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, 1999

                                       or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
            For the transition period from __________to_____________

                        COMMISSION FILE NUMBER: 0-26028

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

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

        6531 NW 18TH COURT, PLANTATION, FL.              33313
        (address of principal office)                  (Zip Code)

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

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

         Securities registered under Section 12(g) of the Exchange Act:
                           COMMON STOCK, NO PAR VALUE
                                (Title of class)

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

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

STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR. -0-

Based on the  average  closing bid and asked  prices of the common  stock on the
latest  practicable  date,  October 11, 1999, the aggregate  market value of the
voting  stock held by  non-affiliates  of the  registrant  was  $4,224,620  with
57,247,380 shares outstanding.

The  number of shares  outstanding  of each of the  issuer's  classes  of common
stock,  as of October 11, 1999 was 57,247,380 As of October 11, 1999, the number
of shares  outstanding of each of the issuer's  classes of preferred stock were:
Series B Convertible Preferred-360,  Series G Convertible Preferred-14, Series H
Convertible Preferred-49 and Series I Convertible Preferred-138.

                       Documents Incorporated By Reference
                                     [None]
<PAGE>

THIS REPORT CONTAINS  FORWARD-LOOKING  STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934.  ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN  UNCERTAINTIES"  AS SET FORTH IN ITEM 6  "MANAGEMENT'S
DISCUSSION    AND   ANALYSIS   OF   FINANCIAL    CONDITION    AND   RESULTS   OF
OPERATIONS-CAUTIONARY STATEMENTS.

PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

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


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


HISTORY

During the first year of operations,  we researched the interaction between high
speed,  rapid  pulsed  (Ti-Sapphire)  laser  technology  and  various  detection
technologies  associated with standard computed tomographic ("CT") schemes. This
research was based upon a prototype  that was developed by Richard  Grable,  our
Chief Executive Officer, prior to his association with the Company.  During June
of 1995, Mr. Grable filed a patent for his  prototype,  which was able to create
images of a breast. We refined various software and hardware  configurations and
components of the device based on these first images and filed a total of twelve
ancillary United States patents since 1996.

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

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

On  December  12,  1995,  we had a  preliminary  meeting  with the Food and Drug
Administration  to  generally  discuss  the  approach  we would  take to  obtain
marketing clearance for our CTLMTM. We were advised that we would need to submit
and have approved a pre-market  approval  application ("PMA") in order to obtain
marketing  clearance for the device.  We were also advised that we would need to
submit an  investigational  device exemption  ("IDE")  application to the FDA in
order to commence human clinical  trials of the device.  An IDE allows a company
to conduct human clinical  trials  without  filing an application  for marketing
clearance.
<PAGE>

We  submitted  our IDE  application  on  January 8,  1996,  and it was  approved
February 9, 1996.  During  calendar year 1996,  among other matters,  we further
refined the detection  scheme and laser power  configuration  in order to obtain
substantially better image quality. In order to incorporate the changes, we were
required to submit to the FDA an amendment to our IDE  application.  Pursuant to
the IDE, as amended,  we were authorized to scan 50 patients at the Strax Breast
Diagnostic  Center in  Lauderhill,  Florida,  and 20 additional  patients at our
in-house  facility.  The CTLM(TM) was installed at Strax in November  1996,  and
three  patients were scanned.  After  scanning the three  patients at Strax,  we
learned of a different type of laser,  which could be used in  conjunction  with
the new Solid State Diode Pump laser package from  Spectra-Physics.  We believed
that this additional  laser component would greatly increase the performance and
image quality of the CTLM(TM). We halted the clinical  investigational trials at
Strax in December  1996 and planned to resume the study after the second  system
modification.

Strax, a not-for-profit  corporation,  requested a donation of $5,000 to be used
to  purchase  needed  medical  equipment  for the  institute,  which  we paid on
December 31, 1996.  Because of the extensive  re-engineering  and design and the
delay in receiving the new laser components to be integrated into the system, we
were unable to complete and test the new system in a timely manner. In fact, the
first of these new  components  was not received  until October 1997.  Strax was
unwilling to wait until the engineering  modifications  were completed unless it
received  compensation for the CTLM(TM)  remaining on its premises.  In light of
the fact that the owners of Strax were in the  process of selling the center and
one of the proposed  purchasers was a potential  competitor,  we declined to pay
any additional compensation. In November 1997, Strax requested that the CTLM(TM)
be removed  from its  premises.  The CTLM(TM) was removed from Strax in November
1997. On May 20, 1998, our  termination of the IDE protocol and our final report
was accepted by the FDA.

In  February  1996,  we  entered  into a letter  of intent  with an  independent
distributor  to  place  a  CTLM(TM)  at  the  Moscow   Research   Institute  for
Diagnostics.  The letter of intent is still in place however, due to the further
advances  in  laser  technology  the  purchase  of the  new  laser  system,  the
modification  and redesign of the CTLM(TM)  hardware  and  software,  the actual
placement has been delayed.

In February 1997, we announced that the  Institutional  Review Board of Columbia
JFK  Medical  Center  located in  Atlantis,  Florida,  approved  its  request to
participate  in the first phase of the clinical  trials.  Our liaison person and
proposed principal investigator was Dr. Donna M. Gallagher.  After Dr. Gallagher
relocated, we did not pursue further involvement at the hospital.

In June 1998, our second IDE was granted. We were authorized to scan 20 patients
at our in-house  facilities in  Plantation,  Florida and upon FDA  approval,  at
three  additional  clinical  sites.  On September 1 and  September  10, 1998, we
formally submitted the first and second series of the 20 patient in-vivo (human)
images and corresponding interpretation data to the FDA.

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

We requested  that we be permitted to expand the scope of the study to include a
medical  facility  where access to women with breast cancer was more  practical.
Nassau County  Medical Center was chosen because of the unusually high incidence
of breast cancer in the population  they serve. It is reported that 1 woman in 7
will experience  breast cancer if they live in this geographic area. Also Nassau
County  represented that they performed a significant number of breast surgeries
each  week,  which we  expected  to  provide  a  relatively  constant  supply of
histologically confirmed cases.

On January 14, 1999, we received  notice that the IDE  application to extend the
in-vivo study to Nassau County Medical  Center was  conditionally  approved.  We
immediately supplied the additional  documentation  required by the FDA, and the
conditions   were  complied  with.  The  IDE  application  was  limited  to  one
institution  (Nassau County Medical Center) and 275 subjects.  We had originally
intended to have the CTLM(TM)  positioned  at Nassau  County  Medical  Center no
later than mid  February  1999,  however  due to  renovations  at Nassau  County
Medical Center, the delivery of the CTLM(TM) was postponed until the renovations
were complete.
<PAGE>

On March 3, 1999 the  CTLM(TM)  system  was  shipped  to Nassau  County  Medical
Center.  After several  administrative  problems,  on June 21, 1999, we received
written  representation  from Nassau  County  that we could  begin the  clinical
investigational  trials  pursuant  to  the  original  IDE  and  the  payment  of
reasonable  and  customary  charges for a  three-month  study.  On July 8, 1999,
Nassau County began scanning patients for the clinical investigational trials.

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

In May 1998, we, realizing that it had no formal written agreement in place with
Mr. Grable,  immediately began negotiating with Mr. Grable for the exclusive use
of the  patent.  In June  1998,  a  written  agreement  was  entered  into.  See
"Cautionary  Statements-Dependence on Patent Licensed by Founder;  Dependence on
Patents   and   other   Proprietary    Information",    "Business-Patent"    and
"Business-Patent License Agreement".

In January 1997, we applied for a patent for a fluorescence  imaging scanner. We
have  received  Issue  Notification  indicating  that the  Patent  was issued on
September 14, 1999, as Patent No 5,952,664.

BREAST CANCER

Breast cancer is one of the most common cancers among women and, notwithstanding
the  currently  available  detection  modalities,  is the leading cause of death
among women aged 35 to 45.  According to the American  Cancer  Society  ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime.  Nationwide,  it is estimated  that in 1998,  approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United  States,  and an  estimated  43,500  women  will die from  this  disease.
Excluding  skin  cancers,  the breast is the most  frequent site of cancer among
American women  accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading  cause of cancer  death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.

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

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

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

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

SCREENING AND DIAGNOSTIC MODALITIES

PHYSICAL EXAMINATION

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

MAMMOGRAPHY

Mammography  is a  non-invasive  x-ray  modality  commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram  produces an image
of the internal  structure of the breast that is intended to display  lesions as
white spots  against the black and/or white  background of normal  tissue.  In a
screening mammogram,  radiologists seek to detect suspicious lesions, while in a
diagnostic  mammogram,  radiologists  seek to characterize  suspicious  lesions.
Mammograms  require  subjective  interpretation  by a radiologist  and are often
uncomfortable for the patient.  Because x-ray mammography exposes the patient to
radiation,  ACS  recommends  that  mammograms  be limited  to once per year.  In
addition,  x-ray  mammography is considered to be less effective for women under
the age of 50 who  generally  have  radiographically  dense breast  tissue.  The
average  cost  of a  diagnostic  mammogram  is  approximately  $55 to  $200  per
procedure (an average of $113) and requires the use of capital equipment ranging
in cost from approximately $75,00 to $225,000.  It is expected that the CTLM(TM)
will cost  approximately  $350,000 and the cost of a bilateral exam will be $125
to $150. Due the high capital costs  associated with  mammography  equipment and
the  specialized  training  necessary to operate the  equipment and to interpret
radiographic images,  mammography is usually available only at specialty clinics
or hospitals.

ULTRASOUND

Ultrasound uses high frequency sound waves to create an image of soft tissues in
the  body in a  non-invasive  manner.  Like  mammography,  this  image  requires
interpretation  by a physician.  Ultrasound's  principal  role in breast  cancer
diagnosis  has been to assist the  physician in  determining  whether a palpable
lesion is likely to be a cyst  (usually  benign)  or a solid  mass  (potentially
cancerous).  The average cost for an ultrasound  of the breast is  approximately
$125 to $500 per  procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately  $60,000 to $200,000.  Again, it is
expected that the CTLM(TM) will cost  approximately  $350,000 and the cost of an
exam will be $125 to $150. Like mammography,  ultrasound is generally  performed
at specialty clinics or hospitals.

BIOPSY

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

THE COMPANY

We have a limited  history of operations.  Since our inception in December 1993,
we have engaged  principally in the development of the CTLMTM. We currently have
no source of operating  revenue and have incurred net operating losses since our
inception. At June 30, 1999, we had an accumulated deficit of $35,092,999, after
discounts and dividends on Preferred Stock. The losses have resulted principally
from costs  associated  with our  operations.  We expect  operating  losses will
<PAGE>

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,  development  of, and clinical trials for, the CTLMTM and other research
and development activities.  Our ability to achieve profitability will depend in
part on our ability to obtain regulatory approvals for our 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 we
will  receive   regulatory   approvals  for  the   development   and  commercial
manufacturing and marketing of our proposed products, or achieve  profitability.
See Item 6.  "Management's  Discussion  and Analyses of Financial  Condition and
Results of Operations".

CTLM(TM)

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

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

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

COMPARISON TO EXISTING DIAGNOSTIC MODALITIES

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

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

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

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

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

FLUORESCENCE IMAGING

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

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

The use of dyes,  sometimes referred to as contrast agents or simply "contrast",
for  radiographic  imaging is a common  medical  practice.  The use of  contrast
agents for breast  imaging is not currently a common medical  practice.  the fda
has recently approved the use of radioactive  compounds to identify beast cancer
locations.  The use of fluorescent dyes that are not radioactive compounds,  for
breast imaging, we believe, has significant but presently undemonstrated role in
breast cancer detection.  We intend to work with contrast agent manufacturers to
explore and possibly develop this emerging technique. The fda must first approve
The use of non-radioactive florescent dyes before they can be used commercially.
Such approval could take several years, if at all.

GOVERNMENT REGULATION

UNITED STATES REGULATION

The United  States  Food and Drug  Administration  (the  "FDA")  has  regulatory
authority  over the  testing,  manufacturing,  and sale of the  CTLM(TM)  in the
United States.  Because the CTLM(TM) is a medical  device,  it is subject to the
relevant  provisions of the Federal Food,  Drug and Cosmetic Act (FD&C Act") and
implementing  its  regulations.  Pursuant  to the  FD&C  Act,  the Food and Drug
Administration ("FDA") regulates, among other things, the manufacture, labeling,
distribution,  and promotion of the CTLM(TM) in the United States.  The FD&C Act
requires that a medical  device must (unless  exempted by regulation) be cleared
or  approved  by the FDA before  being  commercially  distributed  in the United
States. The FD&C Act also requires that manufacturers of medical devices,  among
other things,  comply with the labeling  requirements and to manufacture devices
in accordance with Good  Manufacturing  Practices  ("GMPs"),  which require that
<PAGE>

companies  manufacture  their products and maintain  related  documentation in a
conformed  manner with respect to  manufacturing,  testing,  and quality control
activities. The FDA inspects medical device manufacturers and distributors,  and
has broad authority to order recalls of medical devices,  to seize non-complying
medical  devices,  to enjoin  and/or impose civil  penalties,  and to criminally
prosecute violators.

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

The FD&C Act further  provides  that,  unless  exempted by  regulation,  medical
devices may not be  commercially  distributed  in the United  States unless they
have been  approved or cleared by the FDA.  There are two review  procedures  by
which medical  devices can receive such approval or clearance.  Some devices may
qualify for clearance under a Section 510(k) procedure,  which is not applicable
to the  CTLM(TM)  since it is a Class III device.  Since the  CTLM(TM)  does not
qualify  for the 510(k)  procedure,  it must apply to the FDA for  pre-marketing
approval ("PMA") before marketing can begin. PMA applications  must demonstrate,
among  other  matters,  that the  medical  device is safe and  effective.  A PMA
application is typically a complex submission,  usually including the results of
clinical studies,  and preparing an application is a detailed and time-consuming
process.

Upon  receipt of the PMA  application,  the FDA makes a threshold  determination
whether the application is sufficiently complete to permit a substantive review.
If the FDA  determines  that  the  PMA is  sufficiently  complete  to  permit  a
substantive  review,  the FDA will file the application.  Once a PMA application
has been filed,  the FDA has by  regulation  180 days to review it;  however the
review time may be extended significantly by the FDA asking for more information
or clarification of information  already provided in the submission.  During the
review  period,  an advisory  committee  may also evaluate the  application  and
provide  recommendations to the FDA as to whether the device should be approved.
In  addition,  the  FDA  will  inspect  the  manufacturing  facility  to  ensure
compliance with the FDA's GMP requirements prior to approval of a PMA. While the
FDA has  responded  to PMA  applications  within the allotted  time period,  PMA
reviews  generally take  approximately  12 to 18 months or more from the date of
filing to approval.  The PMA process is a lengthy and  expensive  one, and there
can be no assurance that a pma  application  will be reviewed within 180 days or
that the fda will approve a pma application. A Number of devices for which other
companies  have sought PMA approval have never been approved for  marketing.  We
intend  to file  for  expedited  review  of our  PMA  application.  See  Item 1.
"Business-Regulatory and Clinical Status, United States/FDA".  If we were unable
to obtain FDA approval,  it would have a material adverse effect on our business
and   financial   condition   and   could   result   in   postponement   of  the
commercialization of the CTLM.(TM) See Item 1 "Business- Regulatory and Clinical
Status".

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


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

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

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

FOREIGN REGULATION

Sales of medical  devices  outside of the United  States are  subject to foreign
regulatory  requirements  that vary widely from country to country.  The laws of
certain  European  and Asian  countries  may  permit us to begin  marketing  the
CTLM(TM) in Europe and Asia before  marketing  would be  permitted in the United
States. In order to sell our products within the European Economic Area ("EEA"),
companies are required to achieve  compliance  with  requirements of the Medical
Devices  Directive  ("MDD") and affix a "CE" marking on their products to attest
such  compliance.  In Europe,  we will be required to obtain the  certifications
necessary  to  enable  the CE mark to be  affixed  to our  products  in order to
conduct sales in member  countries of the European  Union. We are in preliminary
preparations  regarding  CE  certification.   Component  parts  that  have  been
finalized are being tested in our  laboratory.  Some of the components are being
changed in order to improve performance, which has delayed the submission of the
CTLM(TM)  for  the CE  certification.  We  have  chosen  DGM of  Denmark  as our
notifying  body. A notifying  body ("NB") is a regulatory  body from the private
sector,  which is responsible  for the review and approval of the  documentation
submitted  by us in order to enable the CE mark to be affixed to  products.  SEE
ITEM 6. "MAnagement's Discussion and Analysis of Financial Condition and Results
of  Operations-Cautionary  Statements  -  Extensive  Government  Regulation,  No
Assurance of Regulatory  Approvals".  The process to obtain a CE mark is lengthy
and time  consuming.  Following are the listed  standards and steps that must be
complied with in order to obtain a CE Mark in order to  distribute  the CTLM(TM)
in the European Economic Area (EEA). The listed standards are for the EEA market
only and additional document/standards exists for other markets. These standards
may have direct or indirect  reference to additional  standards  and  additional
standards may apply:

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

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

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

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

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

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

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

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

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

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

     QUALITY  ASSURANCE SYSTEMS In efforts to assure quality  processes,  we are
     utilizing the most recent quality  control  standards in the development of
     our quality assurance  program.  The standards listed are particular to the
     medical industry.

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

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

     CLINICAL  EVALUATIONS As clinical evaluations are required for the CTLM(TM)
     and almost  every  country has a different  way for the  evaluations  to be
     performed and  documented,  we are required to perform our  evaluations  in
     accordance with the most recent  requirements.  These documents state these
     requirements.

         EN 540:  Clinical investigation of medical devices for human subjects.
         Medical Devices Directive (93/42/EEC) Annex X:  Clinical evaluations.

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

         prEN 1441:  Medical devices - risk analysis.

     ADDITIONAL  MARKINGS/SYMBOLS/TERMINOLOGY/DOCUMENTATION These standards list
     additional aspects of the CTLM(TM) that require additional  information not
     covered by the requirements listed above.

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

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

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

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

REGULATORY AND CLINICAL STATUS

UNITED STATES/FDA
<PAGE>

On March 19, 1998, we submitted the final report for the calibration  portion of
our IDE. In addition,  on March 19, 1998 we met with representatives of the FDA.
The purpose of the meeting was to describe several options to our IDE and to get
the FDA's perspective on these approaches.  It was decided that we would conduct
clinical  trials under the IDE with 20 patient  studies  performed  in-house and
monitored by an Institutional Review Board ("IRB") established by us.

In  April  1998,  we  appointed  seven  physicians  and one  physicist  who were
specialists in the following fields:  Gynecology/Obstetrics and Mammography (4),
breast  surgery  (1),  Neurology  (1),  Radiology  (1),  and  optics  and  laser
engineering  (1),  to serve on the IRB.  The IRB was  appointed  to  review,  to
approve  the  initiation  of, and to  conduct  periodic  review of our  research
involving  human  subjects.  Due to the  completion of in-house IDE, this IRB is
inactive.

The  primary  purpose of the IRB is to assure,  both in advance  and by periodic
review,  that  appropriate  steps are taken to protect the rights and welfare of
humans  participating  as subjects of the research.  To accomplish this purpose,
IRB's use a group process to review  research  protocols  and related  materials
(e.g., informed consent documents and investigator brochures) to ensure that:

Risks to subjects are minimized by using  procedures  that are  consistent  with
sound research design and that do not unnecessarily expose subjects to risk, and
whenever  appropriate,  by  using  procedures  already  being  performed  on the
subjects for diagnostic or treatment purposes.

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

Selection of subjects is equitable.

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

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

There are adequate provisions to protect the privacy of subjects and to maintain
the confidentiality of data.

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

The IRB is not  responsible  for nor does it participate in obtaining  data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for our services;  however, if pursuant to
FDA  requirements,  one of the members should  supervise the actual  scanning of
women, they are paid a supervisory clinical honorarium of $250 per day.

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

In June 1998,  we were  granted  our  second  investigational  device  exemption
("IDE") to conduct  clinical  trials.  We were authorized to scan 20 patients at
our in-house facilities in Plantation, Florida. On September 1 and September 10,
1998,  we  formally  submitted  the first and  second  series of the 20  patient
in-vivo (human) images and corresponding interpretation data to the FDA.

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

We requested  that we be permitted to expand the scope of the study to include a
medical facility where access to women with breast cancer is more practical.

On January 14, 1999, we received  notice that the IDE  application to extend the
in-vivo study to Nassau County Medical  Center was  conditionally  approved.  We
received  final  approval to conduct the  investigational  study on February 26,
1999.  This IDE  application is limited to 1 institution  (Nassau County Medical
Center) and 275 subjects.  We selected the number 275 based on the  distribution
of the types of breast conditions outlined in the IDE protocol.  Pursuant to our
original  discussions with the FDA,  approximately  400 cases will be in the PMA
application  when it is submitted.  Because of the limited  experience  acquired
from the 20-patient  in-house  study, we elected to establish one clinical site,
Nassau County Medical Center and begin testing before  expanding the next series
of clinical tests to additional locations.

The IRB for the Nassau County Study is comprised of  twenty-three  members.  The
IRB was  already  formed and was not  impaneled  specifically  for the  CTLM(TM)
investigational  clinical  trials.  None of the members of the Nassau County IRB
are affiliated with us or affiliated  with any officer,  director or employee of
the Company. The professional  specialties and other information which regard to
the IRB members of the Nassau County Study is set forth in the following table.


 Highest Degree Earned    Professional Specialty  Affiliation With Nassau County

    M.D                     Neurology                               Yes
    M.D                     Surgery                                 Yes
    M.D                     Pediatrics                              Yes
    Reverend                Other Fields, Religion                  Yes
    M.D                     Obstetrics &                            Yes
    Ph.D                    Psychiatry;                             Yes
    M.D                     Pathology                               Yes
    M.D.,                   Medicine-                               Yes
    M.B                     Administrator                           No
    J.D                     Other Fields, Law                       No
    M.D                     Psychiatry                              Yes
    M.D                     Pediatrics                              Yes
    Ph.D                    Obstetrics &                            Yes
    M.D                     Psychiatry                              Yes
    Ph.D                    Biostatistician                         Yes
    Ph.D                    Anesthesiology                          Yes
    B.S.,                   Pharmacy                                Yes
    Ph.D                    Medicine -                              Yes
    Ph.D                    Pediatrics                              Yes
    Ph.D                    Administrative                          Yes
    M.D                     Director for Academic                   Yes
    Ph.D                    Pathology                               Yes
    M.D                     Academic Affairs                        Yes
<PAGE>




On March 3, 1999, we shipped the CTLM(TM) to Nassau County Medical Center. After
renovations of the room and air conditioning  modifications  were made to handle
the heat load of the lasers,  our engineers and medical physicist  completed the
installation and calibrated the CTLM(TM) on April 19, 1999. After further delays
because of  misunderstandings  regarding  the IDE protocol and costs  associated
with the clinical  investigational trials, we began scanning patients on July 8,
1999.

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

At present, we have also entered into discussions with several hospitals,  which
are located  throughout the United States for potential  clinical test sites. We
have  received  oral  approvals  of the protocol and site plan from three of the
proposed  clinical sites. In order to expand our clinical trials to other sites,
the IDE  application  for Nassau County will have to be amended by supplying the
required  documentation i.e. the protocol,  signed investigator  agreement,  IRB
approvals  and the informed  consent  form.  Once a formal  commitment  has been
obtained and the IDE approved by the FDA,  these sites will become  operational.
See Item 6.  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations-Cautionary  Statements-Government  Regulation" and Item 1.
"Business-Regulatory  and  Clinical  Status-United   States/FDA"  and  "Business
Government Regulations"

We intend to  perform  studies  at three or more  hospitals  each of which  will
follow  the same  IDE  protocol,  as  amended,  for 275  volunteers  to  acquire
effectiveness  data on 1,100  women.  Of these,  400 will be selected for actual
submission.  The reason for the plan to scan 1,100 women  instead of only 400 is
that volunteers in these kinds of programs for various reasons may withdraw from
the study.  These  volunteers may not have a histological  confirmation of their
respective  condition,  for  example a woman dies before her  surgery,  or other
reason. Additionally, we plan to develop an atlas of clinical examples on CD-ROM
for teaching purposes.  With a large number of examples of each breast condition
typically encountered, the atlas is expected to be of greater value.

In order to sell the CTLM(TM)  commercially in the United States, we must obtain
marketing  clearance  from the  FDA.  A PMA  application  must be  supported  by
extensive  data,  including  pre-clinical  and clinical  trial data,  as well as
extensive  literature  to prove the  safety  and  effectiveness  of the  device.
Following  receipt  of a  PMA  application,  if  the  FDA  determines  that  the
application is Sufficiently  complete to permit  substantive  review, the agency
will "file" the application. Under the food, drug, and Cosmetic Act, the FDA has
180 days to review a PMA application.

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

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

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


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

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

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

FOREIGN

At  present,  we have not  applied to the FDA for export  approval  for  foreign
sales.  However,  we have  begun the  process of  evaluating  the  CTLM(TM)  for
application of regulatory approval marks and showing compliance with the Medical
<PAGE>

Device Directive ("MDD"), which are rules and regulations which must be complied
with  before  placement  of the CE  Mark.  Many  steps  need  to be  taken  into
consideration  with the end goal of accessing the EEA market. The following is a
brief  explanation of the steps we have taken or are currently taking to achieve
this goal.

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

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

The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated  interpretation of requirements and excellent customer
service.  We have  completed our evaluation and have chosen DGM of Denmark to be
our  Notified  Body under the Medical  Device  Directives.  This choice was made
based on the quality  reputation  of DGM in the medical  field and the fact that
the  member  of DGM  that is  responsible  for the  product  safety  evaluations
("DEMKO") is a wholly owned subsidiary of Underwriters Laboratories,  Inc. (UL).
We  plan to work  with UL to  obtain  approvals  for the  U.S.  market.  DGM has
provided us with  information on the necessary  steps in accessing the market of
the EEA, however no contracts have been entered into at this time.

PRODUCT SAFETY  EVALUATION -We believe that one of the most important aspects of
product  safety  is the  design of the  product.  If  safety  standards  are not
considered through the design of the product,  the product safety evaluation may
require that the mechanical AND electrical  parts of the product be re-designed.
Throughout  the CTLM(TM)  design  process,  we have made every effort to confirm
that it complies with all domestic and international  safety standards.  In this
manner, we are very much involved in the product safety evaluation and, although
we have not entered into contract  with a NB for this purpose,  it is in contact
with several  regulatory  agencies on a regular  basis for  guidance.  We cannot
perform  some of the  evaluations,  such as  electrical  magnetic  compatibility
("EMC"), because those tests require costly equipment that is not cost effective
for us to purchase. There is also the consideration of new requirements,  or new
interpretations of existing requirements, that may effect the CTLM(TM).

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

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

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

SALES AND MARKETING

At present,  our President is also the director of sales.  As Director of Sales,
she is in  charge  of  locating,  obtaining,  and  coordinating  with  strategic
marketing   and   distribution   companies   who  have   established   marketing
capabilities,  both  domestic  and  international.  The target  domestic  market
includes most of the over 10,000  mammography  centers across the United States,
which  exists  in both  large and  small  hospitals  and  private  clinics.  The
international target market is large government and private hospitals.
<PAGE>

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

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

RELIANCE ON INTERNATIONAL SALES

The  laws of  certain  European  and  Asian  countries  may  permit  us to begin
marketing the CTLM(TM) in Europe and Asia before marketing would be permitted in
the United States. See Item 1.  "Business-Government  Regulation".  We intend to
commence  international  sales of the  CTLM(TM)  in  Europe  and  Asia  prior to
commencing  commercial sales in the United States.  Until we receive  pre-market
approval from the FDA to market the CTLM(TM) in the United  States,  as to which
there can be no assurance,  our revenues,  if any, will be derived from sales to
international  distributors.  A significant portion of our revenues,  therefore,
may be subject  to the risks  associated  with  international  sales,  including
economical and political  instability,  shipping delays,  fluctuation of foreign
currency  exchange  rates,  foreign  regulatory  requirements  and various trade
restrictions,  all of which  could have a  significant  impact on our ability to
deliver  products  on a timely  basis.  future  imposition  of,  or  significant
increases  in the  level of  customs,  duties,  export  quotas  or  other  trade
restrictions  could have a material  adverse  effect on our business,  financial
condition  and  results  of  operations.  The  regulation  of  medical  devices,
particularly in Europe,  continues to develop and there can be no assurance that
new laws or regulations will not have an adverse effect on us.

In order for us to ship the CTLM(TM) outside of the United States, the following
information  must be  submitted to the FDA:  (i) a complete  description  of the
device intended for export;  (ii) the status of the device in the U.S.;  (iii) a
letter from the  appropriate  foreign  liaison  (person with authority to sign a
letter of acceptance for the foreign  government  stating that (a) the device is
not in  conflict  with the  laws for the  country  to which it is  intended  for
export;  (b) the  foreign  government  has full  knowledge  of the status of the
device in the U.S.;  and (c) import is  permitted  or not  objected  to. The FDA
reviews export  requests to determine that  exportation of the device (1) is not
contrary to public  health and safety and (2) has the approval of the country to
which it is intended for export.  If the device meets the above criteria,  it is
approved  for  export.  See Item 6.  "Management's  Discussion  and  Analysis of
Financial Condition and Results of  Operations-Cautionary  Statements-Government
Regulation",   "Business-Government   Regulation"  and  "Business  International
Distributors".

INTERNATIONAL DISTRIBUTORS

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

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

In April 1998, we entered into an exclusive International Distribution Agreement
with Focus  Surgical  LTD., to distribute  the CTLM(TM) to hospitals and clinics
throughout  the United  Kingdom and Ireland.  The term of the Agreement is three
years,  with a minimum purchase  requirement of 10, 12, and 15 CTLM's(TM) in the
first, second, and third year(s) of the Agreement, respectively. For the purpose
of the  Agreement,  the  first  year is  deemed  to  begin  when we  obtain  PMA
acceptance  from the FDA. See Item 6.  "Management's  Discussion and Analysis of
<PAGE>

Financial Condition and Results of  Operations-Cautionary  Statements-Government
Regulation",  "cCutionary  Statements-  Reliance  on  International  Sales"  and
Description  of   Business-Government   Regulation.   Focus  Surgical  currently
distributes non-competitive laser products for companies such as Sunrise Medical
Technologies and Baltec, among many others.

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

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

We have already secured exclusive distributors as follows:

                      INTERNATIONAL DISTRIBUTORS BY COUNTRY

                                                RENEWAL OPTION
      COUNTRY         TERM        EXPIRATION    BY THE COMPANY   RENEWAL PERIOD
      Australia      3 years        3/13/00          Yes           2 years
      Austria        3 years        3/11/00          Yes           2 years
      Belgium        1 year         2/9/2000         Yes           1 year
       Brunei        3 years        3/13/00          Yes           2 years
       China         3 years        3/13/00          Yes           2 years
      Ecuador        3 years        10/12/00         Yes           3 years
      Holland        1 year         2/9/2000         Yes           1 year
     Hong Kong       3 years        3/13/00          Yes           2 years
       India         3 years        3/13/00          Yes           2 years
     Indonesia       3 years        3/13/00          Yes           2 years
      Ireland        3 years        3/29/01          Yes           1 year
       Israel        2 years        12/31/00         Yes           2 years
     Luxembourg      1 year         2/9/2000         Yes           1 year
       Macau         3 years        3/13/00          Yes           2 years
      Malaysia       3 years        3/13/00          Yes           2 years
    New Zealand      3 years        3/13/00          Yes           2 years
    Philippines      3 years        3/13/00          Yes           2 years
       Poland        3 years        12/3/02          Yes           1 year
      Portugal       3 years        12/3/02          Yes           1 year
       Russia        3 years        3/11/00          Yes           2 years
     San Marino      29 months      11/30/98         Yes           2 years
     Singapore       3 years        3/13/00          Yes           2 years
    South Korea      2 years        2/10/99          Yes           2 years
       Spain         3 years        12/3/02          Yes           1 year
    Switzerland      3 years        3/11/00          Yes           2 years
       Turkey        18 months      7/19/99          Yes           1 years
   United Kingdom    3 years        3/29/01          Yes           1 year
    Vatican City     29 months      11/30/98         Yes           2 years

To date, we have not marketed,  or generated revenues from the commercialization
of the CTLM(TM). Originally, we anticipated that the CTLM(TM) would be ready for
distribution in the summer of 1998.  However,  during the course of the clinical
trials,  certain problems became evident,  solutions to these problems had to be
found and  adjustments  had to be made to the CTLM(TM) to correct such problems.
Due to the delays in the Nassau County clinical  investigational  trials, we are
presently  unable to project when the first  distribution  of the CTLM(TM)  will
occur.
<PAGE>

THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM

In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance  reimbursement  programs.  Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative  attractiveness  of our products by regulating the level
of reimbursement provided by such payors to the physicians and clinics utilizing
the CTLMTM or by refusing reimbursement.  If examinations utilizing our products
were not reimbursed  under these programs,  our ability to sell our products may
be  materially  and/or  adversely  affected.  There  can  be no  assurance  that
third-party payors will provide  reimbursement for use of our products.  Several
states and the U.S.  government are  investigating  a variety of alternatives to
reform the health care  delivery  system and further  reduce and control  health
care  spending  on  health  care  items and  services,  limit  coverage  for new
technology  and limit or control the price  health care  providers  and drug and
device  manufacturers may charge for their services and products,  respectively.
If adopted and  implemented,  such reforms could have material adverse effect on
our business,  financial  condition and results of operations.  In international
markets,  reimbursement  by private  third-party  medical  insurance  providers,
including governmental insurers and independent  providers,  varies from country
to country.  In certain  countries,  our ability to achieve  significant  market
penetration  may  depend  upon  the  availability  of  third-party  governmental
reimbursement.  Revenues and  profitability  of medical device  companies may be
affected by the  continuing  efforts of  governmental  and third party payers to
contain or reduce the cost of health care  through  various  means.  See Item 6.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-Cautionary  Statements-  Limitation  on  Third  Party  Reimbursement;
Health Care Reform".

PRODUCT LIABILITY

Our business exposes us to potential product liability risks, which are inherent
in the  testing,  manufacturing,  and  marketing of cancer  detection  products.
Significant litigation,  not involving us, has occurred in the past based on the
allegations  of false  negative  diagnoses of cancer.  while the CTLMTM is being
developed  as an  adjunct  to  other  diagnostic  techniques,  there  can  be no
assurance  that  we  will  not be  subjected  to  future  claims  and  potential
liability.  Although the FDA does not require liability insurance and we did not
acquire  it for the  Strax  or  in-house  clinical  investigational  trials,  at
present,  we carry $3,000,000 in product  liability  insurance at the request of
Nassau  County,  and will  continue  to carry it for all  clinical  testing  and
subsequent  distributors.  See Item 6. "Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations-Cautionary  Statements-Risk  of
Product Liability".

COMPETITION

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

Largely, the CTLMTM will be competing with established imaging equipment such as
x-ray mammography  equipment,  ultrasound or high definition ultrasound systems,
Magnetic  Resonance Imaging ("MRI") systems,  thermography,  diaphonography  and
transilluminational devices. Physicians presently using these customary types of
imaging  equipment  may not use our  products.  Although  we  believe  that  our
products  may  offer  certain  technological  advantages  over our  competitors'
currently-marketed  products,  earlier  entrants in the market for a  diagnostic
application often obtain and maintain significant market share relative to later
entrants.

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

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

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

PATENTS

The  patent  for the CTLMTM was  issued in  December  1997 under  Patent  Number
569251.  The  Patent  has a total of 4  independent  claims  and 24  subordinate
claims.  The  independent  claims  serve to provide  an  overall  outline of the
disclosure  of  the  invention.   The  subordinate   claims  provide  additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim. We own the rights, to the Patent pursuant
to an exclusive  patent licensing  agreement,  for the use of the Patent for the
CTLM(TM) technology. The life of a Patent is 17 years. Richard Grable, our Chief
Executive  Officer,  owns the patent.  In  addition,  we have twelve  additional
United States patents pending with regard to Optical Tomography, as follows:

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

  PCT APPL.                      FOR                      CASE #    SERIAL #     FILING DATE     PATENT #   PATENT DATE
    <S>                          <C>                       <C>        <C>          <C>           <C>          <C>
   Yes      Diagnostic Tomographic Laser Imaging         6356      08/484,904   6/7/95        5,692,511   12/2/97
            (Electronics & Imaging)

   Yes      Diagnostic Tomographic Laser Imaging         6356-US   08/952,821   7/31/98       Pending
            (Patient Support Structure) in addition

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Device for Determining the Contour of the    6558-1    08/965,148   11/6/97       Pending
            of an Object Being Scanned

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Device for Determining the Perimeter of      6559-1    08/965,149   11/6/97       Pending
            Surface of an Object Being Scanned and for
            Limiting Reflection from the Object
<PAGE>

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Data Acquisition Technique                   6570      60/032,592   11/29/96      Pending

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Data Acquisition Technique Using Wall Eye    6571      60/032,593    11/29/96     Pending

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Detector Array with Variable Amplifiers      6572-1    08/979,328   11/26/97      Pending
            in a Laser Imaging Device

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Detector Array for Use in a Laser Imaging    6573-1    08/963,760   11/4/97       Pending
            Apparatus

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Method for Reconstructing the Image of an    6574-1    08/979,624   11/28/97      Pending
            Scanned with a Laser Imaging Apparatus

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Fluorescent Imaging                          6585     60/036088     1/17/97       5,952,664   9/14/99

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Laser Imaging Apparatus Using Biomedical     6647     09/008,477    1/16/98       Pending
            Markers That Bind to Cancer Cells

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Phantom for Optical and Magnetic Resonance   6648     09/096,521    6/12/98       Pending
            Imaging Quality Control

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   Yes      Time-Resolved Breast Imaging Device          6707     09/199,440    11/25/98      Pending

PCT APPL    FOR                                          CASE #    SERIAL #     FILING DATE   PATENT #    PATENT DATE
   No       Array Used as a Multiple-Detector            6825     60/118,745    2/5/99        Pending
</TABLE>


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


                       FOREIGN PATENT APPLICATIONS PENDING
<TABLE>
<CAPTION>
AUSTRALIA
<S>            <C>             <C>                     <C>                           <C>                   <C>
INV. DATE    INVOICE#      DESCRIPTION               FOR                           INTL. APPL. #     FILING DATE
12/29/97     C974248JD     National Phase in         Diagnostic Tomographic Laser  PCT/US95/08225    7/10/95
                           of PCT Appl.

CANADA
INV. DATE    INVOICE #     DESCRIPTION               FOR                           INTL. APPL. #     FILING DATE
2/4/98       C984481JPD    National Phase in Canada  Diagnostic Tomographic Laser  PCT/US95/08225    7/10/95
                           of PCT Appl.

CHINA
INV. DATE    INVOICE #     DESCRIPTION               FOR                           INTL. APPL. #     FILING DATE
5/27/98      PM986040JD    Chinese Patent Appl.      Diagnostic Tomographic Laser  PCT/US95/08225    7/10/95

EUROPEAN
INV. DATE    INVOICE #     DESCRIPTION               FOR                           INTL. APPL. #     FILING DATE
1/28/98      C984270JD     National Stage in Europe  Diagnostic Tomographic Laser  PCT/US95/08225    7/10/95

JAPAN
2/5/98       C984482JPD    Natl. Phase in Japan      Diagnostic Tomographic Laser  PCT/US95/08225    7/10/95
                           of PCT Appl.
<PAGE>

MEXICO
INV. DATE    INVOICE #     DESCRIPTION               FOR                           INTL. APPL. #    FILING DATE
9/2/98       C987553JD     National Phase in Mexico  Diagnostic Tomographic      PCT/US95/08225      7/10/95

PCT COVERS                                                                      EUROPEAN PATENT
INV. DATE    INVOICE #     DESCRIPTION               FOR                         INTL. APPL. #      FILING DATE
1/3/97       P970502JD     PCT Appl. For RJG         Diagnostic Tomographic     PCT/US95/08225       7/10/95

2/19/98      C984498JPD    PCT Intl. Appl. of IDSI   Detector Array for Use in    97 951 435.3       11/28/97
2/19/98      C984497JPD    PCT Intl. Appl. of IDSI   Method for Reconstructing    97 954 133.1       11/28/97
                                                     Scanned with a Laser

3/18/98      C985531JPD    PCT Intl. Appl. Of Wake,  Device for Determining the   PCT/US97/19615     11/7/97
                           Grable & Rohler           of an Object Being Scanned
                                                     Reflection from the Object

5/13/98      C986209JPD    PCT Intl. Appl. of IDSI   Apparatus for Determining   97 948 135.5        11/7/97
1/20/99      C999316JD     PCT Intl. Appl. of IDSI   Time-Resolved Breast        PCT/US98/24939      11/25/98
6/21/99      C990756JD     PCT Intl. Appl. of RJG    Laser Imaging Apparatus     PCT/US99/04287      4/1/99

</TABLE>

We intend to file for patents on products,  including the CTLM(TM), for which we
feel the cost of obtaining a patent is  economicalLy  reasonable  in relation to
the expected  protection  obtained.  There can be no assurances  that any patent
that we apply for will be issued,  or that any patents  issued will  protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent  infringement  cases  brought  against it, it will
require  substantial  capital,  the expenditure of which we might not be able to
afford. See Item 6. "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Cautionary Statements-Patents".

PATENT LICENSING AGREEMENT

BACKGROUND

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

It was  unanimously  decided that the Private Company should merge with a public
shell  and raise its  initial  seed  funding  through  the sale of Common  Stock
pursuant  to  Regulation  D, Rule 504. On April 14,  1994,  we merged with Alkan
Corp.,  a New Jersey public  company.  Alkan Corp.'s name was changed to Imaging
Diagnostic  Systems Inc. and the privately held Company was dissolved.  Although
we had an understanding with Mr. Grable that we would have the exclusive license
for use of the Patent and Mr. Grable would be paid a royalty, the Patent was not
actually  issued until  December 1997. The amount to be paid for the license and
other terms and conditions of the license were never discussed and the exclusive
license for the patent was never memorialized in written form. It was understood
at the time of the merger that Mr. Grable would be  compensated  for his patent,
when issued,  and that he would receive a development  royalty based on sales of
the device.  In February  1995,  pursuant  to an  amendment  to his July 5, 1994
employment  agreement (the "Employment  Agreement") he was granted a development
royalty based on the net sales of the CTLM(TM).  We still did not have a binding
<PAGE>

agreement  with  regard to our use of the Patent at that time.  When Mr.  Grable
filed the patent  application in June of 1995, the Board  instructed our General
Counsel  to draft an  Exclusive  Patent  License  Agreement.  Our prior  General
Counsel was  involved  with  funding  agreements,  Federal  filings,  employment
contracts  and other legal  issues,  which are inherent to a  development  stage
Company and never prepared the Patent  License  Agreement and we did not realize
that a formal agreement had not been executed.

NEGOTIATIONS

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

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

Moreover, we believe that the terms of the Patent License Agreement are fair and
comparable to terms that would have been required by an unaffiliated third party
holding the Patent,  given the same circumstances and conditions that existed at
the time the Patent License was negotiated. Our belief is based on the following
facts and circumstances;


An oral  understanding  with Mr. Grable already existed regarding the Patent
License.

A Royalty  Agreement was already included in Mr. Grable's  Employment
Agreement.

The negotiations were conducted to agree on the number of shares to be issued as
consideration  for the Patent License,  to modify the terms of the royalty,  and
memorialize the agreed upon terms in a written contract.

We had  expended  substantial  funds for the  development  of the  CTLM(TM)  and
technically had no legal right for its use.

Mr. Grable and mr. schwartz both had a fiduciary duty to our shareholders and us
to formalize, in writing, the oral agreement regarding the patent.

The value of the  Patent to  Imaging  was  determined  by the  preparation  of a
confidential three year pro-forma statement of operations  beginning with fiscal
year June 30, 1998 and ending with fiscal year ended June 30, 2000.

This statement  reflected an average of  $35,615,732  Net Revenues over the last
two fiscal years assuming that we received FDA marketing clearance in the latter
part of calendar 1998.  Since all of the revenues and our existence were totally
dependent on Mr. Grable's patent,  it was determined that a reasonable  one-time
license fee would be 10% of that average over the two-year period.  That amount,
$3,561,573 was  approximately  the value of the shares ultimately agreed upon by
both parties. Due to the delays in obtaining the new laser system, the delays in
the  modification and redesign of the CTLM(TM) and the delay in the commencement
of tHe Nassau County clinical investigational trials, we are unable to determine
when we might anticipate FDA marketing clearance. Moreover, due to these delays,
we are unable to determine when we will begin to generate revenue.

The lack of a  fairness  opinion  by a  financial  advisor  did not  affect  the
decision of the board, due to the foregoing and because:
<PAGE>

Under Mr.  Grable's  guidance,  the  development  of the  CTLM(TM)  was  nearing
completion.

This  situation  placed  Mr.  Grable  in  better  bargaining   position,   which
strengthened as the CTLM(TM) moved closer to being a marketable  medical imaging
device.

FDA clinical trials were underway.

Three  external  clinical  sites at  hospitals  in the United  States were being
planned.

The Board believed that the transaction was fair.

Initially,  Mr.  Grable's  counsel  advised him to request 15 million  shares of
Common Stock that would be immediately  registered in order to afford Mr. Grable
protection against dilution.  We rejected that offer and continued  negotiating.
After  several  offers and counter  offers and several  discussions,  Mr. Grable
accepted a lesser number of shares (7,000,000) with anti-dilution provisions and
agreed to payment of the licensing fee in two  installments,  one year apart and
agreed to accept restricted shares with no registration  rights. In addition,  a
new royalty  structure,  based upon the net selling  price of all  products  and
goods in which the Patent is used,  before taxes and after  deducting the direct
cost of the product and  commissions  or discounts paid was agreed to. Under Mr.
Grable's prior employment agreement, once we began to generate revenues, we were
contractually  obligated  to pay  the  development  Royalties  set  forth  below
pursuant to Mr. Grable's Employment Agreement. The Development Royalties expired
in  July  1999  with  the  expiration  and  replacement  of Mr.  Grable's  prior
employment agreement.

