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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-1.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-1.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-2.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-2.htm
EX-3.17 - CERTIFICATE OF AMENDMENT-SERIES L DESIGNATION - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit3-17.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[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, 2010
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

IDSI Logo

IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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

5307 NW 35th Court, Fort Lauderdale, FL.
33309
(address of principal office)
(Zip Code)

Registrant's telephone number, including area code: (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 Securities 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  xNo  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
¨  Large accelerated filer
¨  Accelerated filer
x  Non Accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the act). Yes  o     No  x

Based on the average closing bid and asked prices of the common stock on the latest practicable date, October 12, 2010, the aggregate market value of the voting stock held by non-affiliates of the registrant was $12,577,939.

The number of shares outstanding of each of the issuer’s classes of common stock, as of October 12, 2010 was 884,278,434.  As of October 12, 2010, the issuer had 35 shares of preferred stock outstanding.

Documents Incorporated By Reference
[None]

 
 

 


IMAGING DIAGNOSTIC SYSTEMS, INC.
FORM 10-K
ANNUAL REPORT
 
TABLE OF CONTENTS

PART I
 
Page No
     
ITEM 1.
   3
ITEM 1A
  17
ITEM 1B
  31
ITEM 2.
  31
ITEM 3.
  31
ITEM 4.
  32
     
     
PART II
   
     
ITEM 5.
  33
   
ITEM 6.
  42
ITEM 7.
  43
ITEM 7A.
  53
ITEM 8.
  54
ITEM 9.
120
ITEM 9A
120
ITEM 9B
121
     
     
PART III
   
     
ITEM 10.
122
ITEM 11.
126
ITEM 12.
135
   
ITEM 13.
136
ITEM 14.
136
     
     
PART IV
   
     
ITEM 15.
137
     
 
140





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 7 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CAUTIONARY STATEMENTS.”

PART I


Overview
Imaging Diagnostic Systems, Inc. (“IDSI”) is a development stage medical technology company.  Since its inception in December 1993, we have been engaged in the development and testing of a Computed Tomography Laser Breast Imaging System for detecting breast cancer (CT Laser Mammography or, "CTLM®").  We are currently in the process of commercializing the CTLM® in certain international markets where approvals to market have been secured although CTLM® is not yet approved for sale in the U.S.  We initially filed a Pre-Market Approval (“PMA”) application for the CTLM® with the Food and Drug Administration (“FDA”) in 2003.  Because the CTLM® was determined to be new medical technology for which there was no predicate device, it was automatically designated a Class III medical device, which requires PMA approval.

In August 2003, we received a letter from the FDA citing some deficiencies in our PMA application.  Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment.  In October 2004, we made a decision to voluntarily withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing.  In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk (NSR) study when used for our intended use.  We have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application.  We believe that this application will be filed with the FDA by the end of December 2010.

The CTLM® system is a CT-like scanner, but its energy source is a laser beam and not ionizing x-radiation such as is used in conventional x-ray mammography or CT scanners.  The advantages of imaging without ionizing radiation may be significant in our markets.  CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue.  X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases.  Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site.  The CTLM® is being marketed as an adjunct to mammography not a replacement for it, to provide the radiologist with additional information to manage the clinical case.  We believe that the adjunctive use of CT Laser Mammography may help diagnose breast cancer earlier, reduce diagnostic uncertainty especially in mammographically dense breast cases, and may help decrease the number of biopsies performed on benign lesions.  The CTLM® technology is unique and patented.  We intend to develop our technology into a family of related products.  We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.

As of the date of this report, we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through June 30, 2010 of $111,880,882 after discounts and dividends on preferred stock.  We anticipate that losses from operations will continue for at least the next 12 months, primarily due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA approval process, and the costs associated with advanced product development activities.  We had originally planned on submitting our application to the FDA in December 2008; however, due to delays caused by our lack of financing as well as technical and operational issues, we anticipate that the remaining process consisting of the preparation, documentation and review of the application by outside counsel will be completed and filed by the end of December 2010.  Nonetheless, this timetable cannot be met unless we obtain sufficient financing through the sale of equity or debt securities.  There can be no assurance that we will obtain this financing.  Further, since we rely on outside experts in data management, monitoring, biostatistics and FDA matters, there can be no assurance that we will be able to timely submit the application even if we obtain the necessary financing.  Finally, there can be no assurance that we will obtain FDA approval; that the CTLM® will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM® to allow us to operate profitably.



Breast Cancer
The National Cancer Institute (NCI) estimated that approximately 207,090 new cases of invasive breast cancer and 54,010 cases of carcinoma in situ (CIS) non-invasive (localized) breast cancer will be diagnosed in the United States during 2010.  Breast cancer ranks as the second leading cause of cancer-related death among women and will cause an estimated 39,840 deaths in women in the U.S. in 2010.  Based on rates from 2005-2009, 1 in 8 women will be diagnosed with breast cancer during their lifetime.

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 relative survival rate of women who have cancer confined to the primary site is 98%.  It decreases from 98% to 84% after the cancer has spread to the lymph nodes, and to 23% after it has spread to other organs such as the lung, liver or brain.  A major problem with current detection methods is that studies have shown that mammography does not detect 10%-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).  Besides skin cancer, breast cancer is the most commonly diagnosed cancer among U.S. women.  For these women, the American Cancer Society (ACS) has published guidelines for breast cancer screening including: (i) monthly breast self-examinations for all women over the age of 20; (ii) a clinical breast exam (CBE) every three years for women in their 20s and 30s; (iii) a baseline mammogram for women by the age of 40; and (iv) an annual mammogram for women age 40 or older.

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 a diagnostic x-ray mammography, an ultrasound study, a magnetic resonance imaging procedure, or a minimally invasive procedure such as fine needle aspiration or large core needle biopsy.  In each case, the potential benefits of additional diagnostic testing must be balanced against the costs, risks and discomfort to the patient associated with undergoing the additional procedures.

Due in part to the limitations in the ability of the currently available modalities to identify malignant lesions, a large number of patients with suspicious lesions proceed to surgical biopsy, an invasive and expensive procedure.  Approximately 1.3 million surgical biopsies are performed each year in the United States, of which approximately 80% 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 may 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

Mammography
Mammography is an x-ray imaging modality commonly used for both routine breast cancer screening and as a diagnostic tool.  A mammogram produces either films or electronic images of the internal structure of the breast and surrounding tissues.  In a screening mammogram, radiologists seek to detect suspicious lesions, while a diagnostic mammogram seeks to characterize suspicious lesions.

In the U.S., a certified technologist performs the x-ray procedure under the Congressional Mammography Quality Standards Act (MQSA).  MQSA was enacted to improve x-ray breast cancer detection studies by regulating machine specifications, quality control procedures, technologist training and certification, and other variables.  Still, mammography is viewed as an ‘imperfect’ breast cancer detection tool and is often supplemented with follow-up studies including more x-rays at later dates, closer physical examination of the patient, adjunctive ultrasound exams, and, when available, breast MRI or scintimammography, and biopsy.

Because x-ray mammography exposes the patient to radiation, the American Cancer Society recommends that mammograms be limited to once per year.  X-ray mammography is documented to be less effective for women with dense breasts.  X-ray mammography machines use mechanical means to squeeze or compress the breast and flatten the volume so that


x-rays may penetrate more uniform tissue.  These techniques are technically necessary but are often painful and uncomfortable to patients.  Most mammography exams include 2 views of each breast which equates to 4 compressions per session.

The Medicare billing of a diagnostic mammogram is approximately $120 to $160 per procedure and requires the use of x-ray equipment ranging in cost from $75,000 to $225,000 and perhaps ultrasound equipment ranging from $60,000 to $200,000.

Digital Mammography
Digital mammography, also referred to as “full-field digital” mammography, is the latest form of breast x-ray examination.  These systems eliminate the use of x-ray film and record images directly on electronic panels. The digital images can then be manipulated and examined on an electronic viewing station.  However, the limitations of conventional mammography still exist in digital mammography.  Digital mammography units sell for $300,000 to $430,000 and Medicare billing for the procedures ranges from $170 to $200.

Magnetic Resonance Imaging
Magnetic resonance imaging (“MRI”) produces images using a magnetic field and radiofrequency (RF) gradients under computer control to produce proton density images.  MRI has proven effective in imaging breasts with prosthetic implants, detecting recurrent cancer, evaluating the response to chemotherapy and serving as an additional imaging option when mammography or ultrasound fails to provide sufficient imaging information.
 
MRI offers the advantage over x-ray that not only visualizes fine-details in breast tissue but also detects blood flow and angiogenesis associated with malignancies.  The disadvantages are that MRI systems are not widely available in the global market and the costs of using conventional MRI scanners for breast exams are sometimes prohibitive.  Dedicated breast MRI systems sell for approximately $1,200,000 and Medicare billing is approximately $1,500.

Ultrasound
Ultrasound imaging is routinely used in breast imaging practices.  Ultrasound systems can image breast tissue by ‘sonar’ techniques.  Sound transducers are placed directly on breast tissue coupled with an acoustic gel substance.  Trained sonographers locate suspicious areas by moving the transducer over the area of interest.  In some countries physicians perform the study and interpret the results.  Ultrasound images are localized to areas of suspicion usually detected by a previous mammogram.  If mammographic results suggest the presence of a lesion, ultrasound may help differentiate a solid from a cystic mass and locate a biopsy site.  The Medicare billing rate is approximately $240 per procedure and requires the use of capital equipment ranging in cost from approximately $60,000 to $200,000.


CTLM®
The CTLM® laser breast imaging system is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography.  CTLM® is, however, an emerging new modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue.  While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast which is three dimensional (3D), the CTLM® produces 3D images.

We believe that the adjunctive use of CT laser breast imaging will improve early diagnosis, reduce diagnostic uncertainty, decrease the number of biopsies performed on benign lesions, and improve breast cancer case management, especially in dense breasts.  Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer.  Abnormalities in dense breasts can be more difficult to detect on a mammogram.

A CTLM® breast exam is non-invasive and can be performed by a medical technician.  A patient lies face down on a scanning table with one breast suspended naturally into a specially designed scanning chamber.  The scanner images the breast in contiguous slices from chest wall to nipple in minutes.  One breast is scanned at a time.  The CTLM® is a sophisticated electro-mechanical scanner under microprocessor and computer control.  Results are available immediately in digital format for comparison to mammography results, consultation, transmission to multi-modality reading stations, or archiving.

Images and study results present as multiple-slice data sets which can be viewed slice-by-slice or as a 3D volume with image manipulation tools.  Images are usually viewed in gray and


green color shades, since color displays are common with other molecular imaging modalities such as nuclear medicine, PET, fMRI, and in radiation therapy imaging.

Fluorescence Imaging
Fluorescence and molecular imaging techniques are of growing importance to the drug development industry and for disease detection.  Certain molecules exhibit the phenomenon of emitting light after being illuminated by light of an appropriate wavelength, e.g., from a laser.  The light that is emitted is referred to as “fluorescent” light.  The compounds that produce fluorescence are commonly referred to as fluorescent dyes.  At least one company to our knowledge is developing a fluorescent compound for possible use in breast cancer detection.

The CTLM® system laser diodes can stimulate fluorescent light emissions when used in conjunction with such compounds.  When an appropriate fluorescent compound has been introduced into the blood, areas with an abundance of blood vessels, i.e., the angiogenesis associated with a tumor, may retain a higher concentration of the fluorescent compound.  As the CTLM® scanner illuminates these areas; fluorescent light is emitted and detected.  Reconstructed CTLM® images then locate and quantify the fluorescent area within the area of interest.

Several CTLM®’s were retrofitted with laser diodes tuned to specific wavelengths of light which matched the compounds.  Optical filters limited the spectral responses to selected wavelengths.  Experiments were conducted by placing fluorescent compounds inside a breast equivalent phantom and scanning it with CTLM®.  To our knowledge we were the first with the ability to excite a fluorescent compound, detect its location within the simulated breast, and create an image.  On September 14, 1999, a patent was issued to IDSI titled “Laser Imaging Apparatus Using Biomedical Markers that Bind to Cancer Cells” as Patent No 5,952,664.

In March 2002, we signed an agreement with Schering AG to evaluate the advantages of new fluorescence compounds for the potential use of detecting breast cancer.  We installed three CTLM® systems for Schering AG’s clinical trials: one at Charité’s Robert-Rössle Clinic in Berlin, one at the University of Muenster, and the third at Charité Hospital in Berlin, Germany as part of their Phase 1 clinical studies of fluorescent imaging compounds.  In November 2005, we announced that Schering AG had completed the evaluation of fluorescent imaging compound SF64 with three modified CT Laser Mammography systems.  The loaned systems, which had been modified to Schering AG's specifications were subsequently returned to IDSI and have been re-manufactured.

In July 2009, we announced the commencement of a breast cancer imaging study at the Charité, Medical University in Berlin, Germany.  The study will examine the potential role of the CTLM® as an enhanced breast cancer screening tool when used in combination with the fluorescent dye, Indocyanine Green (ICG).  The study will be conducted at the Campus Virchow-Klinikum and the principal investigator is radiologist Dr. Alexander Poellinger.  IDSI is continuing to research and develop fluorescence imaging techniques.


Laser Imager for Lab Animals

Our Laser Imager for Lab Animals “LILA™” program is an optical helical micro-CT scanner in a third-generation configuration.  The system was designed to image numerous compounds, especially green fluorescent protein, derived from the DNA of jellyfish.  The LILA scanner is targeted at pharmaceutical developers and researchers who monitor cancer growth and who use multimodality small animal imaging in their clinical research.

IDSI’s strategic thrust for the LILA project changed, as we decided to focus on women’s health business markets with a family of CTLM® systems and related devices and services.  The animal imager did not fit our business model although the fundamental technology is related to the human breast imager.  Consequently, we sought to align the project with a company already in the animal imaging market that might complete the LILA and commercialize it.

On August 30, 2006 we announced an exclusive license agreement under which Bioscan, Inc. would integrate LILA technology into their animal imaging portfolio.  Under the agreement we would transfer technology to Bioscan by December 2006 upon receipt of the technology transfer fee.  We have received full payment of $250,000 for the technology transfer fee and $69,000 for the parts associated with the agreement.  The agreement also provides for royalties on future sales.  Bioscan has commenced its work on the LILA project and placed one of their engineers at our facility so that he can confer with our engineers if necessary.  Bioscan pays us for use of the space and consulting fees if they require our engineering assistance.  There can be no assurance that it will be successful or that we will receive any royalties from Bioscan.



Government Regulation

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

The FDA classifies medical devices intended for human use into three classes: Class I; Class II; and Class III.  The CTLM is a Class III device.  Class III devices are devices for which the FDA has insufficient information to conclude that either general controls or special controls would be sufficient to assure safety and effectiveness, and which are life-supporting, life-sustaining, of substantial importance in preventing impairment of human health (e.g., a diagnostic device to detect a life-threatening illness), or present a potentially unreasonable risk of illness or injury.  Manufacturers of Class III devices must apply to the FDA for pre-marketing approval (“PMA”) before marketing can begin.  PMA applications must demonstrate, among other matters, that the medical device is safe and effective.  A PMA application is typically a complex submission, usually including the results of clinical studies and statistical analyses.

Once a PMA application has been filed, the FDA has up to 180 days to review it; however, the review time may be extended by the FDA asking for additional information or clarification of information already provided in the submission.  The FDA will inspect the manufacturing facility to ensure compliance with the FDA’s quality system regulations commonly referred to as QSRs prior to approval of a PMA.  The PMA process is lengthy and expensive and there can be no assurance that a PMA application will be approved within 180 days.

In August 2003, we received a letter from the FDA citing some deficiencies in our PMA application.  Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment.  In October 2004, we made a decision to voluntarily withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing.  In November 2004, we received a letter from the FDA stating that the CTLM® study had been declared a Non-Significant Risk (NSR) study when used for our intended use.  We have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application.  We believe that this application will be filed with the FDA by the end of December 2010.

We have engaged the services of U.S. regulatory consultants who specialize in FDA matters to assist us in the final preparation and submission of our FDA application.  See Item 1.  “Business-Regulatory and Clinical Status, United States/FDA”.  If we are unable to obtain prompt FDA approval, it will have a material adverse effect on our business and financial condition and would result in postponement of the commercialization of the CTLM®.  See “Regulatory and Clinical Status”.

Any products manufactured or distributed by us pursuant to FDA marketing clearance will be subject to pervasive and continuing regulation by the FDA.  Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.  In addition, the marketing and use of our products may be regulated by various state agencies.  The export of medical devices is also subject to regulation in certain instances.  Both the FDA and the individual states may inspect the manufacturers of our products on a routine basis for compliance with current QSR regulations and other requirements.

In addition to the foregoing, we are subject to numerous federal, state, and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, and fire hazard control.  There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations and that such compliance will not have a material adverse effect upon our ability to conduct business.  See Item 7.  “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 CTLM® systems outside of the United States are subject to foreign regulatory requirements that vary widely from country to country.  The time required to obtain approval for sale in foreign countries may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.  The laws of certain European and Asian countries have permitted us to begin marketing the CTLM® 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”), we were required to achieve compliance with requirements of the Medical Devices Directive (“MDD”) and affix a “CE” marking on our products to attest such compliance.  In Europe, we have obtained the certifications necessary to enable the CE mark to be affixed to our products.  In obtaining these certifications, we utilized the services of a notified body (“NB”).  A NB is a private sector regulatory body responsible for the review and approval of the documentation submitted by us to gain CE approval. In November 2000, we were recommended for CE marking, subject to review by UL’s Notified Body.  In January 2001, we received regulatory approval from UL to apply the CE marking to our CTLM® system.  CE marking provides us the opportunity to market the CTLM® within the European Union, one of the largest markets in the world and permits medical device product sales in many other markets worldwide.

In October 2000, we contracted Underwriters Laboratories Inc. (“UL”) to perform safety testing and assist us in achieving the regulatory certifications necessary to begin selling the CTLM® system outside the United States.  We also chose our Notified Body to certify our compliance with EN29000/46001/ISO9000 quality assurance standards.  In January 2001 we received notice from UL of completion for worldwide safety classification of our CTLM® system.  We replaced our European authorized representative with Emergo Europe effective August 1, 2005 in the normal course of business.

In May 2001, we received ISO 9002 certification demonstrating our commitment for quality and our ability to provide consistency, reliability, value and exceptional customer service.  ISO 9002 certification is significant in facilitating the global marketing of our CTLM® system by conforming to an effective quality management system recognized around the world.

On September 25, 2001, we received a Certificate of Exportability from the FDA for the CTLM®.  The FDA requires unapproved Class III products that are subject to PMA requirements to have FDA Certificate of Exportability in order to be exported outside of the United States.   We received a renewal of our Certificate of Exportability dated June 22, 2009, which is valid for two years.

In October 2003, we announced that we received a Certificate of Approval that our Quality Management System has been inspected and upgraded to the following quality assurance standards: ISO 9001:2000, ISO, 13485:2003, and Annex II have been granted.  As of the date of this report, almost 100 countries, including the United States, the United Kingdom, Germany, Australia, Canada, Japan and France have adopted ISO Standards as the primary means for evaluating the quality of manufacturing products.  We have been re-inspected by UL and our EC Certificate of Approval and our ISO 13485:2003 have been renewed through May 29, 2012.


CTLM® Development History, Regulatory and Clinical Status

Since inception, the entire mission of IDSI was to further develop and refine the CT Laser Mammography system which was invented in 1989 by our late co-founder, Richard J. Grable.  The 1994 prototype was built on a platform using then state-of-the-art computer processors which were slow and lasers which were very sensitive to temperature changes and required frequent calibration and servicing.

In order to market and sell the CTLM® in the United States, we must obtain marketing clearance from the Food and Drug Administration.  A Pre-Market Approval (PMA) application must be supported by extensive data, including pre-clinical and clinical trial data, as well as evidence to prove the safety and effectiveness of the device.  Under the Food, Drug, and Cosmetic Act, the FDA has up to 180 days to review a submitted PMA application, although in certain cases the FDA may increase that time period through requests for additional information or clarification of existing information.

We received FDA approval to begin our non-pivotal clinical study in February 1999.  The first CTLM® was installed at Nassau County (NY) Medical Center in July 1999 and a second CTLM® was installed at the University of Virginia Health System.  We submitted the non-pivotal clinical data to the FDA in May 2001.  In spite of our efforts to control operating temperatures with thermal cooling cabinets for the lasers and voltage stabilizers to control power, our engineering team led by Mr. Grable decided that they would re-design the CTLM®

system into a compact, robust system using surface-mount technology for the electronics and a solid state diode laser that did not require a separate chiller to control its operating temperature. It was a case where technology had to catch up with the invention.  Unfortunately, Mr. Grable passed away unexpectedly in 2001.   It took several years to re-design and test but our efforts were successful and we began to collect the clinical data necessary to file the PMA application. The application was filed in April 2003.

In August 2003, we received a letter from the FDA citing some deficiencies in the PMA application.  Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment. In October 2004, we made a decision to withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing.  The new PMA application would contain a rephrased intended use statement better supported by our data, the inclusion of new clinical cases to improve the biometrics, and with a new clinical protocol to fully support the adjunctive use of CTLM® in clinical mammography settings.

In November 2004, we received a letter from the FDA stating that it had determined that the CTLM® proposed clinical investigation was a non-significant risk (NSR) device study. We believed this new classification would be helpful in securing new research and development collaborative agreements.

In January 2005 we determined that the clinical study we intended to submit to the FDA did not, in our opinion, adequately reflect the capabilities of CTLM® as an adjunctive mammography tool.  The clinical cases were collected on CTLM® systems dating back to 2001.  Since that time we had developed significant improvements in the scanning subsystems, image reconstruction and image display software.  We had also improved quality assurance routines to ensure better operator and physician training, and improved image quality control.  We therefore announced our intention to collect data using our latest systems because we believed the results would yield a stronger study to support our PMA application.  Consequently, we decided to install updated CTLM® systems in the U.S. which extended the time to actual PMA submission from what we were earlier anticipating, but we believed this approach would better support the application.

We reported in our Prospectus dated December 27, 2005 that we experienced further delays because of difficulties in designing a revised clinical protocol and in enlisting hospitals and imaging centers to participate in acquiring new clinical cases.  In spite of the delays we experienced in obtaining the necessary approvals from the hospitals and their respective Institutional Review Boards (“IRB”), we made good progress in advancing PMA activities.  We further reported on March 23, 2006 that changes would be incorporated to bring the CTLM® system to its most current design level.  Those changes were made and do, we believe, improve the device’s image quality and reliability.  Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol.  We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality.

We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improves visualization of angiogenesis (cancer) in the CTLM® images.  The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier.  We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.

As of May 2009, 10 clinical sites have participated in the clinical trials and we believe we have sufficient clinical data to support our FDA application.  As of the date of this report, we have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application.  We believe that this application will be filed with the FDA by the end of December 2010.

The development chronology stated above details how complicated the process is to develop a brand new medical imaging technology.  We believe that we have a strong patent portfolio and are the world leader in optical tomography.  We have received marketing approval in China and Canada; the CE Mark for the European Union; ISO 13485:2003 registration; UL Electrical Test Certificate; and Product registrations in Brazil and Argentina.  The registrations for Brazil and Argentina were not renewed in 2009 because of the costs associated with new testing requirements by UL.  We have now completed the Electromagnetic Compatibility (“EMC”) testing required by UL and plan to submit our renewal


application for these product registrations in 2011.  Worldwide, our end users have completed more than 15,000 patient scans, and we have sold 15 CTLM® systems as of the date of this report.  Our decision to fund the Company primarily through the sale of equity has enabled us to reach this important milestone.  In fiscal 2010 we used the proceeds from short-term loans and proceeds from our Southridge Private Equity Credit Agreement for working capital.  Going forward we intend to use the proceeds of draws from our Southridge Private Equity Credit Agreement and any successor private equity agreements with Southridge and/or alternative financing facilities, which may include issuance of convertible preferred stock, as our sources of working capital.  Substantial additional financing will be required before and after the filing of the FDA application.  See Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit.”

Clinical Collaboration Sites Update

CTLM® Systems have been installed and patients are being scanned under clinical collaboration agreements as follows:

1)
Humboldt University of Berlin, Charité Hospital, Berlin, Germany
2)
The Comprehensive Cancer Centre, Gliwice, Poland (Two Systems)
3)
Catholic University Hospital, Rome, Italy
4)
MeDoc HealthCare Center, Budapest, Hungary
5)
Tianjin Medical University’s Cancer Institute and Hospital, Tianjin, China


We are in discussions with other hospitals and clinics wishing to participate in our clinical collaboration program. We have been commercializing the CTLM® in many global markets and we previously announced our plans to set up this network to foster research and to promote the technology in local markets.  We will continue to support similar programs outside of the United States.  These investments may accelerate CTLM® market acceptance while providing valuable clinical experiences.


 
Domestic Sales and Marketing

The CTLM will be positioned as an adjunct to x-ray mammography and may be especially useful in studies of dense breasts.  Consequently, CTLM will be marketed to centers performing x-ray mammography.  There are approximately 8,700 Mammography Quality Standards Act (MQSA) centers certified in the United States.  Sales in the U.S. cannot occur unless and until we receive pre-market approval from the FDA.  IDSI will begin marketing to the centers following FDA approval.

Since CT laser breast imaging is a new imaging modality the rate at which the CTLM® achieves market acceptance and penetration will depend on many variables.  These include, but are not limited to, the establishment and demonstration in the medical community of the clinical safety, efficacy, and cost-effectiveness of the CTLM®, and the advantage of the CTLM® when used as an adjunct to existing technology and cancer detection methods.  We believe that the clinical data being collected and assessed under our FDA clinical trial and at research sites will have a significant impact on the ultimate market size for our device.  Failure of our products to gain market acceptance would have a material adverse effect on our business, financial condition, and results of operations.  There can be no assurance that physicians or the medical community in general will accept and/or utilize the CTLM®.

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

 
International Sales

We are pursuing international sales in those countries where regulations permit us to begin marketing the CTLM® subject to certain homologations.  Some countries, including Japan, require FDA approval before the CTLM® can be marketed.  As part of our global commercialization program for the CTLM®, we have installed systems at a number of international locations as clinical partner reference sites.  See “Clinical Collaboration Sites Update”.

Until we receive pre-market approval from the FDA to market the CTLM® in the United States, a significant portion of our revenues 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 continues to develop and there can be no assurance that new laws or regulations will not have an adverse effect on us.

International Distributors - Global Commercialization

In March 2009, we announced that we had redefined our marketing strategy and launched a new campaign focusing on the international market.  Because of our disappointment with the performance of many of our previous distributors, we have terminated their distribution agreements for non-performance or allowed their agreements to expire.  In April 2009, we were pleased to announce that we renewed our distribution agreement with EDO MED Sp. Z.o.o. as our exclusive distributor in Poland.  EDO MED will continue to market and provide technical service support for the CTLM® throughout Poland, as well as to assist with and promote the ongoing research efforts utilizing CTLM® technology at the Comprehensive Cancer Centre in Gliwice, Poland and other institutes and research centers.  Currently, the CTLM® system is in use at the Comprehensive Cancer Centre, Maria Sklodowska-Curie Memorial Institute, and the Military Institute of Health Services in Gliwice and Warsaw.

In the Asia-Pacific Region, we previously announced that we contracted with BAC, Inc. to manage our representative office in Beijing, existing distributors and develop new areas.  As part of our continuing cost cutting initiatives, we closed our representative office in January 2009, and in December 2008, we terminated our contract with BAC, Inc. for non-performance.  In March 2009, we announced the appointment of Jainsons Pty Ltd Company as our new distributor for Australia and New Zealand.  In July 2010, we announced that we installed a CTLM® system at Tata Memorial Hospital, the national cancer comprehensive cancer center in Mumbai, India.  The system was placed by Anto Puthiry, Managing Director of High-Tech Healthcare Equipments Pvt. Ltd.  We continue to seek qualified distribution channels in China but as of the date of this report we have not secured such channels.

