FORM 10-KSB/A2
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                    For the fiscal year ended: June 30, 1998

                                       or

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

            For the transition period from __________to_____________

                         Commission file number: 0-26028
                                                 -------

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

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

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

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

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

         Securities registered under Section 12(g) of the Exchange Act:

                           Common Stock, no par value
                           --------------------------
                                (Title of class)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes   X  No    .
             ----   ----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
amendment to this Form 10-KSB. [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, April 6, 1999, the aggregate market value of the voting
stock held by non-affiliates of the registrant was $10,278,417 with 39,805,643
shares outstanding.

The number of shares outstanding of the issuer's common stock, as of March 15,
1999 was 39,805,643. As of April 6, 1999, the number of shares outstanding of
each of the issuer's classes of preferred stock were Series B Convertible
Preferred-450, Series G Convertible Preferred-38, Series H Convertible
Preferred-103 and Series I Convertible Preferred-138.

                       Documents Incorporated By Reference
                                      None
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH HEREIN.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.
        ------------------------

OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed and is testing a Computed Tomography Laser Mammography
("CTLM(TM)") device for detecting breast cancer through the skin in a
non-invasive procedure. The CTLM(TM) employs a high-speed pico-second pulsed
titanium sapphire laser and proprietary scanning geometry and reconstruction
algorithms to detect and analyze tissue in the breast for indicia of malignancy
or benignancy. The components of the laser system are purchased from two
unaffiliated parties and assembled and installed into the CTLM(TM) by the
Company.

The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters as
laser light pulses pass through the tissue. The CTLM(TM) device is designed to
provide the physician with objective data for interpretation and 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.

HISTORY
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. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of twelve ancillary United States patents from 1996 to October
1998, two additional patents were filed in November 1998 and the Company intends
to file an additional patent application within the next six months. During this
period of time there were further advances in laser technology effecting the
size and stability of the laser component. The Company incorporated these
changes by purchasing a laser package manufactured by Spectra-Physics, Inc.

In November 1995, the Company began discussions with Strax Breast Diagnostic
Institute ("Strax") to conduct clinical trials at their facility. The original
CTLM(TM) prototype used an Argon pump laser, which required a 6-ton water
chiller. The landlord of the Strax office building was unwilling to allow the
Company to install this chiller on the roof because of its weight and its
potential to leak water. In December 1995, the Company learned of a new type of
pump laser using diodes being developed by Spectra Physics Lasers. This new
laser was powered by a standard 110-volt outlet and only required a small
portable chiller to cool the crystal. Rather than continuing to develop the
CTLM(TM) with a laser that required massive cooling, the Company decided to wait
for delivery of the first Solid State Diode Pump laser package from
Spectra-Physics. The lasers were delivered on January 24, 1996. Because it was
the first of its kind, many modifications had to be made by Spectra-Physics
field engineers to the lasers before it would operate to specification. The
Company immediately began re-engineering the CTLM(TM) to integrate this new
laser into its system.

After extensive testing of the laser system, the Company proceeded to design and
build two pre-production CTLM(TM) scanners, one of which would be installed at
Strax. In addition to the change in lasers, modifications were made in both the
detection scheme and software.

On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLM(TM) device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need 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 matters, the
Company further refined the detection scheme and laser power configuration in

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order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and three patients were scanned. After
scanning the three patients at Strax, the Company learned of a different type of
laser, which could be used in conjunction with the new Solid State Diode Pump
laser package from Spectra-Physics. The Company believed that this additional
laser component would greatly increase the performance and image quality of the
CTLM(TM) device. The Company halted the clinical investigational trials at Strax
in December 1996 and planned to resume the study after the second system
modification. Strax, a not-for-profit corporation, requested a donation of
$5,000, to be used to purchase needed medical equipment for the institute, which
the Company paid on December 31, 1996. Because of the extensive re-engineering
and design, and the delay in receiving the new laser components to be integrated
into the system, the Company was unable to complete and test the new system in a
timely manner. In fact, the first of these new components were not received
until October 1997. Strax was unwilling to wait until the modifications were
completed unless it received compensation for the CTLM(TM) remaining on its
premises. In light of the fact that the owners of Strax were in the process of
selling the center and one of the proposed purchasers was a potential
competitor, the Company declined to pay any additional compensation. In November
1997, Strax requested that the CTLM(TM) be removed from its premises. The
CTLM(TM) was removed from Strax in November 1997. On May 20, 1998, the Company's
termination of the IDE protocol and its final report was accepted by the FDA.

The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company is authorized to scan 20 patients at the Company's in-house facilities
in Plantation, Florida and upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.

The FDA responded to the submission on October 1998, asking that the Company
limit future submissions to significant findings, milestones, annual reports, or
changes that may effect the safety of the CTLM(TM). In all the Company scanned
20 women at its in-house facility. These scans produced no significant findings,
milestones or changes that would effect the safety of the CTLM(TM) so there were
no additional submissions except for the request to expand the study to Nassau
County Medical Center.

On January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo study to Nassau County Medical Center was conditionally
approved. This IDE application is limited to one institution (Nassau County
Medical Center) and 275 subjects. The Company had originally intended to have
the CTLM(TM) positioned at Nassau County Medical Center not later than mid
February, however due to renovations at Nassau County Medical Center, the
delivery of the CTLM(TM) was postponed until such time as the renovations were
complete. On March 3, 1999 the CTLM(TM) System was shipped to Nassau County
Medical Center and installed. The testing is designed to develop diagnostic
criteria for CTLM(TM) images. In order to acquire data that will be part of the
final pre-market application (PMA), the Company intends to expand the clinical
trials to hospitals in Miami, Chicago, Los Angeles, Boston and New York.

On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 4 independent and 24 subordinate claims. The independent claims
serve to provide an overall outline of the disclosure of the invention. The
subordinate claims provide additional information to identify pertinent details
of the invention as they relate to the respective specific independent claim.

In May 1998, the Company, realizing that it had no formal written agreement in
place with Mr. Grable, immediately began negotiating with Mr. Grable for the
exclusive use of the patent. In June 1998, a written agreement was entered into.
See Item 1. "Description of Business-Patent"

BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime. Nationwide, it is estimated that in 1998, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and an estimated 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.

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It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.

There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.

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

Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.

Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.

SCREENING AND DIAGNOSTIC MODALITIES

Physical Examination
Physical examinations 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 an 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, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113), and requires the use of capital equipment
ranging in cost from approximately $75,00 to $225,000. It is expected that the
CTLM(TM) device will cost approximately $350,000 and the cost of a bilateral

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exam will be $125 to $150. 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. Again, it is
expected that the CTLM(TM) device will cost approximately $350,000 and the cost
of an exam will be $125 to $150. Like mammography, ultrasound is generally
performed at specialty clinics or hospitals.

Biopsy
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or
histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.

THE COMPANY
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).
The Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At June 30, 1998, the Company had an
accumulated deficit of $27,055,993. 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), development of, and clinical trials for, the
CTLM(TM) and other research and development activities. The Company's ability to
achieve profitability will depend in part on its 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. See Item 6. "Management's
Discussion and Analyses of Financial Condition and Results of Operations."

CTLM(TM)
Since its inception in December 1993, the Company has been engaged in the
research, development and testing of its CTLM(TM) device. The CTLM(TM) is a
system for detecting breast cancer through the skin in a non-invasive procedure
that does not require compression or x-ray. The CTLM(TM) employs a high-speed
pico-second pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms that create contiguous cross sectional slice images of
the breast which are used in the detection and analysis of changes in the breast
for indicia of malignancy or benignancy. The components of the laser system are
purchased from two unaffiliated parties and assembled and installed into the
CTLM(TM) by the Company.

The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters of as
it passes through the tissue. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and 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. Further, the CTLM(TM) does not expose the patient
to ionizing radiation or painful compression, which the Company believes are
contributing factors to a portion of the patient population not obtaining a
conventional mammogram.

A breast exam utilizing the CTLM(TM) is non-invasive and can be performed by a
medical technician in less than 15 minutes. A patient lies face down on the
scanning table with a breast hanging pendulously in the scanning chamber. Once
the entire breast is scanned the other breast is placed in the chamber for
scanning. A bilateral breast scan (both breasts) takes approximately 15 minutes.
Each scan takes approximately 6-8 minutes. The CTLM(TM) has been designed in
such a way as to provide the physician and patient with quick access to
information concerning the probability that an identified lesion is malignant or
benign. The procedure is designed to provide the physician and patient with an
objective, on-site, immediate diagnostic decisions, including whether or not to
proceed to surgical biopsy. Further, the CTLM(TM) is designed to archive and
compare scans and provide the patient with a computer disc (CD) with images
produced from the date of her scan.

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Comparison to Existing Diagnostic Modalities
The CTLM(TM) differs from currently available breast imaging modalities employed
for the detection of breast cancer in that the CTLM(TM) will generate more
precise information for the clinician or doctor. The CTLM(TM) is designed to
generate, depending on the size of the breast, approximately 20 cross-sectional
images of a breast. A conventional screening mammography exam generates two
images of the breast. Cross-sectional imaging will allow a doctor or clinician
to isolate the location of the abnormality within the breast. By doing so, there
is greater resolution of the area where the specific abnormality resides.

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

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

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

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 that does not have these
shortcomings. The use of the CTLM 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.

GOVERNMENT REGULATION

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

Pursuant to the FD&C Act, the FDA classifies medical devices intended for human
use into three classes: Class I, Class II, and Class III. In general, Class I
devices are products the safety and effectiveness of which the FDA determines
can be reasonably assured by general controls under the FD&C Act relating to
such matters as adulteration, misbranding, registration, notification, records
and reports, and GMPs. Class II devices are products for which the FDA
determines that these general controls are insufficient to provide reasonable
assurance of safety and effectiveness, and that require special controls such as
the promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that

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either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in Class III, such as the
Company's CTLM,(TM) require pre-market approval, as described below.

The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some devices may
qualify for clearance under a Section 510(k) procedure, which is not applicable
to the CTLM(TM) since it is a Class III device. Since the CTLM(TM) does not
qualify for the 510(k) procedure it must apply to the FDA for pre-marketing
approval ("PMA") before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results of
clinical studies, and preparing an application is a detailed and time consuming
process. Upon receipt of the PMA application, the FDA makes a threshold
determination whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA is sufficiently complete
to permit a substantive review, the FDA will file the application. Once a PMA
application has been filed, the FDA has by regulation 180 days to review it;
however the review time may be extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMC requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews generally take approximately 12 to 18 months or more from the date
of filing to approval. The PMA process is a lengthy and expensive one, and there
can be no assurance that a PMA application will be reviewed within 180 days or
that a PMA application will be approved by the FDA. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. The Company intends to file for expedited review of its PMA
application. The inability of the Company to obtain FDA approval would have a
material adverse effect on the Company's business and financial condition and
could result in postponement of the commercialization of the CTLM.(TM) See Item
1. "Description of Business-Regulatory and Clinical Status".

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

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

The Company and the manufacturers of the Company's products may be inspected on
a routine basis by both the FDA and the individual states for compliance with
current GMP regulations and other requirements.

In addition to the foregoing, the Company is subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection and fire hazard control. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations and that such compliance will not
have a material adverse effect upon the Company's ability to conduct business.

Foreign Regulation
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter that that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit the
Company to begin marketing the CTLM(TM) device in Europe and Asia before

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marketing would be permitted in the United States. In Europe, the Company must
obtain certification necessary to enable the "CE" Mark to be affixed to the
CTLM(TM) device, which will allow the Company to market the systems throughout
Europe. The process to obtain a CE mark is lengthy and time consuming. Following
are the listed standards and steps that must be complied with in order to obtain
a CE Mark in order to distribute the CTLM(TM) device in the European Economic
Area (EEA). The listed standards are for the EEA market only and additional
document/standards exists for other markets. These standards may have direct or
indirect reference to additional standards and additional standards may apply:

      Safety (Electrical/Mechanical) The safety of operators, patients and
      maintenance persons are of great concern. The medical industry has
      developed standards (as listed below) to maintain a high level of safety
      for the protection from electrical and mechanical hazards. The industry
      has also specified laser safety requirements for products that incorporate
      laser-emitting devices. The standards listed below are very similar to the
      guidelines utilized in the USA for the same purpose.

           EN 60 601-1: Medical electrical equipment. Part 1: General
           requirements for safety.

           EN 60 601-1-1: Medical electrical equipment. Part 1: General
           requirements for safety 1. Collateral standard: Safety requirements
           for medical electrical systems.

           EN 60 601-2-22: Medical electrical equipment. Part 2: Particular
           requirements for the safety of diagnostic and therapeutic laser
           equipment.

           IEC 825-1: Safety of laser products. Part 1: Equipment
           classification, requirements, and user's guide.

           EN 60 950: Safety of Information Technology Equipment Including
           Business Equipment.

      Safety (EMC) An aspect of medical product safety that the medical industry
      has also determined to be a safety factor is the electromagnetic
      compatibility (EMC) of a product. EMC is basically the ability of a
      product to exist in the presence of other products without the
      functionality of either device being effected. The standard listed is
      currently some of the most stringent requirements for products in this
      area.

           EN 60 601-1-2: Medical electrical equipment. Part 1: General
           requirements for safety 2. Collateral standard: Electromagnetic
           compatibility - requirements and tests.

      Programmable Electrical Systems (Software) The medical industry has
      recently determine that the software that runs the safety features of
      medical devices is as much a function of the safety features as the
      hardware. For this reason, standards have been created to allow evaluation
      of such software. As the CTLM does utilize software in some aspects of
      such safety devices, evaluation in accordance with the most recent
      software standards is required. These requirements are ones similar to the
      requirements adopted by the FDA for the same purpose.

           EN 60 601-1-4: Medical electrical equipment. Part 1: General
           requirements for safety 4. Collateral standard: Programmable
           electrical medical systems.

      Quality Assurance Systems In efforts to assure quality processes, the
      Company is utilizing the most recent quality control standards in the
      development of our quality assurance program. The standards listed are
      particular to the medical industry.

           EN 29001: Quality Systems - Model for Quality Assurance in
           design/development, production, installation, and servicing.

           EN 46001: Specification for Application of EN 29001 to the
           manufacture of medical devices.

      Clinical Evaluations As clinical evaluations are required for the CTLM and
      almost every country has a different way for the evaluations to be
      performed and documented, the Company is required to perform our
      evaluations in accordance with the most recent requirements. These
      documents state these requirements.

           EN 540: Clinical investigation of medical devices for human subjects.

           Medical Devices Directive (93/42/EEC) Annex X: Clinical evaluations.

                                       8
<PAGE>

      Risk Assessment Most safety requirements (especially requirements for
      software) are driven from possible safety hazards. These hazards are
      uncovered by a proper risk assessment as outlined in this standard.

           prEN 1441: Medical devices - risk analysis.

      Additional Markings/Symbols/Terminology/Documentation. These standards
      list additional aspects of the CTLM(TM) that require additional
      information not covered by the requirements listed above.

           prEN 980: Terminology, symbols, and information provided with medical
           devices. Graphical symbols for use in the labeling of medical
           devices.

           prEN 1041: Terminology, symbols, and information provided with
           medical devices. Information supplied by the manufacturer with
           medical devices.

           Medical Devices Directive (93/42/EEC) Annex X:  Clinical evaluations.

Although the Company has begun the process for application of regulatory
approval marks and showing compliance with the Medical Devices Directive (MDD),
which allows placement of the CE mark, there can be no assurance that such
approval will be received on a timely basis, or at all. See Item 1. "Description
of Business-Regulatory and Clinical Status".


REGULATORY AND CLINICAL STATUS

United States/FDA
On March 19, 1998 the Company submitted the final Report for the Company's IDE.
Also on March 19, 1998 the Company met with representatives of the FDA. The
purpose of the meeting was to describe several options to the Company's IDE and
to get the FDA's perspective on these approaches. It was decided that the
Company will conduct clinical trials under the IDE with 20 patient studies
performed in-house and monitored by an Institutional Review Board ("IRB")
established by the Company the ("In House Studies). The information obtained
from the study will be submitted to the FDA to enable the Company to commence
the clinical studies at three unaffiliated clinical sites.

In April 1998 the Company appointed seven physicians and one physicist who are
specialists in the following fields: Gynecology/Obstetrics and Mammography (4),
breast surgery (1), Neurology (1), Radiology (1), and optics and laser
engineering (1), to serve on the IRB for the In House Studies. The IRB was
appointed to review, to approve the initiation of, and to conduct periodic
review of the Company's research involving human subjects. The primary purpose
of an IRB is to assure, both in advance and by periodic review, that appropriate
steps are taken to protect the rights and welfare of humans participating as
subjects of the research. To accomplish this purpose, IRB's use a group process
to review research protocols and related materials (e.g., informed consent
documents and investigator brochures) to ensure that:
      (i) Risks to subjects are minimized by using procedures that are
      consistent with sound research design and that do not unnecessarily expose
      subjects to risk, and whenever appropriate, by using procedures already
      being performed on the subjects for diagnostic or treatment purposes.

      (ii) Risks to subjects are reasonable in relation to anticipated benefits
      (if any) to subjects, and the importance of the knowledge that may be
      expected to result.

      (iii) Selection of subjects is equitable.

      (iv) Informed consent will be sought from each prospective subject or the
      subject's legally authorized representative and will be documented in
      accordance with, and to the extent required, by the FDA's informed consent
      regulation.

      (v) Where appropriate, the research plan makes adequate provision for
      monitoring the data collected to ensure the safety of subjects.

                                       9
<PAGE>
      (vi) There are adequate provisions to protect the privacy of subjects and
      to maintain the confidentiality of data.

      (vii) Appropriate additional safeguards have been included in the study to
      protect the rights and welfare of subjects who are members of a vulnerable
      group.

The IRB is not responsible for nor does it participate in obtaining data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for its services; however, if pursuant to
FDA requirements, one of the members should supervise the actual scanning of
women, they are paid a supervisory clinical honorarium of $250 per day. The
optics and laser engineer IRB member also serves and has served for the past
three years, as a consultant to the Company on an "as needed" basis. He receives
a consulting fee from the Company of $700 per month. The Neurology IRB member is
married to one of the Company's engineers. Pursuant to FDA regulations, these
type of relationships between an IRB member and the Company and an IRB member
and a Company employee are not prohibited.

On May 15, 1998 the Company submitted a supplemental safety report to the FDA
which encompasses all of the modifications and upgrades since the initial safety
report was filed.

In order to collect the clinical data for the PMA, the Company was granted, in
June 1998, its second investigational device exemption ("IDE") to conduct
clinical trials. An IDE allows a company to conduct human clinical trials
without filing an application for marketing clearance. See Item 1 "Description
of Business-Government Regulation." The Company was authorized to scan 20
patients at its in-house facilities in Plantation, Florida. On September 1 and
September 10, 1998, the Company formally submitted the first and second series
of the 20 patient in-vivo (human) images and corresponding interpretation data
to the FDA. In December 1998, the Company completed the 20 patient in-vivo
images and submitted them to the FDA.

The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first off-site clinical site to participate in
its 400 case investigational clinical study. On January 14, 1999, the Company
received notice that the IDE application to extend the in-vivo study to Nassau
County Medical Center was conditionally approved by the FDA. The Company
received final approval to conduct the investigational study on February 26,
1999. This IDE application is limited to one institution (Nassau County Medical
Center) and 275 subjects. The Company had originally intended to have the
CTLM(TM) positioned at Nassau County Medical Center no later than mid February,
however due to renovations at Nassau County Medical Center, the CTLM(TM) was
shipped on March 3, 1999 and installed. The Company will continue its
investigational device studies in accordance with the approved IDE protocol. The
Company is still evaluating sites in Miami, Chicago, Los Angeles, and Boston.
Once the 400 case investigational clinical study is completed, the Company plans
to file a Pre-Market Approval application (PMA) with the FDA to obtain marketing
clearance.

The IRB for the Nassau County Study is comprised of twenty-three members, none
of which are affiliated with the Company. The professional specialties and other
information which regard to the IRB members of the Nassau County Study is set
forth in the table below.
<TABLE>
<CAPTION>
      ---------------------------------------------------------------------------------------
                                Professional Specialty
      Highest Degree Earned       General - Specific                   Affiliation With NCMC
      ---------------------------------------------------------------------------------------
      <S>                       <C>                                     <C>
      M.D.                      Neurology                               Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Surgery                                 Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Pediatrics                              Yes
      ---------------------------------------------------------------------------------------
      Reverend                  Other Fields, Religion                  Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Obstetrics & Gynecology                 Yes
      ---------------------------------------------------------------------------------------
      Ph.D                      Psychiatry; Behavioral Scientist        Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Pathology                               Yes
      ---------------------------------------------------------------------------------------
      M.D.,                     Medicine-                               Yes
      Ph.D.                     Allergy/Immunology
      ---------------------------------------------------------------------------------------
      M.B.                      Administrator                           No
      ---------------------------------------------------------------------------------------
      J.D.                      Other Fields, Law                       No
      ---------------------------------------------------------------------------------------
      M.D.                      Physiatry                               Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Pediatrics                              Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Obstetrics & Gynecology                 Yes
      ---------------------------------------------------------------------------------------
</TABLE>
                                       10
<PAGE>
<TABLE>
      <S>                       <C>                                     <C>
      M.D.                      Psychiatry                              Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Biostatistician                         Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Anesthesiology                          Yes
      ---------------------------------------------------------------------------------------
      B.S.R.Ph.                 Pharmacy                                Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Medicine - Biochemistry                 Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Pediatrics - Microbiology               Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Administrative                          Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Director for Academic Affairs           Yes
      ---------------------------------------------------------------------------------------
      Ph.D.                     Pathology                               Yes
      ---------------------------------------------------------------------------------------
      M.D.                      Academic Affairs
      ---------------------------------------------------------------------------------------
</TABLE>

In order to sell the CTLM(TM) device commercially in the United States, the
Company must obtain marketing clearance from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. 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 that 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. The
      availability of the device is otherwise in the best interest of the public
      health.

Although the Company believes that it qualifies for expedited review, there can
be no assurance that any such review will be granted of if granted that the PMA
will be approved or that such approval will be received on a timely basis. See
Item 1. "Description of Business-Government Regulation".

Foreign

The Company has begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks and showing compliance with the MDD which allows
placement of the CE Mark. Many steps need to be taken into consideration with
the end goal of accessing the EEA market. The following is a brief explanation
of the steps the Company has taken or is currently taking to achieve this goal.

Evaluating and Securing a Notified Body ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a Competent Authority, which, among other
things, is responsible for the evaluation of regulatory non-governmental
agencies in their country for designation as a NB.

An agency can be approved to be a NB for different categories (i.e. electrical
products, machinery, medical, etc.). For instance, the NB that the Company will
choose will be one that is approved to assist manufacturers in showing
compliance with MDD. As MDD is very encompassing (product safety, quality
assurance, EMC, software, etc) some NBs are only approved to assist
manufacturers in certain areas (i.e. quality assurance evaluations) and the
manufacturer will need to look to another NB for assistance in the other areas.
The Company is in the process of evaluating applicable NBs and intends to select
a NB that can assist it in all matters of the MDD.

The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated interpretation of requirements and excellent customer
service. The Company believes that they have found a NB that will provide this
type of service and has notified them of its intent to utilize them. The
proposed NB has provided the Company with information on the necessary steps in
accessing the market of the EEA, however no contracts have been entered into at
this time.

                                       11
<PAGE>

Product Safety Evaluation - The Company believes that one of the most important
aspects of product safety is the design of the product. If safety standards are
not considered through the design of the product, the product safety evaluation
may require that the mechanical and electrical parts of the product be
re-designed. The Company has made every effort to confirm throughout the
CTLM(TM) design process that it is in compliance with all domestic and
international safety standards. In this manner, the Company is very much
involved in the product safety evaluation and, although the Company has not
entered into contract with a NB for this purpose, it is in contact with several
regulatory agencies on a regular basis for guidance. There are, however, some
considerations that cannot be anticipated, such as electrical magnetic
compatibility ("EMC"), which requires equipment that is not cost effective for
the Company to purchase in order to evaluate. There is also the consideration of
new requirements, or new interpretations of existing requirements, that may
effect the CTLM(TM).

Quality Assurance - The Company's current goal is to implement a full quality
system at the Company's corporate offices. The Company's Quality Assurance
Manager ("QAM") has begun the process of implementation in accordance with the
required standards. After implementation of the quality system, auditors are
required to review a history of the system in particular how it works and how
the normal difficulties that occur in design and manufacturing were overcome.
The Company's QAM and the NB will need to determine how much history is required
for proper proof that the system is adequate.

Software Evaluation - The preparations for software evaluation are headed by the
Company's Software Manager. Because the standards in this area are relatively
new to the industry, regulatory agencies will be very cautious in the
evaluation. Through advice from the proposed NB, the Company has begun document
preparation for evaluation submission. One of the larger steps in documentation
preparation for this evaluation is the risk analysis for the device. Although
there may be changes to the CTLM(TM) that may effect the report, the Company has
completed a risk analysis for the CTLM(TM) and is ready to proceed with the
remainder of the documentation.

Efficacy - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is
basically the same for the United States as for the EEA, however reporting
methods may differ. As the Company continues with clinical trials in the U.S.,
these efforts will also benefit it in the EEA market.


