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

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

                    For the fiscal year ended: June 30, 1997

                         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. /X/ 

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 24, 1997, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$22,503,933.

The number of shares outstanding of each of the issuer's classes of
common equity, as of June 30, 1997: 24,905,084. 

The number of shares outstanding of the issuer's class of preferred equity 
(Series B Convertible Preferred), as of June 30, 1997: 450.

                       Documents Incorporated By Reference

Proxy Statement dated September 7, 1997 issued in connection with the company's
annual meeting to be held on October 15, 1997. Also see Item 13. Exhibits and
Report on Form 8-K.

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<PAGE>
         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 HEREIN.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

Since its inception (December 10, 1993), Imaging Diagnostic Systems, Inc. (the
"Company") has been engaged in the research and development of its cancer
detection technology and developing, for commercial application its Computed
Tomography Laser Mammography (CTLM(TM)) device.

The CTLM(TM) is a device for detecting breast cancer through the skin in a
non-invasive and objective procedure. The CTLM(TM) employs a high-speed femto
second pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze masses in the breast for indicia
of malignancy or benignancy. The combination and incorporation of the foregoing
components into a device provide for enhanced diagnostic capabilities which the
company believes are superior to standard mammography diagnostic tools such as
ultra-sound and mammography. Based upon the known optical properties of benign
and malignant tissues (whether and to what extent light is impeded as it passes
through the tissue and the measurement of the impedance), the CTLM(TM) device is
designed to provide both the physician and patient with immediate, on-site,
objective interpretation and determination of further clinical work-up.
Accordingly, the Company believes that the CTLM(TM), will improve early
diagnosis, reduce diagnostic uncertainty and decrease the number of biopsies
performed on benign lesions. See Item 1. "Description of Business- Comparison to
Existing Diagnostic Modalities." In addition, the CTLM(TM)device does not expose
the patient to ionizing radiation or the breast to painful compression. Which
the Company believes are the contributing factors that contribute to a portion
of the patient population not obtaining a conventional mammogram.

During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti:Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. Using this research the Company developed the first prototype of the
CTLM(TM) able to create images of a breast. The Company refined various software
and hardware configurations and components of the prototype based on these first
images, and filed a patent in June 1995. During this period of time there were
further advances in laser technology effecting the size and stability of the
laser component. The Company capitalized upon these advances by purchasing a
laser package manufactured by Spectra-Physics, Inc. and incorporating it into
the CTLM(TM). On December 12, 1995, the Company had a preliminary meeting with
the Food and Drug Administration to discuss the approach the Company would need
to take to obtain marketing clearance for its CTLM(TM) device. The Company was
advised that it would need to submit for approval a pre-market approval
application ("PMA") in order to obtain marketing clearance for the device.
Further, the Company also needed to submit an investigational device exemption
("IDE") application to the FDA in order to commence human clinical trials of the
device. The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other developments,
the Company further refined the detection scheme and laser power configuration
in order to obtain substantially better image quality. In order to incorporate
the changes into the CTLM(TM) the Company was required to submit an amendment to
its IDE application. In November, 1996 the Company installed its first CTLM(TM)
device at the Strax Breast Diagnostic Center.

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<PAGE>

On June 12, 1997, the Company was advised by patent counsel that the patent
filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus "was granted
with 7 independent and 16 subordinate claims.

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 Company's
CTLM(TM) device 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.

The market in which the Company intends to participate is highly competitive.
Many companies may succeed in developing products that are more effective or
less costly than the Company's products or such companies may be successful in
manufacturing and marketing their products than the Company. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems, and
thermography, diaphonography and transilluminational devices may be reluctant to
the CTLM(TM). Currently, mammography is the most popular choice for the
detection of breast cancer. The Company's ability to sell the CTLM(TM) device to
medical facilities will, in part, be dependent on the Company's ability to
demonstrate the clinical utility of the CTLM(TM) device as an adjunct to
mammography and physical examination as well as the CTLM(TM)'s advantages over
other available diagnostic tests.

To date, due to the necessity of complying with all applicable United States
government regulations, the Company has not begun to market or sell the CTLM(TM)
and therefore has not generated revenues from the commercialization of the
CTLM(TM). From inception to June 30, 1997 the Company has sustained accumulated
losses of $16,288,314. The Company's results may vary significantly from period
to period depending on several factors, such as the timing of certain expenses
and the progress of the Company's research and development and commercialization
programs, all of which may be affected by the availability of funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

BREAST CANCER

Background
----------

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"), (i)
approximately one in eight women in the United States will develop breast cancer
during her lifetime; (ii) Nationwide it is estimated that approximately 43,900
women will die from this disease in 1997; (iii) In the United States in 1997
approximately 180,200 women will be diagnosed with breast cancer. 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; (iv) Breast
cancer is the second leading cause of death for American women following lung
cancer; (vi) In Europe in 1990, approximately 170,000 cases of cancer were
discovered, with an estimated 73,000 deaths; and (vii) The annual cost of breast
cancer management in the United States alone is approximately $25 billion.

There is widespread agreement within the health care industry 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
misses, on average, 15%-20% of breast cancer detected by physical exam alone.

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<PAGE>

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;(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 the appearance of a physical
symptom, such as a palpable lesion, pain or nipple discharge, which was
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 or a minimally invasive procedure such as
fine needle aspiration or large core needle biopsy. In each case, the potential
benefits of additional diagnostic testing must be balanced against the costs,
risks and discomfort to the patient associated with undergoing the additional
procedures. 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 a 4% miss-rate
factor present.

Due in part to the limitations 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. According to the ACS
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 may 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 ours for their biopsy results.

SCREENING AND DIAGNOSTIC MODALITIES

Physical Examination
--------------------

Physical examinations may be conducted by a physician or clinician as part of a
medical examination, or by a woman performing a breast self-examination;
however, 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 and image
of the internal structure of the breast which 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, the ACS recommends mammograms be limited to one 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

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average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average cost 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(TM) device will cost approximately $300,000 and the cost of a bilateral
exam will be $125 to $150. The foregoing average cost figures are based on a
survey of 23 ACR and FDA certified facilities in Broward County, Florida,
conducted during the month of March, 1997. Due 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.

The foregoing average cost figures are based on a survey of 23 ACR and FDA
certified facilities in Broward County, Florida, conducted during the month of
March, 1997. Again, it is expected that the CTLM(TM) device 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.

The Computed Tomography Laser Mammography Device
------------------------------------------------

A bilateral breast examination, utilizing the CTLM(TM) device is performed by a
Technologist. This procedure last approximately 15 minutes with the patient
resting in a comfortable prone position. One breast at a time is pendulous in
the aperture housing the scanning device. Once the entire breast is scanned the
other breast is placed in the chamber for scanning. Each scan takes
approximately 6-8 minutes. Based upon the known optical properties of benign and
malignant tissues, the procedure is designed to provide both the physician and
patient with immediate, on-site, objective interpretation and determination of
further clinical work-up. Further, the device is designed to archive and compare
scans and provide the patient with a computer disc (CD) of her scan.

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.



Comparison to Existing Diagnostic Modalities
--------------------------------------------

The CTLM(TM) device differs from currently available breast imaging modalities
employed for the detection of breast cancer by generating more precise
information for the clinician or doctor. The CTLM(TM) device generates,
depending on the size of the breast, approximately 20 cross-sectional images of
a breast. A conventional screening mammography exam generates 2 images of the
breast. Cross-sectional imaging allows a doctor or clinician to isolate the
location of the abnormality within the breast. By doing so, there is greater
resolution of the area where the specific abnormality resides.

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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. Vigorous compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but does pose an obstacle for many women either deciding to
have their first mammogram or deciding whether to ever return for an annual
screening mammogram.

Scanning of the breast with the CTLM(TM) device is accomplished in such a manner
that utilizes no compression of tissue. The gathering of data from 360(Degree)
around the breast yields multiple cross-sectional images which are
representative of a near three-dimensional view of its internal structures. Such
an acquisition provides the physician with increased accuracy in lesion
location, as well as determination of the extent and involvement of breast
disease processes. Conventional two-dimensional imaging with mammography and
ultrasound does not provide such quick and complete information.

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. With free suspension of the breast in the CTLM
scanning chamber, and the ability of the device to image the breast from the
chest wall to the nipple, data can be collected from around the entire breast.
Either silicone or saline implants do not impede light transmission through the
breast.

The Company believes that the shortcomings of current breast cancer management,
which include discomfort and exposure to radiation, represent a significant
market opportunity for an objective technology, which does not have these
shortcomings. The use of the CTLM(TM)device to detect breast cancer is believed
to 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.

