FORM 10-KSB
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

                    For the fiscal year ended: June 30, 2003

                                    or

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

            For the transition period from __________to_____________

                         Commission file number: 0-26028

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                 (Name of small business issuer in its charter)

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

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

                    Issuer's telephone number: (954) 581-9800

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

         Securities registered under Section 12(g) of the Exchange Act:
                           Common Stock, no par value
                                (Title of class)

Indicate by check mark whether the Registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __X_ No____ .


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

State issuer's revenues for its most recent fiscal year. $184,085

Based on the average closing bid and asked prices of the common stock on the
latest practicable date, September 25, 2003, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $170,976,288.

The number of shares outstanding of each of the issuer's classes of common
stock, as of September 25, 2003 was 166,025,887. As of September 25, 2003, the
issuer had no shares of preferred stock outstanding.

                       Documents Incorporated By Reference
                                     [None]


<PAGE>



                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                                   FORM 10-KSB
                                  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              18

PART II

ITEM 5.  Market for Common Equity and Related Stockholder Matters           19
ITEM 6.  Management's Discussion and Analysis of Financial Conditions and   25
         Results of Operations
ITEM 7.  Financial Statements                                               28
ITEM 8.  Changes In and Disagreements with Accountants in Accounting and
         Financial Disclosure                                               29

PART III

ITEM 9.  Directors, Executive Officers, Promoters and Control Persons;      29
         Compliance with Section 16 (a) of the Exchange Act
ITEM 10. Executive Compensation                                             33
ITEM 11. Security Ownership of Certain Beneficial Owners and Management     35
ITEM 12. Certain Relationships and Related Transactions                     36
ITEM 13. Exhibits and Reports on Form 8-K                                   37
ITEM 14. Controls and Procedures                                            39

Signatures                                                                  40


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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 6 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CAUTIONARY STATEMENTS."

PART I

ITEM 1.  DESCRIPTION OF BUSINESS.
         ------------------------
OVERVIEW
Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical
technology company. Since its inception in December 1993, we have been engaged
in the development and testing of a Computed Tomography Laser Breast Imaging
System for detecting breast cancer in a non-invasive procedure ("CTLM(R)"). The
CTLM(R) employs a proprietary laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze tissue in the breast for indicia
of malignancy or benignancy.

In connection with the ongoing CTLM(R) clinical trials, we are developing a
clinical atlas of the optical properties of benign and malignant tissues with
respect to absorption and scattering parameters as laser light passes through
the tissue. The CTLM(R) is designed to provide the physician with objective data
for interpretation and further clinical work-up. Accordingly, we believe that
the CTLM(R) will improve early diagnosis, reduce diagnostic uncertainty, and
decrease the number of biopsies performed on benign lesions.

BREAST CANCER
According to the American Cancer Society ("ACS"), approximately one in eight
women in the United States will develop breast cancer during her lifetime.
Nationwide, it is estimated that in 2002, 203,500 new cases of invasive breast
cancer were diagnosed among women in the United States, and approximately 40,000
women will die from this disease. Excluding skin cancers, the breast is the most
frequent site of cancer among American women, accounting for 32% of incident
cancers and 17% of cancer deaths. It is the second leading cause of death for
American women following lung cancer, which is the leading cause of cancer death
among women. The annual cost of breast cancer management in the United States
alone is approximately $25 billion.

There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
96% to 78% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.

Breast cancer screening is generally recommended as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; and
(iv) an annual mammogram for women age 50 or older. As a result of family
medical histories and other factors, certain women are at "high risk" of
developing breast cancer during their lifetimes. For these women, physicians
often recommend close monitoring, particularly if an abnormality posing
increased risk factors has been detected.

Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend


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further diagnostic procedures, including diagnostic mammography and ultrasound
or a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures

Due in part to the limitations in the ability of the currently available
modalities to identify malignant lesions, a large number of patients with
suspicious lesions proceed to surgical biopsy, an invasive and expensive
procedure. Approximately 1.3 million surgical biopsies are performed each year
in the United States, of which approximately80% result in the surgical removal
of benign breast tissue. The average cost of a surgical biopsy ranges from
approximately $1,000 to $5,000 per procedure. Thus, biopsies of benign breast
tissue cost the U.S. health care system approximately $2.45 billion annually. In
addition, biopsies result in pain, scarring, and anxiety to patients. Patients
who are referred to biopsy usually are required to schedule the procedure in
advance and generally must wait up to 48 hours for their biopsy results.

SCREENING AND DIAGNOSTIC MODALITIES

Physical Examination
--------------------
Physical examinations of the breast are normally conducted by a physician or
clinician as part of a medical examination, or by a woman performing a
self-examination. A physical examination of the breast can only detect
relatively large lesions, which may be advanced cancers. Furthermore, physical
examination of the breast does not reliably distinguish between malignant and
benign tissue. More than half the women who menstruate will have a lump in a
breast at some point, but fewer than 10% of such lumps will be malignant.

Mammography
-----------
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast that is intended to display lesions as
white spots against the black and/or white background of normal tissue. In a
screening mammogram, radiologists seek to detect suspicious lesions, while in a
diagnostic mammogram radiologist seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are often
uncomfortable for the patient. Because x-ray mammography exposes the patient to
radiation, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113) and requires the use of capital equipment ranging
in cost from approximately $75,00 to $225,000. It is expected that the CTLM(R)
will cost approximately $300,000 and the cost of an exam will be about $125 to
175. Due to the high capital costs associated with mammography equipment and the
specialized training necessary to operate the equipment and to interpret
radiographic images, mammography is usually available only at specialty clinics
or hospitals. With the introduction of digital mammography, the average cost of
this device is $400,000 with costs for exam ranging from $250 and higher.

Ultrasound
----------
Ultrasound uses high frequency sound waves to create an image of soft tissues in
the body in a non-invasive manner. Like mammography, this image requires
interpretation by a physician. Ultrasound's principal role in breast cancer
diagnosis has been to assist the physician in determining whether a palpable
lesion is likely to be a cyst (usually benign) or a solid mass (potentially
cancerous). The average cost for an ultrasound of the breast is approximately
$125 to $500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000. Again, it is
expected that the CTLM(R) will cost approximately $300,000 and the cost of an
exam will be $125 to $175. Like mammography, ultrasound is generally performed
at specialty clinics or hospitals.

Biopsy
------
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or


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histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.

THE COMPANY
We have a limited history of operations. Since our inception in December 1993,
we have been engaged principally in the development of the CTLM(R). We currently
have no source of operating revenue and have incurred substantial net operating
losses since our inception. On June 30, 2003, we had an accumulated deficit of
$68,844,322 after discounts and dividends on Preferred Stock. Such losses have
resulted principally from costs associated with our operations. We expect
operating losses will continue for at least the next 9 months as substantial
costs and expenses continue due principally to the commercialization of the
CTLM(R), ramp-up costs and clinical expenses associated with the CD-ROM clinical
atlas, and other product development activities. Our ability to achieve
profitability will depend in large part on our ability to obtain regulatory
approvals for our proposed products and to develop the capacity to manufacture
and market our approved products either by ourselves or in collaboration with
others. There can be no assurance as to if or when we will ever receive
regulatory approvals for the commercialization of the CTLM(R), or achieve
profitability. See Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

CTLM(R)
-------
The CTLM(R) is a system for detecting breast cancer in a non-invasive procedure
that does not require compression or X-ray. The CTLM(R) employs a proprietary
laser and proprietary scanning geometry and reconstruction algorithms that
create contiguous cross sectional slice images of the breast which are used in
the detection and analysis of changes in the breast for indicia of malignancy or
benignancy. CTLM(R) produces dramatic three-dimensional images of the blood
vessels and blood-containing tissues of the breast. We have learned from
research that any tumor over 2 mm in size can only survive if it is able to
attract new blood vessels (neovascularization).

Using the patient scans from our investigational clinical trials and installed
sites throughout the world, we are developing a clinical atlas of the optical
properties of benign and malignant tissues with respect to absorption and
scattering parameters of light as it passes through the tissue. This atlas will
be expanded as we obtain additional scans of breast abnormalities. The CTLM(R)
is designed to provide the physician with objective data for interpretation and
further clinical work-up. Accordingly, we believe that the CTLM(R) will improve
early diagnosis, reduce diagnostic uncertainty, and decrease the number of
biopsies performed on benign lesions. Further, the CTLM(R) does not expose the
patient to ionizing radiation or painful compression, which we believe are
factors contributing to the unwillingness or inability of a significant portion
of the patient population to obtain a conventional mammogram.

A breast exam utilizing the CTLM(R) is non-invasive and can be performed by a
medical technician. A patient lies face down on the scanning table with a breast
hanging pendulously in the scanning chamber. Once the entire breast is scanned
the other breast is placed in the chamber for scanning. A bilateral breast scan
(both breasts) takes approximately 15 to 30 minutes. Each scan takes
approximately 8 to 15 minutes. The CTLM(R) has been designed in such a way as to
provide the physician and patient with quick access to information concerning
the probability that an identified lesion is malignant or benign. The procedure
is designed to provide the physician and patient with objective, on-site,
immediate diagnostic decisions, including whether or not to proceed to surgical
biopsy. Further, the CTLM(R) is designed to archive and compare scans and
provide the patient with a compact disc with images produced from the date of
her scan.

Comparison to Existing Diagnostic Modalities
--------------------------------------------
The CTLM(R) differs from currently available breast imaging modalities employed
for the detection of breast cancer in that the CTLM(R) will generate more
precise information for the clinician or doctor. The CTLM(R) is designed to
generate, depending on the size of the breast, approximately 25 cross-sectional
images of a breast. A conventional screening mammography exam generates two
images of the breast. Cross-sectional imaging will allow a doctor or clinician
to isolate the location of the abnormality within the breast. By doing so, there
is greater resolution of the area where the specific abnormality resides.


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<PAGE>

Clinical efficacy of conventional mammography diminishes proportionately with
the abundance of fibroglandular breast tissue. Based upon this fact, limited
interpretability of a mammogram increases the risk that a lesion may be
overlooked, and diagnosis and treatment may be delayed, thus threatening the
patient's survival probability. Forceful compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but is uncomfortable, and often painful. This discomfort level
poses an obstacle for many women in deciding to have their first mammogram or
deciding whether to ever return for an annual screening mammogram.

Scanning of the breast with the CTLM(R) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast, gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. We believe that such images will provide the physician with
increased accuracy in lesion location, as well as determination of the extent
and involvement of breast disease. The CTLM(R) will also be able to produce a
near three-dimensional view.

Breast augmentation through the use of either silicone or saline implants
renders another difficult situation when employing conventional mammography for
imaging. Although radiographic and positioning techniques have vastly improved
the ability to compress and image more breast tissue than ever before, there
still remains a certain amount of breast tissue unable to be imaged due to its
placement around the implant. Due to the free suspension of the breast in the
CTLM(R) scanning chamber, and the ability of the CTLM(R) to image the breast
from the chest wall to the nipple, data can be collected from around the entire
breast. The scanning capacity of the CTLM(R) laser light transmission through
the breast does not appear to be impeded by silicone or saline implants.

We believe there is a significant market opportunity for objective breast cancer
management technology which does not include discomfort and exposure to
radiation. We believe that the use of the CTLM(R) to detect breast cancer will
be especially promising for women between the ages of 20 to 50 (over 50 million
women in the United States) for whom x-ray mammography has lower efficacy. These
women often present diffuse palpable benign breast conditions, which can mask
malignancies or pre-malignant conditions.

FLUORESCENCE IMAGING
--------------------
We are investigating the use of fluorescent compounds in conjunction with the
CTLM(R) for detection of breast abnormalities. Certain molecules exhibit the
phenomenon of emitting light after being illuminated by light of the appropriate
wavelength, i.e., from a laser. This characteristic is referred to as
fluorescence. The compounds that produce fluorescence are commonly referred to
as fluorescent dyes or simply "dyes". A number of pharmaceutical companies are
developing fluorescent dyes that selectively attach to specific types of cells
and are then activated by light. When cells with the dye attached are
illuminated with light of the proper wavelength, the dye will fluoresce at a
unique wavelength. If the dye has been designed to attach to cancer cells, the
fluorescence will be produced at the location where the cancer cells are
situated.

We have signed non-disclosure/confidentiality agreements with two of these
companies in order to share technology for the use of the CTLM(R) with
fluorescence. In February 1999, we demonstrated that the CTLM(R) has the ability
to both excite fluorescent dyes and to detect the fluorescent light produced by
the dye. These experiments were conducted by placing fluorescent dyes inside a
breast equivalent phantom and producing an image of the fluorescence using data
acquired by the CTLM(R). The CTLM(R) was adjusted to produce laser light of the
required wavelength and had optical filters installed to allow the detectors to
sense only the fluorescent light. The ability to excite the dye, detect the
location of the fluorescence within the simulated breast, and create an image of
the result has not, to our knowledge, been accomplished before. In January 1997,
we applied for a patent for a fluorescence-imaging scanner. The Patent was
issued on September 14, 1999, as Patent No 5,952,664.

The use of dyes, sometimes referred to as contrast agents or simply "contrast",
for radiographic imaging is a common medical practice. The use of contrast
agents for breast imaging is not currently a common medical practice. The FDA
has recently approved the use of radioactive compounds to identify breast cancer
locations. The use of non-radioactive fluorescent dyes for breast imaging, we
believe, has the potential to play a significant role in breast cancer
detection. We intend to work with contrast agent manufacturers to explore and


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develop this emerging technique. The FDA must first approve the use of
non-radioactive florescent dyes before they can be used commercially in the
United States. Any such approval could take several years.

In March 2002, we signed an agreement with Schering AG to evaluate the
advantages of new fluorescence dyes developed by Schering AG, for the potential
use of detecting breast cancer. Our CTLM(R) system is being used in conjunction
with Schering AG's dyes during their clinical trials. The collaboration is
assisting in determining the potential benefits of using both technologies
adjunctively to further enhance the CTLM(R) system's capabilities in detecting
breast cancer. In August 2003, Schering AG announced that their innovative
method for breast cancer detection showed positive results in their clinical
phase 1 study. The fluorescent dyes used in their clinical study are being used
in conjunction with our proprietary CTLM(R) System.

GOVERNMENT REGULATION

United States Regulation
------------------------
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(R) in the United
States. Because the CTLM(R) is a medical device, it is subject to the relevant
provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and its
implementing regulations. Pursuant to the FD&C Act, the FDA regulates, among
other things, the manufacture, labeling, distribution, and promotion of the
CTLM(R) in the United States. The FD&C Act requires that a medical device must
(unless exempted by regulation) be cleared or approved by the FDA before being
commercially distributed in the United States. The FD&C Act also requires that
manufacturers of medical devices, among other things, comply with specific
labeling requirements and manufacture devices in accordance with Current Good
Manufacturing Practices ("CGMPs"), which require that companies manufacture
their products and maintain related documentation in a conformed manner with
respect to manufacturing, testing, and quality control activities. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, to seize non-complying medical devices, to
enjoin and/or impose civil penalties, and to criminally prosecute violators.

The FDA classifies medical devices intended for human use into three classes:
Class I; Class II; and Class III. In general, Class I devices are products for
which the FDA can determine that their safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports, and QSRs. Class II devices are products for which the FDA determines
that these general controls are insufficient to provide reasonable assurance of
safety and effectiveness, and that require special controls such as the
promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a
potentially unreasonable risk of illness or injury.

The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. Manufacturers of Class III devices
must apply to the FDA for pre-marketing approval ("PMA") before marketing can
begin. PMA applications must demonstrate, among other matters, that the medical
device is safe and effective. A PMA application is typically a complex
submission, usually including the results of clinical studies, and preparing an
application is a detailed and time-consuming process.

Once a PMA application has been filed, the FDA has by regulation 180 days to
review it; however, the review time may be extended by the FDA asking for
additional information or clarification of information already provided in the
submission. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with the FDA's quality system regulations commonly referred to
as QSR's prior to approval of a PMA. The PMA process is a lengthy and expensive
one, and there can be no assurance that a PMA application will be approved
within 180 days.

We have engaged the services of counsel who specialize in FDA matters and


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consultants to assist us in the final preparation and submission of our PMA
application. We filed our PMA application on April 29, 2003 and requested
expedited review. Our PMA application is now pending. See Item 1.
"Business-Regulatory and Clinical Status, United States/FDA". If we are unable
to obtain prompt FDA approval, it will have a material adverse effect on our
business and financial condition and would result in postponement of the
commercialization of the CTLM(R). See "Regulatory and Clinical Status".

Any products manufactured or distributed by us pursuant to a PMA are or will be
subject to pervasive and continuing regulation by the FDA. The FDA Act also
requires that our products be manufactured in registered establishments and in
accordance with QSR regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The export of medical devices is also subject to
regulation in certain instances. In addition, the marketing and use of our
products may be regulated by various state agencies.

All lasers manufactured for us are subject to the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the FDA. The law requires laser manufacturers to file new product and annual
reports and to maintain quality control, product testing, and sales records, and
to comply with labeling and certification requirements. Various warning labels
must be affixed to the laser, depending on the class for the product under the
performance standard.

Both the FDA and the individual states may inspect the manufacturers of our
products on a routine basis for compliance with current QSR regulations and
other requirements.

In addition to the foregoing, we are subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and fire hazard control. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business. See Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Extensive Government Regulation, No Assurance
of Regulatory Approvals".

Foreign Regulation
------------------
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit us to
begin marketing the CTLM(R) in Europe and Asia before marketing would be
permitted in the United States. In order to sell our products within the
European Economic Area ("EEA"), companies are required to achieve compliance
with requirements of the Medical Devices Directive ("MDD") and affix a "CE"
marking on their products to attest such compliance. In Europe, we have obtained
the certifications necessary to enable the CE mark to be affixed to our products
in order to conduct sales in member countries of the EEA, subject to compliance
with additional regulations imposed by individual countries. In obtaining these
certifications, we utilized the services of UL International (UK). Ltd. as our
notified body ("NB"). An NB is a regulatory body from the private sector that is
responsible for the review and approval of the documentation submitted by us in
order to enable the CE mark to be affixed to products. Certain standards and
steps were complied with in order to obtain the CE mark in order to distribute
the CTLM(R) in the EEA. These standards include risk assessment, quality
assurance and labeling. The listed standards are for the EEA market only and
additional document requirements and standards exist for other markets.

In October 2000, we contracted Underwriters Laboratories Inc. ("UL") to perform
safety testing and assist us in achieving regulatory certifications necessary to
begin selling the CTLM(R) system outside the United States. We also chose UL as
our Notified Body to certify our compliance with EN2900/4600/ISO9000 quality
assurance standards. The certifications and CE marking will signify that the
product and its design, manufacturing and quality systems comply with
international standards. The UL safety testing is also necessary in order for
the CTLM(R) system to be sold in the United States once we receive FDA approval.
In January 2001 we received notice from UL of completion for worldwide safety
classification of our CTLM(R) system.


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In November 2000, we were recommended for CE marking, subject to review by UL's
Notified Body. In January 2001, we received regulatory approval from UL to apply
the CE marking to our CTLM(R) system. CE marking provides us the opportunity to
market the CTLM(R) within the European Union, one of the largest markets in the
world. In addition, CE marking permits medical device product sales in many
other markets worldwide.

In May 2001, we received ISO 9002 certification demonstrating our commitment for
quality and our ability to provide consistency, reliability, value and
exceptional customer service. ISO 9002 certification is significant in
facilitating the global marketing of our CTLM(R) system by conforming to an
effective quality management system recognized as the gold standard around the
world.

On September 25, 2001, we received a Certificate of Exportability from the FDA
for the CTLM(R). The FDA requires unapproved products that are subject to PMA
requirements to have prior FDA Certificate of Exportability in order to be
exported outside of the United States. On September 17, 2003, we received a
renewal of our Certificate of Exportability, which will be valid for two years.


REGULATORY AND CLINICAL STATUS

United States/FDA
-----------------

We received FDA approval to conduct our Nassau County (New York) Medical Center
("NCMC") investigational study in February 1999. This IDE application was
limited to 275 subjects. We selected the number 275 based on the distribution of
the types of breast conditions outlined in the IDE protocol.

In November 1999, we received FDA approval to use the University of Virginia
Health System ("UVA Hospital") as the second approved testing site for the
CTLM(R) breast imaging device. The UVA Hospital testing site follows an IDE
protocol similar to the one approved for NCMC. The UVA Hospital clinical
investigational trials began in November 1999. The FDA approved protocol under
the IDE provides for a total of 425 subjects to be tested at NCMC and the UVA
Hospital sites.

In March 2000, we submitted to the FDA an interim report on the trials being
conducted at NCMC and the UVA Hospital sites. The report contains statistical
results as well as comparative mammography and CTLM(R) images of malignant and
benign case studies. In addition, this data was submitted as part of the
non-clinical pivotal data in module 3.

Clinical investigation of the use of indocyanine green as an optical breast
imaging contrast agent commenced at the UVA Hospital in May 2000 and in July
2000 at NCMC. The CTLM(R) scanner has been used to excite the indocyanine green
in the patient's blood and detect the radiated fluorescence. The rate at which
the indocyanine green travels through the breast has been measured

In order to sell the CTLM(R) commercially in the United States, we must obtain
marketing clearance from the FDA. A PMA application must be supported by
extensive data, including pre-clinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device. Under
the Food, Drug, and Cosmetic Act, the FDA has 180 days to review a PMA
application, although in certain cases the FDA substantially expands that time
period through requests for additional information or clarification of existing
information.

The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:

     o    The device addresses a condition which is serious or life threatening
          or presents a risk of serious injury for which no alternative legally
          marketed diagnostic/therapeutic modality exists.


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<PAGE>

     o    The device addresses a condition which is life threatening or
          irreversibly debilitating, and provides for clinically important
          earlier diagnosis or significant advances in safety and/or
          effectiveness over existing alternatives.
     o    The device represents a clear clinically meaningful advantage over
          existing technology, defined as having major (not incremental)
          increased effectiveness, or reduced risk compared to existing
          technology.
     o    The availability of the device is otherwise in the best interest of
          the public health.


We are following the guidelines of the "Standardized Shell for Modular
Submission" for the FDA approval process. The FDA assigned a Modular Shell
Control Number and a general description of items required for the submission.
Although we believe that our PMA will qualify for expedited review, there can be
no assurance that any such review will be granted or, if granted, that the PMA
will be approved or that such approval will be received on a timely basis.

Below is a table indicating the status of our FDA Modular Submission:

Module #   Description of Module Submission     Date Filed     Date Accepted
--------   ---------------------------------    ----------     --------------
Module 1   General Information & Safety         9/27/2000       1/7/2002
Module 2   Software                             4/17/2001       6/12/2001
Module 3   Non-Pivotal Clinical                 5/1/2001        8/13/2001
Module 4   Manufacturing & Quality Systems      1/2/2001        9/25/2001
PMA        PMA Submission                       4/29/2003       Pending

In February 2001 we completed the non-pivotal patient data collection segment of
our FDA approved clinical trials. The results of these trials were submitted as
non-pivotal clinical studies in Module 3.

In June 2001 we met with the FDA and amended our IDE application to meet the
specification required for the PMA application. We were approved to continue the
clinical data collection as part of the pivotal data required for the PMA
application.

In August 2001 we renewed our clinical investigational contract with University
of Virginia Health System to continue clinical testing of the CTLM(R).

In October 2001, we placed our CTLM(R) system in the Instituto Nacional de
Cancerologia, the foremost cancer institute in Mexico. This will assist us in
obtaining additional clinical data to further substantiate our PMA application,
facilitate the clinical atlas and serve as a promotional site for future sales
prospects.

In November 2001, we installed our CTLM(R) system at the Elizabeth Wende Breast
Clinic in Rochester, NY and at the Women's Center for Radiology in Orlando, FL.
Both systems were placed under the FDA approved IDE program.

In January 2002, we appointed Dr. Eric Milne as Chief Radiologist. Dr. Milne
will evaluate current and future applications of our laser technology in order
to accelerate the adaptation of this technology to the medical community. For 25
years, Dr. Milne was Professor, Chairman and Chief of Chest Radiology at the
University of California, Irvine. In his lifelong career of research, teaching
and clinical practice resulting in over 125 publications, Dr. Milne has been the
recipient of over forty research grants and four International Fellowships.

In June 2002, we installed our CTLM(R) system at The Don and Sybil Harrington
Cancer Center located in Amarillo, Texas under the FDA approved IDE program. The
Harrington Center is a freestanding, not-for-profit, ambulatory cancer center,
serving patients in the Texas Panhandle, eastern New Mexico, parts of Oklahoma,
southeast Colorado and southwest Kansas. The Harrington Center offers screening
exams, patient education and multidisciplinary consultations, and its Outreach


                                       10
<PAGE>

Cancer Detection Program works in cooperation with area physicians and health
agencies to provide the latest technology in breast cancer detection.

In June 2002 we completed the collection of clinical studies at the Elizabeth
Wende Breast Clinic in Rochester, New York and removed the CTLM(R) system with
the exception of the Physicians Review Station.

In September 2002 we completed our clinical studies at the University of
Virginia Health System in Charlottesville, Virginia and removed the CTLM(R)
System. In January 2003 we removed the CTLM(R) System from the Women's Center
for Radiology in Orlando, Florida as the clinical studies were previously
completed. We have also completed our clinical studies at The Don and Sybil
Harrington Cancer Center ("Harrington") in Amarillo, Texas and the Instituto
Nacional de Cancerologia (National Cancer Institute) in Mexico City, Mexico;
however, the CTLM(R) System remains installed at Harrington for future use.

On April 29, 2003, we announced that we submitted our PMA with the U.S. Food and
Drug Administration (FDA) seeking marketing approval for our Computed Tomography
Laser Mammography System, the CTLM(R).

On June 18, 2003, we announced that we received notification from the Food and
Drug Administration that an initial review of our PMA had been conducted and was
found to be sufficiently complete to permit a substantive review and, therefore,
suitable for filing. An in-depth evaluation of the safety and effectiveness of
the device will be conducted to determine the final approval of the PMA
application.

On August 27, 2003, we announced in an 8-K filing that we received a letter from
the FDA stating that it had completed its review of our PMA. The FDA, in its
letter, outlined deficiencies in the PMA submission, which must be resolved
before the FDA's review could be completed. The FDA stated that until these
deficiencies are resolved, the PMA application is not approvable in its current
form. The FDA identified measures to make the PMA approvable and we will amend
our PMA application to address the deficiencies in the letter. We are working
with our FDA counsel and consultants to correct these deficiencies.

Patients are being scanned at our European demonstration sites, the University
of Vienna, Allgemeines Hospital and the Humboldt University of Berlin, Charite
Hospital and at the Instituto Nacional de Cancerologia (National Cancer
Institute) in Mexico City, Mexico. The additional studies obtained from these
clinical sites will be used in our CD-ROM clinical atlas.

Product Quality and Safety

Product Safety Evaluation -We believe that one of the most important aspects of
product safety is the design of the product. If safety standards are not
considered through the design of the product, the product safety evaluation may
require that the mechanical and electrical parts of the product be re-designed.
Throughout the CTLM(R) design process, we have made every effort to confirm that
it complies with all domestic and international safety standards. New
requirements, or new interpretations of existing requirements, may affect the
CTLM(R). In January 2001 we received notice of completion for world-wide safety
classification of our CTLM(R) system from Underwriters Laboratories Inc. (UL).