In September 2007, we announced the installation of a CTLM® system at the Tianjin Medical University’s Cancer Institute and Hospital (“Tianjin”), the largest breast disease center in China.  The hospital evaluated the CTLM® under three research protocols designed to improve current methods of addressing breast cancer imaging and treatment follow-up.  We previously announced that we installed a CTLM® system at Beijing’s Friendship Hospital, which enabled CTLM® clinical procedures to become listed on the Regional and subsequently the National Schedule for patient payments.

In December 2008, we announced that a recent study of the CTLM® was one of the featured scientific abstracts at the Radiological Society of North America (“RSNA”) from November 30th to December 5th.  Dr. Jin Qi, a radiologist at the Tianjin Medical University Cancer Institute and Hospital, Tianjin, China was selected for her clinical paper, “CTLM as an Adjunct to Mammography in the Diagnosis of Patients with Dense Breasts.”  Dr. Qi attended RSNA with IDSI and was present at our exhibit.  Dr. Qi’s clinical paper was accepted as one of the European Congress of Radiology’s conference presentations in March 2009.  The study demonstrated that: “when the CTLM® system was used as an adjunct to mammography in heterogeneously and extremely dense breasts, the sensitivity (detecting cancer) increased significantly.”

We previously signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment was surging due to publicity surrounding their former First Lady, who succumbed to the disease.  In September 2007, we announced the installation of a CTLM® system at the Univeriti Putra Malaysia (“UPM”) in Kuala Lumpur, Malaysia.  The CTLM® was installed at UPM’s academic facility within the jurisdiction of the Ministry of Education and was evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur.  Following the evaluation at UPM, we appointed a new distributor, Daichi Holding Berhad (“Daichi”) of Penasng, Malaysia.  The CTLM® was removed from UPM academic facility at the conclusion of the evaluation period.  Daichi issued a purchase order for this system and it was initially installed in August 2009 at Catherine Women’s Medical Center in Petaling Jaya, Malaysia.  On September 22, 2009, we announced that Daichi completed the purchase of the system with full payment.  In June 2010, Daichi notified us that they were relocating the system and is now installed at the Breast Wellness (M) SDN. BHD (a public limited liability company) in Petaling Jaya, Malaysia.

Activities in Europe and the Middle East are top marketing priorities for IDSI.  As a result of our participation as an exhibitor at the Arab Health Medical Conference in January 2009 in Dubai, UAE, and at the European Congress of Radiology (“ECR”) in March 2009 in Vienna, Austria, we were able to meet with qualified distributors to discuss


their interest in representing us in their respective territories.  While attending Arab Health, we hired a Managing Director to market the CTLM® in the UAE and parts of the Middle East.

In March 2009, we announced the appointment of Shihab Muscat United LLC (“SMU”) as our exclusive distributor for the country of Oman.  Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, Yemen, Belgrade and Syria.  In April 2009, we signed a non-exclusive agreement with Neomedica d.o.o. Beograd to market the CTLM® system to the private and public sectors of Slovenia, Croatia, Serbia, Montenegro, and Macedonia.  In October 2008, we announced that our distributor, Laszlo Meszaros of Kardia Hungary Kft. purchased the first CTLM® system for Budapest, Hungary.  The CTLM® system has been installed at the new MeDoc HealthCare Center (“MDHC”) located in Budapest, in collaboration with Dr. Maria Gergely, Chief Radiologist of Uzsoki Hospital.  Also in April 2009 we announced that Socrate Medical SRL located in Milan, Italy, has been selected as a distributor for the CTLM® system in Northern and Central Italy.

We previously announced in October 2008 that our distributor, The Oyamo Group (“Oyamo”) placed an order for the first CTLM® system for Jerusalem, Israel.  Oyamo obtained the import license from The Israeli Ministry of Health for the CTLM® system and has recently advised us that they now plan to install the system at Sheba Medical Center at Tel Hashomer, which is outside of Tel Aviv, by the end of November 2010.

In December 2008, we announced that a new study evaluating the CTLM system as an adjunct to mammography was featured in the December 2008 issue of Academic Radiology.  Alexander Poellinger, M.D., a radiologist at Charite Hospital in Berlin. Germany, authored “Near-infrared Laser Computed Tomography of the Breast: A Clinical Experience” along with colleagues at Charite and IDSI’s Director of Advanced Development as co-author.  Their work demonstrated an increase in accuracy of diagnosing malignant and benign breast lesions in patients who were examined with mammography and CTLM adjunctively compared to mammography alone.  Dr. Poellinger’s clinical paper was distributed to doctors and distributors visiting our booth at the European Congress of Radiology in March 2009.

In January 2010, we exhibited the CTLM® at the Arab Health 2010 medical conference held from January 26 – 29 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE).  We demonstrated the CTLM system, identified potential distributors for the Middle East region and obtained prospective sales leads.  The Arab Health Exhibition and Congress is one of the largest and most prestigious healthcare events in the Middle East, with over 2,300 exhibitors from over 65 countries and more than 60,000 medical professionals.

In March 2010, we exhibited our CTLM® system and clinical results at the annual European Congress of Radiology (ECR 2010) held from March 4 -8, in Vienna, Austria.  ECR 2010 attracted approximately 19,000 participants worldwide.  ECR is one of the largest medical meetings in Europe and the second largest radiology meeting in the world and currently has 45,000 members.

Among our global users, we have three systems in Poland, two in Italy, two in the Czech Republic, two systems in the United Arab Emirates, and two systems in China as well as one system each in Germany, Hungary, Malaysia and India.  As of the date of this report IDSI’s users have performed over 15,000 CT Laser Mammography (CTLM®) patient scans worldwide.


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 payers (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 payers to the physicians and clinics utilizing the CTLM® or by refusing reimbursement.  There can be no assurance that third-party payers will provide reimbursement for use of our products.  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.

The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”).  The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us.  Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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.  These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.

Product Liability

Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing and marketing of cancer detection products.  While the CTLM® 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.  We previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales.  As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 15,000 patient scans worldwide.

Competition

The medical device industry generally, and the diagnostic imaging segments in particular, are characterized by rapidly evolving technology and intense competition.  The IDSI approach of employing continuous wave laser optical technology in a CT-like device to produce 3D images is unique and patented, and the concept of imaging angiogenesis in the breast to differentiate between benign and malignant tissue is well accepted.

Although the CTLM® system is a CT-like scanner, its energy source for imaging is a laser beam and not ionizing radiation such as is found in conventional x-ray mammography or CT scanners.  The advantage of imaging without ionizing radiation may be significant in our markets.  X-ray mammography is a well-established method of imaging the structures within the breast.  Ultrasound is often used as an adjunct to help differentiate tumors and cysts.  The CTLM® is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography.  CTLM® is, however, a method of molecular functional imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue.  Unlike X-ray or ultrasound, optical molecular imaging is a revolutionary functional imaging modality.  In this respect, CTLM® may compete with magnetic resonance imaging (MRI) in breast imaging because both CTLM and MRI have the capacity to visualize function at the molecular level.

To our knowledge, several companies are targeting the breast optical imaging market.  Advanced Research Technologies, Inc. (ART) (TSX:ARA) is developing a non-3D imager which does not utilize our patented continuous wave technology and in which the breast must be immersed in a gel to be scanned.  ART may have distribution agreements with GE Medical should a product become available.  ART has not received a PMA.

In December 2005, Philips Medical Systems announced their intent to develop optical imaging equipment with an intention to “be on the market early after 2010.”  IDSI also believes that Siemens Medical Systems may be developing optical imaging equipment.

CTLM® Laser Mammography Systems are installed in the following countries: Italy, Germany, Poland, the Czech Republic, the Peoples Republic of China, Malaysia and the United Arab Emirates.  Over 15,000 breast exams have been completed on CTLM® systems.

Patents

The rapid technological advancements that characterize the medical device industry have led us to rely on a combination of patents, trade secrets, copyrights, trademarks, and confidentiality procedures and processes to protect our CTLM® and other technologies that we have developed.

The original patent for the CTLM® was granted in December 1997 under U.S. Patent Number 5,692,511 (the “Patent”).  The Patent has a total of 4 independent claims and 24 subordinate claims.  The independent claims serve to provide an overall outline of the disclosure of the invention.  The subordinate claims provide additional information to identify pertinent details of the invention as they relate to the respective specific independent claim.  We own the rights to the Patent for its 17-year life pursuant to an exclusive patent licensing agreement with the late Richard Grable, who invented the CTLM® and served as our Chief Executive Officer and whose estate has owned the Patent since his death in August 2001.  See “Patent Licensing Agreement” and “Certain Transactions.”  As of the date of this report, we own 20 patents and have 3 additional United States patents pending with regard to optical


tomography, many of which are based on the original CTLM® technology.  We also have 17 International patents and have two International patents pending.

In September 1999, we were granted a patent for “A Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells”.  This patent was issued under U.S. Patent No. 5,952,664.  The biomedical marker we are currently testing is a fluorescent marker.  We plan to continue studying other biomedical markers in conjunction with major pharmaceutical companies as a potential advanced diagnostic feature to be used with our CTLM® system.  The CTLM® in combination with the fluorescent feature has the potential to be used with photodynamic therapy (PDT) to aid in the treatment of breast cancer.

In November 1999, we were granted an Australian patent for “Diagnostic Tomographic Laser Apparatus” as Australian patent number 712849.  This patent, the Australian counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc.   See “Patent Licensing Agreement”.

In February 2000, we were granted a patent for: “Device for Determining the Perimeter of the Surface of an Object Being Scanned and for Limiting Reflection from the Object Surface”.  The patent was issued under U.S. Patent No. 6,029,077.  This particular patent covers the technique for determining the perimeter of the breast, which simplifies the algorithms necessary to produce the image.

In March 2000, we were granted a patent for: “Apparatus And Method for Determining the Perimeter of the Surface of an Object Being Scanned”.  The patent was issued under U.S. Patent No. 6,044,288. This patent covers an optical technique to determine the perimeter of a scanned breast. The U.S. Patent No. 6,029,077 described in the previous paragraph covers a different technique to perform the same measurement.  Together, these two patents protect the practical techniques that can be used to acquire this information.

In August 2000, we were granted a patent for: “Detector Array for Use in a Laser Imaging Apparatus”.  The patent was issued under U.S. Patent No. 6,100,520.  This patent describes the several different variations that can be used while scanning the breast without any contact between the breast and the optical components.  Unlike the conventional method, this unique feature allows the CTLM® to scan the breast without the use of breast compression.

In October 2000, we were granted a patent for: “Method of Reconstructing an Image Being Scanned”.  The patent was issued under U.S. Patent No. 6,130,958.  This patent describes the algorithms used to reconstruct images from data acquired from CTLM® scans.

In December 2000, we were granted a patent for: “Detector Array With Variable Gain Amplifiers For Use In A Laser Imaging Apparatus”.  The patent was issued under U.S. Patent No. 6,150,649.  This patent describes the proprietary electronics used in the CTLM® detector array.

In February 2001, Mr. Richard Grable was granted a patent for “Diagnostic Tomographic Laser Imaging Apparatus”.  This patent was issued for his proprietary scanning bed, a unique feature of the CTLM®, and was issued as U.S. Patent No. 6,195,580.  The patent allows for a fixed horizontal platform including a top surface with an opening through which the female breast is vertically pendent using a laser beam for the detection of breast abnormalities.    See “Patent Licensing Agreement”.

In April 2001, we were granted a patent for: “Detector Array for Use in a Laser Imaging Apparatus”.  The patent was issued under Patent No. 6,211,512.  The patent allows for several different optics variations while scanning the breast without contact between the breast and the optical components.  This feature allows the CTLM® to scan the breast without the use of breast compression.

In January 2002, we were granted a patent for “Detector Array With Variable Gain Amplifiers for Use in a Laser Imaging Apparatus,” as U.S. Patent No. 6,331,700.  This patent protects some of the non-obvious, but essential, design aspects of an optical CT scanner.  This patent addresses the solution to the problem of accommodating a huge dynamic range of light intensities emitted from the breast.

In February 2002, we were issued a patent for “Time-Resolved Breast Imaging Device,” as U.S. Patent No. 6,339,216.  This patent protects the key electronics of a time-resolved optical CT scanner.  It addresses the solution to the problem of simultaneously accommodating a large dynamic range of light intensities emitted from the breast while achieving the necessary temporal resolution.


In May 2003, we were granted a patent for “Medical Optical Imaging Scanner Using Multiple Wavelength Simultaneous Data Acquisition for Breast Imaging,” as U.S. Patent No. 6,571,116.

In October 2003, we were granted a Canadian patent for “Diagnostic Tomographic Laser Imaging Apparatus” as Canadian patent number 2223606.  This patent, the Canadian counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc.   See “Patent Licensing Agreement”.

In December 2003, we were granted a European patent for “Diagnostic Tomographic Laser Imaging Apparatus” as European patent number 0837649.  This patent, the European counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc.   See “Patent Licensing Agreement”.

In January 2004, we were granted a patent for “Phantom For Optical And Magnetic Resonance Imaging Quality Control,” as U.S. Patent No. 6,675,035.  This invention relates to phantoms for use in optical and magnetic resonance imaging that emulates the optical characteristics of breast tissue that resembles the breast in shape and size, as an integral component of a quality assurance protocol to verify the performance of the medical imaging apparatus being evaluated.

In January 2004, we were granted a patent for “Method For Improving The Accuracy Of Data Obtained In A Laser Imaging Apparatus,” as U.S. Patent No. 6,681,130.  This method improves the accuracy of data obtained using a diagnostic medical imaging apparatus that employs a near-infrared laser and array of detectors with variable gain amplifiers that can accommodate the wide dynamic range of signals available from the detectors.

In February 2004, we were granted a patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as U.S. Patent No. 6,693,287.  This patent protects the proprietary method of collecting data while using “biomedical” markers that bind to cancer cells during a CT laser scan to provide a positive identification of the cancer area, to selectively activate the Photo Dynamic Therapy (PDT) drug to destroy the cancer.

In April 2004, we were granted a Canadian Patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as Canadian Patent No. 2,373,299.  This patent broadly covers the optical imaging of fluorescent compounds.

In May 2004, we were granted a patent for “Medical Optical Imaging Scanner Using Multiple Wavelength Simultaneous Data Acquisitions For Breast Imaging” as U.S. Patent No. 6,738,658.  This patent protects the concept of differential reconstruction: reconstructing the difference in data before and after an injection of a contrast agent, such as a fluorescent compound.

In June 2004, we were granted a Chinese Patent for “Diagnostic Tomographic Laser Imaging Apparatus” as Chinese Patent No. ZL95197940X.  The patent, the Chinese counterpart of U.S. Patent 5,692,511, was issued in the name of Richard J. Grable for a period of 20 years from the date of filing until July 10, 2015, and is exclusively licensed to Imaging Diagnostic Systems, Inc.  See “Patent Licensing Agreement”.

In July 2004, we were granted a European patent for “Method For Reconstructing The Image Of An Object Scanned With A Laser Imaging Apparatus” as European patent number 1005286.  This patent is the European counterpart of U.S. Patent No. 6,130,958 and protects the algorithms used to reconstruct CTLM images.

In July 2004, we were granted an Australian patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as Australian patent number 775069.  This patent is the Australian counterpart of U.S. Patent No. 5,952,664 and protects the fluorescent imaging application of the CTLM.

In August 2004, we were granted a European Patent for “Apparatus For Determining The Perimeter Of The Surface Of An Object Being Scanned” as European Patent No. 1003419.  This is the European equivalent of U.S. Patent No. 6,044,288, which protects a key element in the optical technique used to determine the perimeter of an object being scanned.

In December 2004, we were granted a Hong Kong patent for “Apparatus For Determining The Perimeter Of The Surface Of An Object Being Scanned” as Hong Kong patent number HK1029506.  This patent is the Hong Kong counterpart of U.S. Patent No. 6,044,288, which protects a key element in the optical technique used to determine the perimeter of an object being scanned.


In December 2004, we were granted a Hong Kong patent for “Method For Reconstructing The Image Of An Object Scanned With A Laser Imaging Apparatus” as Hong Kong patent number HK1029508.  This patent is the Hong Kong counterpart of U.S. Patent No. 6,130,958 and protects the algorithms used to reconstruct CTLM images.

In June 2005, we were granted a European patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as European patent number 1181511.  This patent is the European counterpart of U.S. Patent No. 5,952,664 and protects the fluorescent imaging application of the CTLM.

In January 2007, we were granted U.S. Patent 7,155,274, entitled “Optical Computed Tomography Scanner for Small Laboratory Animals,” the first patent application of the LILA technology.

In May 2007, a new patent for our optical CT scanner for small laboratory animals was issued as U.S. Patent 7,212,848.  This second patent adds the concept of a second laser which will provide a geographic reference for the fluorescence image.  Our first patent covered the basic CT fluorescent imaging of small laboratory animals.

In November 2007, we announced the issuance of Chinese patent ZL 99 8 16608.1, issued July 11, 2007, entitled “Laser Imaging Apparatus using Biochemical Markers that Bind to Cancer Cells.”  The patent is granted for a period 20 years from date of filing, until April 1, 2019.  This patent, equivalent to U.S. patent 5,952,664, protects the concept of imaging and activating a photodynamic therapy agent in an optical CT scanner.

In November 2008, we were granted U.S. Patent 7,446,875, entitled “Apparatus and Method for Acquiring Time Resolved Measurements Utilizing Direct Digitization of the Temporal Point Spread Function of the Detected Light”.  This invention developed by our engineers covers a key technology for time-resolved optical imaging which improves the quality of the imaging data and decreases the time required to acquire the image data.

We intend to file for patents on products, including the CTLM®, for which we believe the cost of obtaining a patent is economically reasonable in relation to the expected protection obtained.  There can be no assurances that any patent that we apply for will be issued, or that any patents issued will protect our technology.  If the patents we license or obtain are infringed upon, or if we are required to defend any patent infringement cases brought against us that will require substantial capital, the expenditure of which we might not be able to afford, we could be materially adversely affected.

Patent Licensing Agreement
IDSI was formed in December 1993 for the sole purpose of developing and commercializing Mr. Richard Grable's invention, a CT laser breast-imaging device (the “Mammoscan™”).

In June 1998, IDSI signed an exclusive patent license agreement with Mr. Grable, which covers some of the technology for the CTLM®.  The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination under specific conditions.  As consideration for this license, Mr. Grable received 7,000,000 shares of common stock and a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid.  The royalty provisions do not apply to sales made prior to receipt of FDA approval for the CTLM®.  In addition, following FDA approval, Mr. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used.  Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001.  Mrs. Richard Grable, our Chairman and CEO, is the principal beneficiary of Mr. Grable’s estate.

The following table sets forth the Patent licensing royalty structure:

ANNUAL ADJUSTED SALES
PERCENTAGE
$0 to $1,999,999
10%
$2,000,000 to $3,999,999
9%
$4,000,000 to $6,999,999
8%
$7,000,000 to $9,999,99
7%
Greater than $10,000,000
6%




Employees
As of October 2010, we have 19 full-time employees, including our three executive officers.  Seven of our employees (36%), are employed in the areas of scientific, clinical and product research and development.  In September 2009, we had 14 full-time employees, of which eight (57%) were employed in the areas of scientific, clinical and product research and development.  The increase is due to staffing requirements to complete our FDA application.  Our ability to develop our products and 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 key employees.  The loss of the services of existing personnel as well as the failure to recruit key scientific, technical and managerial personnel in a timely manner would be detrimental to our research and development programs and to our business.  Our anticipated growth and expansion into areas and activities requiring additional expertise, such as marketing, will require the addition of new management personnel.  Competition for qualified personnel is intense and there can be no assurance that we will be able to continue to attract and retain qualified personnel necessary for the development of our business.



CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-K and certain information incorporated by reference contains “forward-looking statements” within the meaning of the federal securities laws and use terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “projects”, “potential,” or “continue,” or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future.  These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements.  These forward-looking statements include, among others, statements relating to our business strategy, which is based upon our interpretation and analysis of trends in the healthcare treatment industry, especially those related to the diagnosis and treatment of breast cancer, and upon management’s ability to successfully develop and commercialize its principal product, the CTLM®.  This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to alternative techniques for diagnosing and managing breast cancer.  Factors that could cause actual results to materially differ include, without limitation, the timely and successful completion of our U.S. Food and Drug Administration (“FDA”) clinical trials; the timely and successful submission of our FDA application for marketing clearance of the CTLM®; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future.  There are also many known and unknown risks, uncertainties and other factors, including, but not limited to, technological changes and competition from new diagnostic equipment and techniques, changes in general economic conditions, healthcare reform initiatives, legal claims, regulatory changes and risk factors detailed from time to time in our Securities and Exchange Commission filings that may cause these assumptions to prove incorrect and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, those described above or elsewhere in this annual report.  All forward-looking statements and risk factors included in this document are made as of the date of this report based on


information available to us as of the date of this report, and we assume no obligation to update any forward-looking statements or risk factors.  You are cautioned not to place undue reliance on these forward-looking statements.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS


Risks associated with our financial results

We have incurred and are incurring significant losses and we may not be able to continue our business in the future.

At June 30, 2010, we had an accumulated deficit of $111,880,882 after discounts and dividends on preferred stock.  These losses have resulted principally from costs associated with research and development, clinical trials and from general and administrative costs associated with our operations.  We expect operating losses will continue for at least the next 12 months due primarily to the anticipated expenses associated with:

·
demonstrator sites
·
clinical collaboration sites
·
pre-market approval process,
·
anticipated commercialization of the CTLM®, and
·
other research and development programs

We have a limited history of operations.  Since our inception in December 1993, we have been engaged principally in the development of the CTLM®, which has not been approved for sale in the United States.  While we have received FDA export approval for foreign sales, we have made only 15 foreign sales.  Consequently, we have limited experience in manufacturing, marketing and selling our products.  We currently have no source of material operating revenues and have incurred substantial net operating losses since inception.
 
 
Our auditors have raised substantial doubts as to our ability to continue as a going concern as we have not been and may not be able to be profitable.

We have received an opinion from our auditors stating that the fact that we have suffered substantial losses and have yet to generate an internal cash flow raises substantial doubt about our ability to continue as a going concern.  Our ability to achieve profitability will depend on our ability to obtain regulatory approvals for the CTLM®, develop the capacity to manufacture and market the CTLM® and achieve market acceptance of the CTLM®.  There can be no assurance we will achieve profitability if and when we receive regulatory approvals for the development, commercial manufacturing and marketing of the CTLM®.
 
 
Risks associated with our lack of capital

We require additional capital which we may be unable to raise which may cause us to stop or cut back our operations.

Through June 30, 2010 we have spent approximately $77 million.  Our currently estimated annual expenses are approximately $2.6 million.  In the year following receipt of marketing clearance for our CTLM® from the FDA, we anticipate that we will need approximately $5 million to complete all necessary stages in order to manufacture and market the CTLM® in the United States and foreign countries.  We plan on using the net proceeds raised from the sale of common stock through our Private Equity Credit Agreement with Southridge Partners II, LP and additional financings to develop and market this product family, including funds for:

·
research, engineering and development programs,
·
pre-clinical and clinical testing of the family of products,
·
regulatory processes,
·
inventory,
·
marketing programs, and
·
operating expenses (including general and administrative expenses).



Our future capital requirements depend on many factors, including the following:

·
the progress of our research and development projects,
·
the progress of pre-clinical and clinical testing on other proposed products,
·
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.

In addition, our fixed commitments are substantial and would increase if additional agreements were entered into and additional personnel were retained.  We do not expect to generate a positive internal cash flow for at least 12 months due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA process, and the costs associated with advanced product development activities.

Although we have from time to time reviewed opportunities provided to us by investment bankers or potential investors in regard to additional equity financings, there can be no assurance 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 and will require us to further delay, scale back or eliminate our research, product development and marketing programs; and may require us to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves, or to scale back or eliminate our other operations.  See “Financing/Equity Line of Credit.”
 
 
We have had and may have to issue securities, sometimes at prices substantially below market price, for services which may further depress our stock price and dilute the holdings of our shareholders.

Since we have generated no material 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, we have issued an aggregate of 2,306,500 shares of common stock covered by registration statements on Form S-8.  The aggregate fair market value of those shares when issued was $2,437,151.  The issuance of large amounts of our common stock, sometimes at prices well below market price, for services rendered or to be rendered and the subsequent sale of these shares may further depress the price of our common stock and dilute the holdings of our shareholders.  In addition, because of the possible dilution to existing shareholders, the issuance of substantial additional shares may cause a change-in-control.  On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value.  The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000.  In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for providing additional investor relation services.  The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.  (See Item 5  Market for Registrant's Common Equity and Related Stockholder Matters - Private Placement of Common Stock - Issuance of Stock for Services)


We have in the past and may have to in the future sell additional unregistered convertible securities, possibly without limitations on the number of common shares the securities are convertible into, which could dilute the value of the holdings of current shareholders.

We have relied on the private placement of convertible preferred stock and convertible debentures to obtain working capital and may continue to do so in the future.  As of the date of this report, we have issued 206,827,591 shares of common stock which were converted from privately placed preferred stock and debentures.  This number of shares of common stock represents approximately 23% of the currently outstanding number of shares of common stock.



In deciding to issue preferred stock and debentures through 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 stock or debenture sale, and
·
number of common shares the preferred stock or debentures would have been convertible into at the time of the sale

At the time of each private placement there were enough shares, based on the price of our common stock at the time of the sale of the preferred stock or debentures, to satisfy the conversion requirements.  Although our board of directors attempted to negotiate a floor on the conversion price of each series of preferred stock and debentures prior to their sale, it was unable to do so.

In order to obtain working capital we will continue to:

 
·
draw on our Southridge Private Equity Agreement pursuant to a prior registration statement which has been declared effective
 
·
seek capital through debt or equity financing which may include the issuance of convertible debentures or convertible preferred stock whose rights and preferences are superior to those of the common stockholders, and
 
·
attempt to negotiate the best transactions possible taking into account the impact on our shareholders, dilution, loss of voting power and the possibility of a change-in-control.

Nonetheless, in order to satisfy our working capital needs, it may become necessary to issue convertible securities without a floor on the conversion price.
 
 
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 if the price of our common stock decreases:

 
·
the percentage of shares outstanding that will be held by these holders upon conversion will increase accordingly,
 
·
the lower the market price the greater the number of shares to be issued to these holders upon conversion, thus increasing the potential profits to the holder when the price per share later 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 short sales of our common stock, in addition to a stock overhang of an indeterminable amount, may depress the price of our common stock,
 
·
the sale of a substantial amount of preferred stock or debentures to relatively few holders could effectuate a possible change-in-control, and
 
·
in the event of our voluntary or involuntary liquidation while the preferred stock or debentures are outstanding, the holders of those securities will be entitled to a preference in distribution of our property.
 
·
We may need to record a derivative liability.
 
 
We may draw on our equity credit line which may cause the value of our common stock to decline and dilute the holdings of our shareholders.

Since January 2001 we have raised $42,714,650 and issued 425,676,012 common shares through a series of six Private Equity Credit Agreements with Charlton Avenue LLC (“Charlton”).

On November 23, 2009 we executed a new Private Equity Credit Agreement with Southridge, which was amended on January 7, 2010.  Pursuant to our Southridge Private Equity Credit Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to Southridge at a price equal to 93% of the market price, based on the formula set forth in our agreement with Southridge.  We may need capital in excess of the amounts available under the Southridge Private Equity Credit Agreement, and we may seek additional funding through public or private financing or collaborative, licensing and other arrangements with corporate partners.  As we utilize the Southridge Private Equity Credit Agreement, or additional funds are raised by issuing equity securities, especially convertible preferred stock, dilution to existing shareholders will result and future investors


may be granted rights superior to those of existing shareholders.  Since January 2010 we have raised $2,000,000 and issued 71,244,381 common shares through the Southridge Private Equity Credit Agreement.  See “Financing/Equity Line of Credit/Debentures.”
 
