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

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

                    For the fiscal year ended: June 30, 1997

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

The number of shares outstanding of each of the issuer's classes of common
equity, as of June 30, 1997: 24,905,084. The number of shares outstanding of the
issuer's class of preferred equity (Series B Convertible Preferred), as of June
30, 1997: 450.
                       Documents Incorporated By Reference

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



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     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.

                                    BUSINESS
Overview

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

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

      During the first year of operations, the Company researched the
interaction between high speed, rapid pulsed (Ti:Sapphire) laser technology and
various detection technologies associated with standard computed tomographic
("CT") schemes. Using this research the Company developed the first prototype of


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

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

      The competition for developing a commercial device utilizing computed
tomography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's CTLMTM
device utilizes. A brief list of the most prestigious of these institutions
includes the University of Pennsylvania, The City College of New York, and
University College London. Two of these institutions have granted licenses on
certain patented technologies to two companies: University of Pennsylvania -
Non-Invasive Technologies; City College of New York - MediScience, Inc.

      The market in which the Company intends to participate is highly
competitive. Many companies may succeed in developing products that are more
effective or less costly than the Company's products or such companies may be
successful in manufacturing and marketing their products than the Company.
Physicians using imaging equipment such as x-ray mammography equipment,
ultrasound or high frequency ultrasound systems, Magnetic Resonance Imaging


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(MRI) systems, and thermography, diaphonography and transilluminational devices
may be reluctant to the CTLMTM. Currently, mammography is the most popular
choice for the detection of breast cancer. The Company's ability to sell the
CTLMTM device to medical facilities will, in part, be dependent on the Company's
ability to demonstrate the clinical utility of the CTLMTM device as an adjunct
to mammography and physical examination as well as the CTLMTM's advantages over
other available diagnostic tests.

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

Breast Cancer

      Background

         Breast cancer is one of the most common cancers among women and,
notwithstanding the currently available detection modalities, is the leading
cause of death among women aged 35 to 45. According to the American Cancer
Society ("ACS"), (i) approximately one in eight women in the United States will
develop breast cancer during her lifetime; (ii) Nationwide it is estimated that
approximately 43,900 women will die from this disease in 1997; (iii) In the
United States in 1997 approximately 180,200 women will be diagnosed with breast
cancer. Excluding skin cancers, the breast is the most frequent site of cancer
among American women accounting for 32% of incident cancers and 17% of cancer
deaths; (iv) Breast cancer is the second leading cause of death for American
women following lung cancer; (vi) In Europe in 1990, approximately 170,000 cases
of cancer were discovered, with an estimated 73,000 deaths; and (vii) The annual
cost of breast cancer management in the United States alone is approximately $25
billion.

         There is widespread agreement within the health care industry that
screening for breast cancer, when combined with appropriate follow-up, will
reduce mortality from the disease. According to the National Cancer Institute
("NCI"), the five-year survival rate decreases from 98% to 72% after the cancer
has spread to the lymph nodes, and to 18% after it has spread to other organs
such as the lung, liver or brain. Extensive documentation demonstrates that


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mammography misses, on average, 15%-20% of breast cancer 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 the appearance of a physical
symptom, such as a palpable lesion, pain or nipple discharge, which was
discovered through self or physical examination (approximately seven million) or
a nonpalpable lesion detected by screening x-ray mammography (approximately one
million). Once a physician has identified a suspicious lesion in a woman's
breast, the physician may recommend further diagnostic procedures, including
diagnostic mammography and ultrasound or a minimally invasive procedure such as
fine needle aspiration or large core needle biopsy. In each case, the potential
benefits of additional diagnostic testing must be balanced against the costs,
risks and discomfort to the patient associated with undergoing the additional
procedures. Each of the currently available non-surgical modalities for breast
cancer detection has various clinical limitations. While the minimally invasive
procedures provide more diagnostic information, there is still a 4% miss-rate
factor present.

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

Screening and Diagnostic Modalities


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      Physical Examination

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

      Mammography

         Mammography is a non-invasive x-ray modality commonly used for both
routine breast cancer screening and as a diagnostic tool. A mammogram produces
and image of the internal structure of the breast which is intended to display
lesions as white spots against the black and/or white background of normal
tissue. In a screening mammogram, radiologists seek to detect suspicious
lesions, while in a diagnostic mammogram radiologist seek to characterize
suspicious lesions. Mammograms require subjective interpretation by a
radiologist and are often uncomfortable for the patient. Because x-ray
mammography exposes the patient to radiation, the ACS recommends mammograms be
limited to one per year. In addition, x-ray mammography is considered to be less
effective for women under the age of 50 who generally have radiographically
dense breast tissue. The average cost of a diagnostic mammogram is approximately
$55 to $200 per procedure (an average cost of $113) and requires the use of
capital equipment ranging in cost from approximately $75,00 to $225,000. It is
expected that the CTLMTM device will cost approximately $300,000 and the cost of
a bilateral exam will be $125 to $150. The foregoing average cost figures are
based on a survey of 23 ACR and FDA certified facilities in Broward County,
Florida, conducted during the month of March, 1997.Due the high capital costs
associated with mammography equipment and the specialized training necessary to
operate the equipment and to interpret radiographic images, mammography is
usually available only at specialty clinics or hospitals.

      Ultrasound

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



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The foregoing average cost figures are based on a survey of 23 ACR and FDA
certified facilities in Broward County, Florida, conducted during the month of
March, 1997. Again, it is expected that the CTLM device will cost approximately
$300,000 and the cost of an exam will be $125 to $150. Like mammography,
ultrasound is generally performed at specialty clinics or hospitals.

      The Computed Tomography Laser Mammography Device

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

      Biopsy

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

      Comparison to Existing Diagnostic Modalities

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

           Clinical efficacy of conventional mammography diminishes
proportionately with the abundance of fibroglandular breast tissue. Based upon
this fact, limited interpretability of a mammogram increases the risk that a
lesion may be overlooked, and diagnosis and treatment may be delayed; thus
threatening the patient's survival probability. Vigorous compression of breast


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

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

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

         The Company believes that the shortcomings of current breast cancer
management which include discomfort and exposure to radiation represent a
significant market opportunity for an objective technology which does not have
these shortcomings. The use of the CTLM device to detect breast cancer is
believed to be especially promising for women between the ages of 20 to 50 (over
50 million women in the United States) for whom x-ray mammography has lower
efficacy. These women often present diffuse palpable benign breast conditions
which can mask malignancies or pre-malignant conditions.

Regulatory and Clinical Status

           In order to sell the CTLM device commercially in the United States
the Company must obtain marketing clearance from the FDA. The Company plans to
file a PMA with the FDA to obtain marketing clearance. A PMA application must be
supported by extensive data, including preclinical 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


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will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.

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

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

         o     The device addresses a condition which is life threatening or
               irreversibly debilitating, and provides for clinically important
               earlier diagnosis or significant advances in safety and/or
               effectiveness over existing alternatives.

         o     The device represents a clear clinically meaningful advantage
               over existing technology, defined as having major (not
               incremental) increased effectiveness or reduced risk compared to
               existing technology.

