06                          | )      | $ | (1.09 | ) |

|                                   | Year                Ended    | Year                Ended    | Year                Ended    |
|----------------------------------------|------------------------------|------------------------------|------------------------------|
|                                   | June                30, 2006 | June                30, 2005 | June                30, 2004 |
| Volatility                             | 71.11%                       | 66.16%                       | 75.65%                       |
| Risk                Free Interest Rate | 4%                           | 4%                           | 4%                           |
| Expected                Term           | 8                yrs         | 10                yrs        | 10                yrs        |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

| · | A                significant adverse change in legal factors or in the business                climate                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | An                adverse action or assessment by a regulator                                                                                            |
| · | Unanticipated                competition                                                                                                                 |
| · | Loss                of key personnel                                                                                                                     |
| · | An                expectation that all or a significant portion of a reporting unit                will be                sold or otherwise disposed of. |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(2)**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

*Accounting      Changes and Error Corrections*
*Accounting      Changes*

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(3)**
**RESTATEMENT**

| **Fiscal                year**    |   |                                |     |             |   |      |   |
|-----------------------------------|--------|-------------------------------------|----------|------------------|--------|-----------|--------|
| **ended                June 30,** |   | **Intangible                asset** |     | **Compensation** |   | **Total** |   |
| 1998                              |   | $                                   | -        |             | $      | 265,978   |   | $ | 265,978 |   |
| 1999                              |   |                                | -        |             |   | 263,902   |   |   | 263,902 |   |
| 2000                              |   |                                | -        |             |   | 1,491,267 |   |   | 1,491,267 |   |
| 2001                              |   |                                | (372,410 | )                |   | (566,211  | )      |   | (938,621 | ) |
| 2002                              |   |                                | (57,892  | )                |   | (262,200  | )      |   | (320,092 | ) |
| 2003                              |   |                                | -        |             |   | (178,250  | )      |   | (178,250 | ) |
|                              |   |                                |     |             |   |      |   |   |   |   |
| Totals                            |   | $                                   | (430,302 | )                | $      | 1,014,486 |   | $ | 584,184 |   |

**(4)**
**MERGER**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(5)**
**GOING      CONCERN**

**(6)**
**INVENTORIES**

|                                                                                                  |   | **June                30,** |      |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                                                  |   | **2006**                    |      | **2005** |   |
| Raw                materials consisting of purchased parts, components and                supplies    |   | $                           | 845,516   |   | $ | 577,211 |   |
| Work-in                process including units undergoing final inspection and                testing |   |                        | 139,462   |   |   | 105,902 |   |
| Finished                goods                                                                         |   |                        | 1,014,926 |   |   | 1,337,385 |   |
|                                                                                                  |   |                        |      |   |   |   |   |
| Sub-Total                Inventories                                                                  |   | $                           | 1,999,904 |   | $ | 2,020,498 |   |
|                                                                                                  |   |                        |      |   |   |   |   |
|                    Less Inventory Reserve                                              |   |                        | (108,000  | ) |   | - |   |
|                                                                                                  |   |                        |      |   |   |   |   |
| Total                Inventory - Net                                                                  |   | $                           | 1,891,904 |   | $ | 2,020,498 |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(7)**
**PROPERTY      AND EQUIPMENT**

|                                                             |   | **June                30,** |       |
|------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                             |   | **2006**                    |       | **2005** |   |
| Furniture                and fixtures                            |   | $                           | 262,264    |   | $ | 262,264 |   |
| Building                and land                                 |   |                        | 2,092,529  |   |   | 2,086,330 |   |
| Computers,                equipment and software                 |   |                        | 400,349    |   |   | 387,890 |   |
| CTLM®                software costs                         |   |                        | 352,932    |   |   | 352,932 |   |
| Trade                show equipment                              |   |                        | 298,400    |   |   | 298,400 |   |
| Laboratory                equipment                              |   |                        | 212,560    |   |   | 212,560 |   |
|                                                             |   |                        |       |   |   |   |   |
| Total                Property & Equipment                    |   |                        | 3,619,034  |   |   | 3,600,376 |   |
|                    Less: accumulated depreciation |   |                        | (1,583,851 | ) |   | (1,433,456 | ) |
|                                                             |   |                        |       |   |   |   |   |
| Total                Property & Equipment - Net              |   | $                           | 2,035,183  |   | $ | 2,166,920 |   |

|   | Furniture,                fixtures, clinical, computers, laboratory |                     |
|--------|---------------------------------------------------------------------|--------------------------|
|   |                   equipment and trade show equipment      | 5-7                years |
|   | Building                                                            | 40                years  |
|   | CTLM®                software costs                            | 5                years   |

| **Period                  ended** |   | **Amount** |    |
|-----------------------------------|--------|------------|---------|
| 6/30/01                           |   | $          | 16,241  |   |
| 6/30/00                           |   |       | 51,425  |   |
| 6/30/99                           |   |       | 70,514  |   |
| 6/30/98                           |   |       | 70,587  |   |
| Prior                             |   |       | 144,165 |   |
|                              |   |       |    |   |
| Total                             |   | $          | 352,932 |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(8)**
**INTANGIBLE      ASSETS**

|                                                                                           |   | **June                30,** |    |
|------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                           |   | **2006**                    |    | **2005** |   |
|                                                                                           |   |                        |    | (Restated) |   |
| Patent                license agreement, net of accumulated                                    |   |                        |    |   |   |   |   |
|     amortization                of $273,412 and $239,235 respectively      |   | $                           | 307,588 |   | $ | 341,765 |   |
| UL                & CE approvals, net of accumulated amortization of                $8,225 |   |                        |    |   |   |   |   |
|                    and $8,225 respectively                                      |   |                        | -       |   |   | - |   |
|                                                                                           |   |                        |    |   |   |   |   |
| Totals                                                                                         |   | $                           | 307,588 |   | $ | 341,765 |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(9)**
**ACCOUNTS      PAYABLE AND ACCRUED EXPENSES**

|                                          |   | **June                30,** |    |
|-----------------------------------------------|--------|-----------------------------|---------|
|                                          |   | **2006**                    |    | **2005** |   |
|                                          |   |                        |    |   |   |
| Accounts                payable - trade       |   | $                           | 313,153 |   | $ | 472,623 |   |
| Accrued                property taxes payable |   |                        | 30,819  |   |   | 14,085 |   |
| Accrued                compensated absences   |   |                        | 155,535 |   |   | 132,088 |   |
| Accrued                wages payable          |   |                        | -       |   |   | 128,333 |   |
| Other                accrued expenses         |   |                        | 59,486  |   |   | 36,837 |   |
|                                          |   |                        |    |   |   |   |   |
| Totals                                        |   | $                           | 558,993 |   | $ | 783,966 |   |