SALES AND MARKETING
The Company presently employs a Director of Sales. At present, his job consists
of locating, obtaining and coordinating with strategic marketing and
distribution companies who have established marketing capabilities, both
domestic and international. The target domestic market includes most of the over
10,000 mammography centers across the United States, which exist in both large
and small hospitals and private clinics. The international target market is
large government and private hospitals.

Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers and to the extent that, and rate of which, the
CTLM(TM) achieves market acceptance and penetration will depend on many
variables. These include, but are not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy, and
cost-effectiveness of the CTLM(TM), and the advantage of the CTLM(TM) device
over existing technology and cancer detection methods. The Company has focused
its efforts on establishing a presence at major Breast Imaging Conferences that
are held each year. 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. There can be no assurance that physicians
or the medical community in general will accept and/or utilize the CTLM(TM).

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.

Reliance on International Sales.
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. See Item 1 "Description of Business-Government
Regulation." The Company intends to commence international sales of the CTLM(TM)
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) in the United States, 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,

                                       12
<PAGE>

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. The regulation of
medical devices, particularly in Europe, continues to develop and there can be
no assurance that new laws or regulations will not have an adverse effect on the
Company.

In order for the Company to ship the CTLM(TM) outside of the United States, the
following information must be submitted to the FDA: (i) a complete description
of the device intended for export; (ii) the status of the device in the U.S.;
(iii) a letter from the appropriate foreign liaison (person with authority to
sign a letter of acceptance for the foreign government stating that (a) the
device is not in conflict with the laws for the country to which it is intended
for export; (b) the foreign government has full knowledge of the status of the
device in the U.S.; and (c) import is permitted or not objected to. The FDA
reviews export requests to determine that exportation of the device (1) is not
contrary to public health and safety and (2) has the approval of the country to
which it is intended for export. If the device meets the above criteria, it is
approved for export. The CTLM(TM)is exempt from requirement (1) above because
there is an FDA approved investigational device exemption (IDE) for the
CTLM(TM). The FDA would not grant an IDE for a device that is contrary to public
health and safety.

The Company has deferred foreign distribution of the CTLM(TM) until such time as
it has collected enough clinical data to compile an atlas of CTLM(TM) images to
be used as clinical examples of normal and abnormal breast conditions. Therefore
the Company has not requested the approval of any country, nor has any country
granted permission to import the CTLM(TM).

INTERNATIONAL DISTRIBUTORS
In January 1998, the Company entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based in the
Republic of Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical Instruments, Telsar,
and Medlab, among many others, in the Republic of Turkey. Emtron appears to have
a strong presence in the industry, marketing to the 30 university hospitals, the
Social Security System (which has over 100 hospitals) and larger private
hospitals in Turkey.

Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of Turkey for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.

In April 1998, the Company entered into an exclusive International Distribution
Agreement with Focus Surgical LTD., to distribute the CTLM(TM) device to
hospitals and clinics throughout the United Kingdom and Ireland. The term of the
Agreement is three years, with a minimum purchase requirement of 10, 12, and 15
CTLM(TM) devices in the first, second, and third year(s) of the Agreement,
respectively. For the purpose of the Agreement, the first year is deemed to
begin when the Company obtains PMA acceptance from the FDA. See Item 1:
Description of Business-Government Regulation. Focus Surgical currently
distributes non-competitive laser products for companies such as Sunrise Medical
Technologies and Baltec, among many others.

In December 1998, the Company entered into distribution agreements with
Consultronix and Iberadac to distribute the CTLM(TM) throughout Poland and
Portugal and Spain, respectively. The Agreements are for a term of 3 years, with
a renewal option by the Company for an additional year provided that each
distributor sells at least one CTLM(TM) per year.

Consultronix was established in 1987 and employs 22 persons and markets medical
equipment throughout Poland in the field of Ophthalmology, Image Diagnostic, and
Urology. Iberadac distributes Radiology and Ultrasound equipment for Americare,
Capintec, Acuson and Fisher Imaging throughout Portugal and Spain.

                                       13
<PAGE>

The Company has secured exclusive distributors as follows:

                      INTERNATIONAL DISTRIBUTORS BY COUNTRY

                                                Renewal Option
Country            Term          Expiration     by IDSI           Renewal Period
-------            ----          ----------     -------           --------------
Australia          3 years       3/13/00        Yes               2 years
Austria            3 years       3/11/00        Yes               2 years
Belgium            1 year        2/9/2000       Yes               1 year
Brunei             3 years       3/13/00        Yes               2 years
China              3 years       3/13/00        Yes               2 years
France             29 months     12/31/98       Yes               2 years
Germany            3 years       3/11/00        Yes               2 years
Hong Kong          3 years       3/13/00        Yes               2 years
India              3 years       3/13/00        Yes               2 years
Indonesia          3 years       3/13/00        Yes               2 years
Ireland            3 years       3/29/01        Yes               1 year
Israel             2 years       12/31/98       Yes               2 years
Italy              29 months     11/30/98       Yes               2 years
Luxembourg         1 year        2/9/2000       Yes               1 year
Malaysia           3 years       3/13/00        Yes               2 years
New Zealand        3 years       3/13/00        Yes               2 years
Philippines        3 years       3/13/00        Yes               2 years
Poland             3 years       12/3/02        Yes               1 year
Portugal           3 years       12/3/02        Yes               1 year
Russia             3 years       3/11/00        Yes               2 years
San Marino         29 months     11/30/98       Yes               2 years
Singapore          3 years       3/13/00        Yes               2 years
South Korea        2 years       2/10/99        Yes               2 years
Spain              3 years       12/3/02        Yes               1 year
Switzerland        3 years       3/11/00        Yes               2 years
Turkey             18 months     7/19/99        Yes               1 years
United Kingdom     3 years       3/29/01        Yes               1 year
Vatican City       29 months     11/30/98       Yes               2 years

To date, the Company has not marketed, or generated revenues from the
commercialization of the CTLM(TM). Originally the Company anticipated that the
CTLM(TM) would be ready for distribution in the summer of 1998, however during
the course of clinical trials, certain problems became evident, solutions to
these problems had to be found and adjustments had to be made to the CTLM(TM) to
correct such problems. Due to these delays and the delay in completing our
clinical investigational trials, the Company is presently unable to project when
the first distribution of the CTLM(TM) will occur.

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) 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
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.

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 an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. At present, the Company does not carry product
liability insurance. The Company intends to obtain product liability insurance
prior to testing at clinical sites and marketing the CTLM(TM) device.

                                       14
<PAGE>

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.

To a great extent, the CTLM(TM) will be competing with established imaging
equipment such as x-ray mammography equipment, ultrasound or high definition
ultrasound systems, Magnetic Resonance Imaging ("MRI") systems, and
thermography, diaphonography and transilluminational devices. Physicians
presently using these customary types of imaging equipment may not use the
Company's products. Currently, mammography is employed widely and 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
tommography 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.

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 CTLM(TM) 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.

PATENTS
In December 1997, the patent for the CTLM(TM)) was issued by the United States
Department of Commerce Patent and Trademark Office under Patent Number 5692511
(the "Patent"). The Patent has a total of 4 independent claims and 24
subordinate claims. The independent claims serve to provide an overall outline
of the disclosure of the invention. The subordinate claims provide additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim.

The Company owns the rights, to the Patent pursuant to an exclusive patent
licensing agreement, for the use of the Patent for the CTLM(TM) technology. The
life of a Patent is 17 years. The Patent is owned by Richard Grable, the
Company's Chief Executive Officer. In addition, the Company has twelve
additional United States patents pending with regard to Optical Tomography, as
follows:

                              U.S. PATENTS PENDING
<TABLE>
<CAPTION>
PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
---------      ---                                           ------       --------         -----------    --------
<S>            <C>                                           <C>          <C>              <C>            <C>
Yes            Diagnostic Tomographic Laser Imaging          6356         08/484,904       6/7/95         5,692,511
               Apparatus (Electronics & Imaging)
Yes            Diagnostic Tomographic Laser Imaging          6356-US      08/952,821       7/31/98        Pending
               Apparatus(Patient Support Strucure)
               in addition to above

PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
Yes            Device for Determining the Contour of the     6558-1       08/965,148       11/6/97        Pending
               Surface of an Object Being Scanned

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

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

PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
No             Data Acquisition Technique Using Wall Eye     6571         60/032,593       11/29/96       Pending
</TABLE>
                                       15
<PAGE>
<TABLE>
<S>            <C>                                           <C>          <C>              <C>            <C>
PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
No             Detector Array with Variable Amplifiers for   6572-1       08/979,328       11/26/97       Pending
               Use in a Laser Imaging Device

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

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

PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
No             Fluorescent Imaging                           6585         60/036088        1/17/97        Pending

PCT Appl.      For                                           Case #       Serial #         Filing Date    Patent #
No             Laser Imaging Apparatus Using Biomedical      6647         09/008,477       1/16/98        Pending
               Markers That Bind to Cancer Cells

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


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

Neither the Company nor Mr. Grable hold foreign patents, however the table below
sets forth certain information with regard to the patents that have been applied
for.

                       FOREIGN PATENT APPLICATIONS PENDING
<TABLE>
<CAPTION>
AUSTRALIA

Inv. Date       Invoice#         Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
12/29/97        C974248JD        National Phase in          Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 Australia                  Imaging Apparatus
                                 of PCT Appl.

<CAPTION>

CANADA
Inv. Date       Invoice #        Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
2/4/98          C984481JPD       National Phase in          Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 Canada                     Imaging Apparatus
                                 of PCT Appl.

<CAPTION>
CHINA
Inv. Date       Invoice #        Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
5/27/98         PM986040JD       Chinese Patent Appl.       Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 For Invention              Imaging Apparatus

<CAPTION>
EUROPEAN
PATENT OFFICE
Inv. Date       Invoice #        Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
1/28/98         C984270JD        National Stage in          Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 Europe                     Imaging Apparatus
                                 of PCT Appl.

JAPAN
2/5/98          C984482JPD       Natl. Phase in Japan       Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 of PCT Appl.               Imaging Apparatus
</TABLE>
                                       16
<PAGE>
<TABLE>
<CAPTION>
MEXICO
Inv. Date       Invoice #        Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
9/2/98          C987553JD        National Phase in          Diagnostic Tomographic Laser    PCT/US95/08225    7/10/95
                                 Mexico of PCT Appl.        Imaging Apparatus

<CAPTION>
PCT COVERS
EUROPEAN
COUNTRIES
Inv. Date       Invoice #        Description                For                             Intl. Appl. #     Filing Date
---------       --------         -----------                ---                             -------------     -----------
<S>             <C>              <C>                        <C>                             <C>               <C>
1/3/97          P970502JD        PCT Appl. For RJG          Diagnostic Tomographic          PCT/US95/08225    7/10/95
                                                            Imaging Apparatus
2/19/98         C984498JPD       PCT Intl. Appl of IDSI     Detector Array for Use in a     PCT/US97/20970    11/28/97
                                                            Laser Imaging Apparatus
2/19/98         C984497JPD       PCT Intl. Appl of IDSI     Method for Reconstructing       PCT/US97/23160    11/28/97
                                                            the Image of an Object
                                                            Scanned with a Laser Imaging
                                                            Apparatus
3/18/98         C985531JPD       PCT Intl. Appl. Of         Device for Determining the      PCT/US97/19615    11/7/97
                                 Wake, Grable & Rohler      Perimeter of the Surface
                                 Grable & Rohler            of an Object Being Scanned
                                                            and for Limiting
                                                            Reflection from the Object
                                                            Surface
5/13/98         C986209JPD       PCT Intl. Appl of IDSI     Apparatus for Determining       PCT/US97/19614    11/7/97
                                                            the Perimeter of the
                                                            Surface of an Object Being
                                                            Scanned
</TABLE>

The Company intends to file for patents on products, including the CTLM(TM), for
which it feels the cost of obtaining a patent is economically reasonable in
relation to the expected protection obtained. There can be no assurances that
any patent that the Company applies for will be issued, or that any patents
issued will protect the Company's technology. If the patents the Company license
or obtains are infringed upon, or if the Company is required to defend any
patent infringement cases brought against it, it will require substantial
capital, the expenditure of which the Company might not be able to afford.


PATENT LICENSING AGREEMENT
Background
In December of 1993 Richard Grable, Linda Grable and Allan L. Schwartz (the
"Founders"), Imaging Diagnostic Systems, Inc., which at that time was a
privately held Florida corporation (the "Private Company"). The sole purpose of
the Private Company was to further develop Richard Grable's invention, a CT
laser breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already
been exhibited at the RSNA 89' session and held the promise of a new, emerging
technology for the detection of breast abnormalities without compression or
ionizing X-rays. This device used a laser diode for its energy source and a 386
processor that was extremely slow. Once the technology required to speed up the
processing became available the Founders believed that this device would be a
major breakthrough in the early detection of breast cancer.

It was unanimously decided that the Private Company should merge with a public
shell and raise its initial seed funding through the sale of common stock
pursuant to Regulation D, Rule 504. On April 14, 1994 the Company merged with
Alkan Corp., a New Jersey public company. Alkan Corp.'s name was changed to
Imaging Diagnostic Systems Inc. and the privately held Company was dissolved.
Since inception, the Company and Mr. Grable had an understanding that the
Company would have the exclusive license for use of the Patent and Mr. Grable
would be paid a royalty, however the amount to be paid for the license and other
terms and conditions of the license were never discussed and the exclusive
license for the patent was never memorialized in written form. It was understood
at the time of the merger that Mr. Grable would be compensated for his patent,
when issued and that he would receive a development royalty based on sales of
the device. In February 1995, pursuant to an amendment to his July 5, 1994
employment agreement (the "Employment Agreement") he was granted a development
royalty based on the net sales of the CTLM(TM). The Company still did not have a
binding agreement with regard to its use of the Patent.. When Mr. Grable filed
the patent application in June of 1995, the Board instructed the Company's
General Counsel to draft an Exclusive Patent License Agreement. The Company's
prior General Counsel was involved with funding agreements, Federal filings,
employment contracts and other legal issues which are inherent to a development
stage Company and never prepared the Patent License Agreement and the Company
did not realize that a formal agreement had not been executed.

                                       17
<PAGE>

Negotiations
In September 1997 the Company hired new general counsel. In her review of the
records of the Company she discovered that no agreement for the use of the
Patent had been executed and apprised the Board of Directors of this fact that
the Company had no binding agreement for the use of the Patent. Since it was
always the intent of Mr. Grable to grant the Company an exclusive license to the
Patent, a licensing agreement was negotiated The Company's General counsel
represented the Company and Mr. Grable retained separate counsel for himself.
Mr. Schwartz negotiated the terms of the Patent License Agreement on behalf of
the Company. The Company did not seek the services of a financial advisor to
issue a fairness opinion with regard to the Patent License.

Even though Mr. Schwartz and Mr. Grable are both founders of the Company, the
Company believes that the parties negotiating the transaction were independent
of each other and on equal footing. Mr. Schwartz had full knowledge of the
patent, had physically seen the original prototype, Mammoscan, operate in May of
1990 and recognized the CTLM's(TM) potential to generate revenues for the
Company upon receiving FDA marketing clearance.

Moreover, the Company believes that the terms of the Patent License Agreement
are fair to the Company and comparable to terms that would have been required by
an unaffiliated third party holding the Patent, given the same circumstances and
conditions that existed at the time the Patent License was negotiated. The
Company's belief is based on the following facts and circumstances;(i) an oral
understanding with Mr. Grable already existed from the inception of the Company
regarding the Patent License; (ii) a Royalty Agreement was already included in
Mr. Grable's Employment Agreement; (iii)the negotiations were conducted to agree
on the number of shares to be issued as consideration for the Patent License, to
modify the terms of the royalty, and memorialize the agreed upon terms in a
written contract; (iv) the Company had expended substantial funds for the
development of the CTLM(TM)and technically had no legal right for its use; (v).
Mr. Grable and Mr. Schwartz both had a fiduciary duty to the Company and its
Shareholders to formalize, in writing, the oral agreement regarding the Patent
and (vi) the value of the Patent to the Company was determined by the
preparation of a confidential three year pro-forma statement of operations
beginning with fiscal year June 30, 1998 and ending with fiscal year ended June
30, 2000. This statement reflected an average of $35,615,732 Net Revenues over
the last two fiscal years assuming that the Company received FDA marketing
clearance in the latter part of calendar 1998. Although no assurances can be
given, the Company now anticipates FDA Marketing clearance in the very latter
part of calendar 1999. Since all of the revenues and the Company's existence
were totally dependent on Mr. Grable's patent, it was determined that a
reasonable one-time license fee would be 10% of that average over the two-year
period. That amount, $3,561,573 was approximately the value of the shares
ultimately agreed upon by both parties.

Due to the foregoing and because, under Mr. Grable's guidance, the development
of the CTLM(TM) was nearing completion, FDA clinical trials were underway, and
three external clinical sites at hospitals in the United States were being
planned, and because the Board believed that the transaction was fair, the lack
of a fairness opinion by a financial advisor did not affect the decision of the
Board. This situation placed Mr. Grable in better bargaining position, which
strengthened as the CTLM(TM) moved closer to being a marketable medical imaging
device.

Initially, Mr. Grable's counsel advised him to request 15 million shares of
common stock that would be immediately registered in order to afford Mr. Grable
protection against dilution. The Company rejected that offer and continued
negotiating. After several offers and counter offers and several discussions,
Mr. Grable accepted a lesser number of shares (7,000,000) with anti-dilution
provisions and agreed to payment of the licensing fee in two installments, one
year apart and agreed to accept restricted shares with no registration rights.
In addition, a new royalty structure, based upon the net selling price of all
products and goods in which the Patent is used, before taxes and after deducting
the direct cost of the product and commissions or discounts paid was agreed to.
Once the Company begins to generate revenues, it is contractually obligated to
pay, until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement), Development Royalties set forth below pursuant to Mr. Grable's
Employment Agreement and the Licensing Royalties set forth below pursuant to the
Patent Licensing Agreement until such time as the Patent Licensing Agreement is
ratified by the shareholders. See "The Agreement" below.

Pursuant to the License Royalty structure, the percentage of Royalties to be
paid is in a declining scale as opposed to the ascending scale contained in the
Amendment to Mr. Grable's Employment Agreement. Although the License Royalty
structure is higher on every level than the Development Royalty structure, the
Company believes that in the long run it is more advantageous for the Company to
pay a higher Royalty and have the legal and exclusive right to use the patent as

                                       18
<PAGE>

opposed to being obligated to pay a lower development Royalty pursuant to an
Employment Agreement, with no right to the Patent. Moreover, at the $10,000,000
plus level (the level which represents the sale of approximately 29 machines per
year) the difference in the Royalty structure is only 1%. The following is a
comparison of the Development and License Royalty structures:

     DEVELOPMENT ROYALTY STRUCTURE              LICENSING ROYALTY STRUCTURE

      GROSS SALES            PERCENTAGE         GROSS SALES           PERCENTAGE
---------------------------------------    -------------------------------------
$0 to $999,999               2.5%          $0 to $1,999,999              10%
---------------------------------------    -------------------------------------
$1,000,000 to $1,999,999     3%            $2,000,000 to $3,999,999       9%
---------------------------------------    -------------------------------------
$2,000,000 to $3,999,999     3.5%          $4,000,000 to $6,999,999       8%
---------------------------------------    -------------------------------------
$4,000,000 to $9,999,999     4%            $7,000,000 to $9,999,99        7%
---------------------------------------    -------------------------------------
Greater than $10,000,000     5%            Greater than $10,000,000       6%
---------------------------------------    -------------------------------------

Agreement
In June 1998, the Company and Mr. Grable, entered into the Patent Licensing
Agreement. Pursuant to the terms of the Patent Licensing Agreement, the Company
was granted the exclusive right to modify, customize, maintain, incorporate,
manufacture, sell, and otherwise utilize and practice the Patent, all
improvements thereto and all technology related to the process, throughout the
world. This license shall apply to any extension or re-issue of the Patent. The
term of the license is for the life of the Patent (17 years) and any renewal
thereof, subject to termination, under certain conditions. As consideration for
the License, on June 5, 1998, the Company issued to Mr. Grable 3,500,000 shares
of common stock and is required to issue and additional 3,500,000 shares in June
1999. The market price of the Shares at the time of issuance was $.54 per Share.
In addition, the Company has agreed to pay to Mr. Grable, a royalty based upon
the net selling price (the dollar amount earned from the sale by the Company,
both international and domestic, before taxes minus the cost of the goods sold
and commissions or discounts paid), of all products and goods in which the
Patent is used, before taxes and after deducting the direct cost of the product
and commissions or discounts paid (the "Royalty"). During the second year of the
Agreement there is a minimum cash royalty provision of $250,000 payable at the
end of the second year.

The Board of Directors did not submit the matter for a shareholder's vote prior
to the execution of the Patent License Agreement or the issuance of the shares,
since shareholder approval was not required by the Florida Business Corporation
Act. Pursuant to the Patent License Agreement, the Company is required to have
the Patent License Agreement ratified by its Shareholders at its next special or
annual meeting of Shareholders in order for the Licensing Royalties set forth
above, to take the place of the Development Royalties set forth in the Amendment
to Mr. Grable's Employment Agreement, and for such Amendment to become void and
have no effect. The ratification by the shareholders was requested by Mr.
Grable, based upon advice from his counsel. If shareholder ratification is not
obtained, the Company would contractually be required to pay Development
Royalties until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement) in addition to the Patent License Royalties. If ratification is
received, in the event that litigation is instituted with regard to the validity
of the Patent License Agreement, the Company or Mr. Grable could and may assert
as a defense that shareholders approved the Patent License. All shareholders
will be entitled to vote on the ratification.

The Patent Licensing Agreement also contains anti-dilution protection upon the
occurrence of any stock dividend, stock split, combination or exchange of
shares, reclassification or re-capitalization of the Company's common stock,
reorganization of the Company, consolidation with or merger into or sale or
conveyance of all or substantially all of the Company's assets to another
corporation or any other similar event which serves to decrease the number of
Shares issued pursuant to the Patent Licensing Agreement. See ITEM 6.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 12. Certain Relationships and Related Transactions. The
Patent has generated no revenues to date. The Company anticipates that it will
receive revenues related to the Patent its fourth fiscal quarter beginning April
1999, however no assurance can be given in this regard.

OEM AGREEMENT

In January 1998, the Company entered into an Original Equipment Manufacturer
Agreement (OEM) with Imation Corp. ("Imation"), a worldwide leader in the
imaging and information industry. Imation has a marketing presence in more than
60 countries and operates 17 manufacturing, research and distribution

                                       19
<PAGE>

facilities. In December 1998, Imation's medical imaging business in North
America, Latin America, and Asia was purchased by the Eastman Kodak Company.
Immediately after the purchase by Kodak, the Company received correspondence
from Kodak, which confirmed that the Company's OEM agreement would not be
changed by the acquisition of Imation. At that the time, the company issued a
pruchase order for a new dry View Imager to be delivered in April 1999.

Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty-free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface (the
"Dry View Technology").

The OEM Agreement also gives the Company the right to market the Dry View
Technology directly or indirectly through its Distributors. The DryView(TM)
imagesetting film is a hard-dot quality film that requires no chemical
processing, which traditional image processors require. It also eliminates the
need for a dark room. This dry film product was developed by Imation based on
the same technology used to develop Imation's DryView(TM) Laser Imaging System
for the medical imaging market. The dry image setting film is used in a number
of dry film imagesetters developed by systems developers including Scitex
Corporation Ltd., ECRM Incorporated, Ultre Division of Linotype-Hell Company and
Exxtra Corporation. Due to the fact that the processing procedure for the
DryView(TM) does not use chemicals and therefore eliminates the possibility of
environmental contamination, eliminates the need for a dark room and eliminates
the cost of chemical processing, the Company believes that the Dry View
Technology will provide the Company's end uses with the most efficient,
economical, and ecological product in the medical industry.

It was originally believed that the OEM agreement could provide the Company with
immediate revenues from direct sale of the Dry View Technology. As a result of
local marketing efforts in the immediate market of South Florida, it was quickly
determined that the marketing of this product would not be cost effective since
the Company would be competing with Imation's (Now Kodak's own sales force) and
others who have vaster resources and personal than the Company. Due to this
competition factor, the Company has not marketed any DryView to date and will
use the technology as a Value-added option to the CTLM(TM) device when sold.

NASDAQ LISTING
On March 24, 1996, the Company filed its application with Nasdaq to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no control or relationship with the Company, other
than as a minority shareholder, had a questionable background and owned a 5%
interest in the Company.

As a result, the Company appealed the denial decision to the Nasdaq Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:

           "Accordingly, we recommend that the Panel's decision denying initial
           inclusion be reversed and the case be remanded to the Staff with
           instructions to implement the Company's proposal..."

The Company in fact, did implement its proposal and on March 12th provided
Nasdaq with copies of all documentation necessary to satisfy any concerns that
the Panel had regarding the Shareholder. On March 31, 1997, prior to the time
Nasdaq acted on the proposal, Barron's published an inaccurate article stating
that a Nasdaq spokesman indicated that the listing would be denied. For the 36
trading day period prior to the date of this article the Company's stock traded
at $3.00 and above. The article had a predictable negative impact on the
Company's stock and the price dropped below $3.00 and did not recover, despite a
retraction from Barron's on April 7, 1997. Based upon this decline the Nasdaq
staff has refused to approve the Company for listing on the Nasdaq Small Cap
Market. ". On March 15, 1999, the Company's common stock closed at $.34. See
Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters."