Quality Assurance -We have implemented and intend to maintain a full quality
system at our corporate offices. Our Quality Assurance Manager ("QAM") has
completed the process of implementation in accordance with the required
standards. After implementation of the quality system, auditors from
Underwriters Laboratories completed an assessment of our quality systems. UL
found us in compliance with ISO 9002 and in May 2001 issued a certificate
signifying such compliance for the manufacture and servicing of laser-based
diagnostic mammography imaging systems.


DOMESTIC SALES AND MARKETING
Our Director of Marketing is in charge of locating, obtaining and coordinating
the target domestic market, which includes most of the over 9,600 mammography


                                       11
<PAGE>

centers across the United States, which are located in both large and small
hospitals and in private clinics. We plan on having five Regional Sales Managers
who will launch the sales of the CTLM(R) throughout the United States upon
receiving FDA marketing clearance.

Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers, the extent that, and rate at which, the CTLM(R)
achieves market acceptance and penetration will depend on many variables. These
include, but are not limited to, the establishment and demonstration in the
medical community of the clinical safety, efficacy, and cost-effectiveness of
the CTLM(R), and the advantage of the CTLM(R) over existing technology and
cancer detection methods. We have focused our efforts on establishing a presence
at major Breast Imaging Conferences that are held each year. Failure of our
products to gain market acceptance would have a material adverse effect on our
business, financial condition, and results of operations. There can be no
assurance that physicians or the medical community in general will accept and/or
utilize the CTLM(R).

In order to market any products we may develop, we will have to develop a
marketing and sales force with technical expertise and distribution capability.
There can be no assurance that we will be able to establish sales and
distribution capabilities or that we will be successful in gaining market
acceptance for any products we may develop.

International Sales
-------------------
The laws of certain countries permit us to begin marketing the CTLM(R) subject
to certain homologations before marketing would be permitted in the United
States. See "Government Regulation". In preparation for launching international
sales of the CTLM(R) in Europe we have installed CTLM(R) Systems at University
of Vienna, Allgemeines Hospital and at Charite Hospital, Humboldt-University
Berlin as demonstrators. We intend to pursue international sales in those
countries where permitted prior to commencing commercial sales in the United
States, where sales cannot occur unless and until we receive pre-market approval
from the FDA. Until we receive pre-market approval from the FDA to market the
CTLM(R) in the United States, as to which there can be no assurance, our
revenues, if any, will be derived from sales to international distributors. A
significant portion of our revenues, therefore, may be subject to the risks
associated with international sales, including 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. Future imposition of, or significant increases in the level of customs,
duties, export quotas or other trade restrictions could have a material adverse
effect on our business, financial condition and results of operations. The
regulation of medical devices, particularly in Europe, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on us.

We filed our application with Health Canada for a new medical device license to
sell the CTLM(R) in Canada, in July 2001 shortly after our May 2001 filing of
the last module as part of our PMA modular submission process. Since July 2001,
we have supplemented our Canadian application from time to time with the
information requested by Health Canada. Because of new clinical data, we filed a
new application with Health Canada in June 2003. On June 18, 2003 we received
notification from the Medical Device Bureau of Health Canada that our
application has been accepted for review. We believe that, upon receiving the
PMA approval from the FDA, we will also receive approval by Health Canada to
sell the CTLM(R) in Canada.

In January 2003 we announced that the Ministry of Health in Dubai, United Arab
Emirates, purchased its first CTLM(R) System. The sale was made by our
Canadian-based distributor, Medical Imaging Systems, Inc. (MIS) who has an
exclusive agreement with IDSI to sell CTLM(R) Systems in Canada and selective
territories in the Middle East.


INTERNATIONAL DISTRIBUTORS

In May 2003, based on our commitment to develop international sales, we engaged
the services of Jean-Aime Medici as our International Sales and Marketing
consultant. Mr. Medici has experience in the international marketing of medical
imaging devices, establishing worldwide distribution networks, launching new


                                       12
<PAGE>

products and creating training and development programs. We have given him the
responsibility for the development of our international distribution network.

In April 2002, we signed an exclusive distribution agreement with JAMCO Medical,
Inc. for Latin America including the Caribbean. In May 2003, the distribution
agreement with JAMCO Medical, Inc. was terminated by mutual consent. Mr. Medici
is the President of JAMCO Medical, Inc.

THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM

In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of our products by regulating the level
of reimbursement provided by such payors to the physicians and clinics utilizing
the CTLM(R) or by refusing reimbursement. If examinations utilizing our products
were not reimbursed under these programs, our ability to sell our products may
be materially and/or adversely affected. There can be no assurance that
third-party payors will provide reimbursement for use of our products. In
international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In certain countries, our ability to achieve
significant market penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical device
companies may be affected by the continuing efforts of governmental and third
party payers to contain or reduce the cost of health care through various means.

PRODUCT LIABILITY

Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing and marketing of cancer detection products. While
the CTLM(R) is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that we will not be subjected to future claims and
potential liability. At present we carry $3,000,000 in product liability
insurance to cover both clinical sites and sales.

COMPETITION
The medical device industry generally, and the cancer diagnostic imaging
segments in particular, are characterized by rapidly evolving technology and
intense competition. Other companies in the medical device industry may be
developing, or could in the future attempt to develop, additional products that
are competitive with the CTLM(R). The market in which we intend to participate
is highly competitive. Many of the companies in the cancer diagnostic and
screening markets have substantially greater technological, financial, research
and development, regulatory, manufacturing, human and marketing resources, and
experience than we do. Our competitors may succeed in developing or marketing
technologies and products that are more effective or less costly than ours, or
that would render our technology and products obsolete or noncompetitive. We may
not be able to compete against such competitors and potential competitors in
terms of manufacturing, marketing, and sales.

The CTLM(R) will be marketed in the United States and is being marketed where
permitted as an adjunct to mammography and does not compete directly with X-ray,
computed tomography ("CT") or magnetic resonance imaging ("MRI"). Although the
CTLM(R) is a CT scanner, its energy source for imaging is a laser beam and not
ionizing radiation like conventional CT scanners. The CTLM(R) will be competing
with established imaging equipment such as ultrasound or high definition
ultrasound systems, thermography, diaphonography and transilluminational
devices. Physicians presently using these customary types of imaging equipment
may be reluctant to use a new product. Although we believe that our products may
offer certain technological advantages over our competitors' currently marketed
products, earlier entrants in the market for a diagnostic application often
obtain and maintain significant market share relative to later entrants.

Currently, mammography is employed widely and our ability to sell the CTLM(R) to
medical facilities will, in large part, be dependent on our ability to
demonstrate the clinical utility of the CTLM(R) as an adjunct to mammography and
physical examination and our advantages over other available diagnostic tests.
The competition for developing a commercial device utilizing computed tomography
techniques and laser technology is difficult to ascertain given the proprietary
nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical


                                       13
<PAGE>

imaging" which is a shorthand description of the technology the CTLM(R)
utilizes. A brief list of these institutions includes the University of
Pennsylvania, The City College of New York, and University College London. Two
of these institutions have granted licenses on certain patented technologies to
two companies: University of Pennsylvania - Non-Invasive Technologies; City
College of New York - MediScience, Inc.

Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that future technical changes will not
render our CTLM(R) obsolete. There can be no assurance that the development of
new types of diagnostic medical equipment or technology will not have a material
adverse effect on our business, financial condition, and results of operations.

PATENTS

The patent for the CTLM(R) was issued in December 1997 under Patent Number
5,692,511 (the "Patent"). The Patent has a total of 4 independent claims and 24
subordinate claims. The independent claims serve to provide an overall outline
of the disclosure of the invention. The subordinate claims provide additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim. We own the rights to the Patent for its
17-year life pursuant to an exclusive patent licensing agreement with the late
Richard Grable, who invented the CTLM(R) and served as our Chief Executive
Officer and whose estate has owned the Patent since his death in August 2001.
See "Patent Licensing Agreement" and "Certain Transactions." We own 12 patents
and have 9 additional United States patents pending with regard to optical
tomography, many of which are based on the original CTLM(R) technology. We also
have one International patent and have 35 International patents pending.

In September 1999, we were issued a patent for a laser imaging apparatus using
biomedical markers that bind to cancer cells. This patent was issued under
Patent Number 5,952,664 and is owned by the Company. The biomedical marker we
are currently testing is a fluorescent marker. We plan to continue studying
other biomedical markers in conjunction with major pharmaceutical companies as a
potential advanced diagnostic feature to be used with our CTLM(R) system. The
CTLM(R) in combination with the fluorescent feature has the potential to be used
with photodynamic therapy (PDT) to aid in the treatment of breast cancer.

In February 2000, we were issued a patent for: "Device for Determining the
Perimeter of the Surface of an Object Being Scanned and for Limiting Reflection
from the Object Surface". The patent was issued under Patent Number 6,029,077
and is owned by the Company. This particular patent covers the technique for
determining the perimeter of the breast, which simplifies the algorithms
necessary to produce the image.

In March 2000, we were issued a patent for: "Apparatus and Method for
Determining the Perimeter of the Surface of an Object Being Scanned". The patent
was issued under Patent Number 6,044,288, and is owned by the Company. This
additional patent covers an optical technique to determine the perimeter of a
scanned breast. The Company's patent 6,029,077 described in the previous
paragraph covers a different technique to perform the same measurement.
Together, these two patents protect the practical techniques that can be used to
acquire this information.

In August 2000, we were issued a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent Number 6,100,520 and is
owned by the Company. This patent describes the several different variations
that can be used while scanning the breast without any contact between the
breast and the optical components. Unlike the conventional method, this unique
feature allows the CTLM(R) to scan the breast without the use of breast
compression.

In October 2000, we were issued a patent for: "Method of Reconstructing an Image
Being Scanned". The patent was issued under Patent Number 6,130,958 and is owned
by the Company. This patent describes the algorithms used to reconstruct images
from data acquired from CTLM(R) scans.

In December 2000, we were issued a patent for: "Detector Array With Variable
Gain Amplifiers For Use In A Laser Imaging Apparatus". The patent was issued
under Patent Number 6,150,649 and is owned by the Company. This patent describes


                                       14
<PAGE>

the proprietary electronics used in the CTLM(R) detector array.

In February 2001, Mr. Grable was issued a patent for "Diagnostic Tomographic
Laser Imaging Apparatus". This patent was issued for his proprietary scanning
bed, a unique feature of the CTLM(R), and was issued as U.S. Patent Number
6,195,580. The patent allows for a fixed horizontal platform including a top
surface with an opening through which the female breast is vertically pendent
using a laser beam for the detection of breast abnormalities. The patent should
prevent others in the industry from utilizing a scanning bed with a laser breast
imaging system that requires the patient to lie in the prone position. See
"Patent Licensing Agreeement".

In April 2001, we were issued a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent No. 6,211,512 and is
owned by the Company. The patent allows for several different optics variations
while scanning the breast without contact between the breast and the optical
components. This feature allows the CTLM(R) to scan the breast without the use
of breast compression.

In January 2002, we announced that we were issued a patent for "Detector Array
With Variable Gain Amplifiers for Use in a Laser Imaging Apparatus," as U.S.
Patent No. 6,331,700. This patent protects some of the non-obvious, but
essential, design aspects of an optical CT scanner. This patent addresses the
solution to the problem of accommodating a huge dynamic range of light
intensities emitted from the breast.

In February 2002, we were issued a patent for "Time-Resolved Breast Imaging
Device," as U.S. Patent No. 6,339,216. This patent protects the key electronics
of a time-resolved optical CT scanner. It addresses the solution to the problem
of simultaneously accommodating a large dynamic range of light intensities
emitted from the breast while achieving the necessary temporal resolution.

In May 2003, we were issued a patent for "Medical Optical Imaging Scanner Using
Multiple Wavelength Simultaneous Data Acquisition for Breast Imaging," as U.S.
Patent No. 6,571,116.

We intend to file for patents on products, including the CTLM(R), for which we
believe the cost of obtaining a patent is economically reasonable in relation to
the expected protection obtained. There can be no assurances that any patent
that we apply for will be issued, or that any patents issued will protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent infringement cases brought against us, that will
require substantial capital, the expenditure of which we might not be able to
afford.

PATENT LICENSING AGREEMENT
IDSI was formed in December 1993 for the sole purpose of developing and
commercializing Richard Grable's invention, a CT laser breast-imaging device
(the "Mammoscan(TM)"). The Mammoscan(TM) had already been exhibited at the
Radiology Society of North America ("RSNA") 1989 session and held the promise of
a new, emerging technology for the detection of breast abnormalities without
compression or ionizing X-rays. This device used a laser diode for its energy
source and a 386 processor that was extremely slow. Once the technology became
available to speed up the processing, IDSI's founders (Richard Grable, Linda
Grable and Allan Schwartz) believed that this device would be a major
breakthrough in the early detection of breast cancer.


Mr. Grable invented the CTLM(R) by making major improvements in the
Mammoscan(TM) technology. In June 1998, we finalized an exclusive patent license
agreement with Mr. Grable, which encompasses the technology for the CTLM(R). The
term of the license is for the life of the Patent (17 years) and any renewals,
subject to termination, under specific conditions. As consideration for this
license, we issued to Mr. Grable 7,000,000 shares of common stock. In addition,
we agreed to pay Mr. Grable a royalty based upon a percentage, ranging from 6%
to 10%, of the net selling price (the dollar amount earned from our sale, both
international and domestic, before taxes minus the cost of the goods sold and
commissions or discounts paid) of all the products and goods in which the patent
is used. Mr. Grable agreed that these royalty provisions will not apply to any
sales and deliveries of CTLM(R) systems made by IDSI prior to receipt of the PMA
for the CTLM(R). In addition, following issuance of the PMA, IDSI and Mr. Grable
agreed that Mr. Grable would be paid guaranteed minimum royalties of at least
$250,000 per year based on the sales of the products and goods in which the


                                       15
<PAGE>

CTLM(R) patent is used. Due to Mr. Grable's death in August 2001, his interest
in the patent license agreement passed to his estate. Our Chief Executive
Officer, Mr. Grable's widow Linda Grable, is the principal beneficiary of Mr.
Grable's estate.

The following table sets forth the Patent licensing royalty structure:

      ANNUAL NET SELLING PRICE                    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%

EMPLOYEES
As of the date of this Report, we have 43 full-time employees, including our
four executive officers. A majority of our employees (32) are employed in the
areas of scientific and product research and development. Our ability to provide
our services is dependent upon our recruiting, hiring and retaining qualified
technical personnel. To date, we have been able to recruit and retain sufficient
qualified personnel. None of our employees are represented by a labor union. We
have not experienced any work stoppages and consider our relations with our
employees to be good.

Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel. Therefore, we have entered into employment agreements
with certain of our executive officers and key employees. The loss of the
services of existing personnel as well as the failure to recruit key scientific,
technical and managerial personnel in a timely manner would be detrimental to
our research and development programs and to our business. Our anticipated
growth and expansion into areas and activities requiring additional expertise,
such as marketing, will require the addition of new management personnel.
Competition for qualified personnel is intense and there can be no assurance
that we will be able to continue to attract and retain qualified personnel
necessary for the development of our business.


                                       16
<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

Our headquarters facility is located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by us and comprise a 24,000-sq. ft. building
with ample space to expand, located on a 5-acre landscaped tract. In June 2002,
we obtained a $750,000 mortgage loan on our headquarters facility from a private
investor. We paid a 5% commitment fee ($37,500) and a 2% placement fee ($15,000)
in connection with the mortgage loan. The mortgage loan bears interest at 12%
per year, required monthly payments of principal, interest and real estate taxes
in the amount of $11,901, and was due June 11, 2003. On that date, we paid back
the mortgage loan in full with proceeds of puts under our Third Private Equity
Credit Agreement. See "Financing/Equity Line of Credit". We believe that our
facility is adequate for our current and reasonably foreseeable future needs. We
intend to assemble the CTLM(R) at our facility from hardware components that
will be made by vendors to our specifications. The software components of the
CTLM(R) device are developed in-house by us.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

On May 1, 2000, we filed a civil lawsuit against DOE 1 a/k/a DEIGHTON in the
Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida,
Case No. CACE 00-006881 (04) for defamation and tortious interference with our
contracts and business relationships.

The civil lawsuit filed against Doe 1 a/k/a DEIGHTON is still pending and seeks
permanent relief which would restrain Doe 1 and his/her agents, etc. from making
any statement or engaging in any conduct to intentionally interfere with any
contractual/business relationship by and between IDSI, Richard Grable and Linda
Grable and our customers, shareholders and/or investors, and for damages,
attorney fees, costs and interest in excess of $15,000. A Summons and Verified
Complaint was served on the Doe 1 and a Response was filed by Diane M. Strait, a
former employee of the company. The defendant, Ms. Strait has admitted to being
the author, with her husband, Robert Leonard of over 1,000 postings on the
Raging Bull message boards regarding us. Our motion for a temporary injunction
was denied on November 3, 2000. We are currently conducting discovery in this
case and intend to seek a permanent injunction to prevent the dissemination of
materially false information. On December 18, 2000, we served an amended
complaint, which added Mr. Leonard as a defendant in the lawsuit. Diane Strait
filed a counterclaim for defamation against us. We filed a motion to dismiss
this counterclaim for failure to state cause of action. Our motion to dismiss
was granted and the defendants were given leave to amend their counterclaim.
Defendant, Diane Strait, filed a second amended counterclaim in January 2002. We
filed a motion to dismiss Ms. Strait's second amended counterclaim, which was
granted on April 2, 2002, with leave to file a third amended counterclaim within
30 days. Ms. Strait filed a third amended counterclaim on May 1, 2002, for
defamation, abuse of privilege, negligence, negligent supervision and negligent
retention. We filed an answer in that case. We intend to vigorously prosecute
our action for defamation and intentional interference with contractual/business
relationships and defend the third amended counterclaim.

We were served with a lawsuit filed in the United States District Court, Eastern
District of New York on February 16, 2001 by Anthony Giambrone for alleged
breach of a consulting agreement. Mr. Giambrone sent notice of exercise of all
of his warrants to purchase 500,000 shares of our common stock at a price of
$.93 per share on February 10, 2000, as provided in the consulting agreement. On
March 17, 2000, he tendered only $100,000, representing partial payment for the
warrants and received the 107,527 shares corresponding to the payment. No
further payments were made and the warrants expired on July 26, 2000. Mr.
Giambrone is seeking 392,473 unrestricted shares of common stock or
alternatively, damages of at least $430,645. A Settlement Agreement dated as of
March 22, 2002, was entered into between Mr. Giambrone and us. On March 28,
2002, we issued 350,000 restricted shares of common stock to Mr. Giambrone in
settlement of the lawsuit. The shares were issued in an exempt transaction
pursuant to section 4(2) of the Securities Act of 1933, as amended. The suit was
dismissed by stipulation on April 23, 2002. In addition we agreed that, if the
market price of our common stock on March 28, 2003, was less than $.75 per
share, then we would issue to him additional shares of common stock equal to the
quotient of (a) 262,500 minus the product of (i) 350,000 and (ii) the market
price, divided by (b) the market price. On March 28, 2003, the market price of


                                       17
<PAGE>

our stock was $.17, so we issued to him 1,194,118 additional shares bearing a
restricted legend. Under the settlement agreement, we were obligated to register
the shares issued to Mr. Giambrone, subject to certain conditions. The shares
were subsequently registered on July 23, 2003.

We were served with a lawsuit filed in the United States District Court,
Southern District of New York on March 14, 2001 by Ladenburg Thalmann & Co. Inc.
for alleged breach of an investment-banking contract. We believe that this case
has no merit as Ladenburg Thalmann & Co. terminated the contract and we believe
that we complied with all of our obligations under the contract. We filed a
motion to dismiss on May 25, 2001, which was granted in part and denied in part
on December 10, 2001. We filed an answer to the Plaintiff's complaint on April
16, 2002 denying the material allegations of the complaint. Discovery
proceedings have commenced in late 2002. We intend to vigorously defend this
matter.

We were served with a lawsuit filed in the Commonwealth of Massachusetts,
Norfolk, and Superior Court by Medical Technology Partners, Inc. for alleged
breach of contract for damages of $26,609.99 and attorney's fees and expenses,
on April 17, 2002. This case was settled on January 17, 2003, based upon our
agreement to pay $22,000 to the plaintiff in four monthly installments of
$5,500. A judgment of dismissal was entered on March 18, 2003.

We are not aware of any other material legal proceedings, pending or
contemplated, to which we are, or would be a party to, or of which any of our
property is, or would be, the subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

On December 17, 2002, we held an annual meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purposes:

     1.   To elect six directors to serve a one-year term expiring at the Fiscal
          Year 2004 Annual Meeting of Stockholders or until his/her successor is
          duly elected and qualified;
     2.   To consider and act upon a proposal to amend the Company's Certificate
          of  Incorporation  to increase the number of authorized  shares of the
          Company's common stock, no par value, from 150,000,000 to 200,000,000;
     3.   To ratify the Company's Board of Directors'  appointment of Margolies,
          Fink and Wichrowski, CPA's as independent auditors for the Company for
          the fiscal year ending June 30, 2003.

For proposal no. 1, the stockholders elected two incumbent and four new
directors with the voting as follows:

Linda B. Grable      FOR  132,031,334    AGAINST  155,363    ABSTAIN  1,002,777
Allan L. Schwartz    FOR  131,792,530    AGAINST  394,167    ABSTAIN  1,002,777
Scott R. Yablon      FOR  131,876,949    AGAINST  309,748    ABSTAIN  1,002,777
Sherman Lazrus       FOR  131,852,259    AGAINST  334,438    ABSTAIN  1,002,777
Rolv H. Heggenhougen FOR  131,253,284    AGAINST  933,413    ABSTAIN  1,002,777
Thomas P. Salmon     FOR  132,126,947    AGAINST   59,750    ABSTAIN  1,002,777

For proposal no. 2, the stockholders voted to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock, no par value, from 150,000,000 to 200,000,000 with the following
votes:               FOR  128,002,338    AGAINST 4,823,139   ABSTAIN 363,997

For proposal no. 3, the stockholders voted to ratify the Board of Directors'
action of its appointment of Margolies, Fink and Wichrowski, CPA's as
independent auditors for the Company for the fiscal year ending June 30, 2003
with the following votes:
                     FOR  131,976,199    AGAINST  574,810    ABSTAIN  638,465



                                       18
<PAGE>



PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
          ---------------------------------------------------------------------

Our Common Stock is traded on the NASDAQ's OTC Bulletin Board market under the
symbol IMDS. There has been trading in our common stock since September 20,
1994. The following table sets forth, for each of the fiscal periods indicated,
the high and low bid prices for the common stock, as reported on the OTC
Bulletin Board. These per share quotations reflect inter-dealer prices in the
over-the-counter market without real mark-up, markdown, or commissions and may
not necessarily represent actual transactions.

     QUARTER ENDING                          HIGH BID             LOW BID

FISCAL YEAR 2002
First Quarter                                  $1.05               $0.52
Second Quarter                                 $0.71               $0.43
Third Quarter                                  $0.61               $0.49
Fourth Quarter                                 $0.53               $0.28

FISCAL YEAR 2003
First Quarter                                  $0.43               $0.20
Second Quarter                                 $0.27               $0.19
Third Quarter                                  $0.33               $0.17
Fourth Quarter                                 $0.85               $0.17

FISCAL YEAR 2004
First Quarter (through September 26, 2003)     $1.80               $0.87

On September 26, 2003, the closing trade price of the common stock as reported
on the OTC Bulletin Board was $1.19. As of such date, there were approximately
2,290 registered holders of record of our common stock.


                                       19
<PAGE>


SALE OF UNREGISTERED SECURITIES

Private Placement of Preferred Stock

We have had to rely on the private placement of preferred and common stock to
obtain working capital. In deciding to issue preferred stock pursuant to the
private placements, we took into account the number of common shares authorized
and outstanding, the market price of the common stock at the time of each
preferred sale and the number of common shares the preferred stock would have
been convertible into at the time of the sale. At the time of each private
placement of preferred stock there were enough shares, based on the price of our
common stock at the time of the sale of the preferred to satisfy the preferred
conversion requirements. Although our board of directors tried to negotiate a
floor on the conversion price of each series of preferred stock prior to sale,
it was unable to do so. In order to obtain working capital we will continue to
seek capital through debt or equity financing which may include the issuance of
convertible preferred stock whose rights and preferences are superior to those
of the common stock holders. We have endeavored to negotiate the best
transaction possible taking into account the impact on our shareholders,
dilution, loss of voting power and the possibility of a change-in-control;
however, in order to satisfy our working capital needs, we have been and may
continue to be forced to issue convertible securities and debentures with no
limitations on conversion. In addition, the dividends on the preferred stock
affect the net losses applicable to shareholders. There are also applicable
adjustments as a result of the calculation of the deemed preferred stock
dividends because we have entered into contracts providing for discounts on the
preferred stock when it is converted.

In the event that we issue preferred stock without a limit on the number of
shares that can be issued upon conversion and the price of our common stock
decreases, the percentage of shares outstanding that will be held by preferred
holders upon conversion will increase accordingly. The lower the market price
the greater the number of shares to be issued to the preferred holders, upon
conversion, thus increasing the potential profits to the holders when the price
per share increases and the holders sell the common shares. In addition, the
sale of a substantial amount of preferred stock to relatively few holders could
cause a possible change-in-control. In the event of a voluntary or involuntary
liquidation while the preferred stock is outstanding, the holders will be
entitled to a preference in distribution of our property available for
distribution equal to $10,000 per share. As of the date of this report there are
no outstanding shares of preferred stock.

Series K Preferred

See "Financing/Equity Line of Credit".


                                       20
<PAGE>




Private Placement of Common Stock

On January 26, 2000, we entered into a consulting agreement with Anthony
Giambrone, an unaffiliated third party, which provided payment for services
rendered to us over a six month period with warrants exercisable into 500,000
shares of common stock at a price of $0.93 per share. The term of the warrants
ran concurrent with the term of the consulting agreement. On the date of the
execution of the agreement, the bid-ask range of our common stock was $1.81 -
$2.00. The agreement provided that Mr. Giambrone, an investment banker with 30
years of experience in the financial sector, including fund management and
public relations, would assist us in implementing our short and long range
business plans, including implementing a marketing program, monitoring our hired
advertising and public relations firms, advising us on our stockholders
relations program and raising the awareness of institutional investors regarding
our products and company. Mr. Giambrone sent notice of exercise for all of his
warrants on February 10, 2000 as provided in the consulting agreement. On March
17, 2000 he only tendered partial payment of $100,000 and received 107,527
common shares of stock applicable to such payment. No further payments were
made. The shares paid for were promptly issued and registered. The consulting
agreement and the unpaid warrants expired on July 26, 2000; however, Mr.
Giambrone has sued us for the issuance of 392,473 unrestricted shares of common
stock or alternatively, for the alleged $430,645 value of the expired warrants.
The suit was settled. See "Legal Proceedings".

ISSUANCE OF STOCK FOR SERVICES
The Company, from time to time, has issued and may continue to issue stock for
services rendered by consultants, all of whom have been unaffiliated.