**(10)**
**CUSTOMER      DEPOSITS**

|                             |   | **June                30,** |   |
|----------------------------------|--------|-----------------------------|--------|
|                             |   | **2006**                    |   | **2005** |   |
|                             |   |                        |   |   |   |
| Customer                deposits |   | $                           | 40,000 |   | $ | 30,000 |   |
|                             |   |                        |   |   |   |   |   |
| Total                            |   | $                           | 40,000 |   | $ | 30,000 |   |

**(11)**
**SHORT-TERM      DEBT**

|                        |   | **June                30,** |   |
|-----------------------------|--------|-----------------------------|--------|
|                        |   | **2006**                    |   | **2005** |   |
|                        |   |                        |   |   |   |
| Loan                payable |   | $                           | -      |   | $ | 21,500 |   |
|                             |   |                        |   |   |   |   |   |
| Total                       |   | $                           | -      |   | $ | 21,500 |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(12)**
**EQUITY      LINE OF CREDIT**

** **

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(12)**
**EQUITY      LINE OF CREDIT (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(13)**
**LEASES**

| Year                ending June 30,                |   | Amount |   |
|----------------------------------------------------|--------|--------|--------|
|                                               |   |   |   |
| 2007                                               |   | $      | 4,159  |   |
| 2008                                               |   |   | 356    |   |
|                                               |   |   |   |   |
| Total                minimum future lease payments |   | $      | 4,515  |   |

**(14)**
**INCOME      TAXES**

**(15)**
**REDEEMABLE      CONVERTIBLE PREFERRED STOCK**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(15)**
**REDEEMABLE      CONVERTIBLE PREFERRED STOCK (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

|   | Days                from closing                    | 0-120 | 121-180 | 180  |
|--------|-----------------------------------------------------|-------|---------|------|
|   | Redemption                price as a % of Principal | 105%  | 107.5%  | 110% |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(16)**
**CONVERTIBLE      PREFERRED STOCK (Continued)**

----

*Table            of Contents*

| **IMAGING                DIAGNOSTIC SYSTEMS, INC.**            |   |
|----------------------------------------------------------------|--------|
| **(a                Development Stage Company)**               |   |
|                                                           |   |
| **Notes                to Financial Statements (Continued)**   |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **(16)                COVERTIBLE PREFERRED STOCK (Continued)** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   | Series                A |   | Series                B |   | Series                C |   | Series                D |   | Series                E |   | Series                F |   | Series                H |   | Series                I |   | Series                K |   | Total |   |
|                                                           |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   | Shares |   | Amount |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 1995                        |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale                of Series A                                |   |   | 4,000 |   |   | 3,600,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,000 |   |   | 3,600,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series                A conversion                             |   |   | (1,600 | ) |   | (1,440,000 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,600 | ) |   | (1,440,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 1996                        |   |   | 2,400 |   |   | 2,160,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,400 |   |   | 2,160,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale                of Series B                                |   |   |   |   |   |   |   |   | 450 |   |   | 4,500,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 450 |   |   | 4,500,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series                A conversion                             |   |   | (2,400 | ) |   | (2,160,000 | ) |   |  |   |   |  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,400 | ) |   | (2,160,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 1997                        |   |   | - |   |   | - |   |   | 450 |   |   | 4,500,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 450 |   |   | 4,500,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale                of preferred stock                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Series                C - H)                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 210 |   |   | 2,100,000 |   |   | 54 |   |   | 540,000 |   |   | 54 |   |   | 540,000 |   |   | 75 |   |   | 750,000 |   |   | 108 |   |   | 1,080,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 501 |   |   | 5,010,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                of preferred stock                   |   |   |  |   |   |  |   |   |  |   |   |  |   |   | (210 | ) |   | (2,100,000 | ) |   | (25 | ) |   | (250,000 | ) |   | (30 | ) |   | (300,000 | ) |   | (75 | ) |   | (750,000 | ) |   |  |   |   |  |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (340 | ) |   | (3,400,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 1998                        |   |   | - |   |   | - |   |   | 450 |   |   | 4,500,000 |   |   | - |   |   | - |   |   | 29 |   |   | 290,000 |   |   | 24 |   |   | 240,000 |   |   | - |   |   | - |   |   | 108 |   |   | 1,080,000 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 611 |   |   | 6,110,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale                of Series I                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 138 |   |   | 1,380,000 |   |   |   |   |   |   |   |   | 138 |   |   | 1,380,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                of preferred stock                   |   |   |  |   |   |  |   |   | (60 | ) |   | (600,000 | ) |   |  |   |   |  |   |   | (29 | ) |   | (290,000 | ) |   | (24 | ) |   | (240,000 | ) |   |  |   |   |  |   |   | (40 | ) |   | (400,000 | ) |   |  |   |   |  |   |   |  |   |   |  |   |   | (153 | ) |   | (1,530,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 1999                        |   |   | - |   |   | - |   |   | 390 |   |   | 3,900,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 68 |   |   | 680,000 |   |   | 138 |   |   | 1,380,000 |   |   | - |   |   | - |   |   | 596 |   |   | 5,960,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                of preferred stock, net              |   |   |  |   |   |  |   |   | (390 | ) |   | (3,900,000 | ) |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | (68 | ) |   | (680,000 | ) |   | (138 | ) |   | (1,380,000 | ) |   |  |   |   |  |   |   | (596 | ) |   | (5,960,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 2000                        |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale                of Series K                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 50 |   |   | 5,000,000 |   |   | 50 |   |   | 5,000,000 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion                of preferred stock                   |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | (50 | ) |   | (5,000,000 | ) |   | (50 | ) |   | (5,000,000 | ) |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 30, 2001                        |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |   | - |   | $ | - |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additional                information:                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount                off market price                       |   |   |   |   |   | 25 | % |   |   |   |   | 18 | % |   |   |   |   | 25 | % |   |   |   |   | 25 | % |   |   |   |   | 25 | % |   |   |   |   | 30 | % |   |   |   |   | 25 | % |   |   |   |   | 25 | % |   |   |   |   | 12.5 | % |   |   |   |   |   |   |
| Fair                market value-issue rate                    |   |   |   |   | $ | 8.31 |   |   |   |   | $ | 3.25 |   |   |   |   | $ | 1.63 |   |   |   |   | $ | 0.99 |   |   |   |   | $ | 1.07 |   |   |   |   | $ | 1.24 |   |   |   |   | $ | 0.57 |   |   |   |   | $ | 0.38 |   |   |   |   | $ | 1.13 |   |   |   |   |   |   |   |
| Deemed                preferred stock dividend                 |   |   |   |   | $ | 1,335,474 |   |   |   |   | $ | 998,120 |   |   |   |   | $ | 705,738 |   |   |   |   | $ | 182,433 |   |   |   |   | $ | 182,250 |   |   |   |   | $ | 318,966 |   |   |   |   | $ | 351,628 |   |   |   |   | $ | 492,857 |   |   |   |   | $ | 708,130 |   |   |   |   |   |   |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK**