 
We have increased and will need to increase our authorized shares of common stock to have sufficient shares available to raise capital for continuing operations and strategic initiatives which may cause the value of our common stock to decline and dilute the holdings of our shareholders.

We now have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares.  In addition, we have reserved 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock outstanding and 45,523,120 shares to cover outstanding options.  As of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement.  In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ have agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn.  As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement.  Given our ongoing need to issue substantial amounts of new shares to raise capital to continue operations under our Southridge Private Equity Credit Agreement with Southridge and to have the ability to engage in strategic initiatives, such issuances may cause the value of our common stock to decline and dilute the holdings of our shareholders.


Our currently authorized common stock may not be sufficient to satisfy our financing needs.

In December 2008, our shareholders approved an increase of our authorized common stock to 950,000,000 shares.  With this increase we believed that we would have sufficient shares available to raise the funds needed to complete the FDA approval process and reach a point where we could generate internal revenues from operations.  Due to delays in the completion of our clinical trials and preparation of our FDA application (due in large part to our lack of financing) as well as the depressed level of our stock price, we may not have authorized shares sufficient to satisfy our near-term financing needs.  We now have 884,278,434 shares outstanding, and after reservation of 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock and 45,523,120 shares to cover outstanding options.  As of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement.  In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn.  As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement.  Given our substantial financing needs, low stock price and the likelihood that any new debt financing or the private placement sale of convertible preferred shares would involve convertibility into common stock, we plan to seek shareholder approval to amend our Articles of Incorporation to increase our authorized common stock at our Annual Meeting tentatively planned for December 2010. Such an increase would cause substantial additional dilution to our shareholders, and further downward pressure on our stock price, and there can be no assurance that our shareholders would approve any such increase if it were proposed.


The Southridge Private Equity Credit Line may not be available when we need it, thus limiting our ability to bring our CTLM® to market.

The Southridge Private Equity Credit Line contains various conditions to our being able to use it, including effectiveness of the required registration statement and the absence of any material adverse change in our business or financial condition.  Further, Southridge is a limited partnership registered in the state of Delaware and if it were unable or unwilling to fulfill its obligations, our legal remedies would be limited.  Thus, we may be unable to draw down on the Southridge Private Equity Credit Line when we need the funds, and that could severely harm our business and financial condition and our ability to bring the CTLM® to market.  Prior to the effective date of the Southridge Private Equity Credit Line, we were almost exclusively dependent on Charlton for working capital for nine years.  Since April 1999, we have issued to Charlton a total of 469,676,012 shares of common stock


through conversion of $13,410,000 face amount of our preferred stock and debentures purchased by Charlton and through $44,714,650 in purchases under all of our private equity lines.  Since January 2010 we have raised $2,000,000 and issued 71,244,381 common shares through the Southridge Private Equity Credit Agreement.  See “Financing/Equity Line of Credit/Debentures.”
 
 
We have had and may have to issue securities, sometimes at substantially below market price, in order to pay off our debts which may further depress our stock price and dilute the holdings of our shareholders.

Since we have generated no material revenues to date, we have had difficulty in paying off some of our debts which have become due.  In order to pay these debts, we have issued shares and/or warrants to purchase shares of common stock.  We have also entered into agreements whereby the lender, sometimes at its option, may be issued other equity securities, such as warrants, to pay off debt.  On some occasions, we have converted debt into equity at prices that were well below the market price.  In addition, as we have no material revenues, we may have to issue more shares of common stock or other equity securities, sometimes at prices well below market price, in order to pay off current or future debts that become due.  These types of issuances of common stock and other equity securities to pay off debt may further depress the price of our common stock and would dilute the holdings of our shareholders, and if substantial dilution does occur, could also cause a change-in-control.
 
 
Conversions of our convertible preferred stock and exercise of our convertible debentures and warrants may cause a change of control and other detrimental effects to the value of our shareholders’ holdings.

If we issue substantial amounts of convertible securities and the market price of our common stock declines significantly, we could be required to issue a number of shares of common stock sufficient to result in our current stockholders not having an effective vote in the election of directors and other corporate matters.  In the event of a change-in-control, it is possible that the new majority stockholders may take actions that may not be consistent with the objectives or desires of our current stockholders.

We would most likely be required to convert any convertible preferred stock and convertible debentures which we choose to issue based on a formula that varies with the market price of our common stock.  As a result, if the market price of our common stock increases after the issuance of our convertible preferred stock and convertible debentures, it is possible that, upon conversion of the convertible preferred stock and convertible debentures, we will issue shares of common stock at a price that is far less than the then-current market price of the common stock.

If the market price of our common stock decreases after we issue the convertible preferred stock or convertible debentures, upon conversion, we will have to issue an increased number of shares to the preferred stock and convertible debenture holders.  The sale of convertible preferred stock and debentures may result in a very large conversion at one time.  As of the date of this Report, we have no Debentures outstanding and 35 shares of Series L convertible preferred stock outstanding.  In the event that we issue additional convertible preferred stock or convertible debentures and we do not have sufficient authorized shares to cover conversion of these securities would have to seek shareholder approval increase the number of authorized shares.

In addition, if we issue warrants they will likely be exercisable at a fixed price based on the then-existing market price of our common stock.  If the market price of our common stock thereafter exceeds the warrant exercise price, exercise of the warrants may pose a risk to shareholders because these exercises may drive down the market price of our common stock.
 
 
Risks associated with our industry

We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance would depress our sales.
 
There can be no assurance that physicians or the medical community in general will accept and utilize the CTLM® or any other products that we develop.  The extent and rate the CTLM® achieves market acceptance and penetration will depend on many variables, including, but not limited to, the establishment and demonstration in the medical community of the clinical safety, efficacy and cost-effectiveness of the CTLM® and the advantages of the CTLM® over existing technology and cancer detection methods.



There can be no assurance that the medical community and third-party payers will accept our unique technology.  Similar risks will confront any other products we develop in the future.  Failure of our products to gain market acceptance would hinder our sales efforts resulting in a loss of revenues and potential profit and, ultimately, could cause our business to fail.
 
 
Lack of third-party reimbursement may have a negative impact on the sales of our products, which would negatively impact our revenues.

In the United States, suppliers of health care products and services are greatly affected by Medicare, Medicaid and other government insurance programs, as well as by private insurance reimbursement programs.  Third-party payers (Medicare, Medicaid, private health insurance companies, and other organizations) may affect the pricing or relative attractiveness of our products by regulating the level of reimbursement provided by these payers to the physicians, clinics and imaging centers utilizing the CTLM® or any other products that we may develop, by refusing reimbursement.  The level of reimbursement, if any, may impact the market acceptance and pricing of our products, including the CTLM®.  Failure to obtain favorable rates of third-party reimbursement could discourage the purchase and use of the CTLM® as a diagnostic device.

In international markets, reimbursement by private third-party medical insurance providers, including governmental insurers and independent providers varies from country to country.  In addition, such third-party medical insurance providers may require additional information or clinical data prior to providing reimbursement for a product.  In some 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.
 
 
There are uncertainties regarding healthcare reform, including the effect of the recently-passed Health Care Reform Act of 2010 and other possible legislation, whereby our potential customers may not receive adequate reimbursement for the use of our product on their patients, which may cause our potential customers to use other services and products.

The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”).  The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us.  Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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.  These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.
 
 
Competition in the medical imaging industry may result in competing products, superior marketing and lower revenues and profits for us.

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, manufacturing, human and marketing resources and experience than we do.  These companies may succeed in developing, manufacturing and marketing products that are more effective or less costly than our products.  The competition for developing a commercial device utilizing computed tomography techniques and laser technology is difficult to ascertain given the proprietary nature of the technology.
 
 
Risks associated with our securities

Our common stock is considered "a penny stock" and may be difficult to sell.

The SEC adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions.  Presently, the market price of our common stock is substantially less than $5.00 per share and therefore may be designated as a "penny stock" according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement


from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.  In addition, since our common stock is traded on the NASDAQ OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of our common stock.
 
 
The volatility of our stock price could adversely affect your investment in our common stock.

The price of our common stock has fluctuated substantially since it began trading on the OTC Bulletin Board in September 1994.  For example, in the current fiscal year which began July 1, 2010, the bid price ranged from a low of $0.014 in the second quarter to a high of $0.034 in the first quarter, and in our last fiscal year which ended June 30, 2010, the bid price ranged from a low of $0.004 in the first quarter to a high of $0.068 in the third quarter.  The market price of our shares, like that of the common stock of many other medical device companies, is likely to continue to be highly volatile.  Factors that may have an impact on the price of our common stock include:

·
the timing and results of our clinical trials or those of our competitors,
·
governmental regulation,
·
healthcare legislation,
·
geopolitical events,
·
equity or debt financing, and
·
developments in patent or other proprietary rights pertaining to our competitors or us, including litigation, fluctuations in our operating results, and market conditions for medical device company stocks and life science stocks in general.


We may issue preferred stock at any time to prevent a takeover or acquisition, any of which issuance could dilute the price of our common stock.

Our articles of incorporation authorize the issuance of preferred stock with designations, rights, and preferences that may be determined from time to time by the board of directors.  Our board of directors is empowered, without stockholder approval, to designate and issue additional series of preferred stock with dividend, liquidation, conversion, voting and other rights, including the right to issue convertible securities with no limitations on conversion, which could adversely affect the voting power or other rights of the holders of our common stock.  This could substantially dilute the common shareholders’ interest and depress the price of our common stock.  In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change-in-control.  The substantial number of issued and outstanding convertible preferred stock and the convertible debentures, and their terms of conversion may discourage or prevent an acquisition of our company.
 
 
Our dependence on our Equity Credit Line for financing our operations could dilute the price of our common stock.

Until the time when we are able to generate material revenues, we are dependent on equity or other financing to continue operations.  We will require substantial additional funds for our operations and the costs associated with the submission of our FDA application.  In the event that we are unable to utilize our Equity Credit Line, our common shares may be used for the conversion of new preferred stock or debentures or to accommodate other future issuances of equity securities.

Based on the closing bid price of our common stock on October 12, 2010 of $0.0146 per share, hypothetically 955,882,353 shares would be required to be issued to draw the entire $13 million balance available under the Southridge Private Equity Credit Agreement; however, our ability to use the equity credit line at any particular time will be limited by the number of shares currently authorized and based on our stock price at the time, unless our shareholders approve an increase in our authorized shares.

As of October 12, 2010, we would be required to issue hypothetically 1.01 billion authorized shares apportioned as follows:

 
955,882,353 shares for complete utilization of the Southridge Private Equity Credit Agreement
 
45,523,120 shares required for the exercise of all outstanding options
      16,587,690 shares required for the conversion of the 35 shares of Series L Convertible Preferred Stock



We now have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares.  After reservation of 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock and 45,523,120 shares to cover outstanding options, as of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement.  In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn.  As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement.


There is potential exposure to us in that certain shares of common stock have been issued by us pursuant to conversion of our convertible debentures and exercise of related warrants, which were resold by the debenture holders relying on the effectiveness of the relevant registration statement.

From November 12, 2008 through December 5, 2008, the Debenture holders Whalehaven Capital Fund Ltd. (“Whalehaven”) and Alpha Capital Anstalt (“Alpha”) converted $175,000 principal amount of the first $400,000 debenture, sold on August 1, 2008, for which the relevant registration statement became effective on November 12, 2008.  On November 20, 2008, in connection with the sale of the second $400,000 debenture, the text of the first debenture was amended to add conforming language implementing the $.013 floor price for conversion of the debentures as agreed to by the parties on October 23, 2008.  On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha (the “Purchasers”) specifically relating to the warrants which accompanied the initial debenture (the “Warrants”).  Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant).  On December 12, 2008, we filed a prospectus supplement reflecting this re-pricing of the warrants.

As of December 31, 2008, we entered into a second Amendment Agreement with Whalehaven and Alpha specifically relating to the Warrants.  On January 5, 2009, we filed a prospectus supplement.  Under the second Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha).  We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second amendment agreement.  On January 7, 2009, we filed a prospectus supplement reflecting this re-pricing of the Warrants.

The re-pricing of the Warrants and amendment of the initial debentures after the effectiveness of the subject registration statement, together with the sale of shares underlying the debentures and warrants after the effectiveness, may have resulted in the unlawful sale of unregistered securities, based on the SEC’s interpretive guidance which permits the registration for resale of securities issued pursuant to a private placement provided that the terms of the private placement are not changed following effectiveness of the registration statement.  The re-pricing of the Warrants may have been inconsistent with this guidance.  Consequently, third parties who purchased the subject shares after November 12, 2008 could sue us and/or Whalehaven or Alpha for rescission. The measure of damages would be the purchase price paid plus interest. We are unable to assess the amount of damages in the event that there is any liability.  As of the date of this Report, neither we nor Whalehaven nor Alpha has been contacted by any third parties seeking rescission.  See Sale of Unregistered Securities -"Debenture Private Placement".


We currently are controlled by our executive officers and directors; however, a change-in-control may occur.

Our management beneficially owns 45,152,794 shares of our common stock or 6.12% (assuming exercise of their currently exercisable options) of our common stock.  Although management owns a minority of the outstanding common stock, since we do not have cumulative voting, and since, in all likelihood the officers and directors will be voting as a block and will be able to obtain proxies of other shareholders, management may remain in a position to elect all of our directors and control our policies and issue up to 955,882,353 shares to
 
 

draw the balance of $13 million available under the Southridge Private Equity Credit Agreement.  The amounts of shares issuable under the Southridge Private Equity Credit Agreement or any subsequent Private Equity Credit Agreement could increase substantially if our common stock price declines.  Dilution to management's ownership percentage as a result of share issuances under the Southridge Private Equity Credit Agreement and subsequent financings could cause a change in control.
 
 
We have not paid and do not currently intend to pay dividends, which may limit the current return you may receive on your investment in our common stock.

Since inception, we have not paid a dividend on our common stock and do not intend to pay dividends on our common stock in the foreseeable future.


Risks associated with our technology

We depend on third-party licensing agreements for patents and software without which our operations may be curtailed.

We hold the rights, through an exclusive patent licensing agreement, for the use of the patent for the CTLM® technology.  In addition, we own 20 patents and have 4 additional United States patents pending with regard to optical tomography.  We also have patent rights through a non-exclusive licensing agreement from a third-party as well as three non-exclusive licensing agreements for software from third-parties. If any of these agreements were terminated, our operations may be curtailed until alternative solutions were found.
 
 
Our business would lose its primary competitive advantage if we are unable to protect our proprietary technology, or if substantially the same technology is developed by others.

We rely primarily on a combination of trade secrets, patents, copyright and trademark laws, and confidentiality procedures to protect our technology.  Our ability to compete effectively in the medical imaging products industry will depend on our success in protecting our proprietary technology, both in the United States and abroad.  There can be no assurances that any patent that we apply for will be issued, or that any patents issued will not be challenged, invalidated, or circumvented, that we will have the financial resources to enforce them, or that the rights granted will provide any competitive advantage.  We hold 16 foreign patents; however, we have applied for 6 patents in various foreign countries.  We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties, the expenditure of which we might not be able to afford.  Although we have entered into confidentiality and invention agreements with our employees and consultants, there can be no assurance that these agreements will be honored or that we will be able to protect our rights to our non-patented trade secrets and know-how effectively.  There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.  In addition, we may be required to obtain licenses to patents or other proprietary rights from third parties.  If we do not obtain required licenses, we could encounter delays in product development or find that the development, manufacture, or sale of products requiring these licenses could be foreclosed.  Additionally, we may, from time to time, support and collaborate in research conducted by universities and governmental research organizations.  There can be no assurance that we will have or be able to acquire exclusive rights to the inventions or technical information derived from such collaborations or that disputes will not arise with respect to rights in derivative or related research programs that we conducted in conjunction with these organizations.
 
 
It may be necessary to enter into unfavorable agreements or defend lawsuits which would be costly if we infringe upon the intellectual property rights of others.

There has been substantial litigation regarding patent and other intellectual property rights in the medical device and related industries.  We have been, and may be in the future, notified that we may be infringing on intellectual property rights possessed by other third parties.  If any claims are asserted against our intellectual property rights, we may seek to enter into royalty or licensing arrangements.  There is a risk in situations that no license will be available or that a license will not be available on reasonable terms.  Alternatively, we may decide to litigate these claims or design around the patented technology.  These actions could be costly and would divert the efforts and attention of our management and

 

technical personnel.  Consequently, any infringement claims by third parties or other claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may be costly to defend and may further limit the use of our technology.
 
 
We may not be able to keep up with the rapid technological change in the medical imaging industry which could make the CTLM® obsolete.

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.  Although we believe that the CTLM® can be upgraded to maintain its state-of-the-art character, the development of new technologies or refinements of existing ones might make our existing system technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, our CTLM®.  There can be no assurance that the development and commercial availability 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.  Although we are aware of no substantial technological changes pending, should a change occur, there can be no assurance that we will be able to acquire the new or improved technology which may be required to update the CTLM®.


Risks associated with our business

We must comply with extensive government regulation and have no assurance of regulatory approvals or clearances, which could cause us to cut back or cease operations.

A delay or inability to obtain any necessary United States, state or foreign regulatory clearances or approvals for our products would prevent us from selling the CTLM® system in the U.S. and other countries.

In the United States, the CTLM® is regulated as a medical device and is subject to the FDA's pre-market clearance or approval requirements.  To obtain FDA approval of an application for marketing clearance of a diagnostic device such as the CTLM®, the FDA application must demonstrate based on statistically significant results from extensive clinical studies, that the subject device is safe and has clinical utility, meaning that as a diagnostic tool it provides information that measurably contributes to a diagnosis or management of a disease or condition.  We rely on outside FDA consultants to assist us in reviewing and finalizing our FDA application for marketing clearance of the CTLM®.

In addition, sales of medical devices outside the United States may be subject to international regulatory requirements that vary from country to country.  The time required to gain approval for international sales may be longer or shorter than required for FDA approval and the requirements may differ.

Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® may be marketed.  In addition, to obtain these approvals, the FDA and certain foreign regulatory authorities may impose numerous other requirements which medical device manufacturers must comply with.  Product approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.

The third-party manufacturers upon which we will depend to manufacture our products are required to adhere to applicable FDA regulations regarding quality systems regulations commonly referred to as QSRs, which include testing, control and documentation requirements.  Failure to comply with applicable regulatory requirements, including marketing and promoting products for unapproved use, could result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or approval for devices, withdrawal of approvals and criminal prosecution.  Changes in existing regulations or adoption of new government regulations or polices could prevent or delay regulatory approval of our products.  Material changes to medical devices also are subject to FDA review and clearance or approval.

There can be no assurance that we will be able to obtain or maintain the following:

·
FDA marketing clearance for the CTLM®,
·
foreign marketing clearances for the CTLM® or regulatory approvals or clearances for other products that we may develop, on a timely basis, or at all,
·
timely receipt of approvals or clearances,



·
continued approval or clearance of previously obtained approvals and clearances, and
·
compliance with existing or future regulatory requirements.

If we do not obtain or maintain any of the above-mentioned standards, there may be material adverse effects on our business, financial condition and results of operations.
 
 
We may not be able to develop other products that are currently in the early stages of development due to our need for additional capital.

Due to our need for additional capital, products other than the CTLM® device are at early stages of development.  There can be no assurance that any of our proposed products, including the CTLM®, will:

·
be found to be safe and effective,
·
meet applicable regulatory standards or receive necessary regulatory clearance,
·
be safe and effective, developed into commercial products, manufactured on a large scale or be economical to market, or
·
achieve or sustain market acceptance.

Therefore, there is substantial risk that our product development and commercialization efforts will prove to be unsuccessful.
 
 
We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance of the CTLM® could cause our business to fail.

There can be no assurance that physicians or the medical community in general will accept and utilize the CTLM® or any other products that we develop.  The extent and rate the CTLM® achieves market acceptance and penetration will depend on many variables, including, but not limited to the establishment and demonstration in the medical community of the clinical safety, efficacy and cost-effectiveness of the CTLM® and the advantages of the CTLM® over existing technology and cancer detection methods.

There can be no assurance that the medical community and third-party payers will accept our unique technology.  Similar risks will confront any other products we develop in the future.  Failure of our products to gain market acceptance would hinder our sales efforts resulting in a loss of revenues and potential profit and, ultimately, could cause our business to fail.  It would further prevent us from developing new products.
 
 
We depend upon suppliers with whom we have no contracts, which suppliers could cause production disruption if they terminated or changed their relationships with us.

We believe that there are a number of suppliers for most of the components and subassemblies required for the CTLM®; however, components for our laser system are provided by one supplier.  Although these components are provided by a limited number of other suppliers, we believe our laser supplier and their products are the most reliable.  We have no agreement with our laser supplier and purchase the laser components on an as-needed basis.   For certain services and components, we currently rely on single suppliers.  If we encounter delays or difficulties with our third-party suppliers in producing, packaging, or distributing components of the CTLM® device, market introduction and subsequent sales would be adversely affected.
 
 
We have limited experience in sales, marketing and distribution, which could negatively impact our ability to enter into collaborative arrangements or other third party relationships which are important to the successful development and commercialization of our products and potential profitability.

We have limited internal marketing and sales resources and personnel.  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.  There can be no assurance that we will be able to recruit and retain skilled sales, marketing, service or support personnel, that agreements with distributors will be available on terms commercially reasonable to us, or at all, or that our marketing and sales efforts will be successful.



There can be no assurance that we will be able to further develop our distribution network on acceptable terms, if at all, or that any of our proposed marketing schedules or plans can or will be met.
 
 
We depend on qualified personnel to run and develop our specialized business who we may be unable to retain or hire.

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.  We have entered into employment agreements with our three executive officers.  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 could have an adverse impact upon our business affairs and finances.  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.
 
 
We have a limited manufacturing history that could cause delays in the production and shipment of our product.

We will have to expand our CTLM® manufacturing and assembly capabilities and contract for the manufacture of the CTLM® components in volumes that will be necessary for us to achieve significant commercial sales in the event we begin substantial foreign sales and/or obtain regulatory approval to market our products in the United States.  We have limited experience in the manufacture of medical products for clinical trials or commercial purposes.  Should we continue to manufacture our products at our facility, our manufacturing facilities would continue to be subject to the full range of the FDA's current quality system regulations.  In addition, there can be no assurance that our manufacturing efforts will be successful or cost-effective.
 
 
We depend on third parties who may not be in compliance with the FDA's quality system regulations which may delay the approval or decrease the sales of the CTLM®.

We have used and do use third parties to manufacture and deliver the components of the CTLM® and intend to continue to use third parties to manufacture and deliver these components and other products we may develop.  There can be no assurance that the third-party manufacturers we depend on for the manufacturing of CTLM® components will be in compliance with the quality system regulations (QSR) at the time of the pre-approval inspection or will maintain compliance afterwards.  This failure could significantly delay FDA marketing clearance approval for the CTLM® device.
 
 
We will rely on international sales and may be subject to risks associated with international commerce.

We have commenced international sales efforts for the CTLM® in Europe, Asia, South America and the Middle East.  Until we receive marketing clearance from the FDA to market the CTLM® in the United States, our revenues, if any, will be derived from sales to international distributors.  A significant portion of our revenues 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.

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 in foreign countries continues to develop, and there can be no assurance that new laws or regulations will not have an adverse effect on us.  While we attempt to minimize the risk of doing business with distributors in countries which are having difficult financial times by requesting payment via an irrevocable letter of credit (“L/C”) drawn on a United States bank prior to shipment of the CTLM®, it is not always possible to obtain an L/C from our distributor.  In these cases we must seek alternative

 

payment arrangements which include third-party financing, leasing or extending payment terms to our distributors.
 
 
Our business has the risk of product liability claims, and preferred insurance coverage may be expensive or unavailable, which may expose us to material liabilities.

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.  There can be no assurance that we will not be subjected to claims and potential liability.  Although the FDA does not require product liability insurance with regard to clinical investigations, we previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales.  As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 15,000 patient scans worldwide.  We have assumed the risk of product liability.  A successful product liability claim against us could have a material adverse effect on the Company.  Furthermore, there can be no assurance that, in the future, we will be able to obtain adequate or maintain product liability insurance on acceptable terms.





None
 


On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida.  The term of the lease is five years and one month with the first monthly rent payment due September 1, 2008 with an option to renew for one additional period of three years.  The monthly base rent for the initial year is $6,580.00 plus applicable sales tax.  During the term and any renewal term of the lease, the base annual rent shall be increased each year.  Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax.  IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses which is estimated to be $3,084.37 per month for the first 12 months of the lease.  The total monthly rent including Florida sales tax for the first 12 months is $10,244.23.  Upon the execution of the lease, we paid the first month’s rent of $10,244.23 and a security deposit of $13,160.00.  In August 2008, we moved into our new headquarters facility.  We believe that our new facility is adequate for our current and reasonably foreseeable future needs and provides us with a monthly cost savings of $23,196 per month.  We intend to assemble the CTLM® at our facility from hardware components that will be made by vendors to our specifications.

On September 13, 2007, we entered into an agreement with an unaffiliated third-party for the sale and lease-back of our prior facility at 6531 N.W. 18th Court, Plantation, Florida.  On March 31, 2008, pursuant to the sale/lease-back transaction, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V.  On April 29, 2008, we gave six months prior written notice of termination of our lease of the Plantation facility as part of our cost cutting initiatives.
 


In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005.  One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor.

The plaintiffs alleged that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive FDA approval for the CTLM® and that we would give them exclusive distribution rights in Italy.  The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.

Based on our preliminary investigation of this matter, we believe that this claim is without merit, and we intend to vigorously defend the case.  Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond.  Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009.  The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses.  At the hearing, the plaintiffs did not prove all of the facts underlying their claims.  The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”.  At that time, our counsel will present our demand for damages from “vexatious litigation” by the plaintiffs.


In December 2008, we were served with a lawsuit against us in Cuyahoga County, Ohio, by Plexar Associates, Inc. (“Plexar”), a company that provides software and algorithm development for medical imaging companies.  On January 23, 2008, we engaged the services of Plexar to provide work over a three-month period relating to artifact reduction.  The initial purchase order was limited to an amount not to exceed $48,700.  A second purchase order for a three-month period was signed on July 8, 2008 with a limit not to exceed $61,000.  Thus, the total commitment was $109,700.  As of June 30, 2009, we have paid Plexar the sum of $93,910.66 and have not received any useful work product that would help us reduce artifacts in our images.  In their complaint, Plexar is seeking the sum of $65,076.25.  We filed a counter-claim for non-performance and answered the complaint on February 6, 2009.  Prior to mediation, we reached an agreement with Plexar on August 6, 2009 to settle this case and agreed to allow Plexar’s counsel to prepare a Settlement Agreement and Mutual Release in this matter, which was signed on August


24, 2009.  We believe it was in our best interest to settle this case to avoid incurring substantial litigation costs and the risks of a trial that would have been held in Cleveland, Ohio.  We also would have incurred significant travel and lodging expenses for our employees and expert witnesses.

The Settlement Agreement and Mutual Release stipulated that we would pay Plexar $52,000 with payments as follows: $5,000 no later than August 25, 2009, which was paid; $15,000 no later than October 15, 2009; eight additional payments of $4,000, with the first of these monthly payments due on November 15, 2009 and continuing on the 15th day of each successive month through June 15, 2010.  If any of the above payments remained unpaid for more than five calendar days after each is due, then an additional payment of $9,000 would be due.  The October 15th payment and subsequent payments were not made timely, and we were in default of the Settlement Agreement.  On November 2, 2009, Plexar obtained a final judgment against us for $56,053.69 in the Ohio court.  Plexar stated its intention to seek to domesticate the judgment in Florida.  On December 21, 2009, we paid the sum of $32,036 to Plexar of which $30,000 was applied to the Judgment and $2,036 was applied to attorney’s fees pursuant to an agreement for settlement of the same date.  On January 20, 2010, we paid the sum of $27,919.12 to Plexar as a final payment pursuant to the agreement for settlement which includes accrued interest, filing fees and attorney’s fees for the month of December 2009. Plexar has filed a notice of discharge in both the Ohio Court and the Broward County, Florida Court.  This case is now closed.
 