Since we have generated no revenues to date, our ability to obtain and retain
consultants may be dependent on our ability to issue stock for services. Since
July 1, 1996, we have issued an aggregate of 2,306,500 shares of common stock
according to registration statements on Form S-8. The aggregate fair market
value of the shares when issued was $2,437,151. The issuance of large amounts of
our common stock, sometimes at prices well below market price, for services
rendered or to be rendered and the subsequent sale of these shares may further
depress the price of our common stock and dilute the holdings of our
shareholders. In addition, because of the possible dilution to existing
shareholders, the issuance of substantial additional shares may cause a
change-in-control.

FINANCING/EQUITY LINE OF CREDIT

We will require substantial additional funds for working capital, including
operating expenses, clinical testing, regulatory processes and manufacturing and
marketing programs and our continuing product development programs. Our capital
requirements will depend on numerous factors, including the progress of our
product development programs, results of pre-clinical and clinical testing, the
time and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments and changes in
our existing research, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that we may establish.
Moreover, our fixed commitments, including salaries and fees for current
employees and consultants, and other contractual agreements are likely to
increase as additional agreements are entered into and additional personnel are
retained.

On July 17, 2000 we sold to Charlton in a private placement 400 shares of our
Series K convertible preferred stock for $4 million. We issued an additional 95
Series K shares to Charlton for $950,000 on November 7, 2000. The total of
$4,950,000 was designed to serve as bridge financing pending draws on the
Charlton private equity line (described below). We paid Spinneret Financial
Systems Ltd. ("Spinneret"), an independent financial consulting firm
unaffiliated with the Company and, according to Spinneret and Charlton,
unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche
of Series K shares and five Series K shares as a consulting fee for the second
tranche. We were obligated to pay a 9% dividend on the Series K convertible
preferred in cash or common stock at our option semi-annually on June 30 and
December 31 of each calendar year or upon the conversion date. Under the Series


                                       21
<PAGE>

K Certificate of Designations, we had the option of redeeming the remaining
convertible preferred (except for the Spinneret shares) solely through the use
of the private equity line by paying cash with the following redemption
premiums.

Days from closing             0-120         121-180          180

Redemption price
As a % of Principal           105%           107.5%          110%

In the event that, for whatever reason, we did not redeem the convertible
preferred according to the above schedule, the holder had the right to convert
the convertible preferred into common stock at a per share price equal to the
lower of $1.29 (115% of the closing bid price on the day prior to the initial
issuance) or 87.5% of the average of the three lowest closing bid prices (which
need not be consecutive) of the 20 consecutive trading days prior to the
conversion date. In November 2000, Charlton converted 25 Series K shares plus
accrued dividends into 197,349 restricted shares of common stock. In January
2001, Charlton converted $3,950,000 (395 shares) of Series K convertible
preferred stock into an aggregate of 4,935,412 common shares and Spinneret
converted $50,000 (5 shares) of Series K convertible preferred stock into an
aggregate of 63,996 common shares. On December 12, 2000, we registered 5,720,605
common shares underlying the 500 shares of Series K convertible preferred stock.
The shares registered included only 58,140 shares underlying the Spinneret
Series K preferred so we had to issue 5,856 common shares with a restrictive
legend. Those shares were registered in February 2001. Of the remaining 100
shares of Series K preferred stock, 50 shares were converted into 664,659 shares
of common stock in April 2001 and 50 shares were redeemed for $550,000 using
proceeds from the Charlton private equity line in April 2001.

On August 17, 2000, we entered into a $25 million private equity credit
agreement with Charlton. On November 29, 2000, prior to any draws under the
initial private equity agreement, we terminated that agreement and the initial
agreement was replaced by an Amended Private Equity Credit Agreement dated
November 30, 2000 (the "Private Equity Agreement"). The Private Equity Agreement
committed Charlton to purchase up to $25 million of common stock subject to
certain conditions pursuant to Regulation D over the course of a commitment
period extending 12 months after the effective date of a registration statement
covering the Private Equity Agreement common shares. The timing and amounts of
the purchase by the investor were at our sole discretion. We were required to
draw down a minimum of $10 million from the credit line over the initial
12-month period. If the minimum amount was not sold, Charlton was entitled to
receive a payment equal to 9% of the difference between the $10,000,000 and the
amount drawn by us (the "Shortfall Payment"). The purchase price of the shares
of common stock was set at 91% of the market price. The market price, as defined
in the agreement, was the average of the three lowest closing bid prices of the
common stock over the ten day trading period beginning on the put date and
ending on the trading day prior to the relevant closing date of the particular
tranche. If, subsequent to effectiveness, the registration statement was
suspended at any time, we would be obligated to pay liquidated damages of 1.5%
of the cost of all common stock then held by the investor for each 15-day period
or portion thereof, beginning on the date of the suspension. If such suspension
was cured within the first 15 days, the damages would not apply. The only fee
associated with the private equity financing was a 5% consulting fee payable to
Spinneret. In September 2001 Spinneret proposed to lower the consulting fee to
4% provided that we pay their consulting fee in advance. We reached an agreement
and paid them $250,000 out of proceeds from a put. On December 13, 2000 we
registered 7,089,685 shares of common stock underlying $10 million out of the
$25 million available in the Private Equity Agreement. Because of the decline in
our stock price, we did not have sufficient common shares registered to fulfill
our obligation under the Private Equity Agreement. To satisfy our obligation to
provide registered common shares to cover the $10 million minimum, we registered
9,875,000 additional shares on October 23, 2001. We paid Spinneret an additional
$186,235 in consulting fees relating to the Private Equity Agreement from
January to September 2001.

The principal conditions to our ability to draw under the private equity line
were that (i) during the 15 trading days immediately preceding each of the put
notice date and the corresponding closing date (11 trading days after the put
notice date) the average bid price of our common stock must be at least $.50 and
the average daily trading volume must be at least $100,000, (ii) no more than
19.9% of our outstanding common stock (33,039,151 shares as of the date of this
report) may be issued under the agreement without shareholder approval if such


                                       22
<PAGE>

approval is required by our principal trading market (it is not required by our
current market, the OTC Bulletin Board), (iii) the purchase cannot cause
Charlton to beneficially own more than 9.9% of our outstanding common stock
(according to the information available to us it beneficially owns less than 5%
of the common stock as of the date of this report), and (iv) there be no
material adverse change in our business or financial condition since our most
recent filing with the SEC.

The New Private Equity Agreement
--------------------------------

Because the average bid price of our common stock fell below the contractually
required $.50 during the 15-day period prior to puts and/or put closings from
time to time in the period beginning November 15, 2001, Charlton orally agreed
to waive the minimum price requirement. Further, because we drew only $5,825,000
of the $10,000,000 minimum by December 13, 2001, Charlton orally agreed to
extend the commitment period and thereby waived its right to receive a Shortfall
Payment based on our failure to timely draw the $10,000,000 minimum. On May 7,
2002, we and Charlton entered into a written amendment to the Private Equity
Agreement as of November 15, 2001, which (i) reduced the minimum stock price
requirement from $.50 to $.25, (ii) reduced the minimum average daily trading
volume to $50,000, and (iii) extended the commitment period to December 13,
2003. Between November 15, 2001, and April 24, 2002, Charlton accepted two puts
totaling $625,000 and 1,410,240 shares despite the relevant average bid price
having fallen below $.50. From December 14, 2001, to April 24, 2002, Charlton
accepted eight puts totaling $2,600,000 and 5,897,827 shares. Charlton has not
accepted any puts under the prior Private Equity Agreement since April 24, 2002.

Charlton agreed to the waivers sought by us in connection with the prior Private
Equity Agreement because of our good working relationship and the mutually
beneficial nature of the relationship. During the initial one-year commitment
period, we drew only $5,825,000 of the $10,000,000 minimum because we did not
require all of the funds and wanted to avoid unnecessary dilution of our
shareholders and unnecessary sales of our stock, which could have depressed its
market price. Charlton has never rejected any of our puts. From January 25, 2001
to April 9, 2002 we drew $8,425,000 and issued 15,015,479 shares to Charlton
under the prior Private Equity Agreement.

On May 15, 2002, we and Charlton entered into a new private equity agreement,
which replaced the prior Private Equity Agreement (the "New Private Equity
Agreement"). The terms of the New Private Equity Agreement are substantially
equivalent to the terms of the prior agreement, except that (i) the commitment
period is three years from the effective date of a registration statement
covering the New Private Equity Agreement shares, (ii) the minimum amount we
must draw through the end of the commitment period is $2,500,000, (iii) the
minimum stock price requirement has been reduced to $.20, and (iv) the minimum
average trading volume has been reduced to $40,000. The conditions to our
ability to draw under the Charlton private equity line, as described above, may
materially limit the draws available to us.

Since we did not yet have an effective registration statement covering shares to
be sold pursuant to the New Private Equity Agreement, in May 2002, Charlton
loaned us $350,000 in order to partially cover our short-term working capital
needs. This loan was evidenced by a promissory note dated May 29, 2002, due
August 1, 2002, and bearing interest at a rate of 2% per month. The loan was
secured by a pledge of 1,000,000 shares of our common stock, 500,000 each by our
Chief Executive Officer, Linda Grable, and by our Executive Vice President and
Chief Financial Officer, Allan Schwartz, and was personally guaranteed by Ms.
Grable and Mr. Schwartz. Charlton orally agreed to extend the due date of the
note, and we have paid it back in full with proceeds of puts under the New
Private Equity Agreement between July and December 2002.

On May 17, 2002 we filed a registration statement on Form S-2 to register
10,000,000 shares underlying the New Private Equity Agreement, which was
declared effective by the SEC on July 24, 2002. We intend to make sales under
the New Private Equity Agreement from time to time in order to raise working
capital on an "as needed" basis. We may sell additional shares pursuant to the
New Private Equity Agreement through subsequent registration statement(s),
provided that our stock price remains above that agreement's minimum. As of the
date of this report under the New Private Equity Agreement we have drawn down
$2,076,000 and issued 9,989,319 shares of common stock.


                                       23
<PAGE>

The Third Private Equity Credit Agreement
-----------------------------------------

On October 29, 2002, we and Charlton entered into a new "Third Private Equity
Credit Agreement" with which we intend to supplement the prior New Private
Equity Agreement. The terms of the Third Private Equity Credit Agreement are
substantially equivalent to the terms of the prior agreement, except that (i)
the commitment period is three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment is $15,000,000, (iii) the minimum amount we must draw through
the end of the commitment period is $2,500,000, (iv) the minimum stock price
requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $20,000. The conditions to our ability to draw
under this private equity line, as described above, may materially limit the
draws available to us.

We intend to make sales under the new Third Private Equity Credit Agreement from
time to time in order to raise working capital on an "as needed" basis. Based on
our current assessment of our financing needs, we intend to draw in excess of
the $2,500,000 minimum but substantially less than the $15,000,000 maximum under
the new Third Private Equity Credit Agreement; however, if those needs change we
may draw up to the $15,000,000 maximum. As of the date of this report under the
Third Private Equity Credit Agreement we have drawn down $7,805,000 and issued
21,756,177 shares of common stock.

As of the date of this report, since January 2001, we have drawn an aggregate of
$18,306,000 in gross proceeds from our equity credit lines with Charlton and
have issued 46,790,975 shares as a result of those draws.

There can be no assurance that adequate financing will be available when needed,
or if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that we would otherwise seek to develop ourselves. If we utilize the new Third
Private Equity Credit Agreement or additional funds are raised by issuing equity
securities, especially convertible preferred stock and convertible debentures,
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders. Moreover, substantial
dilution may result in a change in our control.



                                       24
<PAGE>



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The information set forth below should be read in conjunction with our Financial
Statements and the Notes included elsewhere in this Report.

RESULTS OF OPERATIONS

Twelve Months Ended June 30, 2003 and June 30, 2002
---------------------------------------------------
Revenues during the year ended June 30, 2003, were $184,085 as a result of our
first sale of a CTLM(R) System. There were no revenues in the year ended June
30, 2002.

General and administrative expenses in the aggregate during the 12 months ended
June 30, 2003 were $5,048,830 representing an increase of $507,246 or 11% from
$4,541,584 during the 12 months ended June 30, 2002. General and administrative
expenses in the aggregate are derived from deducting compensation and related
benefits, research and development expenses, depreciation and amortization and
adding interest income to the net loss as presented on the Statement of
Operations. Selling, general and administrative expenses ("SG&A") in the
aggregate during the year ended June 30, 2003, were $425,756 representing an
increase of $2,658 or 1% from $423,098 during the year ended June 30, 2002.

Compensation and related benefits during the year ended June 30, 2003, were
$2,891,303 representing an increase of $3,296 or .01% from $2,888,007 during the
year ended June 30, 2002. The increase in compensation is due to normal
fluctuations in the course of business.

Consulting expenses during the year ended June 30, 2003, were $377,272
representing a decrease of $2,777 or 1% from $380,049 during the year ended June
30, 2002. The decrease was due primarily to reduced use of consultants during
the year ended June 30, 2003.

Inventory Valuation Adjustments during the year ended June 30, 2003, were
$910,444 representing an increase of $363,502 or 66% from $547,942 during the
year ended June 30, 2002. The increase is due to the write-down of obsolete
lasers and other components that are no longer used in the manufacturing of the
CTLM(R).

Professional expenses during the year ended June 30, 2003, were $512,779
representing an increase of $107,543, or 27% from $405,236 during the year ended
June 30, 2002. The increase was due primarily to additional litigation expenses.
See Item 3. "Legal Proceedings".

Travel and subsistence costs during the year ended June 30, 2003, were $238,322
representing a decrease of $314,553 or 57% from $552,875 during the year ended
June 30, 2002. This decrease was primarily due to less travel and housing
expenses for our clinical application specialists at our various clinical sites
in the United States and Mexico since the clinical studies were completed.

Interest expense during the year ended June 30, 2003, was $987,917 representing
a increase of $276,582, or 39% from $711,335 during the year ended June 30,
2002. The increase was primarily due to the recording of the 9% discount on our
equity credit line as interest and interest associated with our mortgage.

BALANCE SHEET DATA
We have financed our operations since inception by the issuance of equity
securities with aggregate net proceeds of approximately $40,323,004 and through
loan transactions in the aggregate net amount of $2,595,029. Furthermore, we
issued equity securities for the conversion of all outstanding convertible
debentures in the aggregate net amount of $3,240,000.

Our combined cash and cash equivalents totaled $1,361,507 at June 30, 2003. We


                                       25
<PAGE>

do not expect to generate a positive internal cash flow for at least the next 9
months due to the expected costs of commercializing our initial product, the
CTLM(R) and the time required for homologations from certain countries.

Our inventory totaled $2,012,275 at June 30, 2003 and $2,926,176 at June 30,
2002. This decrease is primarily due to the Inventory Valuation adjustments. Our
property and equipment, net, totaled $2,129,338 at June 30, 2003 and $2,292,177
at June 30, 2002. This decrease is due to depreciation and retirement of certain
equipment.

LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company and our continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate an
internal cash flow, and until the sales of our product begin, we are totally
dependent upon debt and equity funding from outside investors. In the event that
we are unable to obtain debt or equity financing or are unable to obtain such
financing on terms and conditions acceptable to us, we may have to cease or
severely curtail our operations. This would materially impact our ability to
continue as a going concern.

We have financed our operating and research and development activities through
several Regulation S and Regulation D private placement transactions. Net cash
used for operating and product development expenses during fiscal 2003 was
$5,529,017 primarily due to our purchase of additional materials to continue the
manufacture of CTLM(R) Systems in anticipation of receiving orders from our
distributors in certain countries where permitted by law compared to net cash
used by operating activities and product development of the CTLM(R) and related
software development of $6,615,261 in fiscal 2002. At June 30, 2003, we had
working capital of $1,152,061 compared to working capital of $(704,764) at June
30, 2002.

In the event that we receive a PMA from the FDA, which cannot be assured, we
believe that, based on our current business plan approximately $5 million will
be required above and beyond normal operating expenses over the next year to
complete all necessary stages in order for us to market the CTLM(R) in the
United States and foreign countries. The $5 million will be used to purchase
inventory, sub-contracted components, tooling, manufacturing templates and
non-recurring engineering costs associated with preparation for full capacity
manufacturing and assembly and marketing, advertising and promotion, training,
ongoing regulatory expenses, and other costs associated with product launch. If
the need should arise for capital in excess of the Private Equity Line or if the
Private Equity Line is unavailable due to the price of our common stock, our
inability to comply with the registration provision, Charlton's breach of its
agreement, or any other reason, we may be forced to seek additional funding
through public or private financing, collaboration, licensing and other
arrangements with corporate partners. See "Sale of Unregistered
Securities-Financing/Equity Line of Credit."

During fiscal 2003, we were able to raise a total of $7,881,000 less expenses
through Regulation S and Regulation D transactions. We do not expect to generate
a positive internal cash flow for at least the next 9 months due to the expected
costs of commercializing our initial product, the CTLM(R) and the expense of our
continuing product development program. We will require additional funds for
operating expenses, developing our CD-ROM clinical atlas, FDA regulatory
processes, manufacturing and marketing programs and to continue our product
development program. Accordingly, we plan to utilize the Third Private Equity
Credit Agreement to raise the funds required prior to the end of fiscal year
2004 in order to continue operations. In the event that we are unable to utilize
the Third Private Equity Credit Agreement or the New Private Equity Agreement,
we would have to raise the additional funds required by either equity or debt
financing, including entering into a transaction(s) to privately place equity,
either common or preferred stock, or debt securities, or combinations of both;
or by placing equity into the public market through an underwritten secondary
offering. If additional funds are raised by issuing equity securities, dilution
to existing stockholders will result, and future investors may be granted rights
superior to those of existing stockholders.

No assurances, however, can be given that the necessary future financing will be
available or, if available, that it will be obtained on terms satisfactory to
us. Our ability to effectuate our business plan and continue operations is
dependent on our ability to raise capital, structure a profitable business, and
generate revenues. If our working capital were insufficient to fund our
operations, we would have to explore additional sources of financing.


                                       26
<PAGE>


Capital expenditures for the fiscal 2003 were $43,314 as compared to $78,055 for
fiscal 2002. These expenditures were a direct result of purchases of computer
and other equipment, office, warehouse and manufacturing fixtures, trade show
equipment, computer software, laboratory equipment, and other fixed assets. We
anticipate that our capital expenditures for fiscal 2004 will be approximately
$400,000 primarily due to the cost of a new exhibit for the Radiological Society
of America's (RSNA) annual conference and exhibition in Chicago, Illinois.

During the year ending June 30, 2003, there were no changes in our existing debt
agreements and we had no outstanding bank loans as of June 30, 2003. Our annual
fixed commitments, including salaries and fees for current employees and
consultants, rent, payments under license agreements and other contractual
commitments are approximately $6.5 million, as of the date of this report and
are likely to increase as additional agreements are entered into and additional
personnel are retained. We will require substantial additional funds for our
product development programs, operating expenses, regulatory processes, and
manufacturing and marketing programs, which are presently estimated at an
aggregate of approximately $542,000 per month. The foregoing projections are
subject to many conditions most of which are beyond our control. Our future
capital requirements will depend on many factors, including the following: the
progress of our product development projects, the time and cost involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in our existing
collaborative, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that we may establish; and the
development of commercialization activities and arrangements. We do not expect
to generate a positive internal cash flow for at least 9 months due to expected
increases in capital expenditures, working capital and ongoing losses, including
the expected cost of commercializing the CTLM(R). We intend to use the Third
Private Equity Credit Agreement as our principal source of additional capital.
We plan to continue our policy of investing excess funds, if any, in a High
Performance Money Market account at Wachovia Bank N.A.


CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among others,
statements relating to our business strategy, which is based upon our
interpretation and analysis of trends in the healthcare treatment industry,
especially those related to the diagnosis and treatment of breast cancer, and
upon management's ability to successfully develop and commercialize its
principal product, the CTLM(R). This strategy assumes that the CTLM(R) will
prove superior, from both a medical and an economic perspective, to alternative
techniques for diagnosing breast cancer. This strategy also assumes that we will
be able to promptly obtain from the FDA and the relevant foreign governmental
agencies the approvals which are needed to market the CTLM(R) in the United
States and key foreign markets and that we will be able to raise the capital
necessary to finance the completion of the development and commercialization of
the CTLM(R). Many known and unknown risks, uncertainties and other factors,
including, but not limited to, technological changes and competition from new
diagnostic equipment and techniques, changes in general economic conditions,
healthcare reform initiatives, legal claims, regulatory changes and risk factors
detailed from time to time in our Securities and Exchange Commission filings may
cause these assumptions to prove incorrect and may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.


                                       27
<PAGE>



ITEM 7.  FINANCIAL STATEMENTS
         --------------------

         Index to Financial Statements

                                                                     Page

         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS           F-1

         FINANCIAL STATEMENTS:

                  Balance Sheets                                      F-3

                  Statements of Operations                            F-4

                  Statements of Stockholders' Equity                  F-5

                  Statements of Cash Flows                            F-13

                  Notes to Financial Statements                       F-15




                                       28
<PAGE>



                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)



                                TABLE OF CONTENTS

                                                                     Page

         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS           F-1

         FINANCIAL STATEMENTS:

                  Balance Sheets                                      F-3

                  Statements of Operations                            F-4

                  Statements of Stockholders' Equity                  F-5

                  Statements of Cash Flows                            F-13

                  Notes to Financial Statements                       F-15




<PAGE>





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.


We have audited the accompanying balance sheets of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 2003 and 2002, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2003 and 2002 and for the period December 10, 1993 (date of
inception) to June 30, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 2003 and 2002 and the results
of its operations and its cash flows for the years ended June 30, 2003 and 2002
and for the period December 10, 1993 (date of inception) to June 30, 2003 in
conformity with accounting principles generally accepted in the United States of
America.

The Company is in the development stage as of June 30, 2003 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.





<PAGE>




The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



                    /s/
Margolies, Fink and Wichrowski

Certified Public Accountants
Pompano Beach, Florida
August 11, 2003




                                       F-2
<PAGE>








                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                                 Balance Sheets

                             June 30, 2003 and 2002


<TABLE>
<CAPTION>

                                     ASSETS

                                                                   2003            2002
                                                               ------------    ------------
<S>                                                                     <C>             <C>
Current assets:
  Cash and cash equivalents                                    $  1,361,507    $    194,894
  Loans receivable - employees                                        1,455           1,470
  Inventory                                                       2,012,275       2,926,176
  Prepaid expenses                                                   28,722          56,708
                                                               ------------    ------------

         Total current assets                                     3,403,959       3,179,248
                                                               ------------    ------------

Property and equipment, net                                       2,129,338       2,292,177
Other assets                                                        840,420         874,596
                                                               ------------    ------------

                                                               $  6,373,717    $  6,346,021
                                                               ============    ============


             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                        $    937,005    $  1,237,559
  Short-term debt                                                   300,407       1,453,717
  Other current liabilities                                       1,014,486       1,192,736
                                                               ------------    ------------

         Total current liabilities                                2,251,898       3,884,012
                                                               ------------    ------------

Commitments and contingencies

Stockholders' equity:
  Common stock, no par value; authorized 200,000,000 shares,
    issued 162,994,039 and 131,595,713 shares, respectively      71,368,361      61,659,936
  Additional paid-in capital                                      1,597,780       1,597,780
  Deficit accumulated during the development stage              (68,844,322)    (60,663,798)
                                                               ------------    ------------

                                                                  4,121,819       2,593,918
Less: deferred compensation                                            --          (117,600)
          subscriptions receivable                                     --           (14,309)
                                                               ------------    ------------

         Total stockholders' equity                               4,121,819       2,462,009
                                                               ------------    ------------

                                                               $  6,373,717    $  6,346,021
                                                               ============    ============

</TABLE>



               See accompanying notes to the financial statements.


                                       F-3
<PAGE>



<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                            Statements of Operations
<TABLE>
<CAPTION>

                                                                                           From Inception
                                                                                            (December 10,
                                                          Year Ended         Year Ended         1993) to
                                                        June 30, 2003     June 30, 2002    June 30, 2003
                                                         -------------    -------------    -------------
<S>                                                             <C>              <C>              <C>
Sales                                                    $     184,085    $        --      $     184,085

Cost of sales                                                   79,189             --             79,189
                                                         -------------    -------------    -------------

Gross profit                                                   104,896             --            104,896
                                                         -------------    -------------    -------------

Operating expenses:
  Compensation and related benefits:
      Administrative and engineering                     $   1,782,083    $   1,761,684       17,130,676
      Research and development                               1,109,220        1,126,323        7,472,996
  Research and development expenses                                751            2,129        2,996,350
  Selling, general and administrative expenses                 425,756          423,098        3,053,253
  Inventory valuation adjustments                              910,444          547,942        2,648,491
  Depreciation and amortization                                240,329          246,871        2,057,854
  Amortization of deferred compensation                           --               --          4,064,250
  Other operating expenses  (Note 11)                        2,840,863        2,859,209       18,244,950
                                                         -------------    -------------    -------------

                                                             7,309,446        6,967,256       57,668,820
                                                         -------------    -------------    -------------

     Operating loss                                         (7,204,550)      (6,967,256)     (57,563,924)

Gain on sale of fixed assets                                    11,254             --             11,254
Interest income                                                    689            1,031          259,532
Interest expense                                              (987,917)        (711,335)      (4,703,424)
                                                         -------------    -------------    -------------


     Net loss                                               (8,180,524)      (7,677,560)     (61,996,562)

Dividends on cumulative preferred stock:
 From discount at issuance                                        --               --         (5,402,713)
 Earned                                                           --               --         (1,445,047)
                                                         -------------    -------------    -------------

     Net loss applicable to common shareholders          $  (8,180,524)   $  (7,677,560)   $ (68,844,322)
                                                         =============    =============    =============

Net loss per common share:
  Basic
    Net loss per common share                            $        (.06)   $        (.06)   $       (1.10)
                                                         =============    =============    =============

    Weighted average number of common shares               145,150,783      125,746,307       62,748,751
                                                         =============    =============    =============

  Diluted
    Net loss per common share                            $        (.06)   $        (.06)   $       (1.10)
                                                         =============    =============    =============

    Weighted average number of common shares               145,150,783      125,746,307       62,748,751
                                                         =============    =============    =============




               See accompanying notes to the financial statements.