** **

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

** **

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(17)**
**COMMON      STOCK (Continued)**

**(18)**
**STOCK      OPTIONS**

** **

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

**Employee      Plan:**

|                                        |   | Incentive                Stock Options |     | Non                Statutory Stock Options |   |
|---------------------------------------------|--------|----------------------------------------|----------|--------------------------------------------|--------|
|                                        |   | Shares                                 |     | Wtd.                Avg. Price             |   | Shares |   | Wtd.                Avg. Price |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |
| Outstanding                at June 30, 1994 |   |                                   | -0-      |                                       |   |   |   |   | -0- |   |   |   |   |
| Granted                                     |   |                                   | 75,000   |                                       | $      | 1.40 |   |   | 1,500,000 |   | $ | 1.12 |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 1995 |   |                                   | 75,000   |                                       |   | 1.40 |   |   | 1,500,000 |   |   | 1.12 |   |
| Granted                                     |   |                                   | 770,309  |                                       |   | 1.66 |   |   | 750,000 |   |   | 1.44 |   |
| Exercised                                   |   |                                   | (164,956 | )                                          |   | .92 |   |   | (1,800,000 | ) |   | 1.50 |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 1996 |   |                                   | 680,353  |                                       |   | 1.81 |   |   | 450,000 |   |   | .13 |   |
| Granted                                     |   |                                   | 371,377  |                                       |   | 3.27 |   |   | 750,000 |   |   | 3.88 |   |
| Exercised                                   |   |                                   | (395,384 | )                                          |   | 1.10 |   |   | - |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 1997 |   |                                   | 656,346  |                                       |   | 3.07 |   |   | 1,200,000 |   |   | 2.47 |   |
| ** **Granted                           |   |                                   | 220,755  |                                       |   | 1.95 |   |   | 750,000 |   |   | 2.75 |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   | (65,712 | ) |   | .35 |   |
| Canceled                                    |   |                                   | (175,205 | )                                          |   | 4.25 |   |   | - |   |   |   |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

| Outstanding                at June 30, 1998 |   |   | 701,896    |   |   | 2.42                  |   |   | 1,884,288  |   |   | 2.66   |   |
|---------------------------------------------|--------|--------|------------|--------|--------|-----------------------|--------|--------|------------|--------|--------|--------|--------|
| Granted                                     |   |   | 786,635    |   |   | .48                   |   |   | 750,000    |   |   | .43    |   |
| Exercised                                   |   |   | -          |   |   |                  |   |   | (65,612    | )      |   | .35    |   |
| Canceled                                    |   |   | (82,500    | )      |   | 3.37                  |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 1999 |   |   | 1,406,031  |   |   | .53                ** |   |   | 2,568,676  |   |   | 2.24   |   |
| Granted                                     |   |   | 3,139,459  |   |   | .34                   |   |   | -          |   |   |   |   |
| Exercised                                   |   |   | (770,702   | )      |   | .37                   |   |   | (318,676   | )      |   | .35    |   |
| Canceled                                    |   |   | (64,334    | )      |   | .47                   |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2000 |   |   | 3,710,454  |   |   | .42                   |   |   | 2,250,000  |   |   | 2.35   |   |
| Granted                                     |   |   | 1,915,700  |   |   | 2.59                  |   |   | -          |   |   |   |   |
| Exercised                                   |   |   | (3,030,964 | )      |   | .32                   |   |   | (750,000   | )      |   | .31    |   |
| Canceled                                    |   |   | (279,982   | )      |   | .60                   |   |   | (1,500,000 | )      |   | 2.75   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2001 |   |   | 2,315,208  |   |   | 2.38                  |   |   | -          |   |   |   |   |
| Granted                                     |   |   | 6,839,864  |   |   | .68                   |   |   | -          |   |   |   |   |
| Exercised                                   |   |   | -          |   |   |                       |   |   | -          |   |   |   |   |
| Canceled                                    |   |   | (2,695,482 | )      |   | 1.17                  |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2002 |   |   | 6,459,590  |   |   | .85                   |   |   | -          |   |   |   |   |
| Granted                                     |   |   | 1,459,705  |   |   | .38                   |   |   | -          |   |   |   |   |
| Exercised                                   |   |   | -          |   |   |                       |   |   | -          |   |   |   |   |
| Canceled                                    |   |   | (56,788    | )      |   | .74                   |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2003 |   |   | 7,862,507  |   |   | .76                   |   |   | -          |   |   |   |   |
| Granted                                     |   |   | 1,576,620  |   |   | 1.12                  |   |   | 31,748     |   |   | .69    |   |
| Exercised                                   |   |   | (517,769   | )      |   | .44                   |   |   | -          |   |   |   |   |
| Canceled                                    |   |   | (97,525    | )      |   | .78                   |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2004 |   |   | 8,823,833  |   |   | .84                   |   |   | 31,748     |   |   | .69    |   |
| Granted                                     |   |   | -          |   |   |                       |   |   | 4,253,159  |   |   | .34    |   |
| Exercised                                   |   |   | (13,264    | )      |   | .26                   |   |   | -          |   |   |   |   |
| Canceled                                    |   |   | (142,891   | )      |   | .68                   |   |   | -          |   |   |   |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2005 |   |   | 8,667,678  |   |   | .98                   |   |   | 4,284,907  |   |   | .34    |   |
| Granted                                     |   |   | -          |   |   |                       |   |   | 532,855    |   |   | .18    |   |
| Exercised                                   |   |   | -          |   |   |                       |   |   | -          |   |   |        |   |
| Canceled                                    |   |   | (254,277   | )      |   | .74                   |   |   | (23,100    | )      |   | .26    |   |
|                                        |   |   |       |   |   |                  |   |   |       |   |   |   |   |
| Outstanding                at June 30, 2006 |   |   | 8,413,401  |   |   | .96                   |   |   | 4,794,662  |   |   | .32    |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