 
Item 4.  Submission of Matters to a Vote of Security Holders

None




PART II

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

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

QUARTER ENDING
High Bid
Low Bid
     
FISCAL YEAR 2008
   
First Quarter
$0.088
$0.035
Second Quarter
$0.074
$0.045
Third Quarter
$0.055
$0.046
Fourth Quarter
$0.049
$0.02
     
FISCAL YEAR 2009
   
First Quarter
$0.055
$0.012
Second Quarter
$0.048
$0.02
Third Quarter
$0.023
$0.007
Fourth Quarter
$0.009
$0.005
     
FISCAL YEAR 2010
   
First Quarter
$0.011
$0.004
Second Quarter
$0.029
$0.007
Third Quarter
$0.068
$0.018
Fourth Quarter
$0.063
$0.02
     
FISCAL YEAR 2011
   
First Quarter
$0.034
$0.02
Second Quarter (until October 12, 2010)
$0.021
$0.014
     

On October 12, 2010, the closing trade price of the common stock as reported on the OTC Bulletin Board was $0.0146.  As of such date, there were approximately 2,804 registered holders of record of our common stock.


Sale of Unregistered Securities

Debenture Private Placement

On August 1, 2008, we entered into a Securities Purchase Agreement  (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”).  We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration Statement promptly after the filing of our Annual Report on Form 10-K.

The Initial Purchase Agreement provided for the sale of the Initial Debentures in two closings.  The first closing, which occurred on August 4, 2008, was for a principal amount of $400,000.  The second closing would be for up to $400,000 and would occur within the earlier of five business days following the effective date of the Registration Statement and December 1, 2008, provided that the closing conditions in the Initial Purchase Agreement were met.  We retained the option to use our existing equity credit line until the Registration Statement was declared effective.  Sales under the Initial Purchase Agreement were subject to an 8% placement agent fee.  Thus, the first closing generated proceeds to IDSI of $368,000, before normal transaction costs.


Prior to maturity, the Initial Debentures would bear interest at the rate of 8% per annum, payable quarterly in cash or, at our option, in shares of common stock based on the then-existing market price provided that we were in compliance with the Initial Purchase Agreement.

The Initial Debentures could be converted in whole or in part at the option of the holder any time after the closing date into our Common Stock at the lesser of (i) a set price, initially $.019 per share, which was the closing price of our shares on the closing date (“fixed conversion price”) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; however, the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.

At any time after closing, we could redeem for cash, upon written notice, any and all of the outstanding Initial Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Initial Debentures to be redeemed.

The Initial Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated August 1, 2008, between IDSI and Whalehaven.

Pursuant to the first closing of the Initial Private Placement, we issued to Whalehaven five-year Warrants to purchase 22,222,222 shares of our common stock.  The exercise price of these Warrants was $0.0228, i.e., 120% of the market price on the closing date.  The Warrants were subject to cashless exercise at Whalehaven’s option.

The placement agent was entitled to receive a Warrant to purchase common stock equal to 12% of Whalehaven’s Warrants with an exercise price equal to Whalehaven’s exercise price.  Consequently, a Warrant to purchase 2,666,666 shares was issued to the placement agent based on the first closing.

On October 23, 2008, we entered into an Amendment Agreement (the “Amendment”) with Whalehaven relating to the Initial Purchase Agreement, and the Initial Debenture due August 1, 2009, in the principal amount of $400,000 issued by us to Whalehaven pursuant to the Initial Purchase Agreement.  The Amendment provided that the minimum conversion price would be $.013 per share and that the contemplated second closing for another $400,000 debenture would be abandoned.  Consequently, no debenture or warrants were issued beyond the securities issued in connection with the first closing, as the total facility amount was limited to $400,000.

On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective.  On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”).  We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha promptly following our annual meeting of shareholders, which was held on December 29, 2008.  At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”).  We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable and no later than 75 days after filing.  In the case of a review by the Securities and Exchange Commission the effectiveness date deadline extended to 120 days.  In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.

The New Private Placement generated gross proceeds of $368,000 after payment of an 8% placement agent fee but before other expenses associated with the transaction.

Prior to maturity, the New Debentures provided interest at the rate of 8% per annum, payable quarterly in cash or, at the Company’s option, in shares of common stock based on the then-existing market price.

The New Debentures could be converted in whole or in part at the option of the holder any time after the shareholders have voted to approve the Share Amendment at the lesser of (i) a set price, initially $.033 (the closing price of the shares on the closing date) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; provided, however, that the Conversion Price is subject to a floor price, initially $0.013, and provided further however, that the terms of each Initial Debenture prevent


the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.

After the effectiveness of the Registration Statement, we could redeem for cash, upon written notice, any and all of the outstanding Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Debentures to be redeemed.

The New Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated November 20, 2008 between IDSI and Whalehaven and Alpha.  This security interest was pari passu with the security interest granted to Whalehaven on August 1, 2008, in connection with the Company’s sale of the $400,000 Initial Debenture to Whalehaven..

In November 2008, Whalehaven converted $160,000 principal amount of the Initial Debenture and received 9,206,065 shares of our common stock as a result.  On November 26, 2008, Whalehaven sold to Alpha $50,000 principal amount of the Initial Debenture and the right to purchase 5,555,555 shares underlying the Warrant.  As a result of this transaction, the Warrant for 22,222,222 shares were replaced by a warrant held by Whalehaven covering 16,666,667 shares (the "Whalehaven Warrant") and a warrant held by Alpha covering 5,555,555 shares (the "Alpha Warrant") (collectively, the "Warrants").

On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha relating to the Warrants.  Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant).  We used the $105,000 proceeds from the warrant exercise for working capital.

On December 15, 2008, Alpha converted $15,000 principal amount of its Initial Debenture and received 1,052,628 shares of our common stock as a result.

We entered into a second Amendment Agreement dated as of December 31, 2008, with Whalehaven and Alpha relating to the Warrants.  Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha).  We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second Amendment Agreement.

In December 2008 we received $56,000, and in January 2009 we received $17,778 in proceeds from these Warrant exercises, we used the proceeds for working capital.

After the issuance of shares pursuant to Whalehaven’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 11,666,667 shares available for exercise.  After the issuance of shares pursuant to Alpha’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 3,555,555 shares available for exercise.

We entered into a third Amendment Agreement dated as of March 20, 2009, with Whalehaven and Alpha.  This Amendment Agreement pertained to a request by the Company to the Holders that they agree to a suspension of the Company’s obligations under the Registration Rights Agreements for both the Initial and New Debentures.  In consideration for such suspensions, the Company agreed to an adjustment in the conversion price for both debentures whereby the floor price was reduced from $0.013 to $0.005 and the set price was reduced from $0.019 to $0.01.  The new formula for determining the conversion price on any Conversion Date would be equal to the lesser of (a) $0.01, subject to certain standard adjustments (the “Set Price”) and (b) 80% of the average of the 3 lowest Closing Prices during the 10 Trading Days immediately prior to the applicable Conversion Date (subject to adjustments) (the “Conversion Price”); provided, however, that the Conversion Price shall in no event be less than $0.005 (subject to certain standard adjustments).

As of June 30, 2010, Whalehaven had sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.

As of June 30, 2010, Whalehaven had converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result.  Whalehaven has


converted $250,000 of the November Debenture and has received 51,600,363 shares as a result.  Thus, Whalehaven has converted all of its August and November Debentures into 88,442,281 shares of common stock.

In October 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022.  The shares were issued pursuant to Rule 144.  Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.

As of June 30, 2010, Alpha had converted $100,000 of the August Debenture and received 17,313,265 shares as a result.  Alpha has converted $150,000 of the November Debenture and has received 28,429,066 shares as a result.  Thus, Alpha has converted all of its August and November Debentures into 45,742,331 shares of common stock which does not include interest.  In October 2009, we issued Alpha 2,166,263 shares as a result of the 8% interest on their portion of the debentures.

In October 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.029.  The shares were issued pursuant to Rule 144.

In October 2009, the Placement Agents exercised their Warrants to purchase 2,666,666 shares and received 1,989,845 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0197.  The shares were issued pursuant to Rule 144.

In December 2009, Whalehaven exercised its remaining Warrants to purchase 5,666,667 shares and received 4,542,328 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0252.  The shares were issued pursuant to Rule 144.


Private Placement of Preferred Stock

We have had to rely on the private placement of preferred and common stock to obtain working capital.  In deciding to issue preferred stock pursuant to the private placements, we took into account the number of common shares authorized and outstanding, the market price of the common stock at the time of each preferred sale and the number of common shares the preferred stock would have been convertible into at the time of the sale.  At the time of each private placement of preferred stock there were enough shares, based on the price of our common stock at the time of the sale of the preferred to satisfy the preferred conversion requirements.  Although our board of directors tried to negotiate a floor on the conversion price of each series of preferred stock prior to sale, it was unable to do so. In order to obtain working capital we will continue to seek capital through debt or equity financing which may include the issuance of convertible preferred stock whose rights and preferences are superior to those of the common stock holders.  We have endeavored to negotiate the best transaction possible taking into account the impact on our shareholders, dilution, loss of voting power and the possibility of a change-in-control; however, in order to satisfy our working capital needs, we have been and may continue to be forced to issue convertible securities and debentures with no limitations on conversion.  In addition, the dividends on the preferred stock affect the net losses applicable to shareholders.  There are also applicable adjustments as a result of the calculation of the deemed preferred stock dividends because we have entered into contracts providing for discounts on the preferred stock when it is converted.

In the event that we issue preferred stock without a limit on the number of shares that can be issued upon conversion and the price of our common stock decreases, the percentage of shares outstanding that will be held by preferred holders upon conversion will increase accordingly.  The lower the market price the greater the number of shares to be issued to the preferred holders, upon conversion, thus increasing the potential profits to the holders when the price per share increases and the holders sell the common shares.  In addition, the sale of a substantial amount of preferred stock to relatively few holders could cause a possible change-in-control.  In the event of a voluntary or involuntary liquidation while the preferred

 

stock is outstanding, the holders will be entitled to a specified preference in distribution of our property available for distribution.  As of the date of this report there are 35 shares of Series L Convertible Preferred Stock. (See “Issuance of Stock in Connection with Short-Term Loans”)

Series K Preferred

See “Financing/Equity Line of Credit”.


Private Placement of Common Stock

Issuance of Stock for Services

We, from time to time, have issued and may continue to issue stock for services rendered by consultants, all of whom have been unaffiliated.

Since we have generated no significant 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, we have issued an aggregate of 2,306,500 shares of common stock according to registration statements on Form S-8.  The aggregate fair market value of the shares registered on Form S-8 when issued was $2,437,151.  On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value.  The term of the Agreement is six months, with payment for services being made with shares of IDSI’s common stock with a restricted legend to Richard E. Barsom.  The total payment will be 5,000,000 restricted shares, with the first payment of 2,500,000 restricted shares paid on July 16, 2008, and the second payment of 2,500,000 restricted shares due three months after July 15, 2008.  The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000.  The Company agreed to register as soon as practicable the aggregate of 5,000,000 shares in an S-1 Registration Statement.  In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for additional investor relation services.  The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.

The issuance of large amounts of our common stock, sometimes at prices well below market price, for services rendered or to be rendered and the subsequent sale of these shares may further depress the price of our common stock and dilute the holdings of our shareholders.  In addition, because of the possible dilution to existing shareholders, the issuance of substantial additional shares may cause a change-in-control.
 

Issuance of Stock for Settlements In Lieu of Cash

On March 28, 2002, we issued 350,000 restricted shares of common stock to Anthony Giambrone in settlement of a lawsuit for alleged breach of a consulting agreement.  The shares were issued in an exempt transaction pursuant to section 4(2) of the Securities Act of 1933, as amended.  The suit was dismissed by stipulation on April 23, 2002.  In addition we agreed that, if the market price of our common stock on March 28, 2003, was less than $.75 per share, then we would issue to him additional shares of common stock equal to the quotient of (a) 262,500 minus the product of (i) 350,000 and (ii) the market price, divided by (b) the market price.  On March 28, 2003, the market price of our stock was $.17, so we issued to him 1,194,118 additional shares bearing a restricted legend.  Under the settlement agreement, we were obligated to register the shares issued to Mr. Giambrone, subject to certain conditions.  The shares were subsequently registered on July 23, 2003.

On or about September 18, 2003, we entered into a settlement agreement to settle a lawsuit filed by Ladenburg Thalmann & Co. Inc. for alleged breach of an investment-banking contract.  Under this settlement we agreed to issue 401,785 shares of our common stock to Ladenburg in exchange for Ladenburg’s dismissal with prejudice of its claims against us.  As of the date of the Settlement Agreement the value of the stock was approximately $450,000.  We and Ladenburg jointly moved for Court approval of the settlement as fair to Ladenburg so that the delivery of the shares to and the resale of the shares in the United States by Ladenburg may be exempt from registration under Section 3(a)(10) of the Securities Act of 1933.  In an order dated October 24, 2003, the Judge ordered and adjudged that the settlement was approved as fair to the party to whom the shares would be issued within the meaning of Section 3(a)(10) and the case was closed.  The shares were issued on November 12, 2003.



FINANCING/EQUITY LINE OF CREDIT

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

From July 2000 until August 2007, when we entered into an agreement for the sale/lease-back of our headquarters facility, Charlton Avenue LLC (“Charlton”) provided all of our necessary funding through the private placement sale of convertible preferred stock with a 9% dividend and common stock through various private equity credit agreements. See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back”  We initially sold Charlton 400 shares of our Series K convertible preferred stock for $4 million and subsequently issued an additional 95 Series K shares to Charlton for $950,000 on November 7, 2000.  We paid Spinneret Financial Systems Ltd. (“Spinneret”), an independent financial consulting firm unaffiliated with the Company and, according to Spinneret and Charlton, unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche of Series K shares and five Series K shares as a consulting fee for the second tranche.  The total of $4,950,000 was designed to serve as bridge financing pending draws on the Charlton private equity line provided through the various private equity credit agreements described in the following paragraphs.

From November 2000 to April 2001, Charlton converted 445 shares of Series K convertible preferred stock into 5,600,071 common shares and we redeemed 50 Series K shares for $550,000 using proceeds from the Charlton private equity line.  Spinneret converted 5 Series K shares for $63,996.  All Series K convertible preferred stock has been converted or redeemed and there are no convertible preferred shares outstanding.
 
 
Prior Equity Agreements
From August 2000 to February 2004, we obtained funding through three Private Equity Agreements with Charlton.  Each equity agreement provided that the timing and amounts of the purchase by the investor were at our sole discretion.  The purchase price of the shares of common stock was set at 91% of the market price.  The market price, as defined in each agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche.  The only fee associated with the private equity financing was a 5% consulting fee payable to Spinneret.  In September 2001 Spinneret proposed to lower the consulting fee to 4% provided that we pay their consulting fees in advance.  We reached an agreement to pay Spinneret in advance as requested and paid them $250,000 out of proceeds from a put.

From the date of our first put notice, January 25, 2001 to our last put notice, February 11, 2004, under our Third Private Equity Credit Agreement, we drew a total of $20,506,000 and issued 49,311,898 shares to Charlton.  As each of the obligations under these prior agreements was satisfied, the agreements were terminated.  The Third Private

Equity Agreement was terminated on March 4, 2004 upon the effectiveness of our first Registration Statement for the Fourth Private Equity Credit Agreement.

On January 9, 2004, we and Charlton entered into a new “Fourth Private Equity Credit Agreement” which replaced our prior private equity agreements.  The terms of the Fourth Private Equity Credit Agreement were more favorable to us than the terms of the prior Third Private Equity Credit Agreement.  The new, more favorable terms were: (i) The put option price was 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, (ii) the commitment period was two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by us as we had the option of setting a floor price for each put transaction (the previous minimum stock price


in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee to Spinneret, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars.  The previous requirement in the Third Private Equity Credit Agreement was $20,000.

We made sales under the Fourth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis.  Under the Fourth Private Equity Credit Agreement we drew down $14,198,541 and issued 66,658,342 shares of common stock.  We terminated use of the Fourth Private Equity Credit Agreement and instead began to rely on the Fifth Private Equity Credit Agreement (described below) upon the April 26, 2006, effectiveness of our S-1 Registration Statement filed March 23, 2006.

On March 21, 2006, we and Charlton entered into a new “Fifth Private Equity Credit Agreement” which has replaced our prior Fourth Private Equity Credit Agreement.  The terms of the Fifth Private Equity Credit Agreement were similar to the terms of the prior Fourth Private Equity Credit Agreement.  The new credit line’s terms were (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period was two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000,  (v)  the minimum stock price, also known as the floor price was computed as follows:  In the event that, during a Valuation Period, the Bid Price on any Trading Day fell more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties had no right and were under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the

Investment Amount accordingly would be deemed reduced by such amount.  In the event that during a Valuation Period there existed a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice would terminate on such third Trading Day (“Termination Day”), and the Investment Amount would be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equaled or exceeded the Low Bid Price and (vi) there were no fees associated with the Fifth Private Equity Credit Agreement.

We made sales under the Fifth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis.  Prior to the expiration of the Fifth Private Equity Credit Agreement on March 21, 2008, we drew down $5,967,717 and issued 82,705,772 shares of common stock.
 
 
The Sixth Private Equity Credit Agreement

On April 21, 2008, we and Charlton entered into a new “Sixth Private Equity Credit Agreement” which has replaced our prior Fifth Private Equity Credit Agreement.  The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement.  This new credit line’s terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount,  (v)  the minimum stock price, also known as the floor price is computed as follows:  In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount.  In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement.  The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.



We have made sales under the Sixth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis.  As of the date of this report, we have drawn down $2,042,392 and issued 227,000,000 shares of common stock pursuant to this Agreement.

As of the date of this report, since January 2001, we have drawn an aggregate of $42,714,650 in gross proceeds from our equity credit lines with Charlton and have issued 425,676,012 shares as a result of those draws.


The Southridge Private Equity Credit Agreement
On November 23, 2009, we and Southridge entered into a new “Southridge Private Equity Credit Agreement” which has replaced our prior Sixth Private Equity Credit Agreement with Charlton.  On January 7, 2010, we and Southridge amended the terms of the “Southridge Private Equity Credit Agreement” and revised the language to clarify that Southridge is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.

The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton.  This new credit line’s terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount,  and (v) there are no fees associated with the Southridge Private Equity Credit Agreement.  The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.

We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, 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 the light of the circumstances under which they were made, not misleading.

We are further obligated to 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 Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.

On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement.  This Registration Statement was declared effective on February 25, 2010.  On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010.  We reduced the amount of shares registered to 85,744,007 shares.  This amended Registration Statement was declared effective on May 27, 2010.

As of the date of this report, we have drawn down $2,000,000 and issued 71,244,381 shares of common stock under the Private Equity Credit Agreement with Southridge.

As of the date of this report, since January 2001, we have drawn an aggregate of $44,714,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 496,920,393 shares as a result of those draws.




In March 2008, we completed the sale of our Plantation, Florida building for $4.4 million, which was paid for in the following installments:

First Installment
  8/02/2007
$1,100,000.00
Second Installment
  9/21/2007
$1,100,000.00
Third Installment
12/14/2007
   $550,000.00
Fourth Installment
  1/04/2008
   $550,000.00
Fifth Installment
  1/18/2008
$1,056,000.00
Final Payment
  3/26/2008
     $44,027.00

These funds were used to finance our operations on terms more favorable than those which were available under the Fifth Private Equity Credit Agreement.



 
 


The following selected financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements"
 

   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2008
   
June 30, 2007
   
June 30, 2006
 
                               
Sales
  $ 181,172     $ 70,617     $ 39,647     $ 65,136     $ 675,844  
Gain (Loss) on sale of fixed assets
    -       1,181,894       1,609,525       -       (2,439 )
Cost of Sales
    22,512       20,546       20,944       17,870       316,189  
                                         
Gross Profit
    158,660       1,231,965       1,628,228       47,266       357,216  
                                         
Operating Expenses
    4,872,107       4,505,908       6,232,663       7,123,347       6,984,057  
                                         
Operating Loss
    (4,713,447 )     (3,273,943 )     (4,604,435 )     (7,076,081 )     (6,626,841 )
                                         
                                         
Interest income
    995       636       13,377       11,455       8,416  
Other income
    118,796       5,909       7,827       250,001       21,500  
Derivative expense
    (64,524 )     -       -       -       -  
Loss on derivative expense
    (137,631 )     -       -       -       -  
Interest expense
    (175,904 )     (677,031 )     (40,447 )     (387,697 )     (565,797 )
                                         
Net Loss
    (4,971,715 )     (3,944,429 )     (4,623,678 )     (7,202,322 )     (7,162,722 )
                                         
Dividends on cumulative Pfd. stock:
                                       
From discount at issuance
    -       -       -       -       -  
Earned
    -       -       -       -       -  
                                         
Net loss applicable to
                                       
     common shareholders
  $ (4,971,715 )   $ (3,944,429 )   $ (4,623,678 )   $ (7,202,322 )   $ (7,162,722 )
                                         
                                         
Net Loss per common share
  $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.03 )
Weighted avg. no. of common shares,
                                       
    Basic & Diluted
    758,622,934       424,330,162       318,673,749       271,667,256       218,846,738  
                                         
                                         
Cash and Cash Equivalents
  $ 73,844     $ 12,535     $ 49,433     $ 477,812     $ 1,467,687  
Total Assets
    980,360       1,134,580       1,583,356       4,365,427       6,250,909  
Deficit accumulated during
                                       
    the development stage
    (111,880,882 )     (106,909,167 )     (102,964,738 )     (98,341,059 )     (91,138,737 )
Stockholders' Equity
    (2,715,156 )     (1,129,222 )     (468,761 )     3,441,322       5,651,916  







Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and the Condensed Financial Statements included elsewhere in this report and the information described under the caption “Risk Factors” below.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, and intangible assets.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
 
Inventory

Our inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost (first-in, first-out) or market.  As a designer and manufacturer of high technology medical imaging equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage.  These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and reliability, replacement and availability of key components from our suppliers.  We evaluate on a quarterly basis, using the guidance provided in ASC 330 (“Inventory”), our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions.  Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case excess and obsolete inventory would have to be adjusted in the future.  If we determined that inventory was overvalued, we would be required to make an inventory valuation adjustment at the time of such determination.  Although every effort is made to ensure the accuracy of our forecasts of future product demand, significant unanticipated changes in demand could have a significant negative impact on the value of our inventory and our reported operating results. Additionally, purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.

 
Stock-Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model.  ASC-718, (“Compensation-Stock Compensation”) is a very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation.  The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options.  The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data.  However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.  ASC-718 requires the recognition of the fair value of stock compensation in net income.  Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.



Impact of Derivative Accounting

As a result of recent financing transactions we have entered into, our financial statements for the year ended June 30, 2010 and future periods have and will be impacted by the accounting effect of the application of derivative accounting.  The application of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was effective on January 1, 2009 will significantly affect the application of ASC Topic 815 and ASC Topic 815-40 for both freestanding and embedded derivative financial instruments in our financial statements.  Generally, warrants, conversion features in debt, and similar terms that include “full-ratchet” or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exemption for equity classification provided in ASC Topic 815-15.  This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815.  The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.



Results of Operations

In the continuing process of commercializing our operations and as part of our transition plan to exit from reporting as a development stage enterprise, we continue to use the format established for the fiscal year ending June 30, 2005 of our management discussion and analysis of financial condition and results of operations (MD&A) to better disclose and discuss the three most significant categories of expenses, i.e., general and administrative, research and development, and sales and marketing.

Beginning with the fiscal year ending June 30, 2005 we also expanded our discussion of health insurance and worker’s compensation insurance so that they fell into compensation and related benefits for one of the three expense categories, where previously they were included under insurance costs.  For the fiscal year ending June 30, 2006, we expanded our compensation and related benefits disclosure to include the non-cash compensation related to the expensing of stock options in the three expense categories.


Twelve Months Ended June 30, 2010 and June 30, 2009

SALES AND COST OF SALES
Revenues during the year ended June 30, 2010, were $181,172 representing an increase of $110,555 or 157% from $70,617 during the year ended June 30, 2009.  The increase in revenues is a result of a sale of a CTLM® system to our distributor in Malaysia.

The Cost of Sales during the year ended June 30, 2010, was $22,512 representing an increase of $1,966 or 10% from $20,546 during the year ended June 30, 2009.  The increase in Cost of Sales is a result of a sale of a CTLM® system to our distributor in Malaysia.
 

GENERAL AND ADMINISTRATIVE

Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology.  Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.

General and administrative expenses during the year ended June 30, 2010, were $3,584,608 representing an increase of $1,205,496 or 51% from $2,379,112 during the year ended June 30, 2009.  Of the $3,584,608 and $2,379,112, compensation and related benefits comprised $1,768,030 (49%) and $1,465,548 (63%), respectively, representing an increase of $302,482 or 21%.  Of the $1,768,030 and $1,465,548 compensation and related benefits, $578,961 (33%) and $116,319 (9%), respectively, were due to non-cash compensation associated with expensing stock options.

The general and administrative increase of $1,205,496 is due primarily to increases of $302,482 in compensation and related benefits as a result of non-cash compensation associated with expensing stock options; $465,500 in loan costs expense associated with the issuance of additional consideration for short-term loans; $357,000 in loan costs expense to record one month of amortization of the debt discount; $438,144 in premium expenses associated with the short-term loans; $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan.

The total increase is partially offset by decreases of $81,103 in rent expense as a result of recording the rent holiday associated with the lease on our former Plantation facility in the prior fiscal year; $64,000 in placement fees and $7,467 in liquidated damage expense associated with the sale of Convertible Debentures in August and November 2008; $69,429 in proxy service expenses as no Annual Meeting was held in fiscal year 2010; $66,797 in legal expenses involving corporate and securities matters; $32,975 as a result of reducing or canceling several of our insurance policies; $24,819 in real estate taxes, $22,901 in maintenance and repairs, $14,101 in utilities as a result of our move to a smaller facility in August 2008 that we rent rather than own; and $17,640 in freight expenses.

We do not expect a material increase in our general and administrative expenses until we realize a significant increase in revenue from the sale of our product.



RESEARCH AND DEVELOPMENT

We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®.  These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.

Research and development expenses during the year ended June 30, 2010, were $734,943 representing a decrease of $491,775 or 40% from $1,226,718 during the year ended June 30, 2009.  Of the $734,943 and $1,226,718, compensation and related benefits comprised $643,315 (88%) and $755,348 (62%), respectively, representing a decrease of $112,033 or 15%.  Of the $643,315 and $755,348 compensation and related benefits, $9,552 (1%) and $12,939 (2%), respectively, were due to non-cash compensation associated with expensing stock options.

The research and development decrease of $491,775 is due primarily to a decrease of $112,033 in compensation and related benefits as a result of a reduction in staff; $174,432 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines, in consulting expenses primarily associated with the monitoring and data management of our FDA process and various consultants involved with design engineering, software engineering and research by our consulting radiologist; $136,058 in clinical expenses; $45,848 in freight expenses; $2,941 in legal patent expenses associated with patent applications; and $17,715 in travel related expenses due to reduced travel to our U.S. clinical sites and to our International clinical collaboration sites.

Clinical expenses during the year ended June 30, 2010, were $5,655 representing a decrease of $136,058 or 96% from $141,713 as a result of concluding costs associated with our FDA clinical trials.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2011 due to increased costs associated with preparing our FDA application and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application.  See Item 1. Our Business - “Clinical Collaboration Sites Update”.


SALES AND MARKETING

Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration.  Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.