                                       F-4

</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                                                                      IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                        (a Development Stage Company)

                                                                      Statement of Stockhoders' Equity

                                                         From December 10, 1993 (date of inception) to June 30, 2002


                                                   Preferred Stock (**)         Common Stock        Additional
                                                        Number of                Number of            Paid-in
                                                   Shares       Amount      Shares        Amount      Capital
                                                ------------- ----------  ------------- ----------  ------------

<S>                                                    <C>     <C>          <C>         <C>              <C>
Balance at December 10, 1993 (date of inception)          0   $-              0   $      --     $      --

Issuance of common stock, restated for reverse
   stock split                                         --     --        510,000        50,000          --

Acquisition of public shell                            --                  --         178,752          --

Net issuance of additional shares of stock             --                  --      15,342,520        16,451

Common stock sold                                      --                  --          36,500        36,500

Net loss                                               --                                --            --
                                                -----------   ---   -----------   -----------   -----------

Balance at June 30, 1994                               --     --     16,067,772       102,951          --

Common stock sold                                      --     --      1,980,791     1,566,595          --

Common stock issued in exchange for services           --     --        115,650       102,942          --

Common stock issued with employment agreements         --     --         75,000        78,750          --

Common stock issued for compensation                   --     --        377,500       151,000          --

Stock options granted                                  --     --           --            --         622,500

Amortization of deferred compentsation                 --     --           --            --            --

Forgiveness of officers' compensation                  --     --           --            --          50,333

Net loss                                               --     --           --            --            --
                                                -----------   ---   -----------   -----------   -----------

Balance at June 30, 1995                               --     --     18,616,713     2,002,238       672,833
                                                -----------   ---   -----------   -----------   -----------
</TABLE>


<TABLE>
<CAPTION>
                                                  Deficit
                                                Accumulated
                                                 During the
                                                Development    Subscriptions   Deferred
                                                   Stage       Receivable    Compensation      Total
                                                -------------  ------------  -------------- -------------
<S>                                                   <C>            <C>            <C>            <C>
Balance at December 10, 1993 (date of inception)  $    --      $      --      $      --      $      --

Issuance of common stock, restated for reverse
   stock split                                         --             --             --           50,000

Acquisition of public shell                            --             --             --             --

Net issuance of additional shares of stock             --             --             --           16,451

Common stock sold                                      --             --             --           36,500

Net loss                                               --          (66,951)          --          (66,951)
                                                -----------    -----------    -----------    -----------

Balance at June 30, 1994                            (66,951)          --             --           36,000

Common stock sold                                      --         (523,118)          --        1,043,477

Common stock issued in exchange for services           --             --             --          102,942

Common stock issued with employment agreements         --             --             --           78,750

Common stock issued for compensation                   --             --             --          151,000

Stock options granted                                  --             --         (622,500)          --

Amortization of deferred compentsation                 --             --          114,375        114,375

Forgiveness of officers' compensation                  --             --             --           50,333

Net loss                                         (1,086,436)          --             --       (1,086,436)
                                                -----------    -----------    -----------    -----------

Balance at June 30, 1995                         (1,153,387)      (523,118)      (508,125)       490,441
                                                -----------    -----------    -----------    -----------
</TABLE>



               See accompanying notes to the financial statements.

                                       F-5

<PAGE>


<TABLE>
<CAPTION>


                                                                         IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                           (a Development Stage Company)

                                                                   Statement of Stockhoders' Equity (Continued)

                                                            From December 10, 1993 (date of inception) to June 30, 2002


                                                   Preferred Stock (**)              Common Stock            Additional
                                                -----------------------------------------------------------
                                                         Number of                    Number of               Paid-in
                                                   Shares        Amount         Shares          Amount        Capital
                                                ------------- ------------- --------------- --------------- -------------
<S>                                                       <C>             <C>              <C>        <C>              <C>
Balance at June 30, 1995                                    --             --       18,616,713      2,002,238        672,833
                                                     -----------    -----------    -----------    -----------    -----------

Preferred stock sold, including dividends                  4,000      3,600,000           --             --        1,335,474

Common stock sold                                           --             --          700,471      1,561,110           --

Cancellation of stock subscription                          --             --         (410,500)      (405,130)          --

Common stock issued in exchange for services                --             --        2,503,789      4,257,320           --

Common stock issued with exercise of stock options          --             --          191,500        104,375           --

Common stock issued with exercise of options
    for compensation                                        --             --          996,400        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           --

Dividends accrued on preferred stock not
    yet converted                                           --             --             --             --             --

Collection of stock subscriptions                           --             --             --             --             --

Amortization of deferred compentsation                      --             --             --             --             --

Forgiveness of officers' compensation                       --             --             --             --          100,667

Net loss (restated)                                         --             --             --             --             --
                                                     -----------    -----------    -----------    -----------    -----------

Balance at June 30, 1996 (restated)                        2,400      2,160,000     23,023,789     10,075,896      1,574,784
                                                     -----------    -----------    -----------    -----------    -----------
</TABLE>




<TABLE>
<CAPTION>

                                                       Deficit
                                                     Accumulated
                                                      During the
                                                     Development    Subscriptions    Deferred
                                                        Stage        Receivable    Compensation       Total
                                                     ------------- -------------  -------------- -------------
<S>                                                      <C>             <C>             <C>              <C>
Balance at June 30, 1995                              (1,153,387)      (523,118)      (508,125)       490,441
                                                     -----------    -----------    -----------    -----------

Preferred stock sold, including dividends             (1,335,474)          --             --        3,600,000

Common stock sold                                           --             --             --        1,561,110

Cancellation of stock subscription                          --          405,130           --             --

Common stock issued in exchange for services                --             --             --        4,257,320

Common stock issued with exercise of stock options          --           (4,375)          --          100,000

Common stock issued with exercise of options
    for compensation                                        --             --             --          567,164


Conversion of preferred stock to common stock               --             --             --             --


Common stock issued as payment of preferred
    stock dividends                                      (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

Net loss (restated)                                   (6,933,310)          --             --       (6,933,310)
                                                     -----------    -----------    -----------    -----------

Balance at June 30, 1996 (restated)                   (9,470,016)       (18,684)      (275,625)     4,046,355
                                                     -----------    -----------    -----------    -----------
</TABLE>


               See accompanying notes to the financial statements.
                                       F-6

<PAGE>



<TABLE>
<CAPTION>
                                                                         IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                           (a Development Stage Company)

                                                                   Statement of Stockhoders' Equity (Continued)

                                                            From December 10, 1993 (date of inception) to June 30, 2002


                                                   Preferred Stock (**)              Common Stock            Additional
                                                ----------------------------------------------------------
                                                         Number of                    Number of               Paid-in
                                                   Shares        Amount        Shares          Amount         Capital
                                                ------------- ------------- -------------- ---------------  -------------
<S>                                                      <C>             <C>            <C>        <C>             <C>
Balance at June 30, 1996 (restated)                        2,400      2,160,000     23,023,789     10,075,896      1,574,784
                                                     -----------    -----------    -----------    -----------    -----------

Preferred stock sold, including dividends                    450      4,500,000           --             --          998,120

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           --

Common stock issued for compensation                        --             --          353,200        918,364           --

Common stock issued with exercise of stock options          --             --          361,933      1,136,953           --

Common stock issued to employee                             --             --         (150,000)       (52,500)          --

Common stock issued as payment of preferred
    stock dividends                                         --             --           20,760         49,603           --

Dividends accrued on preferred stock not
    yet converted                                           --             --             --             --             --

Stock options granted                                       --             --             --             --        1,891,500

Collection of stock subscriptions                           --             --             --             --             --

Amortization of deferred compentsation                      --             --             --             --             --

Net loss (restated)                                         --             --             --             --             --
                                                     -----------    -----------    -----------    -----------    -----------

Balance at June 30, 1997 (restated)                          450      4,500,000     24,905,084     15,739,729      3,663,120
                                                     -----------    -----------    -----------    -----------    -----------
</TABLE>




<TABLE>
<CAPTION>

                                                        Deficit
                                                      Accumulated
                                                      During the
                                                      Development   Subscriptions    Deferred
                                                         Stage       Receivable    Compensation      Total
                                                     -------------- ------------- --------------- -------------
<S>                                                     <C>             <C>            <C>               <C>
Balance at June 30, 1996 (restated)                   (9,470,016)       (18,684)      (275,625)     4,046,355
                                                     -----------    -----------    -----------    -----------

Preferred stock sold, including dividends               (998,120)          --             --        4,500,000

Conversion of preferred stock to common stock               --             --             --             --

Common stock issued in exchange for services                --             --             --          650,129

Common stock issued for compensation                        --             --             --          918,364

Common stock issued with exercise of stock options          --          (33,750)          --        1,103,203

Common stock issued to employee                             --             --             --          (52,500)


Common stock issued as payment of preferred
    stock dividends                                      (16,387)          --             --           33,216

Dividends accrued on preferred stock not
    yet converted                                       (168,288)          --             --         (168,288)

Stock options granted                                       --             --       (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)                  (18,298,930)       (35,559)    (1,379,125)     4,189,235
                                                     -----------    -----------    -----------    -----------
</TABLE>


               See accompanying notes to the financial statements.
                                       F-7
<PAGE>


<TABLE>
<CAPTION>

                                                                         IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                           (a Development Stage Company)

                                                                   Statement of Stockhoders' Equity (Continued)

                                                            From December 10, 1993 (date of inception) to June 30, 2002


                                                   Preferred Stock (**)              Common Stock            Additional
                                                ----------------------------------------------------------
                                                         Number of                    Number of               Paid-in
                                                   Shares        Amount        Shares          Amount         Capital
                                                ------------- ------------- -------------- ---------------  -------------
<S>                                                      <C>             <C>             <C>         <C>           <C>
Balance at June 30, 1997 (restated)                          450      4,500,000     24,905,084    15,739,729     3,663,120
                                                     -----------    -----------    -----------   -----------   -----------

Preferred stock sold, including dividends
    and placement fees                                       501      5,010,000           --            --       1,290,515

Conversion of preferred stock to common stock               (340)    (3,400,000)     6,502,448     4,644,307    (1,210,414)

Common stock sold                                           --             --          500,000       200,000          --

Common stock issued in exchange for services                --             --          956,000     1,419,130          --

Common stock issued for compensation                        --             --           64,300        54,408          --

Common stock issued with exercise of stock options          --             --           65,712        22,999          --

Common stock issued in exchange for
    licensing agreement                                     --             --        3,500,000     1,890,000    (3,199,000)

Dividends accrued on preferred stock not
    yet converted                                           --             --             --            --            --

Stock options granted                                       --             --             --            --       1,340,625

Collection of stock subscriptions                           --             --             --          12,500          --

Amortization of deferred compentsation                      --             --             --            --            --

Net loss                                                    --             --             --            --            --
                                                     -----------    -----------    -----------   -----------   -----------

Balance at June 30, 1998                                     611      6,110,000     36,493,544    23,983,073     1,884,846
                                                     -----------    -----------    -----------   -----------   -----------
</TABLE>


<TABLE>
<CAPTION>

                                                      Deficit
                                                    Accumulated
                                                    During the
                                                    Development   Subscriptions    Deferred
                                                       Stage       Receivable    Compensation      Total
                                                   -------------- ------------- --------------- -------------
<S>                                                     <C>              <C>            <C>             <C>
Balance at June 30, 1997 (restated)                  (18,298,930)       (35,559)    (1,379,125)     4,189,235
                                                     -----------    -----------    -----------    -----------

Preferred stock sold, including dividends
    and placement fees                                (1,741,015)          --             --        4,559,500

Conversion of preferred stock to common stock               --             --             --           33,893

Common stock sold                                           --             --             --          200,000

Common stock issued in exchange for services                --             --             --        1,419,130

Common stock issued for compensation                        --             --             --           54,408

Common stock issued with exercise of stock options          --             --             --           22,999

Common stock issued in exchange for
    licensing agreement                                     --             --             --       (1,309,000)

Dividends accrued on preferred stock not
    yet converted                                       (315,000)          --             --         (315,000)

Stock options granted                                       --             --       (1,340,625)          --


Collection of stock subscriptions                           --           21,250           --           33,750

Amortization of deferred compentsation                      --             --        1,418,938      1,418,938

Net loss                                              (6,981,710)          --             --       (6,981,710)
                                                     -----------    -----------    -----------    -----------

Balance at June 30, 1998                             (27,336,655)       (14,309)    (1,300,812)     3,326,143
                                                     -----------    -----------    -----------    -----------
</TABLE>


               See accompanying notes to the financial statements.
                                       F-8
<PAGE>






<TABLE>
<CAPTION>
                                                                         IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                           (a Development Stage Company)

                                                                   Statement of Stockhoders' Equity (Continued)

                                                            From December 10, 1993 (date of inception) to June 30, 2002


                                                   Preferred Stock (**)              Common Stock            Additional
                                                ----------------------------------------------------------
                                                         Number of                    Number of               Paid-in
                                                   Shares        Amount        Shares          Amount         Capital
                                                ------------- ------------- -------------- ---------------  -------------
<S>                                                          <C>         <C>              <C>      <C>           <C>
Balance at June 30, 1998                                      611      6,110,000     36,493,544    23,983,073     1,884,846
                                                      -----------    -----------    -----------   -----------   -----------

Preferred stock issued - satisfaction of debt                 138      1,380,000           --            --        (161,348)

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          --

Common stock issued - exchange for services
    and compensation                                         --             --          719,442       301,210          --

Common stock issued - repayment of debt                      --             --        2,974,043     1,196,992          --

Common stock issued in exchange for loan fees                --             --          480,000       292,694          --

Common stock issued with exercise of stock options           --             --           65,612       124,464          --

Common stock issued in satisfaction of
    licensing agreement payable                              --             --        3,500,000     1,890,000          --

Redeemable preferred stock sold, deemed dividend             --             --             --            --            --

Dividends accrued-preferred stock not yet converted          --             --             --            --            --

Stock options granted                                        --             --             --            --         209,625

Amortization of deferred compentsation                       --             --             --            --            --

Net loss                                                     --             --             --            --            --
                                                      -----------    -----------    -----------   -----------   -----------

Balance at June 30, 1999                                      596      5,960,000     49,297,675    29,820,729     1,490,827
                                                      -----------    -----------    -----------   -----------   -----------
</TABLE>




<TABLE>
<CAPTION>

                                                         Deficit
                                                       Accumulated
                                                       During the
                                                       Development   Subscriptions    Deferred
                                                          Stage       Receivable    Compensation      Total
                                                      -------------- ------------- --------------- -------------
<S>                                                       <C>              <C>            <C>            <C>
Balance at June 30, 1998                              (27,336,655)       (14,309)    (1,300,812)     3,326,143
                                                      -----------    -----------    -----------    -----------

Preferred stock issued - satisfaction of debt            (492,857)          --             --          725,795

Conversion of preferred stock to common stock                --             --             --             --

Common stock sold                                            --             --             --           60,000

Common stock issued - exchange for services
    and compensation                                         --             --             --          301,210

Common stock issued - repayment of debt                      --             --             --        1,196,992

Common stock issued in exchange for loan fees                --             --             --          292,694

Common stock issued with exercise of stock options           --             --             --          124,464

Common stock issued in satisfaction of
    licensing agreement payable                              --             --             --        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)          --


Amortization of deferred compentsation                       --             --        1,510,437      1,510,437

Net loss                                               (6,807,194)          --             --       (6,807,194)
                                                      -----------    -----------    -----------    -----------

Balance at June 30, 1999                              (35,092,999)       (14,309)          --        2,164,248
                                                      -----------    -----------    -----------    -----------
</TABLE>


               See accompanying notes to the financial statements.
                                       F-9

<PAGE>


<TABLE>
<CAPTION>
                                                                          IMAGING DIAGNOSTIC SYSTEMS, INC.
                                                                           (a Development Stage Company)

                                                                    Statement of Stockhoders' Equity (Continued)

                                                            From December 10, 1993 (date of inception) to June 30, 2002


                                                          Preferred Stock (**)              Common Stock            Additional
                                                       -----------------------------------------------------------
                                                                Number of                    Number of               Paid-in
                                                          Shares        Amount         Shares          Amount        Capital
                                                       ------------- ------------- --------------- --------------- -------------
<S>                                                      <C>             <C>              <C>            <C>            <C>
Balance at June 30, 1999                                      596       5,960,000      49,297,675     29,820,729       1,490,827
                                                     ------------    ------------    ------------   ------------    ------------

Conversion of convertible debentures                         --              --         4,060,398      3,958,223            --

Conversion of preferred stock to common, net                 (596)     (5,960,000)     45,415,734      7,313,334        (648,885)

Common stock sold                                            --              --           100,000        157,000            --

Common stock issued - exchange for services
    and compensation, net of cancelled shares                --              --           137,000        (18,675)           --

Common stock issued - repayment of debt
   and accrued interest                                      --              --         5,061,294      1,067,665            --

Common stock issued in exchange for
    interest and loan fees                                   --              --             7,297          2,408            --

Common stock issued with exercise of stock options           --              --         1,281,628        395,810         157,988

Common stock issued with exercise of warrants                --              --           150,652        121,563          97,850

Issuance of note payable with warrants at a discount         --              --              --             --           500,000

Dividends accrued-preferred stock not yet converted          --              --              --             --              --

Net loss                                                     --              --              --             --              --
                                                     ------------    ------------    ------------   ------------    ------------

Balance at June 30, 2000                                     --              --       105,511,678     42,818,057       1,597,780
                                                     ------------    ------------    ------------   ------------    ------------
</TABLE>




<TABLE>
<CAPTION>
                                                       Deficit
                                                     Accumulated
                                                     During the

                                                     Development    Subscriptions   Deferred
                                                        Stage        Receivable   Compensation      Total
                                                   ---------------- ------------- -------------- -------------
<S>                                                     <C>                <C>        <C>          <C>
Balance at June 30, 1999                              (35,092,999)        (14,309)    --           2,164,248
                                                     ------------    ------------    ---        ------------

Conversion of convertible debentures                         --              --       --           3,958,223

Conversion of preferred stock to common, net                 --              --       --             704,449

Common stock sold                                            --              --       --             157,000

Common stock issued - exchange for services
    and compensation, net of cancelled shares                --              --       --             (18,675)

Common stock issued - repayment of debt
   and accrued interest                                      --              --       --           1,067,665

Common stock issued in exchange for
    interest and loan fees                                   --              --       --               2,408

Common stock issued with exercise of stock options           --           (13,599)    --             540,199

Common stock issued with exercise of warrants                --              --       --             219,413

Issuance of note payable with warrants at a discount         --              --       --             500,000

Dividends accrued-preferred stock not yet converted      (145,950)           --       --            (145,950)

Net loss                                               (8,022,929)           --       --          (8,022,929)
                                                     ------------    ------------    ---        ------------

Balance at June 30, 2000                              (43,261,878)        (27,908)    --           1,126,051
                                                     ------------    ------------    ---        ------------
</TABLE>


** See Note 15 for a detailed breakdown by Series.

               See accompanying notes to the financial statements.
                                      F-10

<PAGE>


<TABLE>
<CAPTION>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                  Statement of Stockhoders' Equity (Continued)

           From December 10, 1993 (date of inception) to June 30, 2002




                                                          Preferred Stock (**)              Common Stock            Additional
                                                       -----------------------------------------------------------
                                                                Number of                    Number of               Paid-in
                                                          Shares        Amount         Shares          Amount        Capital
                                                       ------------- ------------- --------------- --------------- -------------
<S>                                                      <C>             <C>              <C>            <C>            <C>
Balance at June 30, 2000                                  --             --            105,511,678    42,818,057     1,597,780
                                                          ----    -----------          -----------   -----------   -----------

Preferred stock sold, including dividends                  500      5,000,000                 --            --         708,130

Conversion of preferred stock to common, net              (500)    (5,000,000)           5,664,067     5,580,531      (708,130)

Common stock issued - line of equity transactions         --             --              3,407,613     3,143,666          --

Common stock issued - exchange for services
    and compensation                                      --             --                153,500       227,855          --

Common stock issued - repayment of debt
   and accrued interest                                   --             --                810,000     1,393,200          --

Common stock issued with exercise of stock options        --             --              3,781,614     1,868,585          --

Common stock issued with exercise of warrants             --             --                 99,375       119,887          --

Dividends accrued-preferred stock                         --             --                   --            --            --

Net loss                                                  --             --                   --            --            --
                                                          ----    -----------          -----------   -----------   -----------

Balance at June 30, 2001                                  --      $      --            119,427,847   $55,151,781   $ 1,597,780
                                                          ====    ===========          ===========   ===========   ===========
</TABLE>




<TABLE>
<CAPTION>

                                                       Deficit
                                                     Accumulated
                                                     During the

                                                     Development    Subscriptions   Deferred
                                                        Stage        Receivable   Compensation      Total
                                                   ---------------- ------------- -------------- -------------
<S>                                                     <C>                <C>         <C>          <C>
Balance at June 30, 2000                              (43,261,878)      (27,908)        --        1,126,051
                                                     ------------      --------        ---      -----------

Preferred stock sold, including dividends                (708,130)         --           --        5,000,000

Conversion of preferred stock to common, net                 --            --           --         (127,599)

Common stock issued - line of equity transactions            --            --           --        3,143,666

Common stock issued - exchange for services
    and compensation                                         --            --           --          227,855

Common stock issued - repayment of debt
   and accrued interest                                      --            --           --        1,393,200

Common stock issued with exercise of stock options           --          13,599         --        1,882,184

Common stock issued with exercise of warrants                --            --           --          119,887

Dividends accrued-preferred stock                        (422,401)         --           --         (422,401)

Net loss                                               (8,593,829)         --           --       (8,593,829)
                                                     ------------      --------        ---      -----------

Balance at June 30, 2001                             $(52,986,238)     $(14,309)       $--      $ 3,749,014
                                                     ============      ========        ===      ===========
</TABLE>




** See Note 15 for a detailed breakdown by Series.

              See accompanying notes to the financial statements.

                                      F-11

<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                  Statement of Stockhoders' Equity (Continued)

           From December 10, 1993 (date of inception) to June 30, 2002


<TABLE>
<CAPTION>


                                                          Preferred Stock (**)              Common Stock            Additional
                                                       -----------------------------------------------------------
                                                                Number of                    Number of               Paid-in
                                                          Shares        Amount         Shares          Amount        Capital
                                                       ------------- ------------- --------------- --------------- -------------
<S>                                                      <C>             <C>              <C>            <C>            <C>
Balance at June 30, 2001                                  --             --            119,427,847    55,151,781     1,597,780
                                                          ----    -----------          -----------   -----------   -----------

Common stock issued - line of equity transactions         --             --             11,607,866     6,213,805          --

Common stock issued - exchange for services
    and compensation                                      --             --                560,000       294,350          --

Net loss                                                  --             --                   --            --            --
                                                          ----    -----------          -----------   -----------   -----------

Balance at June 30, 2002                                  --      $      --            131,595,713    61,659,936   $ 1,597,780


Common stock issued - line of equity transactions         --             --             29,390,708     8,737,772          --

Common stock issued - exchange for services
    and compensation                                      --             --              2,007,618       970,653          --


Payment of subscriptions receivable                       --             --                  --             --            --

Net loss                                                  --             --                  --             --            --
                                                          ----    -----------          -----------   -----------   -----------

Balance at June 30, 2003                                  --      $      --            162,994,039   $ 71,368,361   $ 1,597,780
                                                          ====    ===========          ===========   ============   ===========
</TABLE>




<TABLE>
<CAPTION>

                                                       Deficit
                                                     Accumulated
                                                     During the

                                                     Development    Subscriptions   Deferred
                                                        Stage        Receivable   Compensation      Total
                                                   ---------------- ------------- -------------- -------------
<S>                                                     <C>                <C>         <C>          <C>
Balance at June 30, 2001                              (52,986,238)     $(14,309)       $--      $ 3,749,014
                                                     ------------      --------        ---      -----------

Common stock issued - line of equity transactions            --            --           --        6,213,805

Common stock issued - exchange for services
    and compensation                                         --            --       (117,600)       176,750

Net loss                                               (7,677,560)         --           --       (7,677,560)
                                                     ------------      --------        ---      -----------

Balance at June 30, 2002                             $(60,663,798)     $(14,309)       $--      $ 2,462,009


Common stock issued - line of equity transactions           --             --           --        8,737,772

Common stock issued - exchange for services
    and compensation                                        --             --         117,600     1,088,253


Payment of subscriptions receivable                         --           14,309         --           14,309

Net loss                                              (8,180,524)          --           --       (8,180,524)
                                                     ------------      --------        ---      -----------

Balance at June 30, 2003                             $(68,844,322)     $   --        $  --      $ 4,121,819
                                                     ============      ========        ===      ===========
</TABLE>




** See Note 15 for a detailed breakdown by Series.

              See accompanying notes to the financial statements.

                                      F-12

<PAGE>



                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                            Statements of Cash Flows


<TABLE>
<CAPTION>

                                                                                                        From
                                                                                                     Inception
                                                                                                  (December 10,
                                                                 Year Ended      Year Ended        1993) to
                                                               June 30, 2003   June 30, 2002   June 30, 2003
                                                               ------------    ------------    ------------
<S>                                                                     <C>             <C>             <C>
Net loss                                                       $ (8,180,524)   $ (7,677,560)   $(61,996,562)
                                                               ------------    ------------    ------------
Adjustments to reconcile net loss to net cash
 used for operating activities:
    Depreciation and amortization                                   240,329         246,871       2,057,854
    Gain on sale of fixed assets                                    (11,254)           --           (11,254)
    Amortization of deferred compensation                              --              --         4,064,250
    Noncash interest, compensation and consulting expenses        1,827,425         805,555      15,343,110
    (Increase) decrease in loans receivable - employees             131,925           6,930          91,768
    (Increase) decrease in inventory, net                           913,901        (120,992)      1,045,988
    (Increase) decrease in prepaid expenses                          27,985          (8,096)        (28,722)
    (Increase) decrease in other assets                                --           (52,697)       (438,527)
    Increase (decrease) in accounts payable and
      accrued expenses                                             (300,554)        446,928         971,385
    Increase (decrease) in other current liabilities               (178,250)       (262,200)      1,014,486
                                                               ------------    ------------    ------------

      Total adjustments                                           2,651,507       1,062,299      24,110,338
                                                               ------------    ------------    ------------

      Net cash used for operating activities                     (5,529,017)     (6,615,261)    (37,886,224)
                                                               ------------    ------------    ------------

Cash flows from investing activities:
    Proceeds from sale of property and equipment                     11,254            --            11,254
    Prototype equipment                                                --              --        (2,799,031)
    Capital expenditures                                            (43,314)        (78,055)     (4,072,236)
                                                               ------------    ------------    ------------

      Net cash used for investing activities                        (32,060)        (78,055)     (6,860,013)
                                                               ------------    ------------    ------------

Cash flows from financing activities:
    Repayment of capital lease obligation                              --            (4,056)        (50,289)
    Proceeds from convertible debenture                                --              --         3,240,000
    Proceeds from (repayments) loan payable, net                 (1,153,310)      1,100,000       2,595,029
    Proceeds from issuance of preferred stock                          --              --
                                                                                                 18,039,500
    Net proceeds from issuance of common stock                    7,881,000       5,585,000      22,283,504
                                                               ------------    ------------    ------------

      Net cash provided by financing activities                   6,727,690       6,680,944      46,107,744
                                                               ------------    ------------    ------------

Net increase in cash and cash equivalents                         1,166,613         (12,372)      1,361,507

Cash and cash equivalents at beginning of period                    194,894         207,266             -0-
                                                               ------------    ------------    ------------

Cash and cash equivalents at end of period                     $  1,361,507    $    194,894    $  1,361,507
                                                               ============    ============    ============


                                                                                                      (Continued)
</TABLE>




               See accompanying notes to the financial statements.