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

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

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


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

         Sales and Marketing

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

      Known Uncertainties

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

        The Company has a limited history of operations. Since its inception in
December 1993, the Company has engaged principally in the development of the
CTLMTM device. The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At June 30, 1997, the Company
had an accumulated deficit of $16,288,314. Such losses have resulted principally
from costs associated with the Company's operations. The Company expects
operating losses will increase for at least the next several years as total
costs and expenses continue to increase due principally to the anticipated
commercialization of the CTLMTM device, development of, and clinical trials for,
the proposed CTLMTM device 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
is highly uncertain. See "Management's Discussion and Analyses of Financial
Condition and Results of Operations."


      Government Regulation



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


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government regulations or polices could prevent or delay regulatory approval of
the Company's products. Certain material changes to medical devices also are
subject to FDA review and clearance or approval. There can be no assurance that
the Company will be able to obtain FDA approval of a PMA application for the
CTLMTM device on a timely basis, or at all, and delays and delays in receipt of
or failure to obtain such approvals or clearances, the loss of previously
obtained approvals, or failure to comply with existing or future regulatory
requirements that would have material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Government
Regulation."


      Early Stage of Product Development

        The Company's proposed products and future product development efforts
are at an early stage. Accordingly, there can be no assurance that any of the
Company's proposed products will be found to be safe and effective, can be
developed into commercially viable products, can be manufactured on a large
scale or will be economical to market, or will achieve or sustain market
acceptance. There is, therefore, a risk that the Company's product development
efforts will not prove to be successful.


      Dependence Upon U.S. Pre-Market Approval

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


      Dependence on Market Acceptance

        There can be no assurance that physicians or the medical community in
general will accept and utilize the CTLMTM device. The extent that, and rate of
which, the CTLMTM 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 CTLMTM device, the advantage of the CTLMTM device over
existing technology and cancer detection methods, third-party reimbursements
practices and the Company's manufacturing, quality control, marketing and sales
efforts. Failure of the Company's products to gain market acceptance would have
a material adverse effect on the Company's business, financial condition and


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<PAGE>


results of operations. See "Business - Sales and Marketing," "Business -
Manufacturing" and "Business - Reimbursement."


      Limited Marketing and Sales Capability

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


      Limitation on Third-Party Reimbursement; Health Care Reform

        In the United States, suppliers of health care products and services are
greatly affected by Medicare, Medicaid and other government insurance programs,
as well as by private insurance reimbursement programs. Third-party payors
(Medicare, Medicaid, private health insurance companies and other organizations)
may affect the pricing or relative attractiveness of the Company's products by
regulating the level of reimbursement provided by such payors to the physicians
and clinics utilizing the CTLMTM device or by refusing reimbursement. If
examinations utilizing the Company's products were not reimbursed under these
programs, the Company's ability to sell its products may be materially and/or
adversely affected. There can be no assurance that third-party payors will
provide reimbursement for use of the Company's products. Several states and the
U.S. government are investigating a variety of alternatives to reform the health
care delivery system and further reduce and control health care spending on
health care items and services, limit coverage for new technology and limit or
control the price health care providers and drug and device manufacturers may
charge for their services and products, respectively. If adopted and
implemented, such reforms could have material adverse effect on the Company's
business, financial condition and results of operations. In international
markets, reimbursement by private third-party medical insurance providers,
including governmental insurers and independent providers, varies from country
to country. In certain countries, the Company's ability to achieve significant


                                       13
<PAGE>


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. See "Business -
Reimbursement."


      Uncertain Ability to Meet Capital Needs

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


      Dependence on Qualified Personnel

        Due to the specialized scientific nature of the Company's business, the
Company is highly dependent upon its ability to attract and retain qualified


                                       14
<PAGE>


scientific, technical and managerial personnel. Therefore the Company has
entered into employment agreements with certain of its executive officers and
employees. The loss of the services of existing personnel as well as the failure
to recruit key scientific, technical and managerial personnel in a timely manner
would be detrimental to the Company's research and development programs and to
its business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. See "Business - Employees and Management."


      Competition

        The market in which the Company intends to participate is highly
competitive. Many of the companies in the cancer diagnostic and screening
markets have substantially greater technological, financial, research and
development, manufacturing, human and marketing resources and experience than
the Company. Such companies may succeed in developing products that are more
effective or less costly than the company's products or such companies may be
successful in manufacturing and marketing their products than the Company.
Physicians using imaging equipment such as x-ray mammography equipment,
ultrasound or high frequency ultrasound systems, Magnetic Resonance Imaging
(MRI) systems, and thermography, diaphonography and transilluminational devices
may not use the company's products. Currently mammography is employed widely and
the Company's ability to demonstrate the Company's ability to sell the CTLMTM
device to medical facilities will, in part, be dependent on the Company's
ability to demonstrate the clinical utility of the CTLMTM device as an adjunct
to mammography and physical examination and its advantages over other available
diagnostic tests. The competition for developing a commercial device utilizing
computed tomography techniques and laser technology is difficult to ascertain
given the proprietary nature of the technology. There are a significant number
of academic institutions involved in various areas of research involving
"optical medical imaging" which is a shorthand description of the technology the
Company's CTLMTM device utilizes. A brief list of the most prestigious of these
institutions includes the University of Pennsylvania, The City College of New
York, and University College London. Two of these institutions have granted
licenses on certain patented technologies to two companies: University of
Pennsylvania - Non-Invasive Technologies; City College of New York -
MediScience, Inc.


      Technical Obsolescence


                                       15
<PAGE>


        Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products obsolete. There can be no assurance that the
development of new types of diagnostic medical equipment or technology will not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business - Competition."


      Reliance on International Sales

        The Company intends to commence international sales of the CTLMTM device
in Europe and Asia prior to commencing commercial sales in the United States,
where sales cannot occur unless and until the Company receives pre-market
approval from the FDA. Thus, until the Company receives pre-market approval from
the FDA to market the CTLMTM device, as to which there can be no assurance, the
Company revenues, if any, will be derived from sales to international
distributors. A significant portion of the Company's revenues, therefore, may be
subject to the risks associated with international sales, including economical
and political instability, shipping delays, fluctuation of foreign currency
exchange rates, foreign regulatory requirements and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a timely basis. Future imposition of, or significant increases in
the level of, customs duties, export quotas or other trade restrictions could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business - Sales and Marketing," the regulation
of medical devices, particularly in Europe, continue to develop and there can be
no assurance that new laws or regulations will not have an adverse effect on the
Company.


      Product Liability

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


         Employees

      As of September 24, 1997, the Company had 31 full-time employees,
including its three executive officer, and 2 part-time employees. A majority of


                                       16
<PAGE>


the Company's employees (22) are employed in the areas of scientific and product
research and development.


Item 2.  Description of Property

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

Item 3.  Legal Proceedings

         On July 10, 1997, the Company filed an action in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, case no. 97-10533, against
Mr. Valey Kamalov ("Kamalov"). The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Upon filing the complaint, the Company sought and was granted
injunctive relief against Kamalov during the pendency of the proceedings.

