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, 2001

                                       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. -0-

Based on the average closing bid and asked prices of the common stock on the
latest practicable date, September 26, 2001, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $77,546,254.

The number of shares outstanding of each of the issuer's classes of common
stock, as of September 26, 2001 was 121,390,219. As of September 26, 2001, the
issuer had no shares of preferred stock outstanding.

                       Documents Incorporated By Reference
                                     [None]


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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 Mammography device
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. The components of the laser system are purchased from two
unaffiliated parties and assembled and installed by us into the CTLM(R).

In connection with the CTLM(R) clinical investigational 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
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. 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 2001, 192,200 new cases
of invasive breast cancer will be diagnosed among women in the United States,
and approximately 40,600 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 and is
the leading cause of cancer death among women aged 40 to 55. 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
98% to 72% 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

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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
further diagnostic procedures, including diagnostic mammography and ultrasound,
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. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.

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 800,000 surgical biopsies are performed each year in
the United States, of which approximately 700,000 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 a bilateral exam will be $125
to $150. 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.

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 $150. Like mammography, ultrasound is generally performed
at specialty clinics or hospitals.

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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
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, 2001, we had an accumulated deficit of
$52,986,238 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 10 months as substantial
costs and expenses continue due principally to the anticipated commercialization
of the CTLM(R), development of, and clinical trials for, the CTLM(R) 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. The components of the laser system are purchased from two
unaffiliated parties, and assembled and installed into the CTLM(R) by us.

Using the patient scans from our investigational clinical trials, we intend to
develop 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 in less than 15 minutes. 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 minutes.
Each scan takes approximately 6-8 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 computer disc (CD) 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 20 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

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is greater resolution of the area where the specific abnormality resides.

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 is not 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 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 and PDT 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, one of which is PDT compounds, a cancer-seeking drug 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 and PDT's. 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

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


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 Good
Manufacturing Practices ("GMPs"), 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 expect to submit our PMA application by the end of 2001 and
will request expedited review of our PMA application. See Item 1.
"Business-Regulatory and Clinical Status, United States/FDA". If we were unable
to obtain prompt FDA approval, it would 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

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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 addition, unapproved products subject to the PMA requirements must receive
prior FDA Certificate of Exportability in order to be exported outside of the
United States. On September 25, 2001, we received from the FDA a Certificate of
Exportability for the CTLM(R).


REGULATORY AND CLINICAL STATUS

United States/FDA In June 1998, the FDA granted our application for an
investigational device exemption ("IDE") in order to conduct human clinical
trials of the CTLM(R) beyond the very limited trials we conducted in 1996. The
IDE permitted us to scan 20 patients at our in-house facilities in Plantation,
Florida, subject to review and monitoring by an Institutional Review Board
("IRB"). The IRB consisted of seven physicians and one physicist, all
unaffiliated with us whose task was to assure, both in advance and by periodic
review, that appropriate steps are taken to protect the rights and welfare of
the persons participating as subjects of our research. The IRB was not
responsible for nor did it participate in obtaining the data, the interpretation
of data or clinical results, or the approval of the CTLM(R). In September 1998,
we formally submitted the first and second series of the 20 patient in-vivo

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(human) images and corresponding interpretation data to the FDA.

The FDA responded to the submission in October 1998 asking that we limit future
submissions to significant findings, milestones, annual reports, or changes that
may affect the safety of the CTLM(R). In all we scanned 20 women at our in-house
facility. These scans produced no significant findings, milestones or changes
that would affect the safety of the CTLM(R) so there were no additional
submissions except for our request to expand the study to the Nassau County
Medical Center in East Meadow, New York ("NCMC"), where access to women with
breast cancer would be more practical.

We received FDA approval to conduct the NCMC investigational study in February
1999. This IDE application is limited to 275 subjects. We selected the number
275 based on the distribution of the types of breast conditions outlined in the
IDE protocol. Pursuant to our original discussions with the FDA, approximately
425 cases will be in the PMA application when it is submitted. Because of the
limited experience acquired from the 20-patient in-house study, we elected to
establish one clinical site, NCMC, and begin testing before expanding the next
series of clinical tests to additional locations. In July 1999, the NCMC
clinical investigational trials began.

The IRB for NCMC is comprised of 23 unaffiliated members. The IRB was already
formed and was not impaneled specifically for the CTLM(R) investigational
clinical trials.

The results of each patient's scan are compared to her mammogram by NCMC and
then the scan and the mammogram are forwarded to us for our review. The
comparisons may be done individually after each scan or in batches. Depending on
the quality of the images, the software or hardware of the CTLM(R) may be
adjusted to obtain maximum clarity.

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 275 subjects to be tested at each of the 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.

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.
Investigation is ongoing to evaluate how these observed parameters could be used
to enhance detectability of breast abnormalities. Additionally, we are
developing an atlas of clinical examples on CD-ROM for teaching purposes. With a
large number of examples of each breast condition typically encountered, the
atlas is expected to be of great value.

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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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.


After reviewing the FDA Modular Submission sequence of a PMA application, we
decided to request permission to follow the guidelines of the "Standardized
Shell for Modular Submission" for the FDA approval process. The FDA granted the
request and 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. See "Government Regulation".

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


Module #     Description of Module Submission       Date Filed    Date Approved
--------     --------------------------------       ----------    -------------
Module 1     General Information & Safety           9/27/2000     Pending
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      9/25/01
PMA          PMA Submission                         Not Filed

In February 2001 we completed the 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 August 2001 we renewed our clinical
investigational contract with University of Virginia Health System to continue
clinical testing of the CTLM(R). These studies will be used in our PMA
submission and 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.


SALES AND MARKETING
At present, our CEO is also the Director of Sales. See "Management." As Director
of Sales, she is in charge of locating, obtaining, and coordinating with

                                       9
<PAGE>

strategic marketing and distribution companies who have established marketing
capabilities, both domestic and international. The target domestic market
includes most of the over 10,000 mammography centers across the United States,
which are located in both large and small hospitals and in private clinics. The
international target market is large government and private hospitals.

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 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. See "Government Regulation". We intend to commence
international sales of the CTLM(R) in Europe and Asia 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 currently have an application pending with Health Canada which upon approval,
would enable us to sell the CTLM(R) in Canada.

INTERNATIONAL DISTRIBUTORS

Since 1997, we have entered into international distribution agreements with
distributors in various countries. These agreements provide for initial terms of
two to three years, beginning upon our receipt of the PMA. Each agreement
contains a minimum sales quota adapted to the country in question and contains a
one or two-year extension in the event that the sales quota for the initial term
is met. After receiving the CE Mark, UL safety classification and ISO 9002, a
review of our existing distributors was made by management to determine which of
the distributors have fulfilled their obligations and have demonstrated their
willingness to launch sales of the CTLM(R) in their respective countries. As a
result of this review several distributors were terminated.

In April 2001, after the mutual termination of our initial Canadian distributor,
Cycle of Life Technologies, Inc., we entered into a distribution agreement with
Medical Imaging Systems, Inc. ("MIS"), a distributor of medical products based
in Ontario, Canada. This agreement gives MIS the exclusive right to distribute
and sell the CTLM(R) in Canada for a period of three years with the possibility
of a five-year extension of the exclusive distribution and sales rights if MIS
purchases a minimum of two CTLM(R) systems in Canada at a purchase price of
$250,000 per system during the first six months following Health Canada approval
of sale of the CTLM(R); if this requirement is not met, we would be able to
terminate the agreement. As of the date of this filing, we have not received

                                       10
<PAGE>

approval from Health Canada nor have we earned any revenues from this agreement.

We are currently negotiating with a potential distributor in Mexico after
termination by mutual agreement in August 2001 of our initial Mexican
distributor.

In July 2001 we entered into an exclusive distribution agreement with Medical
Imaging Services, Ltd. of the UK. The agreement is for a term of two years, with
a renewal option by us for an additional two years, provided that the sales
quota and performance standards in the initial two-year term of the distribution
agreement are met.

The following is a summary of our existing international distribution
agreements. All agreements are exclusive, except as indicated:

                      INTERNATIONAL DISTRIBUTORS BY COUNTRY

 Country                    Term      Renewal Period
 -------                    ----      --------------
Australia                  3 years        2 years
Bosnia                     3 years        5 years
Brunei                     3 years        2 years
Canada                     3 years        5 years
China                      3 years        2 years
Egypt                      3 years        5 years
Hong Kong                  3 years        2 years
India                      3 years        2 years
Indonesia                  3 years        2 years
Iran                       3 years        5 years
Iraq                       3 years        5 years
Israel                     2 years        2 years
Jordan                     3 years        5 years
Kuwait                     3 years        5 years
Lebanon                    3 years        5 years
Macau                      3 years        2 years
Macedonia                  3 years        5 years
Malaysia                   3 years        2 years
New Zealand                3 years        2 years
Philippines                3 years        2 years
Poland                     3 years         1 year
Portugal                   3 years         1 year
Qatar                      3 years        5 years
Saudi Arabia               3 years        5 years
Singapore                  3 years        2 years
Slovenia                   3 years        5 years
Spain                      3 years         1 year
Syria                      3 years        5 years
Taiwan                     3 years        2 years
Thailand                   3 years        2 years
Turkey                     3 years        5 years
United Arab Emirates       3 years        5 years
United Kingdom             2 years        2 years
Yemen                      3 years        5 years


                                       11
<PAGE>

While our distribution agreements contain sales quotas and other provisions
which allow us to terminate the agreements upon breach by the distributor, the
laws of many countries provide special statutory protections, which do not exist
in the United States, for distributors of imported products. Consequently, in
many countries we may find it very difficult, if not impossible to terminate a
non-performing exclusive distributor and replace that distributor with a more
capable distributor. We could be materially adversely affected if we are unable
to promptly terminate non-performing exclusive distributors in major markets for
the CTLM(R).

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. Several
states and the U.S. government are investigating a variety of alternatives to
reform the health care delivery system and further reduce and control health
care spending on health care items and services, limit coverage for new
technology and limit or control the price health care providers and drug and
device manufacturers may charge for their services and products, respectively.
If adopted and implemented, such reforms could have a material adverse effect on
our business, financial condition and results of operations. 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.
Significant litigation, not involving us, has occurred in the past based on
allegations of false negative diagnoses of cancer. 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. The FDA does not require liability insurance and we therefore did not
acquire it for our in-house clinical investigational trials. At present we carry
$3,000,000 in product liability insurance for both clinical sites and will
continue to carry it for further clinical testing and subsequent distributors.

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 competing primarily with established imaging equipment such
as x-ray mammography equipment, ultrasound or high definition ultrasound
systems, Magnetic Resonance Imaging ("MRI") systems, and 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.

                                       12
<PAGE>

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
imaging" which is a shorthand description of the technology the CTLM(R)
utilizes. A brief list of the most prestigious 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."

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

                                       13
<PAGE>

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
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.

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.