Sales and marketing expenses during the year ended June 30, 2010, were $340,433 representing a decrease of $275,015 or 45% from $615,448 during the year ended June 30, 2009.  Of the $340,433 and $615,448, compensation and related benefits comprised $762 (0%) and $111,743 (18%), respectively, representing a decrease of $110,982 or 99%.  Of the $762 and $111,743 compensation and related benefits, $0 (0%) and $2,069 (2%), respectively, were due to non-cash compensation associated with expensing stock options.

The sales and marketing decrease of $275,015 was due primarily to a decrease in compensation and related benefits of $110,982 as a result of the reduction in staff; $116,053 in representative office expense as a result of closing our representative office in Beijing, China in the prior fiscal year as part of our cost savings initiative; $18,640 in regulatory expenses, $11,250 in public relations expense as a result of a reduction in the issuances of press releases during the year; $9,871 in advertising and promotion; and $5,416 in freight expenses.

After we file our FDA application, we expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program.



AGGREGATED OPERATING EXPENSES

Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2010, were $4,872,107 representing an increase of $366,199 or 8% from $4,505,908 when compared to the operating expenses during the year ended June 30, 2009.  The overall increase in expenses was a result of the costs associated with short-term loans.

Compensation and related benefits during the year ended June 30, 2010, were $2,412,107 representing an increase of $79,468 or 3% from $2,332,639 during the year ended June 30, 2009 due to an increase in stock option expense partially offset by a reduction in staff.  Of the $2,412,107 and $2,332,639 compensation and related benefits, $588,483 (24%) and $131,327 (6%), respectively, were due to non-cash compensation associated with expensing stock options.  The net increase of $79,468 was due to a $457,156 increase in the recording of non-cash compensation related to the expensing of stock options which was partially offset by a decrease of cash compensation of $377,688.

Inventory valuation adjustments during the year ended June 30, 2010, were $67,678 representing a decrease of $14,609 or 18% from $82,286 during the year ended June 30, 2009.  The decrease is due to previous reductions in the write-down of systems that have lost value due to usage as demonstrators on consignment.  See “Critical Accounting Policy – Inventory”.

Depreciation and amortization during the year ended June 30, 2010, were $144,445 representing a decrease of $57,889 or 29% from $202,344 during the year ended June 30, 2009.

Interest expense during the fiscal year ended June 30, 2010, was $175,904 representing a decrease of $501,127 or 74% from $677,031 during the year ended June 30, 2009.  The decrease is due to the recording of the amortization of the debt discount on our convertible debentures and the imputed interest in the prior fiscal year.  Of the $175,904, $24,792 is imputed interest associated with our old equity credit line with Charlton Avenue, LLC (“Charlton”) and $102,754 is imputed interest associated with our new equity credit line with Southridge Partners II, LLP (“Southridge”) as per the terms and conditions of our private equity credit agreement(s); and $35,532 is the amortization of the debt discount on our convertible debentures  Our utilization of the equity credit line decreased during fiscal 2010 compared to the prior period.  See Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”

Other income during the year ended June 30, 2010, was $118,796 representing an increase of $112,821 or 1,888% from $5,975 during the year ended June 30, 2009.  Of the $118,796 other income, $98,829 represented the extinguishment of debt.

We previously presented the gain on the sale of our Plantation property as a non-operating expense item.  We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.


Twelve Months Ended June 30, 2009 and June 30, 2008

SALES AND COST OF SALES
Revenues during the year ended June 30, 2009, were $70,617 representing an increase of $30,970 or 78% from $39,647 during the year ended June 30, 2008.  The increase in revenues is a result of recording revenue from payment plans at the time when the customers paid.  We also recognized certain non-refundable customer deposits as revenue when one of our customers failed to make payments according to the sales agreements.

The Cost of Sales during the year ended June 30, 2009, was $20,546 representing a decrease of $398 or 2% from $20,944 during the year ended June 30, 2008.  The decrease in Cost of Sales is a result of inventory write-downs from prior periods and has been adjusted accordingly to what the customer paid compared to the year ended June 30, 2008.


GENERAL AND ADMINISTRATIVE

Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology.  Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional


fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.

General and administrative expenses during the year ended June 30, 2009, were $2,379,113 representing a decrease of $265,443 or 10% from $2,644,556 during the year ended June 30, 2008.  Of the $2,379,113 and $2,644,556, compensation and related benefits comprised $1,465,548 (63%) and $1,661,477 (63%), respectively, representing a decrease of $195,929 or 12%.  Of the $1,465,548 and $1,661,477 compensation and related benefits, $116,319 (9%) and $155,133 (9%), respectively, were due to non-cash compensation associated with expensing stock options.

The general and administrative decrease of $265,443 is due primarily to decreases of $195,929 in compensation and related benefits as a result of a reduction in staff; $114,867 in Board Meeting expense as a result of not having any outside independent directors; and $133,966 as a result of reducing or canceling several of our insurance policies; $52,974 in real estate taxes, $38,122 in maintenance and repairs and $4,228 in utilities as a result of moving into a smaller facility in August 2008 that we rent rather than own; $9,637 in office supplies and $21,160 in telephone and cell phone expenses as a result of a reduction in staff; and $28,500 in investor relations expenses as a result of canceling our agreement in March 2008 with LC Group, an investor relations consulting firm.  These reductions were a result of our cost saving initiatives.

The total decrease is partially offset by increases of $122,187 in office rent expense; $80,788 in legal expenses associated with general corporate and securities matters; $69,428 in proxy service expenses due to having our annual meeting during the fiscal year and not having an annual meeting in fiscal year 2008; and $64,000 in placement fees in connection with the convertible debenture financing of $800,000.

We do not expect a material increase in our general and administrative expenses until we realize a significant increase in revenue from the sale of our product.
 
 
RESEARCH AND DEVELOPMENT

We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®.  These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.

Research and development expenses during the year ended June 30, 2009, were $1,226,718 representing a decrease of $853,547 or 41% from $2,080,265 during the year ended June 30, 2008.  Of the $1,226,718 and $2,080,265, compensation and related benefits comprised $755,348 (62%) and $1,024,852 (49%), respectively, representing a decrease of $269,504 or 26%.  Of the $755,348 and $1,024,852 compensation and related benefits, $12,939 (2%) and $13,067 (1%), respectively, were due to non-cash compensation associated with expensing stock options.

The research and development decrease of $853,547 is due primarily to a decrease of $269,504 in compensation and related benefits as a result of a reduction in staff; $218,068 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines, in consulting expenses primarily associated with the monitoring and data management of our FDA approval process and various consultants involved with design engineering, software engineering and research by our consulting radiologist; $138,594 in research and development projects; $112,940 in clinical expenses; $71,071 in travel related expenses due to decreased travel to our U.S. clinical sites and to our International clinical collaboration sites; and $56,318 in FDA legal expenses.

Clinical expenses during the year ended June 30, 2009, were $141,713 representing a decrease of $112,940 or 44% from $254,653 as a result of the variable costs associated with our FDA clinical trials.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2010 due to increased costs associated with preparing our FDA application and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application.  See Item 1. Our Business - “Clinical Collaboration Sites Update”.




SALES AND MARKETING

Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration.  Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.

Sales and marketing expenses during the year ended June 30, 2009, were $615,448 representing a decrease of $452,207 or 42% from $1,067,655 during the year ended June 30, 2008.  Of the $615,448 and $1,067,655, compensation and related benefits comprised $111,743 (18%) and $176,005 (16%), respectively, representing a decrease of $64,262 or 37%.  Of the $111,743 and $176,005 compensation and related benefits, $2,069 (2%) and $1,919 (1%), respectively, were due to non-cash compensation associated with expensing stock options.

The sales and marketing decrease of $452,207 was due primarily to a decrease in compensation and related benefits of $64,262 as a result of the reduction in staff; $90,479 in freight charges as a result of transportation charges, customs fees, duties and taxes associated with CTLM® systems we shipped internationally in fiscal year 2008; $67,174 in representative office expense as a result of our new strategic marketing plan to appoint a distributor and dealers and closed our representative office in Beijing, China as part of our cost savings initiative; $203,405 in travel expenses associated with sales and marketing related activities; $33,210 in advertising and promotion; and $49,800 in marketing related consulting expenses.

The total decrease is partially offset by increases of $30,742 in regulatory expenses and $14,048 in trade show expenses.

After we file our FDA application, we expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program.
 

AGGREGATED OPERATING EXPENSES

Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2009, were $4,505,908 representing a decrease of $1,726,755 or 28% from $6,232,663 when compared to the operating expenses during the year ended June 30, 2008.  The overall reduction in expenses was a result of the implementation of cost saving initiatives.

Compensation and related benefits during the year ended June 30, 2009, were $2,332,639 representing a decrease of $529,695 or 19% from $2,862,334 during the year ended June 30, 2008 due to a reduction in staff.  Of the $2,332,639 and $2,862,334 compensation and related benefits, $131,327 (6%) and $170,119 (6%), respectively, were due to non-cash compensation associated with expensing stock options.  The net decrease of $529,695 was due to a decrease of cash compensation of $490,904 combined with a $38,792 decrease in the recording of non-cash compensation related to the expensing of stock options.

Inventory valuation adjustments during the year ended June 30, 2009, were $82,286 representing a decrease of $176,089 or 68% from $258,375 during the year ended June 30, 2008.  The decrease is due to a reduction in the write-down of systems that have lost value due to usage as demonstrators on consignment.  See “Critical Accounting Policy – Inventory”.

Depreciation and amortization during the year ended June 30, 2009, were $202,344 representing an increase of $20,532 or 11% from $181,812 during the year ended June 30, 2008.

Interest expense during the fiscal year ended June 30, 2009, was $677,031 representing an increase of $636,584 or 1,574% from $40,447 during the year ended June 30, 2008.  The interest expense is primarily comprised of the amortization of the debt discount on our convertible debentures and the imputed interest associated with our equity credit line with Charlton Avenue, LLC (“Charlton”) as per the terms and conditions of our private equity credit agreement.  Our utilization of the equity credit line increased significantly during fiscal 2009 as we previously used in fiscal 2008 the proceeds from the sale/lease-back of our building for current operations.  This resulted in the substantial year-over-year increase in interest expense.  See Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”



Other income during the year ended June 30, 2009, was $5,909 representing a decrease of $1,918 or 25% from $7,827 during the year ended June 30, 2008.  The $5,909 represents the sale of the LILA Inventory, use of our facilities and consulting with our engineers pursuant to the Bioscan Agreement.  (See Item 1 Our Business -“Laser Imager for Lab Animals”).


Balance Sheet Data
We have financed our operations since inception by the issuance of equity securities with aggregate net proceeds of approximately $68,886,284 and through loan transactions in the aggregate net amount of $3,846,823.  Furthermore, we issued equity securities for the conversion of all outstanding convertible debentures in the aggregate net amount of $4,040,000.

Our combined cash and cash equivalents totaled $73,844 at June 30, 2010.  We do not expect to generate a positive internal cash flow for at least the next 12 months due to our efforts to obtain FDA approval, the expected costs of commercializing our initial product, the CTLM®, and the time required for homologations from certain countries.

Our inventory, which consists of raw materials, work in process (including completed units under testing), finished goods less Inventory Reserve, totaled $436,110 at June 30, 2010 and $527,467 at June 30, 2009.  Raw materials used for research and development or other purposes are expensed and not included in inventory.  This decrease is primarily due to inventory valuation adjustments of $67,678 and $22,512 to Cost of Goods Sold.  We expect to recover our investment because the CTLM® represents a new technology for imaging the breast using a laser beam instead of ionizing x-ray to produce three dimensional images.  During fiscal year 2010, we continued to receive encouraging results and scientific clinical papers from our various clinical collaboration sites worldwide.  We continue to believe that over time the CTLM® will gain worldwide acceptance in the medical community because computed tomography has a strong basis in science.  See Note 6 “Inventories”.

Our property and equipment, net, totaled $221,763 at June 30, 2010 and $332,031 at June 30, 2009.  The overall decrease of $110,268 is due primarily to depreciation during fiscal year 2010 (See Note 8 – Sale/Lease-Back of Building).

Our Intangible assets (formerly “Other assets”) totaled $170,882 at June 30, 2010 compared to $205,059 at June 30, 2009.  This decrease is due to the amortization of a patent licensing agreement.
 

Liquidity and Capital Resources
We are currently a development stage company and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing.  We have yet to generate a positive internal cash flow, and until significant sales of our product occur, we are mostly dependent upon debt and equity funding from outside investors.  In the event that we are unable to obtain debt or equity financing or are unable to obtain such financing on terms and conditions acceptable to us, we may have to cease or severely curtail our operations.  This would materially impact our ability to continue as a going concern.

We have financed our operating and research and development activities through several private placement transactions.  Net cash used for operating and product development expenses, which include our purchase of additional materials to continue the manufacture of CTLM® Systems in anticipation of receiving orders from our distributors in certain countries where permitted by law was $2,927,704 during fiscal 2010, compared to net cash used by operating activities and product development of the CTLM® and related software development of $2,635,609 during fiscal 2009.  At June 30, 2010, we had working capital of ($2,555,647) compared to working capital of ($1,666,312) at June 30, 2009.

If and when we receive approval from the FDA, which cannot be assured, we believe that, based on our current business plan approximately $5 million will be required above and beyond normal operating expenses over the next year to complete all necessary stages in order for us to market the CTLM® in the United States and foreign countries.  The $5 million will be used to purchase inventory, sub-contracted components, tooling and manufacturing templates and pay non-recurring engineering costs associated with preparation for full capacity manufacturing and assembly and marketing, advertising and promotion, training, ongoing regulatory expenses, and other costs associated with product launch.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or


combinations of both; or by placing equity into the public market through an underwritten secondary offering.  If additional funds are raised by issuing equity securities, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  See “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters/Financing/Equity Line of Credit”.

During fiscal 2010, we raised a total of $1,397,219 less expenses through private placement transactions pursuant to our Sixth Private Equity Credit Agreement with Charlton and Amended Private Equity Credit Agreement with Southridge dated January 7, 2010.  Of the $1,397,219, $297,219 was raised through our Sixth Private Equity Credit Agreement with Charlton and $1,100,000 was raised through our Amended Private Equity Credit Agreement with Southridge.  We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, in the international market and the expense of continuing our ongoing product development program.  We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering.  If additional funds are raised by issuing equity securities, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  In the event we are unable to draw from this new private equity line, alternative financing will be required to continue operations, and there is no assurance that we will be able to obtain alternative financing on commercially reasonable terms.  There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.

As of the date of this report, since January 2001, we have drawn an aggregate of $44,714,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 496,920,393 shares as a result of those draws.

As of the date of this report, we have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares.  In addition, we have reserved approximately 45,523,120 shares to cover outstanding options.  We had anticipated that revenues would have been a significant source of cash by the date of this report, but commercialization has been slower than expected largely due to the delay in obtaining FDA approval, which we believe has depressed our stock price.  We previously used the proceeds of the sale of our building and the proceeds of the sale of convertible debentures for working capital.  In May 2008, we returned to equity funding through our Private Equity Credit Agreement(s).  From November 2009 through February 2010 we relied on short-term loans from private investors for working capital (“See Issuance of Stock in Connection with Short-Term Loans”).


Issuance of Stock in Connection with Short-Term Loans
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes.  These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000.  The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010.  In connection with these four extensions a total of $13,600 of additional premium was accrued.  As of the date of this report, we have repaid an aggregate principal and premium in the amount of $147,500 on these short term notes. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors.  The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500.

In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes.  These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000.  In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes.  The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  In connection with these three extensions a total of $97,400 of additional premium was accrued.  As of the date of this report, we have not repaid any of the aggregate principal and premium on these short term notes.


On January 8, 2010, we borrowed $600,000 from a private investor pursuant to a short-term promissory note.  This note was payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000.  In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  In connection with these three extensions a total of $141,000 of additional premium was accrued.  As of the date of this report, we have not repaid any of the aggregate principal and premium on these short term notes.


On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note.  We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral.  This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010.  The Note was cancelled upon this conversion.  The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock).

As of the date of this report, we owe a total of $1,539,500 in short-term debt.  Of the $1,539,500 we owe a total of $1,089,356 in principal and $450,144 in premium.  We have received loan extensions on all of our short-term notes to October 31, 2010.  We have repaid aggregate principal and premium in the amount of $147,500 on all of our short-term notes.

There can be no assurances that we will be able to pay these notes when due.  If we default on all of the notes due to the lack of new funding, the holders could sell 55,363,907 of the collateral shares, which could materially adversely affect our Company.

Capital expenditures for fiscal 2010 were $0 as compared to $7,360 for the prior year.  During fiscal 2009, we reclassified the net realizable value of $8,591 of CTLM® systems in Inventory to Clinical equipment.  We anticipate that our capital expenditures for fiscal 2011 will be approximately $25,000.

During the year ending June 30, 2010, there were no changes in our existing debt agreements other than extensions and we had no outstanding bank loans as of June 30, 2010.  Our annual fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are approximately $4.8 million, as of the date of this report, and are likely to increase as additional agreements are entered into and additional personnel are retained.  We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs, which are presently estimated at an aggregate of approximately $400,000 per month.  The foregoing projections are subject to many conditions, most of which are beyond our control.  Our future capital requirements will depend on many factors, including the following: the progress of our product development projects, the 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 12 months as substantial costs and expenses continue due principally to the international commercialization of the CTLM®, activities related to our FDA regulatory process, and advanced product development activities.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering.  If additional funds are raised by issuing equity securities, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.  No assurances, however, can be given that this financing or any necessary future financing will be available or, if available, that it will be obtained on terms satisfactory to us.  Our ability to effectuate our business plan and continue operations is dependent on our ability to raise capital, structure a profitable business, and generate revenues.  If our working capital were insufficient to fund our operations, we would have to explore additional sources of financing.  In the absence of adequate funding, we will have to cease operations.



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

As of the date of this report, we believe that we do not have any material quantitative and qualitative market risks.





Item 8.  Financial Statements

Index to Financial Statements
 
     
   
Page
     
55
     
Financial Statements
   
     
 
56
     
 
57
     
 
58
     
 
70
     
 
72




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and
Stockholders of Imaging Diagnostic Systems, Inc.

We have audited the accompanying balance sheets of Imaging Diagnostic Systems, Inc. (A Development Stage Enterprise) as of June 30, 2010 and 2009, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ended June 30, 2010 and 2009 and for the period December 10, 1993 (date of inception) to June 30, 2010. We did not audit the financial statements for the period December 10, 1993 (date of inception) to June 30, 2005. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2010 and 2009, and the results of its operations and cash flows for each of the years then ended June 30, 2010 and 2009 and for the period December 10, 1993 (date of inception) to June 30, 2010 in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that Imaging Diagnostic Systems, Inc. will continue as a going concern.  As more fully described in Note 5, the Company has incurred recurring operating losses and will have to obtain additional capital to sustain operations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 5.  The accompanying financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



/s/  SHERB & CO, LLP

Certified Public Accountants

Boca Raton, Florida
October 13, 2010



 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
Balance Sheets
 
               
Assets
 
               
     
June 30, 2010
   
June 30, 2009
 
Current assets:
           
 
Cash
  $ 73,844     $ 12,535  
 
Accounts receivable, net of allowances for doubtful accounts
               
 
    of $57,982 and $57,982, respectively
    12,850       21,514  
 
Loans receivable, net of reserve of $57,000
               
 
    and $57,000, respectively
    3,796       357  
 
Inventories, net of reserve of $399,000 and $408,000, respectively
    436,110       527,467  
 
Prepaid expenses
    61,115       35,617  
                   
 
Total current assets
    587,715       597,490  
                   
Property and equipment, net
    221,763       332,031  
Intangible assets, net
    170,882       205,059  
                   
 
Total assets
  $ 980,360     $ 1,134,580  
                   
                   
Liabilities and Stockholders' Equity (Deficit)
 
Current liabilities:
               
 
Accounts payable and accrued expenses
  $ 1,538,748     $ 1,994,220  
 
Customer deposits
    98,114       96,114  
 
Short term debt
    1,506,500       -  
 
Convertible debenture, net of debt discount of $0
               
 
     and $35,532, respectively
    -       173,468  
                   
 
Total current liabilities
    3,143,362       2,263,802  
                   
Convertible preferred stock (Series L), 9% cumulative annual dividend,
               
     no par value, 35 and 0 shares issued, respectively
    350,000       -  
 
Derivative Liability
    202,155       -  
                   
Stockholders equity (Deficit):
               
 
Common stock, no par value; authorized 950,000,000 shares,
               
 
 issued 837,087,622 and 611,378,787 shares, respectively
    105,927,719       102,280,228  
 
Common stock - Debt Collateral
    (1,150,000 )     -  
 
Additional paid-in capital
    4,388,006       3,499,717  
 
Deficit accumulated during development stage
    (111,880,882 )     (106,909,167 )
                   
 
Total stockholders' equity (Deficit)
    (2,715,157 )     (1,129,222 )
                   
 
Total liabilities and stockholders' equity (Deficit)
  $ 980,360     $ 1,134,580  
                   
                   
                   
                   
See accompanying notes to the financial statements.
 


 
IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
   
Statements of Operations
 
               
From Inception
 
               
(December 10,
 
   
Year Ended
   
Year Ended
   
1993) to
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
 
                  *  
Net Sales
  $ 181,172     $ 70,617     $ 2,324,664  
Gain on sale of fixed assets
    -       1,181,894       2,794,565  
Cost of Sales
    22,512       20,546       928,617  
                         
Gross Profit
    158,660       1,231,965       4,190,612  
                         
Operating Expenses:
                       
    General and administrative
    3,584,608       2,379,112       58,574,022  
    Research and development
    734,943       1,226,718       22,428,958  
    Sales and marketing
    340,433       615,448       9,113,254  
    Inventory valuation adjustments
    67,678       82,286       4,820,349  
    Depreciation and amortization
    144,445       202,344       3,301,674  
    Amortization of deferred compensation
    -       -       4,064,250  
                         
Total Operating Expenses
    4,872,107       4,505,908       102,302,507  
                         
Operating Loss
    (4,713,447 )     (3,273,943 )     (98,111,895 )
                         
Interest income
    995       636       309,396  
Other income
    118,796       5,975       883,188  
Other income - LILA Inventory
    -       (66 )     (69,193 )
Derivative expense
    (64,524 )             (64,524 )
Loss on derivative liability
    (137,631 )             (137,631 )
Interest expense
    (175,904 )     (677,031 )     (7,842,463 )
                         
Net Loss
    (4,971,715 )     (3,944,429 )     (105,033,122 )
                         
Dividends on cumulative preferred stock:
                       
    From discount at issuance
    -       -       (5,402,713 )
    Earned
    -       -       (1,445,047 )
                         
Net loss applicable to
                       
     common shareholders
  $ (4,971,715 )   $ (3,944,429 )   $ (111,880,882 )
                         
Net Loss per common share:
                       
   Basic and diluted
  $ (0.01 )   $ (0.01 )   $ (0.63 )
                         
Weighted average number of
                       
  common shares outstanding:
                       
   Basic and diluted
    758,622,934       424,330,162       177,889,047  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
See accompanying notes to the financial statements.
 
 
 


  
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010*
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at December 10, 1993 (date of inception)
   
-
 
$
-
   
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
                                                         
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
)
 
-
   
-
   
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 agreements
   
-
   
-
   
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 compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
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
 
 
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
**See note 17 for a detailed breakdown by Series.
 
 See accompanying notes to the financial statements.

 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010*
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
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 stock 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 compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
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
 
 
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. 
**See note 17 for a detailed breakdown by Series. 
 
 See accompanying notes to the financial statements.
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010*
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
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
 
                                                         
Common 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 compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
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
 
                                                         
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.  
**See note 17 for a detailed breakdown by Series. 
                                                         
                                                         
See accompanying notes to the financial statements.
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                           
From December 10, 1993 (date of inception) to June 30, 2010*
 
                       
Deficit
                 
                       
Accumulated
                 
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                 
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
 
                                           
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 compentsation
   
-
   
-
   
-
   
-
   
-
   
-
         
-
   
1,418,938
   
1,418,938
 
                                                               
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(6,715,732
)
 
 
   
-
   
-
   
(6,715,732
)
                                                               
Balance at June 30, 1998 (restated)
   
611
   
6,110,000
   
36,493,544
   
23,983,073
   
1,884,846
   
(27,070,677
)
 
 
   
(14,309
)
 
(1,300,812
)
 
3,592,121
 
                                                               
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. 
 
**See note 17 for a detailed breakdown by Series.   
                                                               
                                                               
See accompanying notes to the financial statements.
 
 
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
     
(a Development Stage Company)
     
 
     
Statements of Stockholders' Equity (Deficit) (Continued)
     
                                               
From December 10, 1993 (date of inception) to June 30, 2010*
     
                       
Deficit
                     
                       
Accumulated
                     
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                     
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
         
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
     
                                               
Balance at June 30, 1998 (restated)
   
611
   
6,110,000
   
36,493,544
   
23,983,073
   
1,884,846
   
(27,070,677
)
 
 
   
(14,309
)
 
(1,300,812
)
 
3,592,121
   
*
 
                                                                     
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 compentsation
   
-
   
-
   
-
   
-
   
-
   
-
         
-
   
1,510,437
   
1,510,437
       
                                                                     
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(6,543,292
)
 
 
   
-
   
-
   
(6,543,292
)
 
 
 
                                                                     
Balance at June 30, 1999 (restated)
   
596
   
5,960,000
   
49,297,675
   
29,820,729
   
1,490,827
   
(34,563,119
)
 
 
   
(14,309
)
 
-
   
2,694,128
   
 
 
 
                                                                   
 
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.  
**See note 17 for a detailed breakdown by Series. 
 
 See accompanying notes to the financial statements.
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
     
(a Development Stage Company)
     
 
     
Statements of Stockholders' Equity (Deficit) (Continued)
     
                                               
From December 10, 1993 (date of inception) to June 30, 2010*
     
                       
Deficit
                     
                       
Accumulated
                     
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                     
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
         
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
     
                                               
Balance at June 30, 1999 (restated)
   
596
   
5,960,000
   
49,297,675
   
29,820,729
   
1,490,827
   
(34,563,119
)
 
 
   
(14,309
)
 
-
   
2,694,128
   
 
 
                                                                     
Conversion of convertible debentures
   
-
   
-
   
4,060,398
   
3,958,223
   
-
   
-
         
-
   
-
   
3,958,223
       
                                                                     
Conversion of preferred stock to common, net
   
(596
)
 
(5,960,000
)
 
45,415,734
   
7,313,334
   
(648,885
)
 
-
         
-
   
-
   
704,449
       
                                                                     
Common stock sold
   
-
   
-
   
100,000
   
157,000
   
-
   
-
         
-
   
-
   
157,000
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation, net of cancelled shares
   
-
   
-
   
137,000
   
(18,675
)
 
-
   
-
         
-
   
-
   
(18,675
)
     
                                                                     
Common stock issued - repayment of debt
                                                                   
and accrued interest
   
-
   
-
   
5,061,294
   
1,067,665
   
-
   
-
         
-
   
-
   
1,067,665
       
                                                                     
Common stock issued in exchange for
                                                                   
interest and loan fees
   
-
   
-
   
7,297
   
2,408
   
-
   
-
         
-
   
-
   
2,408
       
                                                                     
Common stock issued with exercise of stock options
   
-
   
-
   
1,281,628
   
395,810
   
157,988
   
-
         
(13,599
)
 
-
   
540,199
       
                                                                     
Common stock issued with exercise of warrants
   
-
   
-
   
150,652
   
121,563
   
97,850
   
-
         
-
   
-
   
219,413
       
                                                                     
Issuance of note payable with warrants at a discount
   
-
   
-
   
-
   
-
   
500,000
   
-
         
-
   
-
   
500,000
       
                                                                     
Dividends accrued-preferred stock not yet converted
   
-
   
-
   
-
   
-
   
-
   
(145,950
)
       
-
   
-
   
(145,950
)
     
                                                                     
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(6,531,662
)
 
 
   
-
   
-
   
(6,531,662
)
 
 
 
                                                                     
Balance at June 30, 2000 (restated)
   
-
   
-
   
105,511,678
   
42,818,057
   
1,597,780
   
(41,240,731
)
 
 
   
(27,908
)
 
-
   
3,147,198
   
 
 
                                                                     
 
                                                                   
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. 
**See note 17 for a detailed breakdown by Series. 
                                                                     
See accompanying notes to the financial statements.
     