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

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

                NONE

                                     PART II

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

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


                                       17
<PAGE>


      Quarter Ending            High Bid             Low Bid
      Fiscal Year 1995
      ----------------
      September/1994            $1.38                $1.00
      December/1994             $1.44                $ .75
      March/1995                $2.19                $ .50
      June/ 1995                $2.12                $1.46
      Fiscal Year 1996
      ----------------
      September/1995            $ .78                $ .71
      December/1995             $3.15                $ .75
      March/1996                $8.25                $8.00
      June/ 1996                $3.90                $3.87
      Fiscal Year 1997
      ----------------
      September/1996            $3.93                $2.25
      December/1996             $3.93                $1.43
      March/1997                $4.12                $2.43
      June/1997                 $3.06                $2.69

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


Item 6.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations

Results of Operations

Twelve Months Ended June 30, 1997 and June 30, 1996. General and administrative
expenses in the aggregate during the twelve months ended June 30, 1997, were
$2,212,998 representing a decrease of $486,992 from $2,699,990 during the twelve
months ended June 30, 1996. The decrease is due primarily to a substantial
decrease of professional fees as a result of hiring employees and non-recurring
expenses associated with the clinical sites and attendant expenses.
      Compensation and related benefits during the twelve months ended June 30,
1997, were $3,934,294 representing an increase of $2,484,063 from $1,450,231
during the twelve months ended June 30, 1996. The increase in compensation and
related benefits is due to the hiring of an additional 10 employees and the
exercise of incentive and non-qualified stock options by its employees.
      Research and development expenses during the twelve months ended June 30,
1997, were $1,682,064 representing an decrease of $100,865 from $1,782,929
during the twelve months ended June 30, 1996. This decrease is due primarily to
finalizing certain components of the CTLM device.

      Net interest income during the twelve months ended June 30, 1997, was
$114,228 representing an increase of $55,920 from $58,308 during the twelve


                                       18
<PAGE>


months ended June 30, 1996. This increase is due to an increase of funds
invested by the Company.
      Depreciation and amortization expenses during the twelve months ended June
30, 1997, were $202,365 representing an increase of $90,693 from $111,672 during
the twelve month period ended June 30, 1996. This increase is due primarily to
the purchase of the Company's current facility and the attendant improvements.

Balance Sheet Data

Liquidity and Capital Resources

      The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $12,8586,000. In
March, 1996 the Company received net proceeds of approximately $3,600,000 from
the private placement of its Series A Convertible Preferred Stock offering,
approximately $1,600,000 from the private placement of its common stock pursuant
to Regulation S of the Securities Act of 1933, as amended, and approximately
$2,000,000 from the exercise of options that were granted for services rendered.
In December, 1996 the Company received net proceeds of approximately $4,500,000
from the private placement of Series B Convertible Preferred Stock and Warrants
pursuant to Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.

      The Company's combined cash and cash equivalents totaled $383,223 at June
30, 1997, representing a decrease of $3,592,131 from $3,975,354 at June 30,
1996. The decrease in cash and cash equivalents is due to continuing operations.

      The Company's prototype equipment totaled $1,216,585 at June 30, 1997 and
$575,338 at June 30, 1996. All direct costs associated with the prototype
equipment have been capitalized. The increase in prototype equipment is due to
an increase in the development of the Computed Tomography Laser Mammography
(CTLMTM) device and the manufacture of five (5) devices to be placed into
clinical sites.

      The Company's property and equipment, net, totaled $3,320,979 at June 30,
1997 and $657,132 at June 30, 1996. This increase is due to the purchase of a
building and the attendant improvements.

      The Company does not expect to generate a positive internal cash flow for
at least the next twelve (12) months due to the expected increase in spending
for research and development and the expected costs of commercializing it
initial product, the CTLM device. The Company will require additional funds for
its research and development, pre-clinical and clinical testing, operating
expenses, Food and Drug Administration regulatory processes, and manufacturing
and marketing programs. Accordingly, the Company will be required to raise
additional funds prior to the end of calendar year 1997 in order to continue
operations. The Company plans to raise additional funds by either: entering into
a transaction(s) to privately place equity, either common or preferred stock, or
debt securities, or combinations of both; or, placing equity into the public


                                       19
<PAGE>


market through an underwritten secondary offering. At the present time, the
Company continues to receive indications of interest to provide this additional
funding. The Company, however, continues to review and balance these indications
of interest and funding requirements against its strategic product development
goals.

     On September 24, 1997, the Corporation entered into an agreement with a 
merchant banker for the sale, pursuant to Regulation S, of up to a total of 200
shares of Series C Convertible Preferred Stock ("Preferred") and Warrants to 
purchase up to 100,000 shares of the Company's common stock, exercisable at a 
price equal to the Closing bid price of the common stock as of the Closing Date
of the Regulation S Sale (the "Closing Date"), for a total amount of up to 
$2,000,000.  The Preferred is convertible at 75% of the average closing price
of the Company's common stock for the five-day trading period ending on the day 
prior to the date of conversion but in no event will the conversion price be
greater than 75% of the average price on the Closing Date, as determined by the 
average price over the five consecutive trading days ending the trading day 
prior to the Closing Date.  See Financial Statements Note (18) Subsequent Event.


Item 8.  Financial Statements and Supplementary Data

      Index to Consolidated Financial Statements

                                  Page
                                  ----
      Independent Auditor's Report                              F-1

      Financial Statements

           Balance Sheet                                        F-3

           Statement of Operations                              F-4

           Statement of Stockholders' Equity                    F-5

           Statement of Cash Flows                              F-8

           Notes to Financial Statement                         F-10

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

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

                                    PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons; and
         Compliance With Section 16(a) of the Exchange Act.

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

Business Experience

      Richard J. Grable, 55


                                       20
<PAGE>


         Mr. Grable has served as Chief Executive Officer and a Director of the
Company since 1994.

         From March, 1994, to the Present: Mr. Grable is Chief Executive Officer
and a Director of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily responsible
for the development of the CTLMtm device.

         From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Fla., a
manufacturer of breast imaging systems.

         From March, 1992, to December, 1993: Mr. Grable was a an engineering
consultant for Lintronics Technologies, Inc., Tampa, Fla., a manufacturer of
breast imaging systems.

         From August, 1991 to February, 1992: Mr. Grable was an engineering
consultant for Audio Intelligence Devices, Inc., Ft. Lauderdale, Fla., a
manufacturer of surveillance devices.

         From May, 1990, to July, 1991: Mr. Grable was an engineering consultant
for Telmed, Inc., Ft. Lauderdale, Fla., a software and electronic design
company.

      Linda B. Grable, 60

         Mrs. Grable has served as President and Chairman of the Board of
Directors of the Company since 1994.

         From March, 1994, to Present: Mrs. Grable is President and a Director
of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic
imaging systems.

         From September, 1991, to February, 1994: Mrs. Grable was President and
Director of VCC Communications, Inc., Tampa, Fla., a manufacturer of voltage
controlled oscillators (VCO).