Below is a table indicating all United States patents pending or issued with
regard to Optical Tomography:

                         U.S. PATENTS PENDING AND ISSUED
<TABLE>
<CAPTION>

  PCT Appl.                      For                      Case #    Serial #     Filing Date    Patent #    Patent Date
     <S>                         <C>                         <C>     <C>             <C>          <C>           <C>
     Yes      Diagnostic Tomographic Laser Imaging         6356    08/484,904      6/7/95       5,692,511     12/2/97
              Apparatus
              (Electronics & Imaging)
     Yes      Diagnostic Tomographic Laser Imaging       6356-US   08/952,821      7/31/98      6,195,580     2/27/01
              Apparatus
              (Patient Support Structure) in addition
              to above

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Apparatus and Method for Determining the    6558-1   08/965,148      11/6/97      6,044,288     3/28/00
              Perimeter of the Surface of an Object
              Being Scanned

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Device for Determining the Perimeter of     6559-1   08/965,149      11/6/97      6,029,077     2/22/00
              the
              Surface of an Object Being Scanned and for
              Limiting Reflection from the Object
              Surface

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Data Acquisition Technique                   6570    60/032,592     11/29/96       Pending



                                       14
<PAGE>

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Data Acquisition Technique Using Wall Eye    6571    60/032,593     11/29/96       Pending

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Detector Array with Variable Amplifiers     6572-1   08/979,328     11/26/97      6,150,649     11/21/00
              for Use
              in a Laser Imaging Device

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Detector Array for Use in a Laser Imaging   6573-1   08/963,760      11/4/97      6,100,520      8/8/00
              Apparatus

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Detector Array for Use in a Laser Imaging   6573-2   09/627,148      7/27/00      6,211,512      4/3/01
              Apparatus (WideEye-2 or more rows of
              Detectors)

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Detector Array for Use in a Laser Imaging   6573-3   09/816,375      3/26/01       Pending
              Apparatus (FleetEye)

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Method for Reconstructing the Image of an   6574-1   08/979,624     11/28/97      6,130,958     10/10/00
              Object
              Scanned with a Laser Imaging Apparatus

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Laser Imaging Apparatus Using Biomedical     6647    09/008,477      1/16/98      5,952,664     9/14/99
              Markers That Bind to Cancer Cells

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Phantom for Optical and Magnetic Resonance   6648    09/096,521      6/12/98       Pending
              Imaging Quality Control

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Time-Resolved Breast Imaging Device          6707    09/199,440     11/25/98       Pending

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      CCD Array Used as a Multiple Detector        6825    09/497/691      2/4/99        Pending

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Suppression of Optical Reflection            6996    09/829,443      4/10/01       Pending
              in Medical Optical Imaging Scanner

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     Yes      Multiple Wavelength Simultaneous Data        6997    09/851,437      5/9/00        Pending
              Acquisition Device for Breast Imaging

  PCT Appl.   For                                         Case #    Serial #     Filing Date    Patent #    Patent Date
     No       Use of Fluorescent Dye to Facilitate         7035    09/922,952      8/7/00        Pending
              Surgery
</TABLE>

Neither Mr. Grable's estate nor we hold foreign patents; however; the table
below sets forth certain information with regard to the patents that have been
applied for.

         FOREIGN PATENT APPLICATIONS PENDING

Country                     Intl. Appl. #         Filing Date
-------                     -------------         -----------
Australia                   29998/95              7/10/95
Canada                      2223606               7/10/95
China                       95197940.X            7/10/95
European Patent Office      95926136.3            7/10/95
Japan                       9-500394              7/10/95
Mexico                      979830                12/08/97
European Patent Office      97948135.5            11/7/97
Hong Kong                   00107616.9            11/28/00
PCT (1)                     PCT/US97/19614        11/7/97
PCT (1)                     PCT/US97/19615        11/7/97



                                       15
<PAGE>

European Patent Office      97951435.3            11/28/97
Hong Kong                   00107617.8            11/28/00
PCT (1)                     PCT/US97/20970        11/28/97
European Patent Office      97954133.1            11/28/97
Hong Kong                   00107618.7            11/28/00
PCT (1)                     PCT/US97/23160        11/28/97
PCT (1)                     PCT/US99/04287        4/1/99
Canada                      2309214               11/15/98
China                       98811502.6            5/24/00
European Patent Office      98958682.1            11/25/98
Hong Kong                   01101586.7            3/5/01
Japan                       IP-201742             11/15/98
PCT (1)                     PCT/US98/24938        11/25/98
PCT (1)                     PCT/US00/00516        2/4/00
PCT (1)                     PCT/US01/08648        4/11/01

         (1) PCT is the Patent Cooperation Treaty

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).
IDSI and Mr. Grable had previously entered into an oral agreement for the
exclusive license for the CTLM(R) patent (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 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 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, which is now in probate proceedings. 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%

                                       16
<PAGE>


EMPLOYEES
As of the date of this Report, we have 47 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.


ITEM 2.  DESCRIPTION OF PROPERTY

Our facilities are 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 April 1999, we placed
a mortgage on our property in connection with the issuance of a Convertible
Debenture to Charlton Avenue LLC. Upon the full conversion of the debenture in
June 2000, we received and recorded a discharge of mortgage. See "Unregistered
Sales of Securities - Private Placement of Convertible Debentures." 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 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 and DOE 2
a/k/a docpatel 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. The

                                       17
<PAGE>

defendants have amended their counterclaim and we have filed a motion to
dismiss. We believe that this counterclaim is without merit. We intend to
vigorously prosecute this action and defend the counterclaim.

On June 16, 2000 we filed a motion for the issuance of an Interlocutory and
Permanent Injunction against David J. Hall, Ph.D. (a former employee) and ART
Advanced Research Technologies Inc. (his current employer) in the Superior Court
of the Province of Quebec, District of Montreal, Case No. 500-05-058294-008
seeking to enjoin Dr. Hall not to use or divulge trade secrets or other
confidential information to ART and to enjoin Dr. Hall from breaching his duty
of loyalty and contractual obligation of confidentiality and non-competition.
Both Dr. Hall and ART have sworn that Dr. Hall has not divulged or used and will
not divulge or use any confidential information that he obtained from us. A
Desistment was filed with the court on January 16, 2001, which essentially is a
discontinuance of the claim, unless it is revealed that Dr. Hall has actually
disclosed confidential information.

We were served with a lawsuit in the Circuit Court of the 17th Judicial Circuit
in and for Broward County, Florida, Case No. 00-19919 on November 22, 2000, by
Irving Schwab, et.al. for allegedly breaching a promissory note by and between
the Company and Cycle of Life, dated January 27, 2000. All parties entered into
voluntary mediation and a mutually agreeable settlement ensued. On January 22,
2001 the Court entered an Order approving the Stipulation for Settlement and
Dismissal with Prejudice. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Liquidity and Capital
Resources").

We were served with a lawsuit filed in the Circuit Court for Cook County,
Illinois, First Municipal Department on December 12, 2000, by Andrew A. Skolnick
for alleged defamation and civil conspiracy to defame and damage the Plaintiff's
reputation. We filed a limited appearance and brought a motion to quash based
upon lack of personal jurisdiction. Mr. Skolnick withdrew his complaint and was
granted leave to amend. Mr. Skolnick informed the court that he has not filed a
second amended complaint and does not intend to pursue this action. An order was
entered on May 3, 2001 dismissing this lawsuit.

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. We believe that Mr. Giambrone was
in default of the agreement and therefore, this lawsuit is without merit. We
intend to vigorously defend this matter.

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. On or about May
25, 2001 we moved to dismiss the complaint on the grounds that Ladenburg's
breach of contract claims are barred by its execution of a release. The motion
to dismiss is pending before the Court. No other formal discovery has taken
place in the action. We intend to vigorously defend this matter.

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 November 20, 2000 we held an annual meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purposes:

                                       18
<PAGE>

     1.   To elect seven directors to serve a one-year term expiring at the
          Fiscal Year 2002 Annual Meeting of Stockholders or until his/her
          successor is duly elected and qualified;

     2.   To ratify the three executive officers' employment and amended stock
          option agreements; and

     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, 2001.

For proposal no. 1, the stockholders elected five incumbent directors, Richard
J. Grable, Linda B. Grable, Allan L. Schwartz, Irving H. Schwab and David E.
Danovitch and two new directors, Phil E. Pearce and Stanley A. Hirschman with
the voting as follows:

   FOR   93,781,372        AGAINST         3,100     ABSTAIN  236,851

For proposal no. 2, the stockholders voted to ratify the executive officers'
employment and amended stock option agreements with the following votes:

   FOR   91,836,967        AGAINST     1,435,128     ABSTAIN  749,228

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, 2001
with the following votes:

   FOR   91,865,300        AGAINST     1,423,425     ABSTAIN  732,598


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 2000
First Quarter                                 $0.33             $0.11
Second Quarter                                $0.80             $0.08
Third Quarter                                 $5.75             $0.81
Fourth Quarter                                $3.03             $1.01

FISCAL YEAR 2001
First Quarter                                 $3.44             $1.13
Second Quarter                                $2.84             $0.88
Third Quarter                                 $1.96             $0.99
Fourth Quarter                                $1.30             $0.67

FISCAL YEAR 2002
First Quarter (through September 26, 2001)    $1.05             $0.52

On September 26, 2001, the closing trade price of the common stock as reported
on the OTC Bulletin Board was $.80. As of such date, there were approximately
1,455 registered holders of record of our common stock.

SALE OF UNREGISTERED SECURITIES


                                       19
<PAGE>

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. As a result of the dividends on cumulative
preferred stock, the net loss per common shareholder increased $.01 per share
for the fiscal year ending June 30, 2001, with a cumulative total of $.18 per
share. There was no effect on the fiscal year ending June 30, 2000.

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. The following table summarizes certain
information with regard to the Company's sale and full conversion of its Series
B, C, D, E, F, G, H, and I preferred stock, all of which was sold to European
and American institutional investors in private placements pursuant to the
exemptions from registration contained in SEC Regulations D and S.

<TABLE>
<CAPTION>

                             Series B    Series C      Series D    Series E      Series F     Series G     Series H      Series I
                             --------   ----------     ---------  ----------    ----------   ----------   ----------    ----------
<S>                            <C>          <C>          <C>           <C>          <C>          <C>            <C>           <C>
Regulation D or S            Reg. D        Reg. S      Reg. S         Reg. S       Reg. S       Reg. D        Reg. D        Reg. D
No. of Pfd. Shares             450          210          50             50           75           35           100           138
Price per Pfd. share         $10,000      $10,000      $10,000       $10,000       $10,000      $10,000      $10,000       $10,000
Total Offering             $ 4,500,000  $ 2,100,000   $ 500,000     $500,000     $ 750,000     $350,000  $ 1,000,000   $ 1,380,000
Placement Fee-Cash            None           $            $             $             $          None           $            None
                                          220,500       5,000         5,000        50,000                     10,000
Placement Fee-Stock           None          None     4 Pfd. Sh.     4 Pfd. Sh.      None      3 Pfd. Sh.    8 Pfd. Sh.       None
Avg. Bid & Ask Price
at Time of Issuance:
   Common Stock              $4.70         $1.63        $1.22         $1.09        $1.31        $0.34         $0.56         $0.38
   Conversion Price          $3.85         $1.22        $0.9150       $0.8198      $0.9170      $0.2550       $0.42         $0.2850
# of Conversion Shares
at Time of Issuance         1,168,831    1,721,311     546,448       609,905       817,884     1,490,196    2,571,429     4,842,105
Option to Repay
Dividends in Cash
or Stock                       Yes           No          No             No           Yes          No            No           Yes
4.99% Ownership Limit          Yes          Yes          Yes           Yes           Yes          Yes          Yes           Yes
# of Outstanding
Preferred Shares               -0-          -0-          -0-           -0-           -0-          -0-          -0-           -0-
Total # of Shares Issued
Upon Conversion to Date    30,444,719    2,646,527    1,717,134     1,282,826     3,410,571    3,834,492    11,161,725    3,675,160
</TABLE>

                                       20
<PAGE>


Series B Preferred Stock

In December 1996, Weyburn Overseas Limited and Goodland International Investment
Ltd. purchased 450 shares of our Series B preferred stock for $4,500,000. These
shares were convertible into common shares at any time beginning eighty days
after closing date and for three years thereafter at which time there was a
mandatory conversion of all outstanding convertible preferred shares. The
conversion rate was 82% of the average closing price over a five-day period
prior to conversion. The Series B shares carried a 7% cash dividend.