**Director      Plan:**

|                                        |   | Incentive                Stock Options |     | Non                Statutory Stock Options |   |
|---------------------------------------------|--------|----------------------------------------|----------|--------------------------------------------|--------|
|                                        |   | Shares                                 |     | Wtd.                Avg. Price             |   | Shares |   | Wtd.                Avg. Price |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |
| Outstanding                at June 30, 2000 |   |                                   | -0-      |                                       |   |   |   |   |   |   |   |   |   |
| Granted                                     |   |                                   | 150,000  |                                       | $      | .65 |   |   |   |   |   |   |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2001 |   |                                   | 150,000  |                                       |   | .65 |   |   |   |   |   |   |   |
| Granted                                     |   |                                   | 300,000  |                                       |   | .55 |   |   |   |   |   |   |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2002 |   |                                   | 450,000  |                                       |   | .58 |   |   |   |   |   |   |   |
| Granted                                     |   |                                   | 400,000  |                                       |   | .18 |   |   |   |   |   |   |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   |   |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2003 |   |                                   | 850,000  |                                       |   | .40 |   |   | - |   |   |   |   |
| Granted                                     |   |                                   | 100,000  |                                       |   | 1.07 |   |   | 700,000 |   |   | .76 |   |
| Exercised                                   |   |                                   | (450,000 | )                                          |   | .58 |   |   | - |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2004 |   |                                   | 500,000  |                                       |   | .39 |   |   | 700,000 |   |   | .76 |   |
| Granted                                     |   |                                   | -        |                                       |   |   |   |   | 800,000 |   |   | .35 |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2005 |   |                                   | 500,000  |                                       |   | .39 |   |   | 1,500,000 |   |   | .54 |   |
| Granted                                     |   |                                   | -        |                                       |   |   |   |   | 800,000 |   |   | .14 |   |
| Exercised                                   |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
| Canceled                                    |   |                                   | -        |                                       |   |   |   |   | - |   |   |   |   |
|                                        |   |                                   |     |                                       |   |   |   |   |   |   |   |   |   |
| Outstanding                at June 30, 2006 |   |                                   | 500,000  |                                       |   | .39 |   |   | 2,300,000 |   |   | .40 |   |

|                                  |   | **June                30, 2006** |       | **June                30, 2005** |   | **June                30, 2004** |   |
|---------------------------------------|--------|----------------------------------|------------|----------------------------------|--------|----------------------------------|--------|
| Employee                ISO           |   |                             | 8,023,860  |                             |   | 7,699,103                        |   |   | 7,053,586 |   |
| Director                ISO           |   |                             | 500,000    |                             |   | 500,000                          |   |   | 650,000 |   |
| Employee                Non-Statutory |   |                             | 2,261,800  |                             |   | 88,486                           |   |   | - |   |
| Director                Non-Statutory |   |                             | 1,750,000  |                             |   | 950,000                          |   |   | - |   |
|                                  |   |                             |       |                             |   |                             |   |   |   |   |
| Total                                 |   |                             | 12,535,660 |                             |   | 9,237,589                        |   |   | 7,703,586 |   |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(18)**
**STOCK      OPTIONS (Continued)**

|                                                                   |   | Outstanding                options      |   | Exercisable                options                 |
|------------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------------------|
|                                                                   |   |                                    |   | Weighted                                           |   |   |   |   |   |   |
|                                                                   |   |                                    |   | average                                            |   |   |   |   |   |   |
| Range                of                                                |   |                                    |   | remaining                                          |   | Weighted |   |   |   | Weighted |
| exercise                prices                                         |   | Shares                                  |   | life                (years)                        |   | avg.                price |   | Shares |   | avg.                price |
|                        $ .13 - 1.25 |   |                    14,900,513 |   |                      7.05 |   |                    $ .52 |   |      11,428,110 |   |                      $ .59 |
|                  1.26 - 2.49                                      |   |                  107,550           |   | 4.00                                               |   |  .56 |   |                    107,550 |   |                   .56 |
|                  2.50 - 2.85                                      |   | 1,000,000                               |   | 4.00                                               |   | 2.85 |   |  1,000,000 |   |  2.85 |
|                                                                   |   |                                    |   |                                               |   |   |   |   |   |   |
| $                .19 - 2.85                                            |   | 16,008,063                              |   | 6.83                                               |   | $                .67 |   | 12,535,660 |   | $                .77 |