         From August, 1988, to April, 1991: Mrs. Grable was President of
Lintronics International Ltd., Inc., Plantation, Fla., a manufacturer of breast
imaging systems.


      Allan L. Schwartz, 55

         Mr. Schwartz has served as Executive Vice-President, Chief Financial
Officer and a Director of the Company since 1994.

         From March, 1994, to Present: Mr. Schwartz is Executive Vice-President
and Chief Financial Officer of Imaging Diagnostic Systems, Inc., Sunrise, Fla.,
a manufacturer of diagnostic imaging systems.

         From April, 1993, to February, 1994: Mr. Schwartz was President and
Director of DynaMed Technologies, Inc., Coral Springs, Florida, a company that
developed neural network software for use with laser imaging systems.


                                       21
<PAGE>


         From August, 1991, to April, 1993: Mr. Schwartz was President and
Director of Tron Industries, Inc., North Lauderdale, Florida, a developer of low
voltage neon novelty products.

         From April, 1991, to July, 1991: Mr. Schwartz worked as a manufacturing
consultant for SE Enterprises, Miami, Fla., a manufacturer of prototype homes.

      Peter S. Knezevich, 41

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

      Robert H. Wake, 48

         From April, 1995, to Present: Mr. Wake is Director of Engineering for
Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic
imaging systems.

         From January, 1994, to March, 1995: Mr. Wake was a consultant to
various companies in 3-D computer imaging.

         From October, 1986, to December, 1993: Mr. Wake founded and was
President of Reality Imaging Corporation, Solon, Ohio, a manufacturer of 3-D
computer imaging systems. Mr. Wake invented the Voxel Flinger 3-D imaging
technology.

Family Relationships

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

Item 10.  Executive Compensation

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

Item 11. Security Ownership of Certain Beneficial Owners and Management.

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


                                       22
<PAGE>


Item 12. Certain Relationships and Related Transactions

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


Item 13.   Exhibits and Reports on Form 8-K

A)    Exhibits included herein:

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

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

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

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

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

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

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

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

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

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

           (10).2        Incentive Stock Option Plan**

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

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

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

           (11)          Schedule of computation of net loss per share.


                                       23
<PAGE>


 *Filed as an Exhibit to the Company's Form 10-KSB for the year ending June 30,
1996.

** Filed as an exhibit to the Company's Form 10-SB, as amended, file number
0-26028, filed on May 6, 1995.


B) Reports on Form 8-K

                  99.1     Report dated June 12, 1997.



                                       24
<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,
                  Director, and President.
                  September 26, 1997

         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.

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

         Date: September 26, 1997


         By:      /s/Richard J. Grable
                  --------------------
                  Richard J. Grable
                  Director and Chief Executive Officer

         Date: September 26, 1997


         By:      /s/Allan L. Schwartz
                  --------------------
                  Allan L. Schwartz
                  Director and Executive Vice-President

         Dated: September 26, 1997



                                       25

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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


We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1997 and 1996 and for the period December 10, 1993 (date of
inception) to June 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 1997 and 1996 and the results
of its operations and its cash flows for the years ended June 30, 1997 and 1996
and for the period December 10, 1993 (date of inception) to June 30, 1997 in
conformity with generally accepted accounting principles.

As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the change in accounting for software
development costs.

The Company is in the development stage as of June 30, 1997 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.


                                      F - 1

<PAGE>


The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


/s/
Margolies, Fink and Wichrowski


Certified Public Accountants
Pompano Beach, Florida
August 6, 1997


                                      F - 2

<PAGE>



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

                                  Balance Sheet

                             June 30, 1997 and 1996


                                     ASSETS

<TABLE>
<CAPTION>

                                                                                   1997             1996
                                                                               -----------      -----------
<S>                                                                            <C>              <C>
Current assets:
  Cash                                                                         $   383,223      $ 3,975,354
  Restricted certificate of deposit                                                103,500             --
  Loans receivable-other                                                            10,073             --
  Prepaid expenses                                                                  56,792           15,900
                                                                               -----------      -----------
         Total current assets                                                      553,588        3,991,254
                                                                               -----------      -----------

Property and equipment, net                                                      3,320,979          657,132
Prototype equipment                                                              1,216,585          575,338
Other assets                                                                         9,635           53,010
                                                                               -----------      -----------

                                                                               $ 5,100,787      $ 5,276,734
                                                                               ===========      ===========


             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                                        $   519,546      $   205,750
  Current maturities of capital lease obligations                                    8,928             --
  Stockholder loans                                                                    --            77,833
                                                                               -----------      -----------

         Total current liabilities                                                 528,474          283,583
                                                                               -----------      -----------

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

Commitments and contingencies

Stockholders' equity:
  Convertible preferred stock (Series A), 5% cumulative annual dividend,
   no par value; authorized 2,000,000 shares,
   issued 0 and 2,400 shares, respectively                                             --         2,160,000
  Convertible preferred stock (Series B), 7% cumulative annual
   dividend, no par value; authorized 450 shares,
   issued 450 and 0 shares, respectively                                         4,500,000             --
  Common stock, no par value; authorized 48,000,000 shares,
   issued 24,905,084 and 23,023,789 shares, respectively                        14,662,966        9,941,066
  Additional paid-in capital                                                     1,815,496        1,372,540
  Deficit accumulated during the development stage                             (16,288,314)      (8,186,146)
                                                                               -----------      -----------

                                                                                 4,690,148        5,287,460
Less: subscriptions receivable                                                     (35,559)         (18,684)
      deferred compensation                                                       (118,125)        (275,625)
                                                                               -----------      -----------

         Total stockholders' equity                                              4,536,464        4,993,151
                                                                               -----------      -----------

                                                                               $ 5,100,787      $ 5,276,734
                                                                               ===========      ===========

</TABLE>

                    See accompanying notes to the financials.

                                      F - 3

<PAGE>



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

                            Statements of Operations


<TABLE>
<CAPTION>

                                                                                              From
                                                                                            Inception
                                                                                          (December 10,
                                                          Year Ended        Year Ended       1993) to
                                                        June 30, 1997     June 30, 1996   June 30, 1997
                                                        -------------     -------------   --------------
<S>                                                    <C>               <C>              <C>
Compensation and related benefits:
  Administrative and engineering                       $  3,776,794      $ 1,217,731      $  5,247,472
  Research and development                                  616,886          239,669           968,511
Research and development expenses                         1,065,178        1,543,260         2,664,172
Advertising and promotion expenses                          166,520          272,698           544,395
Selling, general and
  administrative expenses                                   528,753          297,229           905,385
Clinical expenses                                            33,506          317,310           350,816
Consulting expenses                                         764,364          832,075         1,715,908
Insurance costs                                             121,287           34,097           166,242
Professional fees                                           178,402          630,284           897,105
Stockholder expenses                                         20,902             --              20,902
Trade show expenses                                         154,782           85,623           289,276
Travel and subsistence costs                                195,585           99,826           345,600
Rent expense                                                 48,897          130,848           221,248
Interest expense                                              2,744             --              27,053
Depreciation and amortization                               202,365          111,672           364,214
Amortization of deferred compensation                       157,500          232,500           504,375
Interest income                                            (116,972)         (58,308)         (175,280)
                                                       ------------      -----------      ------------
                                                          7,917,493        5,986,514        15,057,394
                                                       ------------      -----------      ------------
     Net loss                                            (7,917,493)      (5,986,514)      (15,057,394)