On April 6, 1999, the Series B preferred stock was sold by the Series B
preferred holders to Charlton Avenue, LLC ("Charlton"), an unaffiliated third
party with no prior relationship to us or the Series B preferred holders. On
April 6, 1999, we also entered into a subscription agreement with Charlton
whereby we agreed to issue to Charlton 138 shares of our Series I, 7%
convertible preferred stock as discussed in the paragraph concerning the Series
I Preferred Stock.


All of the Series B preferred stock was converted to 30,447,719 shares of common
stock from March 1999 to December 1999.

Series C Preferred Stock

In October 1997, we sold to Austost Anstalt Schaan, UFH Endowment, Inc., Chris
Baum, Avalon Capital Limited, Dominion Capital, Ltd. and The Cuttyhunk Fund
Limited, 210 shares of our Series C convertible preferred stock, together with
three year warrants to purchase up to 105,000 shares of our common stock at an
exercise price of $1.63 per share and five year warrant to purchase up to 50,000
shares at an exercise price of $1.562 per share, for an aggregate price of
$2,100,000. We also issued a five-year warrant to Settondown Capital
International, Ltd. to purchase 55,000 shares of common stock at an exercise
price of $1.63 per share. The common shares underlying these warrants have not
been registered. These preferred shares were convertible, at any time,
commencing 45 days from the date of issuance and for a period of 3 years
thereafter, without additional consideration. The conversion price was equal to
75% of the average closing price of our common stock for the five-day trading
period ending on the day prior to the date of conversion; provided, however, in
no event was the conversion price to be greater than $1.222 per share.

All of the Series C preferred stock was converted to 2,646,527 shares of common
stock from November 1997 to January 1998.

Series D Preferred Stock

In January 1998, we sold to Avalon Capital Ltd. 50 shares of our Series D
convertible preferred stock, together with three year warrants to purchase up to
25,000 shares of our common stock at an exercise price of $1.22 per share, at an
aggregate price of $500,000.

These preferred shares were convertible, at any time, commencing 45 days from
the date of issuance and for a period of three years thereafter, without
additional consideration. The conversion price was equal to 75% of the average
closing price of our common stock for the five-day trading period ending on the
day prior to the date of conversion.

All of the Series D preferred stock was converted to 1,717,134 shares of common
stock from February 1998 to August 1998.

Series E Preferred Stock

In February 1998, we sold to Austost Anstalt Schaan and Balmore Funds S.A. 50
shares of our Series E convertible preferred stock, together with three year
warrants to purchase up to 25,000 shares of our common stock at an exercise
price of $1.093 per share, for an aggregate price of $500,000.

                                       21
<PAGE>


These preferred shares were convertible, at any time, commencing 45 days from
the date of issuance and for a period of three years thereafter without
additional consideration. The conversion price was equal to 75% of the average
closing price of our common stock for the five-day trading period ending on the
day prior to the date of conversion.

All of the Series E preferred stock was fully converted to 1,282,826 shares of
common stock from March 1998 to July 1998.

Series F Preferred Stock

In February 1998, we sold to Dominion Capital Fund, LTD and Canadian Advantage,
LTD 75 shares of our Series F convertible preferred stock, for an aggregate
price of $750,000.

The preferred shares paid a dividend of 6% per annum, payable in common stock at
the time of each conversion and were convertible, at any time, commencing May
1998, and for a period of two years thereafter without additional consideration.
The conversion price was equal to 70% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of
conversion. The shares underlying the preferred stock were entitled to demand
registration rights in the event that Regulation S was amended prior to the
conversion of the preferred stock. As a result of these rights and the 1998
amendment to Regulation S, the 1,971.375 shares of common stock issued upon the
conversion of the Series F preferred have been registered on behalf of the
holders by the Company pursuant to its registration statement on Form S-2
Post-Effective Amendment No.5, which became effective March 29, 2000 (the
"Registration Statement"). The remaining 1,439,196 common shares received in
conversion from the preferred stock were sold by the holder according to Rule
144.

All of the Series F preferred stock was fully converted to 3,410,571 shares of
common stock from May 1998 to June 1998.

Series G Preferred Stock

In March 1999, we sold to Amro International, S.A., Nesher Inc., Hewlett Fund,
and Guaranty & Finance Ltd., 35 shares of our Series G convertible preferred
stock, together with two-year warrants to purchase 65,625 shares of our common
stock at an exercise price of $.50 per share, for an aggregate price of
$350,000. From April 2000 to August 2000 the holders have exercised warrants to
acquire a total of 52,500 shares of our common stock.

The Series G convertible preferred stock has no dividend provisions. The
conversion price was equal to the lesser of (i) 75% discount to the two lowest
bids in a ten-day period immediately preceding the conversion date or (ii) $.54.
There was no floor on the conversion price and no time limits on conversion.

All of the Series G preferred stock was converted to 3,834,492 shares of common
stock from August 1999 to December 1999. Pursuant to the registration rights
granted to the Series G holders, 1,801,803 of those shares were registered in
the Registration Statement.

Series H Preferred Stock

In June 1998, we sold to Austost Anstalt Schaan and Balmore Funds S.A. 100
shares of our Series H convertible preferred stock, together with 75,000 A five
year warrants and 50,000 B five year warrants, exercisable at $1.00 and $1.50
per share, respectively, for an aggregate price of $150,000 beginning on
November 2, 1998.

The conversion price was equal to the lesser of $.53 and 75% of the lowest
closing bid price of our common stock for the ten-day trading period ending on
the day prior to the date of conversion. There was no floor on the conversion
price and no time limits on conversion. According to the terms of the
registration rights agreement, as amended, we have registered herein 100% of
that number of shares that would be required to be issued if the preferred stock
were converted on the day before the filing of the registration statement,
3,038,020 shares. We fell in default of the registration rights agreement, which
required the registration statement to be declared effective by October 2, 1998.

                                       22
<PAGE>

According to the registration rights agreement, we were required to pay the
Series H preferred holders in cash or in stock, as liquidated damages for
failure to have the registration statement declared effective, not as a penalty,
2% of the principal amount of the securities sold for first 30-day period, and
3% of the principal amount of the securities for each 30-day period thereafter
until we procure registration of the securities.

All of the Series H preferred stock was converted to 11,161,725 shares of common
stock. Pursuant to our registration rights agreement with the Series H holders,
3,038,020 of those shares were registered in the Registration Statement. Because
the Registration Statement did not become effective on a timely basis, we issued
424,242 additional shares of restricted common stock with registration rights to
the Series H holders in March 1999, in payment of $140,000 in aggregate
liquidated damages.

All of the Series H preferred stock was fully converted to 11,161,725 shares of
common stock from November 1998 to November 1999.

Series I Preferred

In April 1999, we entered into a subscription agreement with Charlton where we
agreed to issue Charlton 138 shares of our Series I, 7% convertible preferred
stock. Our board of directors established the value of the Series I preferred at
$10,000 per share. Consideration for the subscription was paid as follows:

          (i)  payments of all of the accumulated dividends (approximately
               $725,795) in connection with the Series B preferred stock;
          (ii) settlement and dismissal, with prejudice, of all litigation
               concerning the Series B preferred stock and the exchange of
               mutual releases;
          (iii) cancellation of 112,500 warrants that were issued with the
               Series B preferred stock; and
          (iv) amendment of the Series B designation to impose a limitation on
               the owner(s) of the Series B preferred stock to ownership of not
               more than 4.99% of our outstanding common stock at any one time.

The Series I preferred paid a 7% premium, to be paid in cash or freely trading
common stock in our sole discretion, at the time of each conversion. The
conversion price was equal to 75% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of the
conversion.

All of the Series I preferred stock was converted to 3,675,100 shares of common
stock from December 1999 to May 2000. Pursuant to our registration rights
agreement with the Series I holders, all of these shares were registered in the
Registration Statement.

Series K Preferred

See "Financing/Equity Credit Line."

Private Placement of Convertible Debentures

We have also had to rely on the private placement of convertible debentures to
obtain working capital. In deciding to issue convertible debentures, the board
of directors took into account many of the same considerations it did when it
decided to issue preferred stock. The following table summarizes certain
information with regard to our outstanding convertible debentures as of May 26,
2000, which is the last date of conversion for all of the Convertible Debentures
listed in the table below.


                                       23
<PAGE>

                                Charlton Debentures      Spinneret Debentures
                                -------------------      --------------------
Regulation D or S                     Reg. D                    Reg. D
Annual Dividend %                       7                          7
# Tranches (up to)                      3                          3
Maximum Proceeds                   $ 3,080,000                $ 51,000
Placement Fee-Cash                     None                      None
Placement Fee-Stock                    None                      None
Avg. Bid & Ask Price
at Time of Issuance:
   Common Stock                       $ .39                   $ .0875
   Conversion Price                   $ .29                   $ .0656
# of Conversion Shares
at Time of Registration             4,740,971                     -0-
Option to Repay
Interest in Cash
or Stock                               Yes                        Yes
4.99% Ownership Limit                  Yes                        Yes
% of Outstanding
Debentures                             -0-                        -0-
Total # of Shares Issued
Upon Conversion to Date             3,908,883                   158,812
Automatic Conversion Date     2 years from issuance      2 years from issuance


Convertible Debentures - Charlton

In March 1999, we entered into a subscription agreement with Charlton, where
Charlton purchased a convertible debenture for $1,100,000. In addition, in
August 1999, we entered into a subscription agreement and subsequently drew down
multiple tranches in the aggregate amount of $825,000. We entered into another
subscription agreement in October 1999 and subsequently drew down multiple
tranches in the aggregate amount of $825,000. The gross proceeds from the
original debenture offering were $2,750,000. In December 1999 we entered into an
additional subscription agreement with Charlton and drew down multiple tranches
totaling $330,000. The debentures were to mature in two years from the date of
issuance.

The conversion price of the debentures was equal to 75% of the average closing
price of our common stock for the five-day trading period ending on the day
prior to the date of the conversion.

The Charlton debentures were secured by a mortgage on our corporate office
building. The mortgage was released in June 14, 2000 after the conversion in
full of all the convertible debentures into 3,908,883 shares of common stock.

Convertible Debenture - Spinneret

In August 1999, we entered into a subscription agreement with Spinneret
Financial, Ltd., where Spinneret purchased a convertible debenture for $51,000.
The sum of $1,000 was paid upon issuance of the debenture for Spinneret's legal
fees. The sum of $50,000 was advanced as a loan in July 1999, and the debenture
was issued in the principal amount of $51,000 in August 1999. The debenture was
to mature in August 2001.

The conversion price is equal to 75% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of the
conversion.

On December 31, 1999, the debenture was converted into 158,812 shares of common
stock.


Private Placement of Common Stock

In September 1998, we sold one unit, consisting of a $250,000 promissory note
and 200,000 shares of common stock, to Settondown Capital International, Ltd.,
an unaffiliated third party, pursuant to Regulation D, for an aggregate purchase
price of $250,000. These shares were included in the Registration Statement. At

                                       24
<PAGE>

the time the sale occurred, the average of the bid and ask price of our common
stock was $.595. The note bore interest at the rate of 12% per annum. In
connection with this sale, we paid the sum of $23,000 to Manchester Asset
Management, Ltd., an unaffiliated third party, as a placement fee. Net proceeds
of $227,000 were used for working capital,. On December 30, 1999, we repaid the
$359,203.33 accrued balance of the promissory note in full by issuing 2,112,961
shares of restricted common stock valued at $.17 per share. On December 30,
1999, the bid-ask range of the common stock was $.56 - $.80.