Pursuant to the License  Royalty  structure,  the  percentage of Royalties to be
paid  is in a  declining  scale  as  opposed  to the  ascending  scale  for  the
Development Royalties. Although the License Royalty structure is higher on every
level than the Development Royalty structure, we believe that in the long run it
is more  advantageous  for us to pay a higher  Royalty  and have the  legal  and
exclusive  right to use the patent as opposed to being  obligated to pay a lower
development  Royalty pursuant to an Employment  Agreement,  with no right to the
Patent.  Moreover, at the $10,000,000 plus level (the level which represents the
sale of  approximately  29  machines  per year) the  difference  in the  Royalty
structure  is only 1%. The  following  is a comparison  of the  Development  and
License Royalty structures:

  DEVELOPMENT ROYALTY STRUCTURE                 LICENSING ROYALTY STRUCTURE

  GROSS SALES               PERCENTAGE        GROSS SALES            PERCENTAGE

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


AGREEMENT

In June 1998,  we entered into a Patent  Licensing  Agreement  with Mr.  Grable.
Pursuant to the terms of the Patent  Licensing  Agreement,  we were  granted the
exclusive right to modify, customize, maintain, incorporate,  manufacture, sell,
and otherwise utilize and practice the Patent, all improvements  thereto and all
technology  related to the process,  throughout  the world.  This license  shall
apply to any extension or re-issue of the Patent. The term of the license is for
the  life  of the  Patent  (17  years)  and  any  renewal  thereof,  subject  to
termination, under certain conditions. As consideration for the License, on June
5,  1998,  we  issued to Mr.  Grable  3,500,000  shares  of Common  Stock and an
additional  3,500,000 shares in June 1999. The market price of the Shares at the
time of the 1999 issuance was $.54 per Share. In addition, we have agreed to pay
to Mr.  Grable,  a royalty  based upon the net selling  price (the dollar amount
earned from the sale, both  international  and domestic,  before taxes minus the
cost of the goods sold and  commissions or discounts  paid), of all products and
goods in which the patent is used.  During the second year of the Agreement,  we
must pay a minimum cash  royalty of $250,000 at the end of the second year.  Mr.
Grable has  deferred  this  minimum  cash  royalty  until we commence  sales and
delivery of CTLM(TM) systems.

The Board of Directors did not submit the matter for a shareholder's  vote prior
to the execution of the Patent License  Agreement or the issuance of the shares,
since the Florida Business Corporation Act did not require shareholder approval.

The Patent Licensing Agreement also contains  anti-dilution  protection upon the
occurrence  of any stock  dividend,  stock  split,  combination  or  exchange of
shares,   reclassification   or   re-capitalization   of   our   Common   Stock,
reorganization, consolidation with or merger into, or sale or conveyance of all,
or substantially  all of our assets to another  corporation or any other similar
<PAGE>

event  which  serves to  decrease  the number of Shares  issued  pursuant to the
Patent Licensing Agreement. See Item 6. "Management's Discussion and Analysis of
Financial  Condition  and Results of  Operations-Cautionary  Statements-Possible
Conflict of Interest"  and "Certain  Transactions".  The Patent has generated no
revenues to date. We had  anticipated  generating  revenues in the fourth fiscal
quarter  beginning April 1999.  However,  due to the  developmental and clinical
investigational trial delays, it is unlikely that these projections will be met.

OEM AGREEMENT

In January 1998, we entered into an Original  Equipment  Manufacturer  Agreement
(OEM) with  Imation  Corp.  ("Imation").  In December  1998,  Imation's  medical
imaging business in North America,  Latin America, and Asia was purchased by the
Eastman  Kodak  Company.  Immediately  after the purchase by Kodak,  we received
correspondence  from Kodak,  which confirmed that our OEM agreement would not be
changed by the acquisition of Imation. At that time, we purchased a new Dry View
Imager,  which was delivered on April 5, 1999. The  additional  Imation Dry View
Imager on loan to us as a  demonstrator  was  shipped to Nassau  County  Medical
Center on April 7, 1999.

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

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

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

NASDAQ LISTING

On March 24, 1996, we filed an application with Nasdaq to be listed on the Small
Cap Market.  Our request for  listing was  subsequently  denied  after a hearing
before the Listing Qualifications Panel (the "Panel"). The denial was based upon
the fact that one of our outside  shareholders (the  "Shareholder"),  who had no
control  or  relationship  with us,  other than as a  minority  shareholder  had
record-keeping  that  was  not  in  compliance  with  NASD  regulations  in  his
previously owned broker-dealer and owned a 5% interest in us.

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

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

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

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

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

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

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

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

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

We contend  that this  determination  is  incorrect  as we never went  through a
re-application  process following remand. The Council went on to state, in part,
that:

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

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

On June 11, 1998,  we filed an  Application  for Review before the United States
Securities  and Exchange  Commission to appeal the Decision of the Council.  The
basis  for the  appeal  was that the  Council  erred in  affirming  the  Panel's
decision placing conditions upon our initial inclusion. We contended that:

v        It did satisfy all the listing  requirements  on a timely basis but was
         initially rejected for listing by the Nasdaq Staff and Panel on grounds
         that were ultimately reversed by the Committee in the first appeal.

v That we satisfied the listing  requirement  and this fact was so recognized in
the Committee's Decision in the first appeal. v That due to the four month delay
cased by the  Nasdaq  Staff;  dilatory  review  process,  and the  irresponsible
remarks made by a

         Nasdaq Staff member to  Barron's;  the price of the our stock  declined
         below the initial  listing  requirement  (but  remained  well above the
         maintenance requirement).

         Based upon price deficiency alone, we were denied listing.
<PAGE>

On August 8,  1998,  we filed our Brief in Support of  Application  for  Review.
Nasdaq's brief was due on September 10, 1998 and filed on September 15, 1998. On
September  25, 1998,  we filed our Reply  Memorandum  to the Brief of the Nasdaq
Stock  Market.  On July 21,  1999,  we  received  an Opinion  of the  Commission
dismissing our application for review.  The Commission found that Nasdaq did not
exceed its authority by requiring us to:

         Satisfy the $4.00 per share bid price requirement.
         Satisfy all other requirements for initial listing.
         Evidence a minimum of $5,000,000 in net tangible assets.

EMPLOYEES

As of the date of this Report,  we have 31 full-time  employees,  including  our
three executive  officers.  A majority of our employees (18) are employed in the
areas of scientific and product research and development. Our ability to provide
our services is dependent upon our  recruiting,  hiring and retaining  qualified
technical personnel. To date, we have been able to recruit and retain sufficient
qualified personnel.  None of our employees are represented by a labor union. We
have not  experienced  any work  stoppages and consider our  relations  with our
employees to be good.

Due  to  the  specialized  scientific  nature  of our  business,  we are  highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel.  Therefore, we have entered into employment agreements
with  certain  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 our research
and  development  programs  and to our  business.  Our  anticipated  growth  and
expansion  into areas and activities  requiring  additional  expertise,  such as
marketing,  will require the addition of new management  personnel.  Competition
for qualified personnel is intense and there can be no assurance that we will be
able to continue to attract and retain  qualified  personnel  necessary  for the
development  of our  business.  See.  Item 9.  "Directors,  Executive  Officers,
Promoters and Control Persons; and Compliance with Section 16(a) of the Exchange
Act".

YEAR 2000

We have  reviewed  and tested our  existing  computer  systems and our  CTLM(TM)
software  and  hardware  products  to ensure  these  systems  aND  products  are
adequately  able to address  the issues  expected  to arise in the year 2000 and
thereafter.  We have  invested,  and will  continue to invest,  in improving our
information technology infrastructure to ensure that such infrastructure is Year
2000 compliant.  Our information  technology system employs Microsoft Windows NT
4.0 Network on three file servers and fifty  workstations.  The CTLM(TM) and its
proprietary  software comprise its  non-information  technology that is not date
dependent.

We have successfully  implemented the systems and programming  changes necessary
to address Year 2000 issues and have spent approximately  $2,500 for third party
software upgrades and Microsoft  Developers Network software ("MSDN").  The MSDN
software  allows  our  computer  programmers  to  update  our  software  to  Y2K
compliance by recompiling the source code. We renewed and will continue to renew
our  subscription  to MSDN  annually.  We do not track the internal costs of our
Year 2000 Compliance Plan. These costs are principally related payroll costs for
our computer-engineering group.

We have  received  the  latest  MSDN  update  from  Microsoft  and our  software
engineers have recompiled all of the proprietary  software used in the CTLM(TM).
Our proprietary software is now Y2K compliant.

We are  dependent  on the  following  software  programs to conduct our business
operations:

     Accounting:                    Peachtree Complete, release 6.0
     Manufacturing:                 Alliance Manufacturing Software, Ver. 2.4a

     Operating Systems:             Windows NT 4.0 and Windows 95
     Word Processor:                Microsoft Office Professional 97

     Database:                      Oracle7

The Peachtree Complete,  Alliance Mfg., and the Oracle7 are Year 2000 compliant.
The  Microsoft  Windows NT 4.0 and Windows 95 are  compliant  with minor issues.
Office Professional 97 is compliant. We believe that these software programs are
Y2K compliant,  however, there is a risk that some or all of these programs will
have minor Y2K issues.  We have in place a disaster  recovery  plan to deal with
any software or hardware failure.

We have tested our  servers  and  workstations  for Y2K  compliance.  All of our
computers have Intel Pentium processors. During stand-alone tests, the computers
with Intel Pentium processors were Y2K compliant. Software has been purchased to
test and repair  non-compliant  systems.  The  testing and  re-mediation  by our
Computer  System Support  Engineer has been completed and we are, as of the date
of this report, Y2K compliant.

We have not fully  determined  the extent to which we may be  impacted  by third
parties'  systems,  which may not be Year 2000  compliant.  While we have  begun
efforts to seek reassurance  from our suppliers,  there can be no assurance that
the systems of other companies,  whom we deal with, will be Year 2000 compliant.
Third  parties'  non-compliance  could have an adverse  effect on us. Failure of
third party  vendors to deliver  parts and  components  timely could  materially
affect our ability to manufacture and deliver CTLM(TM) systemS.  Because of this
potential  risk, a checklist of Y2K compliant  vendors and  sub-contractors  has
been compiled and we have begun to expand our vendor and sub-contractor  base to
safeguard us against this  uncertainty.  Our Year 2000 Compliance  Committee has
prepared a worst case Y2K scenario which  estimates that Internet access will be
severely  impaired,  including the ability to send and receive e-mail,  possible
difficulty in connecting our computer to remote  clinical  sites,  and delays in
shipment and delivery of parts,  components and finished goods. Overall fear and
confusion of the Y2K problem may temporarily  impair many companies,  even those
who are Y2K compliant.

We can fully function without the use of the Internet and e-mail.  Clinical data
will be sent via  overnight  delivery  from the  clinical  sites to us. Fear and
confusion will diminish in a few weeks as companies and  individuals  learn that
most companies are compliant and operating without any major problems. Delays in
shipping will be a minor inconvenience as we will have stockpiled critical parts
and components in anticipation of Y2K. We have a Disaster Recovery Plan in place
to deal  with  software  and  hardware  failures.  This plan  provides  that all
computer  workstations  are backed up on tape every night and a spare  server is
ready to be installed upon failure of any server in service. All of our clinical
data  is  stored  separately  on a  RAID-5  system.  RAID  (redundant  array  of
independent  disks) is a way of storing the same data in different places (thus,
redundantly) on multiple hard disks.

ITEM 2.  DESCRIPTION OF PROPERTY

Our facilities  are located at 6531 N.W. 18th Court,  Plantation,  Florida.  The
facilities are owned by us and comprise a 24,000-sq. ft. building located on a 5
acre  landscaped  tract.  In April 1999, we placed a mortgage on our property in
connection  with  the  issuance  of  a  Convertible   Debenture.   See  Item  6.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-Cautionary  Statements - Uncertain  Ability to Meet Capital Needs and
Sale of  Unregistered  Securities-Convertible  Debenture".  We believe  that our
facility is adequate for our current and reasonably foreseeable future needs. We
will assemble the CTLM(TM) at our facility from hardware components that will be
made by vendors according to Company specifications.  The softwaRE components of
the CTLM(TM) device are developed by us.

ITEM 3.  LEGAL PROCEEDINGS

On July 10, 1997,  we filed an action in the Circuit  Court of the 17th Judicial
Circuit in and for Broward County, case no. 97-10533,  against Dr. Valey Kamalov
("Kamalov")  and Irina  Struganova.  The  complaint  alleges  that  Kamalov,  an
ex-employee of ours,  violated his employment  agreement with us while employed.
After   terminating   his   employment   with   us  he   violated   non-compete,
confidentiality,  and invention covenants of his agreement.  We believe that Dr.
Kamalov  appropriated  our  propriety  information  and  used  Company  time and
resources to develop technology,  which he removed from our premises for his own
personal use after  terminating his  employment.  In order to obtain and keep in
place a temporary  injunction  that prohibited him from using the technology and
the  propriety  information,  we had to  post  two  bonds  for an  aggregate  of
$100,000.  The technical aspects of the case were very complicated and the Court
lifted the restraining  order.  We appealed and lost. Dr. Kamalov  threatened to
file a counterclaim.  Due to the substantial  legal expenses  incurred and to be
incurred by us in proceeding  with the  litigation,  the possible  addition of a
counterclaim and the complicated  technical  aspects of the case, our litigation
counsel  recommended that we settle the matter.  We entered into a settlement in
December 1998.  Pursuant to the settlement,  Dr. Kamalov retained $90,000 of the
$100,000 bond and the remainder was returned to us.

On October 7, 1998 a lawsuit was filed against us in the United States  District
Court,  Southern District of New York, by the Series B Holders (Case No. 98 Civ.
086). We were served on October 19, 1998.  The lawsuit  alleges that we breached
the  contract  of sale to the Series B Holders by,  among other this  failing to
convert the Series B Preferred  Stock and failure to register  the Common  Stock
underlying  the  Preferred.  In April  1999,  the Series B  Preferred  Stock was
purchased  from the Series B Holders by an  unaffiliated  third party,  Charlton
Avenue LLC  ("Charlton").  On April 6,  1999,  we  entered  into a  Subscription
Agreement with Charlton whereby we agreed to issue to Charlton 138 shares of our
Series I, 7% Convertible Preferred Stock. Our Board of Directors established the
value of the Series I  Preferred  at $10,000  per share.  Consideration  for the
subscription was paid as follows:

         (1)      Forgiveness  of  all  of  the  interest  due  and  payable  in
                  connection  with the  Series  B  convertible  Preferred  Stock
                  (approximately $725,795).

         (2)      Settlement  and  dismissal,  with  prejudice,  of  all
                  litigation concerning the Series B convertible  Preferred
                  Stock.

         (3)      Cancellation of 112,500  Warrants  that were  issued  with the
                  Series B  Convertible Preferred  Stock;  and

         (4)      The amendment  of the  Series  B  Preferred designation to
                  impose a limitation on the owner(s) of the Series B
                  Convertible  Preferred  Stock to  ownership  of not more  than
                  4.99% of our outstanding Common Stock at any one time.

On August 25, 1999 the  Company  was served with a civil suit by Andrew  Abraham
Skolnick,  which we believe to be without merit. Our attorneys have filed for an
extension in order to prepare a motion for dismissal.

We  are  not  aware  of  any  other  material  legal  proceedings,   pending  or
contemplated,  to  which we are,  or would be a party to or of which  any of our
property  is, or would be, the  subject.  See Item 5.  Market  for  Registrant's
Common   Equity   and   Related   Stockholder   Matters-Sale   of   Unregistered
Securities-Preferred Stock-Series B".

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

We have not submitted any matters to a vote of Security  Holders.  As of the 3rd
day of December 1998, Austost Anstalt Schaan, Avalon Capital Ltd., Balmore Funds
S.A.,  Steven Cohen,  Canadian  Capital Fund Ltd.,  Dominion Capital Funds Ltd.,
Linda B. Grable,  Richard J. Grable,  Deborah O'Brien,  The Malcolm Kanan Empire
Trust and Allan L. Schwartz,  (collectively "the Majority Common Shareholders"),
and Goodland  International  Investment Ltd., Weyburn Overseas Limited,  Austost
Anstalt  Schaan and Balmore Funds S.A.  (collectively  "the  Majority  Preferred
Shareholders  authorized by written action,  our adoption of an amendment to our
Certificate of  Incorporation,  as amended,  to increase the  authorized  Common
Stock from  48,000,000  shares to  100,000,000  shares (the  "Written  Action").
Taking into account such  provisions,  the Majority Common  Shareholders and the
Majority Preferred Shareholders (collectively, "the Majority Shareholders") were
entitled to and voted the number of shares set forth opposite their names:
<TABLE>
<CAPTION>

NAME                            # OF COMMON           % OF COMMON        # OF PREFERRED      % OF
                                SHARES                SHARES             SHARES              PREFERRED
                                OUTSTANDING (1)                                              SHARES
                                                                                             OUTSTANDING (2)

<S>                                     <C>             <C>                   <C>                <C>

Austost Anstalt Schaan (4)          342,533             .9%                   50               8.96%
Avalon Capital Ltd.                 673,401            1.7%
Balmore Funds S.A.(5)               342,533             .9%                   50               8.96%
Steven Cohen                        396,700            1.0%
Canadian Capital Fund Ltd.          636,379            1.65%
Dominion Capital Funds Ltd.       1,334,996            3.5%
Goodland International
Investment Ltd. (3)                                                          315               56.45%
Linda B. Grable                   3,497,800            9.1%
Richard J. Grable                 7,995,040           20.8%
Deborah O'Brien                     287,000             .75%
Allan L. Schwartz                 3,579,980            9.3%
The Malcolm Kanan Empire Trust    1,200,000            3.1%
Weyburn Overseas Limited (2)                                                 135              24.19%
         TOTAL                   20,328,462           52.8%                  550              98.56%
</TABLE>

1.   This column sets forth the  percentage of the total number of common shares
     outstanding as of December 3, 1998 (38,510,399  shares), the date the final
     written action was executed and presented to our Board of Directors.  As of
     October 11, 1999, there are 57,247,380 shares of Common Stock outstanding.

2.   This  column set forth the  percentage  of the total  number of  Preferred
     Shares  outstanding  as of  December  3, 1998 (558 Shares).

3.   Everest Capital  Limited,  is the investment  manager for Weyburn  Overseas
     Limited and Goodland International Investments, Ltd. Mr. John Malloy is the
     Managing  Director of Everest  Capital  Limited,  a British  Virgin  Island
     corporation.

4.   Thomas  Hackl and  Peter  Nakowitz  are the  Directors  of and have  voting
     control over Austost Anstalt Schaan, a British Virgin Island corporation.

5.   Francois  Morax and  Matityahu  Kaniel are the Directors of and have voting
     control over Balmore Funds S.A., a Liechtenstein corporation.


Pursuant  to Section  607.0704  Florida  Statutes,  any action to be taken at an
annual or  special  meeting  of  shareholders  may be taken  without a  meeting,
without  prior notice and without a vote if the action is taken by a majority of
the holders of  outstanding  stock of each  voting  group  entitled to vote.  In
addition  the  voting  rights   provided  to  the  Common  Stock  holders,   the
Certificates  of Designation  of the Series B, D, E, and H Preferred  Stock (the
"Certificates"),  provide  that, in the event there are  insufficient  shares to
effect a conversion, we are required to increase the number of authorized shares
to effect such conversion.  Preferred Holders, pursuant to the Certificates, are
granted voting rights, and voted solely for the purpose of increasing the number
of authorized  shares to accommodate  the conversion of their  preferred  shares
into common shares.  Due to the decrease in our stock price,  we did not have an
adequate number of common shares authorized to meet our contractual  obligations
with regard to the conversion of the Preferred Stock. In addition, the Amendment
will  insure  that  there are a  sufficient  number  of  shares of Common  Stock
available for issuance upon exercise of  outstanding  stock options and warrants
and enhance our ability to attract and retain qualified employees,  consultants,
officers and directors by enabling us to create stock  options,  incentives  and
rewards for their contributions to our success.  Moreover, until such time as we
are able to generate revenues,  we are dependent on equity or other financing to
continue  operations.  We will  require  substantial  additional  funds  for our
research and development programs,  pre-clinical and clinical testing, operating
expenses, regulatory processes and manufacturing and marketing programs.

The issuance of large  amounts of Common Stock upon  conversion of the preferred
and the  subsequent  sale of such  shares may  further  depress the price of the
Common  Stock.  In addition,  since each new  issuance of Common  Stock  dilutes
existing  shareholders,  the  issuance  of  substantial  additional  shares  may
effectuate  a change  of  control.  As of the  date of this  Report,  there  are
57,247,380 shares outstanding. Based on the average bid and ask closing price of
our Common Stock as of October 11, 1999 ($0.109) approximately 41,574,279 shares
would be required to convert the Series B shares, approximately 1,866,667 shares
would be required to convert the Series G shares, approximately 6,965,174 shares
would be required to convert the Series H shares, approximately 16,739,447 would
be  required  to convert the Series I shares,  approximately  21,227,559  shares
would be required to convert the Debenture  and,  although we are  contractually
prohibited from doing so approximately  167,410,714  shares would be required to
draw down the entire Equity Line of Credit. In addition, approximately 4,890,921
shares would be required for the  exercise of options and  warrants.  Based upon
the  foregoing,  as of October 11, 1999,  we would need in excess of 318 million
authorized shares to effectuate all conversion, utilize the total Equity Line of
Credit and fulfill our remaining stock related obligations including the current
issued and outstanding shares.

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

                                     PART II

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

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

     QUARTER ENDING        HIGH/LOW BID         LOW/LOW BID

FISCAL YEAR 1996

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

FISCAL YEAR 1997

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

FISCAL YEAR 1998

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

FISCAL YEAR 1999

September 1998               $0.56                $0.21
December 1998                $1.00                $0.35
March 31, 1999               $0.59                $0.34
June 30, 1999                $0.47                $0.28

On October 11, 1999,  the closing trade price of the Common Stock as reported on
the OTC Bulletin Board was $.112. As of such date, there were  approximately 745
holders of record of our Common Stock.

SALE OF UNREGISTERED SECURITIES

PRIVATE PLACEMENT OF PREFERRED STOCK

We have had to rely on the private  placement of  Preferred  and Common Stock to
obtain working  capital.  In deciding to issue Preferred  Shares pursuant to the
private placements,  we took into account the number of common shares authorized
and  outstanding,  the  market  price  of the  Common  Stock at the time of each
Preferred  sale and the number of common shares the Preferred  Shares would have
been  convertible  into at the time of the  sale.  At the  time of each  private
placement of Preferred Stock there were enough shares, based on the price of our
Common Stock at the time of the sale of the  Preferred to satisfy the  Preferred
conversion  requirements.  Although our Board of Directors  tried to negotiate a
floor on the conversion  price of each series of Preferred  Stock prior to sale,
it was unable to do so. In order to obtain  working  capital we will continue to
seek capital through debt or equity  financing which may include the issuance of
Convertible Preferred Stock whose rights and preferences are superior than those
of the Common Stock holders.  We will endeavor to negotiate the best transaction
possible taking into account the impact on our shareholders,  dilution,  loss of
voting power and the  possibility of a change of control.  However,  in order to
satisfy  our  working  capital  needs,  we may be  forced  to issue  convertible
securities with no limitations on conversion.  In addition, the dividends on the
Preferred Stock affect the net losses applicable to shareholders. There are also
adjustments  as a  result  of the  calculation  of the  deemed  Preferred  Stock
dividends  applicable  because we have  entered  into  contracts  providing  for
discounts  on the  Preferred  Stock  when it is  converted.  As a result  of the
dividends on cumulative Preferred Stock, the net loss per common shareholder has
increased  from $.07 per share for fiscal  year ending June 30, 1998 to $.02 per
share for fiscal year ending June 30,  1999.  The  cumulative  total is $.21 per
share.

In the event  that we issue  Preferred  Stock  without a limit on the  number of
shares  that can be issued  upon  conversion  and the price of our Common  Stock
decreases,  the percentage of shares  outstanding that will be held by preferred
holders upon  conversion will increase  accordingly.  The lower the market price
the greater  the number of shares to be issued to the  preferred  holders,  upon
conversion,  thus increasing the potential  profits to the Holder when the price
per share  increases  and the Holder  sells the  Common  Shares.  The  Preferred
Stockholders  potential  for  increased  share  issuance  and profit,  including
profits  derived from shorting our Common Stock, in addition to a stock overhang
of an  undeterminable  amount,  may  depress the price of our Common  Stock.  In
addition,  the sale of a substantial amount of Preferred Stock to relatively few
holders could effectuate a possible change of control. Moreover, in the event of
a voluntary or involuntary  liquidation of the Company while the Preferred Stock
is outstanding,  the holders will be entitled to a preference in distribution of
our  property  available  for  distribution  equal to  $10,000  per  share.  The
following table summarizes  certain  information with regard to the Series B, D,
E, G, H, and I Preferred Shares as of October 11, 1999.

<TABLE>
<CAPTION>
SERIES/# OF     COMMON      CONVERSION    # OF COMMON SHARES     APPROX. PRICE OR       # OF COMMON SHARES
<S>               <C>         <C>           <C>                       <C>                   <C>
B/360           $4.70       $3.85         1,168,831              $.379 to $.1131        4,651,651 (2)
D/50            $1.22       $.915         546,448                $.2265 to $.495        1,717,134
E/54            $1.093      $.81975       658,737                $.29775 to $.77475     1,282,826
G/14            $.34        $.255         1,490,196              $.1519 to $.10875      1,805,731
H/49            $.56        $.42          2,571,429              $5025 to $.10875       2,784,230
I/138           $.38        $.285         4,842,105              N/A                    N/A
</TABLE>


(1)   Approximate number estimated for the purpose of this table only.

(2)   Represents  conversion  of 90  shares  of Series B  Preferred  Stock.  The
      remaining 360 shares remain  unconverted.  The  conversion  notice for the
      Series B Preferred Stock  previously  received by us has been cancelled by
      the new Series B Holders.  In  addition,  pursuant to the  issuance of the
      Series I Preferred to the Series B Holders the 1,542,877  shares that were
      required to be issued  pursuant to the dividend  provision of the Series B
      Preferred Shares have been forgiven..

(3)   Represents  conversion  of 59  shares  of Series H  Preferred  Stock.  The
      remaining 49 shares remain unconverted.  As of October 11, 1999, 2,924,731
      shares would be required to convert the Series H shares at the  conversion
      price of $.2325 per share.


SERIES B PREFERRED STOCK

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

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

On October 7, 1998 a lawsuit was filed against us in the United States  District
Court,  Southern District of New York, by the Series B Holders (Case No. 98 Civ.
086). See Item 3 "Legal  Proceedings".  On April 6, 1999, the Series B Preferred
Stock was sold by the Series B Holders to Charlton  Avenue,  LLC (Charlton),  an
unaffiliated  third  party  with no  prior  relationship  to us or the  Series B
Holders.  On April 6, 1999, we also entered into a  Subscription  Agreement with
Charlton  whereby we agreed to issue to Charlton  138 shares of our Series I, 7%
Convertible Preferred Stock. Our Board of Directors established the value of the
Series I Preferred at $10,000 per share.  Consideration for the subscription was
paid as follows:

         (1)      Forgiveness of all of the accrued interest due and payable
                  (approximately  $725,795) in connection with the Series B
                  convertible Preferred Stock.
         (2)      Settlement and dismissal,  with  prejudice,  of all litigation
                  concerning  the Series B convertible  Preferred  Stock and the
                  exchange of mutual releases.
         (3)      Cancellation of 112,500 Warrants that were issued with the
                  Series B Convertible  Preferred  Stock;  and
         (4)      The  amendment  of the Series B Preferred  designation  to
                  impose a  limitation  on the owner(s) of the Series B
                  Convertible  Preferred  Stock to  ownership  of not more  than
                  4.99% of our  outstanding  Common  Stock at any one time.  The
                  Series B Preferred  is  convertible  at 82% of the average bid
                  price  for  the  five  trading  days   immediately   preceding
                  conversion and pays a premium of 7% per annum.  As of the date
                  of this  Report,  60 shares of Series B  Preferred  Stock have
                  been  converted  into  1,931,123  shares of Common  Stock at a
                  conversion  price of $.379  per  share,  10  shares  have been
                  converted  into 620,155 shares of Common Stock at a conversion
                  price of $.16125,  3 shares have been  converted  into 547,409
                  shares of Common Stock at a conversion price of $.127875,  and
                  17 shares have been converted into 1,552,964  shares of Common
                  Stock at a conversion price of $.1131 leaving a balance of 360
                  shares not yet converted.

SERIES C PREFERRED STOCK

On October 6, 1997,  we  finalized  the  private  placement  to Austost  Anstalt
Schaan,  UFH  Endowment,  Inc.,  Chris Baum,  Avalon Capital  Limited,  Dominion
Capital,  Ltd. and The Cuttyhunk Fund Limited and aggregate of 210 shares of our
Series C Convertible  Preferred  Stock ("the  "Preferred  Shares") at a purchase
price of $10,000 per share and Warrants to purchase up to 105,000  shares of our
Common  Stock at an  exercise  price of $1.63 per share  and to  purchase  up to
50,000  warrants at an  exercise  price of $1.56.  The  offering  was  conducted
pursuant to Regulation S as  promulgated  under the  Securities  Act of 1933, as
amended (the ("Regulation S Sale"). At the time the placement was concluded, the
average bid and ask price of our Common Stock was approximately $1.63 per share.

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

Pursuant to the Regulation S Sale documents,  we were also required to escrow an
aggregate of 3,435,583  shares of our Common Stock (200% of the number of shares
the Purchasers would have received if the Preferred Shares were exercised on the
closing date of the  Regulation S Sale).  The shares  underlying  the  Preferred
Shares and Warrants  were  entitled to demand  registration  rights in the event
that Regulation S was amended prior the conversion of the Preferred Stock.  This
right expired upon conversion.

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

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

SERIES D PREFERRED STOCK

On January 9, 1998, we finalized the private placement to Avalon Capital Ltd. of
50 shares of our Series D Convertible Preferred Stock ("the "Preferred Shares"),
at a purchase  price of $10,000 per share and  Warrants to purchase up to 25,000
shares of our Common Stock at an exercise price of $1.22 per share. The offering
was conducted  pursuant to Regulation S as promulgated  under the Securities Act
of 1933,  as amended (the  "Regulation S Sale").  At the time the placement was
concluded,  the average bid and ask price of our Common Stock was  approximately
$1.22 per share.

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

In  connection  with the  Regulation  S Sale,  we issued 4  Preferred  Shares to
Settondown Capital  International,  Ltd., an unaffiliated  Investment Banker for
placement  fees and paid legal fees of $5,000.  Net  proceeds  to us of $495,000
were used for  working  capital and the  continuous  research,  development  and
testing  of  the  CTLM(TM).  The  Series  D  Preferred  Stock  was  subsequently
converted,  in incremenTS of less than 4.9% of our outstanding  shares,  into an
aggregate of 1,717,134 common shares.

SERIES E PREFERRED STOCK

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

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

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

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

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

SERIES F PREFERRED STOCK

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

The F Preferred  Shares pay a dividend of 6% per annum,  payable in Common Stock
at the time of each conversion and were convertible, at any time, commencing May
15,  1998  and  for  a  period  of  two  years  thereafter   without  additional
consideration.  Pursuant to the Subscription Agreement,  the Series F Holder, or
any subsequent holder of the F Preferred Shares,  was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the  beneficial  owner,  in accordance  with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock. Due to this contractual ownership limitation,  the
Series F Preferred Shares were converted,  in increments that, together with all
shares of our Common  Stock held by the  Holder,  would not exceed  4.99% of our
outstanding Common Stock. The number of fully paid and non-assessable  shares of
our Common Stock,  issued upon conversion was determined by dividing (i) the sum
of $10,000 plus any earned dividends by (ii) the Conversion Price (determined as
hereinafter  provided)  in effect  at the time of  conversion.  The  "Conversion
Price" is equal to seventy  percent  (70%) of the Average  Closing  Price of the
Corporation's  Common Stock for the five-day  trading  period  ending on the day
prior to the date of conversion.  The shares underlying the Preferred Shares are
entitled  to  demand  registration  rights in the event  that  Regulation  S was
amended prior the  conversion of the Preferred  Stock.  Pursuant to these demand
rights the  1,971,375  shares of Common Stock issued upon the  conversion of the
Series F Preferred are being  registered on behalf of the Holders (the "Series F
Preferred  Holders")  pursuant  to a  Registration  Statement  on Form SB-2 (the
"Registration Statement").

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

SERIES G PREFERRED STOCK

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

The Series G Preferred has no dividend provisions.  The number of fully paid and
non-assessable  shares of  Common  Stock to be issued  upon  conversion  will be
determined  by  dividing  (i) the  sum of  $10,000  (ii)  the  Conversion  Price
(determined  as hereinafter  provided) in effect at the time of conversion.  The
"Conversion Price" is equal to lesser of (i) seventy-five percent (75%) discount
to the two lowest bids in a ten day period immediately  preceding the conversion
date; or (ii) $.54. There is no floor on the conversion price and no time limits
on  conversion.  The  shares can be  converted  at any time  without  additional
consideration. Pursuant to the Subscription Agreement, and Series G Designation,
the  Series G Holder,  or any  subsequent  holder of the  Preferred  Shares,  is
prohibited from converting any portion of the Preferred Stock which would result
in the  Holder  being  deemed  the  beneficial  owner,  in  accordance  with the
provisions of Rule 13d-3 of the Securities  Exchange Act of 1934, as amended, of
4.99% or more of the then  issued  and  outstanding  Common  Stock . Due to this
ownership  limitation,  the Series G Preferred  Shares can only be  converted in
increments  that,  together  with all  shares of our  Common  Stock  held by the
Holder, would not exceed 4.99%. Pursuant to the terms of the Registration Rights
Agreement we were  required to register  100% of the number of shares that would
be required to be issued if the Preferred Stock were converted on the day before
the filing of the  Registration  Statement.  In the event that the  Registration
Statement  was not  filed  within  14 days  from the  closing  or that it is not
declared  effective  within 60 days,  we will be  required  to pay the  Series G
Holders, as liquidated damages,  for failure to have the Registration  Statement
declared effective;  and not as a penalty of three (3%) percent of the principal
amount of the  Securities  for each thirty (30) day period  thereafter  until we
procure  registration  of the  Securities.  In the event  that the  Registration
Statement is not declared  effective  within 120 days, the Series G Holders have
the right to force us to redeem the Series G Preferred at a redemption  price of
120% of the face value of the  Preferred.  Pursuant to the  Registration  Rights
Agreement,  100% of that number of shares that would be required to be issued if
the G  Preferred  Stock  were  converted  on the day  before  the  filing of the
Registration  Statement  (1,634,409)  are  being  registered  on  behalf  of the
Holders.

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

In the event of a  voluntary  or  involuntary  liquidation  while  the  Series G
Preferred  is   outstanding   the  holders  are  entitled  to  a  preference  in
distribution  of our property  available for  distribution  equal to $10,000 per
share.

As of the date of this Report,  22 shares of Series G Preferred Stock have been
converted into 1,805,731  shares of Common Stock at a conversion price range of
$.10875 to $.1519 per share.

SERIES H PREFERRED STOCK

On June 2, 1998, we finalized a private  placement to Austost Anstalt Schaan and
Balmore  Funds S.A. of 100 shares of our Series H  Convertible  Preferred  Stock
(the  "Preferred  Shares") at a purchase price of $10,000 per share and 75,000 A
Warrant and 50,000 B Warrants. The A and B Warrants are exercisable at $1.00 and
$1.50 per share, respectively. The offering was conducted pursuant to Regulation
D as promulgated under the Securities Act of 1933, as amended (the "Regulation D
Sale").  At the time the placement was concluded,  the average bid and ask price
of our Common Stock was  approximately  $.56 per share.  In connection  with the
Regulation  D  Sale,  we  paid  Settondown  Capital   International,   Ltd.,  an
unaffiliated  Investment  Banker an  aggregate  of  $10,000  and 8 shares of the
Series H Preferred  Stock for  placement  and legal fees.  Net proceeds to us of
$990,000 were used for working capital and the continuous research,  development
and testing of the CTLM(TM).

The number of fully paid and non-assessable  shares of Common Stock to be issued
upon  conversion  will be determined by dividing (i) the sum of $10,000 (ii) the
Conversion Price  (determined as hereinafter  provided) in effect at the time of
conversion.  The  "Conversion  Price"  is equal to the  lesser  of  seventy-five
percent  (75%)  of the  Average  Price  (the  lowest  closing  bid  price of the
Corporation's  Common  Stock for the ten-day  trading  period  ending on the day
prior to the date of conversion).  There is no floor on the conversion price and
no time limits on  conversion.  The shares can be  converted at any time without
additional  consideration.  Pursuant to the Subscription Agreement, the Series H
Holder,  or any subsequent  holder of the Preferred  Shares,  is prohibited from
converting  any portion of the Preferred  Stock which would result in the Holder
being deemed the  beneficial  owner,  in accordance  with the provisions of Rule
13d-3 of the  Securities  Exchange Act of 1934, as amended,  of 4.99% or more of
the then issued and outstanding Common Stock. Due to this contractual  ownership
limitation,  the Series H Preferred  Shares can only be converted in  increments
that, together with all shares of our Common Stock held by the Holder, would not
exceed 4.99%.  Pursuant to the terms of the Registration  Rights  Agreement,  as
amended,  we have registered  herein 100% of that number of shares that would be
required to be issued if the  Preferred  Stock were  converted on the day before
the filing of the Registration Statement (2,924,731 shares). We are in technical
default of the Registration  Rights  Agreement,  which required the Registration
Statement  to be  declared  effective  by  October  2,  1998.  Pursuant  to  the
Registration  Rights  Agreement,  we are required to pay the Series H Holders in
cash or in stock,  as  liquidated  damages for failure to have the  Registration
Statement  declared  effective,  and not as a penalty,  two (2%)  percent of the
principal  amount of the  Securities  for the first thirty (30) days,  and three
(3%) percent of the principal  amount of the Securities for each thirty (30) day
period thereafter until we procure  registration of the Securities.  Pursuant to
the Registration  Rights Agreement,  liquidated damages of $169,000 have accrued
as of March 31,  1999.  We are  presently  unable to comply with the  liquidated
damage provision  payment and no assurances can be given that it will be able to
do so in the future.  On March 25, 1999, we issued  424,242 shares of restricted
Common Stock with  registration  rights to the Series H shareholders  in lieu of
cash for liquidated damages through March 2, 1999. The value of these shares was
$140,000,  leaving a balance of $29,000 due for liquidated damages through March
31,  1999.  We have the option of paying the accrued  dividends  and  liquidated
damages in Common Stock.

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

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

As of the date of this  Report,  5 shares,  35 shares,  5 shares,  5 shares,  5
shares  and 4 shares of Series H  Preferred  Stock  have  been  converted  into
99,502, 1,190,476, 333,333, 333,333, 459,770 and 367,816 shares of Common Stock
at a conversion price of $.5025,  $.21, $.15,  $.15,  $.10875,  and $.10875 per
share, respectively.

SERIES I PREFERRED

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

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

The Series I Preferred  pay a 7% premium,  to be paid in cash or freely  trading
Common Stock in our sole discretion, at the time of each conversion.  The number
of fully  paid and  non-assessable  shares  of Common  Stock to be  issued  upon
conversion  will be  determined  by  dividing  (i) the sum of  $10,000  (ii) the
Conversion Price  (determined as hereinafter  provided) in effect at the time of
conversion. The "Conversion Price" is equal to seventy five percent (75%) of the
Average Closing Price of our Common Stock for the five-day trading period ending
on the day prior to the date of the  conversion.  The shares can be converted at
any time without additional consideration.  Pursuant to the Series I Designation
and the Subscription Agreement, the Series I Holder, or any subsequent holder of
the Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would  result in the Holder being deemed the  beneficial  owner,  in
accordance  with the provisions of Rule 13d-3 of the Securities  Exchange Act of
1934,  as amended,  of 4.99% or more of the then issued and  outstanding  Common
Stock.  Due to this  contractual  ownership  limitation,  the Series I Preferred
Shares can only be converted in increments that, together with all shares of our
Common Stock held by the Holder, would not exceed 4.99%.

Pursuant to the  Registration  Rights  Agreement,  100% of that number of shares
that would be required to be issued if the I Preferred  Stock were  converted on
the day before the filing of the  Registration  Statement  (5,935,484) are being
registered on behalf of the Holders.

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

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

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

As of the date of this  Report,  no shares of the Series I Preferred  Stock have
been converted.

CONVERTIBLE DEBENTURE

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

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

Pursuant to the  Registration  Rights  Agreement,  100% of that number of shares
that would be required to be issued if the Debenture  were  converted on the day
before the filing of the  Registration  Statement  (4,731,183  shares) are being
registered on behalf of the Holders.

The  number of fully  paid and  non-assessable  shares of Common  Stock,  no par
value,  of the  Company  to be issued  upon  conversion  will be  determined  by
dividing  (i) the sum of  $10,000  (ii)  the  Conversion  Price  (determined  as
hereinafter  provided)  in effect  at the time of  conversion.  The  "Conversion
Price" is equal to seventy five percent  (75%) of the Average  Closing  Price of
our Common Stock for the five-day  trading period ending on the day prior to the
date of the  conversion.  The  Debenture  can be  converted  at any time without
additional consideration.  Pursuant to the Subscription Agreement, the Debenture
Holder, or any subsequent holder of the Debenture, is prohibited from converting
any portion of the  Debenture  which would result in the Holder being deemed the
beneficial  owner,  in  accordance  with  the  provisions  of Rule  13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company.  Due to this contractual  ownership
limitation,  the Debentures can only be converted in increments  that,  together
with all shares of our Common Stock held by the Holder,  would not exceed 4.99%.
Since the  conversion  price of the  Series I  Preferred  is based on 75% of the
Average  Price,  without a limit on the number of shares that can be issued upon
conversion,  in the event  that the price of our  Common  Stock  decreases,  the
percentage of shares outstanding that will be held by the Debenture Holders upon
conversion will increase  accordingly.  The lower the Average Price, the greater
the  number  of  shares  to be  issued  to the  Holders  upon  conversion,  thus
increasing  the  potential  profits  to the  Holder  when the  price  per  share
increases and the Holder sells the Common Shares. The Preferred Stocks potential
for increased  share  issuance and profit in addition to a stock  overhang of an
undeterminable amount may depress the price of our Common Stock.

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

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

The proceeds from the sale of the Debenture ($1,100,000) and subsequent tranches
of $915,000 totaling $2,015,000 will be used for clinical  investigational trial
expenses and working capital.  As of the date of this Report,  no portion of the
Convertible Debenture has been converted.

PRIVATE PLACEMENT OF COMMON STOCK

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

In  September  1998,  the  Company  sold  one  unit,  consisting  of a  $250,000
promissory  note and  200,000  shares of Common  Stock,  to  Settondown  Capital
International,  Ltd., an unaffiliated third party, pursuant to Regulation D, for
an  aggregate  purchase  price of  $250,000.  These  Shares are  included in the
Registration  Statement.  At the time the sale occurred, the average bid and ask
price of our Common Stock was $.595.  The Note bears interest at the rate of 12%
per annum. The Note is personally  guaranteed by Linda B. Grable, our President.
The  repayment  of the Note,  which was  originally  due on  October 2, 1998 was
extended  three times and now due August 2, 1999.  We have not received a notice
of default  in  connection  with this Note.  In  connection  with the sale,  the
Company  paid the sum of  $23,000  to  Manchester  Asset  Management,  Ltd.,  an
unaffiliated third party, as a placement fee. Net proceeds of $227,000 were used
as follows: (i) salaries ($21,849-executive officers and $62,447-employees) (ii)
machinery and equipment  $5,959;  (iii)  operating  expenses  ($55,240-inventory
parts and  assemblies,  employee  health  insurance,  workers comp. and property
insurance) and (iv) working capital $82,000).  Pursuant to the terms of the Note
the  principal  and interest is payable in cash,  however the Company may try to
negotiate  repayment  in Common  Stock.  The  Company  intends to repay the note
either  from the  Debenture  or other  equity  and/or debt  financing  or by the
issuance of additional securities.

In October 1998, the Company sold one unit,  consisting of a $100,000 promissory
note and 80,000 shares of Common Stock, to Avalon Capital, Inc., an unaffiliated
third  party,  pursuant  to  Regulation  D for an  aggregate  purchase  price of
$100,000.  These Shares are included in the Registration Statement. No placement
fee was paid in  connection  with this  offering,  however the Company did issue
5,000  shares  of  Common  Stock  to  Goldstein,  Goldstein  and  Reis  LLC,  an
unaffiliated  third party,  as payment for the  attorneys  fees  incurred by the
Purchaser pursuant to the offering. At the time the placement was concluded, the
average bid and ask price of our Common Stock was approximately  $.50 per share.
The Note  bears  interest  at the rate of 12% per  annum.  The  note,  which was
originally  due November 2, 1998, was extended three times and is now due August
2, 1999. We have not received a notice of default in  connection  with the Note.
The Note is  personally  guaranteed  by  Linda B.  Grable,  our  President.  Net
proceeds  of  $100,000  were used as follows:  (i)  salaries  ($21,849-executive
officers and  $62,448-employees)  and (ii) working capital $15,703.  Pursuant to
the terms of the Note the principal and interest is payable in cash, however the
Company may try to negotiate  repayment in Common Stock.  The Company intends to
repay the note either from the Debenture or other equity  and/or debt  financing
or by the issuance of additional securities.