Dividends on cumulative preferred stock:
 From discount at issuance                                 (714,155)        (998,400)       (1,712,555)
 Earned                                                    (184,675)         (47,845)         (232,520)
Amortization of preferred stock discount                    714,155             --             714,155
                                                       ------------      -----------      ------------
     Net loss applicable to common shareholders        $ (8,102,168)     $(7,032,759)     $(16,288,314)
                                                       ============      ===========      ============


Net loss per common share:

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


 Primary net loss per common share                     $       (.33)     $      (.33)     $       (.81)
                                                       ============      ===========      ============

</TABLE>


               See accompanying notes to the financial statements.

                                      F - 4

<PAGE>


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

                       Statements of Stockholders' Equity

          Period December 10, 1993 (date of inception) to June 30, 1997


<TABLE>
<CAPTION>
                                                                                                               
                                                   Preferred Stock (Series A)    Preferred Stock (Series B)                         
                                                  ----------------------------  ----------------------------   
                                                     Number of                    Number of                     
                                                      Shares       Amount          Shares       Amount        
                                                    ----------   ----------     -----------   -----------     

<S>                                                    <C>         <C>             <C>         <C>      
Balance at December 10, 1993(date of inception)         -0-    $    -0-             -0-     $    -0-       
                                                    ----------  -----------     -----------  -----------
                                                                    
Issuance of common stock, restated for reverse                     
 stock split                                             -           -               -            -        
                                                                                     
Acquisition of public shell                              -           -               -            -        
                                                                                     
Net issuance of additional shares of stock               -           -               -            -        
                                                                                     
Common stock sold                                        -           -               -            -        
                                                                                     
Net loss                                                 -           -               -            -        
                                                    ----------  -----------     -----------  -----------
                                                                                     
Balance at June 30, 1994                                 -           -               -            -        
                                                                                     
Common stock sold                                        -           -               -            -        
                                                                                      
Common stock issued in exchange for services             -           -               -            -        
                                                                                     
Common stock issued with employment agreement            -           -               -            -        
                                                                                     
Common stock issued for compensation                     -           -               -            -        
                                                                                     
Stock options granted                                    -           -               -            -        
                                                                                     
Amortization of deferred compensation                    -           -               -            -        
                                                                                     
Forgiveness of officers' compensation                    -           -               -            -        
                                                                                     
Net loss                                                 -           -               -            -        
                                                    ----------  -----------     -----------  -----------
                                                                                     
Balance at June 30, 1995                                 -           -               -            -        
                                                    ----------  -----------     -----------  -----------
</TABLE>


<TABLE>
<CAPTION>


                                                                                                     Deficit    
                                                             Common Stock                          Accumulated   
                                                     -----------------------        Additional     During the
                                                      Number of                      Paid-In       Development       Subscriptions  
                                                       Shares       Amount           Capital          Stage            Receivable   
                                                     ----------   ----------       ------------   --------------    ---------------

<S>                                                   <C>          <C>             <C>             <C>                <C>  
Balance at December 10, 1993(date of inception)          -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)             -0-       
                                                  
Common stock sold                                    1,980,791    1,566,595             -               -               (523,118)   
                                                  
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)           (523,118)   
                                                    ----------    ---------         ---------     ----------          ----------   
</TABLE>



<TABLE>
<CAPTION>
                                                   
                                                         Deferred
                                                       Compensation             Total
                                                       -------------         ------------  

<S>                                                     <C>                  <C>
Balance at December 10, 1993(date of inception)         $   -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                                     -                     36,000
                                                  
Common stock sold                                            -                  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                                    (508,125)             490,441
                                                       -------------         ------------  
</TABLE>
                                                  
                                                                     (Continued)


               See accompanying notes to the financial statements.

                                      F - 5

<PAGE>


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

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1997


<TABLE>
<CAPTION>
                                                                                                               
                                                   Preferred Stock (Series A)    Preferred Stock (Series B)    
                                                  ----------------------------  ----------------------------   
                                                     Number of                      Number of                     
                                                      Shares         Amount          Shares        Amount        
                                                  -------------   ------------     -----------   -----------     

<S>                                                    <C>        <C>             <C>          <C>      
Balance at June 30, 1995                                 -              -               -            -    
                                                  ----------      -----------      -----------  -----------
                                                                    
Preferred stock sold, including dividends             4,000         3,600,000           -            -        
                                                                                     
Common stock sold                                        -              -               -            -        
                                                                                     
Cancellation of stock subscription                       -              -               -            -        
                                                                                     
Common stock issued in exchange for services             -              -               -            -        
                                                                                     
Common stock issued with exercise of stock options       -              -               -            -  

Common stock issued with exercise of options
for compensation                                         -              -               -            -        

Conversion of preferred stock to common stock        (1,600)       (1,440,000)          -            -        

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

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

Collection of stock subscriptions                        -              -               -            -

Amortization of deferred compensation                    -              -               -            -

Forgiveness of officers' compensation                    -              -               -            -

Net loss                                                 -              -               -            -        
                                                  ----------      -----------      -----------  -----------
                                                                                     
Balance at  June 30, 1996                             2,400         2,160,000           -            -        
                                                                                     
</TABLE>



<TABLE>
<CAPTION>

                                                                                                     Deficit 
                                                             Common Stock                          Accumulated  
                                                     -----------------------        Additional     During the
                                                      Number of                      Paid-In       Development       Subscriptions  
                                                       Shares       Amount           Capital          Stage            Receivable   
                                                     ----------   ----------       ------------   --------------    ---------------

<S>                                                   <C>          <C>             <C>             <C>                <C>  
Balance at June 30, 1995                           18,616,713    2,002,238           672,813     (1,153,387)            (523,118)   
                                                   ----------    ---------         ---------     ----------          ----------   
                                                  
Preferred stock sold, including dividends                -           -               998,400       (998,400)              -
                                                   
Common stock sold                                      70,471    1,561,110             -               -                  -  
                                                      
Cancellation of stock subscription                   (410,500)    (405,130)            -               -                 405,130  

Common stock issued in exchange for services        2,503,789    4,257,320             -               -                  -
      
Common stock issued with exercise of stock
options                                               191,500      104,375             -               -                  (4,375)
      
Common stock issued with exercise of options
for compensation                                      916,400      367,164             -               -                  -
    
Conversion of preferred stock to common stock         420,662    1,839,360          (399,360)          -                  -   

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                        -           -                 -               -                 103,679    

Amortization of deferred compensation                    -           -                 -               -                  -       

Forgiveness of officers' compensation                    -           -               100,667           -                  -
             