----

*Table            of Contents*

**IMAGING      DIAGNOSTIC SYSTEMS, INC.**

**(a      Development Stage Company)**

**Notes      to Financial Statements (Continued)**

**(19)**
**CONCENTRATION      OF CREDIT RISK**

**(20)**
**FAIR      VALUE OF FINANCIAL INSTRUMENTS**

**(21)**
**COMMITMENTS      AND CONTINGENCIES**

----

*Table            of Contents*

| **IMAGING                DIAGNOSTIC SYSTEMS, INC.**                   |   |
|-----------------------------------------------------------------------|--------|
| **(a                Development Stage Company)**                      |   |
|                                                                  |   |    |   |   |   |   |   |   |   |
| **Notes                to Financial Statements (Continued)**          |   |
|                                                                  |   |    |   |   |   |   |   |   |   |
|                                                                  |   |    |   |   |   |   |   |   |   |
| **(22)                Selected Quarterly Financial Data (Unaudited)** |   |   |   |   |   |
|                                                                  |   |    |   |   |   |   |   |   |   |
| **Fiscal                2006**                                        |   |    |   |   |   |   |   |   |   |
|                                                                  |   |  Quarter                Ended |   | Quarter                Ended |   | Quarter                Ended |   | Quarter                Ended |   |
|                                                                  |   |  June                30, 2006 |   | March                31, 2006 |   | December                31, 2005 |   | September                30, 2005 |   |
|                                                                  |   |    |   |   |   |   |   |   |   |
| Net                Sales                                              |   | $ | 4,094 |   | $ | - |   | $ | - |   | $ | 671,750 |   |
| Gross                Profit                                           |   | $ | (34,831 | ) | $ | - |   | $ | - |   | $ | 394,486 |   |
| Operating                Loss                                         |   | $ | (1,404,524 | ) | $ | (1,875,653 | ) | $ | (2,021,665 | ) | $ | (1,322,560 | ) |
| Net                loss applicable to                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                shareholders                                    |   | $ | (1,548,544 | ) | $ | (2,074,702 | ) | $ | (2,128,811 | ) | $ | (1,410,665 | ) |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                Loss per common share                              |   | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) |
| Weighted                avg. no. of common shares,                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                & Diluted                                    |   |   | 218,846,738 |   |   | 223,718,450 |   |   | 210,243,309 |   |   | 201,835,198 |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and Cash Equivalents                              |   | $ | 1,467,687 |   | $ | 930,956 |   | $ | 132,331 |   | $ | 348,565 |   |
| Total                Assets                                           |   | $ | 6,250,909 |   | $ | 5,885,950 |   | $ | 5,386,944 |   | $ | 5,700,738 |   |
| Deficit                accumulated during                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| the                development stage                                  |   | $ | (91,138,737 | ) | $ | (89,590,193 | ) | $ | (87,515,491 | ) | $ | (85,386,680 | ) |
| Stockholders'                Equity                                   |   | $ | 5,651,916 |   | $ | 5,229,430 |   | $ | 4,507,579 |   | $ | 4,859,022 |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fiscal                2005**                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |   |   | Quarter                Ended |   |   | Quarter                Ended |   |   | Quarter                Ended |   |   | Quarter                Ended |   |
|                                                                  |   |   | June              30, 2005  |   |   | March                31, 2005 |   |   | December                31, 2004 |   |   | September                30, 2004 |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                Sales                                              |   | $ | - |   | $ | 374,952 |   | $ | - |   | $ | - |   |
| Gross                Profit                                           |   | $ | - |   | $ | 208,267 |   | $ | - |   | $ | - |   |
| Operating                Loss                                         |   | $ | (1,832,777 | ) | $ | (1,514,569 | ) | $ | (2,121,387 | ) | $ | (1,661,806 | ) |
| Net                loss applicable to                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                shareholders                                    |   | $ | (1,579,466 | ) | $ | (1,639,175 | ) | $ | (2,256,934 | ) | $ | (1,837,343 | ) |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                Loss per common share                              |   | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) |
| Weighted                avg. no. of common shares,                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                & Diluted                                    |   |   | 185,636,553 |   |   | 187,800,485 |   |   | 183,133,979 |   |   | 176,855,811 |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and Cash Equivalents                              |   | $ | 765,523 |   | $ | 364,434 |   | $ | 538,097 |   | $ | 766,614 |   |
| Total                Assets                                           |   | $ | 5,608,004 |   | $ | 5,528,833 |   | $ | 5,507,562 |   | $ | 5,888,629 |   |
| Deficit                accumulated during                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| the                development stage                                  |   | $ | (83,976,015 | ) | $ | (82,396,549 | ) | $ | (80,757,374 | ) | $ | (78,500,439 | ) |
| Stockholders'                Equity                                   |   | $ | 4,772,538 |   | $ | 4,262,030 |   | $ | 4,139,497 |   | $ | 4,493,573 |   |

----

*Table            of Contents*

**Item      9.**
**Changes in and Disagreements with      Accountants on Accounting and Financial Disclosure **

**Item**
**      9A.**
**Controls and Procedures **

----

*Table            of Contents*

**MANAGEMENT’S      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

|   | · | Pertain                to the maintenance of records that in reasonable detail accurately                and                fairly reflect the transactions and dispositions of the assets of                the                Company; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements in accordance with generally                accepted                accounting principles, and that receipts and expenditures of the                Company                are being made only in accordance with authorizations of management                and                directors of the Company; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Provide                reasonable assurance regarding prevention or timely detection of                unauthorized acquisition, use or disposition of the Company’s assets that                could have a material effect on the financial                statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Table            of Contents*

**Report      of Independent Registered Public Accounting Firm**

----

*Table            of Contents*

----

*Table            of Contents*

**Item**
**      9B.**
**Other Information**

----

*Table            of Contents*

**PART      III**

**Item      10. **
**Directors and Executive Officers of      the Registrant**

| **Name***                            | **Age** | **Position**                                        | **Year                Elected or Appointed** |
|--------------------------------------|---------|-----------------------------------------------------|----------------------------------------------|
|                                 |    |                                                |                                         |
| Tim                Hansen            | 62      | Chief                Executive Officer and Director | 2004                                         |
|                                 |    |                                                |                                         |
| Allan                L. Schwartz     | 64      | Executive                Vice-President, Chief      | 1994                                         |
|                                 |    | Financial                Officer and Director       |                                         |
|                                 |    |                                                |                                         |
| Deborah                O’Brien | 42      | Senior                Vice-President                | 2003                                         |
|                                 |    |                                                |                                         |
| Sherman                Lazrus        | 73      | Director                                            | 2002                                         |
|                                 |    |                                                |                                         |
| Patrick                J. Gorman     | 52      | Director                                            | 2003                                         |
|                                 |    |                                                |                                         |
| Edward                Rolquin        | 77      | Director                                            | 2003                                         |
|                                 |    |                                                |                                         |
| Jay                S. Bendis         | 59      | Director                                            | 2003                                         |