REGULATORY AND CLINICAL STATUS

In order to sell the CTLM(TM)device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a PMA with the FDA to obtain marketing clearance. 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. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.

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

                  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.

                  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.

                  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.

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                  The availability of the device is otherwise in the best
                  interest of the public health.

On February 9, 1996, the FDA approved the Company's Investigational Device
Exemption (IDE) application. An approved IDE application permits a device, that
would otherwise be subject to marketing clearance, to be shipped lawfully for
the purpose of conducting a clinical study. Further, the Company supplemented
the IDE to allow for the scanning of 7-10 patients in-house for calibration
purposes. On April 3, 1997, the Company was granted approval pursuant to the IDE
to scan an additional 20 patients at its facilities to conduct comparative
studies.

The IDE authorizes the Company to conduct a Phase I study at the Strax Breast
Diagnostic Institute located in Lauderhill, Florida (the "Strax Center"). The
Phase I study involves scanning 50 patients with differing breast abnormalities
and comparing the results with other diagnostic modalities such as ultra-sound
and standard x-ray mammography. These 50 patients will be involved in the study
for the limited period of time for the Phase I study. In addition to the 50
patients, the Company received authorization from the FDA on April 3, 1997, to
scan an additional 20 patients at the Company's facilities. These patient scans
will be compared against mammography and MRI. As of May 2, 1997, the Company has
scanned 15 patients at its facility and 3 patients at the Strax Center. It is
anticipated the Phase I study will take 60-90 days. After the Phase I study is
completed and the results are reviewed by the FDA, the Company will submit its
Phase II application to the FDA. The Phase II study will encompass the
establishment of 4-6 clinical sites at major hospitals in the United States and,
in addition to comparing the results to existing modalities, the results will be
compared against actual biopsies. These clinical sites will be used to
accumulate the approximately 400-500 clinical studies to be submitted with the
PMA application.

The delay between the date of approval of the IDE and the installation of the
device at the Strax Center was due to the availability of a new laser package
which was installed in the CTLM(TM). These technological improvements to the
laser component of the CTLM(TM) resulted in increased scanning capabilities. The
Company was required to submit to the FDA for approval an amendment to the
Company's existing IDE application to incorporate the changes prior to
installing the device at the Strax Center. The FDA also requested that the
Company conduct a clinical test to support the amendment to the IDE application.
The Company received approval for the amendment on April 3, 1997.

SALES AND MARKETING

The laws of certain European and Asian countries may permit the Company to begin
marketing the CTLM(TM)device in Europe and Asia before marketing would be
permitted in the United States. The Company is considering potential
distribution agreements with strategic marketing partners in Europe and Asia and
has entered into a distribution agreement with Euro Trading & Finance S.r.l. to
market and service the device in Italy.

KNOWN UNCERTAINTIES

Limited Operating History; Continuing Operating Losses; Uncertainty of Future 
-----------------------------------------------------------------------------
Profitability
-------------

The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLM(TM)
device. The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At June 30, 1997, the Company
had an accumulated deficit of $16,288,314. Such losses have resulted principally
from costs associated with the Company's operations. The Company expects
operating losses will increase for at least the next several years as total
costs and expenses continue to increase due principally to the anticipated
commercialization of the CTLM(TM) device, development of, and clinical trials
for, the proposed CTLM(TM) device and other research and development activities.
The Company's ability to achieve profitability will depend in part on its

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ability to obtain regulatory approvals for its proposed products and develop the
capacity to manufacture and market any approved products either by itself or in
collaboration with others. There can be no assurance if and when the Company
will receive regulatory approvals for the development and commercial
manufacturing and marketing of its proposed products, or achieve profitability
is highly uncertain. See "Management's Discussion and Analyses of Financial
Condition and Results of Operations."

Government Regulation
---------------------

The manufacture and sale of medical devices, including the CTLM(TM) device, are
subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA and corresponding state agencies, and in
other countries. In the United States, the Company's products are regulated as
medical devices and are subject to the FDA's pre-market clearance or approval
requirements. Securing FDA clearances and approvals may require the submission
of extensive clinical data and supporting information to the FDA. The Company
cannot file its PMA application for the CTLM(TM) device until its clinical
trials are completed. There can be no assurance, however, that the clinical
trials will be successfully completed, or if completed, will provide sufficient
data to support a PMA application for the CTLM(TM) device. Nor can there be any
assurance that the FDA will not require the Company t conduct additional
clinical trials for the CTLM(TM) device. The process for obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain and frequently
requires from one to several years from the date of FDA submission, if
pre-market approval is obtained at all. Sales of medical devices outside the
United States are subject to international regulatory requirements that vary
from country to country. The time required to gain approval for sale
internationally may be longer or shorter than that required for FDA approval and
the requirements may differ. In Europe, the Company will be required to obtain
the certifications necessary to enable the CE mark to be affixed to the
Company's products by mid-1998 in order to conduct sales in member countries of
the European Union. The Company has not obtained such certificates and there can
be no assurance it will be able to do so in a timely manner, or at all.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA ands certain foreign regulatory authorities may impose
numerous other requirements with which other medical device manufacturers must
comply. FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. Product approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. The third-party manufacturers upon which
the Company depends to manufacture its products are required to adhere to
applicable FDA regulations regarding GMPs and similar regulations in other
countries, which include testing, control and documentation requirements.
Ongoing compliance with GMP regulations and other applicable regulatory
requirements will be monitored by periodic inspections by the FDA and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing and promoting products for
unapproved use, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new government
regulations or polices could prevent or delay regulatory approval of the
Company's products. Certain material changes to medical devices also are subject
to FDA review and clearance or approval. There can be no assurance that the
Company will be able to obtain FDA approval of a PMA application for the
CTLM(TM) device on a timely basis, or at all, and delays and delays in receipt
of or failure to obtain such approvals or clearances, the loss of previously
obtained approvals, or failure to comply with existing or future regulatory
requirements that would have material adverse effect on the Company's business,
financial condition and results of operations. See "Business-Government
Regulation".

Early Stage of Product Development
----------------------------------

The Company's proposed products and future product development efforts are at an
early stage. Accordingly, there can be no assurance that any of the Company's
proposed products will be found to be safe and effective, can be developed into
commercially viable products, can be manufactured on a large scale or will be

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economical to market, or will achieve or sustain market acceptance. There is,
therefore, a risk that the Company's product development efforts will not prove
to be successful.

Dependence Upon U.S. Pre-Market Approval
----------------------------------------

Under the provisions of the Federal Food and Cosmetic Act ("the FDC Act"), the
Company must obtain pre-market approval from the FDA prior to commercial use in
the United States of the proposed CTLM(TM) device. There can be no assurance if
or when the Company will receive any such clearances or approvals. Obtaining FDA
pre-market approval may impose costly requirements on the Company and may delay
for a considerable period of time, or prevent, the commercialization of the
CTLM(TM) device.

Dependence on Market Acceptance
-------------------------------
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(TM) device. The extent that, and rate of which,
the CTLM(TM) device achieves market acceptance and penetration will depend on
many variables including, but not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy and
cost-effectiveness of the CTLM(TM) device, the advantage of the CTLM(TM) device
over existing technology and cancer detection methods, third-party
reimbursements practices and the Company's manufacturing, quality control,
marketing and sales efforts. Failure of the Company's products to gain market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Sales and
Marketing," "Business - Manufacturing" and "Business - Reimbursement."

Limited Marketing and Sales Capability
--------------------------------------

In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop. The Company intends
to pursue and has secured one or more distribution arrangements in Europe and
Asia with strategic marketing partners who have established marketing
capabilities. There can be no assurance that the Company on its own, or through
arrangements with others, will be able to enter into such arrangements on
acceptable terms, if at all. To the extent that the Company arranges with third
parties to market its products, the success of such products may depend on the
efforts of such third parties. There can be no assurance that the Company will
be able to enter any such strategic alliance in Europe or that any of the
Company's proposed marketing schedules or plans can or will be met. See
"Reliance on International Sales," "Business - Sales and Marketing," and See
Business - Government Regulation".

Limitation on 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 the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM(TM) device or by refusing reimbursement. If examinations
utilizing the Company's products were not reimbursed under these programs, the
Company's ability to sell its products may be materially and/or adversely
affected. There can be no assurance that third-party payors will provide
reimbursement for use of the Company's 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 material adverse effect on the Company's 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,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and

                                       9
<PAGE>

profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the cost of
health care through various means. See "Business - Reimbursement."