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

In  November  1998,  we  issued  286,000  shares  of  Common  Stock  as  partial
consideration  for a $115,000  aggregate loan to the Company by Deborah O'Brien,
an employee.  At the time the loan was concluded,  the average bid and ask price
of our Common Stock was approximately  $.625 per share. We are also obligated to
repay the  lender  the sum of  $50,000.00.  In  January  1999,  we issued a Note
evidencing  this  indebtedness.  The Note bears  interest  at the rate of 7% per
annum and is due and payable upon demand.  Net proceeds OF $115,000 WERE USED AS
follows: (i) salaries  ($21,849-executive  officers and $62,447-employees)  (ii)
operating  expenses  ($16,345-inventory  parts and  assemblies,  employee health
insurance,  workers  comp.  and property  insurance)  and (iv)  working  capital
($14,359). We were also obligated to repay the lender the sum of $50,000.00.  On
April 8, 1999,  the  company  paid the balance due on the loan of $47,396 to the
lender. These Shares are included in the Registration Statement.

ISSUANCE OF STOCK FOR SERVICES

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

         Legal-General Counseling.

         Legal-Litigation Counseling.

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

         Shareholder    Relations-Keeping    shareholders    informed   of   new
         developments.

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

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

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

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

         SEC Filing and Compliance-Filing and compliance consultation.

         Engineering-Mechanical engineering and prototype development.

         Video Production Consultant-Script writing and production consultation.

Since we have  generated  no revenues to date,  our ability to obtain and retain
consultants  may be dependent on our ability to issue stock for services in lieu
of cash payment.  Since 1996, we have issued an aggregate of 1,806,500 shares of
Common Stock to independent  consultants pursuant to Registration  Statements on
Form S-8.  The  aggregate  fair market value of the shares was  $2,327,151.  The
issuance  of large  amounts  of Common  Stock  for  services  rendered  or to be
rendered  and the  subsequent  sale of such  shares may depress the price of the
Common  Stock.  In addition,  since each new  issuance of Common  Stock  dilutes
existing  shareholders,  the  issuance  of  substantial  additional  shares  may
effectuate a change of control of the Company.

FINANCING/EQUITY LINE OF CREDIT

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

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

Pursuant to the Equity Line of Credit  Agreement,  the Company  may,  but is not
obligated  to, sell to the  Investors  shares of our Common  Stock at a purchase
price of 80% of the market  price if the  shares are traded on the OTC  Bulletin
Board and 85% of the market  price if traded on Nasdaq Small Cap Stock Market or
American Stock Exchange.  As of October 11, 1999,  based on the closing price on
that date of $.112,  167,410,714  shares of Common Stock would have to be issued
in order to  completely  utilize  the  Equity  Line of Credit.  However,  if the
Company utilizes the Equity Line of Credit, it intends to do so over a period of
three years, at times that are as  advantageous  as possible to the Company.  It
addition,  the  limitations  set forth below  would  prohibit  the Company  from
utilizing the entire Line of Credit at one time.

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


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

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

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

1. The  Company  shall  have filed with the SEC a  Registration  Statement  with
respect to the resale of at least that amount of Common  Stock  contained in the
Put Notice (the "Securities").

2. The Registration  Statement shall have previously  become effective and shall
remain  effective until the Securities are sold or until two years from the date
of  issuance  and (i) no notice  has been  received  that the SEC has  issued or
intends  to issue a stop  order  or that  the SEC  otherwise  has  suspended  or
withdrawn the effectiveness of the Registration Statement, either temporarily or
permanently,  or intends or has  threatened to do so (unless the SEC's  concerns
have been addressed and the Investors are  reasonably  satisfied that the SEC no
longer  is  considering  or  intends  to take  such  action),  and (ii) no other
suspension  of the use or withdrawal of the  effectiveness  of the  Registration
Statement or related prospectus shall exist. The Registration  Statement must be
declared effective by the SEC prior to the first and each subsequent Put Date.

3. The Company  shall have obtained all permits and  qualifications  required by
any  state  for the  offer  and  sale of the  Put  Shares,  or  shall  have  the
availability  of exemptions  therefrom.  The sale and issuance of the Put Shares
shall be legally permitted by all laws and regulations to which we are subject.

4. No statute, rule,  regulation,  executive order, decree, ruling or injunction
shall  have been  enacted,  entered,  promulgated  or  endorsed  by any court or
governmental  authority of competent jurisdiction that prohibits or directly and
adversely affects any of the transactions contemplated by this Agreement, and no
proceeding  shall have been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement.

5. Since the date of the Equity Line of Credit Agreement, no event has had or is
reasonably  likely to have a  material  adverse  effect on the  Company  and our
operations has occurred.

6. The trading of our Common Stock has not been suspended,  and the Common Stock
has not been  de-listed or  threatened  by  de-listing,  and the issuance of the
Securities  to  the  Investors  shall  not  violate  the  shareholder   approval
requirements  of the OTC Bulletin Board,  the Nasdaq  Small-Cap  Market,  or the
American Stock Exchange, as applicable.

7. The number of Put Shares to be purchased by each Investor will not exceed the
number of such shares  which,  when  aggregated  with all other shares of Common
Stock then owned by such Investor  beneficially or deemed  beneficially owned by
such  Investor,  would result in any  Investor  owning more than 4.99% of all of
such Common Stock as would be outstanding on such Closing Date, as determined in
accordance with Rule 13d-3 of the Exchange Act and the  regulations  promulgated
thereunder.

8. The closing bid price of our Common Stock must equal or exceed $.50 per share
for the six day period  commencing three (3) trading days immediately  preceding
the Put Notice,  the trading day the Put Notice is deemed  delivered and the two
trading  days  immediately  following  the  Trading Day on which a Put Notice is
deemed to be delivered.

9. The average  trading  volume for the Common  Stock over the  previous  thirty
trading days must exceed 25,000 shares per Trading Day.

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

Although  the equity line of credit is in place,  the Company and the  investors
will have to amend the  agreement to provide for a draw down and issuance of the
Common Stock pursuant to Regulation D and then registration of the shares or the
Company  will  have to  file a  shelf  registration,  if  such  registration  is
available  to the  Company at the time that it intends to use the equity line of
credit.

Although no assurances  can be made, the Company  anticipates  that it will need
approximately $9,000,000, in addition to our present capital requirements,  over
the next two-year period to complete all necessary  stages in order to enable it
to market the CTLM(TM) in tHE United States and foreign  countries.  If the need
should  arise for  capital in excess of the Equity Line or if the Equity Line is
unavailable due to the price of our Common Stock or we are unable to comply with
the  registration  provision,  we may seek additional  funding through public or
private  financing,   collaboration,   licensing  and  other  arrangements  with
corporate  partners.  See  Item 6.  "Management's  Discussion  and  Analysis  of
Financial Discussion" and Results of Operations and "Financial Statements".

If we  utilize  the  Equity  Line of Credit or  additional  funds are  raised by
issuing equity securities,  especially  Convertible Preferred Stock, dilution to
existing  Shareholders  will result and future  investors may be granted  rights
superior to those of existing Shareholders.  Moreover,  substantial dilution may
result  in a change  in  control  of the  Company.  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
us from  implementing  our business  strategy or may require us to delay,  scale
back,  or  eliminate  certain  research and product  development  programs or to
license to third parties rights to commercialize  products or technologies  that
we would otherwise seek to develop ourselves.

In connection with the Equity Line of Credit Agreement,  we issued 25,000 shares
of Common Stock to  Goldstein,  Goldstein  and Reis LLC, an  unaffiliated  third
party, as payment for the attorney fees incurred by the Equity Line funders.

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

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

RESULTS OF OPERATIONS

TWELVE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998.

General and  administrative  expenses in the aggregate  during the twelve months
ended June 30, 1999,  were  $4,002,054  representing a decrease of $476,001 from
$4,478,055   during  the  twelve  months  ended  June  30,  1998.   General  and
administrative expenses in the aggregate are derived from deducting compensation
and related  benefits,  research  and  development  expenses,  depreciation  and
amortization  and adding  interest  income to the net loss as  presented  on the
Statement of  Operations.  The  decrease is due  primarily to a reduction in the
costs of hiring outside consultants, attorneys and advertising. Selling, general
and  administrative  expenses during the twelve months ended June 30, 1999, were
$385,824  representing  a decrease of $10,928  from  $396,752  during the twelve
months ended June 30, 1998.

Compensation  and related benefits during the twelve months ended June 30, 1999,
were $2,421,796  representing an increase of $434,692 from $1,987,104 during the
twelve months ended June 30, 1998.  The increase in  compensation  is due to the
hiring of an additional  software  engineer,  a medical physicist and a clinical
application specialist required for the clinical investigational trials.

Research and development  expenses during the twelve months ended June 30, 1999,
were $71,508 representing a decrease of $183,214 from $254,722 during the twelve
months ended June 30, 1998. This decrease is due primarily to finalizing certain
components of the CTLMTM.

Advertising and promotion expenses during the twelve months ended June 30, 1999,
were $27,273 representing a decrease of $302,173 from $329,446 during the twelve
months ended June 30, 1998.  The decrease was due  primarily to the reduction of
advertising  in  domestic  and  foreign   medical  imaging  and  medical  device
publications.

Consulting  expenses  during the twelve months ended June 30, 1999, were $89,637
representing a decrease of $1,131,039 from  $1,220,676  during the twelve months
ended June 30,  1998.  The  decrease was due  primarily  to the  elimination  of
outside consultants needed for special non-recurring  projects required prior to
placing CTLM(TM) units into clinical trials.

Insurance  costs during the twelve  months ended June 30,  1999,  were  $172,416
representing  an increase of $9,867 from $162,549 during the twelve months ended
June 30,  1998.  The  increase  was due  primarily  to  additional  premiums for
Workers' Comp., Health Insurance, and Property and Casualty Insurance.

Professional  expenses  during  the twelve  months  ended  June 30,  1999,  were
$292,828  representing  a decrease of $161,902 from  $454,730  during the twelve
months ended June 30, 1998.  The  decrease  was due  primarily to reduced  legal
expenses. See Item 3. "Legal Proceedings".

Stockholder  expenses during the twelve months ended June 30, 1999, were $65,165
representing  a decrease of $10,443 from $75,608  during the twelve months ended
June 30,  1998.  The  decrease  was due  primarily to a reduction in mailings to
stockholders.

Trade show expenses  during the twelve months ended June 30, 1999, were $151,403
representing a decrease of $64,779 from $216,182  during the twelve months ended
June 30, 1998. The decrease is due to attending  fewer trade shows and making no
changes to the exhibit for the 1998 Radiological Society of North America's 84th
Scientific Assembly and Annual Meeting in Chicago, IL.

Travel and subsistence  costs during the twelve months ended June 30, 1999, were
$111,361  representing a decrease of $198 from $111,559 during the twelve months
ended June 30, 1998.  This  decrease  was  primarily  due to reduced  travel and
housing expenses for consultants.

Rent  expense  during  the  twelve  months  ended  June 30,  1999,  was  $28,808
representing  an increase of $2,595 from $26,213  during the twelve months ended
June 30, 1998.  This  increase was  primarily  due to the rental of certain test
equipment.

Interest  expense  during the twelve  months ended June 30,  1999,  was $688,644
representing an increase of $633,101 from $55,543 during the twelve months ended
June 30, 1998.  The increase was due to interest paid on  short-term  loans used
for working  capital for the  Company  and the deemed  interest  recorded on the
issuance of the Convertible Debenture.

Loan  placement  expenses and fees during the twelve months ended June 30, 1999,
were $201,494  representing  an increase of $201,494 from $-0- during the twelve
months ended June 30, 1998. The increase was due to expenses and fees associated
with arranging short-term loans used for working capital for the Company.

Depreciation and  amortization  expenses during the twelve months ended June 30,
1999, were $312,956 representing an increase of $28,990 from $283,966 during the
twelve-month  period ended June 30, 1998.  This increase is due primarily to the
depreciation associated with the purchase of additional laboratory equipment and
manufacturing fixtures.

Liquidated  damage  costs during the twelve  months  ended June 30,  1999,  were
$260,000 representing an increase of $260,000 from $-0- during the twelve months
ended  June  30,  1998.  The  increase  was due  our  technical  default  of the
Registration  Rights  Agreement  regarding the Series H Cv.  Preferred Stock. We
were  required  to have the  Registration  Statement  be declared  effective  by
October 2, 1998. We paid the Series H Holders in stock,  the liquidated  damages
due under the Registration Rights Agreement.

Interest  income  during  the twelve  months  ended  June 30,  1999,  was $1,120
representing  a decrease of $21,017 from $22,137  during the twelve months ended
June 30,  1998.  This  decrease  was due to a decrease of funds  invested by the
Company.

Dividends on cumulative  Preferred  Stock from discount at issuance  during the
twelve  months ended June 30, 1999,  were  $619,974  representing  a decrease of
$1,121,041 from $1,741,015  during the twelve-month  period ended June 30, 1998.
This  decrease is due  primarily to the  reduction of the issuance of additional
series of  cumulative  Preferred  Stock with  conversion  features  below market
value.

Dividends on  cumulative  Preferred  Stock earned during the twelve months ended
June 30, 1999,  were $329,176  representing an increase of $14,176 from $315,000
during  the  twelve-month  period  ended June 30,  1998.  This  increase  is due
primarily  to the  additional  accrued  dividends  on the  Series  B  cumulative
Preferred Stock.

BALANCE SHEET DATA

We have  financed  our  operations  since  inception  by the  issuance of equity
securities with aggregate net proceeds of approximately  $18,310,670 and through
non-affiliate  net loan  transactions  in the  aggregate  amount of  $2,154,731.
During Fiscal 1999, we received net proceeds of approximately  $380,000 from the
private  placement of our Series G Convertible  Preferred  Stock and  $1,100,000
through the issuance of a  Convertible  Debenture  pursuant to  Regulation D and
Section 4(2) of the Securities Act of 1933, as amended.

Our  combined  cash and  cash  equivalents  totaled  $70,037  at June 30,  1999,
representing a decrease of $240,079 from $310,116 at June 30, 1998. The decrease
in cash and cash equivalents is due to continuing operations.

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

Our inventory  totaled  $3,698,343 at June 30, 1999,  and $3,214,045 at June 30,
1998. Our property and equipment,  net, totaled  $2,707,994 at June 30, 1999 and
$2,920,980 at June 30, 1998. This decrease is due to depreciation and retirement
of certain equipment.

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

We have financed our operating and research and development  activities  through
several Regulation S and Regulation D private placement  transactions.  Net cash
used for operating and research and development  expenses during fiscal 1999 was
$3,699,728   primarily  due  to  our  purchase  of  materials  to  continue  the
manufacture of five (5) CTLM(TM)  Breast Imaging  Systems and the hiring OF four
additional  employees,  compared  to net cash used by  operating  activities  of
research and  development  of the CTLM(TM) and relatED  software  development of
$3,540,001 in fiscal 1998. At June 30, 1999,  the Company had a working  capital
of $487,774  compared to a working  capital of $(257,166) at June 30, 1998.  The
Company has revised its estimated  annual fixed  commitment from $8.8 million to
4.2  million,  of which $2.6  million  will be required to complete FDA clinical
trials  through  PMA  submission  and to  prepare  for  the  manufacture  of the
CTLM(TM).  Although no assurances  can be made, we anticipate  that we will need
approximately $9 million over the next two year period to complete all necessary
stages in order to enable us to market the  CTLM(TM)  in the  United  States and
foreign countries.  SubstantialLY all of the $9 million will be used to purchase
inventory,  sub-contracted  components,  tooling,  manufacturing  templates  and
non-recurring  engineering  costs  associated with preparation for full capacity
manufacturing and assembly.

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

"Sale of Unregistered Securities-Financing/Equity Line of Credit.

During  fiscal  1999,  we were able to raise a total of $564,464  less  expenses
through  Regulation  D  transactions.  We will  continue  to seek equity or debt
financing  in order to meet our  working  capital  needs.  We do not  expect  to
generate a positive  internal cash flow for at least the next  twelve-months due
to the  expected  increase in spending  for  research  and  development  and the
expected costs of  commercializing  our initial product,  the CTLM(TM).  We will
require  additional  funds for our research and development,  clinical  testinG,
operating  expenses,  Food and Drug  Administration  regulatory  processes,  and
manufacturing and marketing programs.  Accordingly, we will be required to raise
additional  funds  prior to the end of  calendar  year 1999 in order to continue
operations.  We  plan  to  raise  additional  funds  by  either  equity  or debt
financing,  including  entering into a transaction(s) to privately place equity,
either common or Preferred Stock, or debt  securities,  or combinations of both;
or by placing  equity into the public market through an  underwritten  secondary
offering or obtaining  mortgage financing on our real property and improvements.
If  additional  funds are  raised by  issuing  equity  securities,  dilution  to
existing  stockholders  will result,  and future investors may be granted rights
SUPERIOR TO THOSE OF EXISTING STOCKHOLDERS.

No assurances, however, can be given that future financing would be available or
if available, that it could be obtained at terms satisfactory to us. Our ability
to effectuate our plan of and continue operations is dependent on our ability to
raise capital,  structure a profitable business,  and generate revenues.  If our
working  capital  were  insufficient  to fund our  operations,  it would have to
explore additional sources of financing.  Although we have a firm commitment for
a $15 million  Equity line of Credit,  we must first  register  the shares to be
issued  pursuant to the credit  line.  At present,  we have no plans to register
such  shares,  but may do so in the future.  Item 5.  "Market  For  Registrant's
Common   Equity   And   Related   Stockholder   Matters-Sale   of   Unregistered
Stock-Financing/Equity Line of Credit".

Capital expenditures for the fiscal 1999 were approximately  $64,423 as compared
to  approximately  $115,738 for fiscal 1998.  These  expenditures  were a direct
result of purchases  of computer  and other  equipment,  office,  warehouse  and
manufacturing  fixtures,  trade show equipment,  computer  software,  laboratory
equipment,  and other fixed assets. We anticipate that our capital  expenditures
for fiscal 2000 will be approximately $100,000.

During the year ending June 30, 1999 we signed a  Subscription  Agreement  for a
Convertible Debenture and borrowed from officers and other third parties. We had
no  outstanding  bank loans as of June 30, 1999.  Our annual fixed  commitments,
including  salaries  and fees  for  current  employees  and  consultants,  rent,
payments  under  license  agreements  and  other  contractual  commitments  were
previously  estimated to be approximately  $8.8 million,  as of the date of this
report we have  revised  the annual  fixed  commitment  to be $4.2  million.  We
anticipate that this  commitment is likely to increase as additional  agreements
are  entered  into  and  additional  personnel  are  retained.  We will  require
substantial   additional  funds  for  our  research  and  development  programs,
pre-clinical  and  clinical   investigational   studies,   operating   expenses,
regulatory  processes,  and  manufacturing  and  marketing  programs,  which are
presently  estimated at approximately  $500,000.  The foregoing  projections are
subject to many  conditions  most of which are beyond  our  control.  Our future
capital requirements will depend on many factors,  including the following:  the
progress of our research and development projects;  the progress of pre-clinical
and  clinical  testing;  the time  and cost  involved  in  obtaining  regulatory
approvals; the cost of filing,  prosecuting,  defending and enforcing any patent
claims and other  intellectual  property  rights;  competing  technological  and
market  developments;  changes and  developments in our existing  collaborative,
licensing  and  other  relationships  and the  terms  of any new  collaborative,
licensing and other  arrangements that we may establish;  and the development of
commercialization  activities and  arrangements.  We do not expect to generate a
positive internal cash flow for at least several years due to expected increases
in capital  expenditures,  working  capital and ongoing  losses,  including  the
expected cost of commercializing the CTLM(TM). We do not haVE sufficient cash to
fund our  operations  until the end of the fiscal  year ending June 30, 2000 and
therefore  will  require  additional  funding  through  private  debt or  equity
financing,  or  collaborative  licensing or other  arrangements  with  strategic
partners.  There can be no assurance  that such financing can be obtained or, if
it is obtained,  that the terms thereof will be acceptable.  We plan to continue
our policy of investing excess funds, if any, in a daily cash management account
at First Union National Bank.

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

In February  1999, the Company,  in an interview with the Miami Herald  affirmed
the  basic  projections  qualifying  them  by  stating  that  the  results  were
anticipated  for the fiscal year ending June 30, 2000.  Below is a comparison of
the Hawke Projections and the February 1999 Projections.

<TABLE>
<CAPTION>
HAWKE PROJECTIONS                                  FEBRUARY 1999 PROJECTIONS
<S>                                                      <C>
FISCAL YEAR 6-30-98                                FISCAL YEAR 6-30-00
30 foreign units at approximately $250,000         30 foreign units at approximately $250,000
per unit                                           per unit
no domestic                                        no domestic
estimated revenue $7.5mm                           estimated revenue $7.5mm
pre-tax income ($4mm)                              pre-tax income ($4mm)

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

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

Due  to  the  delay  in  the   commencement   of  the  Nassau  County   clinical
investigational  trials,  we are  unable to  determine  when we  anticipate  FDA
marketing clearance or will be able to begin foreign distribution, since we have
deferred  foreign  distribution  of the  CTLM(TM)  until  such  time  as we have
collected enough clinical data to compile an atlas of CTLM(TM) images. The delay
in the  commencement  of the Nassau County  investigational  trials has made the
February 1999 revenue  projections  unattainable  and we are presently unable to
determine when it will begin to generate revenue.

ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS

We have and may  continue  to  issue  stock  for  services  performed  and to be
performed  by  consultants.  Since we have  generated  no revenues to date,  our
ability to obtain and retain  consultants  may be  dependent  on our  ability to
issue stock for services.  Since July 1, 1996 to the filing date of this Report,
we have issued an  aggregate of  1,806,500  shares of Common  Stock  pursuant to
Registration  Statements  on Form S-8.  The  aggregate  fair market value of the
shares  was  $2,327,151.  The  issuance  of large  amounts  of Common  Stock for
services  rendered or to be rendered and the subsequent  sale of such shares may
depress the price of the Common Stock.  In addition,  since each new issuance of
Common  Stock  dilutes  existing  shareholders,   the  issuance  of  substantial
additional  shares  may  effectuate  a change of  control  of the  Company.  See
"Issuance of Stock for Services" and "Note 17 to Financial Statements".

           CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-KSB under the caption  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,"  as
well as in our press releases or oral statements that may be made by the Company
or by officers, directors or employees of the Company acting on our behalf, that
are  not  historical  fact   constitute   "forward-looking   statements".   Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other  factors  that  could  cause  the  actual  results  of the  Company  to be
materially  different from the historical  results or from any results expressed
or implied by such forward-looking  statements.  Factors that might cause such a
difference  include,  without  limitation,  the  information set forth below. In
addition to statements which explicitly  describe such risks and  uncertainties,
statements labeled with the terms "believes",  "belief',  "expects",  "plans" or
"anticipates" should be considered uncertain and forward-looking. All cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear.

     We have a limited  history of  operations.  Since our inception in December
     1993, we have engaged principally in the development of the CTLM(TM), which
     has not been approved for sale in the United States.

     We have not applied to the FDA for export approval for foreign sales.

     We have little experience in manufacturing, marketing and selling our
     products.

     We  currently  have  no  source  of  operating   revenue  and  had  an
     accumulated  deficit at June 30, 1999, of  approximately  $35,092,999,
     after discounts and dividends on Preferred Stock.

     We expect operating losses will increase for at least the next several
     years.

     Our ability to achieve profitability will depend in part on our ability to:
         obtain regulatory approvals for our CTLM(TM),
         develop the capacity to manufacture and market the CTLM(TM),
         either by itself or in collaboration with others,
         market acceptance of the CTLM(TM).

     We have received an opinion from our auditors stating the fact that we
     have suffered  substantial losses and have yet to generate an internal
     cash flow. This raises substantial doubt about our ability to continue
     as a going concern.

     We will require  substantial  additional  funds for clinical testing of
     the  CTLM(TM),  research and  development  programS,  pre-clinical  and
     clinical  testing of other  proposed  products,  regulatory  processes,
     manufacturing and marketing programs and operating expenses  (including
     general and administrative expenses).

v    Our  fixed  commitments,   including  salaries  and  fees  for  current
     employees  and  consultants,  equipment  rent,  payments  under license
     agreements and other contractual commitments, are substantial and would
     increase  if  additional  agreements  are entered  into and  additional
     personnel are retained.

     We do not expect to generate a positive internal cash flow for at least
     several  years  due to  expected  increases  in  capital  expenditures,
     working capital needs, and ongoing losses,  including the expected cost
     of commercializing the CTLM(TM).

     Our cash requirements may vary materially from those now planned due to
     the progress of research and development programs,  results of clinical
     testing,  relationships with strategic partners, if any, changes in the
     focus  and  direction  of  our  research  and   development   programs,
     competitive and technological  advances, the FDA and foreign regulatory
     processes and other factors.

     We require additional capital to fund our operations.

     If additional funds are raised by issuing equity  securities,  further
     dilution to existing  stockholders  will result,  and future investors
     may be granted rights superior to those of existing stockholders.

     There can be no assurance that additional  financing will be available
     when needed, or if available, will be available on acceptable terms.

     We have  already  granted a  mortgage  on our  corporate  property  as
     security  for  the  convertible   debenture  and  therefore,   in  all
     likelihood,  would be unable to use such property to collateralize any
     additional financing.

     Insufficient  funds  may  prevent  us from  implementing  our  business
     strategy and will require us to further delay, scale back, or eliminate
     certain  aspects of our research,  product  development,  and marketing
     program.

     Our future capital requirements will depend on many factors, including:

         The progress of our research and development projects;
         The progress of pre-clinical and clinical testing;
         The time and cost involved in obtaining regulatory approvals;
         The cost of filing,  prosecuting,  defending and enforcing any patent
         claims and other intellectual  property rights;
         Competing  technological and market developments;
         Changes  and  developments  in our  existing  collaborative, licensing
         and other  relationships;
         The  terms of any new  collaborative, licensing and other  arrangements
         that the Company may  establish;  and
         The development of commercialization activities and arrangements.

     Conducting clinical trials will require the expenditure of substantial
     additional funds, which the Company does not currently have available.
     Furthermore, there can be no assurance that:

         Results  obtained in any additional  trials will be consistent
         with the results  obtained in trials  conducted by the Company
         to date.
         Results obtained in any clinical trial or series of clinical trials
         will be consistent among all study sites.
         Results obtained in clinical  trials conducted  with U.S. study
         populations will be consistent with results obtained in studies
         conducted in Europe or other locations outside of the U.S.
         Any such results, or the filing of the PMA will be accepted by the FDA.

     We intend to file our PMA at the conclusion of our clinical trials. If
     and  when  the  PMA is  accepted  for  filing  by the  FDA,  it will be
     designated for review under the FDA's  Expedited  Review policy.  There
     can  be no  assurance,  that  such  Expedited  Review  status  will  be
     maintained  or result in a more  expeditious  approval,  or approval at
     all.

     We are subject to Penny Stock Regulations and Restrictions,  which will
     restrict  the ability of Broker / Dealers to sell our common  stock and
     may affect the ability of Investors to sell their shares.

     The price of our common stock as well as many biotech and medical
     device  stocks in general,  is highly  volatile,  which may
     negatively impact the liquidity and value of your shares.

     Our Articles of Incorporation  empower our Board of Directors,  without
     stockholder  approval,  to  designate  and issue  additional  series of
     Preferred Stock with dividend, liquidation, conversion, voting or other
     rights,  including the right to issue  convertible  securities  with no
     limitations on conversion. Such Preferred Stock, when issued, could:

         Adversely affect the voting power or other rights of the holders of our
         Common Stock.
         Substantially dilute the common shareholder's interest.
         Depress the price of our Common Stock.
         Be  utilized,  under  certain  circumstances,  as a method  of
         discouraging,  delaying or  preventing  a change in control of
         the Company.
         Discourage or prevent an acquisition of the Company.

     We own the rights,  pursuant to an exclusive patent licensing agreement
     with Richard Grable,  our Chief Executive  Officer,  for the use of the
     patent for the CTLM(TM) technology. We have 12 additional United States
     patents  pending with regard to OpticAL  Tomography,  many of which are
     based on the original  CTLM(TM)  technology.  In the event that that we
     breach  the patent  licensing  agreement,  we could lose the  licensing
     rights to the CTLM(TM) technology. The loss of the patent license would
     cause to us TO cease operations.

     Our ability to compete  effectively  in the medical  products  industry
     will depend on our success in protecting  our  proprietary  technology,
     both in the United States and abroad.

     At present we have only one product, the CTLM(TM), which, after gaining
     FDA  marketing  clearance,  will account for  substantialLY  all of our
     revenues  for  the  foreseeable  future.  Failure  to  gain  regulatory
     approvals or market  acceptance  for the CTLM(TM) would have a material
     adverse effect on our business,  financial  condition,  cash flows, and
     results of operations.

     We  purchase  certain  laser  components  for  the  CTLM(TM)  from  two
     unaffiliated  laser suppliers on an as needed basis.  THE disruption or
     termination  of our laser  suppliers  could have a  short-term  adverse
     effect on our ability to manufacture the CTLM(TM).

     There can be no assurance that  physicians or the medical  community in
     general  will  accept and utilize  the  CTLM(TM) or any othER  products
     developed by us.

     We have limited  internal  marketing and sales resources and personnel.
     Sales and service in the  international  market will be dependent  upon
     distributors  already  under  agreement.   We  will  continue  to  seek
     distributors for those countries not yet represented.

     Third-party  payors  (Medicare,   Medicaid,  private  health  insurance
     companies,  and other organizations) may affect the pricing or relative
     attractiveness of our products by regulating the level of reimbursement
     provided  by such  payors to the  physicians  and  clinics  and imaging
     centers  utilizing the CTLM(TM) or any other  products that the Company
     may develop or BY refusing reimbursement.

     In  certain  countries,  our  ability  to  achieve  significant  market
     penetration  may  depend  upon  the  availability  of third  party  and
     governmental  reimbursement.  Revenues  and  profitability  of  medical
     device  companies  may  be  affected  by  the  continuing   efforts  of
     governmental  and third party  payors to contain or reduce the costs of
     health care through various means.

     We have had to rely on the private  placement of  Preferred  and Common
     Stock and  Convertible  Debentures to obtain  working  capital and will
     continue to do so in the future.  In order to obtain working capital we
     will continue to seek capital  through debt or equity  financing  which
     may include the issuance of  Convertible  Preferred  Stock whose rights
     and preferences are superior to those of the Common Stock holders.

     In the event that we issue convertible Preferred Stock or Convertible
     Debentures without a limit on the number of shares that can be issued upon
     conversion  and the price of our Common Stock  decreases,  the percentage
     of shares  outstanding that will be held by such holders upon conversion
     will increase accordingly. The lower the market  price,  the  greater the
     number of shares to be issued to such holders,  upon conversion,  thus
     increasing the potential  profits to the holder when the price per share
     increases and the holder sells the Common Shares.  The Preferred
     Stockholders  and debenture  holders  potential  for increased  share
     issuance and profit,  including  profits derived from shorting our Common
     Stock, in addition to a stock  overhang of an  undeterminable  amount, may
     depress the price of our Common  Stock.  In addition,  the sale of a
     substantial  amount of Preferred Stock to relatively few holders could
     effectuate a possible change of control. Moreover, in the event of a
     voluntarily or involuntarily liquidation of the Company  while the
     Preferred  Stock is  outstanding,  the  holders  will be entitled to a
     preference in distribution of our property.

     We  have  amended  our  Articles  of  Incorporation,  to  increase  our
     authorized  Common Stock from 48,000,000  shares to 100,000,000  common
     shares  in  order  to  facilitate   the  conversion  of  the  Series  B
     Convertible  Preferred Stock and Series H Convertible  Preferred Stock,
     the only Preferred Series  outstanding at that time. We now have issued
     and  outstanding  approximately  $5,610,000  of  convertible  preferred
     securities  and $2,015,000 of  convertible  debentures.  Due to the low
     market price of our Common Stock and the  conversion  of a  substantial
     number of  Preferred  Shares,  we may have to increase  our  authorized
     Common  Stock.  Based on the  average  high and low price of our Common
     Stock as of October 11, 1999 ($.109),  approximately  88,373,126 shares
     would be required to convert all of our convertible securities.

     Due to the specialized scientific nature of our business, we are highly
     dependent upon our ability to attract and retain qualified  scientific,
     technical and managerial personnel.

     Management of the Company  beneficially owns 37.3%,  including options,
     of the outstanding  Common Stock of the Company assuming no exercise of
     outstanding warrants, options, or convertible Preferred Stock. Although
     Management owns less than 50.1% of the outstanding  Common Stock, since
     the  Company  does  not  have  cumulative  voting,  and  since,  in all
     likelihood  the officers  will be voting as a block and will be able to
     obtain  proxies of other  shareholders,  Management  will  continue  to
     remain in a position to elect all of our directors and control policies
     and  operations  of the Company.  After giving  effect to the estimated
     conversion of the Preferred Stock and the  Debentures,  Management will
     own 15%. This additional dilution to Management's  ownership percentage
     could effectuate a change in control of the Company.

     Richard  Grable and Linda  Grable  hold a majority  of the seats on our
     Board of  Directors.  Consequently,  they are in a position  to control
     their own compensation and to approve affiliated transactions, if any.

     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, human and marketing resources,  manufacturing
     and experience than the Company.

     We have limited  experience in the manufacture of medical  products for
     clinical trials or commercial purposes. Should we decide to manufacture
     our products, our manufacturing facilities would be subject to the full
     range of the current Quality System  Regulation  ("QSR")  (formerly the
     Good Manufacturing Practices (GMP) regulation).  We also may be subject
     to the  risks of  delay or  difficulty  in  manufacturing  and we would
     require substantial  additional capital to establish such manufacturing
     facilities.

     We  have  used  certain  third  parties  to  manufacture   and  deliver
     components  of the  CTLM(TM)  and  intend to  continue  to do so in tHE
     future.  Such third  parties must adhere to the QSR enforced by the FDA
     through  our  facilities  inspection  program  and such third  parties'
     facilities  must  pass a plant  inspection  before  the FDA will  grant
     pre-market approval of our products. There can be no assurance that the
     third-party manufacturers on which we depend will be in compliance with
     the QSR at the time of the  pre-approval  inspection  or will  maintain
     such compliance.

     The qualification of additional or replacement  suppliers for certain
     components of the CTLM(TM)or services is a lengthy process. We rely on
     single suppliers for certain services and components. If we encounter
     delays or difficulties with our third-party suppliers in producing,
     packaging, or distributing components of the CTLM(TM), market introduction
     and subsequent sales would be adversely affected. If we have to rely on
     alternative sources of supply, we may not be able to enter into alternative
     supply  arrangements at commercially  acceptable  rates, if at all. If we
     are unable to obtain or retain qualified third-party manufacturers on
     commercially  acceptable terms, we may not be able to commercialize our
     products as planned.  Our  dependence  upon third  parties  for the
     manufacture  of our products may adversely  affect our profit margins
     and our ability to develop and deliver our products on a timely and
     competitive basis.


     Methods for the detection of cancer are subject to rapid  technological
     innovation and there can be no assurance  that  technical  changes will
     not render our proposed products obsolete.

Originally,  we anticipated that the CTLM(TM) would be ready for distribution in
the summer of 1998,  however during the course OF clinical trials, we learned of
certain problems with particular components of the CTLM(TM),  which needed to be
corrected.  Due to theSE delays and the delay in our start of the Nassau  County
Clinical  Investigational  trials,  we cannot  predict when the CTLM(TM) will BE
ready for distribution.

     Until we receive  pre-market  approval from the FDA, a significant
     portion of our revenues, will come from international sales of the
     CTLM(TM) in Europe and Asia and  therefore,  may be subject to the
     following:

         economical and political instability,
         shipping delays,
         fluctuation of foreign currency exchange rates,
         foreign regulatory requirements and various trade restrictions,
         future  imposition  of, or  significant  increases  in the level of
         customs duties, export quotas or other trade restrictions.

In order to minimize the risk of doing business with  distributors  in countries
which are having  difficult  financial  times,  our  International  Distribution
Agreements all require  payment via an  irrevocable  letter of credit drawn on a
United   States  bank  prior  to  shipment   of  the   CTLM(TM).   See  Item  1.
"Business-Government Regulation"

Our business exposes us to potential product liability risks, which are inherent
in the testing,  manufacturing,  and marketing of cancer detection products.  We
carry product and professional  liability insurance in the amount of $3,000,000,
for all clinical sites. A successful  claim against the Company in excess of our
insurance  coverage  could  cause the Company to cease  operations.  See Item 1.
"Business-Product Liability".

     We have not  performed any market or  feasibility  study to assess the
 interest,  demand,  or need for the CTLM(TM).  See Item 1.
     "Business" and "Business-Competition".

     We have not paid a dividend on our Common Stock and do not intend to pay
 dividends.

ITEM 7.  FINANCIAL STATEMENTS

   Index to Financial Statements

                                                              PAGE

   Report of Independent Certified Public Accountants         F-1

   Financial Statements

            Balance Sheet                                     F-3

            Statement of Operations                           F-4

            Statement of Stockholders' Equity                 F-5-9

            Statement of Cash Flows                           F-10-11

            Notes to Financial Statement                      F-12-46












                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                               TABLE OF CONTENTS

                                                                         Page

         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS               F-1

         FINANCIAL STATEMENTS:

                  Balance Sheets                                          F-3

                  Statements of Operations                                F-4

                  Statements of Stockholders' Equity                      F-5

                  Statements of Cash Flows                                F-10

                  Notes to Financial Statements                           F-12






<PAGE>








REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying  balance sheets of Imaging Diagnostic  Systems,
Inc. (a Development Stage Company) as of June 30, 1999 and 1998, and the related
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  June 30,  1999 and 1998 and for the  period  December  10,  1993 (date of
inception) to June 30, 1999. 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, 1999 and 1998 and the results
of its  operations and its cash flows for the years ended June 30, 1999 and 1998
and for the period  December  10, 1993 (date of  inception)  to June 30, 1999 in
conformity with generally accepted accounting principles.

The Company is in the development  stage as of June 30, 1999 and to date has had
no  significant  operations.  Recovery of the  Company's  assets is dependent on
future events, the outcome of which is indeterminable.  In addition,  successful
completion of the Company's development program and its transition,  ultimately,
to  attaining  profitable   operations  is  dependent  upon  obtaining  adequate
financing to fulfill its  development  activities and achieving a level of sales
adequate to support the Company's cost structure.


<PAGE>






The accompanying  financial  statements have been prepared  assuming the Company
will continue as a going concern.  The Company has suffered recurring losses and
has yet to generate an internal  cash flow that raises  substantial  doubt about
its  ability to  continue as a going  concern.  Management's  plans in regard to
these matters are  described in Note 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 31, 1999


<PAGE>










                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS

                             JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>



                                     ASSETS
                                                             1999            1998
<S>                                                         <C>              <C>

 Current assets:
  Cash                                               $     70,037    $    310,116
  Loans receivable - employees                             30,950            --
  Inventory                                             3,698,343       3,214,045
  Prepaid expenses                                         58,250          33,539
                                                     ------------    ------------

         Total Current Assets                           3,857,580       3,557,700
                                                     ------------    ------------

Property and equipment, net                             2,707,994       2,920,980
Other Assets                                              561,158         688,463
                                                     ------------    ------------

                                                     $  7,126,732    $  7,167,143
                                                     ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities:

    Accounts payable and accrued expenses            $  1,597,083    $  1,363,766
    Loans payable                                       1,232,271         285,407

     Current maturities of capital lease obligations

                                                           10,572           9,715
  Other current liabilities                               529,880       2,155,978

     Total current liabilities                          3,369,806       3,814,866


         Convertible debenture                          1,100,000            --
         Long-term capital lease obligations               15,561          26,134


   Total liabilities                                    4,485,367       3,841,000


         Commitments and contingencies

  Redeemable convertible preferred stock
(Series G), no par value; authorized 38 shares,
 issued 38 and 0 shares , respectively                    477,117            --

  Stockholders' equity:

Convertible preferred stock (Series B),
7% cumulative annual dividend, no par value;
 authorized 450 shares, issued 390 and 450
 shares  respectively                                  3,900,000,       4,500,000
Convertible preferred stock (Series D),
 no par value; authorized 54 shares,
  issued 0 and 29 shares, respectively                       --           290,000
Convertible preferred stock (Series E),
 no par value; authorized 54 shares,
  issued 0 and 24 shares, respectively                       --           240,000
Convertible preferred stock (Series H),
  no par value; authorized 108 shares,
  issued 68 and 108 shares, respective                    680,000       1,080,000
Convertible preferred stock (Series I),
 7% cumulative annual dividend, no par value;
  authorized 138 shares, issued 138 and
 0 shares respectively                                  1,380,000
Common stock, no par value; authorized
100,000,000 shares, issued 49,297,675
  and 36,493,544 shares, respectively                  29,820,729      23,983,073
Additional paid-in capital                              1,490,827       1,884,846
Deficit accumulated during the
development stage                                     (35,092,999)    (27,336,655)

                                                        2,178,557       4,641,264
  Less: subscriptions receivable                          (14,309)        (14,309)

           Deferred compensation                             --        (1,300,812)

           Total stockholders' equity                   2,164,248       3,326,143
                                                     ------------    ------------

                                                     $  7,126,732    $  7,167,143
                                                     ============    ============
</TABLE>


<PAGE>


               See accompanying notes to the financial statements.


<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, 1999   June 30, 1998     June 30, 1999
                                                    -------------   -------------     -------------
<S>                                                         <C>          <C>                  <C>
Compensation and related benefits:

  Administrative and engineering                     $  1,477,296    $  1,210,526    $  7,952,534
  Research and development                                944,500         776,578       2,689,589
Research and development expenses                          71,508         254,722       2,990,402
Advertising and promotion expenses                         27,273         329,446         901,114
Selling, general and administrative expenses              385,824         396,752       1,687,961
Clinical expenses                                          16,764           9,859         377,439
Consulting expenses                                        89,637       1,220,676       3,026,221
Insurance costs                                           172,416         162,549         501,207
Professional fees                                         292,828         454,730       1,644,663
Stockholder expenses                                       65,165          75,608         161,675
Trade show expenses                                       151,403         216,182         656,861
Travel and subsistence costs                              111,361         111,559         568,520
Rent expense                                               28,808          26,213         276,269
Interest expense                                          688,644          55,543         771,240
Loan placement expenses and fees                          201,494            --           201,494
Depreciation and amortization                             312,956         283,966         988,818
Amortization of deferred compensation                   1,510,437       1,418,938       4,064,250
Liquidated damages costs                                  260,000            --           260,000
Interest income                                            (1,120)        (22,137)       (198,537)
                                                     ------------    ------------    ------------

                                                        6,807,194       6,981,710      29,521,720
                                                     ------------    ------------    ------------

     Net loss                                          (6,807,194)     (6,981,710)    (29,521,720)

Dividends on cumulative preferred stock:

 From discount at issuance                               (619,974)     (1,741,015)     (4,694,583)
 Earned                                                  (329,176)       (315,000)       (876,696)
                                                     ------------    ------------    ------------

     Net loss applicable to common shareholders      $ (7,756,344)   $ (9,037,725)   $(35,092,999)
                                                     ============    ============    ============


Net loss per common share:

  Basic

    NET LOSS PER COMMON SHARE                        $       (.20)   $       (.32)   $      (1.41)
                                                     ============    ============    ============

    WEIGHTED AVERAGE NUMBER OF COMMON SHARES           39,333,668      27,882,886      24,932,484
                                                     ============    ============    ============

  Diluted

    NET LOSS PER COMMON SHARE                        $       (.20)   $       (.32)   $      (1.41)
                                                     ============    ============    ============

    WEIGHTED AVERAGE NUMBER OF COMMON SHARES           39,333,668      27,882,886      24,932,484
                                                     ============    ============    ============
</TABLE>





               See accompanying notes to thefinancial statements.


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                        STATEMENT OF STOCKHOLDERS' EQUITY

          PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>

                                                                                   Deficit
                                                                                    Accumulated
                             PREFERRED STOCK (**)    COMMON STOCK     Additional    During the
                             Number of                Number of         Paid-In   Development       Subs.       Deferred
                              Shares   Amount       Shares  Amount    Capital          Stage      Receivable    Compensation  Total
<S>                           <C>            <C>    <C>     <C>       <C>             <C>           <C>             <C>      <C>

Balance at December 10,
  1993(date of inception)              -0- $   -0-         -0-    $ -0- $ -0-  $-0-     $   -0-   $  -0-        $-0-

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

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

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

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

Net Loss                                                                --       --           --         --         --        --
                                                                        --       --        (66,951)      --         --     (66,951)
Balance at  June 30, 1994              --        --    16,067,772    102,951     --        (66,951)  -0-            --      36,000

Common stock sold                      --        --     1,980,791  1,566,595     --           --     (523,118)      --   1,043,477

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

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

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

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

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

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

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

BALANCE AT  JUNE 30, 1995      --         --   18,616,713      2,002,238        672,833   (1,153,387)  (523,118)  (508,125)  490,441

</TABLE>

                                   (CONTINUED)

               See accompanying notes to the financial statements.

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                 STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

          PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999


<TABLE>
<CAPTION>


                                                                                     Deficit
                                                                                    Accumulated
                             PREFERRED STOCK (**)    COMMON STOCK     Additional    During the
                             Number of                Number of         Paid-In   Development       Subs.       Deferred
                              Shares   Amount       Shares  Amount    Capital          Stage      Receivable    Compensation  Total


<S>                           <C>            <C>    <C>          <C>    <C>           <C>           <C>              <C>        <C>


BALANCE AT  JUNE 30, 1995                                         -                        -                     18,616,713
                                   2,002,238         672,833      (1,153,387)    (523,118)    (508,125)            490,441

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

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

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

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

Common stock issued with
  exercise of stock options               -            -               191,500          104,375
    -                    -                    (4,375)                -                 100,000

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

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

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

Dividends accrued on preferred

 stock not yet converted                                    -            -               -           -             -
         (33,216)              -                         -                  (33,216)

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

Amortization of deferred
 compensation                             -            -                    -                          -
               -               -                  232,500            232,500

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

NET LOSS (RESTATED)                                               -                        -                                -
                                                  -           -    (6,933,310)     -          -      (6,933,310)

BALANCE AT JUNE 30,
 1996 (RESTATED)                          2,400      2,160,000              23,023,789    10,075,896
 1,574,784        (9,470,016)          (18,684)         (275,625)        4,046,355

</TABLE>


                                   (CONTINUED)

               See accompanying notes to the financial statements.