In October 1998, we sold one unit, consisting of a $100,000 promissory note and
80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated third
party, pursuant to Regulation D, for an aggregate purchase price of $100,000.
These shares were included in the Registration Statement. No placement fee was
paid in connection with this offering, however, we did issue 5,000 shares of
common stock to Goldstein, Goldstein and Reis LLC, an unaffiliated third party,
as payment for the attorney's fees incurred by the purchaser pursuant to the
sale. At the time the placement was concluded, the average of the bid and ask
price of our common stock was approximately $.50 per share. The note bore
interest at the rate of 12% per annum. Net proceeds of $100,000 were used for
working capital, $15,703. On December 30, 1999, we repaid the $119,041.67
accrued balance of the promissory note in full by issuing 700,245 shares of
restricted common stock valued at $.17 per share.

In October 1998, we sold one unit, consisting of a $250,000 promissory note and
210,000 shares of common stock, to GCA Strategic Investment Fund Ltd., an
unaffiliated third party, pursuant to Regulation D, for an aggregate purchase
price of $210,000. These shares were included in the Registration Statement. At
the time the placement was concluded, the average of the bid and ask price of
our common stock was approximately $.43 per share. The note bore interest at the
rate of 12% per annum. In connection with the sale, we paid the sum of $23,000
to LKB Financial LLC, an unaffiliated third party, as a placement fee. We also
issued a three-year warrant beginning on January 20, 1999 to purchase 50,000
shares of common stock at $1.00 per share to GCA Global Advisors. The common
shares underlying these warrants have not been registered. Net proceeds of
$187,000 were used for working capital. The note, and all accrued interest, was
paid in January 1999. Our officers provided the payment for this loan through
the sale of a portion of their shares of our common stock.

In November 1998, we issued 286,000 shares of common stock as partial
consideration for a $115,000 aggregated loan to us by Deborah O'Brien, an
employee. At the time the loan was concluded, the average of the bid and ask
price of our common stock was approximately $.625 per share. We were obligated
to repay the lender the sum of $50,000; the balance of the loan was applied to
the purchase of the shares. In January 1999, we issued a note evidencing this
indebtedness. The note bore interest at the rate of 7% per annum and was due and
payable upon demand. Net proceeds of $115,000 were used for working capital.
From November 1998 to April 1999, we paid the balance due on the loan to the
lender. The 286,000 shares were included in the Registration Statement.

On June 25, July 12 and November 18, 1999, we entered into loans with Balmore
Funds S.A. for the aggregate sum of $100,000 and signed promissory notes with an
interest rate of 15% per annum. On the respective dates of the loans, the
average of the bid and ask prices of our common stock were approximately $.48
per share, $.29 per share and $.36 per share. These notes were guaranteed by
Richard and Linda Grable. On December 30, 1999, we agreed to pay the notes in
full with restricted common stock. The total principal and interest accrued was
$104,802.08. On December 30, 1999, the bid-ask range of our common stock was
$.56 - $.80. For the notes, we issued a total of 616,483 shares of restricted
stock, a price of $.17 per share. As of June 29 and July 6, 1999, we also
entered into loans with Austost Anstalt Schaan for the aggregate sum of $50,000
and signed promissory notes with an interest rate of 15% per annum. On the
respective dates of the loans, the average of the bid and ask prices of our
common stock were approximately $.38 per share and $.30 per share. These notes
were also guaranteed by Richard and by Linda Grable. On December 30, 1999, we
paid these notes in full with restricted stock. The total principal and interest
accrued was $53,822.92. For the notes, we issued a total of 316,605 shares of
restricted stock at a price of $.17 per share.

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

                                       25
<PAGE>

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.
See "Legal Proceedings".

On April 27, 2000, we sold 100,000 shares of restricted common stock to Michael
Associates, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $157,000. No placement fee was paid in connection
with this offering. Net proceeds of $157,000 were used for working capital. At
the time the placement was concluded, the average of the bid and ask price of
our common stock was approximately $2.00 per share.

ISSUANCE OF STOCK FOR SERVICES
The Company from time to time, has issued and may continue to issue stock for
services performed and to be performed by consultants, all of which have been
unaffiliated. The consultants have provided the following consulting services
pursuant to their Consulting Agreements.

         Legal-General Counseling.

         Legal-Litigation Counseling.

         Investor Relations-Introducing us and our emerging technology to
         stockbrokers and the investment community.

         Shareholder Relations-Keeping shareholders informed of new
         developments.

         Public Relations-Creating public awareness of us and our emerging
         technology to the public through print and electronic media.

         Product Planning & Feasibility-Research into all aspects of product
         planning and our acceptance into the medical imaging marketplace.

         Clinical Site Consulting-Selection and introduction to potential
         clinical sites.

         Design Consulting-Design and feasibility of components for the CTLM(R).

         SEC Filing and Compliance-Filing and compliance consultation.

         Engineering-Mechanical engineering and prototype development.

         Video Production Consultant-Script writing and production consultation.

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 in lieu
of cash payment. Since 1996, we have issued an aggregate of 1,806,500 shares of
Common stock to independent consultants pursuant to Registration Statements on
Form S-8. The aggregate fair market value of the shares at the time of issuance
was $2,327,151. The issuance of large amounts of common stock for services
rendered or to be rendered and the subsequent sale of such shares may depress
the price of the common stock. In addition, since each new issuance of common
stock dilutes existing shareholders, the issuance of substantial additional
shares may effectuate a change in our control.


                                       26
<PAGE>

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") $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
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 and 50 shares were redeemed for 664,171 shares of common stock
using the Charlton private equity line and we paid $50,000 for redemption
principal (110% of $500,000) to Charlton in April 2001.

On August 17, 2000, we entered into a $25 million private equity credit
agreement with Charlton Avenue LLC ("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 commits Charlton 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 Private Equity
Agreement common shares. The timing and amounts of the purchase by the investor
are at our sole discretion. We do, however, have to draw down a minimum of $10
million from the credit line over the 12-month period. The purchase price of the
shares of common stock is 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. If, subsequent to effectiveness, the registration statement
is suspended at any time, we are 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

                                       27
<PAGE>

portion thereof, beginning on the date of the suspension. If such suspension is
cured within the first 15 days, the damages shall not apply. The only fee
associated with the private equity financing will be a 5% consulting fee payable
to Spinneret. 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.

The principal conditions to our ability to draw under the private equity line
are 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 ( 24,156,654 shares as of the date of this
report) may be issued under the agreement without shareholder approval if such
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 an 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. These conditions may materially limit our ability to
make draws under the Private Equity Agreement.

We intend to make sales under the Private Equity 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 only the $10,000,000
minimum under the Private Equity Agreement; however, if those needs change we
may draw up to the $25,000,000 maximum.

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 the we would otherwise seek to develop ourselves. If we utilize the Private
Equity Agreement or additional funds are raised by issuing equity securities,
especially convertible preferred stock, 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.

As of the date of this report we have drawn $4, 525,000 from our equity credit
line with Charlton and have issued 5,369,985 shares as a result of those draws.
In December 2000, we initially registered $10 million worth of common stock
based on the market price at that time, representing the minimum dollar amount
required to be drawn down in one year under the Private Equity Agreement. The
registration statement provided for the registration of 7,089,685 common shares.
In order to comply with the terms and conditions of the Private Equity
Agreement, as a result of the recent decline in our stock price, we are
obligated to file a second registration statement to utilize the balance of
funds available to us in the agreement.


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, 2001 and June 30, 2000.
General and administrative expenses in the aggregate during the 12 months ended
June 30, 2001 were $4,023,148 representing an increase of $137,406 or 3.5% from
$3,885,742 during the 12 months ended June 30, 2000. 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, 2001, were $371,477 representing a
decrease of $17,312 or 4.4% from $388,789 during the year ended June 30, 2000.

                                       28
<PAGE>

Compensation and related benefits during the year ended June 30, 2001, were
$4,346,572 representing an increase of $510,905 or 13% from $3,835,667 during
the year ended June 30, 2000. The increase in compensation is due to the hiring
of additional software engineers, a medical physicist, a research scientist and
a clinical application specialist required for the clinical investigational
trials.

Consulting expenses during the year ended June 30, 2001, were $324,851
representing an increase of $175,879 or 118% from $148,972 during the year ended
June 30, 2000. The increase was due primarily to the engagement of outside
consultants needed for special non-recurring projects required prior to
launching the CTLM(R) System in those countries where permitted and for
assistance in the preparation and review of the Modules required for our FDA
Pre-Market Approval application.

Inventory Valuation Adjustments during the year ended June 30, 2001, were
$413,948 representing a decrease of $362,209 or 47% from $776,157 during the
year ended June 30, 2000. The decrease is due to the initial adjustment to our
inventory after the finalization of the CTLM(R) System.

Professional expenses during the year ended June 30, 2001, were $333,802
representing an increase of $106,457, or 47% from $227,345 during the year ended
June 30, 2000. The increase was due primarily to additionallitigation expenses.
See Item 3. "Legal Proceedings".

Travel and subsistence costs during the year ended June 30, 2001, were $400,088
representing an increase of $144,784 or 57% from $255,304 during the year ended
June 30, 2000. This increase was primarily due to increased travel and housing
expenses for our clinical application specialists at Nassau County Medical
Center and the University of Virginia Health Systems.

Interest expense during the year ended June 30, 2001, was $1,265,280
representing an increase of $297,628, or 31% from $967,652 during the year ended
June 30, 2000. The increase was due to interest paid on loans used for working
capital for our operations and the discounts for shares issued to pay loans at a
discount from the market price.

Liquidated damage costs during the year ended June 30, 2001, were $(151,000)
representing a decrease of $182,000 from $31,000 during the year ended June 30,
2000. The decrease was due to the Registration Statement being declared
effective in March 2000 thus eliminating the potential for further liquidated
damages.

Dividends on cumulative preferred stock from discount at issuance during the
year ended June 30, 2001, were $708,130 representing an increase of $708,130
from $0 during the year ended June 30, 2000. This increase is due to the fact
that the Series K convertible preferred stock was issued in the year ended June
30, 2001.

Dividends on cumulative preferred stock paid during the year ended June 30,
2001, were $422,401 representing an increase of $276,451, or 189%, from $145,950
during the year ended June 30, 2000. This increase is due primarily to the
accrued dividends paid with the final conversions of the Series K convertible
preferred stock.

BALANCE SHEET DATA
We have financed our operations since inception by the issuance of equity
securities with aggregate net proceeds of approximately $26,857,004 and through
loan transactions in the aggregate net amount of $2,648,339. 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 $207,266 at June 30, 2001. We do
not expect to generate a positive internal cash flow for at least the next 10
months due to the expected spending for research and development and the
expected costs of commercializing our initial product, the CTLM(R).

Our inventory totaled $2,805,184 at June 30, 2001 and $2,595,878 at June 30,
2000. This increase is primarily due to the purchase of additional parts and

                                       29
<PAGE>

components for the ramp-up of manufacturing for the CTLM(R). Our property and
equipment, net, totaled $2,426,816 at June 30, 2001 and $2,525,287 at June 30,
2000. 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 2001 was
$6,769,821 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 and the hiring of five
additional employees, compared to net cash used by operating activities and
product development of the CTLM(R) and related software development of
$4,025,365 in fiscal 2000. At June 30, 2001, we had working capital of $466,122
compared to working capital of $(1,988,979) at June 30, 2000. We estimate that
of our estimated $7 millionin cash needed in the fiscal year ending June 30,
2002, $2.3 million will be required to complete FDA clinical trials through PMA
submission and to prepare for the manufacture of the CTLM(R).