Uncertain Ability to Meet Capital Needs
---------------------------------------

The Company will require substantial additional funds for its research and
development programs, preclinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked 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 the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fee for current employees and consultants,
and other contractual agreements and are likely to increase as additional
agreements are entered into and additional personnel are retained. See "Business
- - Patents," "Business - Licenses and Other Agreements," "Management -
Employment Agreements," "Certain Transactions" and "Notes to Financial
Statements." The Company may need to raise additional capital to fund its future
operations and may seek such additional funding through public or private
financing or collaborative, licensing and other arrangements with corporate
partners. 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. There can be no assurance, however,
that additional financing will be available when needed, or if available, will
be available on acceptable terms. Insufficient funds may prevent the company
from implementing its business strategy or may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license to third parties rights to commercialize products or
technologies that the Company would otherwise seek to develop itself.

Dependence on Qualified Personnel
---------------------------------

Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and 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 the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. See "Business - Employees and Management."

Competition
-----------

The market in which the Company intends to participate is highly competitive.
Many of the companies in the cancer diagnostic and screening markets have
substantially greater technological, financial, research and development,
manufacturing, human and marketing resources and experience than the Company.
Such companies may succeed in developing products that are more effective or
less costly than the company's products or such companies may be successful in
manufacturing and marketing their products than the Company. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems, and
thermography, diaphonography and transilluminational devices may not use the
company's products. Currently mammography is employed widely and the Company's
ability to demonstrate the Company's ability to sell the CTLM(TM) device to
medical facilities will, in part, be dependent on the Company's ability to
demonstrate the clinical utility of the CTLM(TM) device as an adjunct to
mammography and physical examination and its 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

                                       10
<PAGE>

of academic institutions involved in various areas of research involving
"optical medical imaging" which is a shorthand description of the technology the
Company's CTLM(TM) device 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.

Technical Obsolescence
----------------------

Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products 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 the Company's business, financial condition
and results of operations. See "Business - Competition."

Reliance on International Sales
-------------------------------

The Company intends to commence international sales of the CTLM(TM) device in
Europe and Asia prior to commencing commercial sales in the United States, where
sales cannot occur unless and until the Company receives pre-market approval
from the FDA. Thus, until the Company receives pre-market approval from the FDA
to market the CTLM(TM) device, as to which there can be no assurance, the
Company revenues, if any, will be derived from sales to international
distributors. A significant portion of the Company's 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 the Company's 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 the Company's business, financial condition
and results of operations. See "Business - Sales and Marketing," the regulation
of medical devices, particularly in Europe, continue to develop and there can be
no assurance that new laws or regulations will not have an adverse effect on the
Company.

Product Liability
-----------------

The Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLM(TM) device is being developed as a adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability.

Employees
---------

As of September 24, 1997, the Company had 31 full-time employees, including its
three executive officers, and 2 part-time employees. A majority of the Company's
employees (22) are employed in the areas of scientific and product research and
development.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000 sq. ft.
building located on a 5 acre landscaped tract. The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from hardware components
that will be made by vendors to Company specifications. The software components
of the device are developed by Company.

ITEM 3.  LEGAL PROCEEDINGS

On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Mr. Valey
Kamalov ("Kamalov"). The complaint alleges that Kamalov, an ex-employee of the
Company, violated his employment agreement with the Company while employed and

                                       11
<PAGE>

after terminating his employment with the Company by violating non-compete,
confidentiality, and invention covenants of the agreement. Upon filing the
complaint, the Company sought and was granted injunctive relief against Kamalov
during the pendency of the proceedings.

The Company is not aware of any other material legal proceedings, pending or
contemplated, to which the Company is, or would be, a party or of which any of
its property is, or would be, the subject.

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

NONE
                                     PART II

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

The Company's Common Stock is traded on the over-the-counter bulletin board
market. There has been trading in the Company's Common Stock since September 20,
1994. The following table sets forth, for each of the fiscal periods indicated,
the high and low trade 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, mark down or commissions and may
not necessarily represent actual transactions.


QUARTER ENDING                        HIGH BID            LOW BID
--------------                        --------            -------

FISCAL YEAR 1995
September 1994                          $1.38               $1.00
December 1994                           $1.44               $ .75
March 1995                              $2.19               $ .50
June 1995                               $2.12               $1.46

FISCAL YEAR 1996
September 1995                          $  .78              $ .71
December 1995                           $3.15               $ .75
March 1996                              $8.25               $8.00
June 1996                               $3.90               $3.87

FISCAL YEAR 1997
September 1996                          $3.93               $2.25
December 1996                           $3.93               $1.43
March 1997                              $4.12               $2.43
June 1997                               $3.06               $2.69

On June 30, 1997, the closing trade price of the Common Stock as reported on the
OTC Bulletin Board was $2.69. As of such date, there were approximately 607
holders of record of the Company's Common Stock.

                                       12

<PAGE>

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

RESULTS OF OPERATIONS
   
Twelve Months Ended June 30, 1997 and June 30, 1996
---------------------------------------------------

General and administrative expenses during the twelve months ended June 30,
1997, were $528,753 representing an increase of $231,524 from $297,229 during
the twelve months ended June 30, 1996. The increase is due primarily to a
substantial increase of developmental activities within the Company associated
with the CTLM(TM) device. Compensation and related benefits during the twelve
months ended June 30, 1997, were $3,464,124 representing an increase of
$1,059,928 from $2,404,196 during the twelve months ended June 30, 1996. The
increase in compensation and related benefits is due to the hiring of an
additional 10 employees and the exercise of incentive and non-qualified stock
options by its employees. Research and development expenses during the twelve
months ended June 30, 1997, were $1,065,178 representing an decrease of $478,082
from $1,543,260 during the twelve months ended June 30, 1996. This decrease is
due primarily to finalizing certain components of the CTLM(TM)device.

Advertising and promotion expenses during the twelve months ended June 30, 1997,
were $166,520 representing a decrease of $106,178 from $272,698 during the
twelve months ended June 30, 1996. The decrease is due primarily to the
reduction of advertising in domestic and foreign medical imaging and medical
device publications, public relations and investor public relations expenses.

Consulting expenses during the twelve months ended June 30, 1997, were $764,364
representing a decrease of $67,711 from $832,075 during the twelve months ended
June 30, 1996. The decrease is due primarily to the termination of outside
consultants as new employees are hired to perform these specific tasks.

Professional expenses during the twelve months ended June 30, 1997, were
$178,402 representing a decrease of $451,882 from $630,284 during the twelve
months ended June 30, 1996. The decrease is due primarily to a substantial
decrease of professional fees as a result of hiring employees and non-recurring
expenses associated with the clinical sites and attendant expenses.

Stockholder expenses during the twelve months ended June 30, 1997, were $20,902
representing an increase of $20,902 from $-0- during the twelve months ended
June 30, 1996. The increase is due primarily to the costs associated with
preparing and mailing the Company's Annual Report and Proxy Statement.

Tradeshow expenses during the twelve months ended June 30, 1997, were $154,782
representing an increase of $69,159 from $85,623 during the twelve months ended
June 30, 1996. The increase is due to the cost of modifications required to the
Company's exhibit for the 1996 Radiological Society of North America's
Scientific Assembly and Annual Meeting in Chicago, IL.

Travel and subsistence costs during the twelve months ended June 30, 1997, were
$195,585 representing an increase of $95,759 from $99,826 during the twelve
months ended June 30, 1996. The increase was primarily due to increased travel
and housing expenses for consultants and for travel and lodging expenses
associated with exhibiting at the 1996 Radiological Society of North America's
Scientific Assembly and Annual Meeting in Chicago, IL.

Rent expense during the twelve months ended June 30, 1997, was $48,897
representing a decrease of $81,951 from $130,848 during the twelve months ended
June 30, 1996. This decrease was primarily due to the expiration of the
Company's lease on its office space on NW 46th Street in Sunrise, FL.

                                       13

<PAGE>

Interest expense during the twelve months ended June 30, 1997, was $2,744
representing an increase of $2,744 from $-0- during the twelve months ended June
30, 1996. This increase was due to the reclassification of interest associated
with the capital lease on the Company's telephone system.

Interest income during the twelve months ended June 30, 1997, was $116,972
representing an increase of $58,664 from $58,308 during the twelve months ended
June 30, 1996. This increase is due to an increase of funds invested by the
Company.

Depreciation and amortization expenses during the twelve months ended June 30,
1997, were $230,047 representing an increase of $118,375 from $111,672 during
the twelve month period ended June 30, 1996. This increase is due primarily to
the purchase of the Company's current facility and the attendant improvements.
    