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                 STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

          PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>


                                                                                     Deficit
                                                                                    Accumulated
                             PREFERRED STOCK (**)    COMMON STOCK     Additional    During the
                             Number of                Number of         Paid-In   Development       Subs.       Deferred
                              Shares   Amount       Shares  Amount    Capital          Stage      Receivable    Compensation  Total


<S>                           <C>    <C>               <C>    <C>     <C>                 <C>      <C>            <C>         <C>

BALANCE AT JUNE 30,
 1996 (RESTATED)                          2,400      2,160,000              23,023,789       10,075,896

1,574,784        (9,470,016)          (18,684)        ( 275,625)        4,046,355


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

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

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

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

Common stock issued
 with exercise of stock options                -            -              361,933            1,136,953
-                    -                (33,750)                -               1,103,203

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

Common stock issued
as payment of preferred

  stock dividends                                           -            -               20,760                 49,603          -
         (16,387)               -                        -                   33,216

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

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

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

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

NET LOSS (RESTATED)                                               -                        -                                -

                 -                        -                 (7,646,119)                -                       -
    (7,646,119)

BALANCE AT JUNE 30, 1997 (RESTATED)                             450     4,500,000               24,905,084           15,739,729

     3,663,120      (18,298,930)            (35,559)      (1,379,125)         4,189,235
</TABLE>



                    (CONTINUED)

               See accompanying notes to the financial statements.

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                        STATEMENT OF STOCKHOLDERS' EQUITY

          PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999

<TABLE>
<CAPTION>



                                                                                     Deficit
                                                                                    Accumulated
                             PREFERRED STOCK (**)    COMMON STOCK     Additional    During the
                             Number of                Number of         Paid-In   Development       Subs.       Deferred
                              Shares   Amount       Shares  Amount    Capital          Stage      Receivable    Compensation  Total

<S>                                <C>    <C>           <C>    <C>         C>        <C>            <C>             <C>       <C>


BALANCE AT JUNE 30,
 1997 (RESTATED)                             450     4,500,000               24,905,084        15,739,729

           3,663,120        (18,298,930)          (35,559)      (1,379,125)         4,189,235

Preferred stock sold,
 including dividends
  and placement fees                                                  501     5,010,000                         -            -
           1,290,515          (1,741,015)               -                       -                4,559,500

Conversion of preferred
  stock to common stock                       (340)   (3,400,000)                6,502,448
4,644,307           (1,210,414)                    -                      -                        -                    33,893

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

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

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

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

Common stock issued in
 exchange for
  licensing agreement                                       -            -           3,500,000          1,890,000     (3,199,000)
               -                -                -               (1,309,000)

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

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

Collection of stock
subscriptions                                -            -               -             12,500
        -                  -                 21,250                -               33,750

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

NET LOSS                                                    -                        -                                -

            -                           -              (6,981,710)               -                       -            (6,981,710)

BALANCE AT JUNE 30, 1998                                        611     6,110,000               36,493,544        23,983,073
                                                  ----------------- -------------            ------------------ ------------
       1,884,846      (27,336,655)           (14,309)      (1,300,812)        3,326,143
----------------   --------------    ---------------    -------------     -------------
</TABLE>


                                   (CONTINUED)

                          See accompanying notes to the
financial statements.

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                        STATEMENT OF STOCKHOLDERS' EQUITY

          PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999

<TABLE>
<CAPTION>


                                                                                     Defecit
                                                                                    Accumulated
                             PREFERRED STOCK (**)    COMMON STOCK     Additional    During the
                             Number of                Number of         Paid-In   Development       Subs.       Deferred
                              Shares   Amount       Shares  Amount    Capital          Stage      Receivable    Compensation  Total


<S>                            <C>    <C>         <C>        <C>       <C>    <C>     <C>        <C>       <C>             <C>

BALANCE AT JUNE 30,
 1998                               611     6,110,000               36,493,544        23,983,073

        1,884,846     (27,336,655)           (14,309)      (1,300,812)        3,326,143

Preferred stock issued
- satisfaction of debt                         138     1,380,000                         -            -
               (161,348)         (492,857)                -                      -                  725,795

Conversion of preferred
  stock to common stock                      (153)   (1,530,000)                 4,865,034
1,972,296                (442,296)                  -                 -                      -                        -

Common stock sold                                           -            -              200,000              60,000
           -                -                      -                       -                    60,000

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

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

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

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

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

                                                                                                                            -

                                                                                                                            -

                                                                                                                            -

                                                                                                                            -

                                                                                                           1,890,000

Redeemable preferred stock sold, deemed dividend            -            -                   -             -

                                                                                                                    -
                                                                                                                       (127,117)

                                                                                                                         -

                                                                                                                                  -

                                                                                                            (127,117)

Dividends accrued-preferred stock not yet converted               -            -               -           -                 -
        (329,176)                -                -                 (329,176)

Stock options granted                                       -            -                   -             -            209,625
              -                        -                (209,625)                -

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

NET LOSS                                                    -                        -                                -
                                                  --------------------    --------------------           ---------------------
            -                           -              (6,807,194)                -                      -            (6,807,194)
-------------------       ----------------------- ---------------   ---------------------    --------------------- -------------

BALANCE AT JUNE 30, 1999                                        596 $  5,960,000          49,297,675     $ 29,820,729      $
                                                  ================= ============       =============     ============      =======
                                                                                              1,490,827
                                                                                              $
                                                                                              (35,092,999)
                                                                                              $
                                                                                              (14,309)
                                                                                              $
                                                                                              -

                                                                                              $
                                                                                              2,164,248
</TABLE>

               ** See Note 16 for a detailed breakdown by Series.

               See accompanying notes to the financial statements.


<PAGE>




                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            From
                                                                                           Inception
                                                                                         (December 10,
                                                        Year Ended       Year Ended         1993) to
                                                      JUNE 30, 1999     JUNE 30, 1998     JUNE 30, 1999
                                                     --------------    --------------   ----------------
<S>                                                    <C>            <C>                  <C>

NET LOSS                                             $ (6,807,194)   $ (6,981,710)   $(29,521,720)
                                                     ------------    ------------    ------------
Adjustments to reconcile net loss to net cash
 used for operating activities:

    Depreciation and amortization                         312,956         283,966         988,818
    Amortization of deferred compensation               1,510,437       1,418,938       4,064,250
    Noncash compensation and consulting expenses          593,904       1,379,938       7,982,051
    Decrease in restricted certificate of deposit            --           103,500            --
    (Increase) decrease in loans receivable - other       (44,310)         10,073         (44,310)
    Increase in inventory                                (484,298)       (155,782)       (640,080)
    (Increase) decrease in prepaid expenses               (24,711)         23,253         (58,250)
    (Increase) decrease  in other assets                   91,758         (97,828)        (15,705)
    Increase in accounts payable and accrued expenses     887,828         529,220       1,768,306
    INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES      263,902         (53,569)        529,880
                                                     ------------    ------------    ------------

      TOTAL ADJUSTMENTS                                 3,107,466       3,441,709      14,574,960
                                                     ------------    ------------    ------------

      NET CASH USED FOR OPERATING ACTIVITIES           (3,699,728)     (3,540,001)    (14,946,760)
                                                     ------------    ------------    ------------

Cash flows from investing activities:

    Prototype equipment                                      --        (1,582,446)     (2,799,031)
    CAPITAL EXPENDITURES                                  (64,423)       (115,738)     (3,725,417)

      NET CASH USED FOR INVESTING ACTIVITIES              (64,423)     (1,698,184)     (6,524,448)
                                                     ------------    ------------    ------------

Cash flows from financing activities:

    Repayment of capital lease obligation                  (9,716)         (8,928)        (24,156)
    Proceeds from convertible debenture                 1,100,000            --         1,100,000
    Proceeds from loan payable, net                     1,869,324         285,407       2,154,731
    Proceeds from issuance of preferred stock             380,000       4,559,500      13,039,500
    NET PROCEEDS FROM ISSUANCE OF COMMON STOCK            184,464         329,099       5,271,170
                                                     ------------    ------------    ------------

      NET CASH PROVIDED BY FINANCING ACTIVITIES         3,524,072       5,165,078      21,541,245
                                                     ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents     (240,079)        (73,107)         70,037

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD          310,116         383,223             -0-
--------------------------------------------------   ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD           $     70,037    $    310,116    $     70,037
                                                     ============    ============    ============
</TABLE>








               See accompanying notes to thefinancial statements.

                        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, 1999     JUNE 30, 1998        JUNE 30, 1999
                                                        -------------     -------------        -------------
<S>                                                         <C>                <C>                 <C>

Supplemental disclosures of cash flow information:

         cash paid for interest                         $         16,628  $     3,105$              46,786
                                                        ================  ================        =========


Supplemental disclosures of noncash
investing and financing activities:

         Issuance of common stock and options
           in exchange for services                     $      221,788    $    1,325,530   $    4,837,747
                                                        ==============    ==============   ==============

         Issuance of common stock as loan fees in
           connection with loans to the company         $      292,694    $            -            $       292,694
                                                        ==============    =====================     ===============

         Issuance of common stock as satisfaction of
           loans payable                                $      939,100    $            -            $       939,100
                                                        ==============    =====================     ===============

         Issuance of common stock as satisfaction of
           certain accounts payable                     $      257,892    $            -                 $       257,892
                                                        ==============    =====================          ===============

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

         Issuance of common stock and
          other current liability in Exchange
           for Patent Licensing Agreement                   $ -            $       581,000   $                 581,000
                                                          =====================     ===============       ===============

         Issuance of common stock for
           compensation                                 $        79,422   $         54,408           $    1,770,358
                                                        ===============   ================           ==============

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

         Issuance of common stock as
           payment for preferred stock dividends        $            -            $             -            $         64,232
                                                        =====================     =====================      ================

         Acquisition of property and equipment
           through the issuance of a capital

           lease payable                                $            -            $             -            $         50,289
                                                        =====================     =====================      ================
</TABLE>








               See accompanying notes to the financial statements.


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

(1)      BACKGROUND

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

The Company is in the business of developing  medical imaging devices based upon
the combination of the advances made in ultrafast  electro-optic  technology and
the unique  knowledge  of medical  imaging  devices  held by the founders of the
Company.  Previously,  the  technology  for these  imaging  devices had not been
available.   The  initial  computed  tomography  laser  mammography   ("CTLMTM")
prototype  has  been  developed  with  the  use  of  "ultrafast   laser  imaging
technology"TM, and this technology was first introduced at the "RSNA" scientific
assembly and conference  during late November 1994. The completed  CTLMTM device
was  exhibited  at the "RSNA"  conference  November  26-30,  1995.  ThE  Company
exhibited the pilot  production run CTLMTM device at the "RSNA"  conference held
in Chicago on December 2-6,  1996. A further  refined CTLMTM device and clinical
images were exhibited at the "RSNA"  conference held in Chicago on December 1-5,
1997.  A new design of the  scanning  bed along with  images from the 20 patient
clinical study were exhibited at the RSNA conference held in Chicago on November
30 through December 4, 1998.

The initial  CTLMTM  prototype  produced  live images of an augmented  breast on
February 23, 1995. From the experience gained with this initial  prototype,  the
Company  continued  its research and  development  resulting in new hardware and
software  enhancements.  The Company has completed a series of calibration scans
under an approved  Investigational  Device  Exemption  ("IDE") from the Food and
Drug Administration  ("FDA").  This IDE authorized 50 patient scans at the Strax
Breast  Diagnostic Center and 20 additional  patients at its in-house  facility.
Prior to the  completion  of the 1996 IDE,  the Company was advised that greatly
improved laser technology would SOON BE AVAILABLE.  THE IDE AT STRAX WAS HALTED,
PENDING RECEIPT OF THE NEW LASER SYSTEM. IN NOVEMBER 1997 THE CTLMTM was removed
from Strax and, on May 20, 1998,  the Company's  termination  of the IDE and its
final report was accepted by the FDA.

The Company was granted,  in June 1998, its second IDE  authorizing the scanning
of 20 patients at the  Company's  in-house  facilities.  On  September 1 and 10,
1998,  the  Company  formally  submitted  the first and second  series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On January 14, 1999,  the Company  received  notice that the IDE  application to
extend the in-vivo study to Nassau County  Medical Center (NCMC) in East Meadow,
New York was  conditionally  approved.  On July 8, 1999, the Company commenced a
275 patient clinical investigational study at NCMC.



                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(1)      BACKGROUND (CONTINUED)

On June 12,  1997,  the  Company was  advised by patent  counsel  that its chief
executive  officer's  patent,  filed June 5, 1995 was granted with 7 independent
and 16 subordinate  claims.  Foreign patent applications have been filed and are
pending. On September 14, 1999, the Company was advised by patent counsel that a
patent for laser imaging apparatus using biomedical  markers that bind to cancer
cells was issued.

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

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Use of estimates

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

         (b) Cash and cash equivalents

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

         (c) Inventory

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

                                                         (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (d) Prototype equipment

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

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

         (e) Property, equipment and software development costs

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

                Under  the   criteria   set  forth  in  Statement  of  Financial
                Accounting   Standards  No.  86,   capitalization   of  software
                development costs begins upon the establishment of technological
                feasibility for the product.  The establishment of technological
                feasibility and the ongoing  assessment of the recoverability of
                these costs requires  considerable  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.
                                       (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (f) Research and development

                Research  and  development   expenses  consist   principally  of
                expenditures for equipment and outside  THIRD-PARTY  CONSULTANTS
                WHICH ARE USED IN TESTING AND THE  DEVELOPMENT  OF THE COMPANY'S
                CTLMTM device,  product  software and  compensation  to specific
                company  personnel.  The non-payroll  related  expenses  include
                testing  at  outside  laboratories,  parts  associated  with the
                design of initial  components and TOOLING COSTS, AND OTHER COSTS
                WHICH  DO NOT  REMAIN  WITH THE  DEVELOPED  CTLMTM  device.  The
                software   development   costs  are  with  outside   third-party
                consultants involved with the implementation of final changes to
                the developed  software.  All research and development costs are
                expensed as incurred.

         (g) Net loss per share

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

         (h) Patent license agreement

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

         (i) Stock-based compensation

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

                                                                   (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (j) Long-lived assets

                Effective  July 1, 1996,  the Company  adopted the provisions of
                Statement of Financial Accounting Standards No. 121. "Accounting
                for the  Impairment  of  Long-Lived  Assets  and for  Long-Lived
                Assets to be Disposed Of" ("SFAS 121"). This statement  requires
                companies  to write  down to  estimated  fair  value  long-lived
                assets that are  impaired.  The Company  reviews its  long-lived
                assets   for   impairment   whenever   events  or   changes   in
                circumstances  indicate that the carrying  value of an asset may
                not be recoverable.  In performing the review of  recoverability
                the Company  estimates the future cash flows  expected to result
                from the use of the asset and its eventual  disposition.  If the
                sum of the expected  future cash flows is less than the carrying
                amount of the assets,  an  impairment  loss is  recognized.  The
                Company  has  determined  that no  impairment  losses need to be
                recognized through the fiscal year ended June 30, 1999.

         (k) Income taxes

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

         (l) Deemed preferred stock dividend

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

                                                          (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (m) Discount on convertible debt

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

         (n) Reclassifications

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

(3)      RESTATEMENT

The Company had  restated  the June 30, 1997 and 1996  financial  statements  to
properly   reflect  the  accrual  of  compensation  and  recording  of  deferred
compensation on the qualified and non-qualified  stock options for the officers,
and the correction of an accumulated depreciation  understatement of $27,682 for
the year  ended  June 30,  1997.  The  effect on net loss from the  compensation
restatement  was an increase of $946,796  for the year ended June 30, 1996 and a
decrease of $299,055 for the year ended June 30,  1997.  These  statements  were
also  restated  to  correct  the  calculation  of the  deemed  dividends  on the
cumulative  preferred stock as a result of the discount at issuance.  The effect
of this change was an increase to the net loss applicable to common shareholders
of $283,965  ($.01 per share) and $337,074 ($.02 per share) for the fiscal years
ended June 30, 1997 and 1996, respectively.

THE  COMPANY  HAD  BEEN   CAPITALIZING  THE  COSTS  ASSOCIATED  WITH  THE  FINAL
DEVELOPMENT  OF THE CTLMTM  software from its initial  acquisition  PHASE TO THE
SOFTWARE BEING USED IN THE CTLMTM device currently  undergoing clinical testing.
Effective  December 31, 1996, the Company  restated its financial  statements to
expense all  additional  costs  incurred  since the  acquisition of the original
software.  Accordingly,  the Company  expensed a total of $869,692 as additional
research and development  costs through December 31, 1996, of which $436,736 was
applicable to the fiscal year ended June 30, 1996.

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

      INCREASE IN NET LOSS               $     161,583     $ 1,383,532
                                         =============     ===========

      Per share data:

          BASIC                          $       .01       $       .06
                                         ================= ================

          DILUTED                        $       .01       $       .06
                                         ================= ================
                                                                    (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(4)      MERGER

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

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

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

(5)      GOING CONCERN

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

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

                                                          (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6)      INVENTORIES

Inventories consisted of the following:

                                          JUNE 30,
                                         1999              1998

  Raw materials                         $ 2,125,035    $  1,296,864
  Work-in process                        391,875        1,917,181
  COMPLETED UNITS UNDER TESTING          1,181,433            -
                                     -------------     --------------

                                     $  3,698,343      $  3,214,045
                                      ============      ============


(7)      PROPERTY AND EQUIPMENT

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

                                                          JUNE 30,
                                                  1999              1998

         Furniture and fixtures              $   246,730       $   245,219
         Building and land (See Note 12)       2,084,085         2,084,085
         Clinical equipment                       30,714               -
         Computers and equipment                 516,551          487,143
         CTLMTM software costs                   352,932          352,932
         Trade show equipment                    154,468          153,193
         LABORATORY EQUIPMENT                    191,548          190,031
                                                 ---------   --------------

                                                 3,577,028        3,512,603

         LESS: ACCUMULATED DEPRECIATION         (869,034)        (591,623)
                                               ------------   --------------

                  TOTALS                        $2,707,994     $  2,920,980
                                              =============     ============

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
                  CTLMTM software costs                                  5 years

                                                                  (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(7)      PROPERTY AND EQUIPMENT (CONTINUED)

Telephone  equipment,  acquired  under a  long-term  capital  lease at a cost of
$50,289, is included in furniture and fixtures.  The net UNAMORTIZED COST OF THE
CTLMTM   software  at  June  30,  1999  and  1998  are  $67,666  and   $138,180,
respectively,  which  represents the net REALIZABLE VALUE OF THE CTLMTM software
at the end of each period presented.

AMORTIZATION EXPENSE RELATED TO THE CTLMTM software for each period presented in
the statement of operations is as follows:

                           PERIOD ENDED                         AMOUNT
                           ------------                       ---------
                                 6/30/99                      $   70,514
                                 6/30/98                          70,587
                                 PRIOR                           144,165
                                                              ----------

                             TOTAL                            $ 285,266
                                                              =========


(8)      OTHER ASSETS

Other assets consist of the following:

                                                          JUNE 30,
                                                   1999               1998

   Patent license agreement, net of accumulated

     amortization of $34,176 and $0, respectively    $ 546,824    $    581,000
   UL and CE approvals, net of accumulated
     amortization of $1,371 and $0, respectively        6,854           1,383
   Court bond                                            -             100,000
   SECURITY DEPOSITS                                     7,480           6,080
                                                      ---------    ------------

         TOTALS                                       $  561,158    $  688,463
                                                     ============  ============

During June 1998, the Company  finalized an exclusive  Patent License  Agreement
with its chief executive officer.  The officer is the OWNER OF PATENTS ISSUED ON
DECEMBER 2, 1997 WHICH  ENCOMPASSES  THE  TECHNOLOGY OF THE CTLMTM . Pursuant to
the terms of the  agreement,  the Company was  granted  the  exclusive  right to
modify,  customize,  maintain,  incorporate,  manufacture,  sell,  and otherwise
utilize and practice the Patent,  all  improvements  thereto and all  technology
related to the process,  throughout  the world.  The license  shall apply to any
extension or re-issue of the Patent.  The term of license is for the life of the
Patent  and  any  renewal  thereof,   subject  to  termination,   under  certain
conditions.  As consideration for the License, the Company issued to the officer
7,000,000 shares of common stock. The License agreement has been recorded at the
historical cost basis of the chief  executive  officer,  who owns the patent.  A
liability had been recorded as of June 30, 1998 for the fair market value of the
remaining shares that were issued in June 1999. (see Note 10)

                                                                 (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(9)      ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                    JUNE 30,
                                               1999            1998

         Accounts payable - trade            $773,827    $     774,952
         Preferred stock dividends payable     86,669         483,288
         Accrued property taxes payable        15,585          15,585
         Insurance financing payable                 -         10,233
         Accrued compensated absences          30,297          38,530
         Accrued interest payable             461,462           18,546
         Payroll taxes payable                    -             4,250
         Liquidated damages payable
          (see Note 16)                      120,000               -
         Accrued wages payable               109,243               -
         OTHER                                18,382          18,382
                                             ------------  -------------

                  TOTALS                      $   1,597,083    $ 1,363,766
                                              =============    ===========


(10)     OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

                                                         JUNE 30,
                                                 1999             1998

    Patent licensing agreement
    payable (see Note 8)                   $           -         $  1,890,000
    ACCRUED COMPENSATION-STOCK OPTIONS             529,880           265,978
                                                 --------------    -----------

                                             $     529,880    $  2,155,978
                                             =============    ============

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

                                                            (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(11)     LOANS PAYABLE

Loans payable consisted of the following:

                                                      June 30,
                                            1999                  1998

         Loan payable                    $     300,407     $     285,407

         LOANS PAYABLE TO OFFICERS              443,864                 -
         LOANS PAYABLE TO RELATED PARTIES       488,000                 -
                                            --------------    -------------

                                            $  1,232,271     $     285,407
                                              ============     =============

The Company has borrowed a total of $475,407,  from an unrelated  third-party on
an unsecured  basis.  The loan accrues interest at a rate of 6% per annum and is
payable on demand.  The Company has repaid $175,000 as of June 30, 1999. Accrued
interest of $36,427 is reflected in accrued expenses on the balance sheet.

The officers of the Company have made loans during the year totaling $1,433,487.
The loans are non-interest bearing and the remaining balances were due by August
31, 1999. On May 18, 1999 the officers  were issued a total of 2,171,743  shares
of stock as full satisfaction  ($874,100) of the loans outstanding at that date.
In addition to the loans  outstanding at June 30, 1999, the officers have loaned
an additional  $152,241  subsequent to June 30, 1999, and an additional $450,795
has been repaid,  $20,000 in cash and the balance of $430,795 in common stock of
the Company.

The Company has received various loans from related parties (stockholders of the
Company)  during the year  totaling  $1,093,000.  A total of  $605,000  has been
repaid as of June 30, 1999.  These loans bore  interest at rates varying from 6%
to 15%,  and  accrued  interest as of June 30,  1999  amounted  to $38,921.  The
balance of these loans was due to be paid by August 31, 1999.

(12)     CONVERTIBLE DEBENTURE

On April 6, 1999 the Company  entered  into a  Subscription  Agreement  with the
Purchaser of the Series B Convertible Preferred Stock (see Note 16), whereby the
Purchaser  agreed  to  purchase  $2,750,000  of the  Company's  Debentures.  The
Debentures pay a 7% premium,  to be paid in cash, or freely trading common stock
in the Company's sole discretion,  at the time of each conversion ("the Dividend
Payment Date"). The Debentures are subject to automatic conversion at the end of
the  two  years  from  the  date of  issuance,  at  which  time  all  Debentures
outstanding will be converted based upon a formula detailed within the Debenture
document.

                                                     (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(12)     CONVERTIBLE DEBENTURE (CONTINUED)

The Debentures are secured by a mortgage on the Company's land and building.(see
Note 7) The mortgage  shall only be released  upon the Company  meeting  certain
conditions  described in the mortgage  document.  The funds are available to the
Company as follows:

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

                2. The Company may draw a second $825,000 ($750,000 net of fees)
                anytime  thirty  days  after  the  effective  date  of  the  S-2
                Registration  Statement  (July 29, 1999), as long as the Company
                maintains  an average bid price of $.45 for the ten trading days
                immediately prior to the Company's request for the funding.

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

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

The  Company  has  received  $1,100,000  as of June 30,  1999 and an  additional
$650,000,  net,  between  August 11, 1999 to  September  13,  1999.  Interest of
$18,142 has been  accrued as of June 30, 1999 and the  interest  relating to the
discount  at  issuance  of  $367,972  was  expensed  during the  period,  as the
debenture can be converted immediately, and would have no conversion period.

                                                        (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(13)     LEASES

The Company has entered into a lease  arrangement  which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset.  The asset has been
capitalized  as property and equipment  (see Note 7) and the obligation has been
recorded as debt. At June 30, 1999,  approximate  future  minimum lease payments
under capitalized lease obligations were as follows:

         YEAR ENDING JUNE 30,

                  2000                                              $  12,384
                  2001                                                 12,384
                  2002                                                  4,128
                                                                  -----------

                  Total minimum lease payments                28,896
                  LESS AMOUNT REPRESENTING INTEREST            (2,763)

                  Present value of net minimum lease payments     26,133

                  LESS CURRENT PORTION                            (10,572)

                  LONG-TERM PORTION                                    $  15,561
                                                                       =========

The Company  also leases  certain  office  equipment  under an  operating  lease
expiring in June 2002.  Minimum future lease  payments under the  non-cancelable
operating  lease  having a  remaining  term in excess of one year as of June 30,
1999 are as follows:

                           YEAR ENDING JUNE 30,                     AMOUNT
                                      2000                         $   3,676
                                      2001                              3,676
                                      2002                              3,676

                  TOTAL MINIMUM FUTURE LEASE PAYMENTS         $ 11,028

                                                 (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(14)     INCOME TAXES

No provision  for income taxes has been recorded in the  accompanying  financial
statements as a result of the Company's  net operating  losses.  The Company has
unused tax loss  carryforwards  of  approximately  $22,693,000  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 $7,716,000 and $5,675,000 at June 30, 1999 and 1998, 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, 1998 to June 30, 1999 was an increase of
approximately $2,041,000.

(15)     REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

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

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

Pursuant to the Registration Rights Agreement ("RRA") the Company is required to
register 100% of the number of shares that would be required to be issued if the
Preferred  Stock  were  converted  on the  day  before  the  filing  of the  S-2
Registration Statement. In the event the Registration Statement was not declared
effective  within  120 days,  the  Series G  Holders  had the right to force the
Company to redeem the Series G Preferred Stock at a redemption  price of 120% of
the face value of the preferred stock.  The Registration  Statement was declared
effective on July 29, 1999. As of June 30, 1999,  the  redemption  amount of the
Series G Preferred Stock is $380,000.

                                     (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK

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

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

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

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

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

                                       (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

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

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

The holders of the Series B Preferred  Stock could have  converted  up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred  Stock 100 days from issuance  (March 27, 1997),  and may
convert their  remaining  shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration,  into fully paid and non-assessable
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.

                                                             (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

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

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

As of June 30,  1999,  60  shares  of the  Series  B  Preferred  Stock  had been
converted into 1,931,123 shares of the Company's common stock.

During the years ended June 30, 1999 and 1998 the Company  issued a total of six
Private  Placements of convertible  preferred  stock (see schedule  incorporated
into Note 16). The Private Placements are summarized as follows:

    SERIES C PREFERRED STOCK

    On October 6, 1997, the Company  finalized the private  placement to foreign
    investors  of 210 shares of its Series C  Convertible  Preferred  Stock at a
    purchase  price of $10,000 per share and  warrants to purchase up to 105,000
    shares  of the  Company's  common  stock at an  exercise  price of $1.63 per
    share,  and warrants to purchase up to 50,000 shares of the Company's common
    stock at an exercise  price of $1.562 per share.  The agreement was executed
    pursuant to Regulation S as  promulgated  by the  Securities Act of 1933, as
    amended. As of June 30, 1999 none of the warrants had been exercised.

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

                                                        (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

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

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

    SERIES D PREFERRED STOCK

    On January 9, 1998, the Company  finalized the private  placement to foreign
    investors  of 50 shares of its  Series D  Convertible  Preferred  Stock at a
    purchase  price of $10,000  per share and  warrants to purchase up to 25,000
    shares  of the  Company's  common  STOCK AT AN  EXERCISE  PRICE OF $1.22 per
    share. The agreement was executed pursuant to Regulation S as promulgated by
    the  Securities  Act of 1933,  as  amended.  As of June 30, 1999 none of the
    warrants had been exercised.

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

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

    SERIES E PREFERRED STOCK

    On February 5, 1998, the Company  finalized the private placement to foreign
    investors  of 50 shares of its  Series E  Convertible  Preferred  Stock at a
    purchase  price of $10,000  per share and  warrants to purchase up to 25,000
    shares of the  Company's  common  stock at an  exercise  price of $1.093 per
    share. The agreement was executed pursuant to Regulation S as promulgated by
    the  Securities  Act of 1933,  as  amended.  As of June 30, 1999 none of the
    warrants had been exercised.

                                                             (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

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

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

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

    SERIES F PREFERRED STOCK

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

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

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

                                                 (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

    SERIES H PREFERRED STOCK

     On June 2, 1998,  the Company  finalized  the private  placement to foreign
    investors  of 100 shares of its Series H  Convertible  Preferred  Stock at a
    purchase price of $10,000 per share and Series H-"A" warrants to purchase up
    to 75,000 shares of the Company's common stock at an exercise price of $1.00
    per share,  and Series H-"B" warrants to purchase up to 50,000 shares of the
    Company's  common  stock  at an  exercise  price  of $1.50  per  share.  The
    agreement  was  executed  pursuant to  Regulation  D as  promulgated  by the
    Securities Act of 1933, as amended. As of June 30, 1999 none of the warrants
    had been exercised.

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

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

    The Company was in technical  default of the  Registration  Rights Agreement
    ("RRA"),  which  required  the S-2  Registration  Statement  to be  declared
    effective by October 2, 1998.  Pursuant to the RRA, the Company was required
    to pay the Series H holders,  as liquidated  damages for failure to have the
    Registration  Statement declared effective,  and not as a penalty, 2% of the
    principal  amount of the Securities for the first thirty days, and 3% of the
    principal  amount of the  Securities  for each thirty day period  thereafter
    until the Company  procures  registration  of the  Securities.  On March 25,
    1999, the Company  issued 424,242 shares of common stock as partial  payment
    of the  liquidated  damages.  The total  expense for the year ended June 30,
    1999 amounted to $260,000,  and a balance of $120,000 is  outstanding  as of
    June 30, 1999. (See Note 9)

    SERIES I PREFERRED STOCK

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

                                           (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(16)     CONVERTIBLE PREFERRED STOCK (CONTINUED)

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

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

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

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

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

The  following  schedule  reflects the number of shares of preferred  stock that
have been issued,  converted and are outstanding as of June 30, 1999,  including
certain  additional  information  with  respect  to the deemed  preferred  stock
dividends  that were  calculated as a result of the discount from market for the
conversion price per share:

                                                   (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

    (16) CONVERTIBLE PREFERRED STOCK (CONTINUED)

<TABLE>
<CAPTION>

                         SERIES A             SERIES  B                     SERIES  C              SERIES  D        SERIES  E
                         Shares       Amount  Shares         Amount         Shares  Amount     Shares    Amount    Shares    Amount
<S>                      <C>            <C>    <C>               <C>            <C>    <C>     <C>       <C>        <C>      <C>

Balance at June 30, 1995

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

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

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

Sale of Series B                                  450       4,500,000

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

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

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

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

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

Sale of Series I

Conversion of pfd stock                           (60)     (600,000)                         (29)  (290,000)    (24)    (240,000)

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

Additional information:
Discount off market price              25%                     18%                    25%             25%                    25%
Fair market value-issue date        $ 8.31                   $ 3.25                 $1.63          $ 0.99                  $ 1.07
Deemed preferred stock             $ 1,335,474               $998,121            $705,738        $182,433                 $182,250
 dividend





                                  SERIES  F              SERIES  H                  SERIES  I                  Total       Total
                            Shares         Amount      Shares         Amount        Shares         Amount       Shares    Amount

Balance at June 30, 1995


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

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

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

Sale of Series B                                                                                            (2,400)     (2,160,000)

Series A conversion                                                                                           450       4,500,000

Balance at June 30, 1997

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

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

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

Sale of Series I                                                                    138     1,380,000          138       1,380,000

Conversion of pfd stock                                    (40)       (400,000)                               (153)     (1,530,000)

Balance at June 30, 1999      $-              $-              68     $   680,000    138      1,380,000         596     $ 5,960,000

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


                                                            (CONTINUED)


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(17)     COMMON STOCK

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

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

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

In addition,  during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000,  were  satisfied  with the issuance of
377,500  shares of  restricted  common  stock.  Compensation  expenses have been
recorded  during the fiscal year pursuant to the employment  agreements with the
officers.  In addition,  during the year ended June 30, 1995,  75,000  shares of
RESTRICTED  COMMON  STOCK  WERE  ISSUED TO A COMPANY  EXECUTIVE  PURSUANT  TO AN
EMPLOYMENT   AGREEMENT.   Compensation   expense  of  $78,750  was  recorded  in
conjunction with this transaction.

                                                     (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(17)     COMMON STOCK (CONTINUED)

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

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

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

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


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(17)     COMMON STOCK (CONTINUED)

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

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

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

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

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

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

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

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

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

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

                                                                (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(17)     COMMON STOCK (CONTINUED)

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

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

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

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

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

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

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

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

                                                    (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(17)     COMMON STOCK (CONTINUED)

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

                2. In June  1999,  the  Company  issued to its  chief  executive
                officer 3,500,000 shares ($1,890,000),  representing the balance
                of shares to be issued as consideration for the exclusive Patent
                License Agreement (see Notes 8 and 10).

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

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

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

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

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

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

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

                                                  (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS

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

On March 29, 1995, the incentive  stock option plan was approved by the Board of
Directors  and  adopted by the  shareholders  at the annual  meeting.  This plan
provides for the  granting,  exercising  and issuing of incentive  stock options
pursuant to Internal  Revenue Code Section 422. The Company may grant  incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time.  The Board of Directors has direct  responsibility  for
the administration of these plans.

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

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

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

                                                    (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS (CONTINUED)

                              INCENTIVE  STOCK OPTIONS     NONQUALIFIED OPTIONS
                              SHARES  WTD. AVG. PRICE    SHARES  WTD. AVG. PRICE

Outstanding at June 30, 1994        -0-                       -0-
   Granted                         75,000    $  1.40      1,500,000   $   1.12
   Exercised                         --                                --

Outstanding at June 30, 1995       75,000       1.40      1,500,000       1.12
   Granted                        770,309       1.66        750,000       1.44
   Exercised                     (164,956)       .92     (1,800,000)      1.50

Outstanding at June 30, 1996      680,353       1.81        450,000        .13
   Granted                        371,377       3.27        750,000       3.88
   Exercised                     (395,384)      1.10           --

Outstanding at June 30, 1997      656,346       3.07      1,200,000       2.47
   Granted                        220,755       1.95        750,000       2.75
   Exercised                         --                     (65,712)       .35
   Canceled                      (175,205)      4.25           --

Outstanding at June 30, 1998      701,896       2.42      1,884,288       2.66
   Granted                        786,635        .48        750,000        .43
   Exercised                         --                     (65,612)       .35
   Canceled                       (82,500)      3.37           --

Outstanding at June 30, 1999    1,406,031       .53**      2,568,676       2.24
                                 ========                   ========

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

At June 30, 1999 and 1998, 1,096,825 and 451,513, respectively, of the incentive
stock  options  were  vested  and   exercisable  and  2,568,676  and  1,884,288,
respectively,   of  the  non-qualified  stock  options  were  fully  vested  and
exercisable.  The stock  options  vest at various  rates over  periods up to ten
years.  Shares of authorized common stock have been reserved for the exercise of
all options  outstanding.  The following summarizes the option transactions that
have occurred:

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


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS (CONTINUED)

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

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

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

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

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

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

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

                                              (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS (CONTINUED)

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

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

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

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

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

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

                                              (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS (CONTINUED)

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

The  following  table  summarizes  information  about all of the  stock  options
outstanding at June 30, 1999:

                        OUTSTANDING OPTIONS                EXERCISABLE OPTIONS

                              Weighted
                              average
    Range of                  remaining      Weighted                 Weighted
EXERCISE PRICES     SHARES   LIFE (YEARS)    AVG. PRICE    SHARES     AVG. PRICE

 $ .35 - 1.25     3,224,707   8.16          $   .54     2,915,501    $   .54
  1.36 - 2.94       750,000   7.00             1.36       750,000       1.36


 $ .35 - 2.94     3,974,707   7.94          $   .70     3,665,501    $   .70
================================================================================

At June 30, 1999, the Company has two stock-based compensation plans, which have
been  previously  described.  The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans.  Accordingly,  no compensation cost
has been  recognized  for its fixed  stock  option  plans  with  respect  to its
employees,  however  compensation has been recorded with respect to its officers
due to their  provisions of utilizing  "additional  incentive  stock options" to
exercise their incentive stock options,  and acquire shares of common stock. The
compensation  cost that has been  charged  against  income for the  officers was
$(66,667) and $(53,570) for 1999 and 1998, respectively.

The weighted average Black-Scholes value of options granted during 1999 and 1998
was $.42 and $1.44  per  option,  respectively.  Had  compensation  cost for the
Company's fixed stock-based  compensation plan been determined based on the fair
value at the grant dates for awards under this plan  consistent  with the method
of SFAS 123, the  Company's  pro forma net loss and pro forma net loss per share
would have been as indicated below:

                                                     (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(18)     STOCK OPTIONS (CONTINUED)

                                                                     From
                                                                Inception
                                                                (December 10,
                             Year Ended        Year Ended         1993) to
                           JUNE 30, 1999     JUNE 30, 1998     JUNE 30, 1999
                           -------------     -------------    --------------
Net loss to
common shareholders -

         AS REPORTED       $  (7,756,344)    $ (9,037,725)    $ (35,092,999)
                           =============     ============     =============

         PRO FORMA         $  (7,469,637)    $ (9,297,781)    $ (35,365,868)
                           =============     ============     =============

Basic loss per share -

         AS REPORTED       $      (.20)      $      (.32)     $      (1.41)
                           ================  ================ ==================

         PRO FORMA         $      (.19)      $      (.34)     $      (1.42)
                           ================  ================ ==================

Diluted loss per share -

         AS REPORTED       $      (.20)      $      (.32)     $      (1.41)
                           ================  ================ ==================

         PRO FORMA         $      (.19)      $      (.34)     $      (1.42)
                           ================  ================ ==================


For purposes of the preceding pro-forma  disclosures,  the weighted average fair
value  of each  option  has  been  estimated  on the  date of  grant  using  the
Black-Scholes   options-pricing   model  with  the  following  weighted  average
assumptions used for grants in 1999 and 1998,  respectively:  no dividend yield;
volatility of 28.2% and 7.1%;  risk-free  interest  rate of 6% and 6.5%;  and an
expected term of five years.

(19)     CONCENTRATION OF CREDIT RISK

During the year,  the  Company  has  maintained  cash  balances in excess of the
Federally  insured  limits.  The  funds  are  with a major  money  center  bank.
Consequently,  the Company does not believe that there is a significant  risk in
having these balances in one financial institution. The cash balance at June 30,
1999 was $94,514.

                                                (CONTINUED)

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(20)     FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents,  receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these  instruments.  The fair  value of the  Company's  debt  obligations  is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining  maturities.
At June 30,  1999 and 1998,  the  aggregate  fair  value of the  Company's  debt
obligations approximated its carrying value.

(21)     COMMITMENTS AND CONTINGENCIES

On July 5, 1994 the Company  entered into five-year  employment  agreements with
its  chief  executive  officer,  president  and  executive  vice-president.  The
agreements  expired on July 6, 1999 and new employment  agreements  were entered
into on August 30,  1999.  The new  agreements  are for a term of five years and
provide for  compensation  to these  individuals at the annual rate of $286,225,
$119,070,  and  $119,070,   respectively.  The  agreements  provide  for  annual
increases based upon changes in the Consumer Price Index,  but in no event shall
the cost of living increase be less than seven percent.  The agreements  provide
for bonus arrangements and other normal benefits.

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

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

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


                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                          (A DEVELOPMENT STAGE COMPANY)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(21)     COMMITMENTS AND CONTINGENCIES (CONTINUED)

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


<PAGE>




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

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

                                                               PART III

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

The following  table sets forth  certain  information  concerning  directors and
executive officers of the Company:

NAME                       AGE     POSITION

Richard J. Grable          57      Chief Executive Officer and Director

Linda B. Grable            62      Chairman of the Board and President

Allan L. Schwartz          57      Executive Vice-President, Chief
Financial Officer and
Director.

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

RICHARD J. GRABLE

Richard J. Grable has been Chief Executive Officer and a director of the Company
since 1994 and is primarily  responsible  for the  development  of the CTLM(TM).
From January 1994 to February 1994, Mr. Grable was Vice-President,  research and
development,  for Lintronics Technologies,  Inc., Tampa, Florida, a manufacturer
of breast imaging  systems.  From March 1992 to December 1993, Mr. Grable was an
engineering  consultant for Lintronics  Technologies,  Inc., Tampa,  Florida,  a
manufacturer of breast imaging  systems.  From August 1991 to February 1992, Mr.
Grable was an engineering  consultant for Audio Intelligence Devices,  Inc., Ft.
Lauderdale,  Florida, a manufacturer of surveillance  devices.  From May 1990 to
July 1991,  Mr.  Grable was an  engineering  consultant  for Telmed,  Inc.,  Ft.
Lauderdale, Florida, a software and electronic design company.

LINDA B. GRABLE

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

ALLAN L. SCHWARTZ

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

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

KEY EMPLOYEE

Robert H. Wake is the  Director  of  Engineering  and has been  employed as such
since April 1995. From January,  1994 to March,  1995, Mr. Wake was a consultant
to various companies in 3-D computer imaging.  From October,  1986, to December,
1993: Mr. Wake founded and was President of Reality Imaging Corporation,  Solon,
Ohio, a  manufacturer  of 3-D computer  imaging  systems.  Mr. Wake invented the
Voxel Flinger 3-D imaging technology.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities  Exchange Act of 1934 requires our directors and
executive  officers,  and  persons  who own more than 10  percent  of our Common
Stock,  to file with the SEC initial reports of ownership and reports of changes
in ownership, furnishing the Company with copies of all Section 16(a) forms they
file. To the best of our knowledge, based solely on review of the copies of such
reports  furnished  to  the  Company,  all  Section  16(a)  filing  requirements
applicable  to our officers and  directors  were  complied  with during the year
ended June 30,  1998.  We have not  received  copies of  amended  Form 13 D from
Goodland   International   Investments  Limited  and  Weyburn  Overseas  Limited
indicating  their  ability to  convert  and/or  the  conversion  of the Series B
Preferred Shares into common shares in excess of 10% of the outstanding shares.

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded to, earned by or paid to
our Chief Executive  Officer and other executive  officers for services rendered
to the Company during 1999 and 1998. No other person,  who, during 1999 and 1998
served as an  executive  officer of the Company,  had a total annual  salary and
bonus in excess of $100,000.  Also, see "Stock Option  Plan-Option/SAR Grants in
Last Fiscal Year".

                          SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>

                                 ANNUAL COMPENSATION                            LONG-TERM COMPENSATION

Name & Principal
Position                         Year       Salary (2)       Other Annual      Restricted     Securities/Underlying
                                                             Compensation      Stock Awards       Option/SARs (1)
<S>                                <C>            <C>        <C>                  <C>               <C>

Richard J. Grable, CEO And        1997        $289,779       $115,000            $268,000         22,883
Director
Linda B. Grable, President        1997        $ 97,451       $115,000            $268,000         22,883
and Director
Allan L. Schwartz, Exec           1997        $111,534       $115,000            $268,000        130,410
VP, CFO and Director
</TABLE>


(1) The  aggregate  dollar  value of the 1998  and  1999  options,  based on the
averaged  high and low price on June 30, 1999 are as follows:  Richard J. Grable
-$341,321  Linda B.  Grable-$341,321;  and Allan L.  Schwartz-$341,321.
(2) The salaries include compensation, which has been accrued and not paid as of
June 30,  1999 in the amounts as follows:  Richard J. Grable  $59,630,  Linda B.
Grable $24,806 and Allan L. Schwartz $24,806.


EMPLOYMENT AGREEMENTS

We entered into five-year employment  agreements with Mr. Richard J. Grable, Mr.
Allan L.  Schwartz  and Ms.  Linda B.  Grable  that  expire on August 29,  2004.
Pursuant to the terms of the employment agreements,  base annual salaries, after
giving effect to cost of living adjustments,  are as follows: Richard J. Grable:
$286,224.96;  Linda B. Grable: $119,069.52 and Allan L. Schwartz $119,069.52. In
addition,  Messrs.  Grable  and  Schwartz  and Ms.  Grable  each  receive  a car
allowance of $500 per month.  Each  employment  agreement  provides for bonuses,
health  insurance,  car allowance,  and related  benefits,  and a cost of living
adjustment of 7% per annum. No bonuses have been paid to date.

The  following  table  sets  forth  certain   information  with  regard  to  the
Options/SAR  grants by the Company to Management  for the fiscal year ended June
30, 1999.