The Company appealed the denial of the listing at an oral hearing before the
Nasdaq Qualification Hearing Panel (the "Panel") in Washington D.C. on January
22, 1998. On February 10, 1998, the Panel issued its decision which stated, in
part that despite the Company's argument, the Panel was of the opinion that the
Company must satisfy the $4.00 per share bid price requirement as well as all
other requirements for initial listing. The Panel noted that there were in
excess of 25,000,000 total shares outstanding which it stated, would allow the
Company to effect a reverse split sufficient to raise the bid price above the
$4.00 minimum. The Panel was of the opinion that the Company was in compliance
with the net tangible assets requirement, however the Panel expressed concern
relating to the Company's ability to maintain compliance with the $2,000,000 net

                                       20
<PAGE>

tangible assets requirement over the long term. The Panel granted the Company's
request for initial inclusion on the Nasdaq Small Cap Market, subject to the
following conditions:

      1. On or before May 11, 1998, the Company must effect a reverse stock
split sufficient to raise its bid price to, or above $4.00 per share for the
opening of one trading day or in the alternative, on or before May 11, 1998, the
Company must have and retain for 10 consecutive trading days a $4.00 bid price
through natural forces.

      2. On or before May 11, 1998, the Company must make a public filing with
the SEC and Nasdaq evidencing a minimum of $5,000,000 in net tangible assets.

Due to the substantial amount of preferred shares outstanding at the time, the
Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for the
reverse split. The conditional listing expired on May 11, 1998.

The Company immediately appealed this decision to the Nasdaq Listing and Hearing
Review Council (the "Council"). On May 19, 1998 the Company received the
Decision of the Council which affirmed the decision of the Panel. The Council
stated that:

"In making this decision, we find unpersuasive the Company's argument that on
remand, it was not required to satisfy the initial inclusion bid requirement, or
by implication, any of the other listing requirements. In fact the purpose of a
remand and the continuing role of the staff in the process is to provide
assurance that the Company satisfied Nasdaq listing requirement at the time it
was listed, a fact that the Company likely understood when it went through the
re-application process following remand."

The Company contends that this determination is incorrect in that the Company
never went through a re-application process following remand. The Council went
on to state, in part, that:

"The Company could have no reasonable expectation that it received a waiver of
Nasdaq listing standard. The decision merely determines that the ownership of
the shareholder at issue would not prevent listing, given the Company's plan to
insulate itself. We believe that the Panel's exception, which appears to be
within the Company's control to achieve, was appropriate. While the incorrect
Barron's article was unfortunate, we note that a retraction was later printed
and sufficient time has passed to allow the Company's stock to be fairly priced
in the market. We note that at the time of our consideration, the bid price for
the Company's was 1 1/16. This is well below Nasdaq's initial inclusion
standards.

The Council also agreed with the Panel's determination to require a heightened
net tangible assets requirement based upon the Company's history of losses which
have increased on a quarterly basis.

On June 11, 1998, the Company filed an Application for Review before the United
States Securities and Exchange Commission to appeal the Decision of the Council.
The basis for the appeal was that the Council erred in affirming the Panel's
decision placing conditions upon the Company's initial inclusion. The Company
contends that: (i) it did satisfy all the listing requirements on a timely basis
but was initially rejected for listing by the Nasdaq Staff and Panel on grounds
that were ultimately reversed by the in the first appeal; (ii) that the Company
satisfied the listing requirement and this fact was so recognized in the
Committee's Decision in the first appeal; (iii) that due to the four month delay
cased by the Nasdaq Staff; dilatory review process, and the irresponsible
remarks made by a Nasdaq Staff member to Barron's; the price of the Company's
stock declined below the initial listing requirement (but remained well above
the maintenance requirement). Based upon price deficiency alone, the Company was
denied listing.

On August 8, 1998, the Company filed it's Brief in Support of Application for
Review. Nasdaq's brief was due on September 10, 1998 and filed on September 15,
1998. On September 25, 1998, the Company filed its Reply Memorandum to the Brief
of the Nasdaq Stock Market. As of the date of this Report, no hearing has been
scheduled or decision rendered.

EMPLOYEES
As of April 7, 1999, the Company had 33 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. The Company's ability to provide its services is dependent upon the
Company recruiting, hiring and retaining qualified technical personnel. To date,
the Company has been able to recruit and retain sufficient qualified personnel.

                                       21
<PAGE>

None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.

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 Item 9. "Directors, Executive Officers, Promoters and Control
Persons; and Compliance with Section 16(a) of the Exchange Act".

YEAR 2000

The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant. The Company's
information technology system employs Microsoft Windows NT 4.0 Network on three
file servers and fifty workstations. The Company's product (the CTLM(TM)) and
its proprietary software comprise its non-information technology that is not
date dependent.

The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and has spent approximately $2,500
for third party software upgrades and Microsoft Developers Network software
(MSDN). The MSDN software allows the Company's computer programmers to update
its software to Y2K compliance by recompiling the source code. The Company
renews its subscription to MSDN annually. The Company expects such modifications
to its CTLM(TM) products and internal computer systems will be made on a timely
basis; however there can be no assurance there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations. The Company's Year 2000 Compliance Committee
estimates that an additional $35,000 will be spent to complete the Year 2000
Compliance Plan. The Company does not track the internal costs of its Year 2000
Compliance Plan. These costs are principally related payroll costs for its
computer-engineering group.

The Company has received the latest MSDN update from Microsoft and its software
engineers have recompiled all of the proprietary software used in the CTLM(TM).
The Company's proprietary software is now Y2K compliant. The Company is
dependent on the following software programs to conduct its business operations:

Accounting:          Peachtree Complete, release 6.0
Manufacturing:       Alliance Manufacturing Software, ver. 2.4a
Operating Systems:   Windows NT 4.0 and Windows 95
Word Processor:      Microsoft Office Professional 97
Database:            Oracle 7

The Peachtree Complete, Alliance Mfg., and the Oracle 7 are Year 2000 compliant.
The Microsoft Windows NT 4.0 and Windows 95 are compliant with minor issues.
Office Professional 97 is compliant. The Company believes that these software
programs are Y2K compliant however there is a risk that some or all of these
programs will have minor Y2K issues. The Company has in place a disaster
recovery plan to deal with any software or hardware failure.

The Company has begun testing its servers and workstations for Y2K compliance.
All of its computers have Intel Pentium processors. During stand-alone tests,
the computers with Intel Pentium processors were Y2K compliant. Software has
been purchased to test and repair non-compliant systems. The testing and
remediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.

The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,

                                       22
<PAGE>

there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time the Company is unable to
estimate the cost of its Year 2000 compliance, if any. Failure of third party
vendors to deliver parts and components timely could materially affect the
Company's ability to manufacture and deliver CTLM(TM) Systems. Because of this
potential risk, the Company has expanded its vendor and sub-contractor base to
safeguard itself against this uncertainty. A checklist of Y2K compliant vendors
and sub-contractors will be compiled with a projected completion date of June
30, 1999.

The Company's Year 2000 Compliance Committee has prepared a worst case Y2K
scenario. It estimates that Internet access will be severely impaired including
the ability to send and receive e-mail, possible difficulty in connecting the
Company's computer to remote clinical sites, and delays in shipment and delivery
of parts, components and finished goods. Overall fear and confusion of the Y2K
problem may temporarily impair many companies, even those who are Y2K compliant.

The Company can fully function without the use of the Internet and e-mail.
Clinical data will be sent via overnight delivery from the clinical sites to the
Company. Fear and confusion will diminish in a few weeks as companies and
individuals learn that most companies are compliant and operating without any
major problems. Delays in shipping will be a minor inconvenience, as the Company
will have stockpiled critical parts and components in anticipation of Y2K. The
Company has a Disaster Recovery Plan in place to deal with software and hardware
failures. This plan provides that all computer workstations are backed up on
tape every night and a spare server is ready to be installed upon failure of any
server in service.

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 the 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 Dr. Valey
Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Due to the substantial legal expenses incurred and to be incurred by
the Company in proceeding with the litigation, the Company entered into a
settlement in December 1998. Pursuant to the settlement the Company was required
to and paid the sum of $90,000 to the Defendants.

On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleged
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred.

In April 1999, the Series B Preferred Stock was purchased from the Series by an
unaffiliated third party, Charlton Avenue LLC ("Charlton"). On April 6, 1999,
the Company entered into a Subscription Agreement with Charlton whereby the
Company agreed to issue to Charlton 138 shares of its Series I, 7% Convertible
Preferred Stock. The Company's Board of Directors established the value of the
Series I Preferred at $10,000 per share. Consideration for the subscription was
paid as follows:

      (1)  Forgiveness of approximately $725,795 in interest due and payable in
           connection with the Series B convertible preferred stock.
      (2)  Settlement and dismissal, with prejudice, of all litigation
           concerning the Series B convertible preferred stock.
      (3)  Cancellation of 112,500 Warrants that were issued with the Series B
           Convertible Preferred Stock; and
      (4)  The amendment of the Series B Preferred designation to impose a
           limitation on the owner(s) of the Series B Convertible Preferred
           Stock to ownership of not more than 4.99% of the Company's
           outstanding common stock at any one time.

                                       23
<PAGE>

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

The Company has not submitted any matters to a vote of Security Holders. As of
the 3rd day of December 1998, , Austost Anstalt Schaan, Avalon Capital Ltd.,
Balmore Funds S.A., Steven Cohen, Canadian Capital Fund Ltd., Dominion Capital
Funds, Ltd. Linda B. Grable, Richard J. Grable, Deborah O'Brien, The Malcolm
Kanan Empire Trust and Allan L. Schwartz, (collectively "the Majority Common
Shareholders"), and Goodland International Investment Ltd., Weyburn Overseas
Limited, Austost Anstalt Schaan and Balmore Funds S.A (collectively "the
Majority Preferred Shareholders authorized by written action, the Company's
adoption of an amendment, in the form of Exhibit A hereto (the "Amendment"), to
the Company's Certificate of Incorporation, as amended, to increase the
authorized common stock, no par value per share ("Common Stock"), of the Company
from 48,000,000 shares to 100,000,000 shares (the "Written Action"). Taking into
account such provisions, the Majority Common Shareholders and the Majority
Preferred Shareholders (collectively, "the Majority Shareholders") were entitled
to and voted the number of shares set forth opposite their names:
<TABLE>
<CAPTION>
                                                 % OF COMMON                          % OF PREFERRED
                                  # OF COMMON       SHARES          # OF PREFERRED        SHARES
NAME                                 SHARES      OUTSTANDING (1)         SHARES        OUTSTANDING (1)
----                                 ------      ---------------         ------        ---------------
<S>                               <C>              <C>                   <C>             <C>
Austost Anstalt Schaan (4)           342,533          .9%                  50             8.96%
Avalon Capital Ltd.                  673,401         1.7%
Balmore Funds S.A. (5)               342,533          .9%                  50             8.96%
Steve Cohen                          396,700         1.0%
Canadian Capital Fund Ltd.           636,379        1.65%
Dominion Capital Funds Ltd.        1,334,996         3.5%
Goodland International
Investment Ltd. (3)                                                       315            56.45%
Linda B. Grable                    3,497,800         9.1%
Richard J. Grable                  7,995,040        20.8%
Deborah O'Brien                      287,000         .75%
Allan L. Schwartz                  3,579,980         9.3%
The Malcolm Kanan Empire Trust     1,200,000         3.1%
Weyburn Overseas Limited (2)                                              135            24.19%
         TOTAL                    20,328,462        52.8%                 550            98.56%
</TABLE>
------------------
(1)   This column sets forth the percentage of the total number of common shares
      outstanding as of December 3, 1998 (38,510,399 shares), the date the final
      written action was executed and presented to the Company's Board of
      Directors. As of April 7, 1999, there are 39,805,643 shares of common
      stock outstanding.
(2)   This column set forth the percentage of the total number of Preferred
      Shares outstanding as of December 3, 1998 (558 Shares)
(3)   Everest Capital Limited, is the investment manager for Weyburn Overseas
      Limited and Goodland International Investments, Ltd. Mr. John Malloy is
      the Managing Director of Everest Capital Limited, a British Virgin Island
      corporation.
(4)   Thomas Hackl and Peter Nakowitz are the Directors of and have voting
      control over Austost Anstalt Schaan, a British Virgin Island corporation.
(5)   Francois Morax and Matityahu Kaniel are the Directors of and have voting
      control over Balmore Funds S.A., a Liechtenstein corporation.

Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. In
addition the voting rights provided to the common stock holders, the
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Preferred Holders, pursuant to the
Certificates, are granted voting right, and voted solely for the purpose of
increasing the number of authorized shares to accommodate the conversion of
their preferred shares into common shares. Due to the decrease in the Company's
stock price, the Company did not have an adequate number of common shares
authorized to meet its contractual obligations with regard to the conversion of
the Preferred Stock. In addition, the Amendment will insure that there are a
sufficient number of shares of Common Stock available for issuance upon exercise
of outstanding stock options and warrants and enhance the ability of the Company
to attract and retain qualified employees, consultants, officers and directors

                                       24
<PAGE>

by enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependant on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.

The issuance of large amounts of common stock upon conversion of the preferred
and the subsequent sale of such shares may further depress the price of the
common stock. In addition, since each new issuance of common stock dilutes
existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. As of March 16,1999, there are
39,381,401 shares outstanding. Based on the closing price of the Company's
common stock as of April 6, 1999 ($.38), 14,441,591 shares would be required to
convert the Series B shares, 3,684,211 shares would be required to convert the
Series H shares, 4,842,105 would be required to convert the Series I shares and,
although the Company is contractually prohibited from doing so, 9,649,123 shares
would be required to convert the Debenture and 52,631,578 shares would be
required to draw down the entire Equity Line of Credit. See Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters-"Equity Line of
Credit" "Series I Preferred Stock" and "Debenture". In addition, 4,570,871
shares would be required for the exercise of options and warrants, and 3,500,000
shares are required to be issued to Mr. Grable in July 1999 pursuant to the
Patent Licensing Agreement. Based upon the foregoing, as of April 6, 1999, the
Company would need in excess of 124 million authorized shares to effectuate all
conversion, utilize the total Equity Line of Credit and fulfill its remaining
stock related obligations.

On January 28, 1999, the Company filed a Definitive Information Statement with
the Securities and Exchange Commission (the "Commission") with regard to the
Written Action. The Written Action became effective on February 18, 1999.

                                     PART II

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

The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS. 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,
markdown, or commissions and may not necessarily represent actual transactions.

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

     FISCAL YEAR 1996
     September 1995                  $1.69                    $0.56
     December 1995                   $4.31                    $0.56
     March 1996                      $8.00                    $2.56
     June 1996                       $7.38                    $2.50

     FISCAL YEAR 1997
     September 1996                  $3.93                    $2.25
     March 1997                      $4.00                    $2.50
     December 1996                   $4.50                    $1.44
     June 1997                       $3.06                    $2.44

     FISCAL YEAR 1998
     September 1997                  $2.69                    $1.44
     December 1997                   $1.56                    $0.60
     March 1998                      $1.23                    $0.61
     June 1998                       $1.39                    $0.40

     FISCAL YEAR 1999
     September 1998                  $0.56                    $0.21

On April 6, 1999, the closing trade price of the Common Stock as reported on the
OTC Bulletin Board was $.38. As of such date, there were approximately 745
holders of record of the Company's Common Stock.

                                       25
<PAGE>
SALE OF UNREGISTERED SECURITIES

Private Placement of Preferred Stock

The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital and will continue to do so in the future. In
deciding to issue Preferred Shares pursuant to the private placements, the
Company took into account the number of common shares authorized and
outstanding, the market price of the common stock at the time of each Preferred
sale and the number of common shares the Preferred share would have been
convertible into at the time of the sale. At the time of each private placement
of Preferred Stock there were enough shares, based on the price of the Company's
common stock at the time of the sale of the Preferred to satisfy the Preferred
conversion requirements. Although the Company's Board of Directors tried to
negotiate a floor on the conversion price of each series of Preferred Stock
prior to sale, it was unable to do so. In order to obtain working capital the
Company will continue to seek capital through debt or equity financing which may
include the issuance of Convertible Preferred Stock whose rights and preferences
are superior than those of the common stock holders. The Company will endeavor
to negotiate the best transaction possible taking into account the impact on its
shareholders, dilution, loss of voting power and the possibility of a change of
control. However, in order to satisfy its working capital needs, the Company may
be forced to issue convertible securities with no limitations on conversion.

In the event that the Company issues preferred stock without a limit on the
number of shares that can be issued upon conversion and the price of the
Company's common stock decreases, the percentage of shares outstanding that will
be held by preferred holders upon conversion will increase accordingly. The
lower the market price the greater the number of shares to be issued to the
preferred holders, upon conversion, thus increasing the potential profits to the
Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stockholders potential for increased share issuance and
profit, including profits derived from shorting the Company's common stock, in
addition to a stock overhang of an undeterminable amount, may depress the price
of the Company's common stock. In addition, the sale of a substantial amount of
preferred stock to relatively few holders could effectuate a possible change of
control. Moreover, in the event of a voluntarily or involuntarily liquidation of
the Company while the preferred stock is outstanding, the holders will be
entitled to a preference in distribution of the Company's property available for
distribution $10,000 per share. The following table summarizes certain
information with regard to the Series B, C, D, E, F, G, H, and I Preferred
Shares as of April 7, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                    COMMON STOCK     CONVERSION       # OF COMMON SHARES         APPROX. PRICE OR PRICE
SERIES/# OF         PRICE AT TIME    PRICE AT TIME    CONVERTIBLE INTO AT        RANGE OF COMMON STOCK AT    # OF COMMON SHARES
PREFERRED SHARES    OF ISSUANCE      OF ISSUANCE      TIME OF ISSUANCE (1)       TIME OF CONVERSION          ISSUED UPON CONVERSION
-----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>              <C>              <C>                        <C>                         <C>
B/450               $4.70            $3.85            1,168,831                  N/A                         N/A
-----------------------------------------------------------------------------------------------------------------------------------
C/210               $1.63            $1.2225          1,714,268                  $.4950-$1.0095              2,646,527
-----------------------------------------------------------------------------------------------------------------------------------
D/50                $1.22            $.915            546,448                    $.2265-$.495                1,717,134
-----------------------------------------------------------------------------------------------------------------------------------
E/54                $1.093           $.81975          658,737                    $.29775- $.77475            1,282,826
-----------------------------------------------------------------------------------------------------------------------------------
F/75                $1.31            $.917            817,884                    $.46760-$.47320             1,971,375
-----------------------------------------------------------------------------------------------------------------------------------
G/38                $.34             $.255            1,490,196                  N/A                         N/A
-----------------------------------------------------------------------------------------------------------------------------------
H/108               $.56             $.42             2,571,429                  $5025                       99,502 (3)
-----------------------------------------------------------------------------------------------------------------------------------
I/138               $.38             $.285            4,842,105                  N/A                         N/A
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)   Approximate number estimated for the purpose of this table only.
(2)   The conversion notice for the Series B Preferred Stock previously received
      by the Company has been cancelled by the new Series B Holders. In
      addition, pursuant to the issuance of the Series I Preferred to the Series
      B Holders the 1,542,877 shares that were required to be issued pursuant to
      the dividend provision of the Series B Preferred Shares have been
      forgiven.
(3)   Represents conversion of 5 shares of Series H Preferred Stock. The
      remaining 103 shares remain unconverted. As of April 6, 1999, 3,614,035
      shares would be required to convert the Series H shares at the conversion
      price of $.285 per share.

Series B Preferred
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("Weyborn") and Goodland International Investment Ltd. ("Goodland")
pursuant to Regulation D. At the time the placement was concluded, the average
bid and ask price of the Company's common stock was approximately $4.70 per
share. Net proceeds to the Company of $4,500.000 were used for working capital
and the continuous research, development and testing of the Company's CTLM (TM)
device. No fees were paid in connection with this offering.

                                       26
<PAGE>
The Company filed a Registration Statement of Form S-1 registering the share
underlying the Series B Preferred. The shares were never converted and the
registration statement is no longer current. On September 4, 1998, the Company
received a notice of conversion from the Weyburn and Goodland requesting the
issuance of 4,559,846 and 10,639,642 shares of common stock, respectively. The
conversion rate was 82% of the average market price over a five-day period prior
to conversion or approximately $.35014 per share. At the time the B Preferred
Shares were issued, the conversion rate would have been $3.85 per share and the
Preferred shares would have been convertible into 1,168,831 shares. The increase
in the number of shares to be issued upon conversion is due to the decline in
the market price of the Company's Common Stock.

On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleged
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. On April 6, 1999, the Series B Preferred Stock
was sold by the Series B Holders to Charlton Avenue, LLC (Charlton), an
unaffiliated third party with no prior relationship to the Company or the Series
B Holders. On April 6, 1999, the Company also entered into a Subscription
Agreement with Charlton whereby the Company agreed to issue to Charlton 138
shares of its Series I, 7% Convertible Preferred Stock. The Company's Board of
Directors established the value of the Series I Preferred at $10,000 per share.
Consideration for the subscription was paid as follows:

      (1)  Forgiveness of approximately $725,795 in interest due and payable in
           connection with the Series B convertible preferred stock.
      (2)  Settlement and dismissal, with prejudice, of all litigation
           concerning the Series B convertible preferred stock and the exchange
           of mutual releases.
      (3)  Cancellation of 112,500 Warrants that were issued with the Series B
           Convertible Preferred Stock; and
      (4)  The amendment of the Series B Preferred designation to impose a
           limitation on the owner(s) of the Series B Convertible Preferred
           Stock to ownership of not more than 4.99% of the Company's
           outstanding common stock at any one time.

Series C Preferred Stock
On October 6, 1997, the Company finalized the private placement to Austost
Anstalt Schaan, UFH Endowment, Inc., Chris Baum, Avalon Capital Limited,
Dominion Capital, Ltd. and The Cuttyhunk Fund Limited an aggregate of 210 shares
of its Series C Convertible Preferred Stock ("the "Preferred Shares") at a
purchase price of $10,000 per share and Warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per share.
The offering was conducted pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended (the ("Regulation S Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $1.63 per share.

The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, without additional
consideration. Pursuant to the Subscription Agreement, the Series C Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series C Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding common stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company to
be issued upon conversion were determined by dividing (i) the sum of $10,000 by
(ii) the Conversion Price (determined as hereinafter provided) in effect at the
time of conversion. The "Conversion Price" was equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion
provided, however, in no event was the Conversion Price to be greater than
$1.222 per share. Pursuant to the Regulation S Sale documents, the Company was
also required to escrow an aggregate of 3,435,583 shares of its common stock
(200% of the number of shares the Purchasers would have received if the
Preferred Shares were exercised on the closing date of the Regulation S Sale).
The shares underlying the Preferred Shares and Warrants were entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. This right expired upon conversion.

In connection with this sale, the Company paid Settondown Capital International,
Ltd., an unaffiliated Investment Banker an aggregate of $220,500 for placement
and legal fees. Net proceeds to the Company of $1,879,500 were used for working
capital and the continuous research, development and testing of the Company's
Computed Tomography Laser Mammography (CTLM(TM)) device.

The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 2,646,527
common shares.

                                       27
<PAGE>

Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement of 50 shares of
its Series D Convertible Preferred Stock ("the "Preferred Shares") to Avalon
Capital Ltd., at a purchase price of $10,000 per share and Warrants to purchase
up to 25,000 shares of the Company's common stock at an exercise price of $1.22
per share. The offering was conducted pursuant to Regulation S as promulgated
under the Securities Act of 1933, as amended (the "Regulation S Sale"). At the
time the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $1.22 per share. The Preferred Shares were
convertible, at any time, commencing 45 days from the date of issuance and for a
period of three years thereafter, in whole or in part, without the payment of
any additional consideration. Pursuant to the Subscription Agreement, the Series
D Holder, or any subsequent holder of the Preferred Shares, was prohibited from
converting any portion of the Preferred Stock which would result in the Holder
being deemed the beneficial owner, in accordance with the provisions of Rule
13d-3 of the Securities Exchange Act of 1934, as amended, of 4.99% or more of
the then issued and outstanding Common Stock of the Company. Due to this
contractual ownership limitation, the Series D Preferred Shares were converted
in increments that, together with all shares of the Company's common stock held
by the Holder, would not exceed 4.99% of the Company's outstanding common stock.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion were determined by dividing
(i) the sum of $10,000 by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" was equal
to seventy five percent (75%) of the Average Closing Price of the Corporation's
Common Stock for the five-day trading period ending on the day prior to the date
of conversion. The shares underlying the Preferred Shares and Warrants were
entitled to demand registration rights in the event that Regulation S was
amended prior the conversion of the Preferred Stock. This right expired upon
conversion.

In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.

The Series D Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,717,134
common shares.

Series E Preferred Stock
On February 5, 1998, the Company finalized the private placement to Austost
Anstalt Schaan and Balmore Funds S.A. of 50 shares of its Series E Convertible
Preferred Stock (the "Preferred Shares"), at a purchase price of $10,000 per
share and Warrants to purchase up to 25,000 shares of the Company's common stock
at an exercise price of $1.093 per share. The offering was conducted pursuant to
Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Regulation S Sale"). At the time the placement was concluded, the average bid
and ask price of the Company's common stock was approximately $1.093 per share.