                                      F-13
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                       Statement of Cash Flows (Continued)


<TABLE>
<CAPTION>

                                                                                                 From
                                                                                                 Inception
                                                                                                 (December 10,
                                                                Year Ended        Year Ended        1993) to
                                                              June 30, 2003     June 30, 2002    June 30, 2003
                                                              -------------     -------------    -------------
<S>                                                                 <C>              <C>                <C>
Supplemental disclosures of cash flow information:

         Cash paid for interest                               $       131,145   $     5,104      $     209,968
                                                              ===============   ============     =============

Supplemental disclosures of noncash investing
 and financing activities:

         Issuance of common stock and options
           in exchange for services                           $       841,853   $   176,750      $   5,856,350
                                                              ===============   =============    =============

         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 licensing agreement          $        -       $      -         $     581,000
                                                              ===============   =============    =============

         Issuance of common stock for
           compensation                                       $       128,800   $   117,600      $   2,194,988
                                                              ===============   =============    =============

         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
                                                              ===============   =============    =============





</TABLE>






               See accompanying notes to the financial statements.


                                      F-14
<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                          Notes to Financial Statements


(1)      BACKGROUND

The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc. ("IDSI-Fl."). IDSI-Fl. was
formed on December 10, 1993. (See Note 3) Effective July 1, 1995 the Company
changed its corporate status to a Florida corporation.

The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial Computed Tomography Laser Mammography ("CTLM(R)")
prototype had been developed with the use of "Ultrafast Laser Imaging
TechnologyTM", and this technology was first introduced at the "RSNA" scientific
assembly and conference during late November 1994. The completed CTLM(R) device
was exhibited at the "RSNA" conference November 26-30, 1995. The Company has
continued to develop its CTLM(R) technology and to exhibit its latest clinical
images produced by the newest generation of the CTLM(R) at the "RSNA"
conferences held annually, in Chicago, commencing on the Sunday following
Thanksgiving and running for five days.

The initial CTLM(R) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements.

In order for the Company to sell the CTLM(R) commercially in the United States,
it must obtain marketing clearance from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Under the Food, Drug, and Cosmetic Act, the FDA has 180 days to review a
PMA application, although in certain cases the FDA substantially expands that
time period through requests for additional information or clarification of
existing information. The Company has submitted four modules, which have been
accepted by the FDA as part of its PMA application process. On April 29, 2003
the Company announced that it submitted its PMA application to the FDA and
announced on June 18, 2003 that it was notified that it was suitable for filing.
The Company was notified on June 18, 2003 that its application for a new medical
device was accepted for review by the Medical Device Bureau of Health Canada.
Both applications are pending.

Patients are being scanned at the Company's European demonstration sites, the
University of Vienna, Allgemeines Hospital and the Humboldt University of
Berlin, Charite Hospital and at the Instituto Nacional de Cancerologia (National
Cancer Institute) in Mexico City, Mexico. The additional studies obtained from
these clinical sites will be used in the Company's CD-ROM clinical atlas.

On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995, was granted with 28 claims. The
Company currently has 12 U.S. patents and one International patent and has filed
additional United States and foreign patent applications, which are pending.



                                                                     (Continued)


                                      F-15
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(1)      BACKGROUND (Continued)

The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the CTLMR
device is completed and finally gains Federal Drug Administration marketing
clearance, that the Company will achieve a profitable level of operations.


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Use of estimates

                The preparation of financial statements in conformity with
                generally accepted accounting principles requires management to
                make estimates and assumptions that affect the reported amounts
                of assets and liabilities and disclosure of contingent assets
                and liabilities at the date of the financial statements and the
                reported amounts of revenues and expenses during the reporting
                period. Actual results could differ from those estimates.

         (b) Cash and cash equivalents

                Holdings of highly liquid investments with original maturities
                of three months or less and investment in money market funds are
                considered to be cash equivalents by the Company.

         (c) Inventory

                Inventories, consisting principally of raw materials,
                work-in-process and completed units under testing, are carried
                at the lower of cost or market. Cost is determined using the
                first-in, first-out (FIFO) method.

                Due to recent technological advances resulting in overall lower
                costs for certain inventory components, the Company has reduced
                these components of its inventory to their net realizable value.
                The inventory valuation adjustments are reflected in the
                statement of operations and amounted to $910,444, $547,942, and
                $2,648,491, for the years ended June 30, 2003 and 2002, and for
                the period December 10, 1993 (date of inception) to June 30,
                2003, respectively.








                                                                     (Continued)



                                      F-16
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (d) Prototype equipment

                The direct costs associated with the final CTLMR prototypes have
                been capitalized. On June 17, 1996 the Company's Director of
                Research and Development and the Director of Engineering decided
                to discontinue with the development of the then current
                generation proprietary scanner and data collection system
                (components of the prototype CTLMR device) and to begin
                development of a third generation scanner and data collection
                system. As a result, certain items amounting to $677,395 were
                reclassified as follows: $512,453 as research and development
                expense and $164,942 as computer and lab equipment. The original
                amortization period of two years was increased to five years to
                provide for the estimated period of time the clinical equipment
                would be in service to gain FDA approval.

                During the fiscal year ended June 30, 1998, the costs associated
                with the various pre-production units available for sale have
                been reclassified as inventory and the remaining costs which
                will no longer benefit future periods were expensed to research
                and development costs.

         (e) Property, equipment and software development costs

                Property and equipment are stated at cost, less accumulated
                depreciation and amortization. Depreciation and amortization are
                computed using straight-line methods over the estimated useful
                lives of the related assets.

                Under the criteria set forth in Statement of Financial
                Accounting Standards No. 86, capitalization of software
                development costs begins upon the establishment of technological
                feasibility for the product. The establishment of technological
                feasibility and the ongoing assessment of the recoverability of
                these costs requires considerable judgment by management with
                respect to certain external factors, including, but not limited
                to, anticipated future gross product revenues, estimated
                economic life and changes in software and hardware technology.
                After considering the above factors, the Company has determined
                that software development costs, incurred subsequent to the
                initial acquisition of the basic software technology, should be
                properly expensed. Such costs are included in research and
                development expense in the accompanying statements of
                operations.







                                                                     (Continued)


                                      F-17
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (f) Research and development

                Research and development expenses consist principally of
                expenditures for equipment and outside third-party consultants
                which are used in testing and the development of the Company's
                CTLMR device, product software and compensation to specific
                company personnel. The non-payroll related expenses include
                testing at outside laboratories, parts associated with the
                design of initial components and tooling costs, and other costs
                which do not remain with the developed CTLMR device. The
                software development costs are with outside third-party
                consultants involved with the implementation of final changes to
                the developed software. All research and development costs are
                expensed as incurred.

         (g) Net loss per share

                In 1998, the Company adopted SFAS No. 128, ("Earnings Per
                Share"), which requires the reporting of both basic and diluted
                earnings per share. Basic net loss per share is determined by
                dividing loss available to common shareholders by the weighted
                average number of common shares outstanding for the period.
                Diluted loss per share reflects the potential dilution that
                could occur if options or other contracts to issue common stock
                were exercised or converted into common stock, as long as the
                effect of their inclusion is not anti-dilutive.

         (h) Patent license agreement

                The patent license agreement will be amortized over the
                seventeen year life of the patent, the term of the agreement.

         (i) Stock-based compensation

                The Company adopted Statement of Financial Accounting Standards
                No. 123. "Accounting for Stock-Based Compensation" ("SFAS 123"),
                in fiscal 1997. As permitted by SFAS 123, the Company continues
                to measure compensation costs in accordance with Accounting
                Principles Board Opinion No. 25, "Accounting for Stock Issued to
                Employees", but provides pro forma disclosures of net loss and
                loss per share as if the fair value method (as defined in SFAS
                123) had been applied beginning in fiscal 1997.






                                                                     (Continued)



                                      F-18
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (j) Long-lived assets

                Effective July 1, 1996, the Company adopted the provisions of
                Statement of Financial Accounting Standards No. 121. "Accounting
                for the Impairment of Long-Lived Assets and for Long-Lived
                Assets to be Disposed Of" ("SFAS 121"). This statement requires
                companies to write down to estimated fair value long-lived
                assets that are impaired. The Company reviews its long-lived
                assets for impairment whenever events or changes in
                circumstances indicate that the carrying value of an asset may
                not be recoverable. In performing the review of recoverability
                the Company estimates the future cash flows expected to result
                from the use of the asset and its eventual disposition. If the
                sum of the expected future cash flows is less than the carrying
                amount of the assets, an impairment loss is recognized. The
                Company has determined that no impairment losses need to be
                recognized through the fiscal year ended June 30, 2003.

                In August of 2001, the Company adopted the provisions of
                Statement of Financial Accounting Standards No. 144, Accounting
                for the Impairment or Disposal of Long-Lived Assets ("SFAS
                144"), which addresses accounting and financial reporting for
                the impairment and disposal of long-lived assets. This statement
                is effective for the Company beginning July 1, 2002. The Company
                does not believe that the adoption of SFAS 144 will have a
                significant impact on its financial position and results of
                operations.

         (k) Income taxes

                Effective December 10, 1993, the Company adopted the method of
                accounting for income taxes pursuant to the Statement of
                Financial Accounting Standards No. 109 "Accounting for Income
                Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability
                approach for financial accounting and reporting for income
                taxes. Under SFAS 109, the effect on deferred taxes of a change
                in tax rates is recognized in income in the year that includes
                the enactment date.











                                                                     (Continued)


                                      F-19
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (l) Intangible assets

                Intangible assets, consisting of the patent license agreement
                and UL and CE approvals are reflected in "Other Assets" on the
                balance sheet, net of accumulated amortization (Note 7). The
                patent license agreement has a fixed life of seventeen years and
                will continue to be amortized over its remaining useful life.
                The UL and CE approvals are subject to amortization and will be
                reviewed for potential impairment whenever events or
                circumstances indicate that carrying amounts may not be
                recoverable, in accordance with Statement of Financial
                Accounting Standards No. 142 "Goodwill and Other Intangible
                Assets" ("SFAS 142"). The Company has adopted SFAS 142 for its
                fiscal year beginning July 2001. As of June 30, 2003, the
                Company has determined that there is no impairment loss that
                needs to be recognized at this time with respect to the UL and
                CE approvals.

         (m) Deemed preferred stock dividend

                The accretion resulting from the incremental yield embedded in
                the conversion terms of the convertible preferred stock is
                computed based upon the discount from market of the common stock
                at the date the preferred stock was issued. The resulting deemed
                preferred stock dividend subsequently increases the value of the
                common shares upon conversion.

         (n) Discount on convertible debt

                The discount which arises as a result of the allocation of
                proceeds to the beneficial conversion feature upon the issuance
                of the convertible debt increases the effective interest rate of
                the convertible debt and will be reflected as a charge to
                interest expense. The amortization period will be from the date
                of the convertible debt to the date the debt first becomes
                convertible.

         (o) Comprehensive income

                SFAS 130, "Reporting Comprehensive Income", requires a full set
                of general purpose financial statements to be expanded to
                include the reporting of "comprehensive income". Comprehensive
                income is comprised of two components, net income and other
                comprehensive income. For the period from December 10, 1993
                (date of inception) to June 30, 2003, the Company had no items
                qualifying as other comprehensive income.



                                                                     (Continued)


                                      F-20
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (p) Employee benefits

                The Company provides their employees with a 401(K) plan. The
                employees are eligible to participate upon their hiring, and the
                Company does not contribute to the plan.

         (q) Impact of recently issued accounting standards

                Statement of Financial Accounting Standards No. 148, "Accounting
                for Stock-Based Compensation--Transition and Disclosure" ("SFAS
                148"), amends SFAS 123, "Accounting for Stock-Based
                Compensation." In response to a growing number of companies
                announcing plans to record expenses for the fair value of stock
                options, SFAS 148 provides alternative methods of transition for
                a voluntary change to the fair value based method of accounting
                for stock-based employee compensation. In addition, SFAS 148
                amends the disclosure requirements of SFAS 123 to require more
                prominent and more frequent disclosures in financial statements
                about the effects of stock-based compensation. The Statement
                also improves the timeliness of those disclosures by requiring
                that this information be included in interim as well as annual
                financial statements. In the past, companies were required to
                make pro forma disclosures only in annual financial statements.
                The transition guidance and annual disclosure provisions of SFAS
                148 are effective for fiscal years ending after December 15,
                2002, with earlier application permitted in certain
                circumstances. The interim disclosure provisions are effective
                for financial reports containing financial statements for
                interim periods beginning after December 15, 2002.

         (r) Reclassifications

                Certain amounts in the prior period financial statements have
                been reclassified to conform with the current period
                presentation.


(3)      MERGER

On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger. (see Note 17)





                                                                     (Continued)


                                      F-21
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)


                    Notes to Financial Statements (Continued)

(3)      MERGER (Continued)

As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.

As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.


(4)      GOING CONCERN

The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.

As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. To date, management has been able to
raise the necessary capital to reach this stage of product development and has
been able to fund any capital requirements. However, there is no assurance that
once the development of the CTLMR device is completed and finally gains FDA
marketing clearance, that the Company will achieve a profitable level of
operations.


(5)      INVENTORIES

Inventories consisted of the following:
                                                          June 30,
                                                    2003              2002
                                             ----------------  ---------------

      Raw materials                           $  1,307,052      $  1,865,858
      Work-in process                               49,784           155,389
      Completed units under testing                655,439           904,929
                                             -------------      ------------

                                              $  2,012,275      $  2,926,176
                                              ============      ============

The raw materials inventory is reflected net of inventory valuation adjustments
to the net realizable value for certain components. The valuation adjustments
are reflected in the statement of operations and amounted to $910,444, $547,942,
and $2,648,491, for the years ended June 30, 2003 and 2002, and for the period
December 10, 1993 (date of inception) to June 30, 2003, respectively.


                                                                     (Continued)


                                      F-22
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(6)      PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, less accumulated
depreciation:

                                                           June 30,
                                                    2003               2002
                                              --------------      -------------

    Furniture and fixtures                  $      260,880       $     283,367
    Building and land (See Note 10)              2,086,330           2,086,330
    Clinical equipment                              30,714              30,714
    Computers, equipment and software              349,268             774,492
    CTLMR software costs                           352,932             352,932
    Trade show equipment                              -                158,664
    Laboratory equipment                           222,560             194,034
                                               ------------       -------------

                                                 3,302,684          3,880,533
    Less: accumulated depreciation              (1,173,346)         (1,588,356)
                                              --------------      -------------

             Totals                         $    2,129,338         $  2,292,177
                                              =============        ============

The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:

              Furniture, fixtures, clinical, computers, laboratory
                equipment and trade show equipment                 5-7 years
              Building                                              40 years
              CTLM(R) software costs                                 5 years

Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLMR software at June 30, 2003 and 2002 are $0 and $0, respectively, which
represents the net realizable value of the CTLMR software at the end of each
period presented.

Amortization expense related to the CTLMR software for each period presented in
the statement of operations is as follows:

                           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
                                                          =========





                                                                     (Continued)


                                      F-23
<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(7)      OTHER ASSETS

<TABLE>
<CAPTION>
Other assets consist of the following:
                                                                            June 30,
                                                               ----------------------------------
                                                                     2003              2002
                                                               -----------------  ---------------
         <S>                                                         <C>                <C>
   Patent license agreement, net of accumulated
     amortization of $170,882 and $136,706, respectively       $     410,118        $    444,294
   UL and CE approvals, net of accumulated
     amortization of $8,225 and $8,225, respectively                 430,302             430,302
   Security deposits                                                  -                   -
                                                               ----------------    -------------

         Totals                                                $     840,420        $    874,596
                                                               ==============       ============
</TABLE>

During June 1998, the Company finalized an exclusive Patent License Agreement
with its former chief executive officer. (See Note 21) The officer was the owner
of patents issued on December 2, 1997 which encompassed the technology of the
CTLMR . Pursuant to the terms of the agreement, the Company was granted the
exclusive right to modify, customize, maintain, incorporate, manufacture, sell,
and otherwise utilize and practice the Patent, all improvements thereto and all
technology related to the process, throughout the world. The license shall apply
to any extension or re-issue of the Patent. The term of license is for the life
of the Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
7,000,000 shares of common stock (See Note 17). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owned
the patent.


(8)      ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                      June 30,
                                        ---------------------------------
                                              2003              2002
                                        -------------      -------------

     Accounts payable - trade           $     447,511      $    790,676
     Accrued property taxes payable            14,085            14,085
     Accrued compensated absences             126,721            91,637
     Accrued interest payable                 130,024            97,500
     Accrued wages payable                    218,664           243,661
                                        -------------      ------------

              Totals                    $     937,005      $  1,237,559
                                        =============      ============



                                                                     (Continued)


                                      F-24
<PAGE>




                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(9)      OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:
                                                        June 30,
                                             -----------------------------
                                                 2003             2002
                                             ------------    -------------

    Accrued compensation-stock options       $ 1,014,486     $  1,192,736
                                             -----------     ------------

                                             $ 1,014,486     $  1,192,936
                                             ===========     ============


(10)     SHORT-TERM DEBT

Short-term debt consisted of the following:
                                                        June 30,
                                            --------------------------------
                                                  2003             2002
                                            --------------    -------------

         Loan payable                       $     300,407    $    300,407
         Loan payable to officer                     -             53,310
         Mortgage payable                            -            750,000
         Loan payable to related party               -            350,000
                                            --------------    ------------

                                            $     300,407    $  1,453,717
                                            =============    ============

The Company has borrowed a total of $475,407, from an unrelated third-party on
an unsecured basis. The loan accrues interest at a rate of 6% per annum and is
payable on demand. The Company has repaid $175,000 as of June 30, 2002. Accrued
interest of $90,500 is reflected in accrued expenses on the balance sheet.
Additionally, on January 27, 2000 the Company borrowed $500,000 from an
unrelated third-party on an unsecured basis. The holder had the option to be
repaid in warrants, at an exercise price of $.35 per share. As the Company's
common stock was trading in excess of the $.35 at the date of the note, a
discount of $500,000 was recorded on the transaction, in accordance with the
guidelines of EITF Abstract No. 96-13. The discount was amortized over the term
of the note (see Note 7). The note and accrued interest ($530,000) was repaid on
July 18, 2000. The Company's repayment of $530,000 was originally rejected by
the maker of the note, and the funds were placed in and escrow account with the
Company's legal counsel. A settlement was reached during the year ended June 30,
2001, and the Company issued 810,000 shares of its common stock on January 25,
2001, when the fair market value of the stock was $1.72 per share. As a result,
the Company recorded additional interest expense in the amount of $863,200.
Finally, on June 8, 2000, the Company issued a 10% convertible promissory note
in the amount of $110,000. The note was to be repaid on July 10, 2000, or it
would be converted into convertible preferred stock at the option of the holder.
If the closing of the pending convertible preferred






                                                                     (Continued)


                                      F-25
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(10)     SHORT-TERM DEBT (Continued)

stock issuance did not take place on July 10, 2000, the Company would issue to
the note holder, a warrant to purchase 50,000 shares of the Company's common
stock at an exercise price equal to 110% of the closing price of the common
stock at such date provided under the terms of the agreement. On August 23,
2000, the Company repaid the $110,000 debenture, including accrued interest of
$2,291, and issued a warrant to purchase 50,000 shares of the Company's stock at
an exercise price of $1.452 per share.

During the year ended June 30, 1999, the officers of the Company made loans
totaling $1,433,487. The loans were non-interest bearing and originally due by
August 31, 1999. On May 18, 1999 the officers were issued a total of 2,171,743
shares of stock as full satisfaction ($874,100) of the loans outstanding at that
date. During the year ended June 30, 2000, the officers loaned an additional
$352,241. During the year ended June 30, 2000 a portion of the loans were
repaid, $21,633 in cash and $430,795 in common stock of the Company, with an
additional $292,000 of cash repayments being made during the year ended June 30,
2001. One of the officers loaned the Company $10,000 during 2002, which was
repaid one month later, and $81,000 during 2003. All of these loans were repaid
during the year ended June 30, 2003.

The Company also borrowed $750,000 from an unrelated third-party by utilizing
the equity of their building as collateral on a mortgage (See Note 6). The
mortgage note was due on June 11, 2003 and was amortized over 15 years with a
balloon payment to be made on June 11, 2003. A 5% loan origination fee and a 2%
finder's fee were paid upon the closing of the mortgage. The mortgage was repaid
during the year ended June 30, 2003.

The Company had received various loans from related parties (stockholders of the
Company) during the year ended June 30, 1999 totaling $1,093,000. A total of
$605,000 had been repaid as of June 30, 1999. These loans bore interest at rates
varying from 6% to 15%, and accrued interest as of June 30, 1999 amounted to
$38,921. An additional $600,000 was loaned by related parties during the year
ended June 30, 2000. The Company repaid a total of $588,000 ( $35,000 in cash
and $553,000 in common stock of the Company) during the year ended June 30,
2000, including accrued interest of $85,945 ($5,000 in cash and $80,945 in
common stock). The remaining balance of $500,000 was repaid on July 18, 2000.

During the year ended June 30, 2002, the Company borrowed $350,000 from the
investor funding the equity line of credit. (See Note 11) The loan was
originally to be repaid August 1, 2002, however the term of the loan was
mutually extended, with payments to be deducted from the next seven "puts" made
by the Company on the equity line at $50,000 per "put". The amount will be
withheld from the proceeds being funded to the Company as repayment on the loan.
Interest on the loan accrues at 2% per month with the total accrued interest
amounting to $7,000 during the year ended June 30, 2002. The loan was repaid
during the year ended June 30, 2003.






                                                                     (Continued)


                                      F-26
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(11)     OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>

Other operating expenses are detailed as follows:

                                                                            From Inception
                                                                             (December 10,
                                           Year Ended        Year Ended         1993) to
                                         June 30, 2003     June 30, 2002     June 30, 2003
                                         -------------     -------------    --------------
<S>                                               <C>           <C>              <C>
Certification expenses                    $    38,814    $    45,735      $    84,549
Advertising and promotion expenses             62,325        173,956        1,232,245
Clinical expenses                              56,024        102,178          690,215
Consulting expenses                           377,272        380,049        4,257,365
Insurance costs                               382,932        316,256        1,587,416
Inventory restocking costs                       --             --            377,006
Professional fees                             512,779        405,236        3,123,825
Sales and property taxes                       49,632         54,405          504,085
Stockholder expenses                          128,391        178,303          646,644
Trade show expenses                           143,889        160,806        1,285,199
Travel and subsistence costs                  238,322        552,875        2,015,109
Rent expense                                    8,630         11,435          324,970
Loan placement expenses and fees                 --           15,000          671,494
Liquidated damages costs                         --             --            140,000
Settlement expenses                           841,853        176,750        1,018,603
Death benefit expenses                           --          286,225          286,225
                                          -----------    -----------      -----------

         Total other operating expenses   $ 2,840,863    $ 2,859,209      $18,244,950
                                          ===========    ===========      ===========

</TABLE>



(12)     EQUITY LINE OF CREDIT

On August 17, 2000 the Company finalized a financing agreement with a private
institutional equity investor which contains two component parts, a $25 million
Private Equity Agreement and a private placement of 500 shares of Series K
convertible preferred stock as bridge financing in the amount of $5,000,000 (See
Note 16). On May 15, 2002, the Company entered into a second private equity
agreement which replaced the original Private Equity Agreement. The terms of the
second Private Equity Agreement were substantially equivalent to the terms of
the original agreement, except that (i) the commitment period is three years
from the effective date of a registration statement covering the second Private
Equity Agreement shares, (ii) the minimum amount we must draw through the end of
the commitment period is $2,500,000, (iii) the minimum stock price requirement
has been reduced to $.20, and (iv) the minimum average trading volume has been
reduced to $40,000.




                                                                     (Continued)

                                      F-27
<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(12)     EQUITY LINE OF CREDIT (Continued)

On October 29, 2002, the Company entered into a new "Third Private Equity Credit
Agreement" which the Company intends to supplement the second Private Equity
Agreement. The terms of the Third Private Equity Credit Agreement are
substantially equivalent to the terms of the prior agreement, in that (i) the
commitment period is three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment is $15,000,000, (iii) the minimum amount we must draw through
the end of the commitment period is $2,500,000, (iv) the minimum stock price
requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $20,000. The conditions to draw under this
private equity line, as described above, may materially limit the draws
available to the Company. On November 7, 2002 the Company filed a registration
statement on Form S-2 to register 5,500,000 shares underlying the Third Private
Equity Credit Agreement, which was declared effective by the SEC on November 21,
2002. On December 30, 2002 the Company filed a registration statement on Form
S-2 to register an additional 9,750,000 shares underlying the Third Private
Equity Credit Agreement, which was declared effective by the SEC on January 16,
2003. On April 11, 2003 the Company filed a registration statement on Form S-2
to register an additional 9,800,000 shares underlying the Third Private Equity
Credit Agreement, which was declared effective by the SEC on May 13, 2003.

The Private Equity Agreement commits the investor to purchase up to $25 million
of common stock subject to certain conditions pursuant to Regulation D over the
course of 12 months after an effective registration of the shares. The timing
and amounts of the purchase by the investor are at the sole discretion of the
Company. However, they do have to draw down a minimum of $10 million from the
credit line over the twelve-month period. The purchase price of the shares of
common stock are set at 91% of the market price. The market price, as defined in
the agreement, is the average of the three lowest closing bid prices of the
common stock over the ten day trading period beginning on the put date and
ending on the trading day prior to the relevant closing date of the particular
tranche.

This financing agreement has no warrants attached to either the bridge financing
or the private equity line. Furthermore, the Company was not required to pay the
investor's legal fees, but the Company does pay a 5% consulting fee for the
money funded in this transaction. The Company sold $2,840,000 of common stock
under the terms of the agreement during the year ended June 30, 2001. The total
shares issued by the Company amounted to 3,407,613. The Company incurred
$139,985 of consulting fees and recorded $303,666 of deemed interest expense as
a result of the 9% discount off of the market price. During the year ended June
30, 2002, an additional $5,585,000 of common stock was sold under the terms of
the equity line agreement, and the Company issued a total of 11,607,866 shares
of common stock. The Company incurred $296,250 of consulting fees and recorded
$628,805 of deemed interest expense as a result of the 9% discount off of the
market price. During the year ended June 30, 2003, an additional $7,881,000 of
common stock was sold under the terms of the equity line agreement, and the
Company issued a total of 29,390,708 shares of common stock. The Company
incurred $211,800 of consulting fees and recorded $856,772 of deemed interest
expense as a result of the 9% discount off of the market price.




                                                                     (Continued)


                                      F-28
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(13)     LEASES

The Company had entered into a lease arrangement which expired in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 6) and the obligation has been
recorded as debt. At June 30, 2003, there were no additional payments to be made
on the lease.

The Company also leases certain office equipment under operating leases expiring
in future years. Minimum future lease payments under the non-cancelable
operating lease having a remaining term in excess of one year as of June 30,
2003 are as follows:

                           Year ending June 30,                  Amount
                           -------------------                   ------
                                     2004                      $    5,604
                                     2005                           5,604
                                     2006                           4,159
                                     Thereafter                     2,492
                                                                ---------

                  Total minimum future lease payments           $  17,859
                                                                =========


(14)     INCOME TAXES

No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $50,507,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $19,950,000 and $15,050,000 at June 30, 2003 and 2002,
respectively. The Company has reduced the deferred tax asset resulting from its
tax loss carryforwards by a valuation allowance of an equal amount as the
realization of the deferred tax asset is uncertain. The net change in the
deferred tax asset and valuation allowance from July 1, 2002 to June 30, 2003
was an increase of approximately $4,900,000.