Net loss                                                 -           -                 -         (5,986,514)              -  
                                                   ----------    ---------         ---------     ----------          ----------   
                                                  
Balance at June 30, 1996                           23,023,789    9,941,066         1,372,540     (8,186,146)            (18,684)    
                                                   ----------    ---------         ---------     ----------          ----------   
</TABLE>



<TABLE>
<CAPTION>


                                                      Deferred
                                                    Compensation    Total
                                                    ------------  ----------   
<S>                                                   <C>          <C>            
Balance at June 30, 1995                              (508,125)      490,441
                                                     ---------    ----------
                          
Preferred stock sold, including dividends                 -        3,600,000         
                                                   
Common stock sold                                         -        1,561,110                               
                                                   
Cancellation of stock subscription                        -             - 

Common stock issued in exchange for services              -        4,257,320      
      
Common stock issued with exercise of stock
options                                                   -          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                       

Amortization of deferred compensation                  232,500       232,500                   

Forgiveness of officers' compensation                     -          100,667             
             
Net loss                                                  -       (5,986,514) 
                                                     ---------    ----------
                                                  
Balance at June 30, 1996                              (275,625)    4,993,151                         
                                                     ---------    ----------
                                                   
</TABLE>


                                                                      Continued)

              See accompanying notes to the financial statements.

                                      F - 6


<PAGE>


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

                 Statements of Stockholders' Equity (Continued)

          Period December 10, 1993 (date of inception) to June 30, 1997


<TABLE>
<CAPTION>
                                                                                                               
                                                   Preferred Stock (Series A)    Preferred Stock (Series B)    
                                                  ----------------------------  ----------------------------   
                                                     Number of                      Number of                     
                                                      Shares         Amount          Shares        Amount        
                                                  -------------   ------------     -----------   -----------     

<S>                                                    <C>        <C>             <C>          <C>      
Balance at June 30, 1996                              2,400         2,160,000           -            -
                                                  ----------      -----------      -----------  -----------
                                                                    
Preferred stock sold, including dividends                -              -             450          4,500,000  
                                                                                     
Conversion of preferred stock to common stock        (2,400)       (2,160,000)          -            -        

Common stock issued in exchange for services             -              -               -            -        
                                                                                     
Common stock issued for compensation                     -              -               -            -        
                                                                                     
Common stock issued with exercise of stock options       -              -               -            -  

Common stock issued with exercise of stock options
through stock appreciation rights                        -              -               -            -        

Cancellation of stock issued to employee                 -              -               -            -        
                                                                                     
Common stock issued as payment of preferred
stock dividends                                          -              -               -            -        

Payment of accrued dividends on converted shares         -              -               -            -        

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

Collection of stock subscriptions                        -              -               -            -

Amortization of deferred compensation                    -              -               -            -

Amortization of preferred stock dividend                 -              -               -            -

Net loss                                                 -              -               -            -        
                                                  ----------      -----------      -----------  -----------
                                                                                     
Balance at June 30, 1997                                 -        $      -            450        $4,500,000
                                                  ----------      -----------      -----------  -----------
                                                                                     
</TABLE>



<TABLE>
<CAPTION>


                                                                                                     Deficit                        
                                                             Common Stock                          Accumulated          
                                                     -----------------------        Additional     During the
                                                      Number of                      Paid-In       Development       Subscriptions  
                                                       Shares       Amount           Capital          Stage            Receivable   
                                                     ----------   ----------       ------------   --------------    ---------------

<S>                                                   <C>          <C>             <C>             <C>                <C>  
Balance at June 30, 1996                              23,023,789    9,941,066         1,372,340     (8,186,146)              (8,614)
                                                      ----------    ---------         ---------     ----------          ----------  
                                                     
Preferred stock sold, including dividends                   -           -               714,144       (714,155)              -
                                                      
Conversion of preferred stock to common stock          1,041,202    2,759,040           599,040          -                   -  
                                                         
Common stock issued in exchange for services             214,200      630,129             -              -                   - 
                                                 
Common stock issued for compensation                     313,200      918,364
                                                 
Common stock issued with exercise of stock options        17,000       33,750            11,521          -                  (33,750)

Common stock issued with exercise of stock options
through stock appreciation rights                        334,933      363,514           950,473          -                   -

Cancellation of stock issued to employee                (150,000)     (52,500)            -              -                   -
                                                 
Common stock issued as payment of preferred          
stock dividends                                           20,760       49,603             -            (49,603)              -
                                                     
Payment of accrued dividends on converted shares            -           -                 -              33,216              -      

Dividends accrued on preferred                   
stock not yet converted                                     -           -                 -            (168,288)             - 
                                                 
Collection of stock subscriptions                           -           -                 -               -                  16,875 
                                                 
Amortization of deferred compensation                       -           -                 -                -                  -
                                                 
Amortization of preferred stock dividend                    -           -              (714,155)       714,155                -  

Net loss                                                    -           -                 -         (7,917,493)            -        

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

Balance at June 30, 1997                              24,905,084  $14,662,966        $1,185,496   $(16,288,314)         $  (35,519) 
                                                      ----------    ---------         ---------     ----------          ----------  
</TABLE>
                                                 
                                                 
<TABLE>
<CAPTION>                                            

                                                             Deferrred
                                                            Compensation     Total
                                                           --------------  ---------

<S>                                                          <C>           <C>                                  
Balance at June 30, 1996                                     (215,625)     4,993,151                            
                                                            ---------     ----------
                                                     
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               -            91,521  

Common stock issued with exercise of stock options
through stock appreciation rights                                -         1,313,989      

Cancellation of stock issued to employee                         -           (52,500)          
                                                 
Common stock issued as payment of preferred          
stock dividends                                                  -             -
                                                     
Payment of accrued dividends on converted shares                 -            33,216   

Dividends accrued on preferred                   
stock not yet converted                                          -          (168,288)                       
                                                 
Collection of stock subscriptions                                -            16,875             
                                                 
Amortization of deferred compensation                         157,500        157,500          
                                                 
Amortization of preferred stock dividend                         -        (7,917,493)                              
                                                     

Net loss                                                         -        (7,917,493                                       
                                                            ---------     ----------

Balance at June 30, 1997                                    $(118,125)    $4,536,464                           
                                                            ---------     ---------- 

</TABLE>

              See accompanying notes to the financial statements.