The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. Pursuant to the
Subscription Agreement, the Series E Holder, or any subsequent holder of the
Preferred Shares, was prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock of the Company. Due to this contractual ownership limitation, the Series E
Preferred Shares were converted, in increments that, together with all shares of
the Company's common stock held by the Holder, would not exceed 4.99%. The
number of fully paid and non-assessable shares of common stock, no par value, of
the Company to be issued upon conversion will be determined by dividing (i) the
sum of $10,000 by (ii) the Conversion Price (determined as hereinafter provided)
in effect at the time of conversion. The "Conversion Price" is equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of
conversion.

The shares underlying the Preferred Shares and Warrants are entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. This right expired upon conversion.

In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.

                                       28
<PAGE>

The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1, 282,826
common shares.

Series F Preferred Stock
On February 20, 1998, the Company finalized a private placement to Dominion
Capital Fund, LTD, and Canadian Advantage, LTD of 75 shares of its Series F
Convertible Preferred Stock (the "F Preferred Shares") at a purchase price of
$10,000 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.31 per share.

The F Preferred Shares pay a dividend of 6% per annum, payable in Common Stock
at the time of each conversion and are convertible, at any time, commencing May
15, 1998 and for a period of two years thereafter, in whole or in part, without
the payment of any additional consideration. Pursuant to the Subscription
Agreement, the Series F Holder, or any subsequent holder of the F Preferred
Shares, was prohibited from converting any portion of the Preferred Stock which
would result in the Holder being deemed the beneficial owner, in accordance with
the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended,
of 4.99% or more of the then issued and outstanding Common Stock of the Company.
Due to this contractual ownership limitation, the Series F Preferred Shares were
converted, in increments that, together with all shares of the Company's common
stock held by the Holder, would not exceed 4.99% of the Company's outstanding
Common Stock. The number of fully paid and non-assessable shares of common
stock, no par value, of the Company issued upon conversion were determined by
dividing (i) the sum of $10,000 plus any earned dividends by (ii) the Conversion
Price (determined as hereinafter provided) in effect at the time of conversion.
The "Conversion Price" is equal to seventy percent (70%) of the Average Closing
Price of the Corporation's Common Stock for the five-day trading period ending
on the day prior to the date of conversion. The shares underlying the Preferred
Shares are entitled to demand registration rights in the event that Regulation S
was amended prior the conversion of the Preferred Stock. Pursuant to these
demand rights the 1,971,375 shares of Common Stock issued upon the conversion of
the Series F Preferred are being registered on behalf of the Holders (the
"Series F Preferred Holders") pursuant to the Registration Statement on Form S-2
(the "Registration Statement").

In connection with the Regulation S Sale, the Company paid, Rolcan Finance, Ltd.
an aggregate of $50,000 for placement and legal fees. Net proceeds to the
Company of $700,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM(TM)) device.

Series G Preferred
On March 17, 1999, the Company finalized a private placement to Amro
International, S.A., Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd. of
35 shares of its Series G Convertible Preferred Stock (the "Preferred Shares")
at a purchase price of $10,000 per share and two year Warrants to purchase
65,625 shares of the Company's Common Stock at an exercise price of $.50 per
share. The offering was conducted pursuant to Regulation D as promulgated under
the Securities Act of 1933, as amended (the "Regulation D Sale"). At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.34 per share. In connection with the Regulation
D Sale, the Company paid Settondown Capital International, Ltd., and Libra
Finance S.A., unaffiliated Investment Bankers an aggregate of 3 shares of the
Series G Preferred Stock for placement and legal fees. Net proceeds to the
Company of $350,000 will be used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM(TM)) device.

The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of (i) seventy-five percent (75%) discount to the two
lowest bids in a ten day period immediately preceding the conversion date; or
(ii) $.54. There is no floor on the conversion price and no time limits on
conversion. The shares can be converted at any time without additional
consideration. Pursuant to the Subscription Agreement, the Series G Holder, or
any subsequent holder of the Preferred Shares, is prohibited from converting any
portion of the Preferred Stock which would result in the Holder being deemed the
beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series G Preferred Shares can only be converted in increments
that, together with all shares of the Company's common stock held by the Holder,

                                       29
<PAGE>

would not exceed 4.99%. Pursuant to the terms of the Registration Rights
Agreement between the Company and the Series G Holders, the Company is required
to register 100% of the number of shares that would be required to be issued if
the Preferred Stock were converted on the day before the filing of the
Registration Statement. In the event that the Registration Statement is not
filed with 14 days from the closing or that it is not declared effective with in
60 days, the Company will be required to pay the Series G Holders, as liquidated
damages for failure to have the Registration Statement declared effective, and
not as a penalty three (3%) percent of the principal amount of the Securities
for each thirty (30) day period thereafter until the Company procures
registration of the Securities. In the event that the Registration Statement is
not declared effective within 120 days, the Series G Holders have the right to
force the Company to redeem the Series G Preferred at a redemption price of 120%
of the face value of the Preferred.

Since the conversion price of the Series G Preferred is based on 75% of the
Average Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series G Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.

In the event of a voluntarily or involuntarily liquidation of the Company while
the Series H Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.

Series H Preferred Stock
On June 2, 1998, the Company finalized a private placement to Dominion Capital
Fund, LTD and Canadian Advantage, LTD of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000 A Warrants and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). At the time the placement was
concluded, the average bid and ask price of the Company's common stock was
approximately $.56 per share. In connection with the Regulation D Sale, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $10,000 and 8 shares of the Series H Preferred Stock for
placement and legal fees. Net proceeds to the Company of $990,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM(TM)) device. As of March
16, 1999, five shares of Series H Preferred Stock have been converted.

The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of seventy-five percent (75%) of the Average Price
(the lowest closing bid price of the Corporation's Common Stock for the
ten-ten-day trading period ending on the day prior to the date of conversion).
There is no floor on the conversion price and no time limits on conversion. The
shares can be converted at any time without additional consideration. Pursuant
to the Subscription Agreement, the Series H Holder, or any subsequent holder of
the Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock of the Company. Due to this contractual ownership limitation, the Series H
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.
Pursuant to the terms of the Registration Rights Agreement, as amended, between
the Company and the Series H holder, the Company is required to register 100% of
the number of shares that would be required to be issued if the Preferred Stock
were converted on the day before the filing of the Registration Statement
(2,661,698 shares). The Company filed the Registration Statement on July 31,
1998. On September 4, 1998, the Company received substantial comments from the
Commission, many of which are incorporated into this Report. The Company is in
technical default of the Registration Rights Agreement, which required the
Registration Statement to be declared effective by October 2, 1998. Pursuant to
the Registration Rights Agreement, the Company is required to pay the Series H
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty, two (2%) percent of the principal
amount of the Securities for the first thirty (30) days, and three (3%) percent
of the principal amount of the Securities for each thirty (30) day period
thereafter until the Company procures registration of the Securities. Pursuant
to the Registration Rights Agreement, liquidated damages of $$169,000 have

                                       30
<PAGE>

accrued as of March 31, 1999. The Company is presently unable to comply with the
liquidated damage provision payment and no assurances can be given that it will
be able to do so in the future. On March 25, 1999 the Company issued 424,242
shares of restricted common stock with registration rights to the Series H
shareholders in lieu of cash for liquidated damages through March 2, 1999. The
value of these shares was $140,000. Leaving a balance of $29,000 due for
liquidated damages through March 31, 1999.

Since the conversion price of the Series H Preferred is based on 75% of the
Average Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series H Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.

In the event of a voluntarily or involuntarily liquidation of the Company while
the Series H Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.

Series I Preferred
On April 6, 1999, the Company also entered into a Subscription Agreement with
Charlton whereby the Company agreed to issue to Charlton 138 shares of its
Series I, 7% Convertible Preferred Stock. The Company's Board of Directors
established the value of the Series I Preferred at $10,000 per share.
Consideration for the subscription was paid as follows:

      (1)  Forgiveness of approximately $725,795 in interest due and payable in
           connection with the Series B convertible preferred stock.
      (2)  Settlement and dismissal, with prejudice, of all litigation
           concerning the Series B convertible preferred stock and the exchange
           of mutual releases.
      (3)  Cancellation of 112,500 Warrants that were issued with the Series B
           Convertible Preferred Stock; and
      (4)  The amendment of the Series B Preferred designation to impose a
           limitation on the owner(s) of the Series B Convertible Preferred
           Stock to ownership of not more than 4.99% of the Company's
           outstanding common stock at any one time.

The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (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 the conversion. The shares can be converted at any time
without additional consideration. Pursuant to the Series I Designation and the
Subscription Agreement, the Series I Holder, or any subsequent holder of the
Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock of the Company. Due to this contractual ownership limitation, the Series I
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.

Since the conversion price of the Series I Preferred is based on 75% of the
Average Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series I Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.

In the event of a voluntarily or involuntarily liquidation of the Company while
the Series I Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.

                                       31
<PAGE>

The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.

Convertible Debenture
The Company also entered into a Subscription Agreement with Charlton, pursuant
to which Charlton purchased $1,100,000 of the Company's Debentures. In addition,
the Company may draw down a second tranche in the amount of $825,000) anytime
thirty (30) days after the effective date of the Registration Statement as long
as the Company maintains an average closing bid price of $.45 for the ten (10)
trading days immediately prior to the date the Company requests the second
funding tranche. The Company may draw down a third tranche in the amount of
$825,000) anytime sixty (60) days after the effective date of the Registration
Statement as long as the Company maintains an average closing bid price of $.45
for the ten (10) trading days immediately prior to the date the Company requests
the third funding tranche. When concluded, assuming all the conditions set forth
above are met, the proceeds from the Debenture offering will be $2,750,000.

The Debentures pay a 7% premium, to be paid in cash or freely trading Common
Stock in the Company's sole discretion, at the time of each conversion and is
secured by mortgage on the Company's corporate office building. The Debentures
are subject to automatic conversion at the end of two years from the date of
issuance. The Mortgage will be released after the Registration Statement
covering the Common Stock underlying the Debentures has been declared effective
and upon the earlier of (a) the day the Company qualifies for listing on AMEX or
NASDAQ, as long as said listing requirements are not being met through a reverse
split of the Company's Common Stock or (b) 180 days from the date the Company
receives the third tranche, as described above.

The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (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 the conversion. The Debenture can be converted at any time
without additional consideration. Pursuant to the Subscription Agreement, the
Debenture Holder, or any subsequent holder of the Debenture, is prohibited from
converting any portion of the Debenture which would result in the Holder being
deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended, of 4.99% or more of the then
issued and outstanding Common Stock of the Company. Due to this contractual
ownership limitation, the Debentures can only be converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%.

Since the conversion price of the Debenture is based on 75% of the Average
Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series I Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.

In the event of a voluntarily or involuntarily liquidation of the Company while
the Debenture is outstanding the holders are entitled to a preference in
distribution of the Company's property available for distribution equal to the
Debentures then outstanding principal and interest and will be able to foreclose
against the Mortgage.

The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.

Private Placement of Common Stock
In August 1998, the Company sold 200,000 shares of restricted common stock to
Frank Giambroni, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $60,000. No placement fee was paid in connection
with this offering. Net proceeds of $59,990 were used to pay the salaries of the
Company's non-executive employees. At the time the placement was concluded, the
average bid and ask price of the Company's common stock was approximately $.28
per share. These shares were subsequently registered pursuant to a Form S-2
Registration Statement.

                                       32
<PAGE>

In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. These Shares are included in the
Registration Statement. At the time the sale occurred the average bid and ask
price of the Company's common stock was $.595. The Note bears interest at the
rate of 12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, became due on January 15, 1999, and remains
unpaid to date. The Company has not received a notice of default in connection
with this Note. In connection with the sale, the Company paid the sum of $23,000
to Manchester Asset Management, Ltd., an unaffiliated third party, as a
placement fee. Net proceeds of $227,000 were used as follows: (i) salaries
($21,849-executive officers and $62,447-employees) (ii) machinery and equipment
$5,959; (iii) operating expenses ($55,240-inventory parts and assemblies,
employee health insurance, workers comp. and property insurance) and (iv)
working capital $82,000). The Company is presently negotiating the terms of an
equity and/or debt financing with unaffiliated third parties, that is different
and apart from the Equity Line of Credit discussed below, the proceeds of which,
if consummated, will be used in part to repay the Note. See "Financing/Equity
Line of Credit" below.

In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. These Shares are included in the Registration Statement. No placement
fee was paid in connection with this offering, however the Company did issue
5,000 shares of common stock to Goldstein, Goldstein and Reis LLC, an
unaffiliated third party, as payment for the attorneys fees incurred by the
Purchaser pursuant to the offering. At the time the placement was concluded, the
average bid and ask price of the Company's common stock was approximately $.50
per share. The Note bears interest at the rate of 12% per annum. The Note, which
was originally due and payable on November 2, 1998 was extended twice, became
due on January 15, 1999, and remains unpaid to date. The Company has not
received a notice of default in connection with the Note. The Note is personally
guaranteed by Linda B. Grable, the Company's President. Net proceeds of $100,000
were used as follows: (i) salaries ($21,849-executive officers and
$62,448-employees) and (ii) working capital $15,703. The Company is presently
negotiating the terms of an equity and/or debt financing with unaffiliated third
parties, that is different and apart from the Equity Line of Credit discussed
above, the proceeds of which, if consummated, will be used in part to repay the
Note. See "Financing/Equity Line of Credit" below.

In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to GCA Strategic Investment Fund Ltd.,
an unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $210,000. These Shares are being included in the Registration
Statement. At the time the placement was concluded, the average bid and ask
price of the Company's common stock was approximately $.43 per share. The Note
bore interest at the rate of 12% per annum and was personally guaranteed by
Linda B. Grable, the Company's President. In connection with the sale, the
Company paid the sum of $23,000 to LKB Financial LLC, an unaffiliated third
party, as a placement fee. Net proceeds of $100,000 were used as follows: (i)
salaries ($21,849-executive officers and $62,448-employees) and (ii) working
capital $15,703. The Note, and all accrued interest, was paid in January 1999.
The officers of the Company provided the payment for this loan through the sale
of a portion of their shares of the Company's common stock.

In November, the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 aggregate loan to the Company by Deborah O'Brien,
an employee. At the time the loan was concluded, the average bid and ask price
of the Company's common stock was approximately $.625 per share. The Company is
also obligated to repay the lender the sum of $50,000.00. In January the Company
issued a Note evidencing this indebtedness. The Note bears interest at the rate
of 7% per annum and is due and payable upon demand. Net proceeds of $115,000
were used as follows: (i) salaries ($21,849-executive officers and
$62,447-employees) (ii) operating expenses ($16,345-inventory parts and
assemblies, employee health insurance, workers comp. and property insurance) and
(iv) working capital ($14,359). The Company is also obligated to repay the
lender the sum of $50,000.00. There is no note evidencing this debt. These
Shares are included in the Registration Statement.

Financing/Equity Line of Credit
The Company will require substantial additional funds for its research and
development programs, pre-clinical 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

                                       33
<PAGE>

arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
and other contractual agreements are likely to increase as additional agreements
are entered into and additional personnel are retained.

On November 20, 1998, the Company finalized a $15 Million, three year Equity
Line of Credit whereby the Company, as it deems necessary, may raise capital
through the sale of its common stock to Austost Anstalt Schaan and Balmore Funds
S.A., which represent a consortium of prominent European banking institutions.
Austost Anstalt Schaan and Balmore Funds S.A will be deemed the beneficial
owners of the shares.

Pursuant to the Equity Line of Credit Agreement, the Company may, but is not
obligated to, sell to the Investors shares of the Company's common stock at a
purchase price of 80% of the market price if the shares are traded in the OTC
Bulletin Board and 85% of the market price if traded on Nasdaq Small Cap Stock
Market or American Stock Exchange. As of March 16, 1999, based on the closing
price on that date of $.34, the Company would need to issue 55,147,058 shares of
common stock, in order to completely utilize the Equity Line of Credit. However,
if the Company utilizes the Equity Line of Credit, it intends to do so over a
period of three years, at times that are as advantageous as possible to the
Company. It addition, the limitations set forth below would prohibit the Company
from utilizing the entire Line of Credit at one time.

The Investors are irrevocably committed, subject to certain limitations
discussed below, to purchase that number of shares noticed for sale by the
Company (the "Put Notice"), however the maximum amounts that the Company can
require the Investor to purchase at any one time are indicated in the table
below opposite the heading Closing Price (the range in which the Closing Price
is on the date the Company elects to exercise its right to tender a notice of
sale to the Investors, referred to as the "Put Date") and below the heading 30
Day Average Daily Trading Volume (the range of the trading volume of the
Company's common stock for the thirty day trading period; prior to the Put
Date).
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                   30-Day Avg.       30-Day Avg.       30-Day Avg.        30-Day Avg.         30-Day Avg.         30-Day Avg.
                   Daily Trading     Daily Trading     Daily Trading      Daily Trading       Daily Trading       Daily Trading
Closing Price      Volume            Volume            Volume             Volume              Volume              Volume
                   25,000-50,000     50,001-75,000     75,001-100,000     100,001-125,000     125,001-150,000     150,001 and Above
-----------------------------------------------------------------------------------------------------------------------------------
<S>                <C>               <C>               <C>                <C>                 <C>                 <C>
$0.50 - $1.00      $100,000          $150,000          $200,000           $250,000            $300,000            $350,000
-----------------------------------------------------------------------------------------------------------------------------------
$1.01 - $1.50      $150,000          $200,000          $250,000           $300,000            $350,000            $400,000
-----------------------------------------------------------------------------------------------------------------------------------
$1.51 - $2.00      $200,000          $250,000          $300,000           $350,000            $400,000            $450,000
-----------------------------------------------------------------------------------------------------------------------------------
$2.01 - $2.50      $250,000          $300,000          $350,000           $400,000            $450,000            $500,000
-----------------------------------------------------------------------------------------------------------------------------------
$2.51 - $3.00      $300,000          $350,000          $400,000           $450,000            $500,000            $550,000
-----------------------------------------------------------------------------------------------------------------------------------
$3.01 - $3.50      $350,000          $400,000          $450,000           $500,000            $550,000            $600,000
-----------------------------------------------------------------------------------------------------------------------------------
$3.51 - $4.00      $400,000          $450,000          $500,000           $550,000            $600,000            $650,000
-----------------------------------------------------------------------------------------------------------------------------------
$4.01 - Above      $450,000          $500,000          $550,000           $600,000            $650,000            $700,000
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The number of shares noticed for sale by the Company must be the subject of an
effective Registration Statement prior to the time Company elects to exercise
its right to tender a notice requiring the Investors to purchase shares of the
Company's Common Stock.

The Investors obligations under the Equity Line of Credit are contingent upon
any effect on the business, Bid Price, trading volume of the Common Stock,
operations, properties, prospects, results of operations, or financial condition
of the Company that is material and adverse to the Company and its subsidiaries
and affiliates, individually, or taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, or the
Warrants in any material respect.

The right of the Company to deliver a Put Notice and the obligation of the
Investors hereunder to acquire and pay for the Put Shares is subject to the
normal and customary contract representations and warranties, breach of contract
provisions and the following conditions:

      o    The Company shall have filed with the SEC a Registration Statement
           with respect to the resale of at least that amount of common stock
           contained in the Put Notice (the "Securities").
      o    The Registration Statement shall have previously become effective and
           shall remain effective until the Securities are sold or until two
           years from the date if issuance and (i) no notice has been received

                                       34
<PAGE>

           that the SEC has issued or intends to issue a stop order or that the
           SEC otherwise has suspended or withdrawn the effectiveness of the
           Registration Statement, either temporarily or permanently, or intends
           or has threatened to do so (unless the SEC's concerns have been
           addressed and the Investors are reasonably satisfied that the SEC no
           longer is considering or intends to take such action), and (ii) no
           other suspension of the use or withdrawal of the effectiveness of the
           Registration Statement or related prospectus shall exist.
      o    The Registration Statement must be declared effective by the SEC
           prior to the first and each subsequent Put Date.
      o    The Company shall have obtained all permits and qualifications
           required by any state for the offer and sale of the Put Shares, or
           shall have the availability of exemptions therefrom.
      o    The sale and issuance of the Put Shares shall be legally permitted by
           all laws and regulations to which the Company is subject.
      o    No statute, rule, regulation, executive order, decree, ruling or
           injunction shall have been enacted, entered, promulgated or endorsed
           by any court or governmental authority of competent jurisdiction that
           prohibits or directly and adversely affects any of the transactions
           contemplated by this Agreement, and no proceeding shall have been
           commenced that may have the effect of prohibiting or adversely
           affecting any of the transactions contemplated by this Agreement.
      o    Since the date of the Equity Line of Credit Agreement, no event has
           had or is reasonably likely to have a material adverse effect on the
           Company and its operations has occurred.
      o    The trading of the Company's Common Stock has not been suspended, and
           the common stock has not been de-listed or threatened by de-listing,
           and the issuance of the Securities to the Investors shall not violate
           the shareholder approval requirements of the OTC Bulletin Board, the
           Nasdaq Small-Cap Market, or the American Stock Exchange, as
           applicable.
      o    The number of Put Shares to be purchased by each Investor will not
           exceed the number of such shares which, when aggregated with all
           other shares of Common Stock then owned by such Investor beneficially
           or deemed beneficially owned by such Investor, would result in any
           Investor owning more than 4.99% of all of such Common Stock as would
           be outstanding on such Closing Date, as determined in accordance with
           Rule 13d-3 of the Exchange Act and the regulations promulgated
           thereunder.
      o    The closing bid price of the Company's common stock must equal or
           exceed $.50 per share for the six day period commencing three (3)
           trading days immediately preceding the Put Notice, the trading day
           the Put Notice is deemed delivered and the two trading days
           immediately following the Trading Day on which a Put Notice is deemed
           to be delivered.
      o    The average trading volume for the Common Stock over the previous
           thirty trading days must exceeds 25,000 shares per Trading Day.

The Investors, as holders of common stock, shall have the same rights as all
other holders of common stock; Holders of the Common Stock are entitled to one
vote for each share in the election of directors and in all other matters to be
voted on by the shareholders. There is no cumulative voting in the election of
directors. Holders of Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available thereof and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are fully paid and non-assessable.

Although no assurances can be made, the Company anticipates that it will need
approximately $8,000,000 over the next two-year period to complete all necessary
stages in order to enable it to market the CTLM(TM) in the United States and
foreign countries. If the need should arise for capital in excess of the Equity
Line of Credit the Company may seek such additional funding through public or
private financing or collaborative, licensing and other arrangements with
corporate partners. If the Company utilizes the Equity Line of Credit or
additional funds are raised by issuing equity securities, especially Convertible
Preferred Stock, dilution to existing Shareholders will result and future
investors may be granted rights superior to those of existing Shareholders.
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.

                                       35
<PAGE>

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

RESULTS OF OPERATIONS

Twelve Months Ended June 30, 1998 and June 30, 1997.

General and administrative expenses in the aggregate during the twelve months
ended June 30, 1998, were $4,478,055 representing an increase of $1,474,313 from
$3,003,742 during the twelve months ended June 30, 1997. The increase is due
primarily to substantial increases in amortization of deferred compensation
expense and consulting expenses.

Compensation and related benefits during the twelve months ended June 30, 1998,
were $1,987,104 representing a decrease of $1,477,020 from $3,464,124 during the
twelve months ended June 30, 1997. The decrease in compensation and related
benefits is due to the additional compensation recorded in 1997 on the
compensatory stock options.

Research and development expenses during the twelve months ended June 30, 1998,
were $254,722 representing a decrease of $810,456 from $1,065,178 during the
twelve months ended June 30, 1997. 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, 1998,
were $329,446 representing an increase of $162,926 during the twelve months
ended June 30, 1997. The increase is due primarily to the additional costs of
advertising in domestic and foreign medical imaging and medical device
publications, and an increase in public relations and investor public relations
expenses.

Consulting expenses during the twelve months ended June 30, 1998, were
$1,220,676 representing an increase of $456,312 during the twelve months ended
June 30, 1997. The increase is due primarily to the expanded use of outside
consultants needed for special non-recurring projects required prior to placing
CTLM(TM) units into clinical trials.

Insurance costs during the twelve months ended June 30, 1998, were $162,549
representing an increase of $41,262 during the twelve months ended June 30,
1997. The increase is due primarily to additional premiums for Workers' Comp.,
Health Insurance, and Property and Casualty Insurance.

Professional expenses during the twelve months ended June 30, 1998, were
$454,730 representing an increase of $276,328 during the twelve months ended
June 30, 1997. The increase is due primarily to an increase in legal fees on
legal matters described in Item 1. Legal Proceedings.

Stockholder expenses during the twelve months ended June 30, 1998, were $75,608
representing an increase of $54,706 during the twelve months ended June 30,
1997. The increase is due to the costs associated with preparing, printing and
mailing the Company's 1997 Annual Report and Proxy Statement.

Tradeshow expenses during the twelve months ended June 30, 1998, were $216,182
representing an increase of $61,400 during the twelve months ended June 30,
1997. The increase is due to the cost of preparing and attending including
changes and modifications required to the Company's exhibit for the 1997
Radiological Society of North America's 84th Scientific Assembly and Annual
Meeting in Chicago, IL.