                                                                     (Continued)


                                      F-29
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(15)     REDEEMABLE CONVERTIBLE PREFERRED STOCK

On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at
a purchase price of $10,000 per share and two year warrants to purchase 65,625
shares of the Company's common stock at an exercise price of $.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the Securities
Act of 1933, as amended. A total of 43,125 warrants were exercised during the
year ended June 30, 2000, and an additional 9,375 warrants were exercised during
the year ended June 30, 2001.

The Series G Preferred Stock had no dividend provisions. The preferred stock was
convertible, at any time, for a period of two years thereafter, in whole or in
part, without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula stated that the holder of the
Series G Preferred Stock would receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to the lesser of $.54 or seventy-five
percent (75%) of the Average Closing Price of the Company's common stock for the
ten-day trading period ending on the day prior to the date of conversion.

In connection with the sale, the Company issued three preferred shares to an
unaffiliated investment banker for placement and legal fees, providing net
proceeds to the Company of $350,000. The shares underlying the preferred shares
and warrant are entitled to demand registration rights under certain conditions.

Pursuant to the Registration Rights Agreement ("RRA") the Company was required
to register 100% of the number of shares that would be required to be issued if
the Preferred Stock were converted on the day before the filing of the S-2
Registration Statement. In the event the Registration Statement was not declared
effective within 120 days, the Series G Holders had the right to force the
Company to redeem the Series G Preferred Stock at a redemption price of 120% of
the face value of the preferred stock. The Registration Statement was declared
effective on July 29, 2000. During the year ended June 30, 2000, the Series G
Preferred Stock was converted into 3,834,492 shares of the Company's common
stock.


(16)     CONVERTIBLE PREFERRED STOCK

On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock. All Series of the convertible preferred stock are not redeemable and
automatically convert into shares of common stock at the conversion rates three
years after issuance.

The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.

                                                                     (Continued)


                                      F-30
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

The holders of the Series A Preferred Stock could have converted up to 50% prior
to May 28, 1996, and may convert their remaining shares subsequent to May 28,
1996 without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.

The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.

The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.

As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.

The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.






                                                                     (Continued)


                                      F-31
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.

The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.

The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.

On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases (see Series I).





                                                                     (Continued)


                                      F-32
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

As of June 30, 2000, the Series B Preferred Stock has been converted into
30,463,164 shares of the Company's common stock, and 60 shares were canceled at
the request of the holder.

During the years ended June 30, 1999 and 1998 the Company issued a total of six
Private Placements of convertible preferred stock (see schedule incorporated
into Note 15). The Private Placements are summarized as follows:

    Series C Preferred Stock
    ------------------------
    On October 6, 1997, the Company finalized the private placement to foreign
    investors of 210 shares of its Series C Convertible Preferred Stock at a
    purchase price of $10,000 per share and warrants to purchase up to 160,000
    shares of the Company's common stock at an exercise price of $1.63 per
    share, and warrants to purchase up to 50,000 shares of the Company's common
    stock at an exercise price of $1.562 per share. The agreement was executed
    pursuant to Regulation S as promulgated by the Securities Act of 1933, as
    amended. As of June 30, 2001, 40,000 warrants at the $1.63 exercise price
    were exercised, and the remaining 140,000 warrants had expired. The
    remaining 50,000 warrants ($1.562 exercise price) are outstanding as of June
    30, 2001.

    The Series C Preferred Stock is convertible, at any time, commencing 45 days
    from the date of issuance and for a period of three years thereafter, in
    whole or in part, without the payment of any additional consideration, into
    fully paid and nonassessable shares of the Company's no par value common
    stock based upon the "conversion formula". The conversion formula states
    that the holder of the Series C Preferred Stock will receive shares
    determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
    in effect at the time of conversion.

    The "Conversion Price" shall be equal to seventy-five percent (75%) of the
    Average Closing Price of the Company's common stock; however, in no event
    will the "Conversion Price" be greater than $1.222. Pursuant to the
    Regulation S documents, the Company was also required to escrow an aggregate
    of 3,435,583 shares of its common stock (200% of the number of shares the
    investor would have received had the shares been converted on the closing
    date of the Regulation S sale).

    In connection with the sale, the Company paid an unaffiliated investment
    banker $220,500 for placement and legal fees, providing net proceeds to the
    Company of $1,879,500.

    Series D Preferred Stock
    ------------------------
    On January 9, 1998, the Company finalized the private placement to foreign
    investors of 50 shares of its Series D Convertible Preferred Stock at a
    purchase price of $10,000 per share and warrants to purchase up to 25,000
    shares of the Company's common stock at an exercise price of $1.22 per
    share. The agreement was executed pursuant to Regulation S as promulgated by
    the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had
    expired.




                                                                     (Continued)


                                      F-33
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

    The Series D Preferred Stock is convertible, at any time, commencing 45 days
    from the date of issuance and for a period of three years thereafter, in
    whole or in part, without the payment of any additional consideration, into
    fully paid and nonassessable shares of the Company's no par value common
    stock based upon the "conversion formula". The conversion formula states
    that the holder of the Series D Preferred Stock will receive shares
    determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
    in effect at the time of conversion. The "Conversion Price" shall be equal
    to seventy-five percent (75%) of the Average Closing Price of the Company's
    common stock.

    In connection with the sale, the Company issued four preferred shares to an
    unaffiliated investment banker for placement fees and paid legal fees of
    $5,000, providing net proceeds to the Company of $495,000. The shares
    underlying the preferred shares and warrant are entitled to demand
    registration rights under certain conditions.

    Series E Preferred Stock
    ------------------------
    On February 5, 1998, the Company finalized the private placement to foreign
    investors of 50 shares of its Series E Convertible Preferred Stock at a
    purchase price of $10,000 per share and warrants to purchase up to 25,000
    shares of the Company's common stock at an exercise price of $1.093 per
    share. The agreement was executed pursuant to Regulation S as promulgated by
    the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had
    expired.

    The Series E Preferred Stock is convertible, at any time, commencing 45 days
    from the date of issuance and for a period of three years thereafter, in
    whole or in part, without the payment of any additional consideration, into
    fully paid and nonassessable shares of the Company's no par value common
    stock based upon the "conversion formula".

    The conversion formula states that the holder of the Series E Preferred
    Stock will receive shares determined by dividing (i) the sum of $10,000 by
    the (ii) "Conversion Price" in effect at the time of conversion. The
    "Conversion Price" shall be equal to seventy-five percent (75%) of the
    Average Closing Price of the Company's common stock.

    In connection with the sale, the Company issued four preferred shares to an
    unaffiliated investment banker for placement fees and paid legal fees of
    $5,000, providing net proceeds to the Company of $495,000. The shares
    underlying the preferred shares and warrant are entitled to demand
    registration rights under certain conditions.





                                                                     (Continued)


                                      F-34
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

    Series F Preferred Stock
    ------------------------
    On February 20, 1998, the Company finalized the private placement to foreign
    investors of 75 shares of its Series F Convertible Preferred Stock at a
    purchase price of $10,000 per share. The agreement was executed pursuant to
    Regulation S as promulgated by the Securities Act of 1933, as amended.

    The Series F Preferred Shares pay a dividend of 6% per annum, payable in
    Common Stock at the time of each conversion and are convertible, at any
    time, commencing May 15, 1999 and for a period of two years thereafter, in
    whole or in part, without the payment of any additional consideration, into
    fully paid and nonassessable shares of the Company's no par value common
    stock based upon the "conversion formula". The conversion formula states
    that the holder of the Series F Preferred Stock will receive shares
    determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
    in effect at the time of conversion. The "Conversion Price" shall be equal
    to seventy percent (70%) of the Average Closing Price of the Company's
    common stock.

    In connection with the sale, the Company paid an unaffiliated investment
    banker $50,000 for placement and legal fees, providing net proceeds to the
    Company of $700,000. The shares underlying the preferred shares and warrant
    are entitled to demand registration rights under certain conditions.

    Series H Preferred Stock
    ------------------------
    On June 2, 1998, the Company finalized the private placement to foreign
    investors of 100 shares of its Series H Convertible Preferred Stock at a
    purchase price of $10,000 per share and Series H-"A" warrants to purchase up
    to 75,000 shares of the Company's common stock at an exercise price of $1.00
    per share, and Series H-"B" warrants to purchase up to 50,000 shares of the
    Company's common stock at an exercise price of $1.50 per share. The
    agreement was executed pursuant to Regulation D as promulgated by the
    Securities Act of 1933, as amended. As of June 30, 2001 none of the warrants
    had been exercised.

    The Series H Preferred Stock is convertible, at any time, for a period of
    two years thereafter, in whole or in part, without the payment of any
    additional consideration, into fully paid and nonassessable shares of the
    Company's no par value common stock based upon the "conversion formula". The
    conversion formula states that the holder of the Series H Preferred Stock
    will receive shares determined by dividing (i) the sum of $10,000 by the
    (ii) "Conversion Price" in effect at the time of conversion. The "Conversion
    Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of
    the Average Closing Price of the Company's common stock for the ten-day
    trading period ending on the day prior to the date of conversion.





                                                                     (Continued)


                                      F-35
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

    In connection with the sale, the Company issued eight preferred shares and
    paid $10,000 to an unaffiliated investment banker for placement and legal
    fees, providing net proceeds to the Company of $990,000. The shares
    underlying the preferred shares and warrant are entitled to demand
    registration rights under certain conditions.

    The Company was in technical default of the Registration Rights Agreement
    ("RRA"), which required the S-2 Registration Statement to be declared
    effective by October 2, 1998. Pursuant to the RRA, the Company was required
    to pay the Series H holders, as liquidated damages for failure to have the
    Registration Statement declared effective, and not as a penalty, 2% of the
    principal amount of the Securities for the first thirty days, and 3% of the
    principal amount of the Securities for each thirty day period thereafter
    until the Company procures registration of the Securities. On March 25,
    1999, the Company issued 424,242 shares of common stock as partial payment
    of the liquidated damages. The cumulative liquidated damages expense for the
    years ended June 30, 2001 amounted to $140,000.

    Series I Preferred Stock
    ------------------------
    On April 6, 1999, the Company entered into a Subscription Agreement with the
    Purchaser of the Series B Preferred Stock whereby the Company agreed to
    issue 138 shares of its Series I, 7% Convertible Preferred Stock
    ($1,380,000). The consideration for the subscription agreement was paid as
    follows:

                1. Forgiveness of approximately $725,795 of accrued interest
                (dividends) in connection with the Series B Convertible
                Preferred stock. The Company recorded the forgiveness of the
                accrued interest (dividends) by reducing the accrual along with
                a reduction in the accumulated deficit.
                2. Settlement of all litigation concerning the Series B
                Convertible Preferred stock.
                3. Cancellation of 112,500 warrants that were issued with the
                Series B Convertible Preferred stock.
                4. A limitation on the owner(s) of the Series B Convertible
                Preferred stock to ownership of not more than 4.99% of the
                Company's outstanding common stock at any one time.

    The Series I Preferred stock pays a 7% premium, to be paid in cash or freely
    trading common stock at the Company's sole discretion, upon conversion.





                                                                     (Continued)


                                      F-36
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

    The Series I Preferred Stock is convertible, at any time, in whole or in
    part, without the payment of any additional consideration, into fully paid
    and nonassessable shares of the Company's no par value common stock based
    upon the "conversion formula". The conversion formula states that the holder
    of the Series I Preferred Stock will receive shares determined by dividing
    (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time
    of conversion. The "Conversion Price" shall be equal to seventy-five percent
    (75%) of the Average Closing Price of the Company's common stock.

    Pursuant to the Series I designation and the Subscription Agreement, the
    Series I Holder, or any subsequent holder of the Preferred Shares, is
    prohibited from converting any portion of the Preferred Stock which would
    result in the Holder being deemed the beneficial owner of 4.99% or more of
    the then issued and outstanding common stock of the Company.

    Series K Preferred Stock
    ------------------------
    On July 17, 2000, the Company finalized the private placement to foreign
    investors of 500 shares of its Series K Convertible Preferred Stock at a
    purchase price of $10,000 per share. The agreement was executed in
    accordance with and in reliance upon the exemption from securities
    registration by Rule 506 under Regulation D as promulgated by the Securities
    Act of 1933, as amended.

    The Company was obligated to pay a 9% dividend on the convertible preferred
    in cash or common stock at its option semi-annually, on June 30, and
    December 31, of each calendar year or upon conversion date. The Company also
    had the option of redeeming the convertible preferred solely through the use
    of the private equity line by paying cash with the following redemption
    premiums:

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

If the Company, for whatever reason, was unable to redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a price equal to 87.5% of the
average of the three lowest closing bid prices (which need not be consecutive)
of the twenty consecutive trading days prior to the conversion date. The
agreement further provides that the Company register the underlying common
shares in a registration statement as soon as possible after the closing date,
and must use their best efforts to file timely and cause the registration
statement to become effective within 120 days from the closing date. The
registration statement was effective on December 13, 2000.





                                                                     (Continued)


                                      F-37
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(16)     CONVERTIBLE PREFERRED STOCK (Continued)

    The entire amount of the Series K Convertible Preferred Stock was converted
    or redeemed by the Company during the year ended June 30, 2001 into
    5,664,067 shares of common stock, including 219,225 shares as payment of the
    9% accrued dividend.

The agreements provided that no fractional shares shall be issued. In addition,
provisions were made for any stock dividends or stock splits that the Company
may issue with respect to their no par value common stock. The Company was also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.

The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 2003, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:





                                                                     (Continued)


                                      F-38
<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)

(16)  Convertible Preferred Stock (Continued)
<TABLE>
<CAPTION>

                                          Series A               Series B               Series C               Series D
                                   Shares       Amount     Shares      Amount     Shares      Amount     Shares     Amount
                                  ---------- ------------- -------- ------------- -------- ------------- -------- ------------
<S>                                   <C>          <C>        <C>         <C>       <C>        <C>           <C>        <C>
Balance at June 30, 1995                  -           $ -        -           $ -        -           $ -        -          $ -

Sale of Series A                      4,000     3,600,000

Series A conversion                  (1,600)   (1,440,000)
                                  ---------- -------------

Balance at June 30, 1996              2,400     2,160,000

Sale of Series B                                               450     4,500,000

Series A conversion                  (2,400)   (2,160,000)

                                  ---------- ------------- -------- -------------

Balance at June 30, 1997                  -             -      450     4,500,000

Sale of preferred stock
   (Series C - H)                                                                     210     2,100,000       54      540,000

Conversion of preferred stock                                                        (210)   (2,100,000)     (25)    (250,000)
                                  ---------- ------------- -------- ------------- -------- ------------- -------- ------------

Balance at June 30, 1998                  -             -      450     4,500,000        -             -       29      290,000

Sale of Series I

Conversion of preferred stock                                  (60)     (600,000)                            (29)    (290,000)
                                  ---------- ------------- -------- ------------- -------- ------------- -------- ------------

Balance at June 30, 1999                  -             -      390     3,900,000        -             -        -            -

Conversion of preferred stock, net                            (390)   (3,900,000)
                                  ---------- ------------- -------- ------------- -------- ------------- -------- ------------

Balance at June 30, 2000                  -             -        -             -        -             -        -            -

Sale of Series K

Conversion of preferred stock
                                  ---------- ------------- -------- ------------- -------- ------------- -------- ------------

Balance at June 30, 2001                  -           $ -        -           $ -        -           $ -        -          $ -
                                  ========== ============= ======== ============= ======== ============= ======== ============

Additional information:
    Discount off market price                         25%                    18%                    25%                   25%
                                             =============          =============          =============          ============
    Fair market value-issue rate                   $ 8.31                 $ 3.25                 $ 1.63                $ 0.99
                                             =============          =============          =============          ============
    Deemed preferred stock dividend            $1,335,474              $ 998,120              $ 705,738              $182,433
                                             =============          =============          =============          ============
</TABLE>




<TABLE>
<CAPTION>
                                       Series E             Series F               Series H                Series I
                                  Shares     Amount    Shares     Amount     Shares     Amount      Shares        Amount
                                  -------- ----------- -------- -----------  -------  ------------ ----------  -------------
<S>                                   <C>        <C>       <C>       <C>       <C>          <C>           <C>        <C>
Balance at June 30, 1995                -         $ -        -         $ -        -           $ -          -            $ -

Sale of Series A

Series A conversion


Balance at June 30, 1996

Sale of Series B

Series A conversion



Balance at June 30, 1997

Sale of preferred stock
   (Series C - H)                      54     540,000       75     750,000      108     1,080,000

Conversion of preferred stock         (30)   (300,000)     (75)   (750,000)
                                  -------- ----------- -------- -----------  -------  ------------

Balance at June 30, 1998               24     240,000        -           -      108     1,080,000

Sale of Series I                                                                                         138      1,380,000

Conversion of preferred stock         (24)   (240,000)                          (40)     (400,000)
                                  -------- ----------- -------- -----------  -------  ------------ ----------  -------------

Balance at June 30, 1999                -           -        -           -       68       680,000        138      1,380,000

Conversion of preferred stock, net                                              (68)     (680,000)      (138)    (1,380,000)
                                  -------- ----------- -------- -----------  -------  ------------ ----------  -------------

Balance at June 30, 2000                -           -        -           -        -             -          -              -

Sale of Series K

Conversion of preferred stock
                                  -------- ----------- -------- -----------  -------  ------------ ----------  -------------

Balance at June 30, 2001                -         $ -        -         $ -        -           $ -          -            $ -
                                  ======== =========== ======== ===========  =======  ============ ==========  =============

Additional information:
    Discount off market price                     25%                  30%                    25%                       25%
                                           ===========          ===========           ============             =============
    Fair market value-issue rate               $ 1.07               $ 1.24                 $ 0.57                    $ 0.38
                                           ===========          ===========           ============             =============
    Deemed preferred stock dividend          $182,250             $318,966               $351,628                 $ 492,857
                                           ===========          ===========           ============             =============
</TABLE>



<TABLE>
<CAPTION>
                                          Series K                   Total
                                    Shares       Amount      Shares       Amount
                                  ----------- ------------- ---------  -------------
<S>                                     <C>          <C>        <C>         <C>
Balance at June 30, 1995                   -           $ -         -            $ -

Sale of Series A                                               4,000      3,600,000

Series A conversion                                           (1,600)    (1,440,000)
                                                            ---------  -------------

Balance at June 30, 1996                                       2,400      2,160,000

Sale of Series B                                                 450      4,500,000

Series A conversion                                           (2,400)    (2,160,000)
                                                              -------    -----------


Balance at June 30, 1997                                         450      4,500,000

Sale of preferred stock
   (Series C - H)                                                501      5,010,000

Conversion of preferred stock                                   (340)    (3,400,000)
                                                            ---------  -------------

Balance at June 30, 1998                                         611      6,110,000

Sale of Series I                                                 138      1,380,000

Conversion of preferred stock                                   (153)    (1,530,000)
                                  ----------- ------------- ---------  -------------

Balance at June 30, 1999                   -             -       596      5,960,000

Conversion of preferred stock, net                              (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                        12.5%
                                              =============
    Fair market value-issue rate                    $ 1.13
                                              =============
    Deemed preferred stock dividend               $ 708,130
                                              =============
</TABLE>
                                                                     (Continued)


                                      F-39
<PAGE>



                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK

On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company (See
Statement of Stockholders' Equity).

The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.

During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.

In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expense has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock were issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.





                                                                     (Continued)

                                      F-40
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.

As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends (See Note 16).

Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock options tendered
in the transaction. The excess of fair market value at July 15, 1995
approximated $.57 per share on the 996,400 shares issued.

During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends (See Note 16), accounted for the
issuance of 1,081,962 shares ($2,808,643). The remaining 799,333 shares were
issued as follows:

                1. Services rendered by independent consultants in exchange for
                31,200 shares. Research and development expenses of $90,480 were
                charged as the fair market value at November 20, 1996 was $2.90
                per share.

                2. On December 20, 1996, bonus stock was issued to Company
                employees, 3,200 shares. Compensation expense of $10,463 was
                charged as the fair market value at that date was $3.27 per
                share.

                3. On January 3, 1997 bonus stock was issued to the officers of
                the Company, 350,000 shares. Compensation expense of $907,900
                was charged, as the fair market value at that date was $2.59 per
                share.





                                                                     (Continued)


                                      F-41
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

                4. On February 13, 1997, 4,000 shares were issued to an outside
                consultant in exchange for services performed. Consulting
                services of $11,500 were recorded, representing the fair market
                value ($2.88 per share) on that date.

                5. Services rendered by an independent consultant during June
                1997 in exchange for 199,000 shares. Consulting expenses of
                $548,149 were charged, as the fair market value on the date of
                the transaction was approximately $2.75 per share.

                6. Exercise of incentive stock options comprised of 27,000
                shares ($33,750) exercised and paid for at $1.25 per share, and
                334,933 shares ($1,103,203) acquired in the exchange for options
                tendered in a cash-less transaction.

                7. The Company repurchased 150,000 shares ($52,500), which had
                been previously acquired by one of its employees.

During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:

                1. Services rendered by independent consultants in exchange for
                100,000 shares. Consulting expenses of $221,900 were charged as
                the fair market value at July 10, 1997 was $2.22 per share.

                2. Services rendered by an independent consultant in exchange
                for 200,000 shares. Consulting expenses of $400,000 were charged
                as the fair market value at August 20, 1997 was $2.00 per share.

                3. Services rendered by an independent consultant in exchange
                for 40,000 shares. Consulting expenses of $67,480 were charged
                as the fair market value at September 4, 1997 was $1.69 per
                share.

                4. Services rendered by a public relations company in exchange
                for 166,000 shares. Public relations expenses of $269,750 were
                charged as the fair market value at October 24, 1997 was $1.63
                per share.

                5. On December 15, 1997, bonus stock was issued to Company
                employees, for 39,300 shares. Compensation expense of $41,658
                was charged as the fair market value at that date was $1.06 per
                share.



                                                                     (Continued)


                                      F-42
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

                6. Services rendered by an independent consultant in exchange
                for 250,000 shares. Consulting expenses of $320,000 were charged
                as the fair market value at January 7, 1998 was $1.28 per share.

                7. Services rendered by an independent consultant during May
                1998 in exchange for 200,000 shares. Consulting expenses of
                $140,000 were charged, as the fair market value on that date was
                $.70 per share.

                8. The Company sold 500,000 shares on May 15, 1998 in a
                Regulation D offering at $.40 per share, and received cash
                proceeds of $200,000.

                9. On June 5, 1998, the Company issued to its chief executive
                officer 3,500,000 shares ($1,890,000) as consideration for an
                exclusive Patent License Agreement (see Note 7). The market
                value of the stock on this date was $.54 per share. The excess
                of the fair market value of the common stock over the historical
                cost basis of the patent license was recorded as a distribution
                to the shareholder; recorded as a reduction to additional
                paid-in capital of $3,199,000.

                10. On June 11, 1998, the Company issued 25,000 shares to its
                corporate counsel as additional bonus compensation. Legal
                expenses of $12,750 were recorded as the market value of the
                stock on that date was $.51 per share.

                11. A total of 65,712 non-qualified stock options were exercised
                and proceeds of $22,999 ($.35 per share) was received by the
                Company.

On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Majority Shareholders consent with respect to the Amendment was effective on
February 18, 1999. The number of authorized shares was further increased to
150,000,000 shares during the shareholders annual meeting held on May 10, 2000,
and increased again during the 2002 annual meeting to 200,000,000 shares,
effective January 3, 2003.

During the year ended June 30, 1999, the Company issued a total of 12,804,131
shares ($5,837,656) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:

                                                                     (Continued)


                                      F-43
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

                1. The Company sold 200,000 shares on August 5, 1998 in a
                Regulation D offering at $.30 per share, and received cash
                proceeds of $60,000.

                2. In June 1999, the Company issued to its chief executive
                officer 3,500,000 shares ($1,890,000), representing the balance
                of shares to be issued as consideration for the exclusive Patent
                License Agreement (see Note 7).

                3. On November 9, 1998, the Company issued 15,000 shares to its
                corporate counsel as additional bonus compensation. Legal
                expenses of $10,800 were recorded as the market value of the
                stock on that date was $.72 per share.

                4. A total of 65,612 non-qualified stock options were exercised
                and proceeds of $22,964 ($.35 per share) was received by the
                Company. An additional $101,500 was received this year for stock
                sold in the prior year.

                5. A total of 480,000 shares were issued in connection with
                loans that were received by the Company. The total loan fee
                expenses (based on the market value of the stock at the date of
                issuance) charged to the statement of operations for the year
                was $292,694, or an average of $.61 per share.

                6. A total of 2,974,043 shares were issued as repayment of
                various accounts payable and loans payable during the year. A
                total of $1,196,992 (average of $.40 per share) of debts were
                satisfied through the issuance of the stock.

                7. On December 11, 1998, bonus stock was issued to Company
                employees, for 130,200 shares. Compensation expense of $79,422
                was charged as the fair market value at that date was $.61 per
                share.

                8. On March 26, 1999, the Company issued 424,242 shares of stock
                as partial-payment ($140,000) on the liquidated damages in
                connection with Series H Preferred Stock. The fair market value
                at that date was $.33 per share.

                9. During the year a total of 150,000 shares were issued for to
                various independent parties for services rendered to the
                Company. Expenses of $81,788 were charged, or an average price
                of $.50 per share.




                                                                     (Continued)


                                      F-44
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

During the year ended June 30, 2000, the Company issued a total of 56,214,003
shares ($12,997,328) of its common stock. The conversion of Convertible
Debentures accounted for the issuance of 4,060,398 shares ($3,958,223), the
conversion of Redeemable Convertible Preferred Stock (see Note 15) accounted for
the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible
Preferred Stock (see Note 16) accounted for the issuance of 41,581,242 shares
($6,806,219). The remaining 6,737,871 shares were issued as follows:

                1. The Company sold 100,000 shares on April 27, 2000 in a
                Regulation D offering at $1.57 per share, and received cash
                proceeds of $157,000.

                2. A total of 5,061,294 shares were issued as repayment of
                various loans payable during the year. A total of $1,067,665
                (average of $.21 per share) of debts were satisfied through the
                issuance of the stock.

                3. On November 12, 1999, bonus stock was issued to Company
                employees, for 145,000 shares. Compensation expense of $12,325
                was charged as the fair market value at that date was $.09 per
                share. The company also canceled 8,000 shares which had been
                previously issued to an independent contractor for consulting
                services. A reduction of $31,000 was recorded to consulting
                expenses for the year.

                4. A total of 7,297 shares were issued in connection with a loan
                that was received by the Company. The total loan fee expense and
                interest charged to income amounted to $2,408 during the year.

                5. During the year at total of 150,652 shares were issued for
                the exercise of warrants. On March 21, 2000, the Company
                received $100,000 for the exercise of 107,527 warrants at an
                exercise price of $.93 per share. The Company recorded a charge
                to consulting expense, as the fair market value at the date the
                warrants were issued was $1.84. The Company also received
                $21,563 from the exercise of 43,125 of Series G Preferred Stock
                warrants during the last quarter of the fiscal year.

                6. Exercise of 1,281,628 incentive stock options, ($395,810)
                exercised and paid for at prices ranging from $.13 per share to
                $1.13 per share.