<PAGE>



                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

             No. of Securities    % of Total Options    Exercise or   Market Price
             Underlying Options  Granted to Employees   Base Price     On Date of       Expiration
Name         Granted              In Fiscal Year       ($/Share)      Grant             Date
<S>               <C>               <C>                  <C>           <C>                <C>

Richard J.     250,000              16%                $.17           $.44             7/5/03
Grable         208,333              14$                $.48           $.44             7/5/03

Linda B.       250,000              16%                $.17           $.44             7/5/03
Grable         208,333              14$                $.48           $.44             7/5/03

Allan L        250,000              16%                $.17           $.44             7/5/03
Schwartz       208,333              14$                $.48           $.44             7/5/03

</TABLE>

STOCK OPTION PLANS

("The 1995 Plan"). For the fiscal year ended June 30, 1999, all of the executive
officers were  participants  in this plan. The plan was approved by the Board of
Directors and adopted by the  shareholders at the March 29, 1995 annual meeting.
The plan provides for the granting,  exercising and issuing of incentive  option
pursuant to Internal  Revenue Code Section 422. The Company may grant  incentive
stock options to purchase up to 5% of the issued and outstanding Common Stock of
the Company at any time.  The Board of Directors has direct  responsibility  for
the administration of the plan.

On August 30, 1999, we established an Equity  Incentive  Plan. The  Shareholders
must  approve the 1999 Plan within one year.  The MAXIMUM  NUMBER OF SHARES THAT
CAN BE  GRANTED  UNDER THE 1999 PLAN IS  15,000,000  shares of Common  Stock and
5,000,000 shares of Preferred  Stock. The series,  rights and preferences of the
preferred  shares are to be determined by the Company's Board of Directors.  The
1999 Plan also  includes any stock  available  for future Stock Rights under the
1995 Plan. See Item 13 (a) Exhibit 10.20.

Under both 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.

Pursuant  to stock  option  agreements,  Mr.  Richard J.  Grable,  Mr.  Allan L.
Schwartz  and Mrs.  Linda B. Grable  each have an option to  purchase  2,500,000
shares  of  common  stock  or  preferred  stock.  These  options  vest in  equal
installments  over a  five-year  period at an  exercise  price of $.21 per share
(110% of the fair  market  value of the shares on the date of grant).  The Stock
Option Agreement terminates on August 30, 2003.

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

The following  table sets forth the beneficial  ownership of Common Stock of the
Company as of October 11,  1999 as to (a) each  person  known to the Company who
beneficially  owns more than 5% of the  outstanding  shares of our Common Stock;
(b) each current director executive officer;  and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.

The actual  number of shares of Common  stock  held by Richard  Grable and Linda
Grable,  without giving effect to options,  are 11,494,540 and 3,572,300  shares
respectively.  Both Richard  Grable and Linda Grable  specifically  disclaim any
beneficial interest in each other's shares.




NAME AND ADDRESS           NUMBER OF SHARES OWNED      % OF OUTSTANDING

OF BENEFICIAL OWNER        BENEFICIALLY (1)(2)       SHARES OF COMMON STOCK
-------------------        -------------------       ----------------------

RICHARD J. GRABLE            16,983,506(3)                 29.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313

LINDA B. GRABLE               16,983,506(4)                 29.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313

ALLAN L. SCHWARTZ            4,380,893(5)                    7.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313

ALL OFFICERS AND DIRECTORS    21,364,399 (6)                37.3%
AS A GROUP (3 PERSONS)



(1) Except as indicated in the  footnotes  to this table,  based on  information
    provided by such  persons,  the  persons  named in the table above have sole
    voting power and investment power with respect to all shares of Common Stock
    shown beneficially owned by them.

(2) Percentage  of  ownership  is based on  57,247,380  shares of  Common  Stock
    outstanding  as of October  11,  1999 plus each  person's  options  that are
    exercisable  within 60 days. Shares of Common Stock subject to stock options
    that are  exercisable  within  60 days as of  October  11,  1999 are  deemed
    outstanding for computing the percentage of that person and the group.

(3) Includes 958,333 shares subject to options and 3,572,300 shares owned by the
wife of Richard J.  Grable,  Linda B. Grable,  of which he disclaims  beneficial
ownership.
(4) Includes 958,333 shares subject to options and 11,494,540 shares owned by
the husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership.
(5)  Includes  958,333  shares  subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz,  Carolyn Schwartz,  of which he disclaims  beneficial
ownership.
(6)  Includes  1,916,666  shares  subject to options  held by Linda and  Richard
Grable  and  958,333  shares  subject to options  held by Allan  Schwartz.  Also
includes 9,000 shares owned by the wife of Allan L. Schwartz,  Carolyn Schwartz,
of which he disclaims beneficial ownership.


DIVIDEND POLICY

To date, we have not declared or paid any dividends  with respect to our capital
stock,  and the  current  policy of the  Board of  Directors  is to  retain  any
earnings  to  provide  for the  growth  of the  Company.  Consequently,  no cash
dividends are expected to be paid on our Common Stock in the foreseeable future.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

In June 1998, the Company  finalized an exclusive Patent License  Agreement with
Richard  Grable,  our Chief  Executive  Officer.  Mr. Grable is the owner of the
Patent,  which encompasses the technology for the CTLM(TM).  The Company and Mr.
Grable has previously  entered into an oral agreement for the exclusive  license
for the patent  that was never  memorialized  in written  form.  The term of the
license is for the life of the Patent  (17 years) and any  renewals,  subject to
termination,  under certain  conditions.  As consideration  for the License,  we
issued to Mr. Grable  3,500,000  shares of Common Stock and is required to issue
an additional 3,500,000 shares in June 1999. In addition,  we have agreed to pay
Mr.  Grable a royalty based upon the net selling price (the dollar amount earned
from the sale by the Company,  both  international  and  domestic,  before taxes
minus the cost of the  goods  sold and  commissions  or  discounts  paid) of all
products and goods in which the Patent is used, before taxes and after deducting
the direct cost of the product and  commissions  or discounts  paid.  During the
second  year of the  Agreement  there is a minimum  cash  royalty  provision  of
$250,000  payable at the end of the second  year which Mr.  Grable has  deferred
until we commence sales and delivery of CTLM(TM) Systems. See Item 1.

"Business-Patent Licensing Agreement".

Since  October  1998,  we have  accrued  $109,243  in  salaries  payable  to our
executive officers and directors, Richard J. Grable, Allan Schwartz and Linda B.
Grable, due to our lack of working capital. These salaries remain unpaid to date
and will be paid as soon as the Company determines that the funds are available.

In January 1999 and February 1999,  Richard Grable, our Chief Executive Officer,
director and founder  sold an  aggregate  of 831,743  shares of our Common Stock
owned  by him in  excess  of four  years,  pursuant  to Rule  144 and  lent  the
aggregate proceeds of approximately $347,775 directly to the Company.

In January 1999,  February 1999 and March 1999,  Linda  Grable,  our  President,
director and founder  sold an  aggregate  of 520,000  shares of our Common Stock
owned  by her in  excess  of four  years,  pursuant  to Rule  144 and  lent  the
aggregate proceeds of approximately $166,618 directly to the Company.

In December 1998, January 1999 and February 1999, Allan Schwartz,  our Executive
Vice  President,  director and founder sold an aggregate of 820,000 shares owned
by him in  excess of four  years,  pursuant  to Rule 144 and lent the  aggregate
proceeds of approximately $359,707 directly to the Company.

The loans to the  Company by  Messers.  Grable,  Schwartz  and Ms.  Grable  were
interest free and were  evidenced by promissory  notes.  The December,  January,
February  and March  promissory  notes were due on January  30,  1999,  February
28,1999, March 31, 1999 and April 30, 1999, respectively.  The net proceeds were
recorded as a loan payable to each respective founder.

A meeting of the Board of  Directors  was held on May 12, 1999 to review and act
upon the  previously  adopted  schedule of repayment of the loans,  interest and
potential tax liability.  Based on an opinion of the Founders  personal  outside
counsel  and upon  advice of a tax  advisor,  the  Board  voted to  rescind  the
previously adopted  resolution.  The new resolution  authorized the repayment of
the  December,  January,  February,  and March  promissory  notes in full by the
issuance of shares equal to the number of shares  sold.  The  restricted  shares
issued as repayment for the loan bear registration  rights. Since the loans were
repaid on a share for share basis with no other consideration, the Founders have
been advised that there is no capital gain and therefore no tax liability.

Messrs. Grable,  Schwartz and Ms. Grable received 831,743,  820,000, and 520,000
shares of our restricted  Common Stock,  respectively as payment in full for the
loans from December 1998 to March 1999.

In May 1999, Messrs. Grable and Schwartz each sold 110,000 shares, respectively,
of our Common Stock owned by them in excess of four years,  pursuant to Rule 144
and lent  the  aggregate  proceeds  of  approximately  $91,759  directly  to the
Company.  The loans to the Company are  evidenced  by interest  free  promissory
notes, which are due, and payable on June 30, 1999.

In June 1999, Messrs.  Grable and Schwartz each sold 280,000 and 315,020 shares,
respectively,  of our  Common  Stock  owned  by them in  excess  of four  years,
pursuant to Rule 144 and lent the aggregate  proceeds of approximately  $201,795
directly to the Company. The loans to the Company are evidenced by interest free
promissory notes, which are due, and payable on July 31, 1999.

In July 1999, Mr.  Schwartz sold 500,000 shares of our Common Stock owned by him
in excess of four years, pursuant to Rule 144 and lent the aggregate proceeds of
approximately  $137,241  directly  to the  Company.  The  loan  to  the  Company
evidenced  by an interest  free  promissory  note,  which is due, and payable on
August 31, 1999.

The loans to the Company by Messers.  Grable and Schwartz were interest free and
were evidenced by promissory  notes.  The May, June, July promissory  notes were
due on June 30, 1999, July 31, 1999 and August 31, 1999,  respectively.  The net
proceeds were recorded as a loan payable to each respective founder.

Messrs.  Grable  and  Schwartz  received  390,000  and  925,500  shares  of  our
restricted Common Stock,  respectively as payment in full for the loans from May
1999 to July 1999.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

EXHIBIT                                     DESCRIPTION

3.1      Articles of Incorporation (Florida)- Incorporated by reference to
         Exhibit 3(a) of our Form 10-KSB for the fiscal year ending
         June 30, 1995.
3.2      Amendment  to  Articles  of  Incorporation  (Designation  of  Series  A
         Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
         (i). 6 of our Form 10-KSB for the fiscal  year  ending  June 30,  1996.
         File number 033-04008.

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

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

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

3.6      Amendment  to  Articles  of  Incorporation  (Designation  of  Series  E
         Convertible  Preferred  Shares).  Incorporated by reference to our Form
         8-K dated February 19,1998.
3.7      Amendment  to  Articles  of  Incorporation  (Designation  of  Series  F
         Convertible  Preferred  Shares).  Incorporated by reference to our Form
         8-K dated March 6, 1998.
3.8      Amendment  to  Articles  of  Incorporation  (Designation  of  Series  H
         Convertible  Preferred  Shares).   Incorporated  by  reference  to  our
         Registration Statement on Form S-2 File Number 333-59539.
3.9      Certificate of Dissolution - is incorporated by reference to Exhibit
         (3)(a) of our Form 10-KSB for the fiscal year ending
         June 30, 1995.
3.10     Articles of Incorporation and By- Laws (New Jersey) -are incorporated
         by reference to Exhibit 3 (i) of our Form 10-SB, as
         amended, file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11     Certificate  and Plan of Merger - is  incorporated by reference to
         Exhibit 3(i) of the Form 10-SB.  3.12  Certificate  of  Amendment -
         is  incorporated  by reference to Exhibit 3(i) of the Form 10-SB.
3.13     Amended Certificate of Amendment-Series G Designation.
3.14     Certificate of Amendment-Series I Designation.
3.15     Amended Certificate of Amendment-Series B Designation.
4.1      Instruments  Defining the Rights of Security Holders - Designation of
         Series B  Convertible  Preferred  Shares.  (See Exhibit 3.3,  above).
 4.2     Instruments Defining the Rights of Security  Holders -  Designation  of
         Series C Convertible Preferred Shares. (See Exhibit 3.4, above).
4.3      Instruments Defining the Rights of Security Holders -Designation of
         Series D Convertible Preferred Shares. (See Exhibit 3.5, above).
4.4      Instruments Defining the Rights of Security  Holders - Designation of
         Series E Convertible  Preferred Shares.  (See  Exhibit  3.6,  above).
4.5      Instruments  Defining  the Rights of Security Holders - Designation of
         Series F Convertible  Preferred  Shares.  (See Exhibit 3.7, above).
 4.6     Instruments  Defining the Rights of Security Holders -Designation of
         Series H Convertible  Preferred Shares. (See Exhibit 3.8, above).
4.7      Instruments Defining the Rights of Security Holders - Amended
         Designation of Series  G  Convertible   Preferred  Shares.   (See
         Exhibit  3.13,  above).
4.8 Instruments  Defining the Rights of Security  Holders - Designation  of
Series I Convertible  Preferred  Shares.  (See  Exhibit  3.14,  above).
4.9      Instruments Defining  the  Rights of  Security  Holders -  Amended
         Designation  of Series B Convertible  Preferred  Shares.  (See Exhibit
         3.15,  above).
4.10  Convertible Debenture
10.1     Form of Subscription  Agreement by and between Imaging Diagnostic
         Systems, Inc.  and  Alfred  Ricciardi.  Incorporated  by  reference
         to our Registration Statement on Form S-2, File Number 333-59539.
10.2     Patent Licensing  Agreement.  Incorporated by reference to our
         Registration Statement on Form S-2, File Number 333-59539.
10.3     Incentive Stock Option Plan -is incorporated by reference to Exhibit
         10(b) of the Form 10-SB.
10.4     Employment Agreement(s)  for Richard J. Grable,  Allan L.  Schwartz and
         Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
         Form 10-SB.
10.5     Lock Up  Agreement  By and Between  the Company and Richard J.  Grable,
         Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
         Exhibit  10.5 of our Form  10-KSB for the fiscal  year  ending June 30,
         1996. File number 033-04008.
10.6     Form of Series F Preferred Stock Subscription  Documents.  Incorporated
         by reference  to our  Registration  Statement on Form S-2,  File Number
         333-60405.
10.7     Form of Series H Preferred Stock Subscription  Documents.  Incorporated
         by reference  to our  Registration  Statement on Form S-2,  File Number
         333-60405.
10.8     OEM Agreement  incorporated by reference to Exhibit 10.8 of our Form
         10-KSB for the fiscal  year ending  June 30,  1998.  10.9 Form of
         Equity Line of Credit Agreement  incorporated  by reference to Exhibit
         10.9 of our Form 10-KSB for the fiscal year ending June 30, 1998.
10.10    Focus Distribution Agreement (United Kingdom and Ireland).
         Incorporated by reference to our Form 10 QSB/A filed on April 2,1999.
10.11    Focus Distribution Agreement (Benelux countries).  Incorporated by
         reference to our Amendment number 1 to Registration on
         Form S-2, File Number 333-60405.
10.12    Syncor Distribution Agreement.  Incorporated by reference to our
         Amendment number 1 to Registration on Form S-2, File Number
         333-60405.
10.14    Consultronix S.A. Distribution Agreement. Incorporated by reference to
         our Form 10 KSB/A  filed  on  April  9,  1999.
10.15    Iberadac,  S.A.  Distribution Agreement.  Incorporated  by  reference
         to our Form 10 KSB/A  filed on April 9,1999.
10.16    Form  of  Series  I  Preferred  Stock   Subscription   Documents.
         Incorporated by reference to our Amendment number 1 to Registration
         on Form S-2, File Number 333-60405.
10.17    Form of Debenture Subscription Documents. Incorporated by referenc
         to our Amendment number 1 to Registration on Form S-2,
         File Number 333-60405.
10.18    Form of Mortgage. Incorporated by reference to our Amendment number 1
           to Registration on Form S-2, File Number 333-60405.
10.19    Form of Series G Subscription Documents. Incorporated by reference
         to our Amendment number 1 to Registration on Form S-2, File Number
         333-60405.
10.20    1999 Equity Incentive Plan

10.21    Form of  Debenture  in the amount of $825,000
10.22    Registration Rights Agreement $825,000 Convertible Debenture
10.23    Subscription  Agreement $825,000 Convertible Debenture

(b) Reports on Form 8-K

          None


<PAGE>



                                   SIGNATURES

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

                      IMAGING DIAGNOSTIC SYSTEMS, INC.

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

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

SIGNATURES                            TITLE                        DATE

/S/LINDA B. GRABLE      Chairman of the Board and President    October 11, 1999
--------------------
Linda B. Grable

/S/RICHARD J. GRABLE    Director and Chief Executive Officer   October 11, 1999
--------------------
Richard J. Grable

/S/ALLAN L. SCHWARTZ    Director, Executive Vice-President     October 11, 1999
--------------------  (Principal Accounting and Financial
Allan L. Schwartz       Officer)


<PAGE>


                    Exhibit 10.20 1999 Equity Incentive Plan


<PAGE>


                        IMAGING DIAGNOSTIC SYSTEMS, INC.
                           1999 EQUITY INCENTIVE PLAN

                               ARTICLE 1: PURPOSE

         1.1 GENERAL.  The purpose of the Imaging Diagnostic Systems,  Inc. 1999
Equity  Incentive  Plan (the  "Plan") is to  promote  the  interests  of Imaging
Diagnostic Systems,  Inc. (the "Company"),  by enabling the Company to motivate,
attract,  and retain the services of persons upon whose judgment,  efforts,  and
contributions the success of the Company's business depends. The plan is further
intended to align the personal  interests of such persons with the  interests of
stockholders of the Company through equity participation in the Company's growth
and success.  Capitalized terms not otherwise defined in the text are defined in
Article 14.

                        ARTICLE 2: EFFECTIVE DATE; TERM.

         2.1  EFFECTIVE  DATE.  The Plan shall become  effective at the date and
time of its approval by the stockholders of the Company (the "Effective  Date").
The Plan  shall be  submitted  to the  stockholders  of the  Company  for  their
approval at the 1999 Annual Meeting of the Company.

         2.2      TERM.  This Plan shall terminate on the tenth (10th)
 anniversary of the Effective Date, subject to Article 12.


                     ARTICLE 3: SHARES SUBJECT TO THE PLAN.

         3.1 NUMBER OF SHARES.  The maximum  number of shares of Stock  reserved
and  available  for  delivery  pursuant to Stock  Rights or which may be used to
provide a basis of  measurement  or valuation of a Stock Right shall be equal to
the sum of (a)  15,000,000  shares  of  Common  Stock  and  5,000,000  shares of
Preferred Stock, the Series Rights and preferences of which are to be determined
by the Company's Board of Directors,  plus (b) any shares of Stock available for
future Stock Rights under the  Predecessor  Plan as of the Effective  Date, plus
(c) the  additional  shares  of  Stock  described  below in this  Article  3. No
additional  grants shall be made under the Predecessor  Plan after the Effective
Date.  The  limitations  of this  Article 3 shall be  subject to  adjustment  as
provided in Section 11.1.

         3.2 LAPSED  STOCK  RIGHTS.  To the extent  that a Stock Right under the
Plan or the Predecessor Plan is forfeited, terminates, expires or lapses for any
reason,  any shares of Stock  subject to the Stock Right will again be available
for the grant of a Stock Right under the Plan. To the extent any shares of Stock
covered by an Stock Right are not  delivered  to a  Participant  or  beneficiary
because  the Stock  Right is  forfeited,  terminates,  expires or lapses for any
reason,  or the shares of Stock are not  delivered  because  the Stock  Right is
settled in cash,  such  shares  shall not be deemed to have been  delivered  for
purposes of  determining  the maximum  number of shares of Stock  available  for
delivery under the Plan.

         3.3  PAYMENTS IN STOCK.  Any shares of Stock  tendered  (by delivery or
attestation)  to the Company in  connection  with  payment  for Stock  purchased
pursuant to the Plan or any  Predecessor  Plan or payment of  withholding  taxes
with respect to any Stock Right shall be added back to the  aggregate  number of
shares  reserved  and  available  for Stock  Rights  under the Plan and only the
number of shares of Stock issued net of the number of shares  tendered  shall be
deemed  delivered for purposes of  determining  the maximum  number of shares of
Stock available for delivery under the Plan.

         3.4 LIMITATIONS. Subject to adjustment as provided in Section 11.1, the
following additional limitations apply under the Plan:

         (a) The  maximum  number  of  shares  of Stock  that  may be  delivered
         pursuant to Stock  Rights of  Incentive  Stock  Options,  Non-Qualified
         Stock Options or other Stock Rights shall be 15,000,000 shares.

         (b) In no event shall the aggregate  fair market value  (determined  at
         the time an  Incentive  Stock  Option is granted)  of Common  Stock for
         which Incentive Stock Option's  granted to any employee are exercisable
         for the first time by such employee during any calendar year (under all
         stock option plans of the Company and any Related  Corporation)  exceed
         $100,000.

         (c) The maximum  payment that can be made for Stock  Rights  granted to
         any one individual pursuant to Section 8 (Stock-Reference Stock Rights)
         shall  be  $500,000  for  any  single  or  combined   performance  goal
         established for any annual performance. If an Stock Right granted under
         Section 8 is, at the time of grant, denominated in shares, the value of
         the shares of Stock for  determining  this maximum  individual  payment
         amount  will be the Fair  Market  Value of the  shares  of Stock on the
         first day of the applicable performance period.

         3.5 STOCK DISTRIBUTED.  Any Stock distributed pursuant to a Stock Right
may consist,  in whole or in part, of authorized  and unissued  Stock,  treasury
Stock, or Stock purchased on the open market.

                             ARTICLE 4: ELIGIBILITY.

         4.1 GENERAL.  Stock Rights may be granted only to an individual  who is
an officer,  director or employee (including employees who also are directors or
officers), consultants, independent contractors, or advisers of the Company or a
Subsidiary,  and to other  individuals  the Company or a Subsidiary  proposes to
engage in one of the foregoing capacities, as determined by the Committee.


<PAGE>



                           ARTICLE 5: ADMINISTRATION.

         5.1  ADMINISTRATORS.  The Plan will be  administered  by the  Company's
Board of Directors (the "Committee"). The Board may, in its discretion, delegate
its powers with respect to the Plan to an employee benefit plan committee or any
other  committee.  A  majority  of the  members  of  any  such  Committee  shall
constitute a quorum,  and all  determinations  of the Committee shall be made by
the  majority  of its members  present at a meeting.  Any  determination  of the
Committee  under the Plan may be made without notice or meeting of the Committee
by a writing signed by all of the Committee members.

         5.2 AUTHORITY OF THE COMMITTEE. Subject to ratification of the grant or
authorization  of each Stock Right by the Committee  (but only if so required by
applicable state law), and subject to the terms of the Plan, the Committee shall
have the exclusive power, authority, and discretion to:

         (a) Designate Participants;

         (b) Determine the type or types of Stock Rights to be granted to each
             Participant;

         (c)  Determine  the number of Stock Rights to be granted and the number
of shares of Stock subject to a Stock Right;

         (d) Prescribe the form of each Stock Right Agreement, which need not be
identical for each Participant;

         (e) Determine the terms and conditions of any Stock Right granted under
         the Plan,  including  but not limited  to, the  exercise  price,  grant
         price, or purchase price,  any restrictions or limitations on the Stock
         Right,   any  schedule  for  lapse  of   forfeiture   restrictions   or
         restrictions on the  exercisability of an Stock Right and accelerations
         or waivers thereof, any performance  criteria,  and any modification or
         amendment of any Stock Right previously granted,  based in each case on
         such considerations as the Committee in its sole discretion determines;

         (f) Determine whether,  to what extent, and under what circumstances an
         Stock Right may be settled in, or the exercise  price of an Stock Right
         may be paid in, cash, Stock, other Stock Rights, or other property,  or
         an Stock Right may be canceled, forfeited, or surrendered;

         (g) Decide all other matters that must be determined in connection with
a Stock Right;

         (h) Establish,  adopt,  or revise any rules or  regulations,  as it may
deem necessary or advisable to administer the Plan;

         (i) Interpret the Plan, any Stock Right, and any Stock Right Agreement
 in its discretion; and

         (j) Make all other  decisions and  determinations  that may be required
         under the Plan or as the  Committee  deems  necessary  or  advisable to
         administer the Plan.

         5.3  LIABILITY.  No  members of the  Committee  shall be liable for any
action or determination made in good faith with respect to the Plan or any stock
right granted  under it. No member of the Committee  shall be liable for any act
or omission of any other  member of the  Committee or for any act or omission on
his own  part,  including  but not  limited  to the  exercise  of any  power and
discretion  given to him under the Plan,  except  those  resulting  from his own
gross negligence or willful misconduct.

         5.4 GRANTS TO THE COMMITTEE.  Stock Rights may be granted to members of
the Committee, whether such grants are in their capacity as directors,  officers
or consultants, but no discretionary Stock Rights shall be granted to any person
who is, at the time of the proposed grant, a member of the Committee unless such
grant has been approved by a majority vote of the  disinterested  members of the
Committee.  All grants of Stock Rights to members of the Committee  shall in all
other respects be made in accordance with the provisions of this Plan applicable
to other eligible persons.  Members of the Committee who are either (i) eligible
for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may
vote on any matters affecting the administration of the Plan or the grant of any
Stock Rights pursuant to the Plan, except that no such member shall act upon the
granting  to himself of  discretionary  Stock  Rights but any such member may be
counted in determining the existence of a quorum at any meeting of the Committee
during  which  action is taken  with  respect  to the  granting  to him of Stock
Rights.

         5.5   DECISIONS   BINDING.   All   decisions,    interpretations,   and
determinations  by the Committee with respect to the Plan, any Stock Right,  and
any Stock Right Agreement are final, binding, and conclusive on all parties.

                            ARTICLE 6: STOCK OPTIONS.

         6.1      GENERAL.  The Committee is authorized to grant Options to
Participants on the following terms and conditions:

         (A)  EXERCISE  PRICE.  The  exercise  price per share of Stock under an
         Option  shall  be  determined  by the  Committee,  provided  that  such
         exercise price shall not be less than  eight-five  percent (75%) of the
         Fair  Market  Value  as  of  the  date  of  grant  in  the  case  of  a
         Non-Qualified  Stock Option and one hundred percent (100%) of such Fair
         Market Value in the case of an Incentive  Stock Option.  In the case of
         an  Incentive  Stock  Option to be granted to an employee  owning stock
         which  represents  more than 10  percent  (10%) of the  total  combined
         voting  power of all  classes of stock of the  Company  or any  Related
         Corporation, the price per share specified in the agreement relating to
         such  Incentive  Stock Option shall not be less than 110 percent (110%)
         of the fair market value per share of Common Stock on the date of grant
         and such  Incentive  Stock  Option shall not be  exercisable  after the
         expiration of 5 years from the date of grant.

         (B) PAYMENT.  Payment for Stock issued upon exercise of an Option shall
be made in accordance with Article 9 of the Plan.

         (C) TIME AND CONDITIONS OF EXERCISE.  The Committee shall determine the
         time or times at which an Option may be  exercised in whole or in part;
         provided,  that  no  Option  may be  exercisable  prior  to six  months
         following  the date of the grant of such  Option.  The  Committee  also
         shall  determine the expiration date of each Option and the performance
         or other conditions,  if any, that must be satisfied before all or part
         of an Option may be  exercised.  The Committee may provide in any Stock
         Right  Agreement with respect to an Option for expiration  prior to its
         expiration date, or for accelerated exercisability, in the event of the
         Participant's death, disability, retirement, termination of service, or
         other events.

         (D)  EVIDENCE OF OPTION.  All Options  shall be  evidenced by a written
         Agreement between the Company and the Participant.  The Agreement shall
         include  such  provisions  as may be specified  by the  Committee.  The
         Agreement shall specify whether the Option is an Incentive Stock Option
         or a Non-Qualified Option.

         6.2 INCENTIVE  STOCK OPTIONS.  The terms of any Incentive Stock Options
         granted under the Plan must comply with the following additional rules:

         (A) EXERCISE PRICE.  The exercise price per share of Stock shall be set
         by the  Committee,  provided that the exercise  price for any Incentive
         Stock  Option may not be less than the Fair Market Value as of the date
         of the grant.

         (B) EXERCISE. In no event may any Incentive Stock Option be exercisable
for more than ten years from the date of its grant.

         (C)  INDIVIDUAL  DOLLAR  LIMITATION.  The  aggregate  Fair Market Value
         (determined  as of the time a Stock  Right is granted) of all shares of
         Stock  with  respect  to  which   Incentive  Stock  Options  are  first
         exercisable  by a  Participant  in any  calendar  year  may not  exceed
         $100,000.00.  Any Options  granted that exceed this threshold  shall be
         automatically deemed Non-Qualified Options.

         (D) TEN PERCENT  OWNERS.  An Incentive Stock Option may be granted to a
         Ten Percent Owner, provided that at the time such option is granted the
         exercise  price per  share of Stock  shall not be less than 110% of the
         Fair Market Value and such option by its terms is not exercisable after
         the expiration of five (5) years from the date of its grant.

         (E)  EXPIRATION OF INCENTIVE  STOCK  OPTIONS.  No award of an Incentive
         Stock Option may be made pursuant to this Plan after the  expiration of
         ten (10) years from the Effective Date.

         (F) RIGHT TO EXERCISE.  During a Participant's  lifetime,  an Incentive
Stock Option may be exercised only by the Participant.

         (G)  EMPLOYEES  ONLY.  Only common law  employees  of the Company or a
 Subsidiary  are  eligible to receive  Incentive  Stock
         Options.

                       ARTICLE 7: RESTRICTED STOCK AWARDS.

         7.1 RESTRICTED STOCK AWARDS.  The Committee is authorized to make Stock
Awards  of  Restricted  Stock to  Participants  either in the form of a grant of
Stock or an offer to sell Stock to a Participant, in such amounts and subject to
such terms, conditions and restrictions as may be selected by the Committee. All
Awards of  Restricted  Stock shall be evidenced by an  Agreement.  A Stock Award
Agreement may specify whether,  and to what extent,  holders of Restricted Stock
Awards shall have voting, dividend, and other rights of holders of Stock.

         7.2 ISSUANCE  AND  RESTRICTIONS.  Restricted  Stock shall be subject to
such restrictions on transferability and other  restrictions,  including without
limitation  "vesting" or forfeiture  restrictions,  as the Committee may impose.
These  restrictions may lapse separately or in combination at such times,  under
such  circumstances,  in  such  installments,  or  otherwise,  as the  Committee
determines at the time of the grant of the Stock Right or thereafter.

         7.3 FORFEITURE.  Except as otherwise determined by the Committee at the
time of the  grant  of the  Stock  Right  or  thereafter,  upon  termination  of
employment during the applicable restriction period, Restricted Stock that is at
that time subject to  restrictions  shall be  forfeited  and  reacquired  by the
Company;  provided,  however,  that the Committee may provide in any Stock Right
Agreement  that  restrictions  or forfeiture  conditions  relating to Restricted
Stock  will be waived in whole or in part in  specified  circumstances,  and the
Committee  may in  other  cases  waive  in  whole  or in  part  restrictions  or
forfeiture conditions relating to Restricted Stock.

         7.4 PAYMENT AND  CERTIFICATES  FOR  RESTRICTED  STOCK.  If a Restricted
Stock Right provides for the purchase of Stock by a  Participant,  payment shall
be made  pursuant to Article 9 of the Plan.  Restricted  Stock granted under the
Plan may be evidenced in such  manner,  as the  Committee  shall  determine.  If
certificates  representing shares of Restricted Stock are registered in the name
of the Participant,  certificates  must bear an appropriate  legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company shall retain physical  possession of the certificate until such time
as all applicable restrictions lapse.

         7.5  RESTRICTIONS ON RESTRICTED  STOCK RIGHTS.  Each  Restricted  Stock
Right shall be subject to such conditions,  restrictions and  contingencies,  as
the Committee shall determine.  These may include  continuous service and/or the
achievement of performance  goals. The performance goals that may be used by the
Committee  for such Stock Rights may be based on one or more  business  criteria
that apply to the  individual  participant,  a business  unit of the Company,  a
Subsidiary or the Company as a whole,  and/or  performance as compared with that
of other  publicly  traded  companies.  Such  criteria may include,  but are not
limited to, stock price,  market  share,  sales,  earnings,  earnings per share,
return on equity,  or costs.  The Committee  may designate a single  performance
goal criterion, or multiple performance goal criteria.

                    ARTICLE 8: STOCK REFERENCE STOCK AWARDS.

         8.1 GRANT OF  STOCK-REFERENCE  AWARDS.  The  Committee  is  authorized,
subject to limitations under applicable law, to grant to Participants such other
Stock Rights that are payable in, valued in whole or in part by reference to, or
otherwise, based on or related to shares of Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including without limitation shares
of Stock  awarded  purely as a "bonus"  and not subject to any  restrictions  or
conditions,  other rights  convertible or exchangeable into shares of Stock, and
Stock  Rights  valued by reference to book value of shares of Stock or the value
of securities of or the  performance of specified  divisions or  Subsidiaries of
the Company.

         8.2 RESTRICTIONS ON STOCK-REFERENCE  AWARDS. Each Stock-Reference Award
shall be subject to such  conditions,  restrictions  and  contingencies,  as the
Committee  shall  determine.  These may include  continuous  service  and/or the
achievement of performance  goals. The performance goals that may be used by the
Committee  for such Stock Rights may be based on one or more  business  criteria
that apply to the  individual  participant,  a business  unit of the Company,  a
Subsidiary,  or the Company as a whole, and/or performance as compared with that
of other  publicly  traded  companies.  Such  criteria may include,  but are not
limited to, stock price,  market  share,  sales,  earnings,  earnings per share,
return on equity,  or costs.  The Committee  may designate a single  performance
goal criterion, or multiple performance goal criteria.


<PAGE>



                     ARTICLE 9: PAYMENT FOR STOCK PURCHASES;
                       WITHHOLDING TAXES; RELOAD OPTIONS.

         9.1 PAYMENT.  Payment for Stock  purchased  pursuant to the Plan may be
made in cash (by check) or, where expressly  approved for the Participant by the
Committee in a Stock Right Agreement (or otherwise in writing where permitted by
law):

         (a) By cancellation of indebtedness of the Company to the Participant;

         (b) By surrender of (or attestation to the ownership of) Stock,  valued
         at Fair Market Value on the date new Stock is purchased under the Plan;
         provided,  however,  that such  surrender or  attestation  shall not be
         permitted   if  such  action  would  cause  the  Company  to  recognize
         compensation expense (or additional  compensation expense) with respect
         to the Stock Right for financial reporting purposes;

         (c) By tender of a full recourse  promissory  note having such terms as
         may be approved by the Committee,  secured by the Stock purchased,  and
         bearing  interest at a rate  sufficient  to avoid  imputation of income
         under  Sections  482 and  1274 of the  Code;  provided,  however,  that
         Participants who are not employees of the Company shall not be entitled
         to purchase Stock with a promissory  note unless the note is adequately
         secured by collateral other than the Stock; provided,  further, that in
         the case of newly issued  shares of Stock,  the portion of the Purchase
         Price equal to the par value of the Stock, if any, must be paid in cash
         or other legal consideration;

         (d) By waiver of compensation due or accrued to Participant for
services rendered;

         (e) By tender of property acceptable to the Committee;

         (f) With  respect  only to purchases  upon  exercise of an Option,  and
         provided that a public market for the Company's stock then exists:

                  (1) Through a "same day sale"  commitment from Participant and
                  a broker-dealer  that is a member of the National  Association
                  of Securities  Dealers (a "NASD Dealer")  whereby  Participant
                  irrevocably  elects  to  exercise  the  Option  and to  sell a
                  portion  of the  Stock so  purchased  to pay for the  exercise
                  price and any applicable  withholding  taxes,  and whereby the
                  NASD Dealer irrevocably  commits upon receipt of such Stock to
                  forward  the  exercise  price and any such  withholding  taxes
                  directly to the Company;

                  (2) Through a "margin"  commitment from Participant and a NASD
                  Dealer whereby Participant  irrevocably elects to exercise the
                  Option and to pledge the Stock so purchased to the NASD Dealer
                  in a  margin  account  as  security  for a loan  from the NASD
                  Dealer in the amount of the exercise  price and any applicable
                  withholding  taxes,  and whereby  the NASD Dealer  irrevocably
                  commits  upon  receipt of such Stock to forward  the  exercise
                  price and any such withholding  taxes directly to the Company;
                  or

                  (3) Through any other "cashless  exercise"  procedure approved
by the Committee; or

         (g) By any combination of the foregoing.

         9.2 LOAN  GUARANTEES.  The Committee may help the  Participant  pay for
Shares  purchased  under the Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.

         9.3 TAX  WITHHOLDING.  The  Company  or any  Subsidiary  shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company,  an amount sufficient to satisfy federal,  state and local taxes
(including the  Participant's  FICA  obligation)  required by law to be withheld
with respect to any taxable  event  arising as a result of this Plan.  Whenever,
under the Plan, payments in satisfaction of Stock Rights are to be made in cash,
such payment shall be net of an amount sufficient to satisfy federal, state, and
local  withholding tax requirements.  With respect to withholding  required upon
any taxable event relating to the issuance of Stock under the Plan, Participants
may elect, subject to the Committee's approval and any rules or policies adopted
by the Committee from time to time, to satisfy the withholding  requirement,  in
whole or in part,  by having the Company or any  Subsidiary  withhold  shares of
Stock having a Fair Market Value on the date of withholding  equal to the amount
to be withheld for tax purposes.  The Committee may, at the time any Stock Right
is granted,  require that any and all applicable tax withholding requirements be
satisfied by the withholding of shares of Stock as set forth above.

         9.4 RELOAD  OPTIONS.  Stock  Right  Agreements  may contain a provision
pursuant to which a Participant  who pays all or a portion of the exercise price
of an Option or the tax  required to be  withheld  pursuant to an exercise of an
Option  by  surrendering  shares  of  Stock  pursuant  to  Sections  9.1 or 9.3,
respectively, shall be automatically granted an Option for the purchase of Stock
equal to the number of shares surrendered (a "Reload Option").  The grant of the
Reload  Option  shall be effective on the date the  Participant  surrenders  the
shares of Stock in respect of which the Reload  Option is granted  (the  "Reload
Date").  The Reload Option shall have an exercise price equal to the Fair Market
Value of the Stock on the Reload Date, and shall have a term which is no longer,
and which shall lapse no later, than the original term of the underlying option.
If stock  otherwise  available  under an  Incentive  Stock  Option  is  withheld
pursuant  to Section  9.3,  any Reload  Option  granted in  connection  with the
withholding  shall be treated as a new Incentive  Stock  Option,  subject to the
rules set forth in Section 6.2.


<PAGE>


                        ARTICLE 10: ADDITIONAL PROVISIONS
                           APPLICABLE TO STOCK RIGHTS.

         10.1  STAND-ALONE,  TANDEM,  AND SUBSTITUTE STOCK RIGHTS.  Stock Rights
granted  under the Plan may,  in the  discretion  of the  Committee,  be granted
either  alone or in addition  to, in tandem with,  or in  substitution  for, any
other Stock Right granted under the Plan. Stock Rights granted in addition to or
in tandem with other Stock  Rights may be granted  either at the same time as or
at a different time from the grant of such other Stock Rights.

         10.2  EXCHANGE  PROVISIONS.  The  Committee  may at any  time  offer to
exchange or buy out any  previously  granted  Stock Right for a payment in cash,
Stock,  or another Stock Right,  based on the terms and conditions the Committee
determines and communicates to the Participant at the time the offer is made.

         10.3 TERM OF STOCK RIGHT. The term of each Stock Right shall be for the
period as determined by the Committee,  provided that in no event shall the term
of any Incentive  Stock Option or a Stock  Appreciation  Right granted in tandem
with the  Incentive  Stock Option  exceed a period of ten years from the date of
its grant.

         10.4 FORM OF PAYMENT FOR STOCK RIGHTS. Subject to the terms of the Plan
and any  applicable  law or Stock Right  Agreement,  payments or transfers to be
made by the Company or a  Subsidiary  on the grant or exercise of an Stock Right
may be made in such forms as the  Committee  determines  at or after the time of
grant,  including without limitation,  cash, Stock, other Stock Rights, or other
property,  or any combination,  and may be made in a single payment or transfer,
in  installments,  or on a deferred basis, in each case determined in accordance
with rules adopted by, and at the discretion of, the Committee.

         10.5 LIMITS ON TRANSFER.  No right or interest of a Participant  in any
Stock Right may be pledged,  encumbered,  or  hypothecated to or in favor of any
party other than the Company or a  Subsidiary,  or shall be subject to any lien,
obligation,  or liability of such  Participant to any other party other than the
Company or a  Subsidiary.  Except as otherwise  provided  below,  no Stock Right
shall  be  assignable  or  transferable  by a  Participant  other  than by will,
beneficiary  designation or the laws of descent and  distribution  or, except in
the  case  of an  Incentive  Stock  Option,  pursuant  to a  qualified  domestic
relations order as defined in Section 414(p)(1)(A) of the Code or Title I of the
Employee Retirement Income Security Act, or the rules there under. The Committee
may determine and specify in any Stock Right  Agreement for an Stock Right other
than an Stock Right that  includes an  Incentive  Stock  Option,  at the time of
granting  an  Stock  Right or  thereafter,  that a  Participant  may  assign  or
otherwise transfer all or a portion of the rights represented by the Stock Right
to specified  individuals or classes of  individuals,  or to a trust  benefiting
such individuals or classes of individuals,  or to a partnership or other entity
in which all  partners or equity  owners are such  individuals,  subject to such
restrictions,   limitations,   or  conditions  as  the  Committee  deems  to  be
appropriate.

         10.6 STOCK  CERTIFICATES.  All Stock  certificates  delivered under the
Plan are  subject  to any  stop-transfer  orders and other  restrictions  as the
Committee  deems  necessary  or  advisable  to  comply  with  federal  or  state
securities laws, rules, and regulations and the rules of any national securities
exchange or automated quotation system on which the Stock is listed,  quoted, or
traded.  The Committee may place legends on any Stock  certificate  to reference
restrictions applicable to the Stock.

                         ARTICLE 11: CHANGES IN CAPITAL
                          STRUCTURE; CHANGE OF CONTROL.

11.1  GENERAL  ADJUSTMENTS.  In the event of a  subdivision  of the  outstanding
Stock, a declaration of a dividend payable in Stock, a declaration of a dividend
payable in a form other  than Stock in an amount  that has a material  effect on
the price of the Stock, a combination or consolidation of the outstanding  Stock
(by  classification  or otherwise)  into a lesser  number of shares of Stock,  a
recapitalization,  a spin-off or a similar occurrence,  the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of (a) the number of shares of Stock  available  for future  Stock  Rights under
Article 3, (b) the  limitations  set forth in Article 3, (c) the number and kind
of shares of Stock covered by each  outstanding  Stock Right or (d) the exercise
price under each outstanding Option or other Stock Right in the nature of rights
that may be  exercised.  Except as  provided in this  Article 11, a  Participant
shall have no rights by reason of any issue by the Company of stock of any class
or  securities   convertible  into  stock  of  any  class,  any  subdivision  or
consolidation of shares of stock of any class, the payment of any stock dividend
or any other increase or decrease in the number of shares of stock of any class.

         11.2   DISSOLUTION  OR  LIQUIDATION.   To  the  extent  not  previously
exercised,  Stock Rights shall terminate immediately prior to the dissolution or
liquidation of the Company.

         11.3  REORGANIZATIONS.  In the event  that the  Company is a party to a
merger, consolidation,  or other reorganization,  outstanding Stock Rights shall
be subject to the agreement of merger,  consolidation,  or  reorganization.  The
Committee  shall cause such agreement to provide,  (a) for the  continuation  of
outstanding  Stock  Rights  by  the  Company  (if  the  Company  is a  surviving
corporation),  (b) for their  assumption  by the  surviving  corporation  or its
parent or subsidiary,  (c) for the substitution by the surviving  corporation or
its parent or subsidiary of its own Stock Rights for such Stock Rights,  (d) for
accelerated vesting, accelerated expiration and/or lapse of restrictions, or (e)
for settlement in cash or cash equivalents.

         11.4 EFFECT OF CHANGE IN  CONTROL.  The  Committee  may  determine  and
specify in any Stock Right Agreement,  at the time of granting an Stock Right or
thereafter,  that any or all  outstanding  Options and other Stock Rights in the
nature of rights that may be exercised shall become fully exercisable and any or
all restrictions on other Stock Rights shall lapse,  upon the effectiveness of a
Change of Control, subject to the following limitations:

         (a) In the case of an  Incentive  Stock  Option,  the  acceleration  of
exercisability shall not occur without the Participant's written consent.

         (b) If the Company and the other party to the transaction  constituting
         a Change in Control agree that such  transaction  is to be treated as a
         "pooling of interests" for financial  reporting  purposes,  and if such
         transaction  in  fact  is  so  treated,   then  the   acceleration   of
         exercisability  shall  not  occur  to the  extent  that  the  surviving
         entity's  independent public  accountants  determine in good faith that
         such  acceleration  would  preclude  the use of "pooling of  interests"
         accounting.

                      ARTICLE 12: AMENDMENT, MODIFICATION,
                                AND TERMINATION.

         12.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the
Committee,  at any time and from  time to time,  the  Committee  may  terminate,
amend,  or modify the Plan.  An amendment or  modification  of the Plan shall be
subject  to the  approval  of the  Company's  stockholders  only  to the  extent
required by applicable laws, regulations and rules.

         12.2 STOCK RIGHTS PREVIOUSLY  GRANTED.  No termination,  amendment,  or
modification  of the Plan shall  adversely  affect in any material way any Stock
Right  previously  granted  under the Plan,  without the written  consent of the
Participant.

                         ARTICLE 13: GENERAL PROVISIONS.

         13.1 NO RIGHTS TO STOCK RIGHTS.  No  Participant or employee shall have
any claim to be granted any Stock Right under the Plan,  and neither the Company
nor the Committee is obligated to treat Participants and employees uniformly.

         13.2 NO STOCKHOLDERS  RIGHTS.  No Stock Right gives the Participant any
of the rights of a stockholder  of the Company  unless and until shares of Stock
are in fact issued to such person in connection with such Stock Right.