                                      F - 7


<PAGE>


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

                            Statements of Cash Flows

                           Increase (Decrease) in Cash
<TABLE>
<CAPTION>

                                                                                             From
                                                                                           Inception
                                                                                         (December 10,
                                                         Year Ended      Year Ended         1993) to
                                                       June 30, 1997    June 30, 1996    June 30, 1997
                                                       -------------    -------------    --------------
<S>                                                    <C>               <C>              <C>

Net loss                                               $ (7,917,493)     $(5,986,514)     $(15,057,394)
                                                       ------------      -----------      ------------
Adjustments to reconcile net loss to net cash
 used for operating activities:
    Depreciation and amortization                           202,365          111,672           364,214
    Amortization of deferred compensation                   157,500          232,500           504,375
    Noncash compensation and consulting expenses          2,957,128        3,049,113         6,310,516
    (Increase) in restricted certificate of deposit        (103,500)            --            (103,500)
    (Increase) decrease in loans receivable
        - shareholders and others                           (10,073)          48,600           (10,073)
    (Increase) decrease in prepaid expenses                 (40,892)         (15,900)          (56,792)
    (Increase) decrease in other assets                      43,375          (50,346            (9,635)
    Increase in accounts payable
       and accrued expenses                                 178,724           88,074           351,258
                                                       ------------      -----------      ------------
      Total adjustments                                   3,384,627        3,463,713         7,350,363
                                                       ------------      -----------      ------------
      Net cash used for operating activities             (4,532,866)      (2,522,801)       (7,707,031)
                                                       ------------      -----------      ------------

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

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

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

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

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

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

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

</TABLE>

                                                                     (Continued)

               See accompanying notes to the financial statements.

                                      F - 8

<PAGE>



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

                       Statement of Cash Flows (Continued)

<TABLE>
<CAPTION>

                                                                                                       From
                                                                                                     Inception
                                                                                                   (December 10,
                                                                   Year Ended      Year Ended        1993) to
                                                                  June 30, 1997   June 30, 1996    June 30, 1997
                                                                  -------------   -------------    -------------
<S>                                                                <C>             <C>              <C>    
Supplemental disclosures of cash flow information:

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

Supplemental disclosures of noncash
 investing and financing activities:

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

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


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

         Issuance of common stock through
           exercise of incentive stock options                     $1,405,510       $     --         $1,405,510
                                                                   ==========       ==========       ==========

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

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

</TABLE>


                     See accompanying notes to the financial statements.

                                      F - 9

<PAGE>



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

                          Notes to Financial Statements



(1)      BACKGROUND

The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl. was formed
on December 10, 1993.(see Note 4) Effective July 1, 1995 the Company changed its
corporate status to a Florida corporation.

The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial 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 1-6, 1996. The
Company filed its initial patent application for the CTLM(TM) device on June 7,
1995 and has subsequently filed for foreign patent protection.

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

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


                                                                     (Continued)

                                     F - 10

<PAGE>


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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Use of estimates

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

         (b) Cash and cash equivalents

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

         (c) Prototype equipment

         The direct costs associated with the final 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 costs
         associated with the completed prototype units placed at clinical test
         locations will be transferred to clinical equipment at their historical
         cost. The prototype costs will be amortized over a period of five years
         upon placement of the equipment at the clinical testing locations.

         (d) Property, equipment and software development costs

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

         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

                                                                     (Continued)

                                     F - 11

<PAGE>


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

                    Notes to Financial Statements (Continued)

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

         feasibility and the ongoing assessment of the recoverability of these
         costs requires considerable judgement by management with respect to
         certain external factors, including, but not limited to, anticipated
         future gross product revenues, estimated economic life and changes in
         software and hardware technology. After considering the above factors,
         the Company has determined that software development costs, incurred
         subsequent to the initial acquisition of the basic software technology,
         should be properly expensed. Such costs are included in research and
         development expense in the accompanying statements of operations.

         (e) Research and Development

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

         (f) Net loss per share

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


                                                                     (Continued)

                                     F - 12

<PAGE>


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

                    Notes to Financial Statements (Continued)



(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (g) 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.

         (h) Reclassifications

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


(3)      RESTATEMENT

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) machine currently undergoing tests at
clinical locations. Effective December 31, 1996, the Company has restated its
financial statements to expense all additional costs incurred since the
acquisition of the original software. Accordingly, the Company has expensed a
total of $869,692 as additional research and development costs through December
31, 1996, of which $436,736 was applicable to the fiscal year ended June 30,
1996.


(4)      MERGER

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


                                                                     (Continued)

                                     F - 13

<PAGE>


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

                    Notes to Financial Statements (Continued)


(4)      MERGER (Continued)

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

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


(5)      GOING CONCERN

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

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


(6)      RESTRICTED CERTIFICATE OF DEPOSIT

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


(7)      STOCKHOLDERS' LOANS - RECEIVABLES AND PAYABLES

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

                                                                     (Continued)

                                     F - 14

<PAGE>



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

                    Notes to Financial Statements (Continued)



(8)      PROPERTY AND EQUIPMENT

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

                                                           June 30,
                                                ----------------------------
                                                    1997             1996
                                                -----------       ----------
   Furniture and fixtures                       $   240,029       $  28,199
   Building and land                              2,081,399           --
   Clinical equipment                               250,000           --
   Computers and equipment                          389,373         164,270
   CTLM(TM) software costs                          352,932         352,932
   Trade show equipment                             153,193          81,416
   Laboratory equipment                             179,862         153,758
   Leasehold improvements                             --             38,407
                                                -----------       ---------

                                                  3,646,788         818,982
   Less: accumulated depreciation                  (325,809)       (161,850)
                                                -----------       ---------

            Totals                              $ 3,320,979       $ 657,132
                                                ===========       =========

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
       Leasehold improvements                                    Length of lease

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


                                                                     (Continued)


                                     F - 15

<PAGE>



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

                    Notes to Financial Statements (Continued)



(8)      PROPERTY AND EQUIPMENT (Continued)

                      Period ended                     Amount
                      ------------                   ---------
                        6/30/97                      $  54,345
                        6/30/96                         54,345
                        6/30/95                         19,160
                        6/30/94                             73
                                                     ---------
                    Total                            $ 127,923
                                                     =========


(9)      OTHER ASSETS

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

             Totals                                      $   9,635    $ 53,010
                                                         =========    ========

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


(10)     ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                                  June 30,
                                                         ----------------------
                                                            1997         1996
                                                         ---------    ---------
   Accounts payable - trade                              $ 276,096    $ 165,047
   Preferred stock dividends payable                       168,288       33,216
   Accrued property taxes payable                           14,000        --
   Accrued compensated absences                             56,632        --
   Payroll taxes payable                                     4,530        7,487
                                                         ---------    ---------

                  Totals                                 $ 519,546    $ 205,750
                                                         =========    =========

                                                                     (Continued)

                                     F - 16

<PAGE>

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

                    Notes to Financial Statements (Continued)



(11)     LEASES

The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 8) and the obligation has been
recorded as debt. At June 30, 1997, approximate future minimum lease payments
under capitalized lease obligations were as follows:

     Year ending June 30,
     --------------------
            1998                                                 $  12,384
            1999                                                    12,384
            2000                                                    12,384
            2001                                                    12,384
            2002                                                     4,128
                                                                 ---------

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

            Present value of net minimum lease payments             44,777

            Less current portion                                    (8,928)
                                                                 ---------

            Long-term portion                                    $  35,849
                                                                 =========


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

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




                                                                     (Continued)

                                     F - 17

<PAGE>



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

                    Notes to Financial Statements (Continued)



(12)     INCOME TAXES

No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $11,045,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $3,755,000 and $1,538,500 at June 30, 1997 and 1996, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1996 to June 30, 1997 was an increase of
approximately $2,216,500.