BALANCE SHEET DATA

Liquidity and Capital Resources
-------------------------------

The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $12,858,000. In
March, 1996 the Company received net proceeds of approximately $3,600,000 from
the private placement of its Series A Convertible Preferred Stock offering,
approximately $1,600,000 from the private placement of its common stock pursuant
to Regulation S of the Securities Act of 1933, as amended, and approximately
$2,000,000 from the exercise of options that were granted for services rendered.
In December, 1996 the Company received net proceeds of approximately $4,500,000
from the private placement of Series B Convertible Preferred Stock and Warrants
pursuant to Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.

The Company's combined cash and cash equivalents totaled $383,223 at June 30,
1997, representing a decrease of $3,592,131 from $3,975,354 at June 30, 1996.
The decrease in cash and cash equivalents is due to continuing operations.
   
The Company's prototype equipment totaled $1,216,585 at June 30, 1997
and $575,338 at June 30, 1996. All direct costs associated with the prototype
equipment have been capitalized. The increase in prototype equipment is due to
an increase in the development of the Computed Tomography Laser Mammography
(CTLM(TM)) device and the manufacture of five (5) devices to be placed into
clinical sites. The Company will reclassify prototype equipment as inventory
when the research and development period concludes and the clinical testing
begins.

The Company's property and equipment, net, totaled $3,293,297 at June 30, 1997
and $657,132 at June 30, 1996. The increase of $2,636,165 is due to the purchase
of a building and the attendant improvements.
    
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development and the expected costs of commercializing it initial
product, the CTLM(TM)device. The Company will require additional funds for its
research and development, pre-clinical and clinical testing, operating expenses,
Food and Drug Administration regulatory processes, and manufacturing and
marketing programs. Accordingly, the Company will be required to raise
additional funds prior to the end of calendar year 1997 in order to continue
operations. The Company plans to raise additional funds by either: entering into
a transaction(s) to privately place equity, either common or preferred stock, or
debt securities, or combinations of both; or, placing equity into the public
market through an underwritten secondary offering. At the present time, the
Company continues to receive indications of interest to provide this additional
funding. The Company, however, continues to review and balance these indications
of interest and funding requirements against its strategic product development
goals.

On September 24, 1997, the Corporation entered into an agreement with a merchant
banker for the sale, pursuant to Regulation S, of up to a total of 200 shares of
Series C Convertible Preferred Stock ("Preferred") and Warrants to purchase up

                                       14
<PAGE>

to 100,000 shares of the Company's common stock, exercisable at a price equal to
the Closing bid price of the common stock as of the Closing Date of the
Regulation S Sale (the "Closing Date"), for a total amount of up to $2,000,000.
The Preferred is convertible at 75% of the average closing price of the
Company's common stock for the five-day trading period ending on the day prior
to the date of conversion but in no event will the conversion price be greater
than 75% of the average price on the Closing Date, as determined by the average
price over the five consecutive trading days ending the trading day prior to the
Closing Date. See Financial Statements Note (18) Subsequent Event.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                              Page
                                                              ----

Independent Auditor's Report                                  F-  1
Financial Statements
Balance Sheet                                                 F-  3
Statement of Operations                                       F-  4
Statement of Stockholders' Equity                             F-  5
Statement of Cash Flows                                       F-  8
Notes to Financial Statement                                  F- 10


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

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


                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

All Directors hold their offices until the next shareholder meeting of the
Company and until their successors are elected and qualified or until their
earlier resignation or removal. Officers are appointed by and serve at the
discretion of the Board of Directors.

BUSINESS EXPERIENCE

Richard J. Grable, 55

Mr. Grable has served as Chief Executive Officer and a Director of the Company
since 1994. From March, 1994, to the Present: Mr. Grable is Chief Executive
Officer and a Director of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily responsible
for the development of the CTLM(TM) device. From January, 1994, to February,
1994: Mr. Grable was vice-president, research and development, for Lintronics
Technologies, Inc., Tampa, Fla., a manufacturer of breast imaging systems. From
March, 1992, to December, 1993: Mr. Grable was a an engineering consultant for
Lintronics Technologies, Inc., Tampa, Fla., a manufacturer of breast imaging
systems. From August, 1991 to February, 1992: Mr. Grable was an engineering
consultant for Audio Intelligence Devices, Inc., Ft. Lauderdale, Fla., a
manufacturer of surveillance devices. From May, 1990, to July, 1991: Mr. Grable
was an engineering consultant for Telmed, Inc., Ft. Lauderdale, Fla., a software
and electronic design company.

                                       15
<PAGE>

Linda B. Grable, 60

Mrs. Grable has served as President and Chairman of the Board of Directors of
the Company since 1994. From March, 1994, to Present: Mrs. Grable is President
and a Director of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a
manufacturer of diagnostic imaging systems. From September, 1991, to February,
1994: Mrs. Grable was President and Director of VCC Communications, Inc., Tampa,
Fla., a manufacturer of voltage controlled oscillators (VCO). From August, 1988,
to April, 1991: Mrs. Grable was President of Lintronics International Ltd.,
Inc., Plantation, Fla., a manufacturer of breast imaging systems.

Allan L. Schwartz, 55

Mr. Schwartz has served as Executive Vice-President, Chief Financial Officer and
a Director of the Company since 1994. From March, 1994, to Present: Mr. Schwartz
is Executive Vice-President and Chief Financial Officer of Imaging Diagnostic
Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic imaging systems. From
April, 1993, to February, 1994: Mr. Schwartz was President and Director of
DynaMed Technologies, Inc., Coral Springs, Florida, a company that developed
neural network software for use with laser imaging systems. From August, 1991,
to April, 1993: Mr. Schwartz was President and Director of Tron Industries,
Inc., North Lauderdale, Florida, a developer of low voltage neon novelty
products. From April, 1991, to July, 1991: Mr. Schwartz worked as a
manufacturing consultant for SE Enterprises, Miami, Fla., a manufacturer of
prototype homes.

Peter S. Knezevich, 41

Mr. Knezevich served as the Company's General Counsel and Vice President from
April, 1995 until September 16, 1997, when he resigned for personal reasons.

Robert H. Wake, 48

From April, 1995, to Present: Mr. Wake is Director of Engineering for Imaging
Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic imaging
systems. From January, 1994, to March, 1995: Mr. Wake was a consultant to
various companies in 3-D computer imaging. From October, 1986, to December,
1993: Mr. Wake founded and was President of Reality Imaging Corporation, Solon,
Ohio, a manufacturer of 3-D computer imaging systems. Mr. Wake invented the
Voxel Flinger 3-D imaging technology.


FAMILY RELATIONSHIPS

Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife. Further,
Richard J. Grable and Linda B. Grable are each "Control Persons" as a result of
their control of a majority voting power of the Company's outstanding stock.
Both parties disclaim, however, any beneficial interest or ownership in the
shares owned by the other party.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated herein by reference
to pages 5 through 7 of the Company's Proxy Statement dated September 7, 1997
issued, in connection with its annual meeting to be held on October 15, 1997 (
the "Proxy Statement").

                                       16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is hereby incorporated herein by reference
to page 3 of the Company's Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is hereby incorporated herein by reference
to page 4 of the Company's Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

A) Exhibits included herein:
<TABLE>
<CAPTION>
Exhibit No.                Description
----------                 -----------
<S>                        <C>                                                                                                      
(3)(i).7                   Amendment to Article of Incorporation - Designation of Series B Convertible Preferred
                           Shares. Filed as an Exhibit to the Registration Statement on Form S-1 declared
                           effective on July 10,1997. File Number 333-21243.

(3)(i).6                   Amendment to Article of Incorporation - Designation of Series A Convertible Preferred
                           Shares.*

(3)(i).5                   Articles of Incorporation (Florida)*

(3)(ii).1                  By-Laws(Florida)

(3)(i).4                   Certificate of Dissolution*

3)(i).3                    Articles of Incorporation and By-Laws (New Jersey)**

(3)(i).1                   Certificate and Plan of Merger**

(3)(i).2                   Certificate of Amendment**

(4).1                      Instruments Defining the Rights of Security Holders - Designation of Series A
                           Convertible  Preferred Shares.(See Exhibit (3), above).