         13.3 NO RIGHT TO  EMPLOYMENT.  Nothing  in the Plan or any Stock  Right
Agreement  shall  interfere with or limit in any way the "at will" nature of any
Participant's   employment  or  other  relationship  with  the  Company  or  any
Subsidiary,  nor  confer  upon any  Participant  any  right to  continue  in the
employment or any other  relationship of the Company or any Subsidiary,  and the
Company and each  Subsidiary  reserve the right to terminate  any  Participant's
employment or other relationship at any time.

         13.4  UNFUNDED  STATUS OF STOCK  RIGHTS.  The Plan is intended to be an
"unfunded"  plan for  incentive and deferred  compensation.  With respect to any
payments  not yet made to a  Participant  pursuant  to an Stock  Right,  nothing
contained in the Plan or any Stock Right  Agreement  shall give the  Participant
any rights that are greater  than those of a general  creditor of the Company or
any Subsidiary.

         13.5 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining  any benefits  under any pension,  retirement,
savings, profit sharing, group insurance,  welfare, or other benefit plan of the
Company or any Subsidiary.

         13.6     EXPENSES.  The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.

         13.7 TITLES AND  HEADINGS.  The titles and headings of the Articles and
Sections in the Plan are for  convenience of reference only, and in the event of
any conflict,  the text of the Plan, rather than such titles or headings,  shall
control.

         13.8 FRACTIONAL  SHARES.  No fractional shares of stock shall be issued
and the Committee  shall  determine,  in its  discretion,  whether cash shall be
given in lieu of  fractional  shares or whether  such  fractional  share will be
eliminated by rounding up.

         13.9 SECURITIES LAW  COMPLIANCE.  With respect to any person who is, on
the relevant  date,  obligated to file reports  under Section 16 of the Exchange
Act,  transactions  under this Plan are  intended to comply with all  applicable
conditions of Section 16 or its successors under the Exchange Act. To the extent
any  provision  of the Plan or any Stock  Right  Agreement  or any action by the
Committee fails to so comply, it shall be void to the extent required by law and
voidable as deemed advisable by the Committee.

         13.10 GOVERNMENT AND OTHER  REGULATIONS.  The obligation of the Company
to make payment of Stock  Rights in Stock or  otherwise  shall be subject to all
applicable laws,  rules,  and  regulations,  and to such approvals by government
agencies  as may be  required.  The  Company  shall be under  no  obligation  to
register  under the  Securities  Act any of the  shares of Stock  paid under the
Plan.  The Company may  restrict the issuance or transfer of such shares in such
manner  as  it  deems  advisable  to  ensure  the   satisfaction  of  all  legal
requirements  relating to their  registration,  qualification  or listing or any
exemption there from.

         13.11 GOVERNING LAW. The Plan and all Stock Right  Agreements  shall be
construed in accordance with and governed by the laws of the State of Florida.

         13.12  NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan nor
the submission of the Plan to the stockholders of the Company for approval shall
be  construed as creating any  limitations  upon the right and  authority of the
Committee  to  adopt  such  other  incentive  compensation  arrangements  (which
arrangements  may be  applicable  either  generally  to a class  or  classes  of
individuals or  specifically  to a particular  individual or individuals) as the
Committee in its discretion determines desirable, including, without limitation,
the granting of stock options or other rights otherwise than under the Plan.

                            ARTICLE 14: DEFINITIONS.

         14.1     Definitions.  The following words and phrases shall have the
                                   following meanings for purposes of this Plan:

         (a) "Stock Right" means any Option,  Restricted  Stock Stock Right,  or
               Stock-Reference  Stock Right, or any other right or interest
               relating to Stock, cash or property, granted to a Participant
               under the Plan.

         (b) "Stock Right Agreement" means any written agreement,  contract,  or
               other instrument or document evidencing a Stock Right.

         (c) "Board" means the Board of Directors of the Company.

         (d) "Change of Control" means and includes each of the following:

                  (1) Any  transaction  or series of  transactions,  whereby any
         person (as that term is used in Section 13 and 14(d)(2) of the Exchange
         Act),  is or  becomes  the  beneficial  owner  (as that term is used in
         Section  13(d)  of  the  Exchange  Act)  directly  or  indirectly,   of
         securities  of the  Company  representing  20% or more of the  combined
         voting power of the Company's then  outstanding  securities;  provided,
         that for purposes of this  paragraph,  the term "person"  shall exclude
         (i) a trustee or other fiduciary  holding  securities under an employee
         benefit plan of the Company or of a Subsidiary  and (ii) a  corporation
         owned  directly or  indirectly  by the  stockholders  of the Company in
         substantially  the same  proportions  as their  ownership of the common
         stock of the Company.

                  (2) Any merger,  consolidation,  or liquidation of the Company
         in which the Company is not the continuing or surviving  corporation or
         pursuant to which Stock would be converted  into cash,  securities,  or
         other property,  other than (i) a merger or consolidation with a wholly
         owned Subsidiary,  (ii) a reincorporation of the Company in a different
         jurisdiction,   or  (iii)  other  transaction  in  which  there  is  no
         substantial  change in the  stockholders  of the Company,  where in the
         case of (i),  (ii) or  (iii)  all then  outstanding  Stock  Rights  are
         assumed by the successor corporation, which assumption shall be binding
         on all Participants;

                  (3) Any merger or  consolidation  of the Company  with or into
         another entity or any other corporate reorganization,  if more than 50%
         of the combined  voting power of the  continuing or surviving  entity's
         securities outstanding immediately after such merger,  consolidation or
         other  reorganization  is owned by persons who were not stockholders of
         the Company  immediately  prior to such merger,  consolidation or other
         reorganization.

                  (4)  The  sale,  transfer,  or  other  disposition  of  all or
substantially all of the assets of the Company.

                  (5) A change in the  composition of the Board,  as a result of
         which  fewer than 50% of the  incumbent  directors  are  directors  who
         either  (i) had been  directors  of the  Company  on the date 24 months
         prior to the date of the event that may  constitute a Change in Control
         (the  "original  directors")  or (ii) were  elected,  or nominated  for
         election,  to the  Board  with  the  affirmative  votes  of at  least a
         majority of the  aggregate of the original  directors who were still in
         office at the time of the  election  or  nomination  and the  directors
         whose election or nomination was previously so approved.

         A  transaction  shall not  constitute  a Change of  Control if its sole
purpose is to change the state of  incorporation  of the  Company or to create a
holding company that will be owned in substantially  the same proportions by the
persons who held the Company's securities immediately before such transaction.

         (e) "Code"  means the Internal  Revenue  Code of 1986,  as amended from
time to time.

         (f)  "Committee"  means the committee of the Board described in Article
5.

         (g)  "Exchange  Act"  means the  Securities  Exchange  Act of 1934,  as
amended.

         (h)  "Fair  Market  Value"  means  with  respect  to Stock or any other
property,  the fair market value of such Stock or other  property  determined by
such  methods  or  procedures  as may be  established  from  time to time by the
Committee.  Unless otherwise determined by the Committee,  the Fair Market Value
of Stock as of any date shall be the closing  price for the Stock as reported on
the NASDAQ National Market (or on any national  securities exchange on which the
Stock is then  listed) for that date or, if no closing  price is so reported for
that date,  the  closing  price on the next  preceding  date for which a closing
price was reported.

         (i)  "Incentive  Stock  Option"  means an Option that is intended to
meet the  requirements  of Section 422 of the Code or any
successor provision thereto.

         (j)  "Non-Qualified  Stock Option" means an Option that is not intended
to be an Incentive Stock Option.

         (k) "Option" means a right granted to a Participant  under Article 6 of
the Plan to purchase Stock at a specified  price during  specified time periods.
An Option  may be either an  Incentive  Stock  Option or a  Non-Qualified  Stock
Option.

         (l)  "Participant"  means  a  person  who,  as  an  officer,  director,
employee,  director,  consultant,  independent  contractor,  or  adviser  of the
Company or any Subsidiary, has been granted a Stock Right under the Plan.

                  (m) "Predecessor Plan" means the 1995 Incentive Stock Option
Plan of the Company.

         (n) "Plan" means the Imaging Diagnostic Systems, Inc. 1999 Equity
Incentive Plan, as amended from time to time.

         (o) "Restricted Stock Stock Right" means Stock granted to a Participant
or offered for sale to a Participant under Article 7.

         (p) "Securities Act" means the Securities Act of 1933, as amended.

         (q)  "Stock"  means the  common  stock of the  Company  and such  other
securities of the Company that may be substituted  for Stock pursuant to Article
11.

         (r)  "Stock-Reference   Stock  Right"  means  a  right,  granted  to  a
Participant under Article 8.

         (s)  "Subsidiary"  means any  corporation  of which a  majority  of the
outstanding  voting  stock or voting  power is  beneficially  owned  directly or
indirectly by the Company.

         (t) "Ten Percent Owner" means any individual  who, at the date of grant
of an Incentive Stock Option, owns stock possessing more than ten percent of the
total  combined  voting  power  of all  classes  of Stock  of the  Company  or a
Subsidiary.  For purposes of determining  such  percentage,  the following rules
shall apply:

         (1) The  individual  with  respect  to whom  such  percentage  is being
determined  shall  be  considered  as  owning  the  Stock  owned,   directly  or
indirectly,  by or for his  brothers  and sisters  (whether by the whole or half
blood), spouse, ancestors, and lineal descendants; and

         (2) Stock  owned,  directly  or  indirectly,  by or for a  corporation,
partnership,   estate,   or  trust,   shall  be   considered   as  being   owned
proportionately by or for its stockholders, partners, or beneficiaries.


<PAGE>


            Exhibit 10.21 Form of Debenture in the amount of $825,000


<PAGE>




                                FORM OF DEBENTURE

THE SECURITIES  OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE  REGISTRATION  REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE  TRANSFERRED  OR RESOLD  EXCEPT AS  PERMITTED  UNDER  SUCH LAWS  PURSUANT  TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES  AND EXCHANGE  COMMISSION OR ANY OTHER  REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS  OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING  MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

CONVERTIBLE DEBENTURE ISSUED                                AUGUST   , 1999

CONVERTIBLE DEBENTURE DUE                                   AUGUST   , 2001
PRINCIPAL AMOUNT                                                  $ 825,000

NUMBER                                                                 102

         FOR  VALUE  RECEIVED,  IMAGING  DIAGNOSTIC  SYSTEMS,  INC.,  a New York
corporation  (the  "Company"),  hereby promises to pay CHARLTON  AVENUE,  LLC or
registered  assigns (the "Holder") on March 31, 2001, (the "Maturity Date"), the
principal amount of EIGHT HUNDRED TWENTY-FIVE  THOUSAND Dollars ($825,000) U.S.,
and to pay interest on the principal  amount  hereof,  in such amounts,  at such
times and on such terms and conditions as are specified herein.

ARTICLE 1. INTEREST

         The Company shall pay interest on the unpaid  principal  amount of this
Debenture  (the  "Debenture")  at the rate of Seven  Percent  (7.0%)  per  year,
payable at the time of each conversion until the principal amount hereof is paid
in full or has been converted.  Interest shall be computed on the basis of a 360
day year of 12, 30 day months.  Each payment  shall be paid in cash or in freely
trading Common Stock of the Company,  at the Company's option. If paid in Common
Stock,  the number of shares of the Company's  Common Stock to be received shall
be  determined  by  dividing  the  dollar  amount  of the  interest  by the then
applicable  Market Price as of the interest  payment date.  "Market Price" shall
mean 75% of the  average  of the  5-day  closing  bid  prices,  as  reported  by
Bloomberg,  LP for the five (5) consecutive  trading days immediately  preceding
the date of conversion. If the interest is to be paid in cash, the Company shall
make such  payment  within 5  business  days of the date of  conversion.  If the
interest is to be paid in Common Stock,  said Common Stock shall be delivered to
the Holder, or per Holder's instructions,  within 5 business days of the receipt
of the Notice of  Conversion  and the original  Debenture.  The  Debentures  are
subject  to  automatic  conversion  at the end of two  years  from  the  date of
issuance  at  which  time  all  Debentures  outstanding  will  be  automatically
converted  based upon the formula set forth in Section 3.2. The closing shall be
deemed to have occurred on the date the funds are received by the Company or its
Counsel (the "Closing Date").

ARTICLE 2. METHOD OF PAYMENT

         This  Debenture  must be  surrendered  to the  Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall have
the option of paying the interest on this  Debenture in United States dollars or
in common stock upon  conversion  pursuant to Article 1 hereof.  The Company may
draw a check for the  payment  of  interest  to the order of the  Holder of this
Debenture  and mail it to the  Holder's  address  as shown on the  Register  (as
defined in Section 7.2 below).  Interest and principal payments shall be subject
to withholding  under applicable  United States Federal Internal Revenue Service
Regulations.

ARTICLE 3.  CONVERSION

         SECTION 3.1.  CONVERSION PRIVILEGE

         (a) The Holder of this Debenture  shall have the right,  at its option,
to  convert  it into  shares of common  stock,  no par value per  share,  of the
Company  ("Common  Stock") at any time  following  the Closing Date and which is
before  the  close of  business  on the  Maturity  Date,  except as set forth in
Section  3.1(c)  below.  The number of shares of Common Stock  issuable upon the
conversion of this Debenture is determined  pursuant to Section 3.2 and rounding
the result to the nearest whole share.

         (b) Less  than all of the  principal  amount of this  Debenture  may be
converted  into Common Stock if the portion  converted is at least  $10,000 or a
whole multiple of $10,000 and the provisions of this Article 3 that apply to the
conversion  of all of the  Debenture  shall  also apply to the  conversion  of a
portion of it. This Debenture may not be converted, whether in whole or in part,
except in accordance with Article 3.

         (c) In  the  event  all  or  any  portion  of  this  Debenture  remains
outstanding  on the  second  anniversary  of the date  hereof,  the  unconverted
portion of such Debenture will  automatically be converted into shares of Common
Stock on such date in the manner set forth in Section 3.2.

         SECTION 3.2.  CONVERSION PROCEDURE.

         (A) DEBENTURES.  Upon receipt by the Company or its designated attorney
of a  facsimile  or original of Holder's  signed  Notice of  Conversion  and the
receipt of the  original  Debenture  to be  converted in whole or in part in the
manner set forth in 3.2(b) below,  the Company shall instruct its transfer agent
to issue one or more  Certificates  representing that number of shares of Common
Stock into which the Debenture is convertible in accordance  with the provisions
regarding  conversion set forth in Exhibit A hereto. The Seller's transfer agent
or attorney  shall act as Registrar  and shall  maintain an  appropriate  ledger
containing the necessary information with respect to each Debenture.

         (B)  CONVERSION  PROCEDURES.  The face amount of this  Debenture may be
converted  anytime after the earlier of the effective  date of the  registration
statement  or ninety  (90)  calendar  days  following  the  Closing  Date.  Such
conversion shall be effectuated by surrendering to the Company, or its attorney,
this  Debenture  to be  converted  together  with a facsimile or original of the
signed Notice of Conversion  which evidences  Holder's  intention to convert the
Debenture  indicated.  The date on which the Notice of  Conversion  is effective
("Conversion  Date")  shall be  deemed to be the date on which  the  Holder  has
delivered to the Company or its  designated  attorney a facsimile or original of
the signed  Notice of  Conversion,  as long as the original  Debenture(s)  to be
converted  are  received  by the  Company or its  designated  attorney  within 5
business days thereafter.

         (C) COMMON STOCK TO BE ISSUED.  Upon the  conversion of any  Debentures
and upon  receipt by the Company or its  attorney of a facsimile  or original of
Holder's  signed Notice of Conversion  Seller shall instruct  Seller's  transfer
agent to issue Stock  Certificates  without  restrictive legend or stop transfer
instructions,  if at that  time  the  Registration  Statement  has  been  deemed
effective (or with proper restrictive  legend if the Registration  Statement has
not as yet been declared effective),  in the name of Holder (or its nominee) and
in such  denominations to be specified at conversion  representing the number of
shares of Common Stock  issuable upon such  conversion,  as  applicable.  Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely  transferable  on the books and  records of Seller,  except as may be set
forth herein.

         (D) (I) CONVERSION RATE.  HOLDER IS ENTITLED,  AT ITS OPTION TO CONVERT
the face amount of this Debenture, plus accrued interest,  anytime following the
Closing  Date,  at 75% of the 5-day  average  closing bid price,  as reported by
Bloomberg LP, for the five (5) consecutive  trading days  immediately  preceding
the applicable Conversion Date (the "Conversion Price"). No fractional shares or
scrip  representing  fractions of shares will be issued on  conversion,  but the
number of shares  issuable  shall be rounded up or down,  as the case may be, to
the nearest whole share.

         (II) MOST FAVORED  FINANCING.  If after the Closing Date,  but prior to
the Holder's  conversion of all the  Debentures,  the Company raises money under
either  Regulation D or Regulation S on terms that are more favorable than those
terms set forth in this  Debenture,  then in such event,  the Holder at its sole
option shall be entitled to completely  replace the terms of this Debenture with
the terms of the more beneficial Debenture as to that balance, including accrued
interest and any accumulated liquidated damages,  remaining on Holder's original
investment.  The  Debentures  are subject to a  mandatory,  24 month  conversion
feature at the end of which all  Debentures  outstanding  will be  automatically
converted,  upon the  terms  set forth in this  section  ("Mandatory  Conversion
Date").

         (e) Nothing contained in this Debenture shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the maximum
rate permitted by governing law. In the event that the rate of interest required
to be paid  exceeds the maximum rate  permitted  by  governing  law, the rate of
interest  required to be paid thereunder shall be  automatically  reduced to the
maximum rate permitted under the governing law and such excess shall be returned
with reasonable promptness by the Holder to the Company.

         (f) It  shall be the  Company's  responsibility  to take all  necessary
actions and to bear all such costs to issue the  Certificate  of Common Stock as
provided  herein,  including  the  responsibility  and cost for  delivery  of an
opinion letter to the transfer agent,  if so required.  The person in whose name
the  certificate  of Common  Stock is to be  registered  shall be  treated  as a
shareholder  of record on and after the conversion  date.  Upon surrender of any
Debentures  that are to be  converted  in part,  the Company  shall issue to the
Holder a new  Debenture  equal to the  unconverted  amount,  if so  requested in
writing by Holder.

         (g) In the event the  Common  Stock is not  delivered  per the  written
instructions  of the Holder,  within five business days after the receipt of the
Notice of Conversion and original stock certificate (the "Delivery Date"),  then
in such event the Company  shall pay to Holder in cash or Common  Stock,  at the
Company's option, one percent (1%) of the purchase price of the Debentures being
converted per each day after the fifth  business day  following  the  Conversion
Date that the Common Stock is not delivered.

         The Company  acknowledges  that its failure to deliver the Common Stock
on or before the  Delivery  Date will  cause the Holder to suffer  damages in an
amount that will be difficult to ascertain.  Accordingly, the parties agree that
it is  appropriate  to include in this  Debenture  a  provision  for  liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section  represents the parties' good faith effort to quantify
such  damages  and, as such,  agree that the form and amount of such  liquidated
damages  are  reasonable  and will not  constitute  a  penalty.  The  payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.

         To the extent that the failure of the Company to issue the Common Stock
pursuant to this section is due to the unavailability of authorized but unissued
shares of Common Stock,  the  provisions  of this section  shall not apply,  but
instead the provisions of Section 3.2(h) shall apply.

         The Company  shall make any  payments  incurred  under this  section in
immediately available funds within three business days from the date of issuance
of the applicable  Common Stock.  Nothing herein shall limit a Holder's right to
pursue actual  damages or cancel the  conversion  for the  Company's  failure to
issue and deliver  Common Stock to the Holder  within 10 business days after the
Conversion Date.

         (h) The Company shall at all times reserve (or make alternative written
arrangements  for reservation or contribution of shares or stockholder  approval
to  authorize  additional  shares as described  in the proxy  statement  for the
August 31, 1998,  meeting) and have available all Common Stock necessary to meet
conversion  of the  Debentures by all Holders of the entire amount of Debentures
then outstanding.  If, at any time Holder submits a Notice of Conversion and the
Company does not have sufficient  authorized but unissued shares of Common Stock
(or  alternative  shares of Common Stock as may be contributed by  Stockholders)
available to effect,  in full, a conversion  of the  Debentures  (a  "Conversion
Default",  the date of such default being referred to herein as the  "Conversion
Default  Date"),  the  Company  shall  issue to the  Holder all of the shares of
Common  Stock  which  are  available,  and the  Notice of  Conversion  as to any
Debentures  requested  to be  converted  but  not  converted  (the  "Unconverted
Debentures"),  upon  Holder's  sole  option,  may be deemed  null and void.  The
Company shall provide notice of such Conversion  Default  ("Notice of Conversion
Default") to all  existing  Holders of  outstanding  Debentures,  by  facsimile,
within three (3) business  day of such default  (with the original  delivered by
overnight or two day  courier),  and the Holder shall give notice to the Company
by facsimile  within five  business  days of receipt of the  original  Notice of
Conversion Default (with the original delivered by overnight or two day courier)
of its election to either nullify or confirm the Notice of Conversion.

         The  Company  agrees to pay to all  Holders of  outstanding  Debentures
payments for a Conversion Default  ("Conversion Default Payments") in the amount
of  (N/365)  x (.24) x the  initial  issuance  price of the  outstanding  and/or
tendered but not converted  Debentures  held by each Holder where N = the number
of days from the Conversion Default Date to the date (the "Authorization  Date")
that the Company  authorizes  a  sufficient  number of shares of Common Stock to
effect  conversion  of all remaining  Debentures.  The Company shall send notice
("Authorization   Notice")  to  each  Holder  of  outstanding   Debentures  that
additional shares of Common Stock have been authorized,  the Authorization  Date
and the amount of Holder's  accrued  Conversion  Default  Payments.  The accrued
Conversion  Default  shall be paid in cash or shall be  convertible  into Common
Stock at the Conversion Rate, at the Holder's option, payable as follows: (i) in
the event Holder  elects to take such payment in cash,  cash  payments  shall be
made to such Holder of outstanding  Debentures by the fifth day of the following
calendar  month,  or (ii) in the event  Holder  elects to take such  payment  in
stock,  the Holder may convert  such  payment  amount  into Common  Stock at the
conversion  rate set forth in section  4(d) at anytime  after the 5th day of the
calendar  month  following  the  month in which  the  Authorization  Notice  was
received, until the expiration of the mandatory 24 month conversion period.

         The Company  acknowledges  that its  failure to  maintain a  sufficient
number of  authorized  but  unissued  shares of Common Stock to effect in full a
conversion  of the  Debentures  will  cause the  Holder to suffer  damages in an
amount that will be difficult to ascertain.  Accordingly, the parties agree that
it is  appropriate  to include in this  Debenture  a  provision  for  liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section  represents the parties' good faith effort to quantify
such  damages  and, as such,  agree that the form and amount of such  liquidated
damages  are  reasonable  and will not  constitute  a  penalty.  The  payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.

         Nothing  herein shall limit the Holder's right to pursue actual damages
for the Company's  failure to maintain a sufficient  number of authorized shares
of Common Stock.

         (i) The Company shall furnish to Holder such number of prospectuses and
other  documents  incidental to the  registration  of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.

         (j) Other than the Mandatory  Conversion  provisions  contained in this
Debenture  which are not limited by the  following,  in no other event shall the
Holder be entitled to convert that amount of Debentures in excess of that amount
upon  conversion  of which the sum of (1) the  number of shares of Common  Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock  which may be deemed  beneficially  owned  through  the  ownership  of the
unconverted  portion of the Debentures),  and (2) the number of shares of Common
Stock issuable upon the  conversion of the Debentures  with respect to which the
determination  of this  proviso  is  being  made,  would  result  in  beneficial
ownership by the Holder and its affiliates of more than 4.9% of the  outstanding
shares of Common  Stock of the Company.  For  purposes of this  provision to the
immediately  preceding  sentence,  beneficial  ownership  shall be determined in
accordance  with  Section  13 (d) of the  Securities  Exchange  Act of 1934,  as
amended, and Regulations 13 D and G thereunder,  except as otherwise provided in
clause (1) of such  provision.  Furthermore,  the Company  shall not permit such
conversions that would violate the provisions of this section.

         SECTION 3.3.  FRACTIONAL SHARES. The Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion of this  Debenture.  Instead,  the Company shall round up or down, as
the case may be, to the nearest whole share.

         SECTION  3.4.   TAXES  ON   CONVERSION.   The  Company  shall  pay  any
documentary,  stamp or similar  issue or transfer tax due on the issue of shares
of Common Stock upon the conversion of this Debenture. However, the Holder shall
pay any such tax which is due because the shares are issued in a name other than
its name.

         SECTION 3.5.  COMPANY TO RESERVE  STOCK.  The Company shall reserve the
number of shares of Common  Stock  required  pursuant  to and upon the terms set
forth in Section 3(a) of the Subscription  Agreement  related to this Debenture,
to permit the conversion of this Debenture subject to certain options granted to
the Company and referred to in Section 3(a) of the Subscription  Agreement.  All
shares of Common Stock which may be issued upon the conversion hereof shall upon
issuance  be validly  issued,  fully paid and  non-assessable  and free from all
taxes, liens and charges with respect to the issuance thereof.

         SECTION 3.6.  RESTRICTIONS  ON TRANSFER.  This  Debenture  has not been
registered  under the  Securities  Act of 1933,  as amended,  (the "Act") and is
being  issued  under  Section  4(2) of the  Act and  Rule  506 of  Regulation  D
promulgated under the Act. This Debenture and the Common Stock issuable upon the
conversion thereof may only be offered or sold pursuant to registration under or
an exemption from the Act.

         SECTION 3.7.  MERGERS,  ETC. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another  person and the holders of the Common  Stock are  entitled to receive
stock,  securities  or property in respect of or in exchange  for Common  Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such  successor,  purchaser or transferee  shall amend this Debenture to
provide  that it may  thereafter  be  converted  on the terms and subject to the
conditions  set forth  above  into the kind and amount of stock,  securities  or
property  receivable  upon such  merger,  consolidation,  sale or  transfer by a
holder of the number of shares of Common Stock into which this  Debenture  might
have been  converted  immediately  before such  merger,  consolidation,  sale or
transfer,  subject to adjustments  which shall be as nearly equivalent as may be
practicable to adjustments provided for in this Article 3.

ARTICLE 4.  MERGERS AND ADJUSTMENTS

         Section 4.1 Mergers.  The Company shall not  consolidate or merge into,
or transfer all or substantially  all of its assets to, any person,  unless such
person assume in writing the obligations of the Company under this Debenture and
immediately  after such  transaction no Event of Default  exists.  Any reference
herein to the Company shall refer to such  surviving or  transferee  corporation
and the obligations of the Company shall terminate upon such written assumption.

SECTION 4.2  PREFERENCES

         No preferences or distribution will be given to the common shareholders
in  preference  to the  preferred  shareholders,  and  for the  purpose  of such
distributions the debentureholder shall be treated as a preferred shareholder .

ARTICLE 5.  REPORTS

         The Company  will mail to the Holder  hereof at its address as shown on
the  Register a copy of any annual,  quarterly  or current  report that it files
with the  Securities and Exchange  Commission  promptly after the filing thereof
and a copy of any annual,  quarterly or other report or proxy  statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.

ARTICLE 6.  DEFAULTS AND REMEDIES

         SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if (a) the
Company does not make the payment of the  principal of this  Debenture  when the
same becomes due and payable at maturity, upon redemption or otherwise,  (b) the
Company does not make a payment, other than a payment of principal, for a period
of 5 business days  thereafter,  (c) the Company fails to comply with any of its
other agreements in this Debenture and such failure continues for the period and
after the notice  specified  below,  (d) the  Company  pursuant to or within the
meaning  of any  Bankruptcy  Law  (as  hereinafter  defined):  (i)  commences  a
voluntary  case; (ii) consents to the entry of an order for relief against it in
an  involuntary  case;  (iii)  consents to the  appointment  of a Custodian  (as
hereinafter  defined) of it or for all or  substantially  all of its property or
(iv) makes a general  assignment for the benefit of its creditors or (v) a court
of competent  jurisdiction  enters an order or decree under any  Bankruptcy  Law
that: (A) is for relief against the Company in an involuntary case; (B) appoints
a Custodian  of the Company or for all or  substantially  all of its property or
(C) orders  the  liquidation  of the  Company,  and the order or decree  remains
unstayed and in effect for 60 days, (e) the Company's  Common Stock is no longer
listed on any recognized exchange including electronic over-the-counter bulletin
board. As used in this Section 6.1, the term  "Bankruptcy Law" means Title 11 of
the United  States  Code or any  similar  federal or state law for the relief of
debtors. The term "Custodian" means any receiver, trustee, assignee,  liquidator
or similar  official under any Bankruptcy  Law. A default under clause (c) above
is not an Event of Default  until the  holders of at least 25% of the  aggregate
principal  amount of the  Debentures  outstanding  notify  the  Company  of such
default and the Company does not cure it within five (5) business days after the
receipt of such  notice,  which must  specify  the  default,  demand  that it be
remedied and state that it is a "Notice of Default".

         SECTION  6.2.  ACCELERATION.  If an  Event  of  Default  occurs  and is
continuing,  the  Holder  hereof by  notice  to the  Company,  may  declare  the
remaining  principal  amount of this Debenture to be due and payable.  Upon such
declaration,   the  remaining   principal   amount  shall  be  due  and  payable
immediately.

ARTICLE 7.  REGISTERED DEBENTURES

         SECTION 7.1.  SERIES.  This  Debenture  is one of a numbered  series of
Debentures  which are identical  except as to the  principal  amount and date of
issuance  thereof and as to any restriction on the transfer  thereof in order to
comply with the Securities Act of 1933 and the regulations of the Securities and
Exchange  Commission  promulgated  thereunder.  Such  Debentures are referred to
herein collectively as the "Debentures". The Debentures shall be issued in whole
multiples of $10,000.

         SECTION 7.2.  RECORD  OWNERSHIP.  The Company,  or its attorney,  shall
maintain a register of the holders of the Debentures  (the  "Register")  showing
their  names and  addresses  and the serial  numbers  and  principal  amounts of
Debentures  issued to or  transferred  of record by them from time to time.  The
Register may be maintained in electronic,  magnetic or other  computerized form.
The Company may treat the person  named as the Holder of this  Debenture  in the
Register as the sole owner of this  Debenture.  The Holder of this  Debenture is
the  person  exclusively  entitled  to  receive  payments  of  interest  on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.

         SECTION 7.3. REGISTRATION OF TRANSFER.  Transfers of this Debenture may
be registered on the books of the Company  maintained for such purpose  pursuant
to Section 7.2 above (i.e.,  the Register).  Transfers  shall be registered when
this  Debenture  is  presented  to the Company  with a request to  register  the
transfer  hereof and the Debenture is duly endorsed by the  appropriate  person,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received  evidence  satisfactory to it that such transfer is
rightful and in  compliance  with all  applicable  laws,  including tax laws and
state and federal securities laws. When this Debenture is presented for transfer
and duly transferred hereunder, it shall be canceled and a new Debenture showing
the name of the  transferee as the record holder thereof shall be issued in lieu
hereof.  When this  Debenture  is  presented  to the Company  with a  reasonable
request to  exchange it for an equal  principal  amount of  Debentures  of other
denominations,  the  Company  shall make such  exchange  and shall  cancel  this
Debenture and issue in lieu thereof  Debentures  having a total principal amount
equal to this  Debenture in such  denominations  as agreed to by the Company and
Holder.

         SECTION 7.4. WORN OR LOST DEBENTURES.  If this Debenture  becomes worn,
defaced or mutilated but is still  substantially  intact and  recognizable,  the
Company  or its  agent  may  issue a new  Debenture  in  lieu  hereof  upon  its
surrender. Where the Holder of this Debenture claims that the Debenture has been
lost,  destroyed or wrongfully taken, the Company shall issue a new Debenture in
place of the original  Debenture if the Holder so requests by written  notice to
the Company  actually  received by the  Company  before it is notified  that the
Debenture  has  been  acquired  by a bona  fide  purchaser  and the  Holder  has
delivered  to the  Company an  indemnity  bond in such amount and issued by such
surety as the Company  deems  satisfactory  together  with an  affidavit  of the
Holder  setting forth the facts  concerning  such loss,  destruction or wrongful
taking and such other  information in such form with such proof or  verification
as the Company may request.

ARTICLE 8.  INVESTMENT INTENT

         Holder is acquiring this Debenture and the underlying  common stock for
his own account,  for investment and not with a view to, or for his own account,
for  investment  and not with a view to, or for resale in connection  with,  the
distribution   thereof.   Holder  has  no  present  intention  of  reselling  or
distributing  any  of  the  securities.  Holder  does  not  have  any  contract,
undertaking,  agreement  or  arrangement  with any person to sell or transfer to
such person or to any third person any of the securities. The acquisition of the
securities for investment is consistent with Holder's financial needs.

ARTICLE 9  NOTICES

         Any notice  which is  required  or  convenient  under the terms of this
Debenture  shall be duly given if it is in writing  and  delivered  in person or
mailed by first class mail,  postage  prepaid and  directed to the Holder of the
Debenture  at its address as it appears on the  Register or if to the Company to
its principal executive offices.  The time when such notice is sent shall be the
time of the giving of the notice.

ARTICLE 10.  TIME

         Where this Debenture authorizes or requires the payment of money or the
performance  of a condition  or  obligation  on a Saturday or Sunday or a public
holiday,  or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday,  such payment may be made or condition or  obligation  performed on the
next  succeeding  business day, and if the period ends at a specified hour, such
payment may be made or condition  performed,  at or before the same hour of such
next  succeeding  business  day,  with the same  force and  effect as if made or
performed in accordance with the terms of this Debenture. A "business day" shall
mean a day on which  the banks in New York are not  required  or  allowed  to be
closed.

ARTICLE 11.  WAIVERS

         The holders of a majority in  principal  amount of the  Debentures  may
waive a default  or  rescind  the  declaration  of an Event of  Default  and its
consequences except for a default in the payment of principal or conversion into
Common Stock.

ARTICLE 12.  RULES OF CONSTRUCTION

         In this Debenture,  unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular,  and
words of the masculine gender include the feminine and the neuter,  and when the
sense so  indicates,  words of the neuter  gender may refer to any  gender.  The
numbers and titles of sections  contained  in the  Debenture  are  inserted  for
convenience  of reference  only,  and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof.  Wherever,
in this Debenture,  a determination of the Company is required or allowed,  such
determination  shall be made by a  majority  of the  Board of  Directors  of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.

ARTICLE 13.  GOVERNING LAW

         The validity,  terms,  performance  and  enforcement  of this Debenture
shall be governed and construed by the provisions  hereof and in accordance with
the laws of the State of Florida  applicable to agreements  that are negotiated,
executed, delivered and performed solely in the State of Florida.

ARTICLE 14.  ACCESS TO INFORMATION.

         The Holder has had the  opportunity  to ask  questions  of, and receive
answers from  management of the Company  regarding  the terms and  conditions of
this  Debenture,  and  the  transactions  contemplated  thereby,  as well as the
affairs of the  Company  and  related  matters.  The  Holder may have  access to
whatever additional information concerning the Company, its financial condition,
its business,  its prospects,  its  management,  its  capitalization,  and other
similar  matters  that  the  Holder  or his  purchaser  representative,  if any,
desires,  provided  that  the  Company  can  acquire  such  information  without
unreasonable    effort   or    expense.    In    addition,    as   required   by
ss.517.061(11)(a)(3),  Florida Statutes, and Rule 3E-500.05(a)  thereunder,  the
Holder and his purchaser representative may have, at the offices of the Company,
at any reasonable hour,  after reasonable prior notice,  access to the materials
set forth in the Rule which the Company can obtain without  unreasonable  effort
or expense.

         The Holder has had the  opportunity  to obtain  additional  information
necessary  to verify  the  accuracy  of the  information  referred  to the above
paragraph.

ARTICLE 15.  SEVERABILITY.

         In the  event  any parts of this  Debenture  are found to be void,  the
remaining  provisions of this Debenture  shall  nevertheless be binding with the
same effect as though the void parts were deleted.

ARTICLE 16.  LITIGATION

         (A) FORUM SELECTION AND CONSENT TO  JURISDICTION.  Any litigation based
thereon,  or arising out of, under, or in connection with, this Debenture or any
course of conduct,  course of dealing,  statements  (whether oral or written) or
actions of the Company or Holder shall be brought and maintained  exclusively in
the courts of the State of Florida.  The Company and Holder hereby expressly and
irrevocably  submits to the  jurisdiction  of the federal Courts of the State of
Florida  for  the  purpose  of any  such  litigation  as  set  forth  above  and
irrevocably  agree  to be  bound  by any  final  judgment  rendered  thereby  in
connection  with such  litigation.  The Company and Holder  further  irrevocably
consent to the service of process by registered  mail,  postage  prepaid,  or by
personal service within or without the State of Florida.  The Company and Holder
hereby expressly and irrevocably waives, to the fullest extent permitted by law,
any objection  which it may have or hereafter may have to the laying of venue of
any such  litigation  brought in any such court  referred to above and any claim
that any such  litigation  has been brought in any  inconvenient  forum.  To the
extent  that the Company or Holder have or  hereafter  may acquire any  immunity
from  jurisdiction  of any  court or from any  legal  process  (whether  through
service or notice, attachment prior to judgment,  attachment in aid of execution
or  otherwise)  with  respect to itself or its  property  the Company and Holder
hereby  irrevocably  waive such immunity in respect of their  obligations  under
this Debenture and the other loan documents.

         (B) WAIVER OF JURY TRIAL. The Holder and the Company hereby  knowingly,
voluntarily and intentionally  waive any rights they may have to a trial by jury
in respect of any  litigation  based  hereon,  or arising out of,  under,  or in
connection  with, this agreement,  or any course of conduct,  course of dealing,
statements  (whether  oral or written) or actions of the Holder or the  Company.
The Company  acknowledges  and agrees that it has received  full and  sufficient
consideration  for  this  provision  and  that  this  provision  is  a  material
inducement for the Holder entering into this agreement.

         (C)  SUBMISSION  TO  JURISDICTION.  Any legal action or  proceeding  in
connection with this Debenture or the  performance  hereof may be brought in the
state and federal courts located in Florida,  and the parties hereby irrevocably
submit to the exclusive  jurisdiction of such courts for the purpose of any such
action or proceeding.

ARTICLE 17.  SECURITY INTEREST

         This Debenture is secured,  by a mortgage (in the form attached  hereto
as  Exhibit  ____ and  incorporated  herein)  from the  COMPANY  TO THE  HOLDER,
ENCUMBERING  THE  COMPANY'S  REAL  PROPERTY  LOCATED  AT  6531  NW  18TH  Court,
Plantation  Florida,  up to an  amount  equal to the  principal  amount  of this
Debenture and all accrued interest.

ARTICLE 18.  RELEASE OF MORTGAGE

         Once the  registration  statement  covering the Common Stock underlying
this Debenture is declared effective, the mortgage securing this Debenture shall
be released upon the earlier of (a) the day the Company qualifies for listing on
AMEX or NASDAQ, as long as said listing requirements are not being met through a
reverse  split of the  Company's  Common Stock or (b) 180 days from the date the
Company  receives  its  third  funding  tranche  as  set  forth  in  a  separate
Subscription  Agreement  between the  Purchaser and the Company  concerning  the
Company's convertible debentures.

IN WITNESS WHEREOF,  the Company has duly executed this Debenture as of the date
first written above.

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                                    BY _____
                  Linda B. Grable its President duly authorized


<PAGE>



                                    Exhibit A

                              NOTICE OF CONVERSION

                             (To be Executed by the  Registered  Holder in order
to Convert the Debentures.)

         The undersigned hereby irrevocably  elects, as of ______________,  199_
to convert $_________________ of the Debentures into Shares of Common Stock (the
"Shares") of IMAGING DIAGNOSTIC SYSTEMS,  INC. (the "Company")  according to the
conditions set forth in the Subscription Agreement dated _________________,1999.

Date of Conversion_________________________________________

Applicable Conversion Price_________________________________

Number of Shares Issuable upon this conversion______________

Signature___________________________________________________
                           [Name]

Address_____________________________________________________

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

Phone______________________   Fax___________________________


<PAGE>




                             Assignment of Debenture

        The undersigned hereby sell(s) and assign(s) and transfer(s) unto

                  (name, address and SSN or EIN of assignee)

                                  DOLLARS ($ )
------------------------------------------------------
(principal amount of Debenture, $5,000 or integral multiples of $5,000)

of  principal  amount of this  Debenture  together  with all  accrued and unpaid
interest hereon.

DATE:                      SIGNED:
                                            (Signature must conform in all

                    respects to name of Holder shown of face of Debenture)

Signature Guaranteed:


<PAGE>


   Exhibit 10.22 Registration Rights Agreement $825,000 Convertible Debenture


<PAGE>


                          REGISTRATION RIGHTS AGREEMENT

         THIS REGISTRATION RIGHTS AGREEMENT (THE "AGREEMENT") DATED AS OF AUGUST
___, 1999, BY AND AMONG IMAGING DIAGNOSTIC SYSTEMS,  INC., a Florida corporation
(the "Company"), and the undersigned, (the "Subscriber").

W I T N E S S E T H

         WHEREAS,   pursuant  to  Subscription   Agreement  (the   "Subscription
Agreement"), by and among the Company and the Subscriber, the Company has agreed
to sell and the  Subscriber  has agreed to purchase an  aggregate of $825,000 of
convertible debentures (the "Debentures") of the Company convertible into shares
of the Company's  Common Stock, no par value per share (the "Common Stock") upon
the terms and conditions set forth in the accompanying  Subscription  Agreement;
and

         WHEREAS,  pursuant to the terms of, and in partial  consideration  for,
the Subscriber purchasing the Debentures,  the Company has agreed to provide the
Subscriber with certain registration rights with respect to the Common Stock;

         NOW THEREFORE, in consideration of the mutual promises, representation,
warranties, covenants and conditions set forth in the Subscription Agreement and
this  Registration  Rights  Agreement,  the Company and the Subscriber  agree as
follows:

         1.CERTAIN DEFINITIONS.  As  used in this  Agreement  the following
          terms  shall  have  the  following  respective meanings:

         "Closing Date" shall mean the dat net funds in the amount of $750,000
          are received by the Company.

         "Commission"  shall mean the Securities and Exchange  Commission or any
          other federal agency at the time administering the Securities Act.

         "Common Stock" shall mean the Company's Common Stock, no par value per
          share.

         "Registrable  Shares" shall mean (i) the Common Stock,  (ii) any Common
Stock of the Company issued or issuable in respect of the  Debentures  issued to
the Subscriber,  or upon any stock split,  stock dividend,  recapitalization  or
similar  event;  provided,  however,  that  shares  of  Common  Stock  or  other
securities  shall no longer be  treated as  Registrable  Shares if (a) they have
been  sold  to or  through  a  broker  or  dealer  or  underwriter  in a  public
distribution or a public  securities  transaction,  (b) they have been sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities  Act of 1933 so that all transfer  restrictions  and  restrictive
legends with respect  thereto are removed upon  consummation of such sale or (c)
they are  available  for sale under  Rule 144 or  otherwise,  in the  opinion of
counsel to the Company,  without compliance with the registration and prospectus
delivery  requirements  of the  Securities  Act of  1933  so  that  no  transfer
restrictions   or  restrictive   legends  will  appear  upon  the  Common  Stock
certificates following the consummation of such sale.

         The terms "register",  "registered" and "registration" shall refer to a
registration  effected  by  preparing  and filing a  registration  statement  in
compliance with the Securities Act of 1933 and applicable  rules and regulations
thereunder,  and  the  declaration  or  ordering  of the  effectiveness  of such
registration   statement.   Said  registration  shall  include  all  amendments,
post-effective  amendments and supplements to any such registration statement as
may be necessary  under the Act and the  regulations  of the  Commission to keep
such registration effective with respect to the Registrable Shares until two (2)
years following the Closing Date.

         "Registration Expenses" shall mean all expenses incurred by the Company
in  compliance  with  Section  2  hereof,  including,  without  limitation,  all
registration  and filing fees,  printing  expenses,  fees and  disbursements  of
counsel  for the  Company,  blue  sky  fees and  expenses,  reasonable  fees and
disbursements of one counsel for Subscriber,  and the reasonable expenses of any
special audits incident to or required by any such  registration  (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company). The Company shall not be responsible for any Underwriting
fees or Commissions.

         The "Reserved  Shares"  shall mean the shares of Common Stock  issuable
upon  conversion  of the Shares  that have been duly and  validly  reserved  for
issuance,  and upon issuance which shall be duly and validly issued, fully paid,
and non-assessable.

         The "Act" shall mean the  Securities  Act of 1933,  as amended,  or any
similar  Federal  statute,  and the  rules  and  regulations  of the  Commission
thereunder, all as the same shall be in effect at the time.

         "Selling  Expenses" shall mean all  underwriting  discounts and selling
commissions applicable to the sale of Registrable Shares.

         2.       REGISTRATION.

         (A) MANDATORY  REGISTRATION.  The Company shall use its best efforts to
prepare  and file with the SEC, no later than thirty (30) days after the Closing
Date,  a  Registration  Statement  on Form S-2 (or any  other  available  form),
covering a sufficient number of shares of Common Stock for the Subscriber but in
no event less than  5,500,000  shares of Common Stock into which the  Debentures
issued to Subscriber  would be convertible.  Such  Registration  Statement shall
state  that,  in  accordance  with  the  Securities  Act,  it also  covers  such
indeterminate number of additional shares of Common Stock as may become issuable
to prevent dilution resulting from Stock splits, or stock dividends).  If at any
time after the Closing  Date,  the number of  registered  shares of common stock
only  covers  50% of the total  number of shares of common  stock  that would be
issuable upon conversion of the then remaining balances of the Debentures issued
to the  Subscriber,  then the Company  shall,  within  twenty (20) business days
after  receipt  of  written  notice  from any  Subscriber,  either (i) amend the
Registration  Statement filed by the Company pursuant to the preceding sentence,
if such  Registration  Statement has not been  declared  effective by the SEC at
that time, to register all shares of Common Stock into which the  Debentures may
be converted, or (ii) if such Registration Statement has been declared effective
by the SEC at that time, file with the SEC an additional  Registration Statement
on Form S-2 (or any other  available  form),  to  register  the shares of Common
Stock into which the Shares may be converted that exceed the aggregate number of
shares of Common Stock already registered.