Travel and subsistence costs during the twelve months ended June 30, 1998, were
$111,559 representing a decrease of $84,026 during the twelve months ended June
30, 1997. The decrease was primarily due to reduced travel and housing expenses
for consultants.

Rent expense during the twelve months ended June 30, 1998, was $26,213
representing a decrease of $22,684 during the twelve months ended June 30, 1997.
This decrease was primarily due to the expiration of certain rental agreements.

Interest expense during the twelve months ended June 30, 1998, was $55,543
representing an increase of $52,799 during the twelve months ended June 30,
1997. The increase is due to interest being paid on loans during the fiscal
year.

                                       36
<PAGE>

Interest income during the twelve months ended June 30, 1998, was $22,137
representing a decrease of $94,835 from $116,972 during the twelve months ended
June 30, 1997. This decrease is due to a decrease of funds invested by the
Company.

Depreciation and amortization expenses during the twelve months ended June 30,
1998, were $283,966 representing an increase of $53,919 from $230,047 during the
twelve month period ended June 30, 1997. This increase is due primarily to the
purchase of additional laboratory equipment and manufacturing fixtures.

Comparative fiscal year June 30, 1997 numbers have been changed to reflect
restatement as per Financial Statement, Notes to Financial Statements, (3)
Restatements, Page F15.


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 $17,746,206 and
through loan transactions in the aggregate amount of $520,407. During Fiscal
1998, the Company received net proceeds of approximately $1,879,500 from the
private placement of its Series C Convertible Preferred Stock and Warrants,
approximately $495,000 from the private placement of its Series D Convertible
Preferred Stock and Warrants, approximately $495,000 from the private placement
of its Series E Convertible Preferred Stock and Warrants, approximately $700,000
from the private placement of its Series F Convertible Preferred Stock, all
pursuant to Regulation S of the Securities Act of 1933, as amended, and
approximately $990,000 from the private placement of its Series H 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 $310,116 at June 30,
1998, representing a decrease of $73,107 from $383,223 at June 30, 1997. The
decrease in cash and cash equivalents is due to continuing operations.

The Company does not expect to generate a positive internal cash flow for at
least the next several years due to the expected increase in spending for
research and development and the expected costs of commercializing its initial
product, the CTLM(TM) device.

The Company's prototype equipment totaled $-0- at June 30, 1998 and $1,216,585
at June 30, 1997. All direct costs associated with the prototype equipment have
been capitalized. The Company has reclassified the prototype equipment into
inventory as the development of the Computed Tomography Laser Mammography
(CTLM(TM)) device has been, for the most part, completed and the manufacture of
five (5) devices to be placed into clinical sites has commenced.

The Company's property and equipment, net, totaled $2,920,980 at June 30, 1998
and $3,293,297 at June 30, 1997. This decrease is due to depreciation and
retirement of certain equipment.

LIQUIDITY AND CAPITAL RESOURCES

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 and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begin, the Company is totally dependent upon debt and equity funding. In the
event that the Company is unable to obtain debt or equity financing or is unable
to obtain such financing on terms and conditions acceptable to the Company, the
Company may have to cease or severely curtail its operations. This would
materially impact the Company's ability to continue as a going concern.

The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during fiscal
1998 was $3,540,001 primarily due to the Company's continued research and
development of the CTLM(TM) and preparations for FDA Clinical Trials including
the manufacture of five (5) CTLM(TM) Breast Imaging Systems and the hiring of
six additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) device and related software development
of $4,532,866 in fiscal 1997. At June 30, 1998, the Company had a working
capital of $(257,166) compared to a working capital of $(294,433) at June 30,
1997.

                                       37
<PAGE>

On May 27, 1998, the Company entered into an irrevocable commitment with a
consortium of prominent banking institutions to invest up to $15 million in the
Company over the next three years. A formal Equity Line of Credit Agreement was
to be drafted, reviewed, and executed at a later date. On May 28, 1998, the
Company issued a press release announcing the $15 million commitment. In this
press release the Company also stated that this financing would eliminate the
Company's financial concerns and allow the Company to focus strictly on bringing
the world's first laser based mammography system to market. The foregoing
statements, which were made in the May 28th announcement, are no longer accurate
because the Company was unable to draw on the equity credit line. Due to the
unavailability of the principals of the investors, the workload of the
investors' attorney and the time and effort spent by the Company in filing the
Information Statement and Registration Statement, the formal Equity Line of
Credit Agreement was delayed. During this time the price of the Company's stock
declined from $.54 on May 27, 1998 to $.26 on August 27, 1998. As a result of
the stock price decline, the Company could not utilize the Equity Line because
the stock price was below the minimum price at which the banking institutions
are required to purchase the Company's equity securities. Moreover, due to the
stock price decline, the Company had to increase its number of authorized shares
in order to have shares available for the conversion of the Series B and other
preferred shares. The increase in shares required an information statement
filing with the Securities and Exchange Commission. Since the Company already
had a commitment for the equity line of credit and could not utilize the equity
line due to the stock price decline and the need for additional shares, the
Company centered its time, efforts and resources on the Information Statement
and Registration Statement and the Equity Agreement was not finalized until
November 20, 1998. Although the equity line of credit is in place, the Company
is unable to utilize it at the present time due to; (i) the price of the
Company's Common Stock is now trading below the $.50 required closing price;
(ii) the Company and the investors will have to amend the agreement to provide
for a draw down and issuance of the Common Stock pursuant to Regulation D and
then registration of the shares; or (iii) the Company will have to file a shelf
registration, if the such registration is available to the Company at the time
that it intends to use the equity line of credit.

During fiscal 1998, the Company was able to raise a total of $5,399,599 less
expenses through Regulation S and Regulation D transactions. The Company will
continue to seek equity or debt financing in order to meet its working capital
needs. The Company does not expect to generate a positive internal cash flow for
at least the next twelve-months due to the expected increase in spending for
research and development and the expected costs of commercializing it initial
product, the CTLM(TM). The Company will require additional funds for its
research and development, 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 1998 in order to continue operations. The Company plans to
raise additional funds by either equity or debt financing, including entering
into a transaction(s) to privately place equity, either common or preferred
stock, or debt securities, or combinations of both; or by placing equity into
the public market through an underwritten secondary offering or obtaining
mortgage financing on it real property and improvements. 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. 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, working capital need and
dilution to its shareholders.

No assurances, however, can be given that future financing would be available or
if available, that it could be obtained at terms satisfactory to the Company.
The Company's ability to effectuate its plan of and continue operations is
dependent on its ability to raise capital, structure a profitable business, and
generate revenues. If the Company's working capital is insufficient to fund its
operations, it would have to explore additional sources of financing.

Capital expenditures for the fiscal 1998 were approximately $115,738 as compared
to approximately $2,815,923 for fiscal 1997. These expenditures were a direct
result of purchases of computer and other equipment, office, warehouse and
manufacturing fixtures, tradeshow equipment, computer software, laboratory
equipment and other fixed assets. The Company anticipates that its capital needs
for fiscal 1999 will be approximately $100,000.

During the six months ending December 31, 1997 there were no changes in the
Company's existing debt agreements, and the Company had no outstanding bank
loans as of December 31, 1997. The Company's fixed commitments, including
salaries and fees for current employees and consultants, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase as additional agreements are entered into and additional
personnel are retained. The Company will require substantial additional funds
for its research and development programs, pre-clinical and clinical testing,
operating expenses, regulatory processes, and manufacturing and marketing
programs. The Company's future capital requirements will depend on many factors,

                                       38
<PAGE>

including the following: the progress of its research and development projects;
the progress of pre-clinical and clinical testing; the time and cost involved in
obtaining regulatory approvals; obtaining regulatory approvals; the cost of
filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; competing technological and market developments;
changes and developments in the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. The Company does not expect to
generate a positive internal cash flow for at least several years due to
expected increases in capital expenditures, working capital and ongoing losses,
including the expected cost of commercializing the CTLM(TM) device. The Company
does not have sufficient cash to fund the Company's operations until the end of
the fiscal year ending June 30, 1999 requiring it to secure additional funding
through the private placement sale of debt or equity securities.

The Company entered into an agreement with The Hawke Group to provide financial
public relations from October 15, 1997 to April 15, 1998. As part of their
financial public relations engagement, The Hawke Group requested pro-forma
projections for their Stock Highlights page. The Company furnished estimated
revenues and pre-tax income in October 1997. The projections were based on
statistics published in Diagnostic Imaging, an imaging trade journal, and the
Company's estimate of the number of CTLM(TM) Systems that could be sold. In
October 1997, the Company believed it could capture 30 units representing $7.5
million of the worldwide mammography market of $400 million in the first year.
The domestic market represented a mammography market of $150 million. In the
second and third year, the Company estimated that it could sell 75 and 186
foreign units and 135 and 300 domestic units, respectively. The Company believed
it could achieve these projections because of the delivery of the laser
components from Spectra-Physics in October 1997, which would enable it to resume
clinical investigational trials and build a clinical atlas of case studies. The
Company's Pacific Rim distributor representing thirteen Asian countries had
stated that they were willing to purchase ten CTLM(TM) Systems immediately once
the Company could provide a CD-ROM of clinical cases. The Company also had
specific indications of interest for an additional twenty CTLM(TM) Systems which
were to be sold in the Pacific Rim once the initial atlas was updated to include
clinical data collected from the first ten Pacific Rim CTLM(TM) Systems. The
purchase of the ten CTLM(TM) Systems and the indications of interest for the
addition twenty CTLM(TM) Systems has been recently reconfirmed by the Pacific
Rim distributor. Although FDA export approval is required for any exportation of
the CTLM(TM), FDA marketing clearance is not required for sales outside the
United States. The Company has not yet applied for FDA export approval for any
country. Concurrent with the foreign sales, the Company believed it would have
at least three clinical investigational sites in the United States providing the
data required for Pre-Market Approval (PMA) from the FDA. Over the next few
years, industry predictions are that mammography sales will increase due to
replacement of older systems. The third year after the introduction of a new
medical imaging device usually creates a demand as imaging centers and hospitals
feel that they will lose market share if they cannot provide the new technology
to their patients. New technology generates new business as experienced with
MRI. A forward-looking disclaimer was included directly below the projections.

In February 1999, the Company, in an interview with the Miami Herald affirmed
the basic projections qualifying them by stating that the results were
anticipated for the fiscal year ending June 30, 2000. Below is a comparison of
the Hawke Projections and the February 1999 Projections.
<TABLE>
<CAPTION>
HAWKE PROJECTIONS                                FEBRUARY 1999 PROJECTIONS
<S>                                              <C>
Fiscal Year 6-30-98                              Fiscal Year 6-30-00
30 foreign units at approximately $250,000       30 foreign units at approximately $250,000
per unit                                         per unit
no domestic                                      no domestic
estimated revenue $7.5mm                         estimated revenue $7.5mm
pre-tax income ($4mm)                            pre-tax income ($4mm)

Fiscal Year 6-30-99                              Fiscal Year 6-30-01
75 foreign units at approximately $250,000       75 foreign units at approximately $250,000
per unit                                         per unit
135 domestic units at approximately $350,000     135 domestic units at approximately
per unit                                         $350,000 per unit
estimated revenue $65.9mm                        estimated revenue $65.9mm
pre-tax income $32mm                             pre-tax income $32mm

Fiscal Year 6-30-00                              Fiscal Year 6-30-02
186 foreign units at approximately $250,000      186 foreign units at approximately $250,000
per unit                                         $350,000  per unit
300 domestic units at approximately $350,000     300 domestic units at approximately
per unit                                         $350,000 per unit
estimated revenue $151.5mm                       estimated revenue $151.5mm
pre-tax income $85.9mm                           pre-tax income $85.9mm.
</TABLE>

                                       39
<PAGE>

Due to the delay in the completion of our clinical investigational trials, the
Company is unable to determine when it anticipates FDA marketing approval
clearance or will be able to begin foreign distribution, since the Company has
deferred foreign distribution of the CTLM(TM) until such time as it has
collected enough clinical data to compile an atlas of CTLM(TM) images. These
delays have made the February 1999 revenue projections unattainable and the
Company is presently unable to determine when it will begin to generate revenue.

ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependant on it ability to
issue stock for services. Since July 1, 1996, the Company has issued an
aggregate of 1,190,200 shares of common stock pursuant to Registration
Statements on Form S-8. The aggregate fair market value of the shares was
$2,069,259. The issuance of large amounts of common stock for services rendered
or to be rendered and the subsequent sale of such shares may depress the price
of the common stock. In addition, since each new issuance of common stock
dilutes existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. See "Issuance of Stock for
Services" and "Note 16 to Financial Statements".

The Company is currently seeking additional capital to fund its future
operations through private debt or equity financing, or collaborative licensing
or other arrangements with strategic partners. There can be no assurance that
such financing can be obtained or, if it is obtained, that the terms thereof
will be acceptable. The Company plans to continue its policy of investing excess
funds, if any, in a daily cash management account at First Union National Bank.
See "Cautionary Statements Regarding Forward-Looking Statements Uncertainties as
to Future Profitability."

           CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Report under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as in the
Company's press releases or oral statements that may be made by the Company or
by officers, directors or employees of the Company acting on the Company's
behalf, that are not historical fact constitute "forward-looking statements".
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Factors that might cause such a
difference include, without limitation, the information set forth below. In
addition to statements which explicitly describe such risks and uncertainties,
statements labeled with the terms "believes", "belief', "expects", "plans" or
"anticipates" should be considered uncertain and forward-looking. All cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear.

Uncertain Ability to Meet Capital Needs. The Company will require substantial
additional funds for clinical testing of the CTLM(TM) Device, research and
development programs, pre-clinical and clinical testing of other proposed
products, regulatory processes, manufacturing and marketing programs and
operating expenses (including general and administrative expenses). The
Company's future capital requirements will depend on many factors, including the
following: the progress of its research and development projects; the progress
of pre-clinical and clinical testing; the time and cost involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in the Company's
existing collaborative, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish; and the development of commercialization activities and arrangements.
Moreover, the Company's fixed commitments, including salaries and fees for
current employees and consultants, equipment rent, payments under license

                                       40
<PAGE>

agreements and other contractual commitments, are substantial and would increase
if additional agreements are entered into and additional personnel are retained.
The Company does not expect to generate a positive internal cash flow for at
least several years due to expected increases in capital expenditures, working
capital needs, and ongoing losses, including the expected cost of
commercializing the CTLM(TM) Device. However, the Company's cash requirements
may vary materially from those now planned due to the progress of research and
development programs, results of clinical testing, relationships with strategic
partners, if any, changes in the focus and direction of the Company's research
and development programs, competitive and technological advances, the FDA and
foreign regulatory processes and other factors.

The Company needs additional capital to fund its operations, and is seeking to
obtain additional capital through debt or equity financing, or collaborative
licensing or other arrangements with strategic partners. If additional funds are
raised by issuing equity securities, further 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 and will require the Company to further delay, scale back
or eliminate certain of its research, product development-and marketing programs
and may require the Company to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself, or to scale back or eliminate its other operations.

Uncertainty of FDA Marketing Clearance for the CTLM(TM) Device. In November
1997, the Company's clinical site at Strax Breast Diagnostic Institute in
Lauderhill, Florida was closed. In December 1997, the FDA granted approval to
include specific studies on augmented breasts as part of the Company's extensive
in-house study of the CTLM(TM). The Company was granted, in June 1998, its
second investigational device exemption ("IDE") to conduct clinical trials. An
IDE allows a company to conduct human clinical trials without filing an
application for marketing clearance. The Company is authorized to scan 20
patients at the Company's in-house facilities in Plantation, Florida and upon
FDA approval, at three additional clinical sites. On September 1 and September
10, 1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo investigational device study to Nassau County Medical Center
was conditionally approved. This IDE application is limited to one institution
(Nassau County Medical Center) and 275 subjects. The Company had originally
intended to have the CTLM(TM) positioned at Nassau County Medical Center not
later than mid February, however due to renovations at Nassau County Medical
Center, the delivery of the CTLM(TM) was postponed until such time as the
renovations were complete. On March 3, 1999 the CTLM(TM) System was shipped to
Nassau County Medical Center and is currently being installed. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. In order to acquire
data that will be part of the final pre-market application (PMA), the Company
intends to expand the clinical trials to hospitals in Miami, Chicago, Los
Angeles, Boston and New York.

At the conclusion of the clinical trials the Company will submit the PMA, if and
when accepted for filing by the FDA, it will be designated for review under the
FDA's Expedited Review policy. There can be no assurance, however, that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all. See "Government Regulation; No Assurance of
Regulatory Approval."

Conducting clinical trials will require the expenditure of substantial
additional funds, which the Company does not currently have available.
Furthermore, there can be no assurance (i) that results obtained in any
additional trials will be consistent with the results obtained in trials
conducted by the Company to date, (ii) that results obtained in any clinical
trial or series of clinical trials will be consistent among all study sites,
(iii) that results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies conducted in
Europe or other locations outside of the U.S., or (iv) that any such results, or
the filing of the PMA will be accepted by the FDA. There can be no assurance
that the FDA or other regulatory approvals for the CTLM(TM) Device will be
granted on a timely basis, or at all. Failure to obtain FDA clearance to market
the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.

Limited Operating History; Continuing Operating Losses. 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, which has not
been approved for sale in the United States. Consequently, the Company has
little experience in manufacturing, marketing and selling its products. The
Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At December 31, 1997, the Company had an
accumulated deficit of approximately $19,830,138 before discounts and dividends
on convertible preferred stock issuance since inception. Such losses have

                                       41
<PAGE>

resulted principally from costs incurred in research and development and
clinical trials and from general and administrative costs associated with the
Company's operations. The Company expects operating losses to increase for at
least the next several years due principally to the anticipated expenses
associated with the pre-market approval process for the CTLM(TM) Device, the
proposed commercialization of the CTLM(TM) Device, development of, and clinical
trials for, other medical imaging devices and other research and development
activities.

Uncertainties as to Future Profitability. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for the CTLM(TM) Device and any other proposed products, and to develop the
capacity to manufacture and market any products either by itself or in
collaboration with others. There can be no assurance if or when the Company will
receive required regulatory approvals for the development and commercial
manufacturing and marketing of the CTLM(TM) Device or any other proposed
products, or achieve profitability. Accordingly, the extent of future losses and
the time required to achieve profitability are highly uncertain.

Early Stage of Product Development. The Company's proposed products, other than
the CTLM(TM) Device, are at an early stage of development and the CTLM(TM)
Device must receive marketing clearance from the FDA before it can be
commercially marketed in the United States. There can be no assurance that any
of the Company's proposed products will be found to be safe and effective, meet
applicable regulatory standards or receive necessary regulatory clearance, or if
safe and effective, can be developed into commercial products, manufactured on a
large scale or be economical to market. Nor can there be any assurance that the
Company's proposed products will achieve or sustain market acceptance. In the
event necessary regulatory approvals are obtained for the CTLM(TM) Device, there
can be no assurance that the Company will be successful in establishing
commercial operations, including gaining market acceptance of the CTLM(TM)
Device and implementing commercial-scale manufacturing and sales and marketing
programs. There is, therefore, substantial risk that the Company's product
development and commercialization efforts will not prove to be successful.

Dependence on a Single Product. Although the Company is in the process of
developing additional products based on its core technology, including an
enhancement of the CTLM(TM) Device for use with fluorescence and PhotoDynamic
Therapy (PDT), none of such applications is expected to result in a commercial
product for at least several years, if at all. Consequently, pending its
approval for commercial distribution in the United States, the CTLM(TM) Device
would account for substantially all of the Company's revenues for the
foreseeable future. Failure to gain regulatory approvals or market acceptance
for the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.

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 or
any other products developed by the Company. The extent that, and the rate at
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 advantages of the CTLM(TM) Device
over existing technology and cancer detection methods (including x-ray
mammography, ultrasound or high frequency ultrasound, MRI, thermography,
diaphonography, electrical impedance and transillumination devices), third-party
reimbursement practices and the Company's manufacturing, quality control,
marketing and sales efforts. There can be no assurance that the medical
community and third-party payers will accept the Company's unique technology.
Similar risks will confront any other products developed by the Company in the
future. Failure of the Company's products to gain market acceptance would have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.

Limited Marketing and Sales Experience. The Company has limited internal
marketing and sales resources and personnel. In order to market the CTLM(TM)
Device or any other products it may develop, the Company will have to develop a
marketing and sales force with technical expertise and distribution
capabilities. 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. There
can be no assurance that the Company will be able to recruit and retain skilled
sales, marketing, service or support personnel, that agreements with
distributors will be available on terms commercially reasonable to the Company,
or at all, or that the Company's marketing and sales efforts will be successful.
Failure to successfully establish a marketing and sales organization, whether
directly or through third parties, would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
The Company intends to pursue distribution arrangements in Europe and Asia with
strategic marketing partners who have established marketing and service
capabilities. There can be no assurance that the Company, either 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 any of the
Company's proposed marketing schedules or plans can or will be met.

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<PAGE>

Limited Manufacturing History. The Company will have to ramp up its CTLM(TM)
manufacturing and assembly capabilities and contract for the manufacture of the
CTLM(TM) components in the volumes that will be necessary for the Company to
achieve significant commercial sales in the event it begins foreign sales and/or
obtains regulatory approval to market its products in the United States. The
Company has limited experience in the manufacture of medical products for
clinical trials or commercial purposes. Should the Company manufacture its
products, the Company's manufacturing facilities would be subject to the full
range of the current Quality System Regulation ("QSR") (formerly the Good
Manufacturing Practices (GMP) regulation) and similar risks of delay or
difficulty in manufacturing, and the Company would require substantial
additional capital to establish such manufacturing facilities. In addition,
there can be no assurance that the Company would be able to manufacture any such
products successfully or cost-effectively.

Dependence on Third Parties. The Company has used certain third parties to
manufacture and deliver the components of the CTLM(TM) Device and intends to
continue to use third parties to manufacture and deliver such components and any
other products, which the Company may seek to develop. Such third parties must
adhere to the QSR enforced by the FDA through its facilities inspection program
and such third parties' facilities must pass a plant inspection before the FDA
will grant pre-market approval of the Company's products. There can be no
assurance that the third-party manufacturers on which the Company depends for
the manufacture of CTLM(TM) components will be in compliance with the QSR at the
time of the pre-approval inspection or will maintain such compliance. Such
failure could significantly delay FDA approval of the PMA application for the
CTLM(TM) Device, and such delay would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

The qualification of additional or replacement suppliers for certain components
of the CTLM(TM) Device or services is a lengthy process. For certain services
and components the Company currently relies on single suppliers. If the Company
encounters delays or difficulties with its third-party suppliers in producing,
packaging or distributing components of the CTLM(TM) Device, market introduction
and subsequent sales would be adversely affected. The Company also may have to
rely on alternative sources of supply. In such case, there can be no assurance
that the Company will be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. If the Company is unable to obtain or
retain qualified third-party manufacturers on commercially acceptable terms, it
may not be able to commercialize its products as planned. The Company's
dependence upon third parties for the manufacture of its products may adversely
affect the Company's profit margins and its ability to develop and deliver its
products on a timely and competitive basis.

Competition. The medical device industry generally, and the cancer diagnostic
imaging segments in particular, are characterized by rapidly evolving
technology-and intense competition. Other companies in the medical device
industry may be developing, or could in the future attempt to develop,
additional products that are competitive with the CTLM(TM) Device. Many of the
Company's potential competitors have substantially greater capital resources and
name recognition than the Company. Many of these companies also have
substantially greater expertise than the Company in research and development,
manufacturing and marketing and obtaining regulatory approvals. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there can be no assurance
that the Company will be able to compete against such competitors and potential
competitors in terms of manufacturing, marketing and sales. Although the Company
believes that its products may offer certain technological advantages over its
competitors' currently-marketed products, earlier entrants in the market for a
diagnostic application often obtain and maintain significant market share
relative to later entrants. Physicians using imaging equipment such as x-ray
mammography equipment, ultrasound or high frequency ultrasound systems, MRI
systems, thermography, diaphonography, electrical impedance and
transillumination devices may not use the CTLM(TM) Device or any other products
that the Company may develop. Currently, mammography is employed widely and 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 a diagnostic adjunct to mammography or physical
examination and its advantages over other available diagnostic tests.

Risk of Technological Obsolescence. Methods for the detection of cancer are
subject to rapid technological innovation and there can be no assurance that
technological 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
marketability of the CTLM(TM) Device or any other products developed by the
Company. Commercial availability of such products could render the Company's
products obsolete, which would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.

                                       43
<PAGE>

Potential Reliance on International Sales. The Company intends to commence
commercial sales of the CTLM(TM) Device in Europe and Asia, where permitted,
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 marketing clearance from the FDA for the
CTLM(TM) Device, as to which there can be no assurance, the Company's revenues,
if any, will be derived from international sales. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economic or political instability, shipping
delays, fluctuations in 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 competitive
and 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, cash
flows and results of operations. The regulation of medical devices, particularly
in Europe, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company.

Government Regulation; No Assurance of Regulatory Approvals. The manufacture and
sale of medical devices, including the CTLM(TM) Device, and any other products
that may be developed by the Company 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. To obtain FDA approval of an application for pre-market
approval, the pre-market approval application must demonstrate that the subject
device has clinical utility, meaning that the device has a beneficial
therapeutic effect, or that as a diagnostic tool, it provides information that
measurably contributes to a diagnosis of a disease or condition.