(13)     CONVERTIBLE PREFERRED STOCK

On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock.

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

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


                                                                     (Continued)

                                     F - 18

<PAGE>



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

                    Notes to Financial Statements (Continued)


(13)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

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

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



                                                                     (Continued)

                                     F - 19

<PAGE>


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

                    Notes to Financial Statements (Continued)



(13)     CONVERTIBLE PREFERRED STOCK (Continued)

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

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

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

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


                                                                     (Continued)

                                     F - 20

<PAGE>



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

                    Notes to Financial Statements (Continued)

(14)     COMMON STOCK

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

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

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

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

                                                                     (Continued)

                                     F - 21

<PAGE>


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

                    Notes to Financial Statements (Continued)


(14)     COMMON STOCK (Continued)

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

As of June 30, 1997, there were a total of 1,507,378 shares of common stock
issued as a result of the conversion of the Series A Convertible Preferred Stock
and the related accumulated dividends. (See Note 13)

Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock options and were exercised
in a "cash-less" transaction, resulting in compensation to the officers of
$567,164. Compensation cost was measured as the excess of fair market value of
the shares received over the value of the SAR shares 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 ($4,721,900) of its common stock. The conversion of Series A Convertible
Preferred Stock accounted for the issuance of 1,081,962 shares ($2,808,643). The
remaining 799,333 shares were issued as follows:

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

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

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

                                                                     (Continued)

                                     F - 22

<PAGE>



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

                    Notes to Financial Statements (Continued)


(14)     COMMON STOCK (Continued)

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

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

         6. Exercise of incentive stock options, 361,933 shares ($397,264).

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


(15)     STOCK OPTIONS

During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan, an officer may be
granted non-qualified options to purchase shares of common stock over the next
five calendar years, at a minimum of 250,000 shares per calendar year. The
exercise price shall be thirty-five percent of the fair market value at the date
of exercise. 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 portion of the plan applicable to the officers of the Company was terminated
effective July 1, 1996.

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


                                                                     (Continued)

                                     F - 23

<PAGE>

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

                    Notes to Financial Statements (Continued)



(15)     STOCK OPTIONS (Continued)

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 of grant
and credits additional paid-in capital. The compensation is amortized to income
over the vesting period of the options.

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

<TABLE>
<CAPTION>

                                               Incentive Stock Options                Nonqualified Options
                                               -----------------------             ---------------------------
                                               Shares     Option Price               Shares       Option Price
                                               -------    ------------             -----------    ------------
<S>                                           <C>         <C>                      <C>            <C>
Outstanding at June 30, 1994                     -0-                                       -0-
   Granted                                      71,429    $1.40                      2,250,000         (1)
   Exercised                                        --                                      --
                                               -------                              ----------

Outstanding at June 30, 1995                    71,429    $1.40                      2,250,000
   Granted                                     782,563    $ .81 - 8.16                      --
   Exercised                                  (164,956)   $1.25                     (1,400,831)    $.35 - 1.18
                                              --------                              ----------

Outstanding at June 30, 1996                   689,036    $ .81 - 8.16                 849,169         (1)
   Granted                                     363,427    $2.56 - 4.37                      --
   Exercised                                  (395,384)        (2)                          --
   Canceled                                         --                                (399,169)        (3)
                                              --------                              ----------

Outstanding at June 30, 1997                   657,079    $ .81 - 8.16                 450,000         (1)
                                              ========                              ==========
</TABLE>


         (1) The option price of the non-qualified options for shares issued to
         officers of the Company is thirty-five percent of the fair market value
         at the date of exercise. The option price of the remaining shares
         ranged from $.35 per share for one individual, and the greater of $.50
         per share or thirty-five percent of the fair market value at the date
         of exercise for the other individual. When the non-qualified shares
         were exercised, the fair market value of the common stock ranged from
         $.94 to $1.18 per share. The exercise of 150,000 shares by an
         individual was rescinded in January 1997, and the remaining money
         ($52,500) returned.

         (2) Of the total 395,384 options that were exercised during the year
         ended June 30, 1997, 27,500 of these options were incentive stock
         options exercised by one of the employees at $1.25. (The incentive
         options were granted on September 20, 1995 at fair market value, no
         compensation was recorded.) The remaining 367,884 options were
         exercised by officers and an employee of the Company pursuant to their
         Stock Appreciation Rights, and they acquired a total of 334,933 shares
         of common stock. A charge to compensation expense of $1,405,510, for
         the fair value of the common stock issued in excess of the exercise
         price, was made during the period
                                                                    (Continued)


                                     F - 24

<PAGE>


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

                    Notes to Financial Statements (Continued)


(15)     STOCK OPTIONS (Continued)

         (3) The remaining nonqualified options which were granted and not
         exercised by the officers of the Company have been canceled and that
         plan, with respect to the officers, was terminated effective July 1,
         1996.

At June 30, 1997, 308,084 of the incentive stock options were vested and
exercisable and the 450,000 non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following option transactions have occurred:

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

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

    On March 30, 1995, the Company granted to the director of engineering, a
    non-qualified option to purchase up to 150,000 shares of common stock per
    year, or a total of 450,000 shares, during the period March 30, 1995 and
    ending March 31, 1998. The exercise price shall be $0.35 per share. The
    options do not "vest" until one year from the anniversary date. Deferred
    compensation of $472,500 was recorded on the transaction and is being
    amortized over the vesting period. The Company also granted the individual,
    incentive options to purchase 71,429 shares of common stock at an exercise
    price of $1.40 per share. The options expire on March 30, 1998.

    On 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 - 25


<PAGE>


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

                    Notes to Financial Statements (Continued)


(15)     STOCK OPTIONS (Continued)

    At various dates during the fiscal year ended June 30, 1996, the Company
    issued to various employees incentive options to purchase 340,935 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.

    At various dates during the year ended June 30, 1997, the Company issued to
    various employees incentive options to purchase 294,778 shares of common
    stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
    price was established as the fair market value of the common stock at the
    date of grant, therefore no compensation was recorded on the issuance of the
    options. In most cases, one-third of the options vest one year from the
    grant date, with one-third vesting each of the next two years. The options
    expire in ten years from the grant date.


(16)     CONCENTRATION OF CREDIT RISK

During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1997 was $346,000.


(17)     COMMI(TM)ENTS 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.

                                                                    (Continued)


                                     F - 26

<PAGE>


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

                    Notes to Financial Statements (Continued)


(17)     COMMI(TM)ENTS AND CONTINGENCIES (Continued)

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

As additional consideration for his development efforts in the CTLM(TM)
prototype, the chief executive officer has been granted a "development royalty"
which will be paid based upon the net foreign and domestic sales, after direct
costs and commissions, of the CTLM(TM) device. The royalty percent ranges from
2.5% to a maximum of 5%, based upon varying levels of gross sales.

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

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

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

                                                                    (Continued)


                                     F - 27

<PAGE>


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

                    Notes to Financial Statements (Continued)


(18)     SUBSEQUENT EVENT

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

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



                                     F - 28