         (B) UNDERWRITTEN  OFFERING.  If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Subscribers  acting by majority in interest of the Registrable Shares subject to
such  underwritten  offering shall have the right to select one legal counsel to
represent their  interests,  and an investment  banker or bankers and manager or
managers to  administer  the  offering,  which  investment  banker or bankers or
manager  or  managers  shall be  reasonably  satisfactory  to the  Company.  The
Subscriber(s)   who  hold  the  Registrable   Shares  to  be  included  in  such
underwriting shall pay all underwriting discounts and commissions and other fees
and  expenses  of such  investment  banker or bankers and manager or managers so
selected in  accordance  with this  Section  2(b) (other than fees and  expenses
relating to registration of Registrable Shares under federal or state securities
laws,  which are  payable by the  Company  pursuant  to  Section 5 hereof)  with
respect  to their  Registrable  Shares and the fees and  expenses  of such legal
counsel so selected by the Subscriber.

         (C)      CERTAIN FEES.  The Company shall pay cash liquidated damages
as follows:

         (i) 1.0% of the  principal  amount  of the  Debentures  for each 30 day
period,  or portion thereof,  that the  registration  ceases to remain effective
during the "Registration Period" as defined in Section 3(a);

         (ii) 1.0% of the principal amount of the Debentures if the Registration
Statement  covering  this  offering  is not  declared  effective  within 90 days
following the Closing Date; and

         (iii)    2.0% of the principal  amount of the Debentures for each 30
day period,  or portion  thereof,  120 days following the
Closing Date that registration is not declared effective.

      The above damages shall continue  until the  obligation is fulfilled,  and
shall be paid within 5 business  days after each 30 day  period.  Failure of the
Company to make  payment  within  said 5 business  days  shall be  considered  a
default.  The  Company  acknowledges  that  its  failure  to  meet  any  of  its
obligations  under either Section 2(c) (i), (ii) or (iii) of this Agreement will
cause the  Subscriber  to suffer  damages in an amount that will be difficult to
ascertain.  Accordingly,  the parties agree that it is appropriate to include in
this Agreement a provision for liquidated  damages.  The parties acknowledge and
agree that the liquidated damages provision set forth in this section represents
the parties' good faith effort to qualify such damages and, as such,  agree that
the form and  amount of such  liquidated  damages  are  reasonable  and will not
constitute a penalty.  The payment of  liquidated  damages shall not relieve the
Company from its  obligations  to deliver the Common Stock pursuant to the terms
of this Agreement and the Subscription Agreement.

         3. OBLIGATION OF THE COMPANY.  In connection  with the  registration of
the Registrable Shares, the Company shall do each of the following:

         (a) Prepare promptly,  and file with the SEC within thirty (30) days of
the Closing  Date, a  Registration  Statement  with respect to not less than the
number of Registrable Shares provided in Section 2(a), above, and thereafter use
its best efforts to cause each  Registration  Statement  relating to Registrable
Shares to become  effective  the earlier of (A) five  business days after notice
from the Securities and Exchange Commission that the Registration  Statement may
be declared effective,  or (B) ninety (90) days after the Closing Date, and keep
the Registration  Statement effective at all times until two (2) years following
the Closing  Date (the  "Registration  Period"),  which  Registration  Statement
(including  any  amendments or supplements  thereto and  prospectuses  contained
therein)  shall not contain any untrue  statement of a material  fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements  therein,  in light of the circumstances in which they were made, not
misleading;

         (b)  Prepare  and  file  with  the  SEC  such   amendments   (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus  used  in  connection  with  the  Registration  Statement  as  may be
necessary  to  keep  the   Registration   effective  at  all  times  during  the
Registration  Period,  and,  during the  Registration  Period,  comply  with the
provisions  of  the  Securities  Act  with  respect  to the  disposition  of all
Registrable  Shares of the Company covered by the  Registration  Statement until
such time as all of such Registrable  Shares have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement;

         (c) Furnish to each Subscriber whose Registrable Shares are included in
the Registration  Statement and its legal counsel identified to the Company, (i)
promptly  after the same is prepared  and publicly  distributed,  filed with the
SEC, or received by the  Company,  one (1) copy of the  Registration  Statement,
each  preliminary  prospectus and  prospectus,  and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as the Subscriber may reasonably  request in order to facilitate the disposition
of the Registrable Shares owned by such Subscriber;

         (d) Use reasonable  efforts to (i) register and qualify the Registrable
Shares covered by the Registration Statement under such other securities or blue
sky laws of such  jurisdictions  as the  Subscriber(s)  who hold a  majority  in
interest of the Registrable Shares being offered reasonably request and in which
significant  volumes of shares of Common Stock are traded, (ii) prepare and file
in those jurisdictions such amendments (including post-effective amendments) and
supplements  to such  registrations  and  qualifications  as may be necessary to
maintain the effectiveness  thereof at all times during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and  qualification  in effect at all times during the Registration  Period,  and
(iv) take all other  actions  reasonably  necessary  or advisable to qualify the
Registrable Shares for sale in SUCH JURISDICTIONS:  PROVIDED,  HOWEVER, that the
Company shall not be required in connection  therewith or as a condition thereto
to (A) qualify to do business in any  jurisdiction  where it would not otherwise
be required to qualify but for this Section 3(d),  (B) subject itself to general
taxation  in any such  jurisdiction,  (C) file a general  consent  to service of
process in any such  jurisdiction,  (D) provide any undertakings that cause more
than  nominal  expense  or burden to the  Company  or (E) make any change in its
articles of  incorporation or by-laws or any then existing  contracts,  which in
each case the Board of Directors of the Company determines to be contrary to the
best interests of the Company and its stockholders;

         (e) As  promptly as  practicable  after  becoming  aware of such event,
notify each  Subscriber  of the  happening of any event of which the Company has
knowledge,  as a result of which the  prospectus  included  in the  Registration
Statement,  as then in effect,  includes any untrue statement of a material fact
or omits to state a material fact required to be stated  therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and uses its best efforts promptly to prepare a supplement
or amendment to the Registration  Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such  supplement  or  amendment to each  Subscriber  as such  Subscriber  may
reasonably request;

         (f) As  promptly as  practicable  after  becoming  aware of such event,
notify each Subscriber who holds Registrable Shares being sold (or, in the event
of an underwritten  offering,  the managing underwriters) of the issuance by the
SEC of any notice of  effectiveness or any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time;

         (g) Use its commercially reasonable efforts, if eligible, either to (i)
cause all the  Registrable  Shares covered by the  Registration  Statement to be
listed  on a  national  securities  exchange  and on  each  additional  national
securities  exchange on which  securities  of the same class or series issued by
the Company are then listed,  if any, if the listing of such Registrable  Shares
is then permitted under the rules of such exchange,  or (ii) secure  designation
of all the  Registrable  Shares  covered by the  Registration  Statement  on the
National   Association  of  Securities   Dealers  Automated   Quotations  System
("NASDAQ")  within the meaning of Rule  11Aa2-1 of the SEC under the  Securities
Exchange Act of 1934, as amended (the "Exchange  Act"), and the quotation of the
Registrable  Shares on the NASDAQ  National  Market  System;  or if, despite the
Company's commercially reasonable efforts to satisfy the preceding clause (i) or
(ii), the Company is unsuccessful in doing so, to secure NASD  authorization and
quotation  for such  Registrable  Shares on either  the  SmallCap  Market or the
over-the-counter  bulletin  board and,  without  limiting the  generality of the
foregoing,  to  arrange  for at least two  market  makers to  register  with the
National  Association of Securities Dealers,  Inc. ("NASD") as such with respect
to such Registrable Shares;

         (h)      Provide a transfer agent for the Registrable Shares not later
 than the effective date of the Registration Statement;

         (i) Cooperate with the  Subscribers who hold  Registrable  Shares being
offered to facilitate the timely  preparation and delivery of  certificates  for
the Registrable Shares to be offered pursuant to the Registration  Statement and
enable such certificates for the Registrable  Shares to be in such denominations
or amounts as the case may be, as the  Subscribers  may  reasonably  request and
registration in such names as the Subscribers may request;  and, within five (5)
business days after a Registration  Statement which includes  Registrable Shares
is ordered  effective by the SEC,  the Company  shall  deliver,  and shall cause
legal counsel selected by the Company to deliver,  to the transfer agent for the
Registrable  Shares (with copies to the Subscribers whose Registrable Shares are
included in such Registration  Statement) an appropriate instruction and opinion
of such counsel; and

         (j) Take  all  other  reasonable  actions  necessary  to  expedite  and
facilitate  distribution to the Subscriber of the Registrable Shares pursuant to
the Registration Statement.

The Company shall use its best efforts to effect such  registration  (including,
without  limitation,  the  execution  of  an  undertaking  to  file  amendments,
post-effective  amendments,  and  supplements  appropriate  qualification  under
applicable blue sky or other state  securities  laws and appropriate  compliance
with  applicable  regulations  issued under the Act and the  Regulations  of the
Commission)  as may be so requested and as would permit or  facilitate  the sale
and  distribution  of all or such  Registrable  Shares as are  specified in such
request.

         4. EXPENSES OF REGISTRATION.  Except as set forth in this Agreement the
Company shall bear all  Registration  Expenses  incurred in connection  with any
registration,  qualification or compliance of the Registrable Shares pursuant to
this Agreement. All Selling Expenses shall be born by the Subscriber.

         5. REGISTRATION PROCEDURES.  The Company shall advise the Subscriber of
the  initiation of a  registration  under the Agreement and as to the completion
thereof. At its expenses the Company will:

                  (a) Prepare and file with the Commission  such  amendments and
supplements to such registration statement and the prospectus used in connection
with  such  registration  statement  as may be  necessary  to  comply  with  the
provisions of the Act and the  Regulations of the Commission with respect to the
disposition of securities covered by such registration statement; and

                  (B) CONCERNING THE SECURITIES.The  issuance, sale and delivery
of the Shares have been duly authorized by all required  corporate action on the
part of Company,  and when issued,  sold and  delivered in  accordance  with the
terms  hereof and thereof for the  consideration  expressed  herein and therein,
will be duly and validly issued and  enforceable in accordance with their terms,
subject to the laws of bankruptcy  and  creditors'  rights  generally.  At least
5,500,000  shares of Common Stock  issuable upon  conversion  of the  Debentures
issued to  Subscriber,  based upon the  current  price of the  Company's  Common
Stock, have been duly and validly reserved for issuance and, upon issuance shall
be duly and  validly  issued,  fully paid,  and  non-assessable  (the  "Reserved
Shares"). The Company shall use its best efforts to file within twenty (20) days
additional Registration Statements and/or amendments thereto whenever the number
of  registered  shares of common  stock only  covers 50% of the total  number of
shares of common  stock  that  would be  issuable  upon  conversion  of the then
remaining balance of the Debentures issued to the Subscriber.

         Prior to conversion of all the Shares,  if at anytime the conversion of
all the Shares outstanding  results in an insufficient number of Reserved Shares
being available to cover all the  conversions,  then in such event,  the Company
will move to call and hold a shareholder's  meeting within 45 days of such event
for the  sole  purpose  of  authorizing  additional  Shares  to  facilitate  the
conversions.  In such an event the Company  shall:  (1) recommend its current or
future  officers,  directors  and other  control  people to vote their shares in
favor of  increasing  the  authorized  number of shares of Common  Stock and (2)
recommend to all  shareholders  to vote their shares in favor of increasing  the
authorized  number of shares of Common Stock . Company  represents  and warrants
that  under  no  circumstances  will it deny or  prevent  Subscriber's  right to
convert the Shares as permitted under the terms of the Subscription Agreement or
this Registration Rights Agreement.

         6.       INDEMNIFICATION.

                  (a)  The  Company  will   indemnify   and  hold  harmless  the
Subscriber, each of its stockholders,  executives,  employees,  representatives,
affiliates,  officers,  directors and partners,  and each person controlling the
Subscriber,  with respect to which  registration  has been effected  pursuant to
this Agreement against all claims,  losses, damages and liabilities (or actions,
proceedings or settlements  in respect  thereof)  arising out of or based on any
untrue  statement (or alleged untrue  statement) of a material fact contained in
any prospectus or other document incident to any such registration,  or based on
any omission (or alleged  omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any  violation  by the Company of the Act or any rule or  regulation  thereunder
applicable  to the  Company  and  will  reimburse  the  Subscriber,  each of its
stockholders,  executives,  employees,  representatives,  affiliates,  officers,
directors and partners, and each person controlling the Subscriber for any legal
and any other  expenses  as they are  reasonably  incurred  in  connection  with
investigating and defending any such claim, loss,  damage,  liability or action,
provided,  however,  that the indemnity contained in this Section 6(a) shall not
apply to amounts paid in settlement of any such claim, loss,  damage,  liability
or action if such Settlement is effected without the consent of the Company, and
provided  further  that the Company  shall not be liable in any such case to the
extent that any such claim, loss, damage,  liability or expense arises out of or
is based on any untrue  statement  or omission  based upon  written  information
furnished to the Company by the Subscriber and stated to be specifically for use
in the  registration  statement filed pursuant to this Agreement.  The foregoing
indemnity  agreement  is further  subject to the  condition  that  insofar as it
relates to any untrue  prospectus,  such indemnity  agreement shall not inure to
the  benefit  of the  foregoing  unindemnified  parties  if  copies  of a  final
prospectus  correcting the misstatement,  or alleged  misstatement,  omission or
alleged  omission upon which such loss,  liability,  claim or damage is based is
timely delivered to such indemnified  party and a copy thereof was not furnished
to the person asserting the loss, liability, claim or damage.

                  (b) The  Subscriber  will  indemnify the Company,  each of its
stockholders,  executives,  employers,  representatives,  affiliates, directors,
officers and each person who controls the Company  within the meaning of the Act
and the rules and regulations thereunder against all claims, losses, damages and
liabilities (or actions, proceedings, or settlements in respect thereof) arising
out of or based on any untrue  statement  (or  alleged  untrue  statement)  of a
material fact contained in any prospectus or other document incident to any such
registration or based upon any omission (or alleged omission) to state therein a
material fact required to be stated  therein or necessary to make the statements
therein not  misleading,  or any  violation of the Act or any rule of regulation
thereunder  applicable to the Company and will  reimburse  the Company,  and its
stockholders,  executives,  employers,  representatives,  affiliates, directors,
officers,  partners,  persons,  underwriters or control persons for any legal or
any other  expense  reasonably  incurred in  connection  with  investigating  or
defending any such claim, loss, damage, liability or action, in each case to the
extent,  and only to the extent,  that such untrue  statement (or alleged untrue
statement) or omission or alleged  omission)  relating to such holder is made in
such registration statement,  prospectus, offering circular or other document in
reliance  upon and in  conformity  with  written  information  furnished  to the
Company  by the  Subscriber  and  stated  to be  specifically  for use  therein;
provided, however, that the obligations of the Subscriber shall be limited to an
amount equal to the proceeds to the  Subscriber  and provided  further that such
indemnification  obligations  shall not apply if the Company modifies or changes
to a material extent the written information furnished by such Holder.

                  (c) Each party entitled to indemnification  under this Section
6 (an  "Indemnified  Party") shall give notice to the party  required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual  knowledge of any claim as to which indemnity may be sought and shall
permit the  Indemnifying  Party to assume  the  defense of any such claim or any
litigation  resulting  therefrom,  provided  that  counsel for the  Indemnifying
Party,  who shall conduct the defense of such claim or any litigation  resulting
therefrom, shall be approved by the Indemnified Party, (whose approval shall not
unreasonably be withheld or delayed),  and the Indemnified Party may participate
in such defense at such indemnified  party's expense,  and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the  Indemnifying  Party of its  obligations  under this  Agreement.  No
Indemnifying Party, in the defense of any such claim or litigation, shall except
with the consent of each Indemnified Party,  consent to entry of any judgment or
enter into any  settlement  which  does not  include  as an  unconditional  term
thereof the giving by the claimant or plaintiff to such  Indemnified  Party of a
release  from  all  liability  in  respect  to such  claim or  litigation.  Each
Indemnified  Party shall furnish such information  regarding itself or the claim
in question as an  Indemnifying  Party may reasonably  request in writing and as
shall be  reasonably  required  in  connection  with  defense  of such claim and
litigation resulting therefrom.

         7.  INFORMATION  BY  HOLDER  OF  REGISTRABLE   SHARES.   The  Company's
obligation  to register  the  Registrable  Shares shall be  contingent  upon the
Subscriber's  timely  furnishing to the Company such  information  regarding the
Subscriber and the distribution proposed by such holder of Registrable Shares as
the  Company  may  reasonably  request  in  writing  and as shall be  reasonably
required in connection with any registration referred to in this Agreement.

         8. TRANSFERS OR ASSIGNMENTS OF REGISTRATION  RIGHTS.  The  Subscriber's
rights under this  Agreement  to cause the Company to register  the  Registrable
Shares may be transferred  or assigned by the  Subscriber  only to affiliates of
the Subscriber or to a purchaser of the Shares, or any portion of the Shares, in
the  principal  amount  of at  least  $50,000  or at least  50  Shares  and such
assignment  shall only be  effective  upon  delivery  of written  notice of such
assignment to the Company within thirty (30) days of the  assignment.  Upon such
assignment  the  assignee  shall  have all the  rights  and  obligations  of the
Subscriber hereunder.

         9.       MISCELLANEOUS.

         9.1 GOVERNING LAW. This agreement shall be governed by and construed in
accordance  with the laws of the  State of  Florida  without  giving  effect  to
conflict of laws principles.

         9.2 SUCCESSORS AND ASSIGNS.  Except as otherwise  provided herein,  the
provisions  hereof  shall  inure to the  benefit  of, and be binding  upon,  the
successors, assigns, heirs, executors and administrators of the parties hereto.

         9.3 ENTIRE  AGREEMENT.  This Agreement  constitutes the full and entire
understanding  and  agreement  between  the  parties  with regard to the subject
matter hereof.

         9.4  NOTICES,  ETC.  All notices and other  communications  required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage  prepaid,  or  delivered  by hand or by  messenger  or courier  delivery
service,  addressed  (a) if to the  Subscriber,  at the  address  listed  in the
Subscription  Agreement or at such other  address as the  Subscriber  shall have
furnished to the Company in writing,  or (b) if to the Company, at its executive
office,  or at such other  address as the Company  shall have  furnished  to the
Subscriber in writing.

         9.5 DELAYS OR  OMISSIONS.  No delay or omission to exercise  any right,
power or remedy  accruing  to any  holder of any  Registrable  Shares,  upon any
breach or default of the Company  under this  Agreement,  shall  impair any such
right,  power, or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default,  or an acquiesce therein, or of or in any similar
breach or  default  thereunder  occurring;  nor shall any  waiver of any  single
breach or default be deemed a waiver of any other  breach or default  thereafter
occurring.  Any waiver,  permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing.  All  remedies,  either  under this  Agreement  or by law or  otherwise
afforded to any holder, shall be cumulative and not alternative.

         9.6  COUNTERPARTS.  This  agreement  may be  executed  in any number of
counterparts,  each of which shall be enforceable  against the parties  actually
executing such  counterparts,  and all of which  together  shall  constitute one
instrument.  An  executed  facsimile  counterpart  of this  Agreement  shall  be
effective as an original.

         9.7 SEVERABILITY.  In the case any provision of this agreement shall be
invalid, illegal or unenforceable,  the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

         9.8 AMENDMENTS.  This provision of this Agreement may be amended at any
time and from time to time, and  particular  provisions of this Agreement may be
waived,  with and only with an  agreement  or consent  in writing  signed by the
Company  and by the  owners of all of the  Registrable  Shares as of the date of
such amendment or waiver.

         9.9 TERMINATION OR REGISTRATION  RIGHTS.This  Agreement shall terminate
at such time as there ceases to be any outstanding Shares,  Debentures issued to
the Subscriber and Series B Shares.

         The foregoing  Registration  Rights  Agreement is hereby executed as of
the date first above written.

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                         By:____________________________
                           Linda B. Grable, President

HOLDER OF THE CONVERTIBLE DEBENTURE
CHARLTON AVENUE, LLC

By__________________________

       Exhibit 10.23 Subscription Agreement $825,000 Convertible Debenture


<PAGE>



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

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

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

THE SECURITIES  OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE  REGISTRATION  REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE  TRANSFERRED  OR RESOLD  EXCEPT AS  PERMITTED  UNDER  SUCH LAWS  PURSUANT  TO
REGISTRATION OR AN EXEMPTION  THEREFROM.  THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES  AND EXCHANGE  COMMISSION OR ANY OTHER  REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS  OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING  MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

                           Maximum Offering: $825,000

         This offering consists of $825,000 of the Company's Convertible
                         Debentures convertible into the

                             Company's Common Stock.

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

                             SUBSCRIPTION AGREEMENT

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







                             SUBSCRIPTION PROCEDURES

         The Convertible  Debentures of Imaging  Diagnostic  Systems,  Inc. (the
"Company" or "Seller") is being offered (the  "Debentures").  The  Debentures to
purchase  Common Stock will be transferable to the extent that any such transfer
is  permitted  by law.  This  offering  is  being  made in  accordance  with the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Rule 506 of Regulation D promulgated  under the Act (the
"Regulation D Offering").

         In order to purchase Debentures,  each subscriber (the "Investor") must
complete  and  execute  a  questionnaire  (the  "Investor   Questionnaire"),   a
subscription agreement (the "Subscription  Agreement"),  and an Internal Revenue
Service Form W-9 or other  appropriate  form as may be applicable.  In addition,
the  Investor  must make a payment  to an escrow  fund for the  purchase  of the
Debentures.  All subscriptions  are subject to acceptance by the Company,  which
shall not occur until the Company has  returned the Company  Signature  Page and
the Debentures representing the Debentures purchased to the Investor.

         The  Investor  Questionnaire  is  designed  to enable the  Investor  to
demonstrate the minimum legal  requirements  under federal and state  securities
laws  to  purchase  the   Debentures.   The  Signature  Page  for  the  Investor
Questionnaire and the Subscription Agreement contain representations relating to
the subscription and should be reviewed carefully by each investor.

                  Also  included  is  an  Internal  Revenue  Service  Form  W-9:
                    "Request  for  Taxpayer   Identification  Number  and
                  Certification"  for U.S.  citizens or residents  of the U.S.
                    for U.S.  federal  income tax  purposes  only.  (Foreign
                  investors should consult their tax advisors  regarding the
                    need to complete Internal Revenue Service Form W-9 and any
                  other forms that may be required).

         If you are a foreign person or foreign entity,  you may be subject to a
withholding  tax equal to 30% of any premiums  paid by the Company.  In order to
eliminate  or reduce  such  withholding  tax you may submit a properly  executed
I.R.S.  Form 4224  (Exemption  from  Withholding  of Tax on  Income  Effectively
Connected  with the  Conduct of a Trade or  Business  in the  United  States) or
I.R.S. Form 1001 (Ownership  Exemption or Reduced Trade  Certificate),  claiming
exemption from  withholding or eligibility  for treaty benefits in the form of a
lower rate of withholding tax on interest or premiums.

         Payment must be made by wire transfer as provided below:

Immediately  available  funds  should be sent via wire  transfer  to the  escrow
account  stated  below  and  the  completed  subscription  documents  should  be
forwarded to the Escrow Agent. Your subscription  funds will be deposited into a
non-interest bearing escrow account of Joseph B. LaRocco, Esq., Escrow Agent, at
First  Union  Bank of  Connecticut,  Stamford,  Connecticut.  In the  event of a
termination  of  the  Offering  or  the  rejection  of  this  subscription,  all
subscription funds will be returned without interest.  The wire instructions are
as follows:

         First Union Bank of Connecticut
         Executive Office
         300 Main Street, P. O. Box 700
         Stamford, CT  06904-0700

         ABA #:   021101108

         Swift #: FUNBUS33INT
         Account #:        20000-2072298-4

         Acct.Name:        Joseph B. LaRocco, Esq.  Trustee Account

                             SUBSCRIPTION AGREEMENT

THE SECURITIES  OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE  REGISTRATION  REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE  TRANSFERRED  OR RESOLD  EXCEPT AS  PERMITTED  UNDER  SUCH LAWS  PURSUANT  TO
REGISTRATION OR AN EXEMPTION  THEREFROM.  THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS  OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING  MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

TO:      IMAGING DIAGNOSTIC SYSTEMS, INC.

         This Subscription Agreement is made between IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida  corporation,  (the "Company" or "Seller"),  and the undersigned
prospective purchaser  ("Purchaser") who is subscribing hereby for the Company's
Convertible  Debentures,  no par value (the  "Debentures"),  together  with a 7%
dividend  ,  to be  paid  in  cash  or  freely  trading  Common  Stock  (if  the
Registration  Statement  covering this  offering has been declared  effective at
that time) in the Company's sole discretion, at the time of each conversion. The
Debentures being offered will be separately  transferable to the extent that any
such transfer is permitted by law. The  conversion  terms of the  Debentures are
set forth in Section 4 hereof and the form of Notice of  Conversion  is attached
hereto as Exhibit A. This  subscription  is submitted to Purchaser in accordance
with and  subject to the terms and  conditions  described  in this  Subscription
Agreement  together  with any  Exhibits  thereto,  relating to an offering  (the
"Offering")  of the  Debentures.  The Offering  comprises (i) an offering of the
Debentures to accredited  investors (the  "Regulation D Offering") in accordance
with the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D promulgated under the
Act ("Regulation D").

1.       SUBSCRIPTION.

         (a) The  undersigned  hereby  irrevocably  subscribes for and agrees to
purchase  $825,000  of the  Company's  Debentures.  The  Company  shall pay a 7%
premium,  to be paid in cash or freely trading Common Stock (if the Registration
Statement  covering this Offering has been declared  effective at that time), in
the Company's sole  discretion,  at the time of each  conversion  (the "Dividend
Payment  Date").  If the premium is to be paid in cash,  the Company  shall make
such payment  within five  business  days of the Dividend  Payment  Date. If the
premium is to be paid in Common  Stock,  said Common Stock shall be delivered to
the Purchaser, or per Purchaser's instructions, within five business days of the
Dividend Payment Date. The Debentures are subject to automatic conversion at the
end of two  years  from  the date of  issuance  at  which  time  all  Debentures
outstanding will be automatically  converted based upon the formula set forth in
Section 4(d) hereof.  The closing  shall be deemed to have  occurred on the date
the funds are received by the Company (the "Closing Date"). The Company may draw
down the third tranche in the amount of $825,000)  anytime sixty (60) days after
the  effective  date  of the  Registration  Statement  as  long  as the  Company
maintains  an average  closing bid price of $.45 for the ten (10)  trading  days
immediately  prior to the date the Company  requests the third funding  tranche.
The  Debentures  shall  be  secured  by a  mortgage  on the  company's  land and
building.  The mortgage shall only be released after the Registration  Statement
covering the Common Stock  underlying the  Debentures,  the Series I Convertible
Preferred  Stock and the Series B Convertible  Preferred Stock has BEEN DECLARED
EFFECTIVE AND upon the earlier of (a) the day the Company  qualifies for listing
on AMEX or  NASDAQ,  as long as said  listing  requirements  are not  being  met
through a reverse split of the  Company's  Common Stock or (b) 180 days from the
date the Company receives the third tranche, as described above.

         (b) Upon  receipt  by the  Company  of the  requisite  payment  for the
Debentures being purchased, the Debentures so purchased will be forwarded by the
Escrow Agent, Joseph B. LaRocco, to the Purchaser and the name of such Purchaser
will be registered on the Preferred  Stock  transfer books of the Company as the
record  owner of such  Debentures.  The Escrow Agent shall not be liable for any
action  taken or omitted  by him in good faith and in no event  shall the Escrow
Agent  be  liable  or  responsible  except  for the  Escrow  Agent's  own  gross
negligence or willful  misconduct.  The Escrow Agent has made no representations
or warranties in connection  with this  transaction and has not been involved in
the negotiation of the terms of this Agreement or any matters relative  thereto.
Seller and Purchaser  each agree to indemnify and hold harmless the Escrow Agent
from and with respect to any suits,  claims,  actions or liabilities  arising in
any way out of this  transaction  including  the  obligation to defend any legal
action  brought which in any way arises out of or is related to this  Agreement.
The Escrow Agent is not  rendering  securities  advice to anyone with respect to
this proposed transaction;  nor is the Escrow Agent opining on the compliance of
the proposed transaction under applicable securities law.

2.       REPRESENTATIONS AND WARRANTIES.

         The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:

                  (a) The undersigned has been furnished with, and has carefully
         read the  applicable  form of  Registration  Rights  AGREEMENT  ANNEXED
         HERETO  AS  EXHIBIT B (THE  "REGISTRATION  RIGHTS  AGREEMENT"),  AND is
         familiar with and understands  the terms of the Offering.  With respect
         to tax and other economic  considerations  involved in his  investment,
         the  undersigned  is not relying on the Company.  The  undersigned  has
         carefully  considered and has, to the extent the  undersigned  believes
         such   discussion   necessary,   discussed   with   the   undersigned's
         professional   legal,  tax,   accounting  and  financial  advisors  the
         suitability  of  an  investment  in  the  Company,  by  purchasing  the
         Debentures,   for  the  undersigned's   particular  tax  and  financial
         situation  and has  determined  that the  investment  being made by the
         undersigned is a suitable investment for the undersigned.

                  (b) The undersigned acknowledges that all documents,  records,
         and books  pertaining  to this  investment  which the  undersigned  has
         requested have been made available for inspection by the undersigned.

                  (c) The  undersigned  has had a reasonable  opportunity to ask
         questions  of and receive  answers  from a person or persons  acting on
         behalf of the Company  concerning  the Offering and all such  questions
         have been answered to the full satisfaction of the undersigned.

                  (d) The  undersigned  will not sell or otherwise  transfer the
         Debentures or the Debentures  issued upon  conversion of the Debentures
         without  registration under the Act or applicable state securities laws
         or an exemption  therefrom.  The  Debentures  have not been  registered
         under the Act or under  the  securities  laws of  certain  states.  The
         Common Stock  underlying  the  Debentures  are to be  registered by the
         Company  pursuant  to the terms of the  Registration  Rights  Agreement
         attached  hereto as Exhibit B and  incorporated  herein and made a part
         hereof.  The undersigned  represents that the undersigned is purchasing
         the Debentures for the  undersigned's  own account,  for investment and
         not with a view to resale or distribution except in compliance with the
         Act. The undersigned does not now have or, in the future, will not take
         any short  position or hedge  position in the  Company's  Common  Stock
         until  the total  number  of  Debentures  are  converted,  nor will the
         undersigned  make any promissory notes and/or pledges to that effect of
         the Company's Common Stock. The undersigned has not offered or sold any
         portion of the Debentures  being acquired nor does the undersigned have
         any present  intention  of dividing  the  Debentures  with others or of
         selling,  distributing  or  otherwise  disposing  of any portion of the
         Debentures  either  currently  or  after  the  passage  of a  fixed  or
         determinable period of time or upon the occurrence or non-occurrence of
         any predetermined event or circumstance in violation of the Act. Except
         as provided in the Registration  Rights  Agreement,  the Company has no
         obligation to register the Debentures.

                  (e)  The  undersigned  recognizes  that an  investment  in the
         Debentures  involves  substantial  risks,  including loss of the entire
         amount of such investment.  Further, the undersigned has carefully read
         and  considered  the  schedule  entitled  Pending   Litigation  matters
         attached hereto as Exhibit C.

                  (f)  Legends  (i)  The  undersigned   acknowledges  that  each
         certificate  representing the Debentures unless registered  pursuant to
         the  Registration  Rights  Agreement,  shall be  stamped  or  otherwise
         imprinted with a legend substantially in the following form:

                  THE  SECURITIES  EVIDENCED  BY  THIS  CERTIFICATE  MAY  NOT BE
                  OFFERED  OR  SOLD,  TRANSFERRED,   PLEDGED,   HYPOTHECATED  OR
                  OTHERWISE  DISPOSED  OF EXCEPT (i)  PURSUANT  TO AN  EFFECTIVE
                  REGISTRATION  STATEMENT  UNDER THE  SECURITIES ACT OF 1933, AS
                  AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT
                  (OR  ANY  SIMILAR   RULE  UNDER  SUCH  ACT   RELATING  TO  THE
                  DISPOSITION  OF  SECURITIES),  OR (iii) IF AN  EXEMPTION  FROM
                  REGISTRATION UNDER SUCH ACT IS AVAILABLE.  NOTWITHSTANDING THE
                  FOREGOING,   THE  COMMON  STOCK  INTO  WHICH  THE   SECURITIES
                  EVIDENCED BY THIS CERTIFICATE ARE CONVERTIBLE ARE ALSO SUBJECT
                  TO THE  REGISTRATION  RIGHTS SET FORTH IN EACH OF THAT CERTAIN
                  SUBSCRIPTION  AGREEMENT AND  REGISTRATION  RIGHTS AGREEMENT BY
                  AND BETWEEN THE HOLDER HEREOF AND THE COMPANY,  A COPY OF EACH
                  IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.

                  (ii) The Common Stock issued upon conversion shall contain the
following legend:

                  THE  SECURITIES  REPRESENTED  HEREBY HAVE BEEN INCLUDED IN THE
                  COMPANY'S  REGISTRATION  STATEMENT  INITIALLY  FILED  WITH THE
                  SECURITIES AND EXCHANGE  COMMISSION ON  __________,  199_, AND
                  MAY BE SOLD IN ACCORDANCE WITH THE COMPANY'S  PROSPECTUS DATED
                  ___________,  199_,  WHICH  FORMS A PART OF SUCH  REGISTRATION
                  STATEMENT,   OR  AN  OPINION  OF  COUNSEL  OR  OTHER  EVIDENCE
                  ACCEPTABLE TO THE  CORPORATION  THAT SUCH  REGISTRATION IS NOT
                  REQUIRED.

                  (g) The undersigned  acknowledges and agrees that it shall not
         be entitled to seek any remedies  with respect to the Offering from any
         party other than the Company.

                  (h) This  Subscription  Agreement is executed and delivered on
         behalf of a corporation,  and: (i) such  corporation has the full legal
         right and power and all authority and approval  required (a) to execute
         and deliver,  or authorize execution and delivery of, this Subscription
         Agreement and all other instruments (including, without limitation, the
         Registration  Rights Agreement)  executed and delivered by or on behalf
         of such  corporation in connection  with the purchase of the Debentures
         and (b) to purchase and hold the Debentures:  (ii) the signature of the
         party  signing  on  behalf of such  corporation  is  binding  upon such
         corporation;  and (iii) such  corporation  has not been  formed for the
         specific  purpose of acquiring the  Debentures,  unless each beneficial
         owner of such entity is qualified as an accredited  investor within the
         meaning of Rule 501(a) of  Regulation D and has  submitted  information
         substantiating such individual qualification.

                  (i) The  undersigned  shall  indemnify  and hold  harmless the
         Company  and each  stockholder,  executive,  employee,  representative,
         affiliate,  officer,  director or control person of the Company, who is
         or may be a party or is or may be  threatened to be made a party to any
         threatened, pending or contemplated action, suit or proceeding, whether
         civil,  criminal,  administrative  or  investigative,  by  reason of or
         arising from any actual or alleged misrepresentation or misstatement of
         facts or omission to  represent  or state facts made or alleged to have
         been made by the  undersigned  to the  Company or omitted or alleged to
         have been omitted by the undersigned, concerning the undersigned or the
         undersigned's  subscription  for and purchase of the  Debentures or the
         undersigned's  authority to invest or financial  position in connection
         with   the   Offering,   including,   without   limitation,   any  such
         misrepresentation,   misstatement   or  omission   contained   in  this
         Subscription  Agreement,   the  Questionnaire  or  any  other  document
         submitted by the undersigned,  against losses, liabilities and expenses
         for  which  the  Company,  or  any  stockholder,  executive,  employee,
         representative,  affiliate,  officer, director or control person of the
         Company has not otherwise been  reimbursed  (including  attorneys' fees
         and  disbursements,  judgments,  fines and amounts paid in  settlement)
         actually  and  reasonably  incurred by the  Company,  or such  officer,
         director stockholder, executive, employee, representative, affiliate or
         control person in connection with such action, suit or proceeding.

                  (j) The undersigned is not subscribing for the Debentures as a
         result of, or pursuant to, any advertisement,  article, notice or other
         communication published in any newspaper,  magazine or similar media or
         broadcast  over  television  or radio or  presented  at any  seminar or
         meeting.

                  (k) The undersigned or the undersigned's  representatives,  as
         the case may be, has such  knowledge and  experience in financial,  tax
         and  business  matters so as to enable the  undersigned  to utilize the
         information  made available to the  undersigned in connection  with the
         Offering  to  evaluate  the  merits and risks of an  investment  in the
         Debentures  and to make an informed  investment  decision  with respect
         thereto.

                  (l) The Purchaser is  purchasing  the  Debentures  for its own
         account  for  investment,  and not with a view  toward  the  resale  or
         distribution  thereof.  Purchaser is neither an  underwriter  of, nor a
         dealer in, the Debentures or the Common Stock issuable upon  conversion
         thereof and is not  participating  in the distribution or resale of the
         Debentures or the Common Stock issuable upon conversion thereof.

3.       SELLER REPRESENTATIONS.

         (A) CONCERNING THE  SECURITIES.The  issuance,  sale and delivery of the
Debentures  have been duly  authorized by all required  corporate  action on the
part of the Company,  and when issued, sold and delivered in accordance with the
terms  hereof and thereof for the  consideration  expressed  herein and therein,
will be duly and validly issued and  enforceable in accordance with their TERMS,
SUBJECT TO THE LAWS OF BANKRUPTCY  AND  CREDITORS'  RIGHTS  GENERALLY.  AT LEAST
5,500,000 shares of Common Stock issuable upon conversion of the Debentures have
been duly and validly reserved for issuance and, upon issuance shall be duly and
validly issued,  fully paid, and  non-assessable  (the "Reserved  Shares").  The
Company  shall  use  its  best  efforts  to  file  within  30  days   additional
Registration  Statements and/or amendments  thereto whenever the Reserved Shares
only  cover 50% of the  Debentures,  Series I  Convertible  Preferred  Stock and
Series B Convertible Preferred Stock.

         Prior to conversion of all the Debentures, if at anytime the conversion
of all the Debentures  outstanding results in an insufficient number of Reserved
Shares being available to cover all the conversions and exercises,  then in such
event, the Company will move to call and hold a shareholders'  meeting within 45
days  of  such  event  for the  purpose  of  authorizing  additional  shares  to
facilitate the conversions. In such an event the Company shall: (1) recommend to
its current or future officers, directors and other control people to vote their
Shares in favor of increasing  the  authorized  number of Shares of Common Stock
and (2)  recommend  to all  stockholders  to  vote  their  Shares  in  favor  of
increasing  the  authorized  number  of Shares  of  Common  Stock . The  Company
represents and warrants that under no circumstances  other,  than the default of
Purchaser  or as  provided  in  Section  5  hereof,  will  it  deny  or  prevent
Purchaser's right to convert the Debentures as permitted under the terms of this
Subscription Agreement or the Registration Rights Agreement.

         (B)  AUTHORITY  TO  ENTER  AGREEMENT.  This  Agreement  has  been  duly
authorized,  validly  executed  and  delivered on behalf of the Company and is a
valid and binding  agreement in  accordance  with its terms,  subject to general
principles of equity and to bankruptcy or other laws  affecting the  enforcement
of creditors' rights generally.

                  (C)  NON-CONTRAVENTION.  The  execution  and  delivery of this
Agreement  and the  consummation  of the  issuance  of the  Debentures,  and the
transactions contemplated by this Agreement do not and will not conflict with or
result  in a breach by the  Company  of any of the  terms or  provisions  of, or
constitute  a default  under,  the articles of  incorporation  or by-laws of the
Company, or any indenture,  mortgage, deed of trust, or other material agreement
or  instrument  to  which  the  Company  is a party or by which it or any of its
properties  or assets  are bound,  or any  existing  applicable  law,  rule,  or
regulation of the United States or any State thereof or any  applicable  decree,
judgment,  or order of any Federal or State court,  Federal or State  regulatory
body,  administrative  agency or other United  States  governmental  body having
jurisdiction over the Company or any of its properties or assets.

         (D) COMPANY  COMPLIANCE.  The Company  represents and warrants that the
Company  and  its  subsidiaries  are:  (i) in  full  compliance,  to the  extent
applicable,  with all reporting  obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; (ii) not in violation of any
term or  provision  of its article of  incorporation  or  by-laws;  (iii) not in
default  in the  performance  or  observance  of any  obligation,  agreement  or
condition  contained  in any  bond,  debenture,  note or any other  evidence  of
indebtedness or in any mortgage, deed of trust, indenture or other instrument or
agreement to which they are a party,  either  singly or jointly,  by which it or
any of their  property  is bound or  subject  except at set forth in  Exhibit C.
Furthermore,  the  Company  is not  aware of any  other  facts  which it has not
disclosed which could have a material adverse effect on the business,  condition
(financial  or  otherwise),  operations,  earnings,  performance,  properties or
prospects of the Company and its subsidiaries taken as a whole.

         (E) PENDING  LITIGATION.  Except as  otherwise  disclosed in Exhibit C,
there is (i) no action, suit or proceeding before or by any court, arbitrator or
governmental body now pending or, to the knowledge of the Company, threatened or
contemplated  to which the  Company  or any of its  subsidiaries  is or may be a
party  or to  which  the  business  or  property  of the  Company  or any of its
subsidiaries  is or may be  bound  or  subject,  (ii)  no  law,  statute,  rule,
regulation,  order or ordinance that has been enacted,  adopted or issued by any
governmental body or that, to the knowledge of the Company, has been proposed by
any governmental body materially  adversely  affecting the Company or any of its
subsidiaries, (iii) no injunction, restraining order or order of any nature by a
federal,  state or foreign court or governmental body of competent  jurisdiction
to which the Company or any of its  subsidiaries  is subject issued that, in the
case of clauses (i), (ii) and (iii) above,  (x) is reasonably  likely to, singly
or in the  aggregate,  result in a  material  adverse  effect  on the  business,
condition   (financial  or  otherwise),   operations,   earnings,   performance,
properties or prospects of the Company effect,  and its subsidiaries  taken as a
whole or (y) would  interfere  with or  adversely  affect  the  issuance  of the
Debentures  reasonably  likely  to render  this  Subscription  Agreement  or the
Debentures, or any portion thereof, invalid or unenforceable.

         (F)  ISSUANCE OF THE  DEBENTURES.  No action has been taken and no law,
statute,  rule,  regulation,  order or ordinance  has been  enacted,  adopted or
issued by any governmental  body that prevents the issuance of the Debentures or
the Common Stock issuable upon conversion  thereof;  no injunction,  restraining
order  or  order  of any  nature  by a  federal  or  state  court  of  competent
jurisdiction has been issued that prevents the issuance of the Debentures or the
Common Stock issuable upon thereof or suspends the sale of the Debentures or the
Common  Stock  issuable  upon  conversion  thereof in any  jurisdiction;  and no
action,  suit or proceeding is pending  against or, to the best knowledge of the
Company,  threatened against or affecting,  the Company, any of its subsidiaries
or, to the best knowledge of the Company,  before any court or arbitrator or any
Governmental Body that, if adversely determined,  would prohibit, interfere with
or  adversely  affect the issuance or  marketability  of the  Debentures  or the
Common  Stock  issuable  upon  conversion  thereof  or render  the  Subscription
Agreement or the Debentures , or any portion thereof, invalid or unenforceable.

         (g) The Company  shall  indemnify  and hold  harmless the Purchaser and
each  stockholder,  executive,  employee,  representative,  affiliate,  officer,
director or control person of the  Purchaser,  who is or may be a party or is or
may be threatened to be made a party to any threatened,  pending or contemplated
action,  suit  or  proceeding,   whether  civil,  criminal,   administrative  or
investigative,   by  reason  of  or   arising   from  any   actual  or   alleged
misrepresentation  or  misstatement  of facts or omission to  represent or state
facts  made or  alleged to have been made by the  Company  to the  Purchaser  or
omitted or alleged to have been omitted by the Company, concerning the Purchaser
or the  Purchaser's  subscription  for and  purchase  of the  Debentures  or the
Purchaser 's authority to invest or financial  position in  connection  with the
Offering,   including,   without   limitation,   any   such   misrepresentation,
misstatement  or  omission  contained  in  this  Subscription   Agreement,   the
Questionnaire  or any other document  submitted by the Company,  against losses,
liabilities and expenses for which the Purchaser, or any stockholder, executive,
employee, representative,  affiliate, officer, director or control person of the
Purchaser has not  otherwise  been  reimbursed  (including  attorneys'  fees and
disbursements,  judgments,  fines and amounts paid in  settlement)  actually and
reasonably  incurred by the Purchaser,  or such officer,  director  stockholder,
executive, employee,  representative,  affiliate or control person in connection
with such action, suit or proceeding.

         (H) NO CHANGE.  Other than filings  required by the Blue Sky or federal
securities  law,  no  consent,  approval  or  authorization  of or  designation,
declaration or filing with any governmental or other regulatory authority on the
part of the Company is required in connection with the valid execution, delivery
and performance of this Agreement.  Any required  qualification  or notification
under applicable  federal  securities laws and state Blue Sky laws of the offer,
sale and  issuance of the  Debentures,  has been  obtained on or before the date
hereof or will have been obtained within the allowable period thereafter,  and a
copy thereof will be forwarded to counsel for the Purchaser.