We have also financed our operations with loans from unaffiliated third parties.
On January 27, 2000, we executed a promissory note to evidence a loan from our
former Canadian Distributor, Cycle of Life Technologies, Inc. ("Cycle of Life").
The note was for a principal sum of $500,000, together with interest of twelve
percent (12%) per annum on the on the unpaid balance. The maturity date was July
26, 2000. The note provided that, on its maturity, Cycle of Life had the option
of being repaid the principal and accrued interest either in cash or by issuance
of a two-year warrant to purchase 1,500,000 shares of common stock at an
exercise price of $.35 per share. On the date of the note's issuance, January
27, 2000, the bid-ask range of our common stock was $1.91-$1.97. Prior to the
note's maturity, we elected to prepay the note consistent with its terms and
applicable law. On July 18, 2000, we sent Cycle of Life the sum of $530,000
representing payment in full of the principal and interest due. Cycle of Life,
after receiving the payment, responded by rejecting the payment and subsequently
requested issuance of the warrants in lieu of the payment. In an effort to
prevent protracted litigation and limit legal expenses and to bring closure to
the Cycle of Life Promissory Note matter after suit was filed against us in
November 2000, the beneficial owners of the promissory note reached a settlement
with us in mediation on January 17, 2001. The stipulation for settlement
provided that we issue an aggregate of 810,000 common shares with restrictive
legend to be divided amongst the beneficial owners of the note according to
their respective vested interests and that Irving Schwab resign as a director of
IDSI. We filed a registration statement on February 17, 2001 registering the
settlement shares that was declared effective by the SEC on March 20, 2001.
Cycle of Life returned the original promissory note to us, and the $530,000 held
in escrow was returned to us for use as working capital.

On March 31, 2000, we received a loan from Charlton Avenue LLC in the amount of
$500,000, which was repaid in full on July 18, 2000. The accrued interest (12%
per year) was waived by the holder. On June 8, 2000, we received a loan from
Aspen International Ltd. in the amount of $110,000 evidenced by a promissory
note bearing interest of 10% per annum. If certain terms and conditions of the
promissory note were not met, we were required to issue a two-year warrant to
purchase 50,000 shares of our common stock at $1.452 per share in addition to
the principal and interest. Those terms were not met, and on August 23, 2000, we
paid the sum of $112,291.03 in principal and interest and issued the warrant as
required.

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. Substantially all of the $5 million will be
used to purchase inventory, sub-contracted components, tooling, manufacturing

                                       30
<PAGE>

templates and non-recurring engineering costs associated with preparation for
full capacity manufacturing and assembly. 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 2001, we were able to raise a total of $7,871,961 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 10 months due to the
expected costs of commercializing our initial product, the CTLM(R) and the
expense of continuing product development program. We will require additional
funds for operating expenses, clinical testing, FDA regulatory processes,
manufacturing and marketing programs and to continue our product development
program. Accordingly, we plan to utilize the Private Equity Agreement to raise
the funds required prior to the end of fiscal year 2002 in order to continue
operations. In the event that we are unable to utilize the 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 or by obtaining mortgage financing on our real property and
improvements, which we believe has a fair market value of at least $2.7 million.
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.

Capital expenditures for the fiscal 2001 were $140,494 as compared to $84,956
for fiscal 2000. 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 2002 will be
approximately $150,000.

During the year ending June 30, 2001, there were no changes in our existing debt
agreements and we had no outstanding bank loans as of June 30, 2001. Our annual
fixed commitments, including salaries and fees for current employees and
consultants, rent, payments under license agreements and other contractual
commitments are approximately $7 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, pre-clinical and clinical investigational studies,
operating expenses, regulatory processes, and manufacturing and marketing
programs, which are presently estimated at an aggregate of approximately
$500,000 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 progress 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; 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 10 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 Private Equity Agreement as our principal source
of additional capital. We plan to continue our policy of investing excess funds,
if any, in a daily cash management account at First Union National Bank.


                                       31
<PAGE>

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.

ITEM 7.  FINANCIAL STATEMENTS

         Index to Financial Statements

                                                                     Page

         Report of Independent Certified Public Accountants          F-1

         Financial Statements

                  Balance Sheet                                      F-3

                  Statement of Operations                            F-4

                  Statement of Stockholders' Equity                  F-5-11

                  Statement of Cash Flows                            F-12-13

                  Notes to Financial Statement                       F-14-50




<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-12

                  Notes to Financial Statements                      F-14


<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, 2001 and 2000, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2001 and 2000 and for the period December 10, 1993 (date of
inception) to June 30, 2001. 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, 2001 and 2000 and the results
of its operations and its cash flows for the years ended June 30, 2001 and 2000
and for the period December 10, 1993 (date of inception) to June 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

The Company is in the development stage as of June 30, 2001 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.


                                      F-1
<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 14, 2001



                                      F-2
<PAGE>




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

                                 Balance Sheets

                             June 30, 2001 and 2000



                                     ASSETS
<TABLE>
<CAPTION>

                                                                   2001            2000
                                                               ------------    ------------
<S>                                                                 <C>             <C>
Current assets:
  Cash and cash equivalents                                    $    207,266    $    159,126
  Loans receivable - employees                                        8,400           3,000
  Inventory                                                       2,805,184       2,595,878
  Prepaid expenses                                                   48,612          37,339
                                                               ------------    ------------

         Total current assets                                     3,069,462       2,795,343
                                                               ------------    ------------

Property and equipment, net                                       2,426,816       2,525,287
Other assets                                                        856,076         593,800
                                                               ------------    ------------

                                                               $  6,352,354    $  5,914,430
                                                               ============    ============


             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                        $    790,631    $    995,954
  Loans payable                                                     353,717       1,755,716
  Current maturities of capital lease obligations                     4,056          11,505
  Other current liabilities                                       1,454,936       2,021,147
                                                               ------------    ------------

         Total current liabilities                                2,603,340       4,784,322
                                                               ------------    ------------

Long-term capital lease obligations                                    --             4,057
                                                               ------------    ------------

         Total liabilities                                        2,603,340       4,788,379
                                                               ------------    ------------

Commitments and contingencies

Stockholders' equity:
  Common stock, no par value; authorized 150,000,000 shares,
    issued 119,427,847 and 105,511,678 shares, respectively      55,151,781      42,818,057
  Additional paid-in capital                                      1,597,780       1,597,780
  Deficit accumulated during the development stage              (52,986,238)    (43,261,878)
                                                               ------------    ------------

                                                                  3,763,323       1,153,959
Less: subscriptions receivable                                      (14,309)        (27,908)
                                                               ------------    ------------

         Total stockholders' equity                               3,749,014       1,126,051
                                                               ------------    ------------

                                                               $  6,352,354    $  5,914,430
                                                               ============    ============
</TABLE>


               See accompanying notes to the financial statements.


                                      F-3
<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, 2001    June 30, 2000   June 30, 2001
                                                        -------------    ------------    ------------
<S>                                                           <C>               <C>             <C>
Compensation and related benefits:
  Administrative and engineering                        $   2,651,409    $  2,982,966      13,586,909
  Research and development                                  1,695,163         852,701       5,237,453
Research and development expenses                                 543           2,525       2,993,470
Advertising and promotion expenses                             62,918          31,932         995,964
Selling, general and administrative expenses                  371,477         388,789       2,204,399
Clinical expenses                                              86,376          68,198         532,013
Consulting expenses                                           324,851         148,972       3,500,044
Insurance costs                                               212,215         174,806         888,228
Inventory valuation adjustments                               413,948         776,157       1,190,105
Inventory restocking costs                                       --           377,006         377,006
Professional fees                                             333,802         227,345       2,205,810
Sales and property taxes                                      156,220         107,198         400,048
Stockholder expenses                                          115,769          62,506         339,950
Trade show expenses                                           168,107         155,536         980,504
Travel and subsistence costs                                  400,088         255,304       1,223,912
Rent expense                                                   13,097          15,539         304,905
Interest expense                                            1,265,280         967,652       3,004,172
Loan placement expenses and fees                              250,000         205,000         656,494
Depreciation and amortization                                 277,254         304,582       1,570,654
Amortization of deferred compensation                            --              --         4,064,250
Liquidated damages (income) costs                            (151,000)         31,000         140,000
Interest income                                               (53,688)         (5,587)       (257,812)
                                                        -------------    ------------    ------------

                                                            8,593,829       8,022,929      46,138,478
                                                        -------------    ------------    ------------

     Net loss                                              (8,593,829)     (8,022,929)    (45,138,478)

Dividends on cumulative preferred stock:
 From discount at issuance                                   (708,130)           --        (5,402,713)
 Earned                                                      (422,401)       (145,950)     (1,445,047)
                                                        -------------    ------------    ------------

     Net loss applicable to common shareholders         $  (9,724,360)   $ (8,168,879)   $(52,986,238)
                                                        =============    ============    ============


Net loss per common share:
  Basic
    Net loss per common share                           $        (.09)   $       (.10)   $      (1.22)
                                                        =============    ============    ============

    Weighted average number of common shares              111,651,970      79,222,066      43,534,178
                                                        =============    ============    ============

  Diluted
    Net loss per common share                           $        (.09)   $       (.10)   $      (1.22)
                                                        =============    ============    ============

    Weighted average number of common shares              111,651,970      79,222,066      43,534,178
                                                        =============    ============    ============
</TABLE>


               See accompanying notes to the financial statements.


                                      F-4
<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, 2000


                                                   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, 2000


                                                   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, 2000


                                                   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, 2000


                                                   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, 2000


                                                   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, 2000


                                                          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, 2001




                                                          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)

                            Statements of Cash Flows


<TABLE>
<CAPTION>

                                                                                             From
                                                                                             Inception
                                                                                             (December 10,
                                                                Year Ended     Year Ended     1993) to
                                                               June 30, 2001  June 30, 2000  June 30, 2001
                                                               -----------    -----------    ------------
<S>                                                                 <C>            <C>            <C>
Net loss                                                       $(8,593,829)   $(8,022,929)   $(46,138,478)
                                                               -----------    -----------    ------------
Adjustments to reconcile net loss to net cash
 used for operating activities:
    Depreciation and amortization                                  277,254        304,582       1,570,654
    Amortization of deferred compensation                             --             --         4,064,250
    Noncash interest, compensation and consulting expenses       2,916,262      1,811,817      12,710,130
    (Increase) decrease in loans receivable - employees             (5,400)        14,351         (47,086)
    (Increase) decrease in inventory                              (209,306)     1,102,465         253,079
    (Increase) decrease in prepaid expenses                        (11,273)        20,911         (48,612)
    (Increase) decrease in other assets                           (371,995)         1,870        (385,830)
    Increase (decrease) in accounts payable and
      accrued expenses                                            (205,323)      (749,699)        825,011
    Increase (decrease) in other current liabilities              (566,211)     1,491,267       1,454,936
                                                               -----------    -----------    ------------

      Total adjustments                                          1,824,008      3,997,564      20,396,532
                                                               -----------    -----------    ------------

      Net cash used for operating activities                    (6,769,821)    (4,025,365)    (25,741,946)
                                                               -----------    -----------    ------------

Cash flows from investing activities:
    Prototype equipment                                               --             --        (2,799,031)
    Capital expenditures                                          (140,494)       (84,956)     (3,950,867)
                                                               -----------    -----------    ------------

      Net cash used for investing activities                      (140,494)       (84,956)     (6,749,898)
                                                               -----------    -----------    ------------

Cash flows from financing activities:
    Repayment of capital lease obligation                          (11,506)       (10,571)        (46,233)
    Proceeds from convertible debenture                               --        2,140,000       3,240,000
    Proceeds from (repayments) loan payable, net                  (902,000)     1,395,608       2,648,339
    Proceeds from issuance of preferred stock                    5,000,000           --        18,039,500
    Net proceeds from issuance of common stock                   2,871,961        674,373       8,817,504
                                                               -----------    -----------    ------------

      Net cash provided by financing activities                  6,958,455      4,199,410      32,699,110
                                                               -----------    -----------    ------------

Net increase in cash and cash equivalents                           48,140         89,089         207,266

Cash and cash equivalents at beginning of period                   159,126         70,037             -0-
                                                               -----------    -----------    ------------

Cash and cash equivalents at end of period                     $   207,266    $   159,126    $    207,266
                                                               ===========    ===========    ============
</TABLE>


                                                                     (Continued)
              See accompanying notes to the financial statements.