(10).1                     Facilities Lease(s)**

(10).2                     Incentive Stock Option Plan**

(10).3                     Non-Qualified Stock Option Plan**

(10).4                     Employment Agreement(s)**

(10).5                     Lock Up Agreement By and Between The Company and Richard J. Grable, Linda B. Grable,
                           and Allan L.Schwartz*

(11)                       Schedule of computation of net loss per share.
</TABLE>

* Filed as an Exhibit to the Company's Form 10-KSB for the year ending June 30,
  1996. 
** Filed as an exhibit to the Company's Form 10-SB, as amended, file
   number 0-26028, filed on May 6, 1995.
  
                                       17
<PAGE>

B) Reports on Form 8-K

99.1              Report dated June 12, 1997.


                                   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
amended report on Form 10-KSB-A to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Plantation, State of Florida, on the
1st day of March 1, 1999.

                                  IMAGING DIAGNOSTIC SYSTEMS, INC.

                                  By:  /S/  LINDA B. GRABLE
                                       --------------------------------------
                                       Linda B. Grable, Chairman of the Board,
                                       Director, and President.


Pursuant to the requirements of the Securities Act of 1933, as amended, this
amended Report on Form 10-KSB-A has been signed by the following persons in the
capacities and on the dates indicated.



Dated: March 1, 1999              By:  /S/  LINDA B. GRABLE
                                       --------------------------------------
                                       Linda B. Grable, Chairman of the Board,
                                       Director and President


Dated: March 1, 1999              By:  /S/  RICHARD J. GRABLE
                                       --------------------------------------
                                       Richard J. Grable, Director
                                       and Chief Executive Officer


Dated: March 1, 1999              By:  /S/  ALLAN L. SCHWARTZ
                                       --------------------------------------
                                       Allan L. Schwartz, Director
                                       and Executive Vice-President
                                       Chief Financial Officer
                                       (PRINCIPAL ACCOUNTING OFFICER)

                                       18
<PAGE>
   
                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)



                                TABLE OF CONTENTS


                                                                         Page

         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS              F-1-2

         FINANCIAL STATEMENTS:

                  Balance Sheet                                           F-3

                  Statements of Operations                                F-4

                  Statements of Stockholders' Equity                     F-5-7

                  Statements of Cash Flows                               F-8-9

                  Notes to Financial Statements                          F-10-29


                                                             

<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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


We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1997 and 1996 and for the period December 10, 1993 (date of
inception) to June 30, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996 and the results
of its operations and its cash flows for the years ended June 30, 1997 and 1996
and for the period December 10, 1993 (date of inception) to June 30, 1997 in
conformity with generally accepted accounting principles.

As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the changes in accounting for software
development costs, recording the deemed dividends on the issuance of the
preferred stock and recording the compensation on stock options in accordance
with Accounting Principles Board Opinion No. 25.

The Company is in the development stage as of June 30, 1997 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 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 5. 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 6, 1997




                                      F - 2

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

                                  Balance Sheet

                             June 30, 1997 and 1996


                                     ASSETS
<TABLE>
<CAPTION>
                                                                                                       1997             1996
                                                                                                 ---------------   -------------
                                                                                                                      (restated)
<S>                                                                                              <C>                 <C>        
         Current assets:
           Cash                                                                                  $     383,223       $ 3,975,354
           Restricted certificate of deposit                                                           103,500                 -
           Loans receivable-other                                                                       10,073                 -
           Prepaid expenses                                                                             56,792            15,900
                                                                                                --------------    --------------

                  Total current assets                                                                 553,588         3,991,254
                                                                                                --------------    --------------

         Property and equipment, net                                                                 3,293,297           657,132
         Prototype equipment                                                                         1,216,585           575,338
         Other assets                                                                                    9,635            53,010
                                                                                                --------------    --------------

                                                                                                 $   5,073,105       $ 5,276,734
                                                                                                ==============    ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

         Current liabilities:
           Accounts payable and accrued expenses                                                 $     519,546       $   205,750
           Current maturities of capital lease obligations                                               8,928                 -
           Stockholder loans                                                                                 -            77,833
           Other current liabilities, stock options compensation payable                               319,547           946,796
                                                                                                 -------------     -------------

                  Total current liabilities                                                            848,021         1,230,379
                                                                                                 -------------     ------------

         Long-term capital lease obligations                                                            35,849                 -
                                                                                                --------------    --------------

                  Total liabilities                                                                    883,870         1,230,379
                                                                                                --------------    --------------

         Commitments and contingencies

         Stockholders' equity:
           Convertible preferred stock(Series A), 5% cumulative annual dividend, no par value;
            authorized 2,000,000 shares, issued 0 and 2,400 shares, respectively                             -         2,160,000
           Convertible preferred stock(Series B), 7% cumulative annual dividend, no par value;
            authorized 450 shares, issued 450 and 0 shares, respectively                             4,500,000                 -
           Common stock, no par value; authorized 48,000,000 shares,
            issued 24,905,084 and 23,023,789 shares, respectively                                   15,739,729        10,075,896
           Additional paid-in capital                                                                3,663,120         1,574,784
           Deficit accumulated during the development stage                                        (18,298,930)       (9,470,016)
                                                                                                --------------    --------------

                                                                                                     5,603,919         4,340,664
         Less: subscriptions receivable                                                                (35,559)          (18,684)
                  deferred compensation                                                             (1,379,125)         (275,625)
                                                                                                --------------    --------------

                  Total stockholders' equity                                                         4,189,235         4,046,355
                                                                                                --------------    --------------

                                                                                                 $   5,073,105       $ 5,276,734
                                                                                                ==============    ==============
</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, 1997     June 30, 1996     June 30, 1997
                                                       -------------     -------------    ----------------
                                                                           (restated)
<S>                                                  <C>                 <C>              <C>           
Compensation and related benefits:
  Administrative and engineering                     $     2,847,238     $ 2,164,527      $    5,264,712
  Research and development                                   616,886          239,669            968,511
Research and development expenses                          1,065,178        1,543,260          2,664,172
Advertising and promotion expenses                           166,520          272,698            544,395
Selling, general and
   administrative expenses                                   528,753          297,229            905,385
Clinical expenses                                             33,506          317,310            350,816
Consulting expenses                                          764,364          832,075          1,715,908
Insurance costs                                              121,287           34,097            166,242
Professional fees                                            178,402          630,284            897,105
Stockholder expenses                                          20,902                -             20,902
Trade show expenses                                          154,782           85,623            289,276
Travel and subsistence costs                                 195,585           99,826            345,600
Rent expense                                                  48,897          130,848            221,248
Interest expense                                               2,744                -             27,053
Depreciation and amortization                                230,047          111,672            391,896
Amortization of deferred compensation                        788,000          232,500          1,134,875
Interest income                                             (116,972)         (58,308)          (175,280)
                                                     ---------------  ---------------   ----------------

                                                           7,646,119        6,933,310         15,732,816
                                                     ---------------  ---------------   ----------------

     Net loss                                             (7,646,119)      (6,933,310)       (15,732,816)

Dividends on cumulative preferred stock:
 From discount at issuance                                  (998,120)      (1,335,474)        (2,333,594)
 Earned                                                     (184,675)         (47,845)          (232,520)
                                                     ---------------   ---------------  ----------------

     Net loss applicable to common shareholders      $    (8,828,914)   $  (8,316,629)   $   (18,298,930)
                                                     ===============   ==============   ================
Net loss per common share:

 Weighted average number of common shares                 24,222,966       21,354,155         20,082,632
                                                     ===============   ==============   ================

 Primary net loss per common share                   $          (.36)   $        (.39)   $          (.91)
                                                     ===============   ==============   ================

</TABLE>
               See accompanying notes to the financial statements.