**Tim      Hansen**

----

*Table            of Contents*

**Allan      L. Schwartz**

**Deborah      O’Brien**

**Sherman      Lazrus**

----

*Table            of Contents*

**Patrick      J. Gorman**

**Edward      Rolquin**

**Jay      S. Bendis**

----

*Table            of Contents*

**Audit      Committee**

**Compensation      Committee**

**Nominating      and Corporate Governance Committee**

**Compensation      of Directors**

**Compliance      with Section 16(a) of the Securities Exchange Act of 1934**

----

*Table            of Contents*

**Item      11. **
**Executive      Compensation**

**SUMMARY      COMPENSATION TABLE**

|                                    | **Annual                Compensation** | **Long-Term                Compensation** |
|-----------------------------------------|----------------------------------------|-------------------------------------------|
|                                    |                                   |                                      |   |   |   |
| **Name                & Principal** |                                   |                                      | **Other                Annual** | **Restricted** | **Shares                Underlying** |
| **Position**                            | **Fiscal                Year**         | **Salary**                                | **Compensation(5)** | **Stock                Awards** | **Options                Granted** |
| Linda                B. Grable(1)       | 2004                                   | $347,594                                  | $11,500 |   |   |
|                                    | 2005                                   | $280,000                                  |   |   |   |
|                                    | 2006                                   | $128,333                                  |   |   |   |
|                                    |                                   |                                      |   |   |   |
| Timothy                B. Hansen,       | 2005                                   | $194,423                                  |   | $38,000 | 3,000,000 |
| CEO                and Director(2)      | 2006                                   | $210,000                                  |   |   |   |
|                                    |                                   |                                      |   |   |   |
| Allan                L. Schwartz,       | 2004                                   | $184,219                                  | $11,500 |   | 500,000 |
| Exec.                V.P., CFO and      | 2005                                   | $199,784                                  |   |   | 500,000 |
| Director(3)                             | 2006                                   | $185,000                                  |   |   | 100,000 |
|                                    |                                   |                                      |   |   |   |
| Edward                R. Horton         | 2004                                   | $114,400                                  | $5,750 |   |   |
| COO(6)                                  | 2005                                   | $123,675                                  |   |   | 175,000 |
|                                    | 2006                                   | $50,320                                   |   |   |   |
|                                    |                                   |                                      |   |   |   |
| Deborah                O’Brien    | 2004                                   | $92,542                                   | $11,500 |   | 302,000 |
| Senior                V. Pres. (4)      | 2005                                   | $99,750                                   |   |   |   |
|                                    | 2006                                   | $112,169                                  |   |   |   |

| (1) | Ms.                Grable, our former CEO and Director, retired on April 15, 2004. Under                her                retirement agreement Ms. Grable was entitled to receive her $280,000                annual salary through December 15, 2005. Salary recorded for f/y                2004                includes $47,704 in accrued wages payable as of 6/30/02 to Linda                B. Grable                as heir to the estate of Richard J. Grable and $19,890 in accrued                wages                payable as of 6/30/02 to Linda B. Grable. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mr.                Hansen commenced employment on July 26, 2004. Restricted stock awards                for                f/y 2005 include $38,000 of non-cash compensation for sign-on bonus                in                restricted stock.                                                                                                                                                                                                                                                                                                                           |
| (3) | Salary                recorded for Mr. Schwartz in f/y 2005 includes base salary of $185,000                plus $5,179 as additional wages while serving as Interim CEO and                $9,605                vacation pay. Salary recorded for f/y 2004 includes base salary of                $154,329 plus $19,890 in accrued wages payable as of 6/30/02 and                $10,000                additional wages while serving as Interim CEO.                                                                                                                   |
| (4) | Ms.                O’Brien was appointed Senior Vice President on September 15, 2003.                Salary                recorded for f/y 2005 includes base salary of $95,000 plus $4,750                vacation                pay. Salary recorded for f/y 2006 includes base salary of $95,000                and                $17,169 as additional pay for duties previously performed by our                former                COO, Mr. Horton.                                                                                                        |
| (5) | Other                Annual Compensation reflects non-cash compensation for holiday stock                bonuses which was previously included in the total amount of salaries                paid                to executive officers in 2004.                                                                                                                                                                                                                                                                                                                            |
| (6) | Mr.                Horton voluntarily resigned on October 31,                2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

**Employment      Agreements**

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*Table            of Contents*

| **Date                of Vesting** | **No.                of Option Shares** |
|------------------------------------|-----------------------------------------|
| July                8, 2005        | 500,000                                 |
| January                8, 2006     | 250,000                                 |
| July                8, 2006        | 250,000                                 |
| January                8, 2007     | 250,000                                 |
| July                8, 2007        | 250,000                                 |

| Date                of Vesting   | No.                of Option Shares |
|----------------------------------|-------------------------------------|
| February                23, 2006 | 500,000                             |
| August                23, 2006   | 250,000                             |
| February                23, 2007 | 250,000                             |
| August                23, 2007   | 250,000                             |
| February                23, 2008 | 250,000                             |

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*Table            of Contents*

**Option      Grants in Last Fiscal Year**

|                             | **No.                of**                 |                               |                             |                                                           |                                                    |
|----------------------------------|-------------------------------------------|------------------------------------|----------------------------------|----------------------------------------------------------------|---------------------------------------------------------|
|                             | **Securities**                            | **%                of Total**      |                             |                                                           |                                                    |
|                             | **Underlying**                            | **Options                Granted** | **Exercise                of**   | **Market                Price**                                |                                                    |
|                             | **Options**                               | **to                Employees In** | **Base                Price**    | **On                Date of**                                  | **Expiration**                                          |
| **Name**                         | **Granted**                               | **Fiscal                Year**     | **($/Share)**                    | **Grant**                                                      | **Date**                                                |
| Allan                L. Schwartz |                    100,000 |                  7.5%         |                   $.20 |                        $.20 |                      9/12/2015 |

**Stock      Option Plans**

** **

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*Table            of Contents*