                                       F-12
<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, 2001    June 30, 2000     June 30, 2001
                                                                              -------------    -------------     -------------
<S>                                                                                <C>              <C>               <C>
Supplemental disclosures of cash flow information:

         Cash paid for interest                                               $      5,856      $   21,077        $   73,719
                                                                              ============      ==========        ==========


Supplemental disclosures of noncash investing and financing activities:

         Issuance of common stock and options
           in exchange for services                                           $       --        $     --          $4,837,747
                                                                              ============      ==========        ==========

         Issuance of common stock as loan fees in
           connection with loans to the Company                               $       --        $    1,000        $  293,694
                                                                              ============      ==========        ==========

         Issuance of common stock as satisfaction of
           loans payable and accrued interest                                 $  1,393,200      $1,066,665        $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                                                       $    227,855      $   79,175        $2,077,388
                                                                              ============      ==========        ==========

         Issuance of common stock through
           exercise of incentive stock options                                $  1,856,511      $  157,988        $3,117,702
                                                                              ============      ==========        ==========

         Issuance of common stock as
           payment for preferred stock dividends                              $    206,420      $  236,993        $  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-13
<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 has been developed with the use of "Ultrafast Laser Imaging
Technology"TM, 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 exhibit its latest technology and clinical images at the "RSNA"
conferences held annually, in Chicago, during the last week of November.

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.

During 1999, the Food and Drug Administration ("FDA") granted the Company's
request to expand the clinical investigational trials to Nassau County Medical
Center ("NCMC") in East Meadow, New York and the University of Virginia Health
Systems ("UVA") in Charlottesville, Virginia.

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.
Foreign patent applications have been filed and are pending. On September 14,
1999, the Company was advised by patent counsel that a patent for laser imaging
apparatus using biomedical markers that bind to cancer cells was issued. The
Company has received additional patents through April 2001.

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
CTLM(R) device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.

                                                                     (Continued)
                                      F-14
<PAGE>



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

                    Notes to Financial Statements (Continued)


(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.

         (d) Prototype equipment

                The direct costs associated with the final CTLM(R) 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 CTLM(R) 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.


                                                                     (Continued)
                                      F-15
<PAGE>

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

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (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 judgement 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.

         (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
                CTLM(R) 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 CTLM(R) 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.


                                                                     (Continued)
                                      F-16
<PAGE>

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

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (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.

         (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, 2001.

         (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-17
<PAGE>

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

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (l) 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.

         (m) 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.

         (n) 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, 2001, the Company had no items
                qualifying as other comprehensive income.

         (o) Reclassifications

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


                                                                     (Continued)
                                      F-18
<PAGE>

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

                    Notes to Financial Statements (Continued)


(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 16)

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 CTLM(R) device is completed and finally gains
Federal Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.


                                                                     (Continued)
                                      F-19
<PAGE>

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

                    Notes to Financial Statements (Continued)


(5)      INVENTORIES

Inventories consisted of the following:
                                                            June 30,
                                              --------------    ---------------
                                                    2001              2000
                                              --------------    ---------------

         Raw materials                        $  2,103,392      $  2,156,329
         Work-in process                           110,221            15,487
         Completed units under testing             591,571           424,062
                                              -------------     ------------

                                              $  2,805,184      $  2,595,878
                                              ============      ============


(6)      PROPERTY AND EQUIPMENT

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

                                                            June 30,
                                              ---------------------------------
                                                     2001              2000
                                              ----------------  ---------------

         Furniture and fixtures               $      278,542    $     261,625
         Building and land                         2,085,695        2,084,085
         Clinical equipment                           30,714           30,714
         Computers, equipment and software           702,539          584,768
         CTLM(R) software costs                      352,932          352,932
         Trade show equipment                        158,664          154,468
         Laboratory equipment                        193,392          193,392
                                              ---------------   --------------

                                                   3,802,478        3,661,984
         Less: accumulated depreciation           (1,375,662)      (1,136,697)
                                              --------------    -------------

                  Totals                       $   2,426,816     $  2,525,287
                                               =============     ============

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


                                                                     (Continued)

                                      F-20
<PAGE>

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

                    Notes to Financial Statements (Continued)


(6)      PROPERTY AND EQUIPMENT(Continued)

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
CTLM(R) software at June 30, 2001 and 2000 are $0 and $16,241, respectively,
which represents the net realizable value of the CTLM(R) software at the end of
each period presented.

Amortization expense related to the CTLM(R) 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
                                                  =========


(7)      OTHER ASSETS

Other assets consist of the following:
                                                             June 30,
                                                      ------------------------
                                                          2001          2000
                                                      -----------   ----------
Patent license agreement, net of accumulated
  amortization of $102,529 and $68,353, respectively  $  478,471    $  512,647
UL and CE approvals, net of accumulated
  amortization of $8,225 and $4,113, respectively        372,410         4,113
Unamortized debt discount (See Note 10)                     -           71,430
Security deposits                                          5,195         5,610
                                                      -----------    ---------

         Totals                                       $  856,076    $  593,800
                                                      ===========   ============

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
CTLM(R) . 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 16). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owned
the patent.


                                                                     (Continued)
                                      F-21
<PAGE>

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

                    Notes to Financial Statements (Continued)


(8)      ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                             June 30,
                                               --------------------------------
                                                      2001            2000
                                               --------------------------------

    Accounts payable - trade                   $      440,968   $    561,947
    Customer deposits                                  54,000            -
    Accrued property taxes payable                     14,085         14,085
    Accrued compensated absences                       65,713         39,725
    Accrued interest payable                           72,476         82,041
    Liquidated damages payable (see Note 15)              -          151,000
    Accrued wages payable                                 -           89,839
    Other                                             143,389         57,317
                                               --------------   ------------

             Totals                            $      790,631   $    995,954
                                               ==============   ============


(9)      OTHER CURRENT LIABILITIES

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

                                                  2001             2000
                                               -----------      ------------

     Accrued compensation-stock options        $ 1,454,936      $  2,021,147
                                               -----------      ------------

                                               $ 1,454,936      $  2,021,147
                                               ============     ============


(10)     LOANS PAYABLE

Loans payable consisted of the following:
                                                               June 30,
                                                     --------------------------

                                                         2001          2000
                                                     -----------   ------------

 Loans and note payable                              $  300,407    $   910,407
 Loans payable to officers, net of loan receivable
   of $0 and 11,712, respectively                        53,310        345,309
 Loans payable to related parties                           -          500,000
                                                     -----------    ----------

                                                     $  353,717    $ 1,755,716
                                                     ===========   ===========


                                                                     (Continued)

                                      F-22
<PAGE>


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

                    Notes to Financial Statements (Continued)


(10)     LOANS PAYABLE (Continued)

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, 2001. Accrued
interest of $72,476 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 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.

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.


                                                                     (Continued)

                                      F-23
<PAGE>



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

                    Notes to Financial Statements (Continued)


(11)     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 15)

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. (See Note 21)


(12)     LEASES

The Company has entered into a lease arrangement which expires 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, 2001, approximate future minimum lease payments
under capitalized lease obligations were as follows:


          Year ending June 30, 2002                          $  4,128
                                                             ---------

          Total minimum lease payments                          4,128
          Less amount representing interest                       (72)
                                                             ---------

          Present value of net minimum lease payments           4,056
          Less current portion                                 (4,056)
                                                             ---------

          Long-term portion                                 $    -
                                                            ===========


                                                                     (Continued)

                                      F-24
<PAGE>



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

                    Notes to Financial Statements (Continued)


(12)     LEASES (Continued)

The Company also leases certain office equipment under an operating lease
expiring in June 2002. Minimum future lease payments under the non-cancelable
operating lease having a remaining term in excess of one year as of June 30,
2001 are as follows:

                           Year ending June 30,                Amount

                                      2002                   $   3,676
                                                             ---------

                  Total minimum future lease payments        $   3,676
                                                             =========


(13)     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 $33,903,000 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 $11,527,000 and $9,451,000 at June 30, 2001 and 2000,
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, 2000 to June 30, 2001
was an increase of approximately $2,076,000.


(14)     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.


                                                                     (Continued)

                                      F-25
<PAGE>


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

                    Notes to Financial Statements (Continued)


(14)     REDEEMABLE CONVERTIBLE PREFERRED STOCK (Continued)

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.


(15)     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.

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.


                                                                     (Continued)

                                      F-26
<PAGE>

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

                    Notes to Financial Statements (Continued)


(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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.

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.


                                                                     (Continued)

                                      F-27
<PAGE>

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

                    Notes to Financial Statements (Continued)


(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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).

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:


                                                                     (Continued)

                                      F-28
<PAGE>


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

                    Notes to Financial Statements (Continued)


(15)     CONVERTIBLE PREFERRED STOCK (Continued)

    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-29
<PAGE>


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

                    Notes to Financial Statements (Continued)



(15)     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-30
<PAGE>

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

                    Notes to Financial Statements (Continued)


(15)     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-31
<PAGE>


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

                    Notes to Financial Statements (Continued)


(15)     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-32
<PAGE>

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

                    Notes to Financial Statements (Continued)


(15)     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-33
<PAGE>


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

                    Notes to Financial Statements (Continued)


(15)     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, 2001, 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-34
<PAGE>



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

                    Notes to Financial Statements (Continued)

(15)  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-35
<PAGE>


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

                    Notes to Financial Statements (Continued)


(16)     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 expenses 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 was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.


                                                                     (Continued)

                                      F-36
<PAGE>


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

                    Notes to Financial Statements (Continued)


(16)     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 15).

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 15), 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 was
                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-37
<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     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 was 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 15) 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 was 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 was 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 was 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 was
                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-38
<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     COMMON STOCK (Continued)

                6. Services rendered by an independent consultant in exchange
                for 250,000 shares. Consulting expenses of $320,000 was 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 was 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.

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 15) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:


                                                                     (Continued)

                                      F-39
<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     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 share 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 was 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-40
<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     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 14) accounted for
the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible
Preferred Stock (see Note 15) 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 15) 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 11) accounted for the issuance of 3,407,613 shares ($3,143,666). The
remaining 4,844,489 shares were issued as follows:


                                                                     (Continued)

                                      F-41
<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     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.


(17)     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.


                                                                     (Continued)

                                      F-42
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)

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 stock of the Company. The Board of
Directors or a company established compensation committee has direct
responsibility for the administration of this plan.