                                      F - 4

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

                        Statement of Stockholders' Equity

          Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
                                                   Preferred Stock (Series A)    Preferred Stock (Series B)        Common Stock     
                                                  ---------------------------   --------------------------  ------------------------
                                                      Number of                   Number of                   Number of             
                                                       Shares       Amount          Shares        Amount        Shares       Amount 
                                                  --------------   ----------   ------------   -----------  -----------   ----------
<S>                                                   <C>         <C>            <C>       <C>             <C>           <C>        
Balance at December 10,  1993(date of inception)            -0-   $     -0-        -0-     $     -0-              -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 agreement               -           -          -             -           75,000         78,750 

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

Stock options granted                                        -           -          -             -                -              - 

Amortization of deferred compensation                        -           -          -             -                -              - 

Forgiveness of officers' compensation                        -           -          -             -                -              - 

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

Balance at  June 30, 1995                                    -           -          -             -       18,616,713      2,002,238 
                                                  ============   =========    =======     =========      ===========    =========== 
(TABLE CONTINUED)
                                                                     Deficit                                                        
                                                                   Accumulated                                                     
                                                    Additional      During the                                                     
                                                     Paid-In       Development      Subscriptions       Deferred                   
                                                      Capital         Stage           Receivable      Compensation       Total     
                                                    ----------   -------------      -------------    -------------    -----------  
Balance at December 10, 1993(date of inception       $     -0-     $      -0-         $      -0-        $       -0-    $      -0-  
                                                                                                                                   
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)                -0-                 -        36,000   
                                                                                                                                   
Common stock sold                                           -              -           (523,118)                 -     1,043,477   
                                                                                                                                   
Common stock issued in exchange for services                -              -                  -                  -       102,942   
                                                                                                                                   
Common stock issued with employment agreement               -              -                  -                  -        78,750   
                                                                                                                                   
Common stock issued for compensation                        -              -                  -                  -       151,000   
                                                                                                                                   
Stock options granted                                 622,500              -                  -           (622,500)            -   
                                                                                                                                   
Amortization of deferred compensation                       -              -                  -            114,375       114,375   
                                                                                                                                   
Forgiveness of officers' compensation                  50,333              -                  -                  -        50,333   
                                                                                                                                   
Net loss                                                    -              -         (1,086,436)                 -    (1,086,436)  
                                                    ---------    -----------       ------------        -----------    ----------   
                                                                                                                                   
Balance at  June 30, 1995                             672,833     (1,153,387)          (523,118)          (508,125)      490,441   
                                                    =========    ===========       ============        ===========    ==========   

                                                                                                                      (Continued)
</TABLE>
               See accompanying notes to the financial statements.

                                      F - 5

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

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
                                                  Preferred Stock (Series A)    Preferred Stock (Series B)        Common Stock      
                                                 ---------------------------   --------------------------  -------------------------
                                                   Number of                    Number of                     Number of             
                                                    Shares       Amount          Shares        Amount         Shares       Amount 
                                                 ------------   ----------     ----------   -----------    ---------   -------------
<S>                                                 <C>         <C>             <C>            <C>         <C>          <C>         

Balance at June 30, 1995                                  -            -                -             -    18,616,713    2,002,238  
                                                  ---------  -----------        ---------      --------    ----------   ----------  

Preferred stock sold, including dividends             4,000    3,600,000                -             -             -            -  

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 option         -            -                -             -        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  

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 compensation                     -            -                -             -             -            -  
 
Forgiveness of officers' compensation                     -            -                -             -             -            -  

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

Balance at June 30, 1996 (restated)                   2,400    2,160,000                -             -    23,023,789   10,075,896  
                                                  =========  ===========        =========      ========    ==========   ==========  

(TABLE CONTINUED)                                    
                                                                       Deficit                                                      
                                                                     Accumulated                                                    
                                                      Additional      During the                                                    
                                                       Paid-In       Development      Subscriptions      Deferred                   
                                                        Capital         Stage           Receivable     Compensation       Total     
                                                      ----------   -------------     -------------    -------------   ------------  
Balance at June 30, 1995                                 672,833      (1,153,387)         (523,118)     (508,125)          490,441  
                                                      ----------  --------------     -------------     ---------      ------------  
                                                                                                                                    
Preferred stock sold, including dividends              1,335,474      (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 option              -               -            (4,375)            -           100,000  
                                                                                                                                    
Common stock issued with exercise of options                                                                                        
 for compensation                                              -               -                 -             -           567,164  
                                                                                                                                    
Conversion of preferred stock to common stock           (534,190)              -                 -             -                 -  
                                                                                                                                    
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 compensation                          -               -           232,500       232,500                    
                                                                                                                                    
Forgiveness of officers' compensation                    100,667               -                 -             -           100,667  
                                                                                                                                    
Net loss (restated)                                   (6,933,310)              -                 -             -        (6,933,310) 
                                                      ----------  --------------     -------------     ---------      ------------  
                                                                                                                                    
Balance at June 30, 1996 (restated)                     1,574,78      (9,470,016)          (18,684)     (275,625)        4,046,355  
                                                      ==========  ==============     =============     =========      ============  

                                                                                                                        (Continued)
</TABLE>
               See accompanying notes to the financial statements.

                                      F - 6
<PAGE>
                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
                                                   Preferred Stock (Series A)   Preferred Stock (Series B)      Common Stock        
                                                  --------------------------   -------------------------- --------------------------
                                                    Number of                    Number of                 Number of                
                                                     Shares         Amount        Shares       Amount      Shares         Amount    
                                                  ------------- ------------    ------------ ------------ -----------  -------------
<S>                                                      <C>      <C>            <C>        <C>            <C>           <C>        
Balance at June 30, 1996 (restated)                      2,400    2,160,000            -             -     23,023,789    10,075,896 
                                                  ------------  -----------  -----------    ----------   ------------  ------------ 

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

Conversion of preferred stock to common stock           (2,400)  (2,160,000)           -             -      1,061,202     2,961,284 

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 option            -            -            -             -         27,000        33,750 

Common stock issued with exercise of stock options,
 through stock appreciation rights                           -            -            -             -        334,933     1,103,203 

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

Common stock issued as payment of preferred
  stock dividends                                            -            -            -             -         20,760        49,603 
 
Payment of accrued dividends on converted shares             -            -            -             -              -             - 

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

Stock options granted                                        -            -            -             -              -             - 

Collection of stock  subscriptions                           -            -            -             -              -             - 

Amortization of deferred compensation                        -            -            -             -              -             - 

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

Balance at June 30, 1997                                     -     $      -          450    $4,500,000     24,905,084   $15,739,729 
                                                  ============  ===========  ===========    ==========   ============  ============ 
                                    
(TABLE CONTINUED)
                                                                         Deficit                                                    
                                                                       Accumulated                                                  
                                                       Additional      During the                                                   
                                                        Paid-In        Development       Subscriptions      Deferred                
                                                         Capital           Stage          Receivable      Compensation       Total  
                                                     ---------------  ------------      --------------    ------------    --------- 
Balance at June 30, 1996 (restated)                     1,574,784        (9,470,016)       (18,684)       ( 275,625)      4,046,355 
                                                    -------------   ---------------    -----------      -----------    ------------ 
                                                                                                                                    
Preferred stock sold, including dividends                 998,120          (998,120)             -                -       4,500,000 
                                                                                                                                    
Conversion of preferred stock to common stock            (801,284)                -              -                -               - 
                                                                                                                                    
Common stock issued in  exchange for services                   -                 -              -                -         650,129 
                                                                                                                                    
Common stock issued  for compensation                           -                 -              -                -         918,364 
                                                                                                                                    
Common stock issued with exercise of stock option               -                 -        (33,750)               -               - 
                                                                                                                                    
Common stock issued with exercise of stock options,                                                                                 
 through stock appreciation rights                              -                 -              -                -       1,103,203 
                                                                                                                                    
Cancellation of stock issued to employee                        -                 -              -                -         (52,500)
                                                                                                                                    
Common stock issued as payment of preferred                                                                                         
  stock dividends                                               -           (49,603)             -                -               - 
                                                                                                                                    
Payment of accrued dividends on converted shares                -            33,216              -                -          33,216 
                                                                                                                                    
Dividends accrued on preferred                                                                                                      
 stock not yet converted                                        -          (168,288)             -                -        (168,288)
                                                                                                                                    
Stock options granted                                   1,891,500                 -              -       (1,891,500)              - 
                                                                                                                                    
Collection of stock  subscriptions                              -                 -         16,875                -          16,875 
                                                                                                                                    
Amortization of deferred compensation                           -                 -              -          788,000         788,000 
                                                                                                                                    
Net loss                                                        -                 -              -                -      (7,646,119)
                                                    -------------   ---------------    -----------      -----------    ------------ 
                                                                                                                                    
Balance at June 30, 1997                            $   3,663,120     $ (18,298,930)    $  (35,559)     $(1,379,125)   $  4,189,235 
                                                    =============   ===============    ===========      ===========    ============ 
                                                    
</TABLE>
               See accompanying notes to the financial statements.