         (I) TRUE STATEMENTS.  Neither this Agreement nor any of the "Disclosure
Documents",  as hereinafter defined, contains any untrue statement of a material
fact or  omits  to  state  any  material  fact  necessary  in  order to make the
statements  contained  herein  or  therein  not  misleading  in the light of the
circumstances  under which such  statements  are made.  There  exists no fact or
circumstances  which, to the knowledge of the Company,  materially and adversely
affects  the  business,  properties  or  assets,  or  conditions,  financial  or
otherwise,  of the  Company,  which has not been set forth in this  Subscription
Agreement or disclosed in such documents.

         (j) The  Purchaser  has been  advised that the Company has not retained
any independent professionals to review or comment on this Offering or otherwise
protect the  interests of the  Purchaser.  Although the Company has retained its
own  counsel,  neither  such  counsel  nor any other firm,  including  Joseph B.
LaRocco,  Esq., has acted on behalf of the Purchaser,  and the Purchaser  should
not rely on the Company's legal counsel or Joseph B. LaRocco,  Esq. with respect
to any matters herein described.

         (k) There has never been represented,  guaranteed,  or warranted to the
undersigned by any broker,  the Company,  its officers,  directors or agents, or
employees or any other person, expressly or by implication (i) the percentage of
profits  and/or  amount  of or  type  of  consideration,  profit  or  loss to be
realized,  if any, as a result of the  Company's  operations;  and (ii) that the
past performance or experience on the part of the management of the Company,  or
of any other person, will in any way result in the overall profitable operations
of the Company.

         (L) PRIOR PREFERRED STOCK ISSUED UNDER REGULATION S OR REGULATION D. In
the past  thirty-six  months the  Company  raised  $3,850,000  in  Regulation  S
offerings of Preferred Stock of which none remains unconverted.  The Company has
raised $6,950,000 in Regulation D offerings of Preferred Stock and Debentures in
the past  thirty-six  months of which  the  principal  amount  of  approximately
$5,930,000 remains unconverted.

         (M) CURRENT  AUTHORIZED  DEBENTURES.  As of August 2, 1999,  there were
100,000,000  authorized  Debentures  of  Common  Stock  of  which  approximately
39,381,401 shares of Common Stock were issued and outstanding on a fully diluted
basis

         (N)  DISCLOSURE  DOCUMENTS.   The  Disclosure  Documents  are  all  the
documents (other than preliminary  materials) that the Company has been required
to file with the  Securities and Exchange  Commission  (the "SEC") from June 30,
1998,  to  the  date  hereof  including  the  Company's  Definitive  Information
Statement and the  Registration  Statement on Form S-2, as amended.  As of their
respective  dates,  none  of  the  Disclosure  Documents  contained  any  untrue
statement of a material  fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the  circumstances  under which they were made,  not  misleading,  and except as
disclosed in the  Disclosure  Documents no material event has occurred since the
Company's  filing on Form  10-KSBA  for the year ended June 30, 1998 which could
make  any  of  the  disclosures  contained  therein  misleading.  The  financial
statements  of the  Company  included  in the  Disclosure  Documents  have  been
prepared in accordance with generally accepted accounting  principles applied on
a consistent  basis during the periods  involved  (except as may be indicated in
the notes  thereto or, in the case of unaudited  financial  statements,  subject
only to normal  recurring  year-end  audit  adjustments)  and present fairly the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the  consolidated  results of their  operations  and
changes in financial position for the periods then ended. Purchaser acknowledges
that the  Finiancial  Statements  contained  in Form 10-KSB and the Form S-2 are
being amended pursuant to SEC comments.

         (O) INFORMATION  SUPPLIED.  The information  supplied by the Company to
Purchaser in connection with the offering of the Debentures does not contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements,  in the light of the  circumstances  in which they were
made,  not  misleading.  There  exists no fact or  circumstances  which,  to the
knowledge  of the  Company,  materially  and  adversely  affects  the  business,
properties, assets, or conditions,  financial or otherwise, of the Company which
has not been set forth in this Agreement or disclosed in such documents.

         (P) DELIVERY  INSTRUCTIONS.  On the Closing Date the  Debentures  being
purchased  hereunder  shall be  delivered to Joseph B.  LaRocco,  Esq. as Escrow
Agent,  who will  simultaneously  wire to the  Company  the funds  being held in
escrow,  less  placement  fees and escrow  fees,  at which time the Escrow Agent
shall then have the Debentures  delivered to the Purchaser,  per the Purchaser's
instructions.

         (Q) NON-CONTRAVENTION.  The execution and delivery of this Agreement by
the Company, the issuance of the Debentures, and the consummation by the Company
of the other  transactions  contemplated by this Agreement,  do not and will not
conflict  with or  result  in a breach  by the  Company  of any of the  terms or
provisions  of,  or  constitute  a  default  under,   the  (i)   certificate  of
incorporation or by-laws of the Company, (ii) any indenture,  mortgage,  deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound,  (iii) any material
existing applicable law, rule, or regulation or any applicable decree, judgment,
or (iv) order of any court,  United  States  federal or state  regulatory  body,
administrative  agency, or other governmental body having  jurisdiction over the
Company or any of its  properties  or assets,  except such  conflict,  breach or
default  which  would not have a  material  adverse  effect on the  transactions
contemplated herein.

         (R) NO  DEFAULT.  Except  as set  forth  in  the  Company's  Disclosure
Documents, the Company is not in default in the performance or observance of any
material  obligation,   agreement,   covenant  or  condition  contained  in  any
indenture,  mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it or its  property  is bound,  and  neither the
execution  of, nor the  delivery by the Company of, nor the  performance  by the
Company of its obligations under, this Agreement or the or the Debentures, other
than the  conversion  provision  thereof,  will  conflict  with or result in the
breach or  violation  of any of the terms or  provisions  of,  or  constitute  a
default or result in the  creation  or  imposition  of any lien or charge on any
assets or properties of the Company under, (i) any material indenture, mortgage,
deed  of  trust  or  other  material  agreement  applicable  to the  Company  or
instrument  to which the  Company  is a party or by which it is bound,  (ii) any
statute  applicable to the Company or its  property,  (iii) the  Certificate  of
Incorporation or By-Laws of the Company, (iv) any decree , judgment, order, rule
or regulation of any court or  governmental  agency or body having  jurisdiction
over the Company  regulation of any court or governmental  agency or body having
jurisdiction  over the Company or its properties,  or (v) the Company's  listing
agreement for its Common Stock.

         (S) USE OF PROCEEDS.  The Company  represents  that the net proceeds of
this offering will be used for working capital.

         (T) ARTICLES OF AMENDMENT,  BOARD  RESOLUTION AND OPINION  LETTER.  The
Company shall deliver to the Escrow Agent the following: (a) a copy and proof of
filing of the Articles of Amendment to the Articles of Incorporation; (b) a copy
of the Board Resolution  authorizing this offering; and (c) a copy of an opinion
letter which shall be attached to this Agreement as Exhibit D.

         (U)  COLLATERAL.  The Company has agreed to provide  collateral  in the
form of its office  facility in Plantation,  Florida.  It is understood that the
Purchaser shall release its collateral  interest in the land and building to the
extent that it does not fulfill its obligation to provide the full amount of the
new capital  indicated in this offering.  The Company further agrees to place in
escrow a  sufficient  number  of  free-trading  Founder's  shares  to cover  the
conversion  of the  Debentures.  The  free-trading  Debentures  are  to be  made
available to Purchaser to satisfy  conversions  until the  registration  does go
effective,  but may not be used unless the  registration  statement has not been
deemed effective by 120 days from the Closing Date.

         (V)  CONSULTING  FEE. The Company shall pay a consulting fee of $75,000
upon  closing of the second  funding  tranche  in the  amount of  $825,000.  The
Company shall pay a consulting  fee of $75,000 upon closing of the third funding
tranche in the amount of $825,000.

4.       TERMS OF CONVERSION.

         (A) DEBENTURES.  Upon the Company's  receipt of a facsimile or original
of  Purchaser's  signed Notice of  Conversion  and delivery of the Debenture the
Company  shall  instruct  its transfer  agent to issue one or more  certificates
representing that number of shares of Common Stock into which the Debentures are
convertible in accordance with the provisions  regarding conversion set forth in
this Section 4. The  Company's  transfer  agent shall act as Registrar and shall
maintain an appropriate ledger containing the necessary information with respect
to each share.

         (B)  CONVERSION   DATE.  Such   conversion   shall  be  effectuated  by
surrendering  to the Company,  or its attorney,  the  Debentures to be converted
together with a facsimile or original of the signed  Notice of Conversion  which
evidences Purchaser's intention to convert those Debentures indicated.  The date
on which the Notice of  Conversion  is  effective  ("Conversion  Date") shall be
deemed to be the date on which the  Purchaser  has  delivered  to the  Company a
facsimile  or  original  of the  signed  Notice  of  Conversion,  as long as the
original  Debentures  to be  converted  are  received  by  the  Company  or  its
designated  attorney  within  five  business  days  thereafter.  As  long as the
Debentures to be converted are received by the Company within five business days
after it receives a facsimile  or original of the signed  Notice of  Conversion,
the Company shall deliver to the Purchaser, or per the Purchaser's instructions,
the  shares of  Common  Stock,  with  restrictive  legends  as set forth in this
Agreement,  within  five  business  days  of  receipt  of the  Debentures  to be
converted.

         (C)  COMMON  STOCK  TO BE  ISSUED  WITH  RESTRICTIVE  LEGEND.  Upon the
conversion of any  Debentures and upon receipt by the Company or its attorney of
a facsimile or original of Purchaser's  signed Notice of Conversion (See Exhibit
A), the Company  shall  instruct  the  Company's  transfer  agent to issue Stock
Certificates with restrictive legends as set forth in this Agreement in the name
of  Purchaser  (or its  nominee)  and in such  denominations  to be specified at
conversion  representing  the number of Debentures of Common Stock issuable upon
such conversion, as applicable. The Company warrants that no instructions, other
than these instructions,  have been given or will be given to the transfer agent
and that the Common Stock shall  otherwise be freely  transferable  on the books
and records of the Company.

         (D)  CONVERSION  RATE.  ANYTIME  AFTER THE CLOSING  DATE,  PURCHASER IS
ENTITLED  TO CONVERT  the entire face  amount of the  Debentures,  plus  accrued
premiums,  at 75% of the five day  average  closing  bid price,  as  reported by
Bloomberg,  LP for the five trading days  immediately  preceding the  applicable
Conversion  Date  (the  "Conversion  Price").  No  fractional  shares  or  scrip
representing fractions of shares will be issued on conversion, but the number of
shares  issuable shall be rounded up or down, as the case may be, to the nearest
whole share.

         The Debentures are subject to a mandatory,  24-month conversion feature
at the end of which all Debentures outstanding will be automatically  converted,
upon the terms set forth in this section ("Mandatory Conversion Date").

         (e) Nothing contained in this Subscription Agreement shall be deemed to
establish  or require  the payment of  interest  to the  Purchaser  at a rate in
excess of the maximum rate  permitted  by  governing  law. In the event that the
rate of interest  required to be paid  exceeds the  maximum  rate  permitted  by
governing  law,  the rate of interest  required to be paid  thereunder  shall be
automatically  reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.

         (f) It  shall be the  Company's  responsibility  to take all  necessary
actions and to bear all such costs to issue the  certificate  of Common Stock as
provided  herein,  including  the  responsibility  and cost for  delivery  of an
opinion letter to the transfer agent,  if so required.  The person in whose name
the  certificate  of Common  Stock is to be  registered  shall be  treated  as a
stockholder  of record on and after the conversion  date.  Upon surrender of any
Debentures  that are to be  converted  in part,  the Company  shall issue to the
Purchaser new Debentures  equal to the  unconverted  amount,  if so requested by
Purchaser.

         (g) In the event the  Common  Stock is not  delivered  per the  written
instructions  of the  Purchaser,  within five business days after the receipt of
the Notice of Conversion and original stock  certificate (the "Delivery  Date"),
then in such event the Company  shall pay to Purchaser in cash or Common  Stock,
at the  Company's  option,  one  percent  (1%)  of  the  purchase  price  of the
Debentures  being  converted per each day after the fifth business day following
the Conversion Date that the Common Stock is not delivered.

         The Company  acknowledges  that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Purchaser to suffer  damages in an
amount that will be difficult to ascertain.  Accordingly, the parties agree that
it is  appropriate  to include in this  Agreement  a  provision  for  liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set  forth in this  Section 4  represents  the  parties'  good  faith  effort to
quantify  such  damages  and,  as such,  agree  that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of  liquidated  damages  shall not relieve the Company from its  obligations  to
deliver the Common Stock pursuant to the terms of this Agreement.

         To the extent that the failure of the Company to issue the Common Stock
pursuant  to this  Section  4 is due to the  unavailability  of  authorized  but
unissued  Debentures of Common Stock,  the provisions of this Section 4(g) shall
not apply, but instead the provisions of Section 4(h) shall apply.

         The Company shall make any payments incurred under this Section 4(g) in
immediately available funds within three business days from the date of issuance
of the applicable  Common Stock.  Nothing herein shall limit a Purchaser's right
to pursue actual damages or cancel the  conversion for the Company's  failure to
issue and deliver  Common Stock to the  Purchaser  within 10 business days after
the Conversion Date.

         (h) The  Company  shall at all times  reserve  and have  available  all
shares of the Common Stock necessary to meet conversion of the Debentures by all
Purchasers of the entire amount of Debentures then outstanding.  If, at any time
Purchaser  submits  a  Notice  of  Conversion  and the  Company  does  not  have
sufficient  authorized but unissued  shares of Common Stock available to effect,
in full, a conversion of the  Debentures (a  "Conversion  Default",  the date of
such default being referred to herein as the  "Conversion  Default  Date"),  the
Company shall issue to the Purchaser all of the shares of Common Stock which are
available,  and the Notice of  Conversion as to any  Debentures  requested to be
converted but not converted (the  "Unconverted  Debentures"),  upon  Purchaser's
sole option,  may be deemed null and void.  The Company shall provide  notice of
such  Conversion  Default  ("Notice  of  Conversion  Default")  to all  existing
Purchasers of outstanding Debentures, by facsimile,  within two business days of
such default (with the original delivered by overnight or two-day courier),  and
the Purchaser shall give notice to the Company by facsimile within five business
days of receipt of the original Notice of Conversion  Default (with the original
delivered by overnight or two-day  courier) of its election to either nullify or
confirm the Notice of Conversion.

         The Company agrees to pay to all  Purchasers of outstanding  Debentures
payments for a Conversion Default  ("Conversion Default Payments") in the amount
of  (N/365)  x (.24) x the  initial  issuance  price of the  outstanding  and/or
tendered  but not  converted  Debentures  held by each  Purchaser  where N = the
number of days from the Conversion Default Date to the date (the  "Authorization
Date") that the Company authorizes a sufficient number of shares of Common Stock
to effect conversion of all remaining Debentures.  The Company shall send notice
("Authorization  Notice")  to each  Purchaser  of  outstanding  Debentures  that
additional shares of Common Stock have been authorized,  the Authorization  Date
and the amount of Purchaser's  accrued Conversion Default Payments.  The accrued
Conversion  Default  shall be paid in cash or shall be  convertible  into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows: (i)
in the event Purchaser  elects to take such payment in cash, cash payments shall
be made to such  Purchaser  of  outstanding  Debentures  by the fifth day of the
following  calendar month,  or (ii) in the event  Purchaser  elects to take such
payment in stock,  the  Purchaser  may convert such  payment  amount into Common
Stock at the conversion  rate set forth in Section 4(d) at anytime after the 5th
day of the calendar month following the month in which the Authorization  Notice
was received, until the expiration of the mandatory 24-month conversion period.

         The Company  acknowledges  that its  failure to  maintain a  sufficient
number of  authorized  but  unissued  shares of Common Stock to effect in full a
conversion of the  Debentures  will cause the Purchaser to suffer  damages in an
amount that will be difficult to ascertain.  Accordingly, the parties agree that
it is  appropriate  to include in this  Agreement  a  provision  for  liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set  forth in this  Section 4  represents  the  parties'  good  faith  effort to
quantify  such  damages  and,  as such,  agree  that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of  liquidated  damages  shall not relieve the Company from its  obligations  to
deliver the Common Stock pursuant to the terms of this Agreement.

         Nothing  herein  shall  limit the  Purchaser's  right to pursue  actual
damages  or cancel  the  conversion  for the  Company's  failure  to  maintain a
sufficient number of authorized shares of Common Stock.

         (i) The Company shall furnish to Purchaser such number of  prospectuses
and other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.

5.       LIMITS ON AMOUNT OF CONVERSION AND OWNERSHIP.

         Other  than  the  Mandatory  Conversion  provisions  contained  in this
Agreement  which are not limited by the  following,  in no other event shall the
Purchaser  be entitled to convert  that amount of  Debentures  in excess of that
amount  upon  conversion  of which the sum of (1) the number of shares of Common
Stock  beneficially owned by the Purchaser and its affiliates (other than shares
of Common Stock which may be deemed  beneficially owned through the ownership of
the  unconverted  portion  of the  Debentures),  and (2) the number of shares of
Common Stock  issuable  upon the  conversion of the  Debentures  with respect to
which  the  determination  of this  proviso  is  being  made,  would  result  in
beneficial  ownership by the Purchaser  and its  affiliates of more than 4.9% of
the  outstanding  shares of Common  Stock of the  Company.  For purposes of this
provision to the immediately  preceding sentence,  beneficial ownership shall be
determined in accordance  with Section 13 (d) of the Securities  Exchange Act of
1934, as amended,  and  Regulations  13 D and G thereunder,  except as otherwise
provided in clause (1) of such  provision.  Furthermore,  the Company  shall not
permit such conversions that would violate the provisions of this Section 5.

6.       DELIVERY INSTRUCTIONS.

         The Debentures  being purchased  hereunder shall be delivered to Joseph
B. LaRocco,  Esq. as Escrow Agent, who will hold them in escrow until funds have
been wired to the  Company at which  time the Escrow  Agent  shall then have the
Debentures delivered to the Purchaser, per the Purchaser's instructions.

7.       UNDERSTANDINGS.

         The undersigned  understands,  acknowledges and agrees with the Company
as follows:

FOR ALL SUBSCRIBERS:

         (a) This  Subscription  may be  rejected,  in whole or in part,  by the
Company in its sole and absolute  discretion at any time before the date set for
closing  unless the Company has given notice of acceptance of the  undersigned's
subscription by signing this Subscription Agreement.

         (b) No  U.S.  federal  or  state  agency  or any  agency  of any  other
jurisdiction  has made any finding or  determination  as to the  fairness of the
terms of the Offering for  investment nor any  recommendation  or endorsement of
the Debentures.

         (c) The  representations,  warranties and agreements of the undersigned
and  the  Company  contained  herein  and  in any  other  writing  delivered  in
connection with the transactions  contemplated  hereby shall be true and correct
in all  material  respects on and as of the date of the sale of the  Debentures,
and as of the date of the conversion and exercise thereof,  as if made on and as
of such date and shall survive the  execution and delivery of this  Subscription
Agreement and the purchase of the Debentures.

         (d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR OWN
EXAMINATION  OF THE COMPANY AND THE TERMS OF THE OFFERING,  INCLUDING THE MERITS
AND RISKS INVOLVED.  THE DEBENTURES HAVE NOT BEEN  RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.  FURTHERMORE, THE FOREGOING
AUTHORITIES  HAVE NOT CONFIRMED  THE ACCURACY OR DETERMINED  THE ADEQUACY OF THE
MEMORANDUM OR THIS DOCUMENT.  ANY  REPRESENTATION  TO THE CONTRARY IS A CRIMINAL
OFFENSE.

         (e)  The   Regulation   D  Offering  is  intended  to  be  exempt  from
registration  under  the  Securities  Act  by  virtue  of  Section  4(2)  of the
Securities Act and the  provisions of Regulation D thereunder,  which is in part
dependent upon the truth,  completeness  and accuracy of the statements  made by
the undersigned herein and in the Questionnaire.

         (f) It is  understood  that in order not to jeopardize  the  Offering's
exempt status under  Section 4(2) of the  Securities  Act and  Regulation D, any
transferee  may, at a minimum,  be required to fulfill the investor  suitability
requirements thereunder.

         (g) THE DEBENTURES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED
OF EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE  STATE SECURITIES
LAWS,  PURSUANT TO REGISTRATION  OR EXEMPTION  THEREFROM.  PURCHASERS  SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL  RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.

         (H)      NASAA UNIFORM LEGEND

         IN  MAKING  AN  INVESTMENT  DECISION  INVESTORS  MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE
OFFERING,  INCLUDING THE MERITS AND RISKS  INVOLVED.  THESE  SECURITIES HAVE NOT
BEEN  RECOMMENDED  BY ANY FEDERAL OR STATE  SECURITIES  COMMISSION OR REGULATORY
AUTHORITY.  FURTHERMORE,  THE  FOREGOING  AUTHORITIES  HAVE  NOT  CONFIRMED  THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT.  ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.  THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY  AND  RESALE  AND MAY NOT BE  TRANSFERRED  OR  RESOLD  EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933 AND THE APPLICABLE  STATE  SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.

         (i) The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel,  terminate  or revoke  this  subscription,  and any  agreements  made in
connection herewith shall survive my death or disability.

         (j) The  undersigned  has had the  opportunity to ask questions of, and
receive  answers  from  management  of  the  Company  regarding  the  terms  and
conditions of this  Subscription  Agreement,  and the transactions  contemplated
thereby, as well as the affairs of the Company and related matters.

         (k) The  undersigned  understands  that he may have  access to whatever
additional  information  concerning the Company,  its financial  condition,  its
business, its prospects, its management,  its capitalization,  and other similar
matters  that  he may  desire,  provided  that  the  Company  can  acquire  such
information without unreasonable effort or expense. In addition,  as required by
ss.517.061(11)(a)(3),  Florida Statutes, and Rule 3E-500.05(a)  thereunder,  the
undersigned  understands that he may have, at the offices of the Company, at any
reasonable  hour,  after  reasonable  prior notice,  access to the materials set
forth in the Rule which the Company can obtain  without  unreasonable  effort or
expense.

         (l) The  undersigned  has  had the  opportunity  to  obtain  additional
information  necessary  to verify the  accuracy of the  information  referred to
above.

8.       SUBMISSION TO JURISDICTION

         (A) FORUM SELECTION AND CONSENT TO  JURISDICTION.  Any litigation based
thereon,  or arising out of, under, or in connection with, this Agreement or any
course of conduct,  course of dealing,  statements  (whether oral or written) or
actions of the Company or Purchaser shall be brought and maintained  exclusively
in the federal courts of the State of Florida.  The Company and Purchaser hereby
expressly and  irrevocably  submit to the exclusive  jurisdiction of the federal
Courts of the State of Florida  for the  purpose of any such  litigation  as set
forth above and  irrevocably  agrees to be bound by any final judgment  rendered
thereby in connection with such  litigation.  The Company and Purchaser  further
irrevocably  consent  to the  service of process  by  registered  mail,  postage
prepaid,  or by personal  service  within or without  the State of Florida.  The
Company and Purchaser  hereby  expressly and  irrevocably  waive, to the fullest
extent  permitted by law, any objection  which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above  and any  claim  that  any such  litigation  has  been  brought  in any
inconvenient  forum.  To the  extent  that  the  Company  or  Purchaser  have or
hereafter  may acquire any immunity from  jurisdiction  of any court or from any
legal process (whether through service or notice,  attachment prior to judgment,
attachment  in aid of  execution  or  otherwise)  with  respect to itself or its
property the Company and  Purchaser  hereby  irrevocably  waive such immunity in
respect of their obligations under this Agreement and the other loan documents.

         (B)  WAIVER  OF  JURY  TRIAL.  The  Purchaser  and the  Company  hereby
knowingly,  voluntarily  and  intentionally  waive any rights they may have to a
trial by jury in respect of any  litigation  based  hereon,  or arising  out of,
under, or in connection with, this agreement,  or any course of conduct,  course
of dealing,  statements (whether oral or written) or actions of the Purchaser or
the Company.  The Company  acknowledges and agrees that it has received full and
sufficient  consideration  for this  provision  and  that  this  provision  is a
material inducement for the Purchaser entering into this agreement.

         (C)  SUBMISSION  TO  JURISDICTION.  Any legal action or  proceeding  in
connection with this Agreement or the performance  hereof may be brought only in
the federal courts located in Florida, and the parties hereby irrevocably submit
to the exclusive  jurisdiction of such courts for the purpose of any such action
or proceeding.

9.       MISCELLANEOUS.

         (a) All pronouns and any variations thereof used herein shall be deemed
to refer to the  masculine,  feminine,  impersonal,  singular or plural,  as the
identity of the person or persons may require.

         (b) Neither this Subscription  Agreement nor any provision hereof shall
be waived,  modified,  changed,  discharged,  terminated,  revoked or  canceled,
except by an  instrument  in  writing  signed by the  party  effecting  the same
against whom any change, discharge or termination is sought.

         (c) Notices  required or  permitted to be given  hereunder  shall be in
writing and shall be deemed to be sufficiently  given when personally  delivered
or sent by registered mail, return receipt requested,  addressed:  (i) if to the
Company, at its executive offices or (ii) if to the undersigned,  at the address
for correspondence  set forth in the Questionnaire,  or at such other address as
may be specified by written notice given in accordance with this paragraph 9(c).

         (d)  This  Subscription  Agreement  shall  be  enforced,  governed  and
construed in all respects in  accordance  with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida,  and shall be binding
upon the undersigned,  the undersigned's heirs,  estate, legal  representatives,
successors  and  assigns  and shall  inure to the  benefit of the  Company,  its
successors  and  assigns.  If any  provision of this  Subscription  Agreement is
invalid or unenforceable  under any applicable  statue or rule of law, then such
provisions  shall be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any provision hereof that may prove invalid or unenforceable  under any law
shall not affect the validity or enforceability of any other provision hereof.

         (e) This Subscription  Agreement,  together with Exhibits A, B, C and D
attached hereto and made a part hereof,  constitute the entire agreement between
the parties  hereto with respect to the subject matter hereof and may be amended
only by a writing executed by both parties hereto.

         (f) This Agreement may be executed in  counterparts,  and the facsimile
transmission of an executed  counterpart to this Agreement shall be effective as
an original.

                  [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]


<PAGE>


                           IMAGING DIAGNOSTIC SYSTEMS, INC.

                                                       CORPORATION QUESTIONNAIRE

         INVESTOR NAME:

         The information  contained in this  Questionnaire is being furnished in
order  to  determine  whether  the  undersigned  CORPORATION'S  Subscription  to
purchase the Debentures described in the Subscription Agreement may be accepted.

         ALL  INFORMATION  CONTAINED  IN  THIS  QUESTIONNAIRE  WILL  BE  TREATED
CONFIDENTIALLY.  The  undersigned  CORPORATION  understands,  however,  that the
Company may present this  Questionnaire to such parties as it deems  appropriate
if called upon to establish  that the proposed  offer and sale of the Debentures
is exempt  from  registration  under the  Securities  Act of 1933,  as  amended.
Further, the undersigned  CORPORATION  understands that the offering is required
to be reported to the  Securities  and Exchange  Commission and to various state
securities and "blue sky" regulators.

         IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED  CORPORATION
MUST COMPLETE FORM W-9 ATTACHED HERETO.

I.    PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE CORPORATION.

                  1. The undersigned CORPORATION: (a) has total assets in excess
                  of $5,000,000;  (b) was not formed for the specific purpose of
                  acquiring the  Debentures  and (c) has its principal  place of
                  business in ______________________ .

                  2. Each of the shareholders of the undersigned  CORPORATION is
                  able to certify  that such  shareholder  meets at least one of
                  the following three conditions:

                           (A) the shareholder is a natural person whose
                               individual net worth* or joint net worth with his
                               or herpouse exceeds $10,000,000; or

                           (B) the  shareholder  is a natural  person who had an
                           individual  income* in excess of  $200,000 in each of
                           1997  and  1998  and  who   reasonably   expects   an
                           individual income in excess of $200,000 in 1999; or

                           (C)  Each  of the  shareholders  of  the  undersigned
                           CORPORATION is able to certify that such  shareholder
                           is a natural  person  who,  together  with his or her
                           spouse,  has had a joint income in excess of $300,000
                           in each of 1997 and 1998 and who reasonably expects a
                           joint income in excess of $300,000  during 1999;  and
                           the  undersigned  CORPORATION has its principal place
                           of business in ________________.

* For purposes of this  Questionnaire,  the term "net worth" means the excess of
total assets over total liabilities.  In determining  income, an investor should
add to his or her adjusted gross income any amounts  attributable  to tax-exempt
income received, losses claimed as a limited partner in any limited partnership,
deductions claimed for depletion, contributions to IRA or Keogh retirement plan,
alimony payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.

                  3. The undersigned CORPORATION is:

                           (A)  a bank as defined in Section 3(a)(2) of the
                               Securities Act; or

                           (B)  a  savings   and  loan   association   or  other
                           institution  as defined in Section  3(a)(5)(A) of the
                           Securities  Act whether  acting in its  individual or
                           fiduciary capacity; or

                           (C) a broker or dealer registered pursuant to
                              Section 15 of the Securities Exchange Act of
                              1934; or

                           (D)  an insurance company as defined in Section 2(13
                               of the Securities Act; or

                           (E)  An  investment   company  registered  under  the
                           Investment   Company   Act  of  1940  or  a  business
                           development company as defined in Section 2(a)(48) of
                           the Investment Company Act of 1940; or

                           (F) a small business  investment  company licensed by
                           the U.S. Small Business  Administration under Section
                           301 (c) or (d) of the Small  Business  Investment Act
                           of 1958; or

                           (G) a private  business  development  company  as
                          defined in  Section  202(a)  (22) of the  Investment
                           Advisors Act of 1940.

II.      OTHER CERTIFICATIONS.

         By signing the Signature Page, the undersigned certifies the following:

         (A)      That the  CORPORATION'S  purchase of the Debentures will be
               solely for the  CORPORATION'S own account and not for the
         account of any other person or entity; and

         (B)  that  the  CORPORATION'S  name,  address  of  principal  place  of
         business,  place of incorporation and taxpayer identification number as
         set forth in this Questionnaire are true, correct and complete.

III.     GENERAL INFORMATION

         (A)      PROSPECTIVE PURCHASER (THE CORPORATION)

Name:  __________________________________________________________

Principal Place of Business:  _________________________________________

__

ADDRESS FOR CORRESPONDENCE (IF DIFFERENT):
                                                     (Number and Street)

----------------------------------------------------------------
         (City)                             (State)               (Zip Code)

Telephone Number:________________________________________________
                                    (Area Code)               (Number)

JURISDICTION OF INCORPORATION:________________________________

Date of Formation:_________________________________________________

Taypayer Identification Number:______________________________________

Number of Shareholders:____________________________________________

     (b)   INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.

Name:___________________________________________________________

Position or Title:___________________________________________________

                        IMAGING DIAGNOSTIC SYSTEMS, INC.

                           CORPORATION SIGNATURE PAGE

         YOUR  SIGNATURE  ON  THIS  CORPORATION  SIGNATURE  PAGE  EVIDENCES  THE
AGREEMENT BY THE PURCHASER TO BE BOUND BY THE QUESTIONNAIRE AND THE SUBSCRIPTION
AGREEMENT.

         1. The undersigned hereby represents that (a) the information contained
in the  Questionnaire is complete and accurate and (b) the Purchaser will notify
Imaging Diagnostic  Systems,  Inc.  immediately if any material change in any of
the information  occurs prior to the acceptance of the  undersigned  Purchaser's
subscription and will promptly send Imaging Diagnostic Systems, Inc.

written confirmation of such change.

         2. The undersigned  officer of the Purchaser  hereby  certifies that he
has read and understands this Subscription Agreement.

         3. The  undersigned  officer of the  Purchaser  hereby  represents  and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Debentures and sign this  Subscription  Agreement
on behalf of _______________  and, further,  that  ____________________  has all
requisite  authority to purchase the Debentures and enter into this Subscription
Agreement.

         4. The undersigned  acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel,  terminate  or revoke  this  subscription,  and any  agreements  made in
connection herewith shall survive my death or disability.

         5. The  undersigned  has had the  opportunity  to ask questions of, and
receive  answers  from  management  of  the  Company  regarding  the  terms  and
conditions of this  Subscription  Agreement,  and the transactions  contemplated
thereby, as well as the affairs of the Company and related matters.

         6. The  undersigned  understands  that he may have  access to  whatever
additional  information  concerning the Company,  its financial  condition,  its
business, its prospects, its management,  its capitalization,  and other similar
matters  that  he may  desire,  provided  that  the  Company  can  acquire  such
information without unreasonable effort or expense. In addition,  as required by
ss.517.061(11)(a)(3),  Florida Statutes, and Rule 3E-500.05(a)  thereunder,  the
undersigned  understands that he may have, at the offices of the Company, at any
reasonable  hour,  after  reasonable  prior notice,  access to the materials set
forth in the Rule which the Company can obtain  without  unreasonable  effort or
expense.

         7.  The  undersigned  has  had the  opportunity  to  obtain  additional
information  necessary  to verify the  accuracy of the  information  referred to
above.

--------------------------          --------------------------
Number of Debentures subscribed for                           Date

                           (Purchaser)

                                             By: _______________________
                                                                    (Signature)

Name: ____________________            Title:         _____________________
             (Please Type or Print)                      (Please Type or Print)

         THE  DEBENTURES  HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF
1933.  AS  AMENDED  (THE  "ACT"),  AND MAY  NOT BE  OFFERED,  SOLD OR  OTHERWISE
TRANSFERRED  UNLESS SUCH  SECURITIES  ARE INCLUDED IN AN EFFECTIVE  REGISTRATION
STATEMENT UNDER THE ACT.

                                                        COMPANY ACCEPTANCE PAGE

THIS SUBSCRIPTION AGREEMENT ACCEPTED AND AGREED

TO THIS ____ DAY OF AUGUST, 1999

IMAGING DIAGNOSTIC SYSTEMS, INC.

BY__________________________________
     LINDA B. GRABLE, PRESIDENT

                                    EXHIBIT A

                              NOTICE OF CONVERSION

           (TO BE EXECUTED BY THE REGISTERED OWNER IN ORDER TO CONVERT
                           THE CONVERTIBLE DEBENTURES)

         THE UNDERSIGNED HEREBY IRREVOCABLY  ELECTS, AS OF ______________,  199_
TO CONVERT  $__________  OF DEBENTURES  INTO COMMON STOCK OF IMAGING  DIAGNOSTIC
SYSTEMS,  INC.  (THE  "COMPANY")  ACCORDING TO THE  CONDITIONS  SET FORTH IN THE
SUBSCRIPTION AGREEMENT DATED AUGUST____, 1999.

DATE OF CONVERSION_________________________________________

APPLICABLE CONVERSION PRICE_________________________________

NUMBER OF DEBENTURES ISSUABLE UPON THIS CONVERSION______________

SIGNATURE___________________________________________________
                           [NAME]

ADDRESS_____________________________________________________

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

PHONE______________________   FAX___________________________

                                    EXHIBIT D

                       Form of Pre-Closing Opinion Letter


Purchasers of (Company) (Describe Securities)

Re:      (Company)

Ladies and Gentlemen:

I have acted as  counsel to Imaging  Diagnostic  Systems,  Inc.,  a  corporation
incorporated  under  the  laws of the  State  of  Florida  (the  "Company"),  in
connection  with its  offering,  pursuant  to  Regulation  D,  for the  proposed
issuance  and sale of an aggregate of $825,000 of  Convertible  Debentures  (the
"Securities") pursuant to the Subscription Agreement and the Registration Rights
Agreement  (including all Exhibits and  Appendices  thereto)  (collectively  the
"Agreements")            with            _______________________.            and
___________________("Purchasers"),  dated August______, 1999 between the Company
and the Purchasers. This Opinion is furnished pursuant to Section ______________
of the  Agreement  and is given with consent of the Company.  Capitalized  terms
that are not otherwise  defined in this opinion shall have the  definitions  set
forth in the Agreements.

I do not express any opinion  concerning  any law other than the laws of Florida
and the federal securities law of the United States.

This opinion has been  prepared and is to be  construed in  accordance  with the
Report on  Standards  for  Florida  Opinions  dated  April 8, 1991 issued by the
Business  Law Section of the Florida Bar (the  "Standards")  The  Standards  are
incorporated by reference into this opinion.

In connection with rendering the opinion set forth herein,  I have relied,  with
your  approval,  as to factual  matters  that affect our  opinion,  solely on my
examination of the following  documents or certificates  (the  "Documents")  and
have  made no  independent  verification  of the facts  asserted  to be true and
correct in those documents, including the factual representations and warranties
contained in the Agreements.

A.       Drafts of the Agreements

B.       The Company's Certificate of Incorporation, and its Bylaws, as amended
           to date.

C.                The  Company's  annual report under Form 10-KSB issued for the
                  year  ending June 30,  1998,  the  Company's  Reports on Forms
                  10-KSB,  10-QSB and 8-K filed with the Securities and Exchange
                  Commission,  Registration  Statements  on Form S-1 and S-2 and
                  the  Company's  most recent Proxy  Statement  and  Information
                  Statement (collectively the "Reports")

D.       Minutes of the Board of Directors Meeting of December 21, 1998, 1998
           approving the subject transaction
E.       Certificate of Officers and Directors.

In conducting my examination, I have assumed the following: (i) that each of the
Agreements has been executed by each of the parties  thereto in the same form as
the forms which I have examined,  (ii) the  genuineness of all  signatures,  the
legal  capacity  of  natural  persons,  the  authenticity  and  accuracy  of all
documents submitted to me as copies,  (iii) that each of the Agreements has been
duly and validly  authorized,  executed,  and  delivered by the party or parties
thereto other than the Company, and (iv) that each of the Agreements constitutes
the valid and binding  agreement of the party or parties  thereto other than the
Company,  enforceable  against  such  party or parties  in  accordance  with the
Agreements' terms.

Based upon the  foregoing,  and subject to the  qualifications  and  limitations
stated in this opinion and the Standards, we are of the opinion that:

Based upon and subject to the foregoing, I am of the opinion that:

1.  The  Company  has  been  duly  incorporated  and is  validly  existing  as a
corporation  in good  standing  under the laws of the State of Florida,  is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions  where the Company owns or leases properties,  maintains employees
or  conducts  business,  except  for  jurisdictions  in which the  failure to so
qualify  would not have a material  adverse  effect on the Company,  and has all
requisite  corporate  power and authority to own its  properties and conduct its
business;

2.  The  authorized  capital  stock  of  the  Company  consists  of  100,000,000
Debentures  of  Common  Stock,  no par  value per  share  ("Common  Stock")  and
2,000,000  Debentures of Preferred  Stock, no par value,  450 of which have been
designated  as Series B, 75 of which  have been  designated  as Series G, 108 of
which have been  designated as Series H and 455 of which have been designated as
Series I..

3. The Common Stock is registered  pursuant to Section 12(b) or Section 12(g) of
the Securities Exchange Act of 1934, as amended and the Company has timely filed
all the  material  required to be filed  pursuant to Sections  13(a) or 15(d) of
such Act for a period of at least twelve months preceding the date hereof;

4. When duly  countersigned by the Company's  transfer agent and registrar,  and
delivered to you or upon your order against payment of the agreed  consideration
therefor in accordance  with the  provisions of the  Agreements,  the Securities
(and any Common Stock to be issued upon the  conversion  of the  Securities)  as
described in the  Agreements  represented  thereby will be duly  authorized  and
validly issued, fully paid and non-assessable;

5. The company has the requisite corporate power and authority to enter into the
Agreements  and to sell and deliver the  Securities  and the Common  Stock to be
issued upon the  conversion of the  Securities  as described in the  Agreements;
each of the  Agreements  has been duly and validly  authorized  by all necessary
corporate  action  by  the  Company  to  our  knowledge,   no  approval  of  any
governmental or other body is required for the execution and delivery of each of
the  Agreements  by  the  Company  or  the   consummation  of  the  transactions
contemplated  thereby; each of the Agreements has been duly and validly executed
and  delivered  by and on behalf  of the  Company,  and is a valid  and  binding
agreement of the Company,  enforceable in accordance  with its terms,  except as
enforceability  may be  limited  by general  equitable  principles,  bankruptcy,
insolvency,  fraudulent  conveyance,  reorganization,  moratorium  or other laws
affecting creditors rights generally,  and except as to compliance with federal,
state, and foreign securities laws, as to which no opinion is expressed;

6. To the best of our knowledge, the execution,  delivery and performance of the
Agreements by the company and the performance of its  obligations  thereunder do
not and will not  constitute  a breach  or  violation  of any of the  terms  and
provisions  of, or  constitute a default  under or conflict  with or violate any
provisions of (i) the Company's  Certificate of Incorporation  or By-Laws,  (ii)
any indenture,  mortgage,  deed of trust, agreement or other instrument to which
the Company is a party or by which it or any of its property is bound, (iii) any
applicable  statue or  regulation or as other,  (iv) or any judgment,  decree or
order of any court of governmental body having  jurisdiction over the Company or
any of its property.

7. The issuance of Common Stock upon  conversion of the Securities in accordance
with  the  terms  and  conditions  of the  Certificate  of  Designation  and the
Agreements,  will not  violate  the  applicable  listing  agreement  between the
Company and any securities exchange or market on which the Company's  securities
are listed.

8. To our  knowledge,  after due  inquiry,  there is no  pending  or  threatened
litigation  investigation  or other  proceedings  against the Company (except as
described in Exhibit A hereto).

This opinion is rendered only with regard to the matters set out in the numbered
paragraphs  above.  No other  opinions are intended nor should they be inferred.
This opinion is based solely upon the laws of the State of Florida, as currently
in effect,  and the Florida  Business l) Corporation Act and does not include an
interpretation  or  statement   concerning  the  laws  of  any  other  state  or
jurisdiction. Insofar as the enforceability of the Agreements may be governed by
the laws of other  states,  we have assumed that such laws are  identical in all
respects to the laws of the State of Florida.

The opinions expressed herein are given to you solely for your use in connection
with the  transaction  contemplated by the Agreements and may not be relied upon
by any  other  person  or entity  or for any  other  purpose  without  our prior
consent.

                                                     Very truly yours,

Rebecca J. Del Medico, General Counsel


<PAGE>



                                                               EXHIBIT C

LITIGATION

On October 7, 1998 a lawsuit was filed  against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086).  The Company was served on October 19, 1998.  The lawsuit  alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this  failing  to convert  the  Series B  Preferred  Stock and  failure to
register the common stock  underlying the  Preferred.  The Series B Holders have
demanded damages in excess of $75,000, to be determined at trial,  together with
interest costs and legal fees.

DEFAULTS

In December  1996,  the Company  sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited  ("Weyborn") and Goodland  International  Investment  Ltd.  ("Goodland")
pursuant to Regulation D. The Company filed a Registration Statement of Form S-1
registering the share  underlying the Series B Preferred.  The shares were never
converted and the registration  statement is no longer current.  On September 4,
1998, the Company  received a notice of conversion from the Weyburn and Goodland
requesting  the issuance of 4,559,846  and  10,639,642  shares of common  stock,
respectively.  The  conversion  rate of the Shares is 82% of the average  market
price over a five-day  period prior to conversion or  approximately  $.35014 per
share.  The Company contends that when and if the Company converts the Preferred
Shares, the Series B Holders may be entitle to an aggregate of 12,852,002 common
shares pursuant to the conversion and 1,542,877  shares pursuant to the dividend
provision of the Preferred Shares,  not the 15,199,488 shares set forth in their
notice.  The Series B Holders have demanded damages in excess of $75,000,  to be
determined at trial, together with interest, costs, and legal fees.

In  September  1998,  the  Company  sold  one  unit,  consisting  of a  $250,000
promissory  note and  200,000  shares of common  stock,  to  Settondown  Capital
International,  Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000.  The Note bears interest at the rate of
12% per  annum.  The Note is  personally  guaranteed  by Linda  B.  Grable,  the
Company's  President.  The repayment of the Note,  which was  originally  due on
October 2, 1998 was extended  twice,  was due on January 15,  1999,  and remains
unpaid to date.  The Company has not received a notice of default in  connection
with this Note.

In October 1998, the Company sold one unit,  consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third  party,  pursuant  to  Regulation  D for an  aggregate  purchase  price of
$100,000.  The Note bears interest at the rate of 12% per annum. The Note, which
was  originally  due on  November 2, 1998,  was  extended  twice,  became due on
January 15,  1999,  and remains  unpaid to date.  The Company has not received a
notice of default in connection with the Note.

On June 2, 1998, the Company  finalized a private  placement to Austost  Anstalt
Schaan  and  Balmore  Funds  S.A.  of 100  shares  of its  Series H  Convertible
Preferred  Stock (the  "Preferred  Shares")  at a purchase  price of $10,000 per
share and  75,000A  Warrant  and 50,000 B  Warrants.  The A and B  Warrants  are
exercisable  at $1.00  and $1.50  per  share,  respectively.  The  offering  was
conducted  pursuant to Regulation D as  promulgated  under the Securities Act of
1933,  as  amended  (the  "Regulation  D  Sale").  Pursuant  to the terms of the
Registration Rights Agreement, as amended,  between the Company and the Series H
holder,  the Company is  required to register  100% of the number of shares that
would be required to be issued if the Preferred  Stock were converted on the day
before the filing of the Registration  Statement (2,661,698 shares). The Company
filed Amendment 1 to the Registration Statement on November 16 1998. The Company
is in technical default of the Registration Rights Agreement, which required the
Registration  Statement to be declared effective by October 2, 1998. Pursuant to
the Registration  Rights Agreement,  the Company is required to pay the Series H
Holders,  as liquidated  damages for failure to have the Registration  Statement
declared  effective,  and not as a penalty,  two (2%)  percent of the  principal
amount of the  Securities for the first thirty (30) days, and three (3%) percent
of the  principal  amount of the  Securities  for each  thirty  (30) day  period
thereafter until the Company procures  registration of the Securities.  To date,
the liquid damages were paid by the issuance of common stock.