 
 
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
     
(a Development Stage Company)
     
 
     
Statements of Stockholders' Equity (Deficit) (Continued)
     
                                               
From December 10, 1993 (date of inception) to June 30, 2010*
     
                       
Deficit
                     
                       
Accumulated
                     
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                     
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
         
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
     
                                               
Balance at June 30, 2000 (restated)
   
-
   
-
   
105,511,678
   
42,818,057
   
1,597,780
   
(41,240,731
)
 
 
   
(27,908
)
 
-
   
3,147,198
   
 
 
                                                                     
Preferred stock sold, including dividends
   
500
   
5,000,000
   
-
   
-
   
708,130
   
(708,130
)
       
-
   
-
   
5,000,000
       
                                                                     
Conversion of preferred stock to common, net
   
(500
)
 
(5,000,000
)
 
5,664,067
   
5,580,531
   
(708,130
)
 
-
         
-
   
-
   
(127,599
)
     
                                                                     
Common stock issued - line of equity transactions
   
-
   
-
   
3,407,613
   
3,143,666
   
-
   
-
         
-
   
-
   
3,143,666
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation
   
-
   
-
   
153,500
   
227,855
   
-
   
-
         
-
   
-
   
227,855
       
                                                                     
Common stock issued - repayment of debt
                                                                   
and accrued interest
   
-
   
-
   
810,000
   
1,393,200
   
-
   
-
         
-
   
-
   
1,393,200
       
                                                                     
Common stock issued with exercise of stock options
   
-
   
-
   
3,781,614
   
1,868,585
   
-
   
-
         
13,599
   
-
   
1,882,184
       
                                                                     
Common stock issued with exercise of warrants
   
-
   
-
   
99,375
   
119,887
   
-
   
-
         
-
   
-
   
119,887
       
                                                                     
Dividends accrued-preferred stock
   
-
   
-
   
-
   
-
   
-
   
(422,401
)
       
-
   
-
   
(422,401
)
     
                                                                     
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(9,532,450
)
 
 
   
-
   
-
   
(9,532,450
)
 
 
 
                                                                     
Balance at June 30, 2001 (restated)
   
-
   
-
   
119,427,847
   
55,151,781
   
1,597,780
   
(51,903,712
)
 
 
   
(14,309
)
 
-
   
4,831,540
   
 
 
                                                                     
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. 
**See note 17 for a detailed breakdown by Series. 
                                                                     
See accompanying notes to the financial statements.
     
 
 
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
     
(a Development Stage Company)
     
 
     
Statements of Stockholders' Equity (Deficit) (Continued)
     
                                               
From December 10, 1993 (date of inception) to June 30, 2010*
     
                       
Deficit
                     
                       
Accumulated
                     
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                     
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
         
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
     
                                               
Balance at June 30, 2001 (restated)
   
-
   
-
   
119,427,847
   
55,151,781
   
1,597,780
   
(51,903,712
)
 
 
   
(14,309
)
 
-
   
4,831,540
   
 
 
                                                                     
Common stock issued - line of equity transactions
   
-
   
-
   
11,607,866
   
6,213,805
   
-
   
-
         
-
   
-
   
6,213,805
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation
   
-
   
-
   
560,000
   
294,350
   
-
   
-
         
-
   
(117,600
)
 
176,750
       
                                                                     
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(7,997,652
)
 
 
   
-
   
-
   
(7,997,652
)
 
 
 
                                                                     
Balance at June 30, 2002 (restated)
   
-
   
-
   
131,595,713
   
61,659,936
   
1,597,780
   
(59,901,364
)
 
 
   
(14,309
)
 
(117,600
)
 
3,224,443
   
 
 
                                                                     
Common stock issued - line of equity transactions
   
-
   
-
   
29,390,708
   
8,737,772
   
-
   
-
         
-
   
-
   
8,737,772
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation
   
-
   
-
   
2,007,618
   
970,653
   
-
   
-
         
-
   
117,600
   
1,088,253
       
                                                                     
Payment of subscriptions receivable
   
-
   
-
   
-
   
-
   
-
   
-
         
14,309
   
-
   
14,309
       
                                                                     
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(8,358,774
)
 
 
   
-
   
-
   
(8,358,774
)
 
 
 
                                                                     
Balance at June 30, 2003 (restated)
   
-
   
-
   
162,994,039
   
71,368,361
   
1,597,780
   
(68,260,138
)
 
 
   
-
   
-
   
4,706,003
   
 
 
                                                                     
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.  
**See note 17 for a detailed breakdown by Series. 
                                                                     
See accompanying notes to the financial statements.
     
 

 
IMAGING DIAGNOSTIC SYSTEMS, INC.
     
(a Development Stage Company)
     
 
     
Statements of Stockholders' Equity (Deficit) (Continued)
     
                                               
From December 10, 1993 (date of inception) to June 30, 2010*
     
                       
Deficit
                     
                       
Accumulated
                     
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                     
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
         
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
     
                                               
Balance at June 30, 2003 (restated)
   
-
   
-
   
162,994,039
   
71,368,361
   
1,597,780
   
(68,260,138
)
 
 
   
-
   
-
   
4,706,003
   
 
 
                                                                     
Common stock issued - line of equity transactions
   
-
   
-
   
8,630,819
   
6,541,700
   
-
   
-
         
-
   
-
   
6,541,700
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation
   
-
   
-
   
734,785
   
832,950
   
-
   
-
         
-
   
-
   
832,950
       
                                                                     
Common stock issued - exercise of stock options
   
-
   
-
   
967,769
   
492,701
   
-
   
-
         
-
   
-
   
492,701
       
                                                                     
Net loss
   
-
   
-
   
-
   
-
   
-
   
(8,402,959
)
       
-
   
-
   
(8,402,959
)
     
                                                                     
Balance at June 30, 2004 (Restated)
   
-
   
-
   
173,327,412
   
79,235,712
   
1,597,780
   
(76,663,097
)
 
 
   
-
   
-
   
4,170,395
   
 
 
                                                                     
Common stock issued - line of equity transactions
   
-
   
-
   
26,274,893
   
7,797,807
   
-
   
-
         
-
   
-
   
7,797,807
       
                                                                     
Common stock issued - exchange for services
                                                                   
and compensation
   
-
   
-
   
285,000
   
113,850
   
-
   
-
         
-
   
-
   
113,850
       
                                                                     
Common stock issued - exercise of stock options
   
-
   
-
   
13,264
   
3,404
   
-
   
-
         
-
   
-
   
3,404
       
                                                                     
Net loss
   
-
   
-
   
-
   
-
   
-
   
(7,312,918
)
       
-
   
-
   
(7,312,918
)
     
                                                                     
Balance at June 30, 2005
   
-
 
$
-
   
199,900,569
 
$
87,150,773
 
$
1,597,780
 
$
(83,976,015
)
     
$
-
 
$
-
   
4,772,538
       
                                                                     
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.    
**See note 17 for a detailed breakdown by Series.   
                                                                     
See accompanying notes to the financial statements.
     
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at June 30, 2005
   
-
   
-
   
199,900,569
   
87,150,773
   
1,597,780
   
(83,976,015
)
 
-
   
-
   
4,772,538
 
                                                         
Common stock issued - line of equity transactions
   
-
   
-
   
47,776,064
   
7,409,543
   
-
   
-
   
-
   
-
   
7,409,543
 
                                                         
Fair Value of Stock Option Expenses
   
-
   
-
   
-
   
-
   
632,557
   
-
   
-
   
-
   
632,557
 
                                                         
Net loss
   
-
   
-
   
-
   
-
   
-
   
(7,162,722
)
 
-
   
-
   
(7,162,722
)
                                                         
Balance at June 30, 2006
   
-
 
 
-
   
247,676,633
 
 
94,560,316
 
 
2,230,337
 
 
(91,138,737
)
 
-
 
 
-
   
5,651,916
 
                                                         
 
Common stock issued - line of equity transactions
    -    
 -
   
63,861,405
   
4,560,415
      -      -    
   -
     -    
4,560,415
 
                                                         
 
Fair Value of Stock Option Expenses
     -      -     -     -    
431,313
     -      -      -     431,313   
                                                         
 
Net loss
     -      -     -     -      -     (7,202,322 )   -      -     (7,202,322
                                                         
 
Balance at June 30, 2007
         -     311,538,038      99,120,731      2,661,650      (98,341,059)      -      -     3,441,322   
                                                         
   
** See Note 17 for a detailed breakdown by Series.
                                                       
See accompanying notes to the financial statements.
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at June 30, 2007
   
-
   
-
   
311,538,038
   
99,120,731
   
2,661,650
   
(98,341,059
)
 
-
   
-
   
3,441,322
 
                                                         
Common stock issued - line of equity transactions
   
-
   
-
   
13,979,430
   
530,414
   
-
   
-
   
-
   
-
   
7,409,543
 
                                                         
Fair Value of Stock Option Expenses
   
-
   
-
   
-
   
-
   
183,182
   
-
   
-
   
-
   
183,182
 
                                                         
Net loss
   
-
   
-
   
-
   
-
   
-
   
(4,623,679
)
 
-
   
-
   
(4,623,679
)
                                                         
Balance at June 30, 2008
   
-
 
 
-
   
325,517,468
 
 
99,651,145
 
 
2,844,832
 
 
(102,964,738
)
 
-
 
 
-
   
(468,761
)
                                                         
Common stock issued - line of equity transactions      -      -     158,747,217      1,674,885     -                  1,674,885  
                                                         
Common stock issued - Conversion of Cv Debenture      -      -     93,958,547      621,220     -                  621,220  
                                                         
Common stock issued - Exercise of Warrants        -      -      21,755,555      178,778     -                  178,778  
                                                         
Common stock issued - Consulting      -      -      5,000,000      55,000      -                  55,000  
                                                         
Common stock issued - Employees      -      -      2,400,000      19,200      -                  19,200  
                                                         
Sale of Common Stock - Restricted Shares Issued      -      -      4,000,000      80,000      -                  80,000  
                                                         
Fair Value of Stock Option Expenses       -      -     -      -      145,577                  145,577  
                                                         
Discount - FV and BCF for $400,000 Cv Deb.       -      -      -       -      400,000                    400,000  
                                                         
Discount - FV and BCF for $400,000 Cv Deb. # 2      -      -      -      -      92,308                  92,308  
                                                         
Repricing of Warrants       -      -      -      -     17,000                  17,000  
                                                         
Net loss                   -       -      -      -      -      (3,944,429   -     -      (3,944,429
                                                         
Balance of June 30, 2009       -     -      611,378,787      102,280,228     3,499,717       (106,909,167 )   -     -      (1,129,222
                                                         
   
** See Note 17 for a detailed breakdown by Series.
                                                       
See accompanying notes to the financial statements.
 
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' Equity (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2010
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at June 30, 2009
   
-
   
-
   
611,378,787
   
102,280,228
   
3,499,717
   
(106,909,167
)
 
-
   
-
   
(1,129,222)
 
                                                         
Preferred stock issued - Series L(1)
   35
-
   
-
   
-
   
-
   
(10,875
 )  
-
   
-
   
-
   
(10,875)
 
                                                         
Common stock issued - line of equity transactions(2)     -      -     90,803,568      1,524,764     -                  1,524,764  
                                                         
Common stock issued - Conversion of Cv Debenture      -      -     45,334,856      223,743     -                  223,743  
                                                         
Common stock issued - Exercise of Warrants        -      -      11,180,822      89,444     (89,444                -  
                                                         
Common stock issued - Consulting      -      -      250,000      2,250      11,250                  13,500  
                                                         
Common stock issued - Employees      -      -      6,150,952      191,790      10,793                  202,583  
                                                         
Common stock issued - Add'l Consideration for Loans      -      -      16,625,000      465,500      21,000                  486,500  
                                                         
Common stock issued - Collateral for Loans      -      -     55,363,637      -      -                  -  
                                                         
Fair Value of Stock Option Expenses       -     -     -     -      588,565                 588,565  
                                                         
Discount - Add'l Consideration for Loans      -      -      -      -      357,000                  357,000  
                                                         
Net loss                   -       -      -      -      -      (4,971,715   -     -      (4,971,715
                                                         
Balance of June 30, 2010(2)   35  -     -      837,087,622      104,777,719     4,388,006       (111,880,882 )   -     -      (2,715,157
                                                         
   
(1)Convertible Preferred Shares are reported as a liability and therefore have no value in Stockholders' Equity.   
(2)As of June 30, 2010 JH Darbie & Co. is holding 196,431 shares that have been issued but not sold under the Equity Credit Line.   
** See Note 17 for a detailed breakdown by Series.
 
   
See accompanying notes to the financial statements.
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
                   
Statement of Cash Flows
 
                   
               
From Inception
 
               
(December 10,
 
   
Year Ended
   
Year Ended
   
1993) to
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
 
                  *  
Net loss
  $ (4,971,715 )   $ (3,944,429 )   $ (105,033,122 )
Adjustments to reconcile net loss to net cash
                       
  used for operating activities:
                       
    Depreciation and amortization
    144,445       202,344       3,309,317  
    (Gain) Loss on sale of fixed assets
    -       (1,181,894 )     (2,794,565 )
    Extinguishment of debt
    (98,829 )     -       (530,291 )
    Inventory valuation adjustment
    67,678       82,286       4,820,349  
    Amoritization of deferred compensation
            -       4,064,250  
    Noncash interest, compensation and consulting services
    1,693,390       858,510       21,531,883  
    Fair Value of Stock Option Expenses
    588,564       145,577       1,981,193  
    (Increase) decrease in accounts and
                       
        loans receivable - employees, net
    5,225       27,222       (170,313 )
     Increase (decrease) in allowance for
                       
        doubful account
    -       47,982       114,982  
    (Increase) decrease in inventories, net
    23,680       28,825       (2,327,880 )
    (Increase) decrease in prepaid expenses
    (25,498 )     19,751       (61,115 )
    (Increase) decrease in other assets
    -       -       (306,618 )
    Increase (decrease) in accounts payable and
                       
        accrued expenses
    (356,644 )     1,194,152       1,803,010  
    Increase (decrease) in other current liabilities
    2,000       (30,000 )     98,114  
    Increase in deferred rent liability
    -       (85,935 )     -  
                         
        Total adjustments
    2,044,011       1,308,820       31,532,316  
                         
        Net cash used for operating activities
    (2,927,704 )     (2,635,609 )     (73,500,806 )
                         
                         
Cash flows from investing activities:
                       
     Proceeds from sale of property & equipment
    -       2,400       4,390,015  
     Prototype equipment
    -       -       (2,799,031 )
     Capital expenditures
    -       7,360       (4,779,405 )
                         
        Net cash used for investing activities
    -       9,760       (3,188,421 )
                         
                         
Cash flows from financing activities:
                       
     Repayment of capital lease obligation
    -       -       (50,289 )
     Proceeds from convertible debenture
    -       800,000       4,040,000  
     Proceeds from (repayments) loan payable, net
    1,241,794       -       3,836,823  
     Proceeds from issuance of preferred stock
    350,000       -       18,389,500  
     Proceeds from exercise of stock options
    -       -       903,989  
     Net proceeds from issuance of common stock
    1,397,219       1,788,951       49,643,048  
                         
       Net cash provided by financing activities
    2,989,013       2,588,951       76,763,071  
                         
Net increase (decrease) in cash and cash equivalents
    61,309       (36,898 )     73,844  
                         
Cash and cash equivalents at beginning of period
    12,535       49,433       -  
                         
Cash and cash equivalents at end of period
  $ 73,844     $ 12,535     $ 73,844  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
                         
See accompanying notes to the financial statements.
 


 
IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
                   
Statement of Cash Flows (Continued)
 
                   
               
From Inception
 
               
(December 10,
 
   
Year Ended
   
Year Ended
   
1993) to
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
 
Supplemental disclosures of cash
                *  
   flow information:
                   
                     
Cash paid for interest
  $ -     $ -     $ 215,962  
                         
Supplemental disclosures of noncash
                       
   investing and financing activities:
                       
                         
Issuance of common stock and options
                       
   in exchange for services
  $ 11,250     $ -     $ 6,317,600  
                         
Issuance of common stock as loan fees in
                       
   connection with loans to the Company
  $ -     $ -     $ 293,694  
                         
Issuance of common stock as collateral in
                       
   connection with loans to the Company
  $ 1,150,000     $ -     $ 1,150,000  
                         
Issuance of common stock as additional consideration
                 
   in connection with loans to the Company
  $ 465,500     $ -     $ 465,500  
                         
Issuance of common stock as satisfaction of
                       
   loans payable and accrued interest
  $ -     $ -     $ 3,398,965  
                         
Issuance of common stock as satisfaction of
                       
   certain accounts payable
  $ 2,250     $ -     $ 260,142  
                         
Issuance of common stock in
                       
   exchange for property and equipment
  $ -     $ -     $ 89,650  
                         
Issuance of common stock and other current liability
                       
   in exchange for patent liceensing agreement
  $ -     $ -     $ 581,000  
                         
Issuance of common stock for
                       
   compensation
  $ 191,789     $ 19,200     $ 2,902,777  
                         
Issuance of common stock through
                       
   exercise of incentive stock options
  $ -     $ -     $ 3,117,702  
                         
Issuance of common stock as
                       
   payment for preferred stock dividends
  $ -     $ -     $ 507,645  
                         
Acquisition of property and equipment
                       
   through the issuance of a capital
                       
   lease payable
  $ -     $ -     $ 50,289  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
See accompanying notes to the financial statements.
 

 

 

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 a development stage enterprise and during fiscal year ending June 30, 2010, utilized the proceeds from short-term loans and our Private Equity Credit Agreements with Charlton Avenue, LLC and Southridge Partners II LP (“Southridge”).  As additional working capital will be required, the Company will obtain such capital through the use of its Private Equity Credit Agreement with Southridge and other sources of financing.  Since January 2003, the Company has had revenues of $2,324,664 from the sale of its CTLM® Breast Imaging System.  There is no assurance that once the development of the CTLM® device is completed and finally receives 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) Revenue Recognition

We recognize revenue in accordance with the guidance presented in the SEC’s Staff Accounting Bulletin No. 104.  We sell our medical imaging products, parts, and services to independent distributors and in certain unrepresented territories directly to end-users.  Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery has occurred such that title and risk of loss have passed to the buyer or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonable assured.  Unless agreed otherwise, our terms with international distributors provide that title and risk of loss passes F.O.B. origin.

To be reasonably assured of collectibility, our policy is to minimize the risk of doing business with distributors in countries which are having difficult financial times by requesting payment via an irrevocable letter of credit (“L/C”) drawn on a United States bank prior to shipment of the CTLM®.  It is not always possible to obtain an L/C from our distributors so in these cases we must seek alternative payment arrangements which include third-party financing, leasing or extending payment terms to our distributors.






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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(c) Allowance for Doubtful Accounts

In the event that management determines that a receivable becomes uncollectible, or events or circumstances change, which result in a temporary cessation of payments from the distributor, we will make our best estimate of probable or potential losses in our accounts receivable balance using the allowance method for each quarterly period.  Management will periodically review the receivables at the end of each quarterly reporting period and the appropriate accrual will be made based on current available evidence and historical experience.

Our allowance for doubtful accounts was $114,982 as of June 30, 2010 and was $114,982 in the prior fiscal year.

(d) 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.

(e) Inventory

Inventories, consisting principally of raw materials, work-in-process (including completed units under testing), finished goods and units placed on consignment, are carried at the lower of cost or market.  Cost is determined using the first-in, first-out (FIFO) method.  Raw materials consist of purchased parts, components and supplies.  Work-in-process includes completed units undergoing final inspection and testing.

We have used and will continue to use CTLM® systems from finished goods as demonstrators or for clinical collaboration.  At the conclusion of the demonstration or clinical collaboration period, the CTLM® may be sold at reduced prices.  On a quarterly basis, using the guidance provided by ASC 330, our ability to realize the value of our inventory is based on a combination of factors including the following: how long a consigned system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions.

Due to recent technological advances resulting in overall lower costs for certain inventory components; the Company has reduced these components of its inventory to their net realizable value.  The inventory valuation adjustments are reflected in the statement of operations and amounted to $67,678, $82,286 and $4,820,349, for the years ended June 30, 2010, 2009 and for the period December 10, 1993 (date of inception) to June 30, 2010, respectively.







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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(f) 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.  Expenditures for renewals and betterments which increase the estimated useful life or capacity of the asset are capitalized; expenditures for repairs and maintenance are expensed when incurred.

Using the guidance provided by ASC 985, 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 require considerable judgment 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.

(g) Research and development

Research and development expenses consist principally of expenditures for equipment and outside third-party consultants, raw materials which are used in testing and the development of the Company's CTLM® device or other products, product software and compensation to specific company personnel.  The non-payroll related expenses include testing at outside laboratories, parts associated with the design of initial components and tooling costs, and other costs which do not remain with the developed CTLM® 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.

(h) Net loss per share

The Company relies on the guidance provided by ASC 260, (“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.

 
The Company has excluded vested options and warrants in the amount of 44,496,012 and 44,457,539 during the years June 30, 2010 and 2009 as the inclusion of such options and warrants would be anti-dilutive.






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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(i) Patent license agreement
 
The patent license agreement will be amortized over the seventeen-year life of the patent, the term of the agreement.  See Note 2(m) Intangible Assets for disclosure on impairment policy.

(j) Stock-based compensation

The Company relies on the guidance provided by ASC 718, (“Share Based Payments”).  ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying ASC 718 approximated $588,564 and $145,577, respectively, in additional compensation expense for the twelve months ended June 30, 2010 and 2009.

The fair value concepts were not changed significantly in ASC 718, however, in adopting this Standard, companies were given the option to choose among alternative valuation models and amortization assumptions.  We elected to continue to use the Black-Scholes option pricing model and expense the options as compensation over the requisite service period of the grant.  We will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.


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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


 
Year Ended
Year Ended
 
June 30, 2010
June 30, 2009
Volatility
173.16%
131.31%
Risk Free Interest Rate
5%
5%
Expected Term
8 yrs
8 yrs

Our expected term assumption of eight years for the year ended June 30, 2010, was based upon the guidance provided by SEC Staff Accounting Bulletin 107 enabling us to use the simplified method for “plain vanilla” options for this calculation.  This provision was allowed to be used for grants made on or before December 31, 2007.  On December 21, 2007, the SEC issued Staff Accounting Bulletin 110 which extended the timeframe we will have to use the simplified method on an interim basis.  The SEC will suspend use of this method once detailed information on exercise terms become readily available.  We then will be required to estimate the expected term of an option using historical data.

See Note 19 – Stock Options


(k) Long-lived assets

The Company relies on the guidance provided by ASC 360 (“Property, Plant & Equipment”).  ASC 360 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.

In April 2008, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired subsequent to the adoption date.  The adoption of these revised provisions had no impact on the Company’s Audited Financial Statements.

The Company has determined that no impairment losses need to be recognized through the fiscal year ended June 30, 2010.

(l) Income taxes

The Company provides for income taxes using the asset and liability method as required by ASC 740 (“Income Taxes”).  ASC 740 recognizes the amount of federal and state taxes payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the financial statements and income tax returns.  Deferred income tax assets and liabilities are adjusted to recognize the change in tax laws or tax rates. These changes are recognized in income in the year that includes the enactment date.


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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m) Intangible assets

Intangible assets, consisting of the patent license agreement and certain initial UL and CE costs are reflected in “Intangible Assets” on the balance sheet, net of accumulated amortization (Note 9).  The patent license agreement has a fixed life of seventeen years and will continue to be amortized over its remaining useful life.

Long-lived assets, including patents, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The impairment analysis for patents can be very subjective as we rely upon signed distribution, dealer or license agreements with variable cash flows to substantiate the recoverability of these long-lived assets.  In our analysis we also take into account our position as a world-wide market leader in CT optical tomography; net sales of CTLM® systems of $2,324,664 since January 2003; the growing acceptance of our technology with over 15,000 scans performed world-wide; approvals or product registration in the following countries: CE Mark for the European Union, Canada, Peoples Republic of China, Argentina, Brazil and Colombia.  We believe the fair value of our patent license exceeds the carrying amount of $170,882.

We have recorded accumulated amortization of $410,118 with a balance remaining of $170,882, which will be amortized over the next five years at $8,544 per quarter.  We will continue to test for impairment on an annual basis or more frequently if events and circumstances change using the guidance provided in ASC 350.  Examples of such events and circumstances are:

·
A significant adverse change in legal factors or in the business climate
·
An adverse action or assessment by a regulator
·
Unanticipated competition
·
Loss of key personnel
·
An expectation that all or a significant portion of a deporting unit will be sold or otherwise disposed of.

Based on our analysis, we determined that there was no impairment as of June 30, 2010.



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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 
(n) Warranty Reserve

 
The Company established a warranty reserve effective for the fiscal year ending June 30, 2005.  The table below reflects the Warranty Reserve established for the last three fiscal years.  Although the Company tests its product in accordance with its quality programs and processes, its warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or service costs differ from the Company’s estimates, which are based on limited historical data, where applicable, revisions to the estimated warranty liability would be required.

   
Year Ended
   
Year Ended
 
   
June 30, 2010
   
June 30, 2009
 
Warranty Reserve
  $ 3,244     $ 4,065  

(o) 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.

(p) 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.

(q) Comprehensive income

The Company relies on the guidance provided by ASC 220, (“Comprehensive Income”).  ASC 220 requires a full set of general-purpose financial statements to be expanded to include the reporting of “comprehensive income”.  Comprehensive income is comprised of two components, net income and other comprehensive income.  For the period from December 10, 1993 (date of inception) to June 30, 2010, the Company had no items qualifying as other comprehensive income.

(r) Impact of recently issued accounting standards

In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP.  All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification.  All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database.  The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts our financial statements as all future references to


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

Notes to Financial Statements (Continued)

(2)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

authoritative accounting literature will be referenced in accordance with the Codification.  There have been no changes to the content of our financial statements or disclosures during the quarter ended June 30, 2010 as a result of implementing the Codification.

As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2009 and thereafter, previous references to new accounting standards and literature are no longer applicable.

In December 2007, the Securities and Exchange Commission (“SEC”) (“SAB 110”) which provides guidance to allow eligible public companies to continue to use a simplified method for estimating the expense of stock options if their own historical experience isn’t sufficient to provide a reasonable basis.  Since we have limited experience in determining expected term of “plain vanilla” share options, we will continue to use the simplified method as discussed in SAB No. 107.

In June 2009, the FASB issued guidance which will amend the Consolidation Topic of the Codification.  The guidance addresses the effects of eliminating the qualifying special-purpose entity (QSPE) concept and responds to concerns over the transparency of enterprises’ involvement with variable interest entities (VIEs).  The guidance is effective beginning on January 1, 2010.  We do not expect the adoption of this guidance to have an impact on our financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05).  ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification by providing additional guidance clarifying the measurement of liabilities at fair value.  ASU 2009-05 is effective for us for the reporting period ending December 31, 2009.  We do not expect the adoption of ASU 2009-05 to have an impact on our financial statements.

In June 2010, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”), which amends and expands previously existing guidance on derivative instruments to require tabular disclosure of the fair value of derivative instruments and their gains and losses., This ASC also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The adoption of this ASC did not have an impact on the Company’s Audited Financial Statements.

All other issued but not yet effective FASB issued guidances have been deemed to be not applicable hence when adopted, these guidances are not expected to have any impact on the financial position of the company.