                                      F - 7



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

                            Statements of Cash Flows

                           Increase (Decrease) in Cash

<TABLE>
<CAPTION>
                                                                                               From
                                                                                            Inception
                                                                                         (December 10,
                                                        Year Ended       Year Ended         1993) to
                                                      June 30, 1997     June 30, 1996     June 30, 1997
                                                     --------------    --------------   ---------------
                                                                           (restated)
<S>                                                  <C>               <C>               <C>            
Net loss                                             $   (7,646,119)   $   (6,933,310)   $  (15,732,816)
                                                     --------------    --------------    --------------
Adjustments to reconcile net loss to net cash
 used for operating activities:
    Depreciation and amortization                           230,047           111,672           391,896
    Amortization of deferred compensation                   788,000           232,500         1,134,875
    Noncash compensation and consulting expenses          2,654,821         3,049,113         6,008,209
    (Increase) in restricted certificate of deposit        (103,500)                -          (103,500)
    (Increase) decrease in loans receivable
        - shareholders and others                           (10,073)           48,600           (10,073)
    (Increase) decrease in prepaid expenses                 (40,892)          (15,900)          (56,792)
    (Increase) decrease  in other assets                     43,375           (50,346)           (9,635)
    Increase in accounts payable and accrued expenses       178,724            88,074           351,258
    Increase (decrease) in other current liabilities       (627,249)          946,796           319,547
                                                    ---------------    --------------   ---------------

      Total adjustments                                   3,113,253         4,410,509         8,025,785
                                                    ---------------    --------------   ---------------

      Net cash used for operating activities             (4,532,866)       (2,522,801)       (7,707,031)
                                                    ---------------    --------------   ---------------

Cash flows from investing activities:
    Prototype equipment                                    (641,247)         (304,963)       (1,216,585)
    Capital expenditures                                 (2,815,923)         (471,930)       (3,545,256)
                                                    ---------------    --------------   ---------------

      Net cash used for investing activities             (3,457,170)         (776,893)       (4,761,841)
                                                    ---------------    --------------   ---------------

Cash flows from financing activities:
    Repayment of capital lease obligation                    (5,512)                -            (5,512)
    Proceeds from stockholder loans, net                    (77,833)           29,060                 -
    Proceeds from issuance of preferred stock             4,500,000         3,600,000         8,100,000
    Net proceeds from issuance of common stock              (18,750)        3,629,929         4,757,607
                                                    ---------------    --------------   ---------------

      Net cash provided by financing activities           4,397,905         7,258,989        12,852,095
                                                    ---------------    --------------   ---------------

Net increase (decrease) in cash                          (3,592,131)        3,959,295           383,223

Cash and cash equivalents at beginning of period          3,975,354            16,059               -0-
                                                    ---------------    --------------   ---------------

Cash and cash equivalents at end of period           $      383,223    $    3,975,354   $       383,223
                                                    ===============    ==============   ===============


                                                                                            (Continued)
               See accompanying notes to the financial statements.
</TABLE>

                                      F - 8

<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, 1997     June 30, 1996    June 30, 1997
                                                     -------------     -------------    ----------------
                                                                           (restated)
<S>                                                  <C>                 <C>              <C>             
Supplemental disclosures of cash flow information:

         Cash paid for interest                      $           2,744   $           -    $         27,053
                                                     ================= ===============   =================

Supplemental disclosures of noncash 
 investing and financing activities:

         Issuance of common stock and options
           in exchange for services                  $         650,129   $   2,487,025   $       3,290,429
                                                     ================= ===============   =================


         Issuance of common stock in
           exchange for property and equipment       $               -   $      10,900   $          89,650
                                                     ================= ===============   =================


         Issuance of common stock for
           compensation                              $         918,364   $     567,164   $       1,636,528
                                                     ================= ===============   =================

         Issuance of common stock through
           exercise of incentive stock options       $       1,103,203   $           -   $       1,103,203
                                                     ================= ===============   =================

         Issuance of common stock as
           payment for preferred stock dividends     $          49,603   $      14,629   $          64,232
                                                     ================= ===============   =================

         Acquisition of property and equipment
           through the issuance of a capital
           lease payable                             $          50,289   $           -   $          50,289
                                                     ================= ===============   =================

</TABLE>
               See accompanying notes to the financial statements.

                                      F - 9

<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 4) 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 CTLMTM 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 CTLMTM device was exhibited at the "RSNA" conference November 26-30,
1995. The Company exhibited the pilot production run CTLMTM device at the "RSNA"
conference held in Chicago on December 1-6, 1996. The Company filed its initial
patent application for the CTLMTM device on June 7, 1995 and has subsequently
filed for foreign patent protection.

The initial CTLMTM 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. The Food and Drug Administration (FDA) approved
calibration Investigational Device Exemption ("IDE") clinical testing in the
Company's laboratory. This phase of clinical testing was approved for a small
number of calibration scans on volunteers. At the conclusion of the calibration
studies, the Company will commence its first clinical trial at the Strax
Diagnostic Breast Institute under a Phase I - IDE application, which was
approved by the FDA on February 9, 1996. Four additional clinical sites are
planned by the end of calendar 1997.

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
CTLMTM prototype is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.


                                                                    (Continued)
                                     F - 10

<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) Prototype equipment

         The direct costs associated with the final CTLMTM 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 CTLMTM 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 $164,941 as computer and lab equipment. The costs associated with
         the completed prototype units placed at clinical test locations will be
         transferred to clinical equipment at their historical cost. 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.

         (d) 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.


                                                                     (Continued)
                                     F - 11

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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (d) Property, equipment and software development costs (Continued)

         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.

         (e) 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 prototypes, 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 CTLMTM
         prototype. 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.

         (f) 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 effective
         July 1, 1997.

                                                                     (Continued)
                                     F - 12

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

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (g) Net loss per share

         Net loss per share of common stock is computed by dividing the net loss
         applicable to common shareholders by the weighted average number of
         common shares outstanding and common stock equivalents. Stock options
         and the convertible preferred stock are considered common stock
         equivalents unless their inclusion would be anti-dilutive.

         (h) 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.

         (i) 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, 1997.

         (j) Reclassifications

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

                                                                     (Continued)
                                     F - 13

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

                    Notes to Financial Statements (Continued)

(3)      RESTATEMENT

The June 30, 1996 financial statements have been restated to properly reflect
the accrual of compensation on the qualified stock options for the officers. The
effect on net loss from the compensation restatement was an increase of $946,796
for the year ended June 30, 1996. These statements were also restated to correct
the calculation of the deemed dividends on the cumulative preferred stock as a
result of the discount at issuance. The effect of this change was an increase to
the net loss applicable to common shareholders of $337,074 ($.02 per share) for
the fiscal year ended June 30, 1996.

The Company had been capitalizing the costs associated with the final
development of the CTLMTM software from its initial acquisition phase to the
software being used in the CTLMTM machine currently undergoing tests at clinical
locations. Effective December 31, 1996, the Company has restated its financial
statements to expense all additional costs incurred since the acquisition of the
original software. Accordingly, the Company has expensed a total of $869,692 as
additional research and development costs through December 31, 1996, of which
$436,736 was applicable to the fiscal year ended June 30, 1996.

                                                         1996
                                                         ----

                  Increase in net loss               $ 1,383,532
                                                     ===========

                  Per share data:
                      Primary                        $       .06
                                                     ===========


(4)      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 14)

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.
                                                                     (Continued)

                                     F - 14

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

                    Notes to Financial Statements (Continued)

(5)      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. In addition, 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 to date. There is no assurance
that once the development of the CTLMTM prototype is completed and finally gains
Federal Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.


(6)      RESTRICTED CERTIFICATE OF DEPOSIT

The Company has issued an irrevocable letter of credit, due on October 4, 1997,
towards the purchase of laboratory equipment. The letter of credit is secured
with the certificate of deposit.


(7)      STOCKHOLDERS' LOANS - RECEIVABLES AND PAYABLES

Certain of the major shareholders have advanced funds to the Company during 1995
and 1996. These loans are unsecured and non-interest bearing. These loans have
been repaid in full during the year ended June 30, 1997.