The process of obtaining FDA and other required regulatory approvals may be
lengthy, expensive and uncertain and frequently requires from six months to
several years from the date of the FDA submission, if pre-market approval is
obtained at all. Following the filing of a submission of the PMA for the
CTLM(TM) Device, the FDA may require more information or clarification of
information already provided as part of the PMA. During the review period, an
advisory panel will likely be convened by the FDA to review and evaluate the PMA
and provide recommendations to the FDA as to whether the PMA should be approved.
Although the FDA may grant Expedited Review status to the CTLM(TM) Device, there
can be no assurance that such status will be maintained or result in timely
approval of the CTLM(TM) Device, if approval is obtained at all. Failure to
obtain FDA marketing clearance of the CTLM(TM) Device would have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations. See "Uncertainty of FDA Approval for the CTLM(TM)
Device."

Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval and the requirements may differ. In
addition, in order to sell its products within the European Economic Area,
companies are required to achieve compliance with the requirements of the
Medical Devices Directive and affix a "CE" marking on their products to attest
such compliance. The Company will be required to obtain CE Mark Certification
for the CTLM(TM) Device.

In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be marketed outside of the United States
unless they are approved for use by any member country of the European Union or
certain other countries, including Australia, Canada, Israel, Japan, New
Zealand, Switzerland and South Africa, in which case they can be exported to any
country provided that certain limited notification requirements are met. There
can be no assurance that the Company will meet the FDA's export requirements or
receive FDA export approval when such approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import.
Failure of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import, could
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations.

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 and certain foreign regulatory authorities may impose
numerous other requirements with which 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

                                       44
<PAGE>



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 the QSR and similar regulations in other countries,
which include testing, control and documentation requirements. Ongoing
compliance with the QSR and other applicable regulatory requirements will be
monitored by periodic inspection by the FDA and by comparable agencies in other
countries. Failure to comply with applicable regulatory requirements, including
marketing or 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 governmental regulations or policies 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, on a timely
basis, or at all, FDA approval of the PMA for the CTLM(TM) Device, foreign
marketing clearances for the CTLM(TM) Device or regulatory approvals or
clearances for other products that the Company may develop, 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 would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.

Delays In Getting Product To Market
Originally, the Company anticipated that the CTLM(TM) would be ready for
distribution in the summer of 1998, however during the course of clinical
trials, the Company learned of certain problems with particular components of
the CTLM(TM), which needed to be corrected. Solutions to these problems had to
be found and adjustments had to be made to the CTLM(TM) to correct such
problems. Specifically, the laser components were removed from the base of the
scanning bed and installed with additional laser components on a dedicated
breadboard laser table, which is enclosed and resembles a cabinet. The
electronic components involved with image acquisition were also removed from the
scanning bed and installed in a dedicated electronic cabinet with pull out
drawers for easy serviceability. Pre-amplifiers were installed on the detector
circuits and changes were made in the fiber optics.

The Company needs to obtain FDA marketing clearance for the CTLM(TM) device
before it can be sold in the U.S. However, the device may be sold under special
circumstances pursuant to an IDE. Under FDA guidelines, only product cost and
clinical costs can be recovered. No profit is allowed in IDE sales. Sales of
medical imaging devices can be made in those countries not requiring the CE
mark. Sales can also be made under exemptions for clinical investigational
testing.

The Company has deferred foreign distribution of the CTLM(TM) until such time as
it has collected enough clinical data to compile an atlas of CTLM(TM) images to
be used as clinical examples of normal and abnormal breast conditions. Therefore
the Company has not requested the approval of any country, nor has any country
granted permission to import the CTLM(TM). Although at present the Company has
not applied to the FDA for export approval for foreign sales, the Company had
anticipated that the first foreign distributions of the CTLM(TM) would occur in
its fourth fiscal quarter beginning April 1999, however due to the problems
discussed above and the delay in the Nassau County clinical investigation, which
was to produce the CTLM(TM) images to be used in the atlas, the Company will not
be able to give a revised anticipated distribution date until clinical data is
obtained and reviewed from the Nassau County clinical investigation. The Nassau
County delays are discussed in detail in "Business Regulatory and Clinical
Status". Also see "Business-Government Regulation".

In order for the Company to ship the CTLM(TM) outside of the United States, the
following information must be submitted to the FDA: (i) a complete description
of the device intended for export; (ii) the status of the device in the U.S.;
(iii) a letter from the appropriate foreign liaison (person with authority to
sign a letter of acceptance for the foreign government stating that (a) the
device is not in conflict with the laws for the country to which it is intended
for export; (b) the foreign government has full knowledge of the status of the
device in the U.S.; and (c) import is permitted or not objected to. The FDA
reviews export requests to determine that exportation of the device (1) is not
contrary to public health and safety and (2) has the approval of the country to
which it is intended for export. If the device meets the above criteria, it is
approved for export. The CTLM(TM)is exempt from requirement (1) above because
there is an FDA approved investigational device exemption (IDE) for the
CTLM(TM). The FDA would not grant an IDE for a device that is contrary to public
health and safety.

Limitations on Third-Party Reimbursement. 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 payers (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 payers to the physicians, hospitals, clinics and
imaging centers utilizing the CTLM(TM) Device or any other products that the
Company may develop or by refusing reimbursement. If examinations utilizing the
Company's products are not reimbursed under these programs, the Company's
ability to sell its products may be materially adversely affected.

                                       45
<PAGE>

There can be no assurance that third-party payers will provide reimbursement for
use of the CTLM(TM) Device or any other products that the Company may develop.
Moreover, the level of reimbursement, if any, may impact the market acceptance
and pricing of the Company's products, including the CTLM(TM) Device. Failure to
obtain favorable rates of third party reimbursement could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.

In international markets, reimbursement by third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In addition, such third-party medical insurance
providers may require additional information or clinical data prior to providing
reimbursement for a product. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of third
party and governmental reimbursement. Revenues and profitability of medical
device companies may be affected by the continuing efforts of governmental and
third party payors to contain or reduce the costs of health care through various
means.

Uncertainties Regarding Health Care Reform. 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. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the prices
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, cash flows and results of operations.

Uncertain Ability to Protect Patents and Proprietary Technology and Information.
The Company's ability to compete effectively in the medical products industry
will depend on its success in protecting its proprietary technology, both in the
United States and abroad. The patent positions of medical products companies
generally involve complex legal and factual questions. The Company's proprietary
products and technology are the subject of one U.S. patent licensed to the
Company, and eleven additional applications owned by the Company pending with
the United States Patent and Trademark Office ("PTO") and certain foreign
patents. The Company has filed, and intends to continue to file, patent
applications in certain foreign jurisdictions covering the patent claims that
are the subject of U.S. patents and patent applications. There can be no
assurance that the PTO or foreign jurisdictions will grant the Company's pending
patent applications or that the Company will obtain any additional patents or
other protection for which it has applied. There can be no assurance that
patents issued to or licensed by or to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage. The Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties.

Although the Company has entered into confidentiality and invention agreements
with its employees and consultants, there can be no assurance that such
agreements will be honored or that the Company will be able to protect its
rights to its non patented trade secrets and know-how effectively. Moreover,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and know-how. In addition, the
Company may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If the Company does not obtain required licenses, it could
encounter delays in product development or find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Additionally, the Company may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations.
There can be no assurance that the Company will have or be able to acquire
exclusive rights to the inventions or technical information derived from such
collaborations or that disputes will not arise with respect to rights in
derivative or related research programs conducted by the Company or such
collaborators.

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. 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 engineering, manufacturing,
and marketing, will require the addition of new 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.

                                       46
<PAGE>

Potential 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 allegations of false negative
diagnoses of cancer. While the CTLM(TM) Device does not purport to diagnose any
patient, there can be no assurance that the Company will not be subjected to
future claims and potential liability. While the Company plans to maintain
insurance against product and professional liability and defense costs, there
can be no assurance that claims against the Company arising with respect to its
products will be successfully defended or that the insurance to be carried by
the Company will be sufficient to cover liabilities arising from such claims. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company. Furthermore, there
can be no assurance that the Company will be able to continue to obtain or
maintain product liability insurance on acceptable terms.

Potential for Environmental Liability. Although the Company's manufacturing
processes do not currently involve the use of potentially hazardous materials,
it may use such materials in the future. The Company may, in the future, become
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of such materials. There can be no
assurance that the Company will not incur significant future costs to comply
with environmental laws, rules, regulations and policies, or that the business,
financial position, cash flows or results of operations of the Company will not
be materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of hazardous
materials.

Authorization and Discretionary Issuance of Preferred Stock/Barriers to
Takeover. The Company's Articles of Incorporation authorize the issuance of up
to 2,000,000 shares of "blank check" preferred stock with such designations,
rights, and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, without stockholder
approval, to designate and issue additional series of preferred stock with
dividend, liquidation, conversion, voting or other rights, including the right
to issue convertible securities with no limitations on conversion, which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock, substantially dilute the common shareholder's interest
and depress the price of the Company's common stock. In addition, the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The Company has, in the past, issued Convertible Preferred Stock
without a limit on the number of shares that can be issued upon conversion and
may continue to do so in the future. See "Sale of Unregistered Securities" and
"Description of Securities".

The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. See "Sale of Unregistered Securities-Series H Preferred"
and "Sale of Unregistered Securities-Equity Line of Credit".

Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including the Series H Preferred Shares, the lower
the market price the greater the number of shares to be issued to the holders,
holders of such preferred upon conversion, thus increasing the potential profits
to the Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stocks potential for increased share issuance and profit
in addition to a stock overhang of an undeterminable amount may depress the
price of the Company's common stock. See "Sale of Unregistered Securities-Series
H Preferred" and "Sale of Unregistered Securities-Equity Line of Credit".

No Dividends. The Company has never declared or paid any cash dividends on its
capital stock and does not intend to pay any cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all its earnings
for use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future.

Possible Volatility of Stock Price. The price of the Company's Common Stock has
fluctuated substantially since it began trading on the OTC Bulletin Board in
September 1994. The market price of the shares of the Common Stock, like that of
the common stock of many other medical device companies, is likely to continue
to be highly volatile. Factors such as the timing and results of clinical trials
by the Company or its competitors, governmental regulation, healthcare
legislation, equity or debt funding, developments in patent or other proprietary

                                       47
<PAGE>

rights of the Company or its competitors, including litigation, fluctuations in
the Company's operating results, and market conditions for medical device
company stocks and life science stocks in general, could have a significant
impact on the future price of the Common Stock. The Company's stock is currently
traded on the OTC Bulletin Board. The Company is seeking to be in compliance
with NASDAQ SmallCap Market Listing Requirements. The trading of the Company's
Common Stock on the NASDAQ SmallCap Market is conditioned upon the Company's
meeting certain quantitative criteria related to the market price of the
Company's Common Stock, net tangible assets, market capitalization and certain
other quantitative and non-quantitative requirements established by such stock
market. To maintain eligibility for trading on the NASDAQ Small-Cap Market,
among other requirements, the Company is required to have net tangible assets in
excess of $4,000,000 and have a minimum bid price of $3 per share for initial
inclusion and then maintain a bid price of $ 1 per share. The Company's failure
to meet such requirements could result in the de-listing of the Common Stock
from trading on the NASDAQ SmallCap Market. If, however, the Company did not
meet the requirements of the NASDAQ SmallCap Market, trading of the Common Stock
would be conducted on an electronic bulletin board (OTC BB) established for
securities that do not meet the NASDAQ listing requirements or in what is
commonly referred to as the "pink sheets." De-listing may restrict investors'
interest in the Common Stock and materially adversely affect the trading market
and prices for the Common Stock and the Company's ability to issue additional
securities or to secure additional financing.

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

        Index to Financial Statements

                                                                         Page
                                                                         ----

        Report of Independent Certified Public Accountants               F-1-2

        Financial Statements

                  Balance Sheet                                          F-3

                  Statement of Operations                                F-4

                  Statement of Stockholders' Equity                      F-5-8

                  Statement of Cash Flows                                F-9-10

                  Notes to Financial Statement                           F-11-42

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<PAGE>

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

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

                                    PART III

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

The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name                                       Age      Position
----                                       ---      --------
<S>                                        <C>      <C>
Richard J. Grable                          56       Chief Executive Officer and Director

Linda B. Grable                            61       Chairman of the Board and President

Allan L. Schwartz                          57       Executive Vice-President, Chief
                                                    Financial Officer and Director.
</TABLE>

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

Richard J. Grable has been Chief Executive Officer and a director of the Company
since 1994 and 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, Florida, a
manufacturer of breast imaging systems. From March, 1992, to December, 1993: Mr.
Grable was a an engineering consultant for Lintronics Technologies, Inc., Tampa,
Florida, 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, Florida, a manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant for
Telmed, Inc., Ft. Lauderdale, Florida, a software and electronic design company.

Linda B. Grable has been President and Chairman of the Board of Directors of the
Company since 1994. From September 1991, to February, 1994, Mrs. Grable was
President and Director of VCC Communications, Inc., Tampa, Florida, a
manufacturer of voltage controlled oscillators (VCO). From August, 1988, to
April, 1991: Mrs. Grable was President of Lintronics International Ltd., Inc.,
Plantation, Florida, a manufacturer of breast imaging systems.

Allan L. Schwartz has been Executive Vice-President, Chief Financial Officer and
a Director of the Company since 1994. 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,
Florida, a manufacturer of prototype homes.

Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
serve at the discretion of the board.

Key Employee

Robert H. Wake is the Company's Director of Engineering and has been employed as
such since April 1995. 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.

                                       49
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership, furnishing the Company with copies of all
Section 16(a) forms they file. To the best of the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the year ended June 30, 1998. The Company has not received
copies of amended Form 13 D from Goodland International Investments Limited and
Weyburn Overseas Limited indicating their ability to convert and/or the
conversion of the Series B Preferred Shares into an aggregate of 15,199,488
common shares. Item 5. "Market for Registrant's Common Equity and Related
Stockholder Matters-Sale of Unregistered Securities/Conversion of Preferred
Shares".

ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

The following table sets forth the compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and other executive officers for services
rendered to the Company during 1998 and 1997. No other person, who, during 1997
and 1996 served as an executive officer of the Company, had a total annual
salary and bonus in excess of $100,000.

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

Name & Principal                                                Other Annual       Restricted         Securities/Underlying
Position                         Year       Salary              Compensation       Stock Awards       Option/SARs (1) (2)
<S>                              <C>        <C>                 <C>                <C>                <C>
----------------------------------------------------------------------------------------------------------------------------
Richard J. Grable, CEO and       1996       $183,333
Director                         1997       $289,779            $115,000           $268,000           22,883
                                 1998       $286,225                                                  534,602 (3)
----------------------------------------------------------------------------------------------------------------------------
Linda B Grable, President and    1996       $91,000
Director                         1997       $97,451             $115,000           $268,000           22,883
                                 1998       $119,070                                                  534,602(3)
----------------------------------------------------------------------------------------------------------------------------
Allan L. Schwartz, Exec.         1996       $124,000
V.P., CFO and                    1997       $111,534            $115,000           $268,000           130,410
Director                         1998       $119,070                                                  534,602 (3)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate dollar value of the 1997 and 1998 options, based on the
averaged high and low price on June 30, 1998 are as follows: Richard J.
Grable-$225,781.42; Linda B. Grable-$225,781; and Allan L.
Schwartz-$269,329.86.
(2) Does not include qualified options to purchase 208,333 shares a $.48 per
share (110% of fair market value on day of issuance) and non-qualified options
to purchase 250,000 shares at $.17 per share (35%) of fair market value on day
of grant) issued to each of Messrs. Grable and Schwartz and Ms Grable on July 6,
1998.
(3) Includes 250,000 non-qualifies options that were required, by contract, to
be issued in July 1997 but were not issued until January 2, 1998.

Option Grants.

The following table sets forth certain information concerning grants of options
to purchase Common Stock to the Named Executive Officers during the fiscal year
ended June 30, 1998.

                                       50
<PAGE>

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                          No. of Securities      % of Total Options      Exercise or       Market Price
                          Underlying Options     Granted to Employees    Base Price        On Date of         Expiration
Name                      Granted                In Fiscal Year          ($/Share)         Grant              Date
<S>                          <C>                       <C>                  <C>
------------------------------------------------------------------------------------------------------------------------
Richard J. Grable (1)        250,000                     14%                $ .31              $ .85            1/2/02
                             250,000                     14%                $ .31              $ .65            1/2/02
                              34,602                    1.9%                $2.63              $2.39            1/2/02
------------------------------------------------------------------------------------------------------------------------
Linda B. Grable (1)          250,000                     14%                $ .31              $ .85            1/2/02
                             250,000                     14%                $ .31              $ .65            1/2/02
                              34,602                    1.9%                $2.63              $2.39            1/2/02
------------------------------------------------------------------------------------------------------------------------
Allan L. Schwartz (1)        250,000                     14%                $ .31              $ .85            1/2/02
                             250,000                     14%                $ .31              $ .65            1/2/02
                              34,602                    1.9%                $2.63              $2.39            1/2/02
------------------ -----------------------------------------------------------------------------------------------------
</TABLE>

(1) In January 1998, pursuant to employment agreements dated July 4, 1994,
Richard Grable, Linda Grable, and Allan Schwartz were granted options to
purchase and aggregate of 500,000 Common Shares each. The grants were for the
July 1996 and July 1997 anniversary dates of their employment and were never
issued by prior counsel for the Company. The options are non-qualified stock
options, vesting one year from the grant date and exercisable at an exercise
price of $0.31 per share (35% of the fair market value on the date of issuance).
In January 1998, Richard Grable, Linda Grable, and Allan Schwartz were granted
options to purchase 22,883 and 34,602 shares of Common Shares each pursuant to
the Company's incentive stock option plan. These options were earned in July
1996 and July 1997 but never issued., however the options for the 22,883 shares
were disclosed in the Company's Proxy Statement last year. These shares are
exercisable at any time at an exercise price of $4.37 and $2.63 per share,
respectively (110% of the fair market value on the contractual date of
issuance).

Employment Agreements
The Company entered into five-year employment agreements with each of Mr.
Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable that expire
July 6, 1999. Pursuant to the terms of the employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable: $286,224.96; Linda B. Grable: $119,069.52 and Allan L.
Schwartz $119,069.52. During the Company's operational stage the salary of Allan
L. Schwartz salary will increase to $156,000. In addition, in fiscal 1998
Messrs. Grable and Schwartz and Ms. Grable each receive a car allowance of $500
per month. Each employment agreement provides for bonuses, health insurance, car
allowance, and related benefits, and a cost of living adjustment of 7% per
annum. The bonuses are equal to 5% of the adjusted consolidated net earnings of
the Company. No bonuses have been paid to date. In addition, pursuant to each
Agreement, Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B.
Grable each have an option to purchase 250,000 shares of common stock each
calendar year at 35% of the fair market value of the common stock of the Company
at the time of grant.

Richard Grable will receive a royalty bonus of 2.5% to a maximum of 5%, based
upon varying levels of gross sales of the CTLM(TM) device. Upon ratification of
the Patent Licensing Agreement at the next annual meeting of shareholders, the
royalties as outlined in that agreement will take the place of those set forth
in the original employment agreement. See Item 1. "Description of
Business-.Patent Licensing Agreement".

Stock Option Plans
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1998, all of the executive officers were participants in this plan. The plan was
approved by the Board of Directors and adopted by the shareholders at the March
29, 1995 annual meeting. The plan provides for the granting, exercising and
issuing of incentive option 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 the plan.

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.

Pursuant to stock option agreements, Mr. Richard J. Grable, Mr. Allan L.
Schwartz and Mrs. Linda B. Grable each have an option to purchase that number of
shares equal to $100,000 divided by 110% of the fair market value of the shares
on July 6th of each year. The Stock Option Agreement terminates on September 1,
1999.

                                       51
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
         ---------------------------------------------------------------

The following table sets forth the beneficial ownership of Common Stock of the
Company as of October 9, 1998 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.

The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,750,040 and 3,445,800 share
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares.

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

Richard J. Grable                  12,606,606(3)                   32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313

Linda B. Grable                    12,606,606(4)                   32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313

Allan L. Schwartz                   4,253,390(5)                   10.9%
C/o 6351 NW 18th Court
Plantation, FL 33313

Weyburn Overseas Limited            4,455,000(6)                   10.5%
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda

Goodland International             10,744,488(6)                   22.2%
Investment LTD.
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda

All officers and directors         16,859,996(6)                   43.4%
as a group (3 persons)
--------------------
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole voting
power and investment power with respect to all shares of Common Stock shown
beneficially owned by them.
(2) Percentage of ownership is based on 37,989,399 shares of Common Stock
outstanding as of October 12, 1998 plus each person's options that are
exercisable within 60 days. Shares of Common Stock subject to stock options that
are exercisable within 60 days as of July 10, 1998 are deemed outstanding for
computing the percentage of that person and the group.
(3) Includes 556,883 shares subject to options and 3,497,800 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(4) Includes 556,883 shares subject to options and 7,995,040 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(5) Includes 664,410 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(6) Includes an aggregate of 15,199,488 shares underlying the Series B
Preferred, for which the Company has received a notice of conversion. Does not
include Warrants to purchase 112,500 shares at $5.00 per share.
(7) Includes 1,778,176 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims.

                                       52
<PAGE>

The following table sets forth the beneficial ownership of Common Stock of the
Company as of April 7, 1999 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.

The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,162,797 and 3,000,800 shares
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares.

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

Richard J. Grable                  8,020,480(3)(7)                 20.1%
C/o 6351 NW 18th Court
Plantation, FL 33313

Linda B. Grable                    8,020,480(4)(7)                 20.1%
C/o 6351 NW 18th Court
Plantation, FL 33313

Allan L. Schwartz                  4,253,390(5)(7)                  8.2%
C/o 6351 NW 18th Court
Plantation, FL 33313
6th Floor

All officers and directors        12,273,870(6)(7)                 28.3%
as a group (3 persons)
--------------------
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole voting
power and investment power with respect to all shares of Common Stock shown
beneficially owned by them.
(2) Percentage of ownership is based on 39,805,643 shares of Common Stock
outstanding as April 7, 1999 plus each person's options that are exercisable
within 60 days. Shares of Common Stock subject to stock options that are
exercisable within 60 days are deemed outstanding for computing the percentage
of that person and the group.
(3) Includes 556,883 shares subject to options and 3,000,800 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(4) Includes 556,883 shares subject to options and 7,162,797 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(5) Includes 664,410 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per share
and 250,000 shares at $.44, which are not exercisable within the next 60 days.
(6) Includes 1,778,176 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(7) Does not include shares to be issued to the directors as follows; Linda
Grable-445,000 shares, Richard Grable-831,743 shares and Allan Schwartz-820,000
shares. These shares are to be issued as replacement shares for shares the
Directors sold to fund the Company's operations through February 28, 1999. See
Item 12 below.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

In September and October 1998 Linda Grable, the Company's President, personally
guaranteed three promissory notes issued by the Company to third parties. Ms.
Grable received no compensation for these guarantees. As of the date of this
Report, one of the three Notes has been repaid. See "Private Placement of Common
Stock".

In January 1999 and February 1999, Richard Grable, the Company's Chief Executive
Officer, director and founder sold an aggregate of 831,743 shares of the
Company's common stock owned by him and lent the aggregate proceeds of
approximately $347,775 directly to the Company.

                                       53
<PAGE>

In January 1999 and February 1999, Linda Grable, the Company's President,
director and founder sold an aggregate of 445,000 shares of the Company's common
stock owned by her and lent the aggregate proceeds of approximately $138,093
directly to the Company.

In December 1998, January 1999 and February 1999, Allan Schwartz, the Company's
Executive President, director and founder sold an aggregate of 820,000 shares
and lent the aggregate proceeds of approximately $359,707 directly to the
Company.

In February 1999, the Company's Board of Director voted to compensate Messrs.
Grable, Schwartz, and Ms. Grable (the "Founders") for the shares they sold on
behalf of the Company due to the following financial loss. incurred by the
Founders. In April 1999, the compensation was revised as follows:

      o    The Founders may be liable for income tax of approximately 18% on the
           money received from the sale of the shares without having received
           any personal benefit from the sales,
      o    The Founders have reduced their percentage ownership in the company
           by the number of shares that have been sold, and
      o    The Founders will loose the tax benefit of having held the their
           shares for more than 2 years.

In order to make the founders whole the Company will replace the shares sold by
the Founders as follows :

      o    A share for share replacement of the shares sold,
      o    Option shares equaling 18% of the money provided to the Company based
           on the 5-day average closing price of the stock preceding the date
           the funds were transferred to the Company to recover any tax
           ramifications,
      o    Option shares equaling 10% of the money provided to the Company based
           on the 5-day average closing price of the stock preceding the date
           the funds were transferred to the Company to cover the difference in
           tax bracket (28% - 18%) that will occur through sale of shares not
           held for 2 years, and
      o    Option shares equaling 10% of the money provided to the Company based
           on the 5-day average closing price of the stock proceeding the date
           the funds were transferred to the Company to as an incentive to sell
           the free-trading shares.

Messrs. Grable, Schwartz and Ms. Grable are entitled to receive 831,743,
820,000, and 445,000 shares of the Company restricted common stock, as share for
share replacement respectively. No shares or option certificates have been
issued to date.