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>

                                        Incentive Stock Options     Nonqualified 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           --
                                     --------                   ----------


                                                                     (Continued)
                                      F-43
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17 )    STOCK OPTIONS (Continued)


                                        Incentive Stock Options     Nonqualified Options
                                        -----------------------     ------------ -------
                                      Shares   Wtd. Avg. Price    Shares     Wtd. Avg. Price
                                      ------   ---------------    ------     ---------------

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                          1,717,375        2.66               --
   Exercised                       (3,030,964)        .32          (750,000)       .31
   Canceled                          (279,982)        .60        (1,500,000)      2.75
                                    ---------                     ----------

Outstanding at June 30, 2001        2,116,883        2.46              --
                                    ==========                    ==========
</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.

At June 30, 2001 and 2000, 1,782,522 and 3,372,505, respectively, of the
incentive stock options were vested and exercisable and 2,250,000 of the
non-qualified stock options were fully vested and exercisable as of June 30,
2000. The stock options vest at various rates over periods up to ten years.
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.


                                                                     (Continued)

                                      F-44
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)

    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.

    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).


                                                                     (Continued)

                                      F-45
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)  STOCK OPTIONS (Continued)

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.

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.


                                                                     (Continued)

                                      F-46
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)  STOCK OPTIONS (Continued)

    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 1,717,375
    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.

The following table summarizes information about all of the stock options
outstanding at June 30, 2001:

<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>
       $ .23 - 1.25           425,008          5.06         $   .90         246,139      $   .85
        1.36 - 2.49           172,075          4.33            1.73          29,783         1.54
        2.50 - 3.75         1,519,800          4.99            2.87       1,506,600         2.86
      ------------------------------------------------------------------------------------------

       $ .23 - 3.75         2,116,883          4.95         $  2.38       1,782,522      $  2.56
      ==========================================================================================
</TABLE>

At June 30, 2001, 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
$1,290,300 and $1,649,255 for 2001 and 2000, respectively.


                                                                     (Continued)

                                      F-47
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)

The weighted average Black-Scholes value of options granted during 2001 and 2000
was $1.63 and $2.22 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, 2001     June 30, 2000     June 30, 2000
                                                     -------------     -------------    --------------
                     <S>                                   <C>               <C>              <C>
         Net loss to common shareholders -
                  As reported                        $  (9,724,360)    $   (8,168,879)  $ (52,986,238)
                                                     =============     ==============   ==============

                  Pro forma                          $  (7,960,975)     $ (13,935,057)  $ (51,222,853)
                                                     =============      =============    =============

         Basic loss per share -
                  As reported                        $      (.09)      $      (.10)     $      (1.22)
                                                     ==============    ==============   ==============

                  Pro forma                          $      (.07)      $      (.18)     $      (1.18)
                                                     ==============    ==============   ==============

         Diluted loss per share -
                  As reported                        $      (.09)      $      (.10)     $      (1.22)
                                                     ==============    ==============   ==============

                  Pro forma                          $      (.07)      $      (.18)     $      (1.18)
                                                     ==============    ==============   ==============
</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 2001 and 2000, respectively: no dividend yield;
volatility of 1.6% and 78.8%; risk-free interest rate of 6.5% and 6.5%; and an
expected term of five years.


(18)     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 at June 30,
2001 was $227,054.


                                                                     (Continued)

                                      F-48
<PAGE>

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

                    Notes to Financial Statements (Continued)


(19)     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, 2001 and 2000, the aggregate fair value of the Company's debt
obligations approximated its carrying value.


(20)     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 30, 1999. The new agreements will be 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.

As additional consideration for his development efforts in the CTLM(R) device,
the chief executive officer has been granted a "development royalty" which will
be paid based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLM(R) 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. (See Note 21)

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.

The Company has entered into agreements with various distributors located
throughout Europe, Asia, Canada, Mexico and South America to market the CTLM(R)
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.


                                                                     (Continued)
                                      F-49
<PAGE>

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

                    Notes to Financial Statements (Continued)


(21)     SUBSEQUENT EVENTS

The Chief Executive Officer of the Company and inventor of the CTLM(R)
unexpectedly passsed away of August 13, 2001. On August 14, 2001, by corporate
resolution, the President of the Company was named Chief Executive Officer; she
is the surviving spouse of the previous Chief Executive Officer. As a result of
his passing, the Board of Directors met on August 28, 2001 and confirmed the
following actions:

     1. A death benefit of one year's salary ($286,225) would be paid to the
     beneficiary, who is now the current Chief Executive Officer. A payment of
     $10,000 has been paid through the date of this report.

     2. The Board confirmed the hiring of a new President and Chief Operating
     Officer.

During the period subsequent to June 30, 2001, the Company has drawn an
additional $1,685,000 from their equity line, resulting in an additional
1,962,372 shares of common stock being issued by the Company. (See Note 11)

                                      F-50
<PAGE>



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

Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.


                                    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 current
directors and executive officers of the Company, as well as former directors who
served during a portion of fiscal 2001.

                                       32
<PAGE>

<TABLE>
<CAPTION>
Name                       Age                 Position                     Year Elected or Appointed
----                       ---                 --------                     -------------------------
<S>                        <C>                     <C>                              <C>
Richard J. Grable(1)       58         Chief Executive Officer and Director          1994

Linda B. Grable            63         Chairman of the Board, Chief Executive        1994
                                      Officer and President

John d'Auguste             51         President                                     2001

Allan L. Schwartz          59         Executive Vice-President, Chief               1994
                                      Financial Officer and Director

Ed Horton                  43         Chief Operating Officer                       2001

John R. Liegey(2)          45         Director                                      2000

Irving H. Schwab(3)        58         Director                                      2000

David E. Danovitch         39         Director                                      2000

Robert L. Kagan (4)        55         Director                                      2000

Phil E. Pearce             72         Director                                      2000

Stanley A. Hirschman       55         Director                                      2000
</TABLE>

1.   Mr. Grable passed away on August 13, 2001.
2.   Mr. Liegey was not nominated for re-election as Director at the annual
     meeting held on November 20, 2000.
3.   Mr. Schwab was elected in May 2000 and resigned in January 2001 as a result
     of a stipulation in the Cycle of Life settlement agreement.
4.   Mr. Kagan was elected in May 2000 and resigned in August 2000.

Richard Grable, 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.


Richard J. Grable
Mr. Grable was Chief Executive Officer and Director of Research and Development
and was the inventor of the CTLM(R) device. He was considered a pioneer in the
Optical Imaging field with over 25 years experience. Mr. Grable was a graduate
of the University of Miami School of Business with a Masters Degree in Business
Administration. He had over 30 years of electronic design experience and had
been directly involved in the development and sales of CT, Nuclear Medicine and
Ultrasound instrumentation since 1972. He had over sixteen years of experience
of preparing and filing 510(k)'s, Investigation Device Exemptions, and Premarket
Notification documents for the Food and Drug Administration. He held two United
States Patents and was co-inventor for one other medical device. He was a member
of the Institute of Electrical & Electronics Engineers, Optical Society of
America, the American Association for the Advancement of Science, the New York
Academy of Science, and a member and guest speaker of the International Society
for Optical Engineering. Mr. Grable had been a Director and Officer of the
Company since its inception in 1993. Mr. Grable passed away unexpectedly on
August 13, 2001..

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 was has played
a major role in raising over $35 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
a BA in Journalism and Marketing.


                                       33
<PAGE>

John d'Auguste
John d'Auguste was appointed President by the Board of Directors in August 2001.
Mr. d'Auguste began his career over 25 years ago at GE Medical Systems and
completed their GE Manufacturing Management Program in 1975. He has extensive
experience with medical products including CT, MRI, X-Ray and microscopes. His
experience was gained while holding positions with GE Medical Systems from 1973
to 1983, Picker X-Ray International from 1983 to 1985, and Cambridge Instruments
from 1988 to 1989. He also held management positions with GE's Aerospace
Division from 1985 to 1988, General Railway Signal from 1989 to 1993 and was
Vice President- Direct Sales of Gateway 2000 Inc. from 1993 to 1997, managing
1,500 employees with sales in excess of $3 billion. He also served Gateway as
Vice President-Operations managing 2,500 employees producing $5 billion in
annual revenue. More recently he was President of Operations for Cabletron
Systems from 1997 to 1999 and Chief Executive Officer of Revonet Inc. from 1999
to 2001. Mr. d'Auguste holds a B.S. degree in Systems Engineering from
Polytechnic Institute of Brooklyn and a M.S. degree in Engineering Management
from the Milwaukee School of Engineering.

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.

Ed Horton
Ed Horton was appointed Chief Operating Officer by the Board of Directors in
August 2001 and will be 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.

David E. Danovitch
Mr. Danovitch was appointed by the Board of Directors in August 2000 to replace
Dr. Robert Kagan who resigned effective August 1, 2000. Since January 2000, he
has been a senior partner of NewWest Associates, LLC, an international
consulting firm, and Del Rey Investments, LLC, a merchant banking firm, both
based in New York, New York. From January 2000 to present , Mr. Danovitch was a
Managing Director of Cambridge Partners, a merchant banking firm which focused
on misunderstood companies and assets. From 1995 to 1997, he was a founding
principal of Snowden Capital, Inc., a New York City-based investment banking
firm. From 1993 to1994, he served as Chief of Staff to Gerald Mczarne, a Senior
Vice President of IBM. Mr. Danovitch is an attorney and member of the District
of Columbia, Massachusetts and New York bars. He holds an A.B. from Kenyon
College, a J.D. from Suffolk University Law School and a LL.M.-Taxation from
Boston University School of Law.

Phil E. Pearce
Mr. Pearce has been an independent business consultant with Phil E. Pearce &
Associates since 1990, Chairman and Director of Financial Express Corporation
since 1990 and since 1988 has been a principal of Pearce-Henry Capital Corp. All
of these companies are based in New York City. Prior to 1988, Mr. Pearce was
Senior Vice President and a director of E.F. Hutton, Chairman of the Board of
Governors of the National Association of Securities Dealers and was closely
involved in the formation of the Nasdaq Stock Market, a Governor of the New York

                                       34
<PAGE>

Stock Exchange and a member of the Advisory Council to the United States
Securities and Exchange Commission on the Institutional Study of the Stock
Markets. Mr. Pearce also is a director of StarBase Corporation, a software
development company and Bravo! Foods International Corporation and Xybernaut
Corporation. Mr. Pearce is a graduate of the University of South Carolina (B.A.
1953) and attended the Wharton School of Investment Banking at the University of
Pennsylvania.

Stanley A. Hirschman
Mr. Hirschman is President of CPointe Associates, Inc., a Plano, Texas executive
management and consulting firm which he founded in 1996 and which specializes in
solutions for emerging companies with technology-based products. He is Chairman
of the Board of Bravo! Foods International Corporation, and former Chairman of
the Board of Mustang Software. His client list has included SBC Wireless,
Northern Telecom (Nortel), Earthlink, Inc., RetailHighway.com and Xybernaut
Corporation. Mr. Hirschman took a hands-on role in the planning and execution of
the strategic initiative to increase Mustang.Com shareholder value resulting in
the recent announcement of the acquisition of the company by Quintus
Corporation. Prior to establishing CPointe Associates, he was Vice President
Operations, Software Etc., Inc., a 396 retail store software chain, from 1989
until 1996. He has held senior executive management positions with T.J. Maxx,
Gap Stores and Banana Republic. He is active in community affairs and serves on
the Advisory Board of the Salvation Army Adult Rehabilitation Centers.

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.