                                                                     (Continued)

                                     F - 15

<PAGE>

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

                    Notes to Financial Statements (Continued)


(8)      PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, less accumulated
depreciation:
<TABLE>
<CAPTION>
                                                                           June 30,
                                                              -------------------------------
                                                                    1997             1996
                                                              ---------------  --------------
<S>                                                           <C>                <C>          
         Furniture and fixtures                               $       240,029    $      28,199
         Building and land                                          2,081,399                -
         Clinical equipment                                           250,000                -
         Computers and equipment                                      389,373          164,270
         CTLMTM software costs                                        352,932          352,932
         Trade show equipment                                         153,193           81,416
         Laboratory equipment                                         179,862          153,758
         Leasehold improvements                                             -           38,407
                                                              ---------------  ---------------

                                                                    3,646,788          818,982
         Less: accumulated depreciation                              (353,491)        (161,850)
                                                              ---------------  ---------------

                  Totals                                      $     3,293,297    $     657,132
                                                              ===============  ===============

</TABLE>
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<CAPTION>
<S>                                                                             <C>      
                  Furniture, fixtures, clinical, computers, laboratory
                   equipment and trade show equipment                           5-7 years
                  Building                                                       40 years
                  CTLMTM software costs                                           5 years
                  Leasehold improvements                                        Length of lease
</TABLE>

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
CTLMTM software at June 30, 1997 and 1996 are $225,007 and $279,353,
respectively, which represents the net realizable value of the CTLMTM
 software at the end of each period presented. Amortization expense related to
the CTLMTM software for each period presented in the statement of operations is
as follows:
                                                                     (Continued)

                                     F - 16

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

                    Notes to Financial Statements (Continued)

(8)      PROPERTY AND EQUIPMENT (Continued)

                           Period ended                       Amount
                           ------------                      --------
                               6/30/97                      $  54,345
                               6/30/96                         54,345
                               6/30/95                         19,160
                               6/30/94                             73
                                                            ---------

                             Total                          $ 127,923
                                                            =========


(9)      OTHER ASSETS

Other assets consist of the following:
<TABLE>
<CAPTION>
                                                                            June 30,
                                                              ---------------------------------
                                                                     1997             1996
                                                              ----------------- ---------------
<S>                                                           <C>                <C>           
         Deposit on purchase of new building                  $               -  $       50,000
         Security deposits                                                9,635           3,010
                                                              ----------------- ---------------

                  Totals                                      $           9,635  $       53,010
                                                              ================= ===============
</TABLE>

The Company had paid a $50,000 deposit on the acquisition of a building, with a
purchase price of $1,250,000, as of June 30, 1996, which was finally acquired on
August 29, 1996.


(10)     ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                          June 30,
                                                              -------------------------------
                                                                   1997             1996
                                                              ----------------  -------------
<S>                                                           <C>                 <C>        
         Accounts payable - trade                             $        276,096    $   165,047
         Preferred stock dividends payable                             168,288         33,216
         Accrued property taxes payable                                 14,000              -
         Accrued compensated absences                                   56,632              -
         Payroll taxes payable                                           4,530          7,487
                                                              ----------------  -------------

                  Totals                                      $        519,546    $   205,750
                                                              ================  =============
</TABLE>
                                                                     (Continued)

                                    F - 17

<PAGE>

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

                    Notes to Financial Statements (Continued)



(11)     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 8) and the obligation has been
recorded as debt. At June 30, 1997, approximate future minimum lease payments
under capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
         Year ending June 30,
         -------------------
<S>               <C>                                                           <C>        
                  1998                                                          $    12,384
                  1999                                                               12,384
                  2000                                                               12,384
                  2001                                                               12,384
                  2002                                                                4,128
                                                                                -----------

                  Total minimum lease payments                                       53,664
                  Less amount representing interest                                  (8,887)
                                                                                -----------

                  Present value of net minimum lease payments                        44,777

                  Less current portion                                               (8,928)
                                                                                -----------
                  Long-term portion                                             $    35,849
                                                                                ===========
</TABLE>

The Company also leases certain office equipment under an operating lease
expiring in June 1998. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.

Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 1997 for the next year total
$3,396.

                                                                     (Continued)

                                     F - 18

<PAGE>

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

                    Notes to Financial Statements (Continued)


(12)     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 $11,045,000 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 $3,755,000 and $1,538,500 at June 30, 1997 and 1996, 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, 1996 to June 30, 1997 was an increase of
approximately $2,216,500.


(13)     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 may convert 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 - 19

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

                    Notes to Financial Statements (Continued)



(13)     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.

Since the Series A Preferred Stock is issued with a 25% discounted conversion
price from market value, a deemed preferred stock dividend of $1,335,474 has
been recorded at the issuance of the preferred stock.

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

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

                                                                     (Continued)

                                     F - 20

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

                    Notes to Financial Statements (Continued)


(13)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

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

Since the Series B Preferred Stock is issued with a 18% discounted conversion
price from market value, a deemed preferred stock dividend of $998,120 has been
recorded at the issuance of the preferred stock.

As of June 30, 1997, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $168,288 of accrued
dividends payable.

                                                                    (Continued)

                                     F - 21

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

                    Notes to Financial Statements (Continued)



(14)     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. The Company has
an escrow agent as custodian for these unpaid shares. 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.

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


                                                                     (Continued)

                                     F - 22

<PAGE>

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

                    Notes to Financial Statements (Continued)


(14)     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 13)

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 options 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 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 - 23

<PAGE>

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

                    Notes to Financial Statements (Continued)



(14)     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.


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

On March 29, 1995 the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This 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 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.

                                                                     (Continued)

                                     F - 24

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

                    Notes to Financial Statements (Continued)


(15)     STOCK OPTIONS (Continued)

The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.

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
                                    ==============                      =============
</TABLE>

At June 30, 1997, 270,526 of the incentive stock options were vested and
exercisable and the 1,200,000 non-qualified stock options were fully vested and
exercisable. 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 option transactions have occurred:

                                                                     (Continued)

                                     F - 25

<PAGE>

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

                    Notes to Financial Statements (Continued)



(15)     STOCK OPTIONS (Continued)

    On July 5, 1994 the Company issued non-qualified options to its officers and
    directors to purchase 1,500,000 shares of common stock at 35% of the fair
    market value at the date of exercise. Compensation expense of $567,164 was
    recorded during the year ended June 30, 1994 as a result of the discount
    from the market value at the date of exercise.

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

    On March 30, 1995, the Company granted to the director of engineering, a
    non-qualified option to purchase up to 150,000 shares of common stock per
    year, or a total of 450,000 shares, during the period March 30, 1995 and
    ending March 31, 1998. 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 71,429 shares of common stock at an exercise
    price of $1.40 per share. The options expire on March 30, 1998.

    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, 2000.

                                                                     (Continued)

                                     F - 26

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

                    Notes to Financial Statements (Continued)



    (15)          STOCK OPTIONS (Continued)

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

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

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

    At various dates during the year ended June 30, 1997, the Company issued to
    various employees incentive options to purchase 294,778 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.


(16)     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,
1997 was $346,000.

                                                                     (Continued)

                                     F - 27

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

                    Notes to Financial Statements (Continued)


(17)     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 provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $104,000 (amended by Board of Directors effective
January 15, 1997), and $104,000, respectively.

Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000; or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months. On April 1, 1995, the Company entered into a two year
agreement with its vice-president and general counsel, and provides for annual
compensation of $85,000. This contract was extended on June 16, 1997, providing
for annual compensation of $95,000, with no limit as to the term.

As additional consideration for his development efforts in the CTLMTM prototype,
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 CTLMTM device. The royalty percent ranges from 2.5% to a
maximum of 5%, based upon varying levels of gross sales.

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 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.

During the years ended June 30, 1997 and 1996, employment agreements were
initiated with individuals in various positions within the Company. Annual
payments for compensation under these agreements amount to $634,000 and
$357,000, respectively, in the aggregate.

                                                                     (Continued)

                                     F - 28

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

                    Notes to Financial Statements (Continued)



(17)     COMMITMENTS AND CONTINGENCIES (Continued)

On July 1, 1996, the Company entered into a "Re-Seller Agreement" with an
organization located in Italy, for the sole purpose of providing the
organization with exclusive distribution rights within the three countries
defined by the agreement. The term of this agreement shall be for twenty-nine
months, and the Company and Distributor agree to renew the agreement for an
additional two years if the Distributor makes purchases of the CTLMTM device in
an aggregate amount of at least four million U.S. dollars ($4,000,000) during
the Initial Term of this agreement.


(18)     SUBSEQUENT EVENT

On September 10, 1997 the Company executed a formal "Term Sheet" with an
investor to raise additional equity capital. The Company will receive net
proceeds of approximately $1,780,000, after commissions, by issuing in a
Regulation D Private Placement shares of its common stock. The actual number of
shares of common stock to be issued will be determined at closing, and will be
based upon an average price of the common stock, five days prior to closing. The
closing of this offering is expected to take place within fifteen days. The
stock will be restricted under Rule 144 for either a one or two year period,
which will also be finalized at closing. The Company will also issue 400,000
warrants, exercisable over the next five years, at an exercise price equal to
twice the closing price of the private placement offering.

On September 11, 1997 the Company accepted a letter of intent for the issuance
of $2,500,000 of "Series C Convertible Preferred Stock". The holders of the
preferred shares shall have demand registration rights pursuant to a
registration rights agreement which shall be signed contemporaneously with the
subscription agreement. The closing of this offering is expected to take place
within fifteen days.

                                     F - 29