During the year ended June 30, 2001, the Company issued a total of 13,916,169
shares ($12,333,724) of its common stock. The conversion of Convertible
Preferred Stock (see Note 16) accounted for the issuance of 5,664,067 shares
($5,580,531), and the common stock issued through the equity line of credit (See
Note 12) accounted for the issuance of 3,407,613 shares ($3,143,666). The
remaining 4,844,489 shares were issued as follows:


                                                                     (Continued)


                                      F-45
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

                1. A total of 810,000 shares were issued as repayment of a loan
                payable during the year. (See Note 10) A total of $530,000 of
                debt was satisfied through the issuance of the stock, and an
                additional $863,200 was charged as interest expense as the fair
                market value of the stock at the date of issuance was $1.72 per
                share.

                2. On December 7, 2000, 143,500 shares of bonus stock were
                issued to Company employees. Compensation expense of $219,555
                was charged as, the fair market value of the common stock at
                that date was $1.53 per share. The Company also issued 10,000
                shares on May 17, 2001. Consulting services of $8,300 was
                charged, as the fair market value of the stock was $.83 per
                share.

                3. During the year a total of 99,375 shares of common stock were
                issued for the exercise of warrants. The Company received $4,687
                from the exercise of 99,375 Series G Preferred Stock warrants.
                On August 10, 2000, the Company received $65,200 for the
                exercise of 40,000 Series C Preferred Stock warrants at an
                exercise price of $1.63 per share.

                4. Common stock issued to officers as a result of the exercise
                of their incentive stock options and their non-qualified stock
                options amounted to 3,755,414 shares. The options were exercised
                in a "cash-less" transaction, resulting in compensation to the
                officers of $1,848,566. An additional 26,200 shares were issued
                to employees upon the exercise of their incentive stock options
                during the year, at exercise prices ranging from $.35 per share
                to $.60 per share.

During the year ended June 30, 2002, the Company issued a total of 12,167,866
shares ($6,508,155) of its common stock. The common stock issued through the
equity line of credit (See Note 12) accounted for the issuance of 11,607,866
shares ($6,213,805). The remaining 560,000 shares were issued as follows:

                1. On November 21, 2001, 210,000 shares of bonus stock were
                issued to Company employees. Deferred compensation of $117,600
                was charged as, the fair market value of the common stock at
                that date was $.56 per share, and the stock will not be
                physically delivered to the employees until January 2003.

                2. A total of 350,000 shares were issued in conjunction with the
                settlement on March 22, 2002 of a lawsuit. Settlement expense of
                $176,750 has been charged on the statement of operations as the
                fair market value of the stock at the date of issuance was $.51
                per share.

                                                                     (Continued)


                                      F-46
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(17)     COMMON STOCK (Continued)

During the year ended June 30, 2003, the Company issued a total of 31,398,326
shares ($9,708,425) of its common stock. The common stock issued through the
equity line of credit (See Note 12) accounted for the issuance of 29,390,708
shares ($8,737,772). The remaining 2,007,618 shares were issued as follows:

                1. During December 2002, 258,500 shares of bonus stock were
                issued to Company employees. Compensation of $62,425 was charged
                as, the fair market value of the common stock on the dates of
                issuance averaged $.24 per share. In addition, the Company
                recorded an adjustment for deferred compensation, which resulted
                in a reduction to common stock for $73,500.

                2. A total of 1,194,118 shares were issued in conjunction with
                the settlement on June 5, 2003 of a lawsuit. Settlement expense
                of $841,853 has been charged on the statement of operations as
                the fair market value of the stock at the date of issuance was
                $.70 per share.

                3. During the year a total of 555,000 shares were issued to
                various parties for services rendered to the Company. Expenses
                of $139,875 were charged, or an average price of $.25 per share.


(18)     STOCK OPTIONS

During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.

On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This original
plan was revised and on January 3, 2000 the Board of Directors adopted the
Company's "2000 Non-Statutory Plan", and the plan was subsequently approved by
the shareholders on May 10, 2000 at the annual meeting. This plan provides for
the granting, exercising and issuing of incentive stock options pursuant to
Internal Revenue Code Section 422. The Company may grant incentive stock options
to purchase up to 4,850,000 shares of common

                                                                     (Continued)


                                      F-47
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)     STOCK OPTIONS (Continued)

stock of the Company. This Plan also allows the Company to provide long-term
incentives in the form of stock options to the Company's non-employee directors,
consultants and advisors, who are not eligible to receive incentive stock
options. In January 2002, our Board replaced the 1995 Plan and 2000 Plan with a
new combined stock option plan, the 2002 Incentive and Non-Statutory Stock
Option Plan (the "2002 Plan"), which provides for the grant of incentive and
non-statutory options to purchase an aggregate of 6,340,123 shares of Common
Stock. Upon approval of the 2002 Plan at the next shareholders' meeting, all
options outstanding under the 1995 and 2000 Plans will remain outstanding;
however, no new options will be granted under those plans. The Board of
Directors or a company established compensation committee has direct
responsibility for the administration of these plans.

The exercise price of the non-statutory stock options shall be equal to no less
than 50% of the fair market value of the common stock on the date such option is
granted.

In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").

Transactions and other information relating to the plans are summarized as
follows:

<TABLE>
<CAPTION>

         Employee Plan:
                                      Incentive Stock Options         Non Statutory Stock Options
                                  -------------------------------   ----------------------------
                                    Shares      Wtd. Avg.  Price         Shares        Wtd. Avg.  Price
                                  ----------    ----------------     -------------     ----------------
<S>                                    <C>            <C>              <C>                   <C>
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>

                                                                     (Continued)


                                      F-48
<PAGE>



                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)

<TABLE>
<CAPTION>

(18)     STOCK OPTIONS (Continued)

<S>                                   <C>             <C>              <C>                <C>
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          1.57                -
   Granted                        1,459,705           .38                -
   Exercised                             -                               -
   Canceled                         (81,788)          .74                -
                                 ----------                       ------------

Outstanding at June 30, 2003      7,837,507          1.19                -
                                 ==========                       ============
</TABLE>

** On June 25, 1999, the exercise price of 502,225 outstanding incentive stock
options was restated to $.60 per share. The Company has recorded compensation of
$330,569 during the fiscal year ended June 30, 1999 as a result of this
repricing, in accordance with the guidelines discussed in the proposed FASB
interpretation of APB Opinion No. 25.

         Director Plan:
                                                          Stock Options
                                                  Shares      Wtd. Avg.  Price
                                                  ------      ----------------
               Outstanding at June 30, 2000        -0-
                  Granted                        150,000            $.65
                  Exercised                         -
                  Canceled                          -
                                               ---------








                                                                     (Continued)


                                      F-49
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)  STOCK OPTIONS (Continued)

         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
                                               ===========

At June 30, 2003 and 2002, 4,941,985 and 2,244,045, respectively, of the
employee incentive stock options were vested and exercisable. The employee stock
options vest at various rates over periods up to ten years. At June 30, 2003 and
2002, 575,000 and 300,000, respectively, of the director stock options were
vested and exercisable. Shares of authorized common stock have been reserved for
the exercise of all options outstanding. The following summarizes the option
transactions that have occurred:

    On July 5, 1994 the Company issued non-qualified options to its officers and
    directors to purchase an aggregate of 750,000 shares of common stock at 35%
    of the fair market value at the date of grant. Compensation expense of
    $567,164 was recorded during the year ended June 30, 1996 as a result of the
    discount from the market value.

    On November 7, 1994, the Company granted 300,000 non-qualified options to
    its general counsel, currently a vice-president of the Company, at an
    exercise price of $0.50 per share. Deferred compensation of $150,000 was
    recorded on the transaction and is being amortized over the vesting period.
    The options were all exercised as of June 30, 1997.

    On March 30, 1995, the Company granted to the director of engineering, a
    non-qualified option to purchase up to 150,000 shares of common stock per
    year, or a total of 450,000 shares, during the period March 30, 1995 and
    ending March 31, 1999. The exercise price shall be $0.35 per share. The
    options do not "vest" until one year from the anniversary date. Deferred
    compensation of $472,500 was recorded on the transaction and is being
    amortized over the vesting period. The Company also granted the individual,
    incentive options to purchase 75,000 shares of common stock at an exercise
    price of $1.40 per share. The options originally expired on March 30, 1998,
    but were reissued on March 30, 1998 for two years.

    On July 5, 1995 the Company issued non-qualified options to its officers and
    directors to purchase an aggregate of 750,000 shares of common stock at 35%
    of the fair market value at the date of grant. Compensation expense was
    recorded during the year ended June 30, 1996 as a result of the discount
    from the market value.



                                                                     (Continued)


                                      F-50
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)  STOCK OPTIONS (Continued)

    On September 1, 1995, the Company issued to its three officers and directors
    incentive options to purchase 107,527 shares, individually, at an exercise
    price of $0.93 per share (110% of the fair market value). The options expire
    on September 1, 1999.

    On September 1, 1995, the Company issued to an employee incentive options to
    purchase 119,047 shares of common stock at an exercise price of $0.84 per
    share. The options expire on September 1, 1999

    At various dates during the fiscal year ended June 30, 1996, the Company
    issued to various employees incentive options to purchase 328,681 shares of
    common stock at prices ranging from $0.81 to $8.18. In all instances, the
    exercise price was established as the fair market value of the common stock
    at the date of grant, therefore no compensation was recorded on the issuance
    of the options. In most cases, one-third of the options vest one year from
    the grant date, with one-third vesting each of the next two years. The
    options expire in ten years from the grant date.

    On July 4, 1996, the Company issued to its three officers and directors
    incentive options to purchase 22,883 shares, individually, at an exercise
    price of $4.37 per share (110% of the fair market value). The options expire
    on July 4, 2001.

    On July 5, 1996 the Company issued non-qualified options to its officers and
    directors to purchase an aggregate of 750,000 shares of common stock at 35%
    of the fair market value at the date of grant. Deferred compensation of
    $1,891,500 was recorded on the transaction and is being amortized over the
    remaining term of the employment contracts (three years).

    At various dates during the year ended June 30, 1997, the Company issued to
    various employees incentive options to purchase 264,778 shares of common
    stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
    price was established as the fair market value of the common stock at the
    date of grant, therefore no compensation was recorded on the issuance of the
    options. In most cases, one-third of the options vest one year from the
    grant date, with one-third vesting each of the next two years. The options
    expire in ten years from the grant date.

    On July 4, 1997, the Company granted to its three officers and directors
    incentive options to purchase 34,000 shares, individually, at an exercise
    price of $2.94 per share (110% of the fair market value). The options expire
    on July 4, 2002.







                                                                     (Continued)


                                      F-51
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)  STOCK OPTIONS (Continued)

    On July 5, 1997, the Company issued non-qualified options to its officers
    and directors to purchase 750,000 shares of common stock at 35% of the fair
    market value at the date of grant. Deferred compensation of $1,340,625 was
    recorded on the transaction and is being amortized over the remaining term
    of the employment contract (two years).

    At various dates during the year ended June 30, 1998, the Company issued to
    various employees incentive options to purchase 204,905 shares of common
    stock at prices ranging from $.55 to $2.60. In all instances, the exercise
    price was established as the fair market value of the common stock at the
    date of grant, therefore no compensation was recorded on the issuance of the
    options. In most cases, one-third of the options vest one year from the
    grant date, with one-third vesting each of the next two years. The options
    expire in ten years from the grant date.

    On July 5, 1998, the Company issued non-qualified options to its officers
    and directors to purchase 750,000 shares of common stock at 35% of the fair
    market value at the date of grant. Deferred compensation of $622,500 was
    recorded on the transaction and is being amortized over the remaining term
    of the employment contract (one year).

    At various dates during the year ended June 30, 1999, the Company issued to
    various employees incentive options to purchase 786,635 shares of common
    stock at prices ranging from $.46 to $.60. In all instances, the exercise
    price was established as the fair market value of the common stock at the
    date of grant, therefore no compensation was recorded on the issuance of the
    options. In most cases, one-third of the options vest one year from the
    grant date, with one-third vesting each of the next two years. The options
    expire in ten years from the grant date.

    At various dates during the year ended June 30, 2000, the Company issued to
    its officers and various employees incentive options to purchase 3,139,459
    shares of common stock at prices ranging from $.23 to $4.38. The exercise
    price was established as the fair market value of the common stock at the
    date of grant for employees, and 110% of the fair market value at the date
    of grant for officers, therefore no compensation was recorded on the
    issuance of the options. The officers' options vested immediately, while the
    employees' options vest one-third from the grant date, with one-third
    vesting each of the next two years. The options expire in five years from
    the grant date.

    At various dates during the year ended June 30, 2001, the Company issued to
    its officers and various employees incentive options to purchase 1,915,700
    shares of common stock at prices ranging from $.65 to $2.85. The exercise
    price was established as the fair market value of the common stock at the
    date of grant for employees, and 110% of the fair market value at the date
    of grant for officers, therefore no compensation was recorded on the
    issuance of the options. The officers' options vested immediately, while the
    employees' options vest one-third from the grant date, with one-third
    vesting each of the next two years. The options expire in five years from
    the grant date.

                                                                     (Continued)


                                      F-52
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)     STOCK OPTIONS (Continued)

    In addition, on November 20, 2000 the Company granted to each director a
    stock option to purchase 50,000 shares (an aggregate of 150,000 shares) of
    the Company's common stock at an exercise price of $.65 per share. The
    option expires in ten years and shall become exercisable on a quarterly
    pro-rata basis (12,500 shares) from the date of grant. The option is not
    intended to be an incentive stock option pursuant to Section 422 of the
    Internal Revenue Code.

    At various dates during the year ended June 30, 2002, the Company issued to
    its officers and various employees incentive options to purchase 6,839,864
    shares of common stock at prices ranging from $.50 to $.93. The exercise
    price was established as the fair market value of the common stock at the
    date of grant for employees, and 110% of the fair market value at the date
    of grant for officers, therefore no compensation was recorded on the
    issuance of the options. Vesting for certain of the officers' options is
    immediately, while the other officers' options and the employees' options
    vest over varying periods up to three years from the date of grant. The
    options expire from four to ten years from the grant date.

    In addition, on November 20, 2001 the Company granted to each director a
    stock option to purchase 100,000 shares (an aggregate of 300,000 shares) of
    the Company's common stock at an exercise price of $.55 per share. The
    option expires in ten years and shall become exercisable on a quarterly
    pro-rata basis (25,000 shares) from the date of grant. The option is not
    intended to be an incentive stock option pursuant to Section 422 of the
    Internal Revenue Code.

    At various dates during the year ended June 30, 2003, the Company issued to
    its officers and various employees incentive options to purchase 1,459,705
    shares of common stock at prices ranging from $.19 to $.79. The exercise
    price was established as the fair market value of the common stock at the
    date of grant for employees, and 110% of the fair market value at the date
    of grant for officers, therefore no compensation was recorded on the
    issuance of the options. Vesting for certain of the officers' options is
    immediately, while the other officers' options and the employees' options
    vest over varying periods up to three years from the date of grant. The
    options expire from four to ten years from the grant date.

    In addition, at various dates during the year ended June 30, 2003 the
    Company granted to each new director a stock option to purchase 100,000
    shares (an aggregate of 400,000 shares) of the Company's common stock at
    exercise price ranging from $.20 to $.25 per share. The option expires in
    ten years and shall become exercisable on a quarterly pro-rata basis (25,000
    shares) from the date of grant. The option is not intended to be an
    incentive stock option pursuant to Section 422 of the Internal Revenue Code.


    The following table summarizes information about all of the stock options
outstanding at June 30, 2003:


                                                                     (Continued)


                                      F-53
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(18)     STOCK OPTIONS (Continued)

<TABLE>
<CAPTION>

                                           Outstanding options                       Exercisable options
                                           -------------------                       -------------------
                                                Weighted
                                                average
          Range of                              remaining        Weighted                         Weighted
      exercise prices         Shares            life (years)     avg. price         Shares        avg. price
      ---------------      --------------       ------------     -----------     ------------     ----------
           <S>                 <C>                <C>                <C>             <C>            <C>
       $ .11 - 1.25        7,394,542            4.34            $  .57            4,264,526        $ .59
        1.36 - 2.49          204,690            1.59              1.59              200,070         1.58
        2.50 - 3.75        1,088,275            2.91              2.91            1,052,389         2.93
       -----------------------------------------------------------------------------------------------------


       $ .11 - 3.75        8,687,507            4.10            $  .88            5,516,985      $  1.07
      ======================================================================================================
</TABLE>


At June 30, 2003, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing "additional incentive stock options" to
exercise their incentive stock options, and acquire shares of common stock. The
compensation cost that has been charged against income for the officers was
$(178,250) and $(262,200) for 2003 and 2002, respectively.

The weighted average Black-Scholes value of options granted during 2003 and 2002
was $.19 and $.36 per option, respectively. Had compensation cost for the
Company's fixed stock-based compensation plan been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per share
would have been as indicated below:

<TABLE>
<CAPTION>

                                                                                         From
                                                                                         Inception
                                                                                        (December 10,
                                                       Year Ended        Year Ended      1993) to
                                                     June 30, 2003     June 30, 2002     June 30, 2003
                                                     -------------     -------------    --------------
                  <S>                                      <C>               <C>               <C>
         Net loss to common shareholders -
                  As reported                        $  (8,180,524)    $   (7,677,560)  $ (68,844,322)
                                                     =============     ==============   =============

                  Pro forma                          $  (7,328,944)    $   (7,031,083)  $ (65,582,880)
                                                     =============     ==============   =============

         Basic loss per share -
                  As reported                        $      (.06)      $      (.06)     $      (1.10)
                                                     ==============    ==============   ==============

                  Pro forma                          $      (.05)      $      (.06)     $      (1.05)
                                                     ==============    ==============   ==============

</TABLE>






                                                                     (Continued)


                                      F-54
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)

<TABLE>
<CAPTION>

(18)     STOCK OPTIONS (Continued)

                 <S>                                         <C>             <C>                <C>
         Diluted loss per share -
                  As reported                        $      (.06)      $      (.06)      $      (1.10)
                                                     ================  ================  ==================

                  Pro forma                          $      (.05)      $      (.06)      $      (1.05)
                                                     ================  ================  ==================
</TABLE>


For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2003 and 2002, respectively: no dividend yield;
volatility of 107.8% and 79.2%; risk-free interest rate of 4% and 5%; and an
expected term of five years.


(19)     CONCENTRATION OF CREDIT RISK

During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance with the
bank at June 30, 2003 was $1,427,012.


(20)     FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these instruments. The fair value of the Company's debt obligations is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
At June 30, 2003 and 2002, the aggregate fair value of the Company's debt
obligations approximated its carrying value.


(21)     COMMITMENTS AND CONTINGENCIES

On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements expired on July 6, 1999 and new employment agreements were entered
into on August 29, 1999. The new agreements are for a term of five years and
provide for compensation to these individuals at the annual rate of $286,225,
$119,070, and $119,070, respectively. The agreements provide for annual
increases based upon changes in the Consumer Price Index, but in no event shall
the cost of living increase be less than seven percent. The agreements provide
for bonus arrangements and other normal benefits. The CEO passed away on August
13, 2001, and the President was appointed CEO.





                                                                     (Continued)


                                      F-55
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(21)     COMMITMENTS AND CONTINGENCIES (Continued)

At a special meeting of the Board of Directors held on August 28, 2001 the Board
voted to grant a death benefit of one year's salary ($286,225) to the
beneficiary of the CEO in recognition of his services as a co-founder, CEO and
inventor of the CTLM(R). As of the date of this report the Company has paid
$165,000 of this death benefit. The remaining balance of $131,225 is included in
accrued expenses on the balance sheet as of June 30, 2003.

On December 1, 2001, the Company entered into a new three-year employment
agreement with the CEO. Under this agreement, the CEO will receive an annual
base salary of $280,000 and incentive options to purchase up to an aggregate of
2,250,000 shares of the Company's common stock at an exercise price of $.60 per
share. The incentive stock options will vest at 750,000 shares per year starting
December 1, 2002.

As additional consideration for his development efforts in the CTLMR device, the
chief executive officer was granted a "development royalty" which will be paid
based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLMR device. The royalty percentages in the revised patent
licensing agreement, entered into on June 2, 1998, and approved at the
shareholders' annual meeting start at 10% and decrease to 6% as gross sales
volumes increase. The CEO had agreed that these royalty provisions would not
apply to any sales and deliveries of CTLM(R) systems made by the Company prior
to receipt of the PMA for the CTLM(R). In addition, following issuance of the
PMA, the Company and the CEO agreed that he would be paid guaranteed minimum
royalties of at least $250,000 per year based on the sales of the products and
goods in which the CTLM(R) patent is used. Due to his death in August 2001, his
interest in the patent license agreement passed to his estate. Our current Chief
Executive Officer, his widow, is the principal beneficiary of his estate.

On August 15, 2001, the Company entered into a three-year employment agreement
with its Chief Operating Officer at an annual salary of $110,000. The COO was
also granted 500,000 incentive stock options at an exercise price of $.77 per
share, the fair market value at the date of the grant, which will vest ratably
over the three year period.

On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. The contract also provided for the issuance of 75,000 restricted
shares of the Company's common stock. Compensation expense ($1.05 per share), in
the amount of $78,750 was recorded on the transaction. On April 6, 2000, the
contract was extended for fifteen months at an annual salary of $110,000, and on
July 6, 2001, it was further extended for eighteen months at an annual salary of
$125,000. During the year ended June 30, 2000, the Director also received 36,300
incentive stock options at an exercise price of $1.66 per share, the fair market
value at the date of the grant. On July 6, 2001, the Director was granted an
additional 100,000 incentive stock options at an exercise price of $.925 per
share, the fair market value at the date of the grant.


                                                                     (Continued)


                                      F-56
<PAGE>

                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)


(21)     COMMITMENTS AND CONTINGENCIES (Continued)

The Company has entered into agreements with various distributors located
throughout Europe, Asia, Canada, Mexico, Latin America and South America to
market the CTLMR device. The terms of these agreements range from eighteen
months to three years. The Company has the right to renew the agreements, with
renewal periods ranging from one to five years.

The Company is also a defendant in other legal proceedings arising in the course
of its business. In the opinion of management (based on the advice of counsel)
the ultimate resolution of these other legal proceedings should not have a
material adverse effect on the Company's financial position or annual results of
operations.




                                      F-57
<PAGE>




ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The following table sets forth certain information concerning our directors and
executive officers:


<TABLE>
<CAPTION>

Name                 Age                Position                  Year Elected or Appointed
----                 ---                --------                  -------------------------
<S>                  <C>                  <C>                                 <C>
Linda B. Grable      66        Chairman of the Board, Chief                 1994
                               Executive Officer

Allan L. Schwartz    61        Executive Vice-President, Chief              1994
                               Financial Officer and Director

Edward R. Horton     45        Chief Operating Officer                      2001

Deborah O'Brien      39        Senior Vice-President                        2003

Sherman Lazrus       68        Director                                     2002

Patrick J. Gorman    49        Director                                     2003

Edward Rolquin       74        Director                                     2003

Jay S. Bendis        56        Director                                     2003
</TABLE>


David E. Danovitch, Stanley A. Hirschman and Phil E. Pearce decided not to run
for re-election at the Annual Meeting on December 17, 2002. Sherman Lazrus,
Scott R. Yablon, Rolv H. Heggenhougen and Thomas P. Salmon were elected to the
Board of Directors on December 17, 2002. Mr. Yablon and Mr. Heggenhougen
resigned from the Board on January 13, 2003 and Mr. Salmon resigned on February
19, 2003.

Messrs. Gorman, Rolquin and Bendis were appointed by the Board of Directors on
January 16, February 25, and February 28, 2003 respectively.

Allan Schwartz and Linda Grable are our founders and as such may be deemed
"promoters" and "parents" as defined in the Rules and Regulations promulgated
under the Securities Act, as those terms are defined in the rules and
regulations promulgated under the Securities Act. Directors serve until the next
meeting of shareholders. Officers serve at the pleasure of the Board of
Directors.

We have adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley
Act of 2002 that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. .

Linda B. Grable
Ms. Grable has been our Chief Executive Officer since August 2001, and, since
its inception in 1993, has served as Chairman of the Board and Director of the
Company. She was our President from inception to August 2001. She has played a
major role in raising approximately $46 million in debt and equity funding for
the research and development of the CTLM(R) device. She has over 35 years
experience in negotiating funding with banking institutions for both medical and
real estate development businesses. Ms. Grable has over 20 years of executive
experience in the medical device industry, for both sales and marketing in the
U.S. and foreign countries. She is a graduate of Ohio State University and holds


                                       29
<PAGE>

a BA in Journalism and Marketing.

Allan L. Schwartz
Mr. Schwartz is Executive Vice-President and Chief Financial Officer of the
Company and is responsible for its financial affairs. He is an operationally
oriented executive with a wide range of management, marketing, field
engineering, construction, and business development experience. Prior to joining
the Company as a founder in 1993, he developed the Chronometric Trading System
for analyzing stock market trends using neural networks and developed
pre-engineered homes for export to Belize, Central America for S.E. Enterprises
of Miami, Florida. In 1991 he formed Tron Industries, Inc. for the development
of low-voltage neon novelty items and self-contained battery powered portable
neon. He is a graduate of C.W. Post College of Long Island University with a
B.S. in Business Administration. Previous innovations by Mr. Schwartz before
relocating to Florida have included the use of motion detection sensors in
commercial burglar alarm systems for Tron-Guard Security Systems. Inc. and the
use of water reclamation systems with automatic carwash equipment. Mr. Schwartz
has been a Director and Officer of the Company since its inception.

Edward R. Horton
Mr. Horton was appointed Chief Operating Officer by the Board of Directors in
August 2001 and is responsible for all operational activities including the
planning, purchasing, production, quality assurance, engineering and
distribution functions. Mr. Horton began his career almost 20 years ago in the
medical device industry beginning with Bristol Myers as a manufacturing
engineer. He then became the VP of Manufacturing and Operations for Microtek
Medical Inc. in 1993. From 1997 to 2001 he was a co-founder and Vice President
of Operations for Deka Medical, Inc. bringing the company from a start-up to a
revenue producing company with over $23 million in annual sales in just 4 years.
Mr. Horton holds a B.S. degree in Industrial Engineering from Bradley University
and a M.B.A. from University of North Florida.

Deborah O'Brien
Deborah O'Brien was appointed Senior Vice President by the Board of Directors on
September 15, 2003. Ms. O'Brien has been employed at IDSI since 1995. During her
tenure, she has held the positions of Director of Investor Relations, Vice
President of Corporate Communications and most recently, since September 2001,
Vice President of Business Development. Her responsibilities have included
developing and executing a strategic corporate communications campaign. She
managed internal communications as well as outside public relations agency
efforts to secure national print and broadcast media placements. In addition,
Ms. O'Brien was directly responsible for the development and establishment of
consumer and industry awareness of our CTLM(R) System via a media outreach which
targeted industry publications, national network television, radio,
nationally-circulated publications and high traffic internet sites.As Vice
President of Business Development, she was closely involved with various
regulatory and marketing projects and played an integral role in the development
and preparation of our PMA Application. She also supervised and managed the
collection of clinical data for the PMA process. Prior to joining IDSI, she
worked for seven years in the financial arena, managing investor accounts, and
in the medical device industry, marketing medical equipment. Ms. O'Brien began
her career in the mortgage loan industry as an account executive with Citibank.