**Item      12. **
**Security Ownership of Certain      Beneficial Owners and Management.**

| **Name                and Address**              | **Number                of Shares Owned** | **%                of Outstanding**       |
|--------------------------------------------------|-------------------------------------------|-------------------------------------------|
| **of                Beneficial Owner**           | **Beneficially                (1)(2)**    | **Shares                of Common Stock** |
|                                             |                                      |                                      |
| Linda                B. Grable                   | 19,660,274(3)                             | 7.9%                                      |
|                                             |                                      |                                      |
| Timothy                B. Hansen                 | 1,850,000(4)                              | 0.8%                                      |
| 6531                NW 18th                Court |                                      |                                      |
| Plantation,                FL 33313              |                                      |                                      |
|                                             |                                      |                                      |
| Allan                L. Schwartz                 | 6,988,852(5)                              | 2.8%                                      |
| 6531                NW 18th                Court |                                      |                                      |
| Plantation,                FL 33313              |                                      |                                      |
|                                             |                                      |                                      |
| Deborah                O’Brien             | 1,035,000(6)                              | 0.4%                                      |
| 6531                NW 18th                Court |                                      |                                      |
| Plantation,                FL 33313              |                                      |                                      |
|                                             |                                      |                                      |
| Sherman                Lazrus                    | 650,000(7)                                | 0.3%                                      |
|                                             |                                      |                                      |
| Patrick                J. Gorman                 | 1,416,160(8)                              | 0.6%                                      |
|                                             |                                      |                                      |
| Edward                Rolquin                    | 610,000(7)                                | 0.2%                                      |
|                                             |                                      |                                      |
| Jay                S. Bendis                     | 665,000(7)                                | 0.3%                                      |
|                                             |                                      |                                      |
| All                officers and directors        | 13,215,012(9)                             | 5.4%                                      |
| as                a group (7 persons)            |                                      |                                      |
|                                             |                                      |                                      |
| All                beneficial owners             | 32,875,286(10)                            | 13.3%                                     |
| Listed                above (8 persons)          |                                      |                                      |

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*Table            of Contents*

| (1)  | Except                as indicated in the footnotes to this table, based on information                provided                by such persons, the persons named in the table above have sole voting                power and investment power with respect to all shares of common stock                shown beneficially owned by them.                                                                                                                                                                                                               |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Percentage                of ownership is based on 247,676,633 shares of common stock outstanding                as                of September 12, 2006 plus each person’s options that are exercisable                within 60 days. Shares of common stock subject to stock options that                are                exercisable within 60 days as of September 12, 2006 are deemed outstanding                for computing the percentage of that person and the group.                                                                 |
| (3)  | Based                on the last filing of record includes 3,250,000 shares subject to                options                and 16,410,274 shares owned by Linda B. Grable. Ms. Grable retired                on                April 15, 2004.                                                                                                                                                                                                                                                                                                          |
| (4)  | Mr.                Hansen was issued 100,000 restricted shares pursuant to his employment                agreement dated July 8, 2004. Includes 1,750,000 shares subject to                options.                                                                                                                                                                                                                                                                                                                                                       |
| (5)  | Includes                2,600,000 shares subject to options and 9,000 shares owned by the                wife of                Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial                ownership.                                                                                                                                                                                                                                                                                                                           |
| (6)       | Includes                525,000 shares subject to options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (7)       | Includes                650,000 shares of options owned by Sherman Lazrus, 600,000 shares                of                options owned by Edward Rolquin and 600,000 shares of options owned                by Jay                S. Bendis.                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (8)       | Includes                650,000 shares subject to options and 183,356 shares owned by the                wife of                Patrick J. Gorman, Diana Gorman, of which he disclaims beneficial                ownership.                                                                                                                                                                                                                                                                                                                                    |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (9)       | Includes                7,375,000 shares subject to options held by, Timothy Hansen, Allan                Schwartz, Deborah O’Brien, Sherman Lazrus, Patrick J. Gorman, Edward                Rolquin and Jay S. Bendis. Also includes 9,000 shares owned by the                wife of                Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial                ownership and 183,356 shares owned by the wife of Patrick J. Gorman,                Diana                Gorman, of which he disclaims beneficial ownership. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10)      | Includes                all of the shares in footnote 9 plus 3,250,000 shares subject to                options                held by Linda B. Grable.                                                                                                                                                                                                                                                                                                                                                                                                        |

**Dividend      Policy**

**Item      13. **
**Certain Relationships and Related      Transactions**

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*Table            of Contents*

**Item      14. **
**Principal Accounting Fees and      Services**

**Item**
**      15.**
**Exhibits, Financial Statement Schedules, and Reports      on Form 8-K**

| 3.1 | Articles                of Incorporation (Florida)- Incorporated by reference to Exhibit                3(a) of                our Form 10-KSB for the fiscal year ending June 30,                1995 |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.2 | Amendment                to Articles of Incorporation (Designation of Series A Convertible                Preferred Shares) - Incorporated by reference to Exhibit 3. (i).                6 of our                Form 10-KSB for the fiscal year ending June 30, 1996. File number                033-04008. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.3 | Amendment                to Articles of Incorporation (Designation of Series B Convertible                Preferred Shares). Incorporated by reference to our Registration                Statement                on Form S-1 dated July 1, 1997. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.4 | Amendment                to Articles of Incorporation (Designation of Series C Convertible                Preferred Shares). Incorporated by reference to our Form 8-K dated                October                15, 1997. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.5 | Amendment                to Articles of Incorporation (Designation of Series D Convertible                Preferred Shares). Incorporated by reference to our Form 8-K dated                January                12, 1998. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.6 | Amendment                to Articles of Incorporation (Designation of Series E Convertible                Preferred Shares). Incorporated by reference to our Form 8-K dated                February 19,1998. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.7 | Amendment                to Articles of Incorporation (Designation of Series F Convertible                Preferred Shares). Incorporated by reference to our Form 8-K dated                March                6, 1998. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.8 | Amendment                to Articles of Incorporation (Designation of Series H Convertible                Preferred Shares). |
|-----|------------------------------------------------------------------------------------------------------------------------------|