Richard J. Grable and. 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.

From time to time Linda Grable, the Company's President, has personally
guaranteed promissory notes issued by the Company to third parties. Ms. Grable
received no compensation for these guarantees.

In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of the Patent, which encompasses the technology for the CTLM(TM) device. The
Company and Mr. Grable has previously entered into an oral agreement for the
exclusive license for the patent that was never memorialized in written form.
See Item 1. "Description of Business-Patent Licensing Agreement".

                                       54
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------
(a) Exhibits

EXHIBIT                             DESCRIPTION

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

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

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

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

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

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

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

3.8        Amendment to Articles of Incorporation (Designation of Series H
           Convertible Preferred Shares). Incorporated by reference to the
           Company's Registration Statement on Form S-2 File Number 333-59539.

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

3.10       Articles of Incorporation and By- Laws (New Jersey) -are incorporated
           by reference to Exhibit 3 (i) of the Company's Form 10-SB, as
           amended, file number 0-26028, filed on May 6, 1995 ("Form 10-SB").

3.11       Certificate and Plan of Merger - is incorporated by reference to
           Exhibit 3(i) of the Form 10-SB.

3.12       Certificate of Amendment - is incorporated by reference to Exhibit
           3(i) of the Form 10-SB.

4.1        Instruments Defining the Rights of Security Holders - Designation of
           Series B Convertible Preferred Shares. (See Exhibit 3.3, above).

4.2        Instruments Defining the Rights of Security Holders - Designation of
           Series C Convertible Preferred Shares. (See Exhibit 3.4, above).

4.3        Instruments Defining the Rights of Security Holders -Designation of
           Series D Convertible Preferred Shares. (See Exhibit 3.5, above).

4.4        Instruments Defining the Rights of Security Holders - Designation of
           Series E Convertible Preferred Shares. (See Exhibit 3.6, above).

4.5        Instruments Defining the Rights of Security Holders - Designation of
           Series F Convertible Preferred Shares. (See Exhibit 3.7, above).

4.6        Instruments Defining the Rights of Security Holders - Designation of
           Series H Convertible Preferred Shares. (See Exhibit 3.8, above).

10.1       Form of Subscription Agreement by and between Imaging Diagnostic
           Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
           Company's Registration Statement on Form S-2, File Number 333-59539.

10.2       Patent Licensing Agreement. Incorporated by reference to the
           Company's Registration Statement on Form S-2, File Number 333-59539.

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

                                       55
<PAGE>

10.4       Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
           Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
           Form 10-SB.

10.5       Lock Up Agreement By and Between the Company and Richard J. Grable,
           Linda B. Grable, and Allan L. Schwartz, is incorporated by reference
           to Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year
           ending June 30, 1996. File number 033-04008.

10.6       Form of Series F Preferred Stock Subscription Documents. Incorporated
           by reference to the Company's Registration Statement on Form S-2,
           File Number 333-60405.

10.7       Form of Series H Preferred Stock Subscription Documents. Incorporated
           by reference to the Company's Registration Statement on Form S-2,
           File Number 333-60405.

10.8       OEM Agreement. Incorporated by reference to the Company's Form 10-KSB
           for the fiscal year ended June 30, 1999.

10.9       Form of Equity Line of Credit Agreement. Incorporated by reference to
           the Company's Form 10-KSB for the fiscal year ended June 30, 1999.

10.10      Focus Distribution Agreement. Incorporated by reference to the
           company's Form 10QSB/A filed on April 2 1999.

10.11      Consultronix Distribution Agreement. Incorporated by reference to the
           company's Form 10-KSB/A filed in April 1999.

10.12      Iberadac Distribution Agreement. Incorporated by reference to the
           company's Form 10-KSB/A filed in April 1999.

(b) Reports on Form 8-k

None

                                       56
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,



                                         IMAGING DIAGNOSTIC SYSTEMS, INC.


                                         By: /s/Linda B. Grable
                                             -----------------------------------
                                             Linda B. Grable,
                                             Chairman of the Board and President

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures                         Title                                       Date
<S>                                <C>                                         <C>
/s/Linda B. Grable                 Chairman of the Board and President         July 22, 1999
-----------------------------
Linda B. Grable


/s/Richard J. Grable               Director and Chief Executive Officer        July 22, 1999
-----------------------------
Richard J. Grable


/s/Allan L. Schwartz               Director, Executive Vice-President          July 22, 1999
-----------------------------      (Principal Accounting and Financial
Allan L. Schwartz                  Officer)
</TABLE>

                                       57


<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-5-8

                  Statements of Cash Flows                              F-9-10

                  Notes to Financial Statements                         F-11-42


<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, 1998 and 1997,
    and the related statements of operations, stockholders' equity and cash
    flows for the years ended June 30, 1998 and 1997 and for the period December
    10, 1993 (date of inception) to June 30, 1998. 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, 1998 and 1997
    and the results of its operations and its cash flows for the years ended
    June 30, 1998 and 1997 and for the period December 10, 1993 (date of
    inception) to June 30, 1998 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, 1998 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, 1998



                                      F-2
<PAGE>
<TABLE>
<CAPTION>

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

                                  Balance Sheet

                             June 30, 1998 and 1997

                                     ASSETS
                                                                                                          1998            1997
                                                                                                      ------------    ------------
                                                                                                                       (restated)
<S>                                                                                                   <C>             <C>
Current assets:
  Cash                                                                                                $    310,116    $    383,223
  Restricted certificate of deposit                                                                           --           103,500
  Loans receivable-other                                                                                      --            10,073
  Inventory                                                                                              3,214,045            --
  Prepaid expenses                                                                                          33,539          56,792
                                                                                                      ------------    ------------

         Total current assets                                                                            3,557,700         553,588
                                                                                                      ------------    ------------

Property and equipment, net                                                                              2,920,980       3,293,297
Prototype equipment                                                                                           --         1,216,585
Other assets                                                                                               688,463           9,635
                                                                                                      ------------    ------------
                                                                                                      $  7,167,143    $  5,073,105
                                                                                                      ============    ============
             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                                                               $  1,363,766    $    519,546
  Loan payable                                                                                             285,407            --
  Current maturities of capital lease obligations                                                            9,715           8,928
  Other current liabilities                                                                              2,155,978         319,547
                                                                                                      ------------    ------------

         Total current liabilities                                                                       3,814,866         848,021
                                                                                                      ------------    ------------

Long-term capital lease obligations                                                                         26,134          35,849
                                                                                                      ------------    ------------

         Total liabilities                                                                               3,841,000         883,870
                                                                                                      ------------    ------------
Commitments and contingencies

Stockholders' equity:
  Convertible preferred stock (Series B), 7% cumulative annual dividend, no par value;
    authorized 450 shares, issued 450 shares                                                             4,500,000       4,500,000
  Convertible preferred stock (Series D),  no par value; authorized 54 shares,
    issued 29 and 0 shares, respectively                                                                   290,000            --
  Convertible preferred stock (Series E),  no par value; authorized 54 shares,
    issued 24 and 0 shares, respectively                                                                   240,000            --
  Convertible preferred stock (Series H),  no par value; authorized 108 shares,
    issued 108 and 0 shares, respectively                                                                1,080,000            --
  Common stock, no par value; authorized 48,000,000 shares, issued 36,493,544
    and 24,905,084 shares, respectively                                                                 23,983,073      15,739,729
  Additional paid-in capital                                                                             1,884,846       3,663,120
  Deficit accumulated during the development stage                                                     (27,336,655)    (18,298,930)
                                                                                                      ------------    ------------

                                                                                                         4,641,264       5,603,919
Less: subscriptions receivable                                                                             (14,309)        (35,559)
         deferred compensation                                                                          (1,300,812)     (1,379,125)
                                                                                                      ------------    ------------

         Total stockholders' equity                                                                      3,326,143       4,189,235
                                                                                                      ------------    ------------

                                                                                                      $  7,167,143    $  5,073,105
                                                                                                      ============    ============
</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, 1998  June 30, 1997   June 30, 1998
                                                   -------------  -------------  --------------
                                                                   (restated)
<S>                                               <C>             <C>             <C>
Compensation and related benefits:
  Administrative and engineering                  $  1,210,526    $  2,847,238    $  6,475,238
  Research and development                             776,578         616,886       1,745,089
Research and development expenses                      254,722       1,065,178       2,918,894
Advertising and promotion expenses                     329,446         166,520         873,841
Selling, general and
   administrative expenses                             396,752         528,753       1,302,137
Clinical expenses                                        9,859          33,506         360,675
Consulting expenses                                  1,220,676         764,364       2,936,584
Insurance costs                                        162,549         121,287         328,791
Professional fees                                      454,730         178,402       1,351,835
Stockholder expenses                                    75,608          20,902          96,510
Trade show expenses                                    216,182         154,782         505,458
Travel and subsistence costs                           111,559         195,585         457,159
Rent expense                                            26,213          48,897         247,461
Interest expense                                        55,543           2,744          82,596
Depreciation and amortization                          283,966         230,047         675,862
Amortization of deferred compensation                1,418,938         788,000       2,553,813
Interest income                                        (22,137)       (116,972)       (197,417)
                                                  ------------    ------------    ------------

                                                     6,981,710       7,646,119      22,714,526
                                                  ------------    ------------    ------------

     Net loss                                       (6,981,710)     (7,646,119)    (22,714,526)

Dividends on cumulative preferred stock:
 From discount at issuance                          (1,741,015)       (998,120)     (4,074,609)
 Earned                                               (315,000)       (184,675)       (547,520)
                                                  ------------    ------------    ------------

     Net loss applicable to common shareholders   $ (9,037,725)   $ (8,828,914)   $(27,336,655)
                                                  ============    ============    ============


Net loss per common share:
  Basic
    Net loss per common share                     $       (.32)   $       (.36)   $      (1.27)
                                                  ============    ============    ============

    Weighted average number of common shares        27,882,886      24,222,966      21,574,057
                                                  ============    ============    ============

  Diluted
    Net loss per common share                     $       (.32)   $       (.36)   $      (1.27)
                                                  ============    ============    ============

    Weighted average number of common shares        27,882,886      24,222,966      21,574,057
                                                  ============    ============    ============
</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, 1998
<TABLE>
<CAPTION>

                                                                                                                          Deficit
                                                                                                                        Accumulated
                                                          Preferred Stock (**)       Common Stock         Additional     During the
                                                               Number of                Number of           Paid-In     Development
                                                       Shares           Amount     Shares         Amount    Capital        Stage
                                                     --------           ------     ------         ------  ----------   -------------
<S>                                                      <C>         <C>               <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                                                 --             --            --             --       --      (66,951)
                                                    -------        -------   -----------    -----------  -------  -----------
Balance at  June 30, 1994                                --             --    16,067,772        102,951       --      (66,951)

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                                    --             --            --             --  622,500           --

Amortization of deferred compensation                    --             --            --             --       --           --

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


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

Balance at  June 30, 1995                                --             --    18,616,713      2,002,238  672,833   (1,153,387)
                                                    =======        =======   ===========    ===========  =======  ===========


(RESTUBBED TABLE)
                                                                                Subscriptions         Deferred
                                                                                  Receivable        Compensation   Total
                                                                                -------------       ------------   -----


Balance at December 10,  1993(date of inception)                               $  -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)
                                                                            ---------            --------     ----------
Balance at  June 30, 1994                                                         -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)            --

Amortization of deferred compensation                                              --             114,375        114,375

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


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

Balance at  June 30, 1995                                                    (523,118)           (508,125)       490,441
                                                                            =========            ========     ==========

                                                                                                             (Continued)
</TABLE>

              See accompanying notes to the financial statements.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1998
                                                                                                                         Deficit
                                                                                                                        Accumulated
                                                      Preferred Stock (**)           Common Stock          Additional   During the
                                                            Number of                  Number of            Paid-In     Development
                                                     Shares         Amount     Shares           Amount      Capital        Stage
                                                     ------        -------     ------          ------     ---------   ------------
<S>                                                                            <C>            <C>              <C>       <C>
Balance at  June 30, 1995                              --             --       18,616,713     2,002,238        672,833   (1,153,387)
                                                    -------      ---------    -----------    ----------     ----------  -----------
Preferred stock sold, including dividends             4,000      3,600,000           --            --        1,335,474   (1,335,474)

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

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

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

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

Common stock issued with  exercise of options
 for compensation                                      --             --          996,400       567,164           --           --

Conversion of preferred  stock to common stock       (1,600)    (1,440,000)       420,662     1,974,190       (534,190)        --

Common stock issued as  payment of preferred
  stock dividends                                      --             --            4,754        14,629           --        (14,629)

Dividends accrued on preferred
 stock not yet converted                               --             --             --            --             --        (33,216)

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

Amortization of deferred compensation                  --             --             --            --             --           --

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

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

                                                    -------      ---------    -----------    ----------     ----------  -----------
Balance at June 30, 1996 (restated)                   2,400      2,160,000     23,023,789    10,075,896      1,574,784   (9,470,016)
                                                    =======      =========    ===========    ==========     ==========  ===========

(RESTUBBED TABLE)
                                                                      Subscriptions     Deferred
                                                                       Receivable     Compensation      Total
                                                                     -------------   -------------      -----


Balance at  June 30, 1995                                                (523,118)      (508,125)       490,441
                                                                        ----------      --------      ---------
Preferred stock sold, including dividends                                    --             --        3,600,000

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

Cancellation of  stock  subscription                                      405,130           --             --

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

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

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

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

Common stock issued as  payment of preferred
  stock dividends                                                            --             --             --

Dividends accrued on preferred
 stock not yet converted                                                     --             --          (33,216)

Collection of stock  subscriptions                                        103,679           --          103,679

Amortization of deferred compensation                                     232,500        232,500

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

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

                                                                        ----------      --------      ---------
Balance at June 30, 1996 (restated)                                       (18,684)      (275,625)     4,046,355
                                                                        ==========      ========      =========

                                                                                                     (Continued)
</TABLE>


              See accompanying notes to the financial statements.
                                      F-6

<PAGE>
<TABLE>
<CAPTION>

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

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1998


                                                                                                                         Deficit
                                                    Preferred Stock (**)          Common Stock                          Accumulated
                                                 --------------------------   -------------------------   Additional     During the
                                                         Number of                    Number of            Paid-In      Development
                                                  Shares           Amount     Shares            Amount     Capital         Stage
                                                  ------           ------     ------            -------   ----------   -------------

<S>                                                 <C>        <C>           <C>            <C>             <C>         <C>
Balance at June 30, 1996 (restated)                 2,400      2,160,000     23,023,789     10,075,896      1,574,784   (9,470,016)
                                                  -------    -----------    -----------    -----------    -----------   -----------
Preferred stock sold, including dividends             450      4,500,000           --             --          998,120     (998,120)

Conversion of preferred  stock to common stock     (2,400)    (2,160,000)     1,061,202      2,961,284       (801,284)        --

Common stock issued in  exchange for services        --             --          234,200        650,129           --           --

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

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

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

Common stock issued as payment of preferred
  stock dividends                                    --             --           20,760         49,603           --        (16,387)

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

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

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

Amortization of deferred compensation                --             --             --             --             --           --

Net loss (restated)                                  --             --             --             --             --     (7,646,119)

                                                  -------    -----------    -----------    -----------    -----------   -----------
Balance at June 30, 1997 (restated)                   450      4,500,000     24,905,084     15,739,729      3,663,120  (18,298,930)
                                                  =======    ===========    ===========    ===========    ===========   ===========
(RESTUBBED TABLE)

                                                                   Subscriptions      Deferred
                                                                    Receivable      Compensation      Total
                                                                   ------------     ------------      -----


Balance at June 30, 1996 (restated)                                    (18,684)      (275,625)     4,046,355
                                                                     ---------      ---------     ----------
Preferred stock sold, including dividends                                 --             --        4,500,000

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

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

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

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

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

Common stock issued as payment of preferred
  stock dividends                                                         --             --           33,216

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

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

Collection of stock  subscriptions                                      16,875           --           16,875

Amortization of deferred compensation                                     --          788,000        788,000

Net loss (restated)                                                       --             --       (7,646,119)

                                                                     ---------      ---------     ----------
Balance at June 30, 1997 (restated)                                    (35,559)    (1,379,125)     4,189,235
                                                                     =========      =========     ==========
                                                                                                 (Continued)

</TABLE>

              See accompanying notes to the financial statements.

                                      F-7
<PAGE>
<TABLE>
<CAPTION>


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

                        Statement of Stockholders' Equity

          Period December 10, 1993 (date of inception) to June 30, 1998

                                                                                                                          Deficit
                                                                                                                        Accumulated
                                                      Preferred Stock (**)           Common Stock        Additional      During the
                                                            Number of                  Number of          Paid-In       Development
                                                    Shares           Amount    Shares            Amount   Capital          Stage
                                                    ------           ------    ------            ------   -------          -----
<S>                                                    <C>       <C>          <C>            <C>           <C>          <C>
Balance at June 30, 1997 (restated)                    450       4,500,000    24,905,084     15,739,729    3,663,120    (18,298,930)
                                                    ------    ------------   -----------   ------------ ------------   ------------
Preferred stock sold, including dividends
  and placement fees                                   501       5,010,000          --             --      1,290,515     (1,741,015)

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

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

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

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

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

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

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

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

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

Amortization of deferred compensation                 --              --            --             --           --             --

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

                                                    ------    ------------   -----------   ------------ ------------   ------------
Balance at June 30, 1998                             611      $  6,110,000    36,493,544   $ 23,983,073 $  1,884,846   $(27,336,655)
                                                    ======    ============   ===========   ============ ============   ============

(RESTUBBED TABLE)

                                                                             Subscriptions       Deferred
                                                                               Receivable      Compensation     Total
                                                                               ----------      ------------     -----

Balance at June 30, 1997 (restated)                                              (35,559)     (1,379,125)      4,189,235
                                                                            ------------    ------------    ------------
Preferred stock sold, including dividends
  and placement fees                                                                --              --         4,559,500

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

Common stock sold                                                                   --              --           200,000

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes to the financial statements.

                                      F-8


<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, 1998   June 30, 1997   June 30, 1998
                                                              --------------  -------------- ----------------
                                                                                  (restated)

<S>                                                            <C>             <C>             <C>
Net loss                                                       $ (6,981,710)   $ (7,646,119)   $(22,714,526)
                                                               ------------    ------------    ------------
Adjustments to reconcile net loss to net cash
 used for operating activities:
    Depreciation and amortization                                   283,966         230,047         675,862
    Amortization of deferred compensation                         1,418,938         788,000       2,553,813
    Noncash compensation and consulting expenses                  1,379,938       2,654,821       7,388,147
    (Increase) decrease in restricted certificate of deposit        103,500        (103,500)           --
    (Increase) decrease in loans receivable - other                  10,073         (10,073)           --
    Increase in inventory                                          (155,782)           --          (155,782)
    (Increase) decrease in prepaid expenses                          23,253         (40,892)        (33,539)
    (Increase) decrease  in other assets                            (97,828)         43,375        (107,463)
    Increase in accounts payable and accrued expenses               529,220          88,074         880,478
    Increase (decrease) in other current liabilities                (53,569)       (536,599)        265,978
                                                               ------------    ------------    ------------

      Total adjustments                                           3,441,709       3,113,253      11,467,494
                                                               ------------    ------------    ------------

      Net cash used for operating activities                     (3,540,001)     (4,532,866)    (11,247,032)
                                                               ------------    ------------    ------------

Cash flows from investing activities:
    Prototype equipment                                          (1,582,446)       (641,247)     (2,799,031)
    Capital expenditures                                           (115,738)     (2,815,923)     (3,660,994)
                                                               ------------    ------------    ------------

      Net cash used for investing activities                     (1,698,184)     (3,457,170)     (6,460,025)
                                                               ------------    ------------    ------------

Cash flows from financing activities:
    Repayment of capital lease obligation                            (8,928)         (5,512)        (14,440)
    Proceeds from stockholder loans, net                               --           (77,833)           --
    Proceeds from loan payable, net                                 285,407            --           285,407
    Proceeds from issuance of preferred stock                     4,559,500       4,500,000      12,659,500
    Net proceeds from issuance of common stock                      329,099         (18,750)      5,086,706
                                                               ------------    ------------    ------------

      Net cash provided by financing activities                   5,165,078       4,397,905      18,017,173
                                                               ------------    ------------    ------------

Net increase (decrease) in cash                                     (73,107)     (3,592,131)        310,116

Cash and cash equivalents at beginning of period                    383,223       3,975,354             -0-
                                                               ------------    ------------    ------------

Cash and cash equivalents at end of period                     $    310,116    $    383,223    $    310,116
                                                               ============    ============    ============

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

                                      F-9
<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, 1998   June 30, 1997  June 30, 1998
                                                                            -------------   -------------  -------------
                                                                                              (restated)
<S>                                                                           <C>               <C>          <C>
Supplemental disclosures of cash flow information:

         Cash paid for interest                                               $         3,105   $    2,744   $   30,158
                                                                              ===============   ==========   ==========


Supplemental disclosures of noncash investing and financing activities:

         Issuance of common stock and options
           in exchange for services                                           $     1,325,530   $  650,129   $4,615,959
                                                                              ===============   ==========   ==========


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

         Issuance of common stock and other current liability
           in exchange for patent licensing agreement                         $       581,000   $     --     $  581,000
                                                                              ===============   ==========   ==========

         Issuance of common stock for
           compensation                                                       $        54,408   $  918,364   $1,690,936
                                                                              ===============   ==========   ==========

         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   $   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-10

<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 Computed Tomography Laser Mammography ("CTLM(TM)")
prototype has been developed with the use of "Ultrafast Laser Imaging
Technology"TM, and this technology was first introduced at the "RSNA" scientific
assembly and conference during late November 1994. The completed CTLM(TM) device
was exhibited at the "RSNA" conference November 26-30, 1995. The Company
exhibited the pilot production run CTLM(TM) device at the "RSNA" conference held
in Chicago on December 2-6, 1996. A further refined CTLM(TM) device and clinical
images were exhibited at the "RSNA" conference held in Chicago on December 1-5,
1997.

The initial CTLM(TM) 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 Company has completed a series of calibration scans
under an approved Investigational Device Exemption ("IDE") from the Food and
Drug Administration ("FDA"). This IDE authorized 50 patient scans at the Strax
Breast Diagnostic Center and 20 additional patients at its in-house facility.
Prior to the completion of the 1996 IDE, the Company was advised that greatly
improved laser technology would soon be available. The IDE at Strax was halted,
pending receipt of the new laser system. In November 1997 the CTLM(TM) was
removed from Strax and, on May 20, 1998, the Company's termination of the IDE
and its final report was accepted by the FDA.

The Company was granted, in June 1998, its second IDE authorizing the scanning
of 20 patients at the Company's in-house facilities. On September 1 and 10,
1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.

On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending.

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

                                      F-11


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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Use of estimates

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

         (b) Cash and cash equivalents

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

         (c) Inventory

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

         (d) Prototype equipment

         The direct costs associated with the final CTLM(TM) prototypes have
         been capitalized. On June 17, 1996 the Company's Director of Research
         and Development and the Director of Engineering decided to discontinue
         with the development of the then current generation proprietary scanner
         and data collection system (components of the prototype CTLM(TM)
         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 original
         amortization period of two years was increased to five years to provide
         for the estimated period of time the clinical equipment would be in
         service to gain FDA approval.

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

                                                                     (Continued)

                                       F-12

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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (e) Property, equipment and software development costs

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

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

         (f) Research and development

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

         (g) Net loss per share

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

                                                                     (Continued)

                                      F-13


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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (h) Patent license agreement

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

         (i) Stock-based compensation

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

         (j) Long-lived assets

         Effective July 1, 1996, the Company adopted the provisions of Statement
         of Financial Accounting Standards No. 121. "Accounting for the
         Impairment of Long-Lived Assets and for Long-Lived Assets to be
         Disposed Of" ("SFAS 121"). This statement requires companies to write
         down to estimated fair value long-lived assets that are impaired. The
         Company reviews its long-lived assets for impairment whenever events or
         changes in circumstances indicate that the carrying value of an asset
         may not be recoverable. In performing the review of recoverability the
         Company estimates the future cash flows expected to result from the use
         of the asset and its eventual disposition. If the sum of the expected
         future cash flows is less than the carrying amount of the assets, an
         impairment loss is recognized. The Company has determined that no
         impairment losses need to be recognized through the fiscal year ended
         June 30, 1998.

         (k) Income taxes

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

                                                                     (Continued)
                                      F-14


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

                    Notes to Financial Statements (Continued)


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (l) Deemed preferred stock dividend

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

         (m) Reclassification

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



(3)      RESTATEMENT

         The June 30, 1997 and 1996 financial statements have been restated to
         properly reflect the accrual of compensation and recording of deferred
         compensation on the qualified and non-qualified stock options for the
         officers, and the correction of an accumulated depreciation
         understatement of $27,682 for the year ended June 30, 1997. The effect
         on net loss from the compensation restatement was an increase of
         $946,796 for the year ended June 30, 1996 and a decrease of $299,055
         for the year ended June 30, 1997. 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 $283,965 ($.01 per share) and $337,074 ($.02 per share)
         for the fiscal years ended June 30, 1997 and 1996, respectively.