 
(s) Reclassifications

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




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

Notes to Financial Statements (Continued)

(3)           OTHER INCOME

During the fiscal years ending June 30, 2010 and 2009, the Company recorded a net total of Other Income of $118,796 and $5,909 of which $98,829 and $0, respectively, represents extinguishment of debt.  We have recorded income as a result of the recapture of expenses associated with the closing of our Representative Office in Beijing, China and legal expenses associated with a case that settled in October 2003.  Of the $118,796 and $5,909 Other Income, $19,967 and $5,909, respectively, represents the monthly rent expense and fees we charged Bioscan Inc.  During the fiscal year ending June 30, 2007, the Company sold its LILA technology to Bioscan Inc. for the sum of $250,001 which we received and recorded as Other Income.


(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 No. 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 enterprise and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing.  We have yet to generate a positive internal cash flow, and until significant sales of our product occur, we are mostly dependent upon debt and equity funding.  See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

In the event that we are unable to obtain debt or equity financing or we 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.  In the event that we are unable to draw on our private equity line, alternative financing would be required to continue operations.  Management has been able to raise the capital necessary to reach this stage of product development and has been able to obtain funding for capital requirements to date. There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.

We have commenced our planned principal operations of the manufacture and sale of our sole product, the CTLM®, CT Laser Mammography System. We are continuing to appoint distributors and are installing systems under our clinical collaboration program as part of our global commercialization program.  We have sold a total of 15 systems as of June 30, 2010; however, we continue to operate as a development stage enterprise because we have yet to produce significant revenues.  Should additional working capital be required, the Company will obtain such capital through the use of its Southridge Private Equity Credit Agreement and other sources of financing.  We have to create product awareness as a foundation to developing our markets through our existing distributor network and through the appointment of additional distributors and the training of their field service engineers.  We would be able to exit the status of a Development Stage Enterprise pursuant to the guidance provided by ASC 915 (“Development Stage Entities”) reporting sufficient revenues for two successive quarters such that we would not have to utilize our Southridge Private Equity Credit Agreement or alternative funding sources for capital to cover our quarterly operating expenses.



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

Notes to Financial Statements (Continued)


(6)           INVENTORIES

Inventories consisted of the following:

   
June 30,
 
   
2010
   
2009
 
Raw materials consisting of purchased parts, components and supplies
  $ 513,556     $ 529,410  
Work-in process including units undergoing final inspection and testing
    28,943       28,943  
Finished goods
    292,611       377,114  
                 
Sub-Total Inventories
  $ 835,110     $ 935,467  
                 
     Less Inventory Reserve
    (399,000 )     (408,000 )
                 
Total Inventory - Net
  $ 436,110     $ 527,467  

We review our Inventory for parts that have become obsolete or in excess of our manufacturing requirements and our Finished Goods for valuation pursuant to our Critical Accounting Policy for Inventory.  For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 as this CTLM® system is being used as a clinical system at the University of Florida.  For the fiscal year ending June 30, 2008 since such finished goods are being utilized for collecting data for our FDA application, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment.  For the fiscal year ending June 30, 2009 we identified $408,000 of Inventory that we deem impaired due to the lack of inventory turnover.  For the fiscal year ending June 30, 2010 we identified $399,000 of Inventory that we deem impaired due to the lack of inventory turnover.


(7)           PROPERTY AND EQUIPMENT

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

   
June 30,
 
   
2010
   
2009
 
Furniture and fixtures
  $ 257,565     $ 257,565  
Building and land (See Note 8)
    -       -  
Computers, equipment and software
    426,873       426,873  
CTLM® software costs
    352,932       352,932  
Trade show equipment
    298,400       298,400  
Clinical equipment
    440,937       440,937  
Laboratory equipment
    212,560       212,560  
                 
Total Property & Equipment
    1,989,267       1,989,267  
   Less: accumulated depreciation
    (1,767,504 )     (1,657,236 )
                 
Total Property & Equipment - Net
  $ 221,763     $ 332,031  

For the fiscal year ending June 30, 2008, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment as these CTLM® systems continue to be used as clinical systems associated with the data collection for our FDA application which we planned to submit to the FDA in December 2008.

For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 of CTLM® systems in Inventory to Clinical equipment as this CTLM® system is being used as a clinical system at the University of Florida.





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

Notes to Financial Statements (Continued)

(7)           PROPERTY AND EQUIPMENT (Continued)

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

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

Telephone equipment, acquired under a long-term capital lease at a cost of $50,289, is included in furniture and fixtures.  The CTLM® software is fully amortized.


(8)           SALE/LEASE-BACK OF BUILDING

On March 31, 2008, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V. pursuant to our September 13, 2007 sale/lease-back agreement with Superfun B.V.  We received payments of $2,200,000 in the quarter ending September 30, 2007, $550,000 in the quarter ending December 31, 2007, and $1,650,027 in the quarter ending March 31, 2008.  We recorded the advanced payments received as a current liability on the Balance Sheet which was carried until we received the full payment of $4.4 million.  At that time we conveyed title to our property and executed the five year lease.  Pursuant to existing FASB guidance at the time of the sale, we recorded the sale, removed the sold property and its related liabilities from the Balance Sheet and deferred the gain over the five year term of the operating lease.   We computed the amount of gain on the sale portion of the sale/lease-back in accordance with the existing FASB guidance at the time of the sale.  In this regard, we recorded a gain of $1,609,525 and recorded a deferred gain of $1,040,000, which is the present value of the lease payments over the five year term of the lease.  We planned to amortize the deferred gain in proportion to the gross rental charged to expense over the lease term.  The lease provided a six-month rent holiday with rent payments commencing on September 14, 2008.  To account for the rent holiday, we recorded $13,935 for Rent Expense from March 14th to March 31st and accrued that amount as a deferred rent liability.  From April 1st to September 14th, we recorded rent expense of $24,000 per month and accrued that amount as a deferred rent liability. The $144,000 deferred rent liability was amortized on a straight-line basis over the lease term.  See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back.

The lease provided that either party may cancel the lease without penalty or fault upon 180 days prior notice given to the other party.  On April 29, 2008, we gave six months prior written notice of termination of our lease of our Plantation, Florida facility as part of our cost cutting initiatives.  On September 24, 2008, we gave notice to Bright that we vacated the Plantation, Florida premises.  Because of our termination of the lease, we accelerated the deferred gain of $1,040,000 on the sale of our commercial building and accelerated amortization of the deferred rent liability of $144,000 and recorded the accrual of 45 days of rent expense in the amount of $35,506.85 for the period September 15 to October 28, 2008.

On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida. (See Note 13 - Leases)




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

Notes to Financial Statements (Continued)

(9)           INTANGIBLE ASSETS

Intangible assets consist of the following:

   
June 30,
 
   
2010
   
2009
 
             
Patent license agreement, net of accumulated
           
   amortization of $410,118 and $375,941 respectively
  $ 170,882     $ 205,059  
                 
Totals
  $ 170,882     $ 205,059  

During June 1998, the Company signed an exclusive Patent License Agreement with its former chief executive officer. (See Note 22)  The officer was the originator of patents issued on December 2, 1997 which covers some of the technology of the CTLM®.  Pursuant to the terms of the agreement, the Company was granted the exclusive right to modify, customize, maintain, incorporate, manufacture, sell, and otherwise utilize and practice the Patent, all improvements thereto and all technology related to the process, throughout the world.  The license shall apply to any extension or re-issue of the Patent.  The term of license is for the life of the Patent and any renewal thereof, subject to termination, under certain conditions.  As consideration for the License, the Company issued to the officer 7,000,000 shares of common stock (See Note 19). The License agreement has been recorded at the historical cost basis of the chief executive officer, who owned the patent.  The amortization expense for the year ended June 30, 2010 for the patent license agreement is $34,176, with a balance to be amortized over the remaining life of the patent which is five (5) years.  We will review the value of this patent and test it for impairment on an annual basis.  No impairment of this intangible asset was identified for the fiscal year ending June 30, 2010.

The core costs of obtaining the initial UL and CE approvals have an indefinite life, and intangible assets having an indefinite life are not amortized at the point of acquisition or subsequent to point of acquisition in accordance with the guidance of ASC 350.  We recorded the initial costs of these systems and protocols as an intangible asset with an indefinite life because we believed that the costs of obtaining them applied to our Company’s entire functional process including manufacturing, labeling and compliance.  We followed the guidance provided in a paradigm, Figure 23-1: Summary of Accounting for Intangible Assets by ASC 350, in which questions are asked relative to indefinite life, asset impairment and whether assumption of indefinite life is still valid.


(10)           ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
June 30,
 
   
2010
   
2009
 
             
Accounts payable - trade
  $ 894,432     $ 1,194,964  
Accrued tangible personal property taxes payable
    6,000       30,819  
Accrued compensated absences
    47,529       46,368  
Accrued wages payable
    498,424       583,896  
Other accrued expenses
    92,363       138,173  
                 
Totals
  $ 1,538,748     $ 1,994,220  




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

Notes to Financial Statements (Continued)

(11)           CUSTOMER DEPOSITS

Customer deposits consisted of the following:

   
June 30,
 
   
2010
   
2009
 
             
Customer deposits
  $ 98,114     $ 96,114  
                 
Total
  $ 98,114     $ 96,114  

Deposits received from customers are identified and accounted for as customer deposits and are presented as both a current asset and an offsetting current liability on our balance sheet.  In the event of a cancellation or termination of a customers’ order, the deposit is refunded less any fees previously agreed to.


(12)           EQUITY LINE OF CREDIT

On August 17, 2000 the Company finalized a financing agreement with a private institutional equity investor, which contained two component parts, a $25 million Private Equity Agreement and a private placement of 500 shares of Series K convertible preferred stock as bridge financing in the amount of $5,000,000 (See Note 15). The Private Equity Agreement committed the investor to purchase up to $25 million of common stock subject to certain conditions pursuant to Regulation D over the course of 12 months after an effective registration of the shares.  The timing and amounts of the purchase by the investor were at the sole discretion of the Company.  However, they were required to draw down a minimum of $10 million from the credit line over the twelve-month period.  The purchase price of the shares of common stock was set at 91% of the market price.  The market price, as defined in the agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche.

On May 15, 2002, the Company entered into a second private equity agreement, which replaced the original Private Equity Agreement.  The terms of the second Private Equity Agreement were substantially equivalent to the terms of the original agreement, except that (i) the commitment period was three years from the effective date of a registration statement covering the second Private Equity Agreement shares, (ii) the minimum amount required to be drawn through the end of the commitment period was $2,500,000, (iii) the minimum stock price requirement was reduced to $.20, and (iv) the minimum average trading volume was reduced to $40,000.

On October 29, 2002, the Company entered into a new “Third Private Equity Credit Agreement” which the Company intended to supplement the second Private Equity Agreement.  The terms of the Third Private Equity Credit Agreement were substantially equivalent to the terms of the prior agreement, in that (i) the commitment period was three years from the effective date of a registration statement covering the Third Private Equity Credit Agreement shares, (ii) the maximum commitment was $15,000,000, (iii) the minimum amount required to be drawn through the end of the commitment period was $2,500,000, (iv) the minimum stock price requirement was reduced to $.10, and (v) the minimum average trading volume in dollars was reduced to $20,000.

On January 9, 2004, the Company entered into a new “Fourth Private Equity Credit Agreement” which replaced the prior private equity agreements.  The terms of the Fourth Private Equity Credit Agreement were more favorable to the Company than the terms of the prior Third Private Equity Credit Agreement.  The new, more favorable terms were: (i) The put option price was 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, ii) the commitment period was two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount the Company was required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was  $2,500,000, (v) the minimum stock price requirement was controlled by the Company as it had the option of setting a floor price for


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

Notes to Financial Statements (Continued)

(12)           EQUITY LINE OF CREDIT (Continued)

each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars.  The previous trading volume requirement in the Third Private Equity Credit Agreement was $20,000.

On March 21, 2006, the Company and Charlton entered into a new “Fifth Private Equity Credit Agreement,” which replaced the Company’s prior Fourth Private Equity Credit Agreement upon the April 25, 2006, effectiveness of our S-1 Registration Statement filed on March 23, 2006 to register shares underlying the Fifth Private Equity Credit Agreement.  The terms of the Fifth Private Equity Credit Agreement are similar to the terms of the prior Fourth Private Equity Credit Agreement.  The new credit line’s material terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period is two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount the Company must draw through the end of the commitment period is $1,000,000,  (v)  the minimum stock price, also known as the floor price is computed as follows:  In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount.  In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Fifth Private Equity Credit Agreement.  The conditions to the Company’s ability to draw under this private equity line, as described above, may materially limit the draws available to the Company.

These financing agreements have had no warrants attached to either the bridge financing or the private equity line.  Furthermore, the Company was not required to pay the investor’s legal fees, but the Company previously paid a 5% consulting fee for the money funded in all prior transactions up until the approval of the Fourth Private Equity Credit Agreement.  The Company sold $2,840,000 of common stock under the terms of the initial private equity agreement during the year ended June 30, 2001.  The total shares issued by the Company amounted to 3,407,613.  The Company incurred $139,985 of consulting fees and recorded $303,666 of deemed interest expense as a result of the 9% discount off of the market price. During the year ended June 30, 2002, an additional $5,585,000 of common stock was sold under the terms of the applicable equity credit line agreement, and the Company issued a total of 11,607,866 shares of common stock.  The Company incurred $296,250 of consulting fees and recorded $628,805 of deemed interest expense as a result of the 9% discount off of the market price. During the year ended June 30, 2003, an additional $7,881,000 of common stock was sold under the terms of the applicable equity credit line agreement, and the Company issued a total of 29,390,708 shares of common stock.  The Company incurred $211,800 of consulting fees and recorded $856,772 of deemed interest expense as a result of the 9% discount off of the market price.  During the year ended June 30, 2004, an additional $5,850,000 of common stock was sold under the terms of the equity credit line agreements, and the Company issued a total of 8,630,819 shares of common stock.  The Company incurred $188,000 of consulting fees which was solely from the Third Private Equity Credit Agreement and recorded a total of $691,701 of deemed interest expense of which $555,897 is a result of the 9% discount off the market price under the Third Private Equity Credit Agreement and $135,804 is a result of the 7% discount off the market price under the Fourth Private Equity Credit Agreement.  During the year ended June 30, 2005, an additional $7,204,370 of common stock was sold under the terms of the Fourth Private Equity Credit Agreement and the Company issued a total of 26,274,893 shares of common stock.  The Company recorded a total of $593,437 of deemed interest expense as a result of the 7% discount off the market price under the Fourth Private Equity Credit Agreement.


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

Notes to Financial Statements (Continued)


(12)           EQUITY LINE OF CREDIT (Continued)

During the year ended June 30, 2006, an additional $6,844,171 of common stock was sold under the terms of the equity credit line agreements, and the Company issued a total of 47,776,064 shares of common stock.  The Company recorded a total of $565,372 of deemed interest expense as a result of the 7% discount off the market price under the Fourth Private Equity Credit Agreement and Fifth Private Equity Credit Agreement.

During the year ended June 30, 2007, an additional $4,192,717 of common stock was sold under the terms of the Fifth Private Equity Credit Agreement and the Company issued a total of 63,861,405 shares of common stock.  The Company recorded a total of $367,698 of deemed interest expense as a result of the 7% discount off the market price under the Fifth Private Equity Credit Agreement.

On April 21, 2008, we and Charlton entered into a new “Sixth Private Equity Credit Agreement” which has replaced our prior Fifth Private Equity Credit Agreement.  The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement.  This new credit line’s terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount,  (v)  the minimum stock price, also known as the floor price is computed as follows:  In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount.  In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement.  The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.

During the year ended June 30, 2008, an additional $275,000 of common stock was sold under the terms of the Fifth Private Equity Credit Agreement and the Company issued a total of 7,726,647 shares of common stock.  The Company recorded a total of $23,782 of deemed interest expense as a result of the 7% discount off the market price under the Fifth Private Equity Credit Agreement.

During the year ended June 30, 2008, an additional $215,000 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 6,252,783 shares of common stock.  The Company recorded a total of $16,665 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.

During the year ended June 30, 2009, an additional $1,530,173 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 158,747,217 shares of common stock.  The Company recorded a total of $144,713 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.

During the year ended June 30, 2010, an additional $297,219 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 62,000,000 shares of common stock.  The Company recorded a total of $24,792 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.

On November 23, 2009, we and Southridge entered into a new “Southridge Private Equity Credit Agreement” which has replaced our prior Sixth Private Equity Credit Agreement with Charlton.  On January 7, 2010, we and Southridge amended the terms of the “Southridge Private Equity Credit Agreement” and revised the language to clarify that Southridge


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

Notes to Financial Statements (Continued)


(12)           EQUITY LINE OF CREDIT (Continued)

is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.

The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton.  This new credit line’s terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount,  and (v) there are no fees associated with the Southridge Private Equity Credit Agreement.  The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.

We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, 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 the light of the circumstances under which they were made, not misleading.

We are further obligated to 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 Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.

On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement.  This Registration Statement was declared effective on February 25, 2010.  On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010.  We reduced the amount of shares registered to 85,744,007 shares.  This amended Registration Statement was declared effective on May 27, 2010.

During the year ended June 30, 2010, $1,100,000 of common stock was sold under the terms of the Southridge Private Equity Credit Agreement and the Company issued a total of 28,803,569 shares of common stock.  The Company recorded a total of $102,754 of deemed interest expense as a result of the 7% discount off the market price under the Southridge Private Equity Credit Agreement.






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

Notes to Financial Statements (Continued)


(13)           LEASES

The Company leases certain office equipment under capital leases expiring in future years.  Minimum future lease payments under the non-cancelable operating lease having a remaining term in excess of one year as of June 30, 2010 are as follows:

Total rent expense for capital leases amounted to $6,349 and $6,144 for the years ended June 30, 2010 and 2009, respectively, and $384,219 from inception (December 10, 1993) to June 30, 2010.

Total rent expense for operating leases amounted to $127,019 and $208,122 for the years ended June 30, 2010 and 2009, respectively, and $421,076 from inception (December 10, 1993) to June 30, 2010.


   
Payments Due by Fiscal Year
 
                                     
   
Total
   
2011
   
2012
   
2013
   
2014
   
2015
 
Capital Lease Obligations
  $ 6,709     $ 3,888     $ 2,821     $ -     $ -     $ -  
                                                 
Operating Lease -
  $ 35,507     $ -     $ -     $ -     $ -     $ -  
Bright Investments, LLC
                                               
                                                 
Operating Lease –
  $ 425,053     $ 132,489     $ 137,773     $ 143,273     $ 11,518     $ -  
Fort Lauderdale Business
                                               
Plaza Associates
                                               

Operating Lease – Bright Investments, LLC
On September 13, 2007, we entered into an agreement with an unaffiliated third-party for the sale and lease-back of our property at 6531 N.W. 18th Court, Plantation, Florida.  On March 31, 2008, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC, an unaffiliated third-party and a sister company to Superfun B.V.  Terms of the triple net lease were five years with the first monthly rent payment due six months from the commencement date of the lease.  The monthly rent for the base year is $24,000 plus applicable sales tax.  During the term and any renewal term of the lease, the minimum annual rent shall be increased each year.  Commencing with the first day of the second lease year and on each lease year anniversary thereafter, the minimum annual rent shall be cumulatively increased by $24,000 per each lease year or $2,000 per month plus applicable sales tax.  Either party may cancel the lease without penalty or fault upon 180 days prior notice given to the other party. On April 29, 2008, we gave six months prior written notice of termination of our lease of our Plantation, Florida facility as part of our cost cutting initiatives.

The lease provided a six-month rent holiday with rent payments commencing on September 14, 2008.  To account for the rent holiday, we recorded $13,935 for Rent Expense from March 14th to March 31st and accrued that amount as a deferred rent liability.  From April 1st to September 14th, we recorded rent expense of $24,000 per month and accrued that amount as a deferred rent liability. The $144,000 deferred rent liability will be amortized on a straight-line basis over the lease term.

The lease provided that either party may cancel the lease without penalty or fault upon 180 days prior notice given to the other party.  On April 29, 2008, we gave six months prior written notice of termination of our lease of our Plantation, Florida facility as part of our cost cutting initiatives.  On September 24, 2008, we gave notice to Bright that we vacated the Plantation, Florida premises.  Because of our termination of the lease, we accelerated the deferred gain of $1,040,000 on the sale of our commercial building and accelerated amortization of the deferred rent liability of $144,000 and recorded the accrual of 45 days of rent expense in the amount of $35,506.85 for the period September 15 to October 28, 2008.




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

Notes to Financial Statements (Continued)

(13)           LEASES (Continued)


Operating Lease – Fort Lauderdale Business Plaza Associates
On June 2, 2008, the Company executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida.  The term of the lease is five years and one month with the first monthly rent payment due September 1, 2008 with an option to renew for one additional period of three years.  The monthly base rent for the initial year is $6,580 plus applicable sales tax.  During the term and any renewal term of the lease, the base annual rent shall be increased each year.  Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax.  IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses which is estimated to be $3,084 per month for the first 12 months of the lease.  The total monthly rent including Florida sales tax for the first 12 months is $10,244.  Upon the execution of the lease, we paid the first month’s rent of $10,244 and a security deposit of $13,160.


(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 $86,000,000 to offset future taxable income.  Such carryforwards expire in years beginning 2014 through 2030.  The deferred tax asset recorded by the Company as a result of these tax loss carryforwards is approximately $30,100,000 and $29,200,000 at June 30, 2010 and 2009, 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 for the year ended June 30, 2009 was an increase of approximately $1,500,000 and increase of $900,000 for the year ended June 30, 2010. The reconciliation of income tax computed at the U.S. federal statutory rate of 35% has been offset by permanent differences relating to stock option expense and the discount recorded debt in the amount of 12% and 6% for fiscal 2010 and 2009 and by a full valuation allowance against the related net operating loss for each of the respective years then ended.


(15)          CONVERTIBLE DEBENTURES

On August 1, 2008, we entered into a Securities Purchase Agreement  (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”).  We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration Statement promptly after the filing of our Annual Report on Form 10-K.

The Initial Purchase Agreement provided for the sale of the Initial Debentures in two closings.  The first closing, which occurred on August 4, 2008, was for a principal amount of $400,000.  The second closing would be for up to $400,000 and would occur within the earlier of five business days following the effective date of the Registration Statement and December 1, 2008, provided that the closing conditions in the Initial Purchase Agreement have been met.  We retained the option to use our existing equity credit line until the Registration Statement is declared effective.  Sales under the Initial Purchase Agreement were subject to an 8% placement agent fee.  Thus, the first closing generated proceeds to IDSI of $368,000, before normal transaction costs.


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

Notes to Financial Statements (Continued)

(15)           CONVERTIBLE DEBENTURES (Continued)

Prior to maturity, the Initial Debentures bear interest at the rate of 8% per annum, payable quarterly in cash or, at our option, in shares of common stock based on the then-existing market price provided that we are in compliance with the Initial Purchase Agreement.

The Initial Debentures may be converted in whole or in part at the option of the holder any time after the closing date into our Common Stock at the lesser of (i) a set price, initially $.019 per share, which was the closing price of our shares on the closing date (“fixed conversion price”) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; however, the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit may be increased to 9.99% on 61 days prior written notice from the holder.

At any time after closing, we may redeem for cash, upon written notice, any and all of the outstanding Initial Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Initial Debentures to be redeemed.

The Initial Debentures are secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated August 1, 2008, between IDSI and Whalehaven.

Pursuant to the first closing of the Initial Private Placement, we issued to Whalehaven five-year Warrants to purchase 22,222,222 shares of our common stock.  The exercise price of these Warrants was $0.0228, i.e., 120% of the market price on the closing date.  The Warrants are subject to cashless exercise at Whalehaven’s option.

The placement agent was entitled to receive a Warrant to purchase common stock equal to 12% of Whalehaven’s Warrants with an exercise price equal to Whalehaven’s exercise price.  Consequently, a Warrant to purchase 2,666,666 shares was issued to the placement agent based on the first closing.

On October 23, 2008, we entered into an Amendment Agreement (the “Amendment”) with Whalehaven relating to the Initial Purchase Agreement, and the Initial Debenture due August 1, 2009, in the principal amount of $400,000 issued by us to Whalehaven pursuant to the Initial Purchase Agreement.  The Amendment provided that the minimum conversion price would be $.013 per share and that the contemplated second closing for another $400,000 debenture would be abandoned.  Consequently, no debenture or warrants would be issued beyond the securities issued in connection with the first closing, as the total facility amount was limited to $400,000.

On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective.  On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”).  We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha promptly following our annual meeting of shareholders, which was held on December 29, 2008.  At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”).  We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable and no later than 75 days after filing.  In the case of a review by the Securities and Exchange Commission the effectiveness date deadline extended to 120 days.  In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.

The New Private Placement generated gross proceeds of $368,000 after payment of an 8% placement agent fee but before other expenses associated with the transaction.

Prior to maturity, the New Debentures bear interest at the rate of 8% per annum, payable quarterly in cash or, at the Company’s option, in shares of common stock based on the then-existing market price.


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

Notes to Financial Statements (Continued)

(15)  
CONVERTIBLE DEBENTURES (Continued)

The New Debentures may be converted in whole or in part at the option of the holder any time after the shareholders have voted to approve the Share Amendment at the lesser of (i) a set price, initially $.033 (the closing price of the shares on the closing date) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; provided, however, that the Conversion Price is subject to a floor price, initially $0.013, and provided further however, that the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit may be increased to 9.99% on 61 days prior written notice from the holder.

After the effectiveness of the Registration Statement, we may redeem for cash, upon written notice, any and all of the outstanding Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Debentures to be redeemed.

The New Debentures are secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated November 20, 2008 between IDSI and Whalehaven and Alpha.  This security interest is pari passu with the security interest granted to Whalehaven on August 1, 2008, in connection with the Company’s sale of the $400,000 Initial Debenture to Whalehaven..

In November 2008, Whalehaven converted $160,000 principal amount of the Initial Debenture and received 9,206,065 shares of our common stock as a result.  On November 26, 2008, Whalehaven sold to Alpha $50,000 principal amount of the Initial Debenture and the right to purchase 5,555,555 shares underlying the Warrant.  As a result of this transaction, the Warrant for 22,222,222 shares was replaced by a warrant held by Whalehaven covering 16,666,667 shares (the "Whalehaven Warrant") and a warrant held by Alpha covering 5,555,555 shares (the "Alpha Warrant") (collectively, the "Warrants").

On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha relating to the Warrants.  Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant).  We used the $105,000 proceeds from the warrant exercise for working capital.

On December 15, 2008, Alpha converted $15,000 principal amount of its Initial Debenture and received 1,052,628 shares of our common stock as a result.

We entered into a second Amendment Agreement dated as of December 31, 2008, with Whalehaven and Alpha relating to the Warrants.  Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha).  We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second Amendment Agreement.

In December 2008 we received $56,000, and in January 2009 we received $17,778 in proceeds from these Warrant exercises, we used the proceeds for working capital.

After the issuance of shares pursuant to Whalehaven’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they have a balance of 11,666,667 shares available for exercise.  After the issuance of shares pursuant to Alpha’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they have a balance of 3,555,555 shares available for exercise.

We entered into a third Amendment Agreement dated as of March 20, 2009, with Whalehaven and Alpha.  This Amendment Agreement pertains to a request by the Company to the Holders that they agree to a suspension of the Company’s obligations under the Registration Rights Agreements for both the Initial and New Debentures.  In consideration for such suspensions, the Company agreed to an adjustment in the conversion price for both debentures whereby the floor price was reduced from $0.013 to $0.005 and the set price was reduced

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

Notes to Financial Statements (Continued)

(15)           CONVERTIBLE DEBENTURES (Continued)

from $0.019 to $0.01.  The new formula for determining the conversion price on any Conversion Date shall be equal to the lesser of (a) $0.01, subject to certain standard adjustments (the “Set Price”) and (b) 80% of the average of the 3 lowest Closing Prices during the 10 Trading Days immediately prior to the applicable Conversion Date (subject to adjustments) (the “Conversion Price”); provided, however, that the Conversion Price shall in no event be less than $0.005 (subject to certain standard adjustments).