|   | Incorporated                by reference to our Registration Statement on Form S-2 File Number                333-59539. |
|--------|--------------------------------------------------------------------------------------------------------------------------|

| 3.9 | Certificate                of Dissolution - is incorporated by reference to Exhibit (3)(a) of                our                Form 10-KSB for the fiscal year ending June 30,                1995. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.10 | Articles                of Incorporation and By- Laws (New Jersey) -are incorporated by reference                to Exhibit 3 (i) of our Form 10-SB, as amended, file number 0-26028,                filed                on May 6, 1995 ("Form 10-SB"). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.11  | Certificate                and Plan of Merger - is incorporated by reference to Exhibit 3(i)                of the                Form 10-SB. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 3.12  | Certificate              of Amendment - is incorporated by reference to Exhibit 3(i) of the              Form              10-SB. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------|

| 3.13 | Amended                Certificate of Amendment-Series G                Designation. |
|------|--------------------------------------------------------------------------------------|

| 3.14 | Certificate                of Amendment-Series I Designation |
|------|--------------------------------------------------------------|
| 3.15  | Amended Certificate of Amendment-Series B              Designation  |
|------------|--------------------------------------------------------------------------|

| 3.16 | Certificate                of Amendment-Series K Designation. Incorporated by reference to our                Form                10-KSB for the fiscal year ending June 30, 2000 filed on September                14,                2000. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Patent                Licensing Agreement. Incorporated by reference to our Registration                Statement on Form S-2, File Number 333-59539. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Incentive                Stock Option Plan - is incorporated by reference to Exhibit 10(b)                of the                Form 10-SB. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------|

| 10.60    | Employment                Agreement with Deborah O’Brien, Senior Vice President dated September 15,                2003. |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------|

| 10.61 | Fourth                Private Equity Credit Agreement between IDSI and Charlton Avenue                LLC,                dated as of January 9, 2004, with exhibits. Incorporated by reference                to                our Form S-2, File Number 333-112377 filed on January 30,                2004. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.62 | Registration                Rights Agreement between IDSI and Charlton Avenue, LLC dated as of                January                9, 2004. Incorporated by reference to our Form S-2, File Number 333-112377                filed on January 30, 2004. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.63 | Retirement                Agreement between IDSI and Linda B. Grable dated April 15, 2004.                Incorporated by reference to our Form S-2, File Number 333-116694                filed on                June 21, 2004. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.64 | Employment                Agreement with Timothy B. Hansen, Chief Executive Officer dated July                8,                2004. Incorporated by reference to our Form 10-K filed on September                17,                2004. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

| 10.65 | Employment                Agreement with Edward Horton, Chief Operating Officer dated August                15,                2004. Incorporated by reference to our Form 10-K filed on September                17,                2004. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.66 | One-Year                Employment Extension Agreement with Allan L. Schwartz, Executive                Vice                President and Chief Financial Officer dated August 30, 2004. Incorporated                by reference to our Form 10-K filed on September 17,                2004. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.67 | Stock                Option Agreement with Timothy B. Hansen, Chief Executive Officer,                dated                February 23, 2005. Incorporated by reference to our Registration                Statement                on Form S-2, File Number 333-123197 filed on March 8,                2005. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.68 | One-Year                Employment Agreement with Allan L. Schwartz, Executive Vice President                and                Chief Financial Officer dated September 12, 2005. Incorporated by                reference to our Form 10-K filed on September 13,                2005. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.69 | Fifth                Private Equity Credit Agreement between IDSI and Charlton Avenue                LLC dated                March 21, 2006 with all exhibits. Incorporated by reference to our                Form                S-1, File Number 333-132664 filed on March 23,                2006. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.70 | License                Agreement dated as of June 16, 2006, as amended as of August 30,                2006,                between Bioscan, Inc. and Imaging Diagnostic Systems, Inc. Incorporated                by                reference to our Form 8-K, filed on September 5,                2006. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.71 | One-Year                Employment Agreement with Allan L. Schwartz, Executive Vice President                and                Chief Financial Officer dated September 12,                2006. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.72 | One-Year                Employment Agreement with Deborah O’Brien, Senior Vice President dated                September 12, 2006. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------|
| 14.1 | Code of Ethics for Senior Financial              Officers |
|------|-----------------------------------------------------------|

| 31.1 | Certification                by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as                Adopted                Pursuant to Section 302 of the Sarbanes-Oxley Act of                2002. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.2 | Certification                by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as                Adopted                Pursuant to Section 302 of the Sarbanes-Oxley Act of                2002. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.1 | Certification                by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as                Adopted                Pursuant to Section 906 of the Sarbanes-Oxley Act of                2002. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.2 | Certification                by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as                Adopted                Pursuant to Section 906 of the Sarbanes-Oxley Act of                2002. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table            of Contents*

**SIGNATURES**

|   | By:    | /s/                Timothy B. Hansen                                                  |
|--------|--------|---------------------------------------------------------------------------------------|
|   |   | Timothy                B. Hansen, Chief Executive Officer and                Director |

| **Signatures**                       | **Title**                                          | **Date**                          |
|--------------------------------------|----------------------------------------------------|-----------------------------------|
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/Timothy                B. Hansen  | Chief                Executive Officer             | September                13, 2006 |
| Timothy                B. Hansen     | and                Director                        |                              |
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/Allan                L. Schwartz  | Director,                Executive Vice-President, | September                13, 2006 |
| Allan                L. Schwartz     | and                Chief Financial Officer         |                              |
|                                 | (Principal                Accounting and Financial |                              |
|                                 | Officer)                                           |                              |
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/                Jay S. Bendis     | Co-Chairman                of the Board            | September                13, 2006 |
| Jay                S. Bendis         | and                Director                        |                              |
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/                Patrick J. Gorman | Co-Chairman                of the Board            | September                13, 2006 |
| Patrick                J. Gorman     | and                Director                        |                              |
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/                Sherman Lazrus    | Director                                           | September                13, 2006 |
| Sherman                Lazrus        |                                               |                              |
|                                 |                                               |                              |
|                                 |                                               |                              |
| /s/                Edward Rolquin    | Director                                           | September                13, 2006 |
| Edward                Rolquin        |                                               |                              |

----

----