MANAGEMENT TRANSITION

Upon the passing of her husband, Richard Grable, our Board of Directors named
Linda B. Grable our new Chief Executive Officer on August 14, 2001. She will
continue as Chairman of the Board of Directors. At our Board of Directors'
special meeting on August 28, 2001, the Board also confirmed the previous
appointments of John d'Auguste as the new President and Ed Horton as the new
Chief Operating Officer. The management transition is occurring at this time of
important challenges and opportunities given our recent approvals -- CE Mark, UL
and ISO 9002, --ongoing clinical and development activities, and the preparation
required for the filing of our PMA application with the FDA. It is usual and
customary that during management transitions numerous issues, risks and
uncertainties must be dealt with. These include but are not limited to the
ability of new management to handle its new responsibilities and to quickly
understand and develop and successfully implement effective strategies for the
business; and to retain key employees.

COMPENSATION OF DIRECTORS
Each director who is not our employee receives $500 per board meeting attended
at our corporate offices plus reimbursement of reasonable travel expenses. The
non-employee directors also receive stock options for 50,000 shares annually at
an exercise price equal to the market price on the date of the grant.

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, 2001.


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 2001, 2000 and 1999. 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".

                                       35
<PAGE>

                                             SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                 Annual Compensation                       Long-Term Compensation

Name & Principal
Position                  Year     Salary     Other Annual    Restricted    Securities/Underlying
                                              Compensation    Stock Awards  Option/SARs
<S>                        <C>       <C>           <C>            <C>           <C>
Richard J. Grable, CEO    1999    $286,225                                    458,333
and Director              2000    $286,225                                    793,255
                          2001    $286,225                                    500,000 (1)
Linda B Grable,           1999    $119,070                                    458,333
President and Director    2000    $119,070                                    793,255
                          2001    $127,404                                    500,000 (1)
Allan L. Schwartz,        1999    $119,070                                    458,333
Exec. V.P., CFO and       2000    $119,070                                    793,255
Director                  2001    $127,404                                    500,000 (1)
</TABLE>

(1) The aggregate dollar value of the 2001 options, based on the averaged high
and low price on June 30, 2001 are as follows: Richard J. Grable -$482,500;
Linda B. Grable-$482,500; and Allan L Schwartz-$482,500.


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 $10,000 of this death benefit to Linda Grable, as
beneficiary of Richard Grable.

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, 2001. Richard J. Grable, Linda B. Grable and Allan L. Schwartz each
exercised options that netted 1,108,967 common shares after their respective
cashless exercises of options during fiscal 2001.


                      Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                        No. of Securities  % of Total Options
                        Underlying         Granted to           Exercise or       Market Price
                        Options            Employees In         Base Price        On Date of      Expiration
Name                      Granted          Fiscal Year          ($/Share)             Grant           Date
----                    ------------       -------------------  ---------         ---------       --------
<S>                         <C>                   <C>               <C>              <C>           <C>
Richard J. Grable           500,000               29%               2.73             2.48         8/30/04
Linda B. Grable             500,000               29%               2.73             2.48         8/30/04
Allan L. Schwartz           500,000               29%               2.73             2.48         8/30/04
</TABLE>


Stock Option Plans
For the fiscal year ended June 30, 2001, all of our executive officers were
participants in our 1995 stock option plan. The plan was approved by our Board
of Directors and adopted by the shareholders at the March 1995 annual meeting.

                                       36
<PAGE>

The plan provides for the granting, exercising and issuing of incentive options
pursuant to Internal Revenue Code, Section 422. We may grant incentive stock
options to purchase up to 5% of our issued and outstanding common stock at any
time. Our Board of Directors has direct responsibility for the administration of
the plan.

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. 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 2000 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
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 26, 2001 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.

The actual number of shares of common stock held by the estate of Richard Grable
and Linda Grable, without giving effect to options, are 12,758,507 and 4,683,767
shares, respectively. Prior to the death of Richard Grable, both Richard Grable
and Linda Grable specifically disclaimed any beneficial interest in each other's
shares; however, given Linda Grable's status as the main beneficiary of Richard
Grable's estate, all of these shares are presumed beneficially owned by Linda
Grable.

Name and Address               Number of Shares Owned     % of Outstanding
of Beneficial Owner            Beneficially (1)(2)        Shares of Common Stock
-------------------            ----------------------    -----------------------

Estate of Richard J. Grable      18,902,274(3)                     15.6%
6531 NW 18th Court
Plantation, FL 33313

                                       37
<PAGE>

Linda B. Grable                  18,902,274(4)                     15.6%
6531 NW 18th Court
Plantation, FL 33313

Allan L. Schwartz                 5,555,127(5)                      4.6%
6531 NW 18th Court
Plantation, FL 33313

John d'Auguste                           -0-                          0%
6531 NW 18th Court
Plantation, FL 33313

Ed Horton                                -0-                          0%
6531 NW 18th Court
Plantation, FL 33313

David E. Danovitch                       -0-                          0%

Phil E. Pearce                           -0-                          0%

Stanley A. Hirschman                     -0-                          0%

All officers and directors       24,457,401(6)                     20.2%
as a group (6 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 121,390,219 shares of common stock
          outstanding as of September 26, 2001 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 26,
          2001 are deemed outstanding for computing the percentage of that
          person and the group.

     (3)  Includes 1,000,000 shares subject to options and 4,683,767 shares
          owned by the widow of Richard Grable, Linda Grable.

     (4)  Includes 500,000 shares subject to options and 12,758,507 shares owned
          by theestate of Richard Grable.

     (5)  Includes 1,000,000 shares subject to options and 9,000 shares owned by
          the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
          beneficial ownership.

     (6)  Includes 1,500,000 shares subject to options held by Linda and the
          estate of Richard Grable and 1,000,000 shares subject to options held
          by Allan Schwartz. 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 their control of
a substantial portion of our outstanding stock.

                                       38
<PAGE>

In September and October 1998, Linda Grable, personally guaranteed three
promissory notes totaling $600,000 which we issued to third parties. Linda
Grable received no compensation for these guarantees. All three notes have been
repaid as of the date of this filing.

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 1999, Messrs. Grable and Schwartz each sold 110,000 shares, respectively,
of our common stock owned by them in excess of 4 years, in accordance with Rule
144, and lent the aggregate proceeds of approximately $91,759 directly to us.
The loans were evidenced by interest free promissory notes, which were due and
payable on June 30, 1999. In June 1999, Messrs. Grable and Schwartz each sold
280,000 and 315,020 shares, respectively, of our common stock owned by them in
excess of 4 years, in accordance with Rule 144, and lent the aggregate proceeds
of approximately $201,795 directly to us. The loans were evidenced by interest
free promissory notes, which were due, and payable on July 31, 1999. In July
1999, Mr. Schwartz sold 500,000 shares of our common stock owned by him in
excess of 4 years, in accordance with Rule 144, and lent the aggregate proceeds
of approximately $137,241 directly to us. The loan was evidenced by an interest
free promissory note, which was due and payable on August 31, 1999. The net
proceeds of each loan were recorded as a loan payable to the lender. In August
1999, Messrs. Grable and Schwartz received 390,000 and 925,500 shares of our
restricted common stock, respectively, as payment in full for the loans made
between May 1999 and July 1999.

At our Annual Meeting held on May 10, 2000, Irving H. Schwab was elected a
director of the Company. Mr. Schwab had an ownership interest of $200,000 (40%)
in the $500,000 Promissory Note dated February 1, 2000, held by Cycle of Life
Technologies, Inc., as the lender. Consequently, Mr. Schwab received 324,000, or
40% of the 810,000 shares of our common stock issued in connection with the
January 2001 settlement of that note and the litigation brought by Cycle of
Life. In connection with the settlement agreement, Mr. Schwab agreed to resign
as a director. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."

In June 2000, Linda B. Grable loaned us an aggregate total of $215,000. The
loans were evidenced by interest free promissory notes, which were due and
payable on July 31, 2000. On July 19, 2000 we paid back the loans in full with
cash.


                                       39
<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.
10.12  Syncor Distribution Agreement. Incorporated by reference to our Amendment
       number 1 to Registration on Form S-2, File Number 333-60405.
10.14  Consultronix S.A. Distribution Agreement. Incorporated by reference to
       our Form 10 KSB/A filed on April 9, 1999.
10.15  Iberadac, S.A. Distribution Agreement. Incorporated by reference to our
       Form 10 KSB/A filed on April 9, 1999.
10.17  Form of Debenture Subscription Documents. Incorporated by reference to
       our Amendment number 1 to Registration on Form S-2, File Number
       333-60405.
10.18  Form of Mortgage. Incorporated by reference to our Amendment number 1 to
       Registration on Form S-2, File Number 333-60405.
10.20  1999 Equity Incentive Plan
10.26  Promissory Note by and between IDSI and Cycle of Life Technologies, Inc,
       dated February 1, 2000. Incorporated by reference to our Post-Effective
       Amendment No. 4 to Registration on Form S-2, File Number 333-60405.


                                       40
<PAGE>

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.
10.31  Securities Purchase Agreement for Series K between IDSI and Charlton
       Avenue LLC. Incorporated by reference to our Form 10-KSB for the fiscal
       year ending June 30, 2000 filed on September 14, 2000.
10.32  Registration Rights Agreement for Series K between IDSI and Charlton
       Avenue LLC. Incorporated by reference to our Form 10-KSB for the fiscal
       year ending June 30, 2000 filed on September 14, 2000.
10.33  Private Equity Credit Agreement between IDSI and Charlton Avenue LLC.
       Incorporated by reference to our Form 10-KSB for the fiscal year ending
       June 30, 2000 filed on September 14, 2000.
10.34  Registration Rights Agreement for Private Equity Agreement for $25
       Million between IDSI and Charlton Avenue LLC. Incorporated by reference
       to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on
       September 14, 2000.
10.35  Convertible Promissory Note between IDSI and Aspen International Ltd.
       Incorporated by reference to our Form 10-KSB for the fiscal year ending
       June 30, 2000 filed on September 14, 2000.
10.36  Promissory Note from IDSI to Charlton Avenue LLC. Incorporated by
       reference to our Form 10-KSB for the fiscal year ending June 30, 2000
       filed on September 14, 2000.
10.38  Securities Purchase Agreement between IDSI and Charlton Avenue LLC.
       Incorporated by reference to our Form 10-QSB for the quarter ending
       September 30, 2000 filed on November 13, 2000.
10.39  Amended Private Equity Credit Agreement dated as of November 30, 2000
       between IDSI and Charlton Avenue LLC, which replaces and supersedes
       Exhibit 10.33. Incorporated by reference to our Amendment No. 2 to
       Registration on Form S-2, File Number 333-46546.
10.40  Stipulation for Settlement and Dismissal with Prejudice dated January 17,
       2001 between IDSI and the beneficial owners of the Cycle of Life
       promissory note. Incorporated by reference to our Registration on Form
       S-2, File Number 333-55766, filed on February 16, 2001.
10.41  Distribution Agreement between IDSI and Medical Imaging Systems, Inc.
10.42  Distribution Agreement between IDSI and Medical Imaging Services, Ltd.


 (b)     Reports on Form 8-k
None


                                       41
<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, 2001
------------------
Linda B. Grable                   Executive Officer


/s/Allan L. Schwartz              Director, Executive Vice-President        September 26, 2001
--------------------
Allan L. Schwartz                 (Principal Accounting and Financial
                                  Officer)


/s/ David E. Danovitch            Director                                  September 26, 2001
----------------------
David E. Danovitch


/s/Phil E. Pearce                 Director                                  September 26, 2001
-----------------
Phil E. Pearce


/s/ Stanley A. Hirschman          Director                                  September 26, 2001
------------------------
Stanley A. Hirschman
</TABLE>


                                       42
<PAGE>