         The Company had been capitalizing the costs associated with the final
         development of the CTLM(TM) software from its initial acquisition phase
         to the software being used in the CTLM(TM) device currently undergoing
         clinical testing. Effective December 31, 1996, the Company restated its
         financial statements to expense all additional costs incurred since the
         acquisition of the original software. Accordingly, the Company 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.

                                                   1997             1996
                                              -------------     -----------

                  Increase in net loss        $     161,583     $ 1,383,532
                                              =============     ===========

                  Per share data:
                      Basic                   $         .01     $       .06
                                              =============     ===========

                      Diluted                 $         .01     $       .06
                                              =============     ===========

                                                                     (Continued)

                                      F-15


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

                    Notes to Financial Statements (Continued)



(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 16)

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

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


(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. To date, management has been able to
raise the necessary capital to reach this stage of product development and has
been able to fund any capital requirements. However, there is no assurance that
once the development of the CTLM(TM) device 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 had issued an irrevocable letter of credit, which matured on October
4, 1997, towards the purchase of laboratory equipment. The letter of credit was
secured with the certificate of deposit.
                                                                     (Continued)

                                      F-16


<PAGE>

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

                    Notes to Financial Statements (Continued)



(7)      INVENTORIES

Inventories consisted of the following:
<TABLE>
<CAPTION>
                                                                        June 30,
                                                              -----------------------------
                                                                 1998              1997
                                                                 ----              ----
<S>                                                           <C>               <C>
                  Raw materials                               $  1,296,864      $         -
                  Work-in process                                1,917,181                -
                                                              ------------     ------------

                                                              $  3,214,045      $         -
                                                              ============      ===========
</TABLE>
(8)      PROPERTY AND EQUIPMENT

The following is a summary of property and equipment, less accumulated
depreciation:
<TABLE>
<CAPTION>
                                                                    June 30,
                                                        ------------------------------
                                                            1998              1997
                                                            ----              ----
<S>                                                      <C>            <C>
         Furniture and fixtures                          $   245,219    $     240,029
         Building and land (See Note 20)                   2,084,085        2,081,399
         Clinical equipment                                        -          250,000
         Computers and equipment                             487,143          389,373
         CTLM(TM) software costs                             352,932          352,932
         Trade show equipment                                153,193          153,193
         Laboratory equipment                                190,031          179,862
                                                     ---------------   --------------

                                                           3,512,603        3,646,788
         Less: accumulated depreciation                     (591,623)        (353,491)
                                                     ---------------   --------------

                  Totals                                 $ 2,920,980    $   3,293,297
                                                     ===============   ==============
</TABLE>

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

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

Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 1998 and 1997 are $138,180 and $225,007,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
                                                                     (Continued)

                                      F-17
<PAGE>
                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                          (a Development Stage Company)

                    Notes to Financial Statements (Continued)



(8)      PROPERTY AND EQUIPMENT (Continued)

Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:

                           Period ended                       Amount
                           ------------                     ---------
                              6/30/98                      $    70,587
                              6/30/97                           70,587
                              6/30/96                           54,345
                              6/30/95                           19,160
                              6/30/94                               73
                                                           -----------

                          Total                            $   214,752
                                                           ===========


(9)      OTHER ASSETS

Other assets consist of the following:
                                                           June 30,
                                                  --------------------------
                                                     1998             1997
                                                     ----             ----
         Patent license agreement                 $   581,000    $         -
         Court bond                                   100,000              -
         Security deposits                              6,080          9,635
         Other                                          1,383              -
                                                  -----------  -------------

                  Totals                          $   688,463    $     9,635
                                                  ===========  =============

During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the CTLM(TM) . Pursuant to
the terms of the agreement, the Company was granted the exclusive right to
modify, customize, maintain, incorporate, manufacture, sell, and otherwise
utilize and practice the Patent, all improvements thereto and all technology
related to the process, throughout the world. The license shall apply to any
extension or re-issue of the Patent. The term of license is for the life of the
Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
3,500,000 shares of common stock and is required to issue an additional
3,500,000 shares in June 1999. The License agreement has been recorded at the
historical cost basis of the chief executive officer, who owns the patent. A
liability has been recorded for the fair market value of the remaining shares to
be issued in June 1999. (see Note 11)
                                                                     (Continued)

                                      F-18


<PAGE>

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

                    Notes to Financial Statements (Continued)


(10)     ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                              June 30,
                                                    ---------------------------
                                                         1998            1997
                                                    ---------------------------

         Accounts payable - trade                   $    774,952    $   276,096
         Preferred stock dividends payable               483,288        168,288
         Accrued property taxes payable                   15,585         14,000
         Insurance financing payable                      10,233              -
         Accrued compensated absences                     38,530         56,632
         Accrued interest                                 18,546
         Payroll taxes payable                             4,250          4,530
         Other                                            18,382              -
                                                    ------------    -----------

                  Totals                            $  1,363,766    $   519,546
                                                    ============    ===========


(11)     OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                       ----------------------------
                                                                           1998             1997
                                                                           ----             ----
<S>                                                                    <C>              <C>
         Patent licensing agreement payable (see Note 9)               $  1,890,000     $         -
         Accrued compensation-stock options                                 265,978         319,547
                                                                       ------------     -----------

                                                                       $  2,155,978     $   319,547
                                                                       ============     ===========
</TABLE>

The Company anticipates that the items included in other current liabilities
will be liquidated through the issuance of common stock within the next fiscal
year.

(12)     LOAN PAYABLE

During the year ended June 30, 1998, the Company borrowed $460,407, from an
unrelated third-party on an unsecured basis. The loan accrues interest at a rate
of 6% per annum and is payable on demand. The Company has repaid $175,000 as of
June 30, 1998. Accrued interest of $18,546 is reflected in accrued expenses on
the balance sheet.

                                                                     (Continued)
                                F-19


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

                    Notes to Financial Statements (Continued)



(13)     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, 1998, approximate future minimum lease payments
under capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
<S>                                                                             <C>
         Year ending June 30,
                  1999                                                          $   12,384
                  2000                                                              12,384
                  2001                                                              12,384
                  2002                                                               4,128
                                                                                ----------

                  Total minimum lease payments                                      41,280
                  Less amount representing interest                                 (5,431)
                                                                                ----------
                  Present value of net minimum lease payments                       35,849

                  Less current portion                                              (9,715)
                                                                                ----------
                  Long-term portion                                             $   26,134
                                                                                ==========
</TABLE>
The Company also leases certain office equipment under an operating lease
expiring in June 2002. 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, 1998 are as follows:

                              Fiscal year ended
                                  June 30,                         Amount
                                  --------                         ------

                                    1999                         $    3,370
                                    2000                              3,676
                                    2001                              3,676
                                    2002                              3,676
                                                                 ----------

                  Total minimum future lease payments            $   14,398
                                                                 ==========

                                                                     (Continued)
                                      F-20

<PAGE>

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

                    Notes to Financial Statements (Continued)



(14)     INCOME TAXES

No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $16,691,000 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 $5,675,000 and $3,755,000 at June 30, 1998 and 1997, 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, 1997 to June 30, 1998 was an increase of
approximately $1,920,000.


(15)     CONVERTIBLE PREFERRED STOCK

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

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

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


                                                                     (Continued)
                                      F-21

<PAGE>


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

                    Notes to Financial Statements (Continued)



(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

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

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

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

                                                                     (Continued)
                                      F-22

<PAGE>

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

                    Notes to Financial Statements (Continued)



(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

As of June 30, 1998, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $483,288 of accrued
dividends payable. (See Note 20)

During the year ended June 30, 1998 the Company issued five Private Placements
of convertible preferred stock (see schedule incorporated into Note 15). The
Private Placements are summarized as follows:

    Series C Preferred Stock
    ------------------------
    On October 6, 1997, the Company finalized the private placement to foreign
    investors of 210 shares of its Series C Convertible Preferred Stock at a
    purchase price of $10,000 per share and warrants to purchase up to 105,000
    shares of the Company's common stock at an exercise price of $1.63 per
    share. The agreement was executed pursuant to Regulation S as promulgated by
    the Securities Act of 1933, as amended.

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

                                                                     (Continued)

                                F-23


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

                    Notes to Financial Statements (Continued)



(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

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

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

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

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

    The Series E Preferred Stock is convertible, at any time, commencing 45
    days from the date of issuance and for a period of three years thereafter,
    in whole or in part, without the payment

                                                                     (Continued)

                                  F-24

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

                    Notes to Financial Statements (Continued)



(15)     CONVERTIBLE PREFERRED STOCK (Continued)

    of any additional consideration, into fully paid and nonassessable shares of
    the Company's no par value common stock based upon the "conversion formula".

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

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

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

    The Series F Preferred Shares pay a dividend of 6% per annum, payable in
    Common Stock at the time of each conversion and are convertible, at any
    time, commencing May 15, 1998 and for a period of two years thereafter, in
    whole or in part, without the payment of any additional consideration, into
    fully paid and nonassessable shares of the Company's no par value common
    stock based upon the "conversion formula". The conversion formula states
    that the holder of the Series F Preferred Stock will receive shares
    determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
    in effect at the time of conversion. The "Conversion Price" shall be equal
    to seventy percent (70%) of the Average Closing Price of the Company's
    common stock.

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

    Series H Preferred Stock
    ------------------------
    On June 2, 1998, the Company finalized the private placement to foreign
    investors of 100 shares of its Series H Convertible Preferred Stock at a
    purchase price of $10,000 per share and warrants to purchase up to 126,500
    shares of the Company's common stock at an exercise price of $1.00 per
    share. The agreement was executed pursuant to Regulation D as promulgated by
    the Securities Act of 1933, as amended.

                                                                     (Continued)

                                      F-25
<PAGE>

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

                    Notes to Financial Statements (Continued)


(15)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

    The Company is currently in technical default of the Registration Rights
    Agreement ("RRA"), which required the Registration Statement to be declared
    effective by October 2, 1998. Pursuant to the RRA, the Company is required
    to pay the Series H holders, as liquidated damages for failure to have the
    Registration Statement declared effective, and not as a penalty, 2% of the
    principal amount of the Securities for the first thirty days, and 3% of the
    principal amount of the Securities for each thirty day period thereafter
    until the Company procures registration of the Securities. (See Note 20)

The agreements provide 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
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.

The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 1998, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:

                                                                     (Continued)
                                      F-26

<PAGE>
<TABLE>
<CAPTION>

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

                                     Notes to Financial Statements (Continued)



(15)     Convertible Preferred Stock (Continued)

                                  Series A            Series B           Series C           Series D            Series E
--------------------------------------------------------------------------------------------------------------------------------

                             Shares      Amount   Shares     Amount   Shares   Amount   Shares   Amount   Shares       Amount
                             ------      ------   ------     ------   ------   ------   ------   ------   ------       ------
<S>                                   <C>                    <C>               <C>                <C>                    <C>
Balance at June 30, 1995          -   $        -       -     $    -        -   $       -      -   $     -        -       $    -

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

Series A conversion          (1,600)  (1,440,000)
                            -------   ----------  ------ ----------    -----  ----------   ----  --------   ------    ---------
Balance at June 30, 1996      2,400    2,160,000

Sale of Series B                                     450  4,500,000

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

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

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

Conversion of preferred
stock                                                                   (210) (2,100,000)   (25) (250,000)     (30)    (300,000)
                            -------   ----------  ------ ----------    -----  ----------   ----  --------   ------    ---------

Balance at June 30, 1998          -   $        -     450 $4,500,000        -  $        -     29  $290,000       24     $240,000
                            =======   ==========  ====== ==========    =====  ==========   ====  ========   ======    =========


Additional information:
----------------------

Discount off market price                     25%               18%                   25%             25%                    25%
                                              ==                ==                    ==              ==                     ==

Fair market value-issue date               $8.31             $3.25                 $1.63           $0.99                  $1.07
                                           =====             =====                 =====           =====                  =====

Deemed preferred stock
dividend                              $1,335,474          $998,120              $705,738        $182,433               $182,250
                                      ==========          ========              ========        ========               ========

(RESTUBBED TABLE)
                                                           Series F           Series H                  Totals
                                                       ---------------------------------------------------------------

                                                       Shares      Amount  Shares       Amount    Shares       Amount
                                                       ------      ------  ------       ------    ------       ------
Balance at June 30, 1995                                   -      $     -       -     $      -         -        $    -

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

Series A conversion                                                                               (1,600)   (1,440,000)
                                                       -----    ---------    ----   ----------  --------    ----------
Balance at June 30, 1996                                                                           2,400     2,160,000

Sale of Series B                                                                                     450     4,500,000

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

Balance at June 30, 1997

Sale of preferred stock
(Series C - H)                                            75      750,000     108    1,080,000       501     5,010,000

Conversion of preferred
stock                                                    (75)    (750,000)                          (340)   (3,400,000)
                                                       -----    ---------    ----   ----------  --------    ----------

Balance at June 30, 1998                                   -    $       -     108   $1,080,000       611    $6,110,000
                                                       =====    =========    ====   ==========  ========    ==========


Additional information:
----------------------

Discount off market price                                             30%                  25%
                                                                      ==                   ==

Fair market value-issue date                                       $1.24                $0.57
                                                                   =====                =====

Deemed preferred stock
dividend                                                        $318,966             $351,628
                                                                ========             ========
                                                                                                            (Continued)
</TABLE>
                                      F-27

<PAGE>

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

                    Notes to Financial Statements (Continued)



(16)     COMMON STOCK

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

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

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

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

                                                                     (Continued)
                                      F-28

<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     COMMON STOCK (Continued)

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

As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends. (See Note 15)

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

During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends, 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-29

<PAGE>

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

                    Notes to Financial Statements (Continued)


(16)     COMMON STOCK (Continued)

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

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

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

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

During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:

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

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

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

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

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

                                                                     (Continued)
                                      F-30

<PAGE>

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

                    Notes to Financial Statements (Continued)



(16)     COMMON STOCK (Continued)

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

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

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

      9. On June 5, 1998, the Company issued to its chief executive officer
      3,500,000 shares ($1,890,000) as consideration for an exclusive Patent
      License Agreement (see Note 8). The market value of the stock on this date
      was $.54 per share. The excess of the fair market value of the common
      stock over the historical cost basis of the patent license was recorded as
      a distribution to the shareholder; recorded as a reduction to additional
      paid-in capital of $3,199,000.

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

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


(17)     STOCK OPTIONS

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

                                                                     (Continued)

                                      F-31
<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)

On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This 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.

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
   Granted                                 220,755      1.95                  750,000         2.75
   Exercised                                     -                            (65,712)         .35
   Canceled                               (175,205)     4.25                        -
                                    --------------                      -------------

Outstanding at June 30, 1998               701,896      2.42                1,884,288         2.66
                                    ==============                      =============

                                                                                       (Continued)

</TABLE>
                                      F-32

<PAGE>

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)

At June 30, 1998 and 1997, 451,513 and 270,526, respectively, of the incentive
stock options were vested and exercisable and 1,884,288 and 1,200,000,
respectively, of the 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 summarizes the option transactions that
have occurred:

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

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

    On March 30, 1995, the Company granted to the director of engineering, a
    non-qualified option to purchase up to 150,000 shares of common stock per
    year, or a total of 450,000 shares, during the period March 30, 1995 and
    ending March 31, 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 75,000 shares of common stock at an exercise
    price of $1.40 per share. The options originally expired on March 30, 1998,
    but were reissued on March 30, 1998 for two years.

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

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

    On September 1, 1995, the Company issued to an employee incentive options to
    purchase 119,047 shares of common stock at an exercise price of $0.84 per
    share. The options expire on September 1, 2000.


                                                                     (Continued)
                                      F-33

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

                    Notes to Financial Statements (Continued)


(17)     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 264,778 shares of common
    stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
    price was established as the fair market value of the common stock at the
    date of grant, therefore no compensation was recorded on the issuance of the
    options. In most cases, one-third of the options vest one year from the
    grant date, with one-third vesting each of the next two years. The options
    expire in ten years from the grant date.

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

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

                                                                     (Continued)
                                      F-34

<PAGE>


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

                    Notes to Financial Statements (Continued)



(17)     STOCK OPTIONS (Continued)

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


The following table summarizes information about all of the stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
                                      Outstanding options                  Exercisable options
                                      -------------------                  -------------------
                                           Weighted
                                            average
          Range of                         remaining        Weighted                    Weighted
      exercise prices    Shares           life (years)     avg. price    Shares        avg. price
      ---------------    ------           ------------     ----------    ------        ----------
<S>    <C>     <C>          <C>           <C>                <C>          <C>            <C>
       $ .35 - 1.25         1,374,720     8.61               $   .83      1,252,490      $   .78
        1.36 - 2.94           975,115     7.85                  1.59        936,552         1.55
        3.10 - 5.08           236,349     7.67                  3.93        146,759         4.34
      ------------------------------------------------------------------------------------------
       $ .35 - 5.08         2,586,184     8.24               $  1.40      2,335,801      $  1.31
      ==========================================================================================
</TABLE>

At June 30, 1998, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing "additional incentive stock options" to
exercise their incentive stock options, and acquire shares of common stock. The
compensation cost that has been charged against income for the officers was
$(53,570) and $475,955 for 1998 and 1997, respectively.

The weighted average Black-Scholes value of options granted during 1998 and 1997
was $1.44 and $2.03 per option, respectively. Had compensation cost for the
Company's fixed stock-based compensation plan been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per share
would have been as indicated below:

                                                                     (Continued)
                                      F-35

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

                    Notes to Financial Statements (Continued)


(17)     STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
                                                                                             From
                                                                                           Inception
                                                                                         (December 10,
                                                       Year Ended        Year Ended         1993) to
                                                     June 30, 1998    June 30, 1997      June 30, 1998
                                                       ----------        ----------         --------
                                                                        (restated)
<S>                                                  <C>               <C>              <C>
         Net loss to common shareholders -
                  As reported                        $  (9,378,102)    $ (8,544,949)    $ (27,055,993)
                                                     =============     ============     =============

                  Pro forma                          $  (9,638,158)    $ (8,758,447)    $ (27,615,569)
                                                     =============     ============     =============

         Basic loss per share -
                  As reported                        $        (.34)    $       (.35)    $       (1.25)
                                                     =============     ============     =============

                  Pro forma                          $        (.35)    $       (.36)    $       (1.28)
                                                     =============     ============     =============

         Diluted loss per share -
                  As reported                        $        (.34)    $       (.35)    $       (1.25)
                                                     =============     ============     =============

                  Pro forma                          $        (.35)    $       (.36)    $       (1.28)
                                                     =============     ============     =============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: no dividend yield;
volatility of 7.1% and .2%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.


(18)     CONCENTRATION OF CREDIT RISK

During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1998 was $350,698.

                                                                     (Continued)
                                      F-36

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

                    Notes to Financial Statements (Continued)



(19)     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. The officer resigned
during the fiscal year ended June 30, 1998.

As additional consideration for his development efforts in the CTLM(TM) device,
the chief executive officer has been granted a "development royalty" which will
be paid based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLM(TM) device. The royalty percent ranges from 2.5% to a
maximum of 5%, based upon varying levels of gross sales. Upon ratification of
the patent licensing agreement, entered into on June 2, 1998, at the Company's
next annual shareholder meeting, the royalties as outlined in that agreement
will take the place of those set forth in the original employment contract. The
royalty percentages in the new agreement start at 10% and decrease to 6% as
gross sales volumes increase.

On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. The contract also provided for the issuance of 75,000 restricted
shares of the Company's common stock. Compensation expense ($1.05 per share), in
the amount of $78,750 was recorded on the transaction.

During the years ended June 30, 1998, 1997 and 1996, employment agreements were
initiated with individuals in various positions currently within the Company.
Annual payments for compensation under these agreements amount to $170,000,
$536,500 and $206,500, respectively, in the aggregate.

                                                                     (Continued)
                                      F-37

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

                    Notes to Financial Statements (Continued)



(19)     COMMITMENTS AND CONTINGENCIES (Continued)

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

During the year ended June 30, 1998, the Company entered into an agreement for a
fifteen million dollar, three year equity line of credit, whereby the Company,
as it deems necessary, may raise capital through the sale of its common stock to
a consortium of prominent European banking institutions. The shares will be
purchased by the consortium at a discount from the fair market value of the
Company's common stock.


(20)     SUBSEQUENT EVENTS

The Company has selected Nassau County Medical Center of East Meadow, Long
Island, New York, to be its first external clinical site. The Company has
submitted its Investigational Device Exemption ("IDE") protocol to the
hospital's Institutional Review Board, which is scheduled to meet on October 14,
1998 to review the IDE protocol. Upon approval, documents will be forwarded to
the Food and Drug Administration ("FDA") for their approval. The Company will be
contacted by the FDA granting permission to proceed with the clinical trials
described in the IDE protocol.

The Company has applied for a conventional first mortgage, of up to $2,000,000,
on its office and manufacturing facility located in Plantation, Florida. At
present, a commitment letter with respect to this mortgage is still pending.

During the period subsequent to the end of the fiscal year, the Company has
borrowed approximately $410,000 in three separate transactions. The Company
issued 480,000 shares of common stock in conjunction with the borrowings.

On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Company is in the process of completing the revisions to the Information
Statement. The Majority Shareholders consent with respect to the Amendment will
take effect twenty days from the notification that the SEC has no further
comments with respect to the Information Statement.

                                                                     (Continued)
                                      F-38

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

                    Notes to Financial Statements (Continued)



(20)     SUBSEQUENT EVENTS (Continued)

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

The Company also entered into a Subscription Agreement with the Purchaser
whereby the Company agreed to issue 138 shares of its Series I, 7% Convertible
Preferred Stock. The consideration for the subscription agreement was paid as
follows:

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

In addition, the Company entered into a Subscription Agreement with the
Purchaser whereby the Purchaser agrees to purchase $2,750,000 of the Company's
Debentures. The Debentures pay a 7% premium, to be paid in cash, or freely
trading common stock in the Company's sole discretion, at the time of each
conversion ("the Dividend Payment Date"). The Debentures are subject to
automatic conversion at the end of the two years from the date of issuance, at
which time all Debentures outstanding will be converted based upon a formula
detailed within the Debenture document. The Debentures are secured by a mortgage
on the Company's land and building. The mortgage shall only be released upon the
Company meeting certain conditions described in the mortgage document. The funds
are available to the Company as follows:

         1.  The Purchaser has irrevocably agreed to purchase $1,100,000 of the
         Debentures, which will net the Company proceeds of $1,000,000 after
         fees.

                                                                     (Continued)
                                      F-39

<PAGE>

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

                    Notes to Financial Statements (Continued)


(20)     SUBSEQUENT EVENTS (Continued)

         2. The Company may draw a second $825,000 ($750,000 net of fees)
         anytime thirty days after the effective date of the Registration
         Statement, as long as the Company maintains an average bid price of
         $.45 for the ten trading days immediately prior to the Company's
         request for the funding.
         3. The Company may draw a final $825,000 ($750,000 net of fees) anytime
         sixty days after the effective date of the Registration Statement, as
         long as the Company maintains an average bid price of $.45 for the ten
         trading days immediately prior to the Company's request for the
         funding.

The Series I Preferred and the Debenture also limits the Holders to ownership of
not more than 4.99% of the Company's outstanding common stock at any one time.
The shares underlying the Series B Preferred, the Series I Preferred and the
Debentures have registration rights and will be registered in the Company's S-2
Registration Statement presently pending with the Commission.

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

Pursuant to the terms of the Registration Rights Agreement ("RR Agreement")
between the Company and the Series H Holder, the Company has registered that
number of shares that would be required to be issued if the Series H Preferred
Stock were converted. The Company is in technical default of the "RR Agreement",
which required the Registration Statement to be declared effective by October 2,
1998. The Company filed Amendment No. 1 to the Registration Statement on
November 16, 1998. The "RR Agreement" requires the Company to pay the Series H
Holder in cash or in stock, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, two (2%)
percent of the principal amount of the Securities for the first thirty days, and
three (3%) percent of the principal amount of the Securities for each thirty day
period thereafter until the Company procures registration of the Securities. The
Company is presently unable to comply with the liquidated damage provision
payments and no assurances can be given that it will be able to do so in the
future.

Management of the Company has determined that a reasonable estimate of potential
damages to the Company to defend these defaults would be approximately $100,000,
and this amount has been accrued by the Company during October 1998. In
addition, the Company has accrued $125,000 as potential liquidated damages
resulting from the delay in effecting the Registration Statement, through
February 28, 1999. The Company has issued 424,242 shares of its common stock as
partial payment of the liquidated damages to the Series H holders.

                                      F-40


<PAGE>

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

                    Notes to Financial Statements (Continued)


(20)     SUBSEQUENT EVENTS (Continued)

On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Convertible Preferred Stock at a purchase
price of $10,000 per share and two year warrants to purchase 65,625 shares of
the Company=s common stock at an exercise price of $.50 per share. The agreement
was executed pursuant to Regulation D as promulgated by the Securities Act of
1933, as amended.

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

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

Pursuant to the Registration Rights Agreement (ARRA@) the Company is required to
register 100% of the number of shares that would be required to be issued if the
Preferred Stock were converted on the day before the filing of the Registration
Statement. In the event the Registration Statement is not declared effective
within 120 days, the Series G Holders have the right to force the Company to
redeem the Series G Preferred Stock at a redemption price of 120% of the face
value of the preferred stock.

As of March 31, 1999, the redemption amount of the Series G Preferred Stock is
$380,000.


                                      F-41