As of June 30, 2009, Whalehaven has sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.  Whalehaven now holds a principal amount of $250,000 in the November Debenture.  Whalehaven also holds Warrants to purchase 11,666,667 shares of common stock at an exercise price of $0.005.

As of June 30, 2009, Whalehaven has converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result.  Whalehaven has converted $181,000 of the November Debenture and has received 37,803,364 shares as a result.  Whalehaven holds a principal amount of $69,000 in the November Debenture.

As of June 30, 2009, Alpha has converted $100,000 of the August Debenture and received 17,313,265 shares as a result.  Alpha holds a principal amount of $150,000 in the November Debenture.  Alpha also holds Warrants to purchase 3,555,555 shares of common stock at an exercise price of $0.005.

As of June 30, 2010, Whalehaven had sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.

As of June 30, 2010, Whalehaven had converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result.  Whalehaven has converted $250,000 of the November Debenture and has received 51,600,363 shares as a result.  Thus, Whalehaven has converted all of its August and November Debentures into 88,442,281 shares of common stock.

In October 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022.  The shares were issued pursuant to Rule 144.  Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.

As of June 30, 2010, Alpha had converted $100,000 of the August Debenture and received 17,313,265 shares as a result.  Alpha has converted $150,000 of the November Debenture and has received 28,429,066 shares as a result.  Thus, Alpha has converted all of its August and November Debentures into 45,742,331 shares of common stock which does not include interest.  In October 2009, we issued Alpha 2,166,263 shares as a result of the 8% interest on their portion of the debentures.

In October 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.029.  The shares were issued pursuant to Rule 144.

In October 2009, the Placement Agents exercised its Warrants to purchase 2,666,666 shares and received 1,989,845 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.0197.  The shares were issued pursuant to Rule 144.

In December 2009, Whalehaven exercised its remaining Warrants to purchase 5,666,667 shares and received 4,542,328 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.0252.  The shares were issued pursuant to Rule 144.



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

Notes to Financial Statements (Continued)


(16)           REDEEMABLE CONVERTIBLE PREFERRED STOCK

On March 17, 1999, the Company finalized the private placement to foreign investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at a purchase price of $10,000 per share and two year warrants to purchase 65,625 shares of the Company’s common stock at an exercise price of $.50 per share. The agreement was executed pursuant to Regulation D as promulgated by the Securities Act of 1933, as amended.  A total of 43,125 warrants were exercised during the year ended June 30, 2000, and an additional 9,375 warrants were exercised during the year ended June 30, 2001.

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

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

Pursuant to the Registration Rights Agreement (“RRA”) the Company was required to register 100% of the number of shares that would be required to be issued if the Preferred Stock were converted on the day before the filing of the S-2 Registration Statement.  In the event the Registration Statement was not declared effective within 120 days, the Series G Holders had the right to force the Company to redeem the Series G Preferred Stock at a redemption price of 120% of the face value of the preferred stock.  The Registration Statement was declared effective on July 29, 2000.  During the year ended June 30, 2000, the Series G Preferred Stock was converted into 3,834,492 shares of the Company’s common stock.



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

Notes to Financial Statements (Continued)


(17)           CONVERTIBLE PREFERRED STOCK

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

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

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

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

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

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

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

As of June 30, 2000, the Series B Preferred Stock has been converted into 30,463,164 shares of the Company’s common stock, and 60 shares were canceled at the request of the holder.



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

Notes to Financial Statements (Continued)


(17)           CONVERTIBLE PREFERRED STOCK (Continued)

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 160,000 shares of the Company’s common stock at an exercise price of $1.63 per share, and warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.562 per share.  The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended.  As of June 30, 2001, 40,000 warrants at the $1.63 exercise price were exercised, and the remaining 140,000 warrants had expired.  The remaining 50,000 warrants ($1.562 exercise price) are outstanding as of June 30, 2001.

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


Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement to foreign investors of 50 shares of its Series D Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 25,000 shares of the Company’s common stock at an exercise price of $1.22 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended.  As of June 30, 2001 the warrants had expired.

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


Series E Preferred Stock
On February 5, 1998, the Company finalized the private placement to foreign investors of 50 shares of its Series E Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 25,000 shares of the Company’s common stock at an exercise price of $1.093 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended.  As of June 30, 2001 the warrants had expired.

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.

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.



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

Notes to Financial Statements (Continued)


(17)           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, 2001 none of the warrants had been exercised.

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

The Company was in technical default of the Registration Rights Agreement (“RRA”), which required the S-2 Registration Statement to be declared effective by October 2, 1998.  Pursuant to the RRA, the Company was required to pay the Series H holders, as liquidated damages for failure to have the Registration Statement declared effective, and not as a penalty, 2% of the principal amount of the Securities for the first thirty days, and 3% of the principal amount of the Securities for each thirty day period thereafter until the Company procures registration of the Securities. On March 25, 1999, the Company issued 424,242 shares of common stock as partial payment of the liquidated damages.  The cumulative liquidated damages expense for the years ended June 30, 2001 amounted to $140,000.


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

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

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



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

Notes to Financial Statements (Continued)

(17)           CONVERTIBLE PREFERRED STOCK (Continued)

Series K Preferred Stock
On July 17, 2000, the Company finalized the private placement to foreign investors of 500 shares of its Series K Convertible Preferred Stock at a purchase price of $10,000 per share. The agreement was executed in accordance with and in reliance upon the exemption from securities registration by Rule 506 under Regulation D as promulgated by the Securities Act of 1933, as amended.

The entire amount of the Series K Convertible Preferred Stock was converted or redeemed by the Company during the year ended June 30, 2001 into 5,664,067 shares of common stock, including 219,225 shares as payment of the 9% accrued dividend.

The following schedule reflects the number of shares of preferred stock that have been issued, converted and are outstanding as of June 30, 2010, 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:

Series L Preferred Stock
On February 25, 2010, the Company issued 35 shares of its Series L Convertible Preferred Stock at a purchase price of $10,000 per share as collateral in connection with a $350,000 short-term loan.  On March 31, 2010 the holder converted the note into the collateral shares of 35 preferred shares of Series L Convertible Preferred Stock.  We have reserved 16,587,690 shares of common stock to cover the conversion of the 35 shares of Series L Convertible Preferred Stock outstanding.  Pursuant to the Certificate of Designation of Series L Convertible Preferred Stock, (iii) Issuance of Securities, a reset provision is provided if common shares are issued less than $.0211 on or before the conversion of all of the Series L Convertible Preferred shares.  The reset provision triggered a Derivative Liability valuation for such provision.




IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Notes to Financial Statements (Continued)
 
                                                                                                                                     
(17) COVERTIBLE PREFERRED STOCK (Continued)
                                                                                                                   
   
 
   
 
   
 
   
 
                                                                                                 
   
Series A
   
Series B
   
Series C
   
Series D
   
Series E
   
Series F
   
Series H
   
Series I
   
Series K
   
Series L
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance at June 30, 1995
    -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -  
                                                                                                                                                                                 
Sale of Series A
    4,000       3,600,000                                                                                                                                                       4,000       3,600,000  
                                                                                                                                                                                 
Series A conversion
    (1,600 )     (1,440,000 )                                                                                                                                                     (1,600 )     (1,440,000 )
                                                                                                                                                                                 
Balance at June 30, 1996
    2,400       2,160,000                                                                                                                                                       2,400       2,160,000  
                                                                                                                                                                                 
Sale of Series B
                    450       4,500,000                                                                                                                                       450       4,500,000  
 
                                                                                                                                                                               
Series A conversion
    (2,400 )     (2,160,000 )                                                                                                                                                     (2,400 )     (2,160,000 )
 
                                                                                                                                                                               
Balance at June 30, 1997
    -       -       450       4,500,000                                                                                                                                       450       4,500,000  
 
                                                                                                                                                                               
Sale of preferred stock
                                                                                                                                                                               
   (Series C - H)
                                    210       2,100,000       54       540,000       54       540,000       75       750,000       108       1,080,000                                                       501       5,010,000  
                                                                                                                                                                                 
Conversion of preferred stock
                                    (210 )     (2,100,000 )     (25 )     (250,000 )     (30 )     (300,000 )     (75 )     (750,000 )                                                                     (340 )     (3,400,000 )
 
                                                                                                                                                                               
Balance at June 30, 1998
    -       -       450       4,500,000       -       -       29       290,000       24       240,000       -       -       108       1,080,000                                                       611       6,110,000  
 
                                                                                                                                                                               
Sale of Series I
                                                                                                                    138       1,380,000                                       138       1,380,000  
 
                                                                                                                                                                               
Conversion of preferred stock
                    (60 )     (600,000 )                     (29 )     (290,000 )     (24 )     (240,000 )                     (40 )     (400,000 )                                                     (153 )     (1,530,000 )
 
                                                                                                                                                                               
Balance at June 30, 1999
    -       -       390       3,900,000       -       -       -       -       -       -       -       -       68       680,000       138       1,380,000       -       -                       596       5,960,000  
 
                                                                                                                                                                               
Conversion of preferred stock, net
                    (390 )     (3,900,000 )                                                                     (68 )     (680,000 )     (138 )     (1,380,000 )                                     (596 )     (5,960,000 )
 
                                                                                                                                                                               
Balance at June 30, 2000
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -                       -       -  
                                                                                                                                                                                 
Sale of Series K
                                                                                                                                    50       5,000,000                       50       5,000,000  
 
                                                                                                                                                                               
Conversion of preferred stock
                                                                                                                                    (50 )     (5,000,000 )                     (50 )     (5,000,000 )
 
                                                                                                                                                                               
Balance at June 30, 2001
    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -                       -       -  
                                                                                                                                                                                 
Sale of Series L(1)
                                                                                                                                                    35       350,000       35     $ 350,000  
                                                                                                                                                                                 
Conversion of preferred stock
                                                                                                                                                    -       -       -          
                                                                                                                                                                                 
Balance at June 30, 2010
    -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -             $         35       350,000       35     $ 350,000  
                                                                                                                                                                                 
Additional information:
                                                                                                                                                                               
Discount off market price
            25 %             18 %             25 %             25 %             25 %             30 %             25 %             25 %             12.5 %             58.63 %                
Fair market value-issue rate
          $ 8.31             $ 3.25             $ 1.63             $ 0.99             $ 1.07             $ 1.24             $ 0.57             $ 0.38             $ 1.13             $ 0.0211                  
Deemed preferred stock dividend
          $ 1,335,474             $ 998,120             $ 705,738             $ 182,433             $ 182,250             $ 318,966             $ 351,628             $ 492,857             $ 708,130             $ 10,875                  
                                                                                                                                                                           
(Continued)
 
                                                   
(1)The Series L Convertible Preferred Stock was initially issued as collateral for a short-term loan and was converted by the holder on March 31, 2010.
                                                 
                                                                                                                                                                                 
                                                                                                                                                                                 
 
 

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

Notes to Financial Statements (Continued)

(18)           DERIVATIVE LIABILITY

Effective June 1, 2010, we adopted the ASC 815 guidance provided for Derivatives and Hedging which applies to any free standing financial instruments or embedded features that have characteristics of a derivative and to any free standing financial instruments that are potentially settled in an entity’s own common stock.  As of June 30, 2010, we had 35 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument.  ASC 815 requires the Series L Convertible Preferred Stock to be recorded as a liability as it is no longer afforded equity treatment.  As a result of the reset provision we recorded a Derivative Liability of $64,524 which accrued on the date of issuance and recorded an increase of $137,631 as a result in changes in the market price of our stock.  The total Derivative Liability for the Series L Convertible Preferred Stock for the fiscal year ended June 30, 2010 was $202,156.


(19)           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 expense has been recorded during the fiscal year pursuant to the employment agreements with the officers.  In addition, during the year ended June 30, 1995, 75,000 shares of restricted common stock were issued to a company executive pursuant to an employment agreement. Compensation expense of $78,750 was recorded in conjunction with this transaction.

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



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

Notes to Financial Statements (Continued)


(19)           COMMON STOCK (Continued)

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 (See Note 16), 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 were 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.

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 were charged, as the fair market value on the date of the transaction was approximately $2.75 per share.

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

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

During the year ended June 30, 1998, the Company issued a total of 11,588,460 shares ($8,583,721) of its common stock.  The conversion of Convertible Preferred Stock (see Note 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.



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

Notes to Financial Statements (Continued)


(19)           COMMON STOCK (Continued)

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 were 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 were 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.

6. Services rendered by an independent consultant in exchange for 250,000 shares.  Consulting expenses of $320,000 were 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 were charged, as the fair market value on that date was $.70 per share.

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

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

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

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


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

Notes to Financial Statements (Continued)


(19)           COMMON STOCK (Continued)

On July 10, 1998, the majority shareholders of the Company authorized, by written action, the Company’s adoption of an Amendment to the Company’s Articles of Incorporation increasing the Company’s authorized shares of common stock from 48,000,000 shares to 100,000,000 shares.  The Florida Statutes provide that any action to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if the action is taken by a majority of outstanding stockholders of each voting group entitled to vote.  On August 5, 1998, the Company filed an Information Statement with the Securities and Exchange Commission with regard to the Written Action.  The Majority Shareholders consent with respect to the Amendment was effective on February 18, 1999. The number of authorized shares was further increased to 150,000,000 shares during the shareholders annual meeting held on May 10, 2000, and increased again during the 2002 annual meeting to 200,000,000 shares, effective January 3, 2003.

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:

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

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

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 shares 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.


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

Notes to Financial Statements (Continued)


(19)           COMMON STOCK (Continued)

9. During the year a total of 150,000 shares were 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.

During the year ended June 30, 2000, the Company issued a total of 56,214,003 shares ($12,997,328) of its common stock.  The conversion of Convertible Debentures accounted for the issuance of 4,060,398 shares ($3,958,223), the conversion of Redeemable Convertible Preferred Stock (see Note 15) accounted for the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 41,581,242 shares ($6,806,219).  The remaining 6,737,871 shares were issued as follows:

1. The Company sold 100,000 shares on April 27, 2000 in a Regulation D offering at $1.57 per share, and received cash proceeds of $157,000.

2. A total of 5,061,294 shares were issued as repayment of various loans payable during the year.  A total of $1,067,665 (average of $.21 per share) of debts were satisfied through the issuance of the stock.

3. On November 12, 1999, bonus stock was issued to Company employees, for 145,000 shares.  Compensation expense of $12,325 was charged as the fair market value at that date was $.09 per share.  The company also canceled 8,000 shares, which had been previously issued to an independent contractor for consulting services.  A reduction of $31,000 was recorded to consulting expenses for the year.

4. A total of 7,297 shares were issued in connection with a loan that was received by the Company.  The total loan fee expense and interest charged to income amounted to $2,408 during the year.

5. During the year at total of 150,652 shares were issued for the exercise of warrants.  On March 21, 2000, the Company received $100,000 for the exercise of 107,527 warrants at an exercise price of $.93 per share.  The Company recorded a charge to consulting expense, as the fair market value at the date the warrants were issued was $1.84.  The Company also received $21,563 from the exercise of 43,125 of Series G Preferred Stock warrants during the last quarter of the fiscal year.

6. Exercise of 1,281,628 incentive stock options, ($395,810) exercised and paid for at prices ranging from $.13 per share to $1.13 per share.

During the year ended June 30, 2001, the Company issued a total of 13,916,169 shares ($12,333,724) of its common stock.  The conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 5,664,067 shares ($5,580,531), and the common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 3,407,613 shares ($3,143,666).  The remaining 4,844,489 shares were issued as follows:

1. A total of 810,000 shares were issued as repayment of a loan payable during the year.  A total of $530,000 of debt was satisfied through the issuance of the stock, and an additional $863,200 was charged as interest expense as the fair market value of the stock at the date of issuance was $1.72 per share.


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

Notes to Financial Statements (Continued)

(19)           COMMON STOCK (Continued)

2. On December 7, 2000, 143,500 shares of bonus stock were issued to Company employees.  Compensation expense of $219,555 was charged as, the fair market value of the common stock at that date was $1.53 per share.  The Company also issued 10,000 shares on May 17, 2001.  Consulting services of $8,300 was charged, as the fair market value of the stock was $.83 per share.

3. During the year a total of 99,375 shares of common stock were issued for the exercise of warrants.  The Company received $4,687 from the exercise of 99,375 Series G Preferred Stock warrants.  On August 10, 2000, the Company received $65,200 for the exercise of 40,000 Series C Preferred Stock warrants at an exercise price of $1.63 per share.

4. Common stock issued to officers as a result of the exercise of their incentive stock options and their non-qualified stock options amounted to 3,755,414 shares.  The options were exercised in a “cash-less” transaction, resulting in compensation to the officers of $1,848,566.  An additional 26,200 shares were issued to employees upon the exercise of their incentive stock options during the year, at exercise prices ranging from $.35 per share to $.60 per share.

During the year ended June 30, 2002, the Company issued a total of 12,167,866 shares ($6,508,155) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 11,607,866 shares ($6,213,805).  The remaining 560,000 shares were issued as follows:

1. On November 21, 2001, 210,000 shares of bonus stock were issued to Company employees.  Deferred compensation of $117,600 was charged as, the fair market value of the common stock at that date was $.56 per share, and the stock will not be physically delivered to the employees until January 2003.

2. A total of 350,000 shares were issued in conjunction with the settlement on March 22, 2002 of a lawsuit.  Settlement expense of $176,750 has been charged on the statement of operations, as the fair market value of the stock at the date of issuance was $.51 per share.

During the year ended June 30, 2003, the Company issued a total of 31,398,326 shares ($9,708,425) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 29,390,708 shares ($8,737,772).  The remaining 2,007,618 shares were issued as follows:

1. During December 2002, 258,500 shares of bonus stock were issued to Company employees.  Compensation of $62,425 was charged as, the fair market value of the common stock on the dates of issuance averaged $.24 per share.  In addition, the Company recorded an adjustment for deferred compensation, which resulted in a reduction to common stock for $73,500.

2. A total of 1,194,118 shares were issued in conjunction with the settlement on June 5, 2003 of a lawsuit.  Settlement expense of $841,853 has been charged on the statement of operations, as the fair market value of the stock at the date of issuance was $.70 per share.

3. During the year a total of 555,000 shares were issued to various parties for services rendered to the Company.  Expenses of $139,875 were charged, or an average price of $.25 per share.




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

Notes to Financial Statements (Continued)

(19)           COMMON STOCK (Continued)

During the year ended June 30, 2004, the Company issued a total of 10,333,373 shares ($7,867,351) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 8,630,819 shares ($6,541,700).  The remaining 1,702,554 shares were issued as follows:


1. During November 2003, 401,785 shares were issued in conjunction with the settlement on September 18, 2003 of a lawsuit.  Settlement expense of $450,000 has been charged on the statement of operations as the fair market value of the stock at the date of the settlement agreement was $1.12 per share.

2. During January 2004, 333,000 shares of bonus stock were issued to Company employees.  Compensation of $382,950 was charged as the fair market value of the common stock on the date of issuance was $1.15 per share.

3. Common stock issued to directors as a result of the exercise of their incentive stock options amounted to 450,000 shares during the year.  The Company received $262,500 from the exercise of 450,000 option shares.  The exercise prices range from $.55 per share to $.65 per share.

4. Common stock issued to employees as a result of the exercise of their incentive stock options amounted to 517,769 shares during the year.  The Company received $230,201 from the exercise of 517,769 option shares. The exercise prices range from $.19 per share to $.65 per share.

During the year ended June 30, 2005, the Company issued a total of 26,573,157 shares ($7,915,061) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 26,274,893 shares ($7,797,807).  The remaining 298,264 shares were issued as follows:

1. During September 2004, 100,000 restricted shares were issued to our CEO in conjunction with his employment agreement.  Compensation of $38,000 was charged as the fair market value of the common stock on the date of issuance was $.38 per share.

2. During January 2005, 185,000 shares of bonus stock were issued to Company employees.  Compensation of $75,850 was charged as the fair market value of the common stock on the date of issuance was $.41 per share.

3. Common stock issued to employees as a result of the exercise of their incentive stock options amounted to 13,264 shares during the year.  The Company received $3,404 from the exercise of 13,264 option shares.  The exercise prices range from $.20 per share to $.27 per share.

During the year ended June 30, 2006, the Company issued a total of 47,776,064 shares ($7,409,543) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 47,776,064 shares ($7,409,543).

During the year ended June 30, 2007, the Company issued a total of 63,861,405 shares ($4,560,415) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 63,861,405 shares ($4,560,415).

During the year ended June 30, 2008, the Company issued a total of 13,979,430 shares ($490,000) of its common stock.  The common stock issued through the equity line of credit (See Note 13) accounted for the issuance of 13,979,430 shares ($490,000).


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

Notes to Financial Statements (Continued)

(19)           COMMON STOCK (Continued)

During the year ended June 30, 2009, the Company issued a total of 285,861,319 shares ($2,646,083) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 158,747,217 shares ($1,674,885).  The conversion of Convertible Debentures accounted for the issuance of 93,958,547 shares ($621,220).  The exercise of warrants accounted for the issuance of 21,755,555 shares ($195,778).

The remaining 11,400,000 shares were issued as follows:

1. During July 2008, 5,000,000 restricted shares were issued to a consultant.  Compensation expense of $55,000 was recorded as the fair market value of the common stock on the date of issuance was $.011 per share.

2. During November 2008, 3,000,000 shares of restricted stock were issued to a shareholder in a private placement pursuant to Rule 144.  The shareholder paid the Company $75,000 as the fair market value of the shares on the date of issuance was $.025.

3. During March 2009, 2,400,000 shares of restricted stock were issued to Company employees.  Compensation expense of $19,200 was charged as the fair market value of the common stock on the date of issuance was $.008 per share.

4. During March 2009, 1,000,000 shares of restricted stock were issued to a shareholder in a private placement pursuant to Rule 144.  The shareholder paid the Company $5,000 as the fair market value of the shares on the date of issuance was $.005.

During the year ended June 30, 2010, the Company issued a total of 225,708,835 shares ($2,497,491) of its common stock.  The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 90,803,568 shares ($1,524,764).  The conversion of Convertible Debentures accounted for the issuance of 45,334,856 shares ($223,743).  The exercise of warrants accounted for the issuance of 11,180,822 shares ($89,444).

The remaining 78,389,589 shares were issued as follows:

1. During December 2009, 16,625,000 shares of restricted stock were issued to a various investors as additional consideration for short-term loans.  Premium expense of $465,500 was recorded as the fair market value of the shares on the date of issuance was $.028.

2. During December 2009, 3,000,000 shares of common stock were issued to Company employees and 750,000 shares of restricted stock were issued to Company officers.  Compensation expense of $75,000 was charged as the fair market value of the common stock on the date of issuance was $.02 per share.  A total of 200,000 shares of common stock were canceled.  Compensation expense of $1,600 was credited as the fair market value of the common stock on the date of issuance was $.008 per share.

3. During December 2009 and January 2010 a total of 55,363,637 shares of restricted stock were issued as collateral in connection with short-term loans.  A total of $1,150,000 was recorded as Common Stock – Debt Collateral.

4 During April 2010, 250,000 shares of restricted stock were issued to a consultant of which $2,250 was satisfaction of an aged accounts payable owed to him for investor relations services and for providing a limited amount of investor relation services without further charge.  

 

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

Notes to Financial Statements (Continued)

(19)           COMMON STOCK (Continued)


Additional Paid-In-Capital of $11,250 was recorded as the fair market value of the common stock on the date of issuance was $.054 per share.  The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.

5. During May 2010, 2,600,952 shares of restricted stock were issued to Company employees.  Compensation expense of $128,389 and Additional Paid-In-Capital of $10,793 were recorded as the fair market value of the common stock on the date of issuance was $.045 per share.


(20)           STOCK OPTIONS

The Company relies on the guidance provided by ASC 718 (“Compensation-Stock Compensation”).  ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards.  The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment.  As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future.  In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest.  The Company cannot assess its forfeiture rate at this time.

The Company continues to use an expected term of eight years as provided by Staff Accounting Bulletin 110.  Our expected term assumption of eight years for the year ended June 30, 2010, was based upon the guidance provided by SEC Staff Accounting Bulletin 107 enabling us to use the simplified method for “plain vanilla” options for this calculation.  This provision was allowed to be used for grants made on or before December 31, 2007.  On December 21, 2007, the SEC issued Staff Accounting Bulletin 110 which extended the timeframe we will have to use the simplified method on an interim basis.  The SEC will suspend use of this method once detailed information on exercise terms become readily available.  We then will be required to estimate the expected term of an option using historical data by analyzing its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding.  If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period.  The impact of applying ASC 718 approximated $588,645 and $145,577, respectively, in additional compensation expense for the twelve months ended June 30, 2010 and 2009.

During July 1994, the Company adopted a non-qualified Stock Option Plan (the "Plan"), whereby officers and employees of the Company could be granted options to purchase shares of the Company’s common stock.  Under the plan and pursuant to their employment contracts, an officer could 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 original plan was revised and on January 3, 2000 the Board of Directors adopted the Company’s “2000 Non-Statutory Plan”, and the plan was subsequently approved by the shareholders on


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

Notes to Financial Statements (Continued)

(20)           STOCK OPTIONS (Continued)

May 10, 2000 at the annual meeting.  This plan provided for the granting, exercising and issuing of incentive stock options pursuant to Internal Revenue Code Section 422. The Company was entitled to grant incentive stock options to purchase up to 4,850,000 shares of common stock.  This Plan also allowed the Company to provide long-term incentives in the form of stock options to the Company's non-employee directors, consultants and advisors, who were not eligible to receive incentive stock options. In January 2002, the Board replaced the 1995 Plan and 2000 Plan with a new combined stock option plan, the 2002 Incentive and Non-Statutory Stock Option Plan (the "2002 Plan"), which provided for the grant of incentive and non-statutory options to purchase an aggregate of 6,340,123 shares of Common Stock.  Upon approval of the 2002 Plan, all options outstanding under the 1995 and 2000 Plans remained outstanding; however, no new options could be granted under those plans.  The Board of Directors or a company established compensation committee had direct responsibility for the administration of these plans.

The exercise price of the non-statutory stock options was required to be equal to no less than 50% of the fair market value of the common stock on the date such option is granted.

On February 4, 2004, the Board of Directors adopted the Company’s 2004 Non-Statutory Stock Option Plan (the “2004 Plan”), which was adopted by the shareholders on March 24, 2004 at the annual meeting, to provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  The maximum number of options that may be granted under the 2004 Plan shall be options to purchase 8,432,392 shares of Common Stock (5% of our issued and outstanding common stock as of February 4, 2004).  Options may be granted under the 2004 Plan for up to 10 years after the date of the 2004 Plan.  The 2004 Non-Statutory Stock Plan replaced the 2002 Incentive and Non-Statutory Stock Option Plan.

On August 24, 2005, the Board Of Directors resolved that the Company’s 1995, 2000, 2002 and 2004 Stock Option Plans and Stock Options Agreements that were entered into pursuant to these plans, be amended to increase the post-termination exercise period following the termination of the Optionee’s employment/directorship or in the event of change of control of the Company, to be three (3) years from the date of termination or change of control, subject to those options that were vested as of the date of termination or change of control and subject to the original term of the option, which ever time is less.

On July 26, 2007, the Board of Directors adopted the Company’s 2007 Non-Statutory Stock Option Plan (the “2007 Plan”), which must be adopted by the shareholders at the annual meeting which must occur within one year of the Board’s adoption of the 2007 Plan.  The 2007 Plan will provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  The maximum number of options that may be granted under the 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (5% of our issued and outstanding common stock as of July 26, 2007).  Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan.  The 2007 Non-Statutory Stock Plan replaced the 2004 Non-Statutory Stock Option Plan.

On March 