                                       30
<PAGE>


Sherman Lazrus
Mr. Lazrus has been a Director since December 2002 and serves as a member of the
Compensation Committee. He has enjoyed a distinguished career with nearly 40
years' experience in government and private sector health care and health care
finance. He was elected to the Board of Directors of Emergency Filtration
Products, Inc., Las Vegas, NV (OTCBB: EMFP) in December 1998, and appointed as
Interim Chief Executive Officer in June 2001 and appointed Chairman of the Board
of Directors in August 2002. He continues to serve in these positions. Mr.
Lazrus presently also serves as President of American Medical Capital, a
division of American Medical Enterprises, LLC located in Bethesda, Maryland, a
financial services and investment banking company specializing in the healthcare
industry, a position he has held since 1991. Mr. Lazrus was initially employed
with the Federal Government and while at the Department of Health, Education and
Welfare in 1964 he was involved with the development of the Medicare and
Medicaid Programs and served as the Director of Policy Coordination for the two
programs. Also while employed by the Federal Government, Mr. Lazrus served from
1965 to 1966 in the office of the Director of the National Institute of Health
and was involved in planning activities in areas involving biomedical research.
He later administered the Social Security Administration's Disability Insurance
Research Programs as Director of Program Analysis. Mr. Lazrus's final Federal
Government position encompassed the administration of the military health care
system serving as the Deputy Assistant Secretary of Defense from 1974 to 1976.
In this position he was the Federal Government's senior career health official.
Mr. Lazrus also served in the State of Maryland's Governor's office as Director
of the Governor's Study Group on Vocational Rehabilitation from 1966 to 1968 and
later developed a comprehensive human services delivery system for the City of
Washington, D.C. from 1968 to 1972. While in the private sector, Mr. Lazrus from
1976 to 1978 was Vice President of American Medical International Inc., a major
NYSE hospital corporation, which owned and operated numerous hospitals around
the world. The company is now known as Tenet Healthcare Corporation. As a
developer Mr. Lazrus was responsible for the development of various Washington
D.C. area office buildings, shopping centers, industrial warehouses and
residential communities. Mr. Lazrus attended George Washington University where
he received A.A., B.A. and M.B.A. degrees.

Patrick J. Gorman
Mr. Gorman, a Certified Public Accountant practicing in West Islip, New York,
has been a Director since January 2003 and serves as Chairman of the Audit
Committee. He has enjoyed a distinguished 25-year career in both public and
private accounting. From 1991 to the present he has worked in private practice,
serving both publicly traded and privately held companies, specializing in
taxation. Mr. Gorman served as Corporate Tax Manager for Axsys Technologies,
Inc. in Deer Park, New York from 1987 to 1990 and Controller/Tax Manager for
Computer Associates in Jericho, New York from 1983 to 1986. Prior to joining
Computer Associates, he served as Tax Manager with Ernst & Young in Melville,
New York and Tax Accountant for Arthur Andersen in New York City. Mr. Gorman
holds a MS in taxation from Long Island University and is a member of the
NYSSCPA and the AICPA.

Edward Rolquin
Mr. Rolquin of Naples, Florida, a consultant and retired corporate executive,
has been a Director since February 2003 and serves as a member of the
COmpensation Committee. He has enjoyed a distinguished 48-year career in
management, sales and finance with international experience in the medical
industry. From 1989 to 1995, he served as a consultant for the Chinese
government on various import, export and technology transfer projects. From 1984
to 1992 Mr. Rolquin was the Founder and President of JR Micrographics in
Huntington, NY that specialized in medical records management. He has served in
a management and consultant capacity while working with major international
companies such as Anaconda Copper Mining Company in Chile and El Salvador from
1952 to 1984, Mobil Oil from 1976 to 1984, Cerro Corp., (an international mining
company in Peru) from 1962 to 1978, and Esso (Standard Oil) from 1957 to 1968.
Mr. Rolquin was responsible for equipping five hospitals for Anaconda, a 100-bed
hospital in Chile for Cerro Corp., a 50-bed dispensary for Mobil Oil, and a
hospital for Esso.

Jay S. Bendis
Mr. Bendis of Akron, Ohio, has been a Director since February 2003 and serves as
a member of the Audit Committee and is Chairman of the Compensation Committee.


                                       31
<PAGE>


He has over 30 years experience in sales and marketing and is currently
President of Transfer Technology Consultants, Akron, OH, where he specializes in
transferring new product concepts through to commercialization working with
established and start-up companies in both domestic and international markets.
He is also a partner in the Crystal Corridor Group, Hudson, OH, which works with
Kent State University's Liquid Crystal Institute in facilitating liquid crystal
technology. From 1995 to 2000, Mr. Bendis was Vice President of Sales and
Marketing and a Director of American Bio Medica Corp. a public company in
Kinderhook, NY, which develops and markets on-site drug abuse diagnostic kits.
From 1993 to 1999, he was the President and co-founder of Emerging Technology
Systems, Akron, OH, which is a research and development company specializing in
developing new concept medical devices. From 1990 to 1992, he was a co-founder
and Vice President of Sales and Marketing and a Director for Scientific Imaging
Instruments of Trumbull, CT. From 1985 to 1990, he served as National Sales
Manager of the XANAR Laser Corp., Colorado Springs, CO, a division of Johnson &
Johnson, where he directed its national sales force and developed its marketing
strategy for integrating high power lasers into the hospital market. From 1979
to 1984, he was the Sales and Marketing Manager for the IVAC Corp., San Diego,
CA, a division of Eli Lilly Corp. and has had sales and management experiences
with XEROX and A.M. International. He has also served as a member of the Edison
BioTechnology Center Advisory Council for the State of Ohio. Mr. Bendis
presently serves on the Boards of several private companies and earned his B.A.
in Marketing/Management from Kent State University.

Our Directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. Officers serve at the discretion
of the board.

AUDIT COMMITTEE
The Board of Directors has elected Patrick J. Gorman as Chairman of the Audit
Committee. In addition, the Board has determined that Mr. Gorman is an "audit
committee financial expert," as defined under new SEC regulations, who is
independent of management of the Company. Jay S. Bendis also serves as a member
of the Audit Committee.

COMPENSATION COMMITTEE
The Board of Directors has elected Jay S. Bendis as Chairman of the Compensation
Committee. Sherman Lazrus and Edward Rolquin also serve as members of the
Compensation Committee.

COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives a quarterly
retainer of $2,000 and $600 per diem fees for days in which a Board meeting is
attended or a non-employee board member is otherwise required to visit the
Company or spend a significant amount of a day on Company matters. Non-employee
directors are also reimbursed for travel expenses. Non-employee directors will
be eligible to receive options to purchase 100,000 shares per year of the
Company's common stock, vesting at 25,000 shares per quarter of service to the
Company. The shares shall be issued pursuant to the Company's 2002 Incentive and
Non-Statutory Stock Option Plan.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10 percent of our common
stock, to file with the SEC initial reports of ownership and reports of changes
in ownership, furnishing us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on review of the copies of such reports
furnished to us, all Section 16(a) filing requirements applicable to our
officers and directors were complied with during the year ended June 30, 2003.

AUDIT FEES
The independent auditors of the Company for the year ended June 30, 2003 were
Margolies, Fink & Wichrowski. The aggregate fees, including expenses billed by
Margolies, Fink & Wichrowski, in connection with the audit of the Company's
annual financial statements for the most recent fiscal year and for the review
of the Company's financial information included in its annual report on Form
10-KSB and its quarterly reports on Form 10-QSB were $23,435.

ALL OTHER FEES
There were no other fees, including expenses billed for other services rendered
to the Company by Margolies, Fink & Wichrowski during the year ended June 30,
2003.



                                       32
<PAGE>



ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

The following table sets forth the compensation awarded to, earned by or paid to
our Chief Executive Officer and other executive officers for services rendered
to us during fiscal 2003, 2002 and 2001. No other person during these years, who
served as one of our executive officers, had a total annual salary and bonus in
excess of $100,000. Also, see "Stock Option Plan-Option/SAR Grants in Last
Fiscal Year".

<TABLE>
<CAPTION>

                                             SUMMARY COMPENSATION TABLE

                                 Annual Compensation                     Long-Term Compensation

Name & Principal
Position               Fiscal Year      Salary      Other Annual    Restricted    Securities/Underlying
                                                    Compensation    Stock Awards      Option/SARs
<S>                       <C>            <C>            <C>             <C>              <C>
Linda B Grable, CEO       2001         $127,404                                        500,000
and Director              2002         $218,648                                        500,000
                          2003         $280,000                                        750,000 (2)

Richard J. Grable,        2001         $286,225                                        500,000
CEO and Director (1)      2002         $35,778

John d'Auguste (3)        2002         $73,769
President

Allan L. Schwartz,        2001         $127,404                                        500,000
Exec. V.P., CFO and       2002         $134,836                                        500,000
Director                  2003         $144,275                                        500,000 (2)

Edward R. Horton          2002         $96,673
COO(4)                    2003         $113,300                                        166,667

</TABLE>

     (1)  Mr. Grable passed away on August 13, 2001.
     (2)  The aggregate dollar value of the 2003 options, based on the averaged
          high and low price on June 30, 2003 are as follows: Linda B.
          Grable-$603,750; and Allan L Schwartz-$402,500.
     (3)  Mr. d'Auguste commenced employment on August 15, 2001 and resigned on
          March 14, 2002.
     (4)  Mr. Horton commenced employment on August 15, 2001.


EMPLOYMENT AGREEMENTS
---------------------
On August 29, 1999, we entered into five-year employment agreements with Richard
Grable, Allan Schwartz and Linda Grable. Under these agreements, base annual
salaries, are as follows: Richard Grable, $286,225; Linda Grable, $119,070; and
Allan Schwartz, $119,070. In addition, each person receives a car allowance of
$500 per month. Each employment agreement provides for performance bonuses,
health insurance, car allowances, and other customary benefits, and a cost of
living adjustment of 7% per annum. No bonuses have been paid to date.

At a special meeting of the Board of Directors held on August 28, 2001 the
Board, with Linda Grable abstaining, voted to grant a death benefit of one
year's salary ($286,225) to Richard Grable's beneficiary in recognition of his
services as a co-founder, CEO and inventor of the CTLM(R). As of the date of
this report we have paid $215,000 of this death benefit to Linda Grable, as
beneficiary of Richard Grable.

On August 15, 2001, we entered into a three-year employment agreement with our
Chief Operating Officer at an annual salary of $110,000. The COO was also
granted 500,000 incentive stock options at an exercise price of $.77 per share,
the fair market value at the date of the grant, which will vest ratably over the
three-year period.

On December 1, 2001, we entered into a new three-year employment agreement with
Linda Grable. Under this agreement, Ms. Grable will receive an annual base
salary of $280,000. Ms. Grable received incentive options to purchase up to an


                                       33
<PAGE>

aggregate of 2,250,000 shares of the Company's common stock at an exercise price
of $.60 per share. The incentive stock options will vest at 750,000 shares per
year starting December 1, 2002. In addition, she will also receive a car
allowance of $500 per month.

On September 15, 2003, we entered into a three-year employment agreement with
our Senior Vice-President at an annual salary of $ 95,000. The Senior
Vice-President was also granted 302,000 incentive stock options at an exercise
price of $1.13 per share, the fair market value at the date of the grant, which
will vest ratably over the three-year period.

The following table sets forth certain information with regard to the
Options/SAR grants by the Company to management for the fiscal year ended June
30, 2003. Linda B. Grable, Allan L. Schwartz and Edward Horton did not exercise
any options during fiscal 2003.

<TABLE>
<CAPTION>

                      Option/SAR Grants in Last Fiscal Year

                      No. of          % of Total
                      Securities      Options Granted     Exercise or        Market Price
                      Underlying      to Employees In     Base Price         On Date of      Expiration
Name                  Options         Fiscal Year         ($/Share)          Grant           Date
----                  Granted         ----------          ---------          ---------       --------
                      -------
<S>                      <C>              <C>                <C>                <C>            <C>
Linda B. Grable
Allan L. Schwartz      500,000            34%               $0.30             $0.27        8/30/04
Edward Horton

</TABLE>


Stock Option Plans
------------------
Our 1995 Stock Option Plan was approved by our Board of Directors and adopted by
the shareholders at the March 1995 annual meeting. The plan provided for the
granting, exercising and issuing of incentive options pursuant to Internal
Revenue Code, Section 422.

On August 30, 1999, we established an equity incentive plan. The shareholders
had to approve this plan within one year. The maximum number of shares that
could be granted under this plan is 15,000,000 shares of common stock and
5,000,000 shares of preferred stock. The series, rights and preferences of the
preferred stock were to be determined by our Board of Directors. This plan also
included any stock available for future stock rights under our 1995 Stock Option
Plan. On January 3, 2000 the Board of Directors decided to replace this equity
incentive plan and adopted our 2000 Non-Statutory Stock Option Plan so as to
provide a critical long-term incentive for employees, non-employee directors,
consultants, attorneys and advisors of the Company. On May 10, 2000 our
shareholders approved the 2000 Non-Statutory Stock Option Plan, which was
replaced with our 2002 Incentive and Non-Statutory Stock Option Plan approved by
our shareholders on March 13, 2002. Our Board of Directors has direct
responsibility for the administration of the plan. The Board of Directors
believes that our policy of granting stock options to such persons will continue
to provide us with a critical advantage in attracting and retaining qualified
candidates. In addition, the Stock Option Plan is intended to provide us with
maximum flexibility to compensate plan participants. It is expected that such
flexibility will be an integral part of our policy to encourage employees,
non-employee directors, consultants, attorneys and advisors to focus on the
long-term growth of stockholder value. The Board of Directors believes that
important advantages to us are gained by an option program such as the 2002
Incentive and Non-Statutory Stock Option Plan which includes incentives for
motivating our employees, while at the same time promoting a closer identity of
interest between our employees, non-employee directors, consultants, attorneys
and advisors on the one hand, and the stockholders on the other.

According to their stock option agreements, which are part of their employment
agreements, Mr. Richard J. Grable, Mr. Allan L. Schwartz and Mrs. Linda B.
Grable each received an option to purchase 2,500,000 shares of common stock or
preferred stock. These options are granted and vest in equal installments over a
five-year period. On August 30, 1999, the officers received vested options to
purchase 500,000 shares at an exercise price of $.23 per share (110% of the fair


                                       34
<PAGE>

market value of the shares on the date of grant, August 30, 1999). On each
subsequent anniversary date, August 30th, the officers received vested stock
options for an additional 500,000 shares at 110% of the fair market value of the
shares on that date. These stock option agreements terminate on August 30, 2004.
The employment and stock option agreements were approved by the Board of
Directors and were ratified by our shareholders at the annual meeting held on
November 20, 2000. As a result of his death on August 13, 2001, Mr. Grable's
unvested options to purchase 1,500,000 shares underlying his employment
agreement were cancelled.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
         ---------------------------------------------------------------

The following table shows the beneficial ownership of our common stock as of
September 25, 2003 regarding:

     o    each person that we know of who beneficially owns more than 5% of the
          outstanding shares of our common stock,
     o    each current director and executive officer, and
     o    all executive officers and directors as a group.

Name and Address             Number of Shares Owned      % of Outstanding
of Beneficial Owner          Beneficially (1)(2)         Shares of Common Stock
-------------------          ----------------------      -------------------

Linda B. Grable              18,300,274(3)                     10.7%
6531 NW 18th Court
Plantation, FL 33313

Allan L. Schwartz             6,454,400(4)                      3.8%
6531 NW 18th Court
Plantation, FL 33313

Edward Horton                   340,834(5)                      0.2%
6531 NW 18th Court
Plantation, FL 33313

Deborah O'Brien                 658,333(6)                      0.3%
6531 NW 18th Court
Plantation, FL 33313

Sherman Lazrus                   75,000(7)                      0.1%

Patrick J. Gorman               831,160(8)                      0.4%

Edward Rolquin                   50,000(7)                      0.1%

Jay S. Bendis                   105,000(7)                      0.1%

All officers and directors   26,815,001(9)                     15.7%
as a group (8 persons)



     (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 170,492,554 shares of common stock
          outstanding as of September 25, 2003 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 25,
          2003 are deemed outstanding for computing the percentage of that
          person and the group.

     (3)  Includes 1,750,000 shares subject to options and 12,758,507 shares
          owned by the estate of Richard Grable, of which Linda Grable is the
          sole heir and as to which she has sole voting control.


                                       35
<PAGE>

     (4)  Includes 2,000,000 shares subject to options and 9,000 shares owned by
          the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
          beneficial ownership.

     (5)  Includes 333,334 shares subject to options.

     (6)  Includes 158,333 shares subject to options.

     (7)  Includes 75,000 shares of options owned by Sherman Lazrus, 50,000
          shares of options owned by Edward Rolquin and 50,000 shares of options
          owned by Jay S. Bendis.

     (8)  Includes 50,000 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 1,083,334 shares subject to options held by Linda Grable,
          Allan Schwartz and Edward Horton. Also includes 9,000 shares owned by
          the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
          beneficial ownership.

Dividend Policy
To date, we have not declared or paid any dividends with respect to our common
stock, and the current policy of the Board of Directors is to retain any
earnings to provide for our growth. We do not anticipate paying cash dividends
on our common stock in the foreseeable future.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

Richard Grable and Linda Grable were husband and wife. Each of them was, and
Linda Grable continues to be, a "control person" as a result of her control of a
substantial portion of our outstanding stock.

In June 1998, we finalized an exclusive patent license agreement with Richard
Grable. Mr. Grable was the owner of the patent which encompasses the technology
for the CTLM(R). IDSI and Mr. Grable had previously entered into an oral
agreement for the exclusive license for the patent that was never memorialized
in written form. The term of the license is for the life of the patent (17
years) and any renewals, subject to termination, under specific conditions. As
consideration for this license, we issued to Mr. Grable 7,000,000 shares of
common stock. In addition, we agreed to pay Mr. Grable a royalty based upon a
percentage, ranging from 6% to 10%, of the net selling price (the dollar amount
earned from our sale, both international and domestic, before taxes minus the
cost of the goods sold and commissions or discounts paid) of all the products
and goods in which the patent is used. Mr. Grable agreed that these royalty
provisions will not apply to any sales and deliveries of CTLM(R) systems made by
IDSI prior to receipt of the PMA for the CTLM(R). In addition, following
issuance of the PMA, IDSI and Mr. Grable agreed that he would be paid guaranteed
minimum royalties of at least $250,000 per year based on the sales of the
products and goods in which the CTLM(R) patent is used. Upon Mr. Grable's death
in August 2001, his interest in the patent license agreement passed to his
estate, of which Linda Grable is the principal beneficiary.

In May 2002, Charlton loaned us $350,000 in order to partially cover our
short-term working capital needs. This loan is evidenced by a promissory note
dated May 29, 2002, due August 1, 2002, and bearing interest at a rate of 2% per
month. The loan is secured by a pledge of 1,000,000 shares of our common stock,
500,000 each by our Chief Executive Officer, Linda B. Grable, and by our
Executive Vice President and Chief Financial Officer, Allan L. Schwartz, and is
personally guaranteed by Ms. Grable and Mr. Schwartz. As of the date of this
report we have paid back this note in full.

In May 2002, Linda B. Grable loaned us an aggregate of $10,000. On June 12,
2002, we paid back the loans in full with cash without interest.

In November 2002, Linda B. Grable loaned us $81,000. On May 21, 2003, we paid
back the loan in full with cash without interest.


                                       36
<PAGE>



ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

EXHIBIT                        DESCRIPTION


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.
10.27   Consulting Agreement by and between IDSI and Anthony Giambrone, dated
        January 26, 2000. Incorporated by reference to our Post-Effective
        Amendment No. 4 to Registration on Form S-2, File Number 333-60405.
10.28   Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
        Linda B. Grable signed August 30, 1999. Incorporated by reference to our
        Post-Effective Amendment No. 4 to Registration on Form S-2, File Number
        333-60405.
10.29   2000 Non-Statutory Stock Option Plan Incorporated by reference to our
        Form 10-KSB for the fiscal year ending June 30, 2000 filed on September
        14, 2000.
10.40   Distribution Agreement between IDSI and Medical Imaging Systems, Inc.
10.41   Distribution Agreement between IDSI and Medical Imaging Services, Ltd.
10.42   Employment Agreement with John d'Auguste, President. Incorporated by
        reference to our Form 10-QSB for the quarter ending September 30, 2001,
        filed on November 13, 2001.


                                       37
<PAGE>

10.43   Employment Agreement with Ed Horton, Chief Operating Officer.
        Incorporated by reference to our Form 10-QSB for the quarter ending
        September 30, 2001, filed on November 13, 2001.
10.44   Employment agreement with Linda B. Grable, Chief Executive Officer.
        Incorporated by reference to our Form 10-QSB for the quarter ending
        September 30, 2001, filed on November 13, 2001.
10.45   2002 Incentive and Non-Statutory Stock Option Plan. Incorporated by
        reference to our Schedule 14A proxy statement filed on February 7, 2002.
10.47   Amendment dated as of November 15, 2001, to Amended Private Equity
        Credit Agreement, dated as of November 30, 2000 between IDSI and
        Charlton Avenue LLC. The Amended Private Equity Credit Agreement is
        incorporated by reference to our Amendment No. 2 to registration on Form
        S-2, File Number 333-46546, and the Amendment to the Amended Private
        Equity Agreement is incorporated by reference to our Form 10-QSB for the
        quarter ending March 31, 2002, filed on May 15, 2002.
10.48   Private Equity Agreement between IDSI and Charlton Avenue, LLC dated as
        of May 15, 2002. Incorporated by reference to our Form 10-QSB for the
        quarter ending March 31, 2002, filed on May 15, 2002.
10.49   Registration Rights Agreement between IDSI and Charlton Avenue, LLC
        dated as of May 15, 2002. Incorporated by reference to our Form 10-QSB
        for the quarter ending March 31, 2002, filed on May 15, 2002.
10.50   $350,000 Promissory Note dated May 21, 2002, from IDSI to Charlton
        Avenue, LLC. Incorporated by reference to our Amendment No. 1 to our
        Registration on Form S-2, File Number 333-88604 filed on June 28, 2002.
10.51   $750,000 Balloon Promissory Note and Mortgage from IDSI to Peter
        Wolofsky, incorporated by reference to our Form 8-K filed on June 25,
        2002.
10.52   Private Equity Agreement between IDSI and Charlton Avenue LLC dated as
        of May 15, 2002, with exhibits. Incorporated by reference to our
        Amendment No. 1 to our Registration on Form S-2, File Number 333-88604
        filed on June 28, 2002.
10.53   Amendment dated as of July 18, 2002, to Private Equity Agreement dated
        as of May 15, 2002 between IDSI and Charlton Avenue LLC. Incorporated by
        reference to our Amendment No. 2 to our Registration on Form S-2, File
        Number 333-88604 filed on July 18, 2002.
10.54   Letter of Intent between IDSI and Sanotech Group Srl. dated January 8,
        2002.
10.55   Distributorship Agreement between IDSI and JAMCO Medical Inc. dated
        March 22, 2002.
10.56   Financial Services Consulting Agreement between Linda B. Grable and
        iCapital Finance, Inc. dated September 19, 2002.
10.57   Third Private Equity Credit Agreement between IDSI and Charlton Avenue
        LLC dated as of October 29, 2002, with exhibits.
10.58   Registration Rights Agreement between IDSI and Charlton Avenue LLC dated
        as of October 29, 2002.
10.59   Termination letter of distributorship agreement between IDSI and JAMCO
        Medical Inc. dated May 28, 2003.
10.60   Employment Agreement with Deborah O'Brien, Senior Vice President dated
        September 15, 2003.
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

 (b)     Reports on Form 8-k

         A Form 8-K was filed on January 17, 2003 regarding the resignations on
         January 13, 2003 of Scott Yablon and Rolv Heggenhougen, from our Board
         of Directors. On January 16, 2003 a meeting of the Board of Directors
         was held, and Patrick J. Gorman was appointed to fill one of the vacant
         seats on the Board.

         A Form 8-K was filed on February 26, 2003 regarding the resignation on
         February 19, 2003 of Thomas P. Salmon from our Board of Directors. On
         February 25, 2003, a meeting of the Board of Directors was held, and
         Edward Rolquin was appointed to fill Mr. Salmon's seat on the Board.


                                       38
<PAGE>

         A Form 8-K was filed on March 3, 2003 regarding the February 28, 2003
         meeting of the Board of Directors, where Jay Bendis was appointed to
         fill the vacant seat on the Board.

         A Form 8-K was filed on April 30, 2003 regarding the April 29, 2003
         press release we issued announcing the submission of our Premarket
         Approval Application (PMA) with the U.S. Food and Drug Administration
         (FDA).

         A Form 8-K was filed on June 19, 2003, stating that we paid in full a
         $750,000 Balloon Promissory Note secured by a first mortgage on our
         headquarters facility located at 6531 NW 18th Court, Plantation,
         Florida. A Satisfaction of Mortgage was executed by the lender, Peter
         Wolofsky, on June 12, 2003 and recorded in the Public Records of
         Broward County, Florida on June 19, 2003.

         A Form 8-K was filed on August 27, 2003, stating that we are in receipt
         of a letter from the FDA stating that it has completed its review of
         the Company's PreMarket approval application (PMA). The FDA, in its
         letter, outlined deficiencies in the PMA submission, which must
         resolved before the FDA's review could be completed. The FDA stated
         that until these deficiencies are resolved, the PMA application is not
         approvable in its current form. The FDA identified measures to make the
         PMA approvable and the Company will amend its PMA application to
         address the deficiencies in the letter.

         A Form 8-K was filed on August 28, 2003, stating that Schering AG of
         Berlin, Germany announced, through a press release today, that their
         innovative method for breast cancer detection shows positive results in
         their clinical phase 1 study. The fluorescent dyes used in the clinical
         study were used in conjunction with our proprietary Computed Tomography
         Laser Breast Imaging System (CTLM(R)).


ITEM 14.    CONTROLS AND PROCEDURES
            -----------------------

As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
along with our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer along with the our Chief Financial Officer concluded that our
disclosure controls and procedures are effective. There have been no significant
changes in our internal controls or in other factors, which could significantly
affect internal controls subsequent to the date we carried out our evaluation.

Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.


                                       39
<PAGE>




                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized,


                            IMAGING DIAGNOSTIC SYSTEMS, INC.


                             By:  /s/Linda B. Grable
                                  Linda B. Grable, Chairman of the Board and
                                  Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Annual Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signatures                    Title                                   Date
----------                    -----                                   ----
<S>                            <C>                                    <C>

/s/Linda B. Grable            Chairman of the Board and Chief         September 26, 2003
------------------
Linda B. Grable               Executive Officer


/s/Allan L. Schwartz          Director, Executive Vice-President      September 26, 2003
--------------------
Allan L. Schwartz             (Principal Accounting and Financial
                              Officer)


/s/ Sherman Lazrus            Director                                September 26, 2003
--------------------
Sherman Lazrus


/s/ Patrick J. Gorman         Director                                September 26, 2003
---------------------
Patrick J. Gorman


/s/ Edward Rolquin            Director                                September 26, 2003
------------------
Edward Rolquin


/s/ Jay S. Bendis             Director                                September 26, 2003
-----------------
Jay S. Bendis
</TABLE>


                                       40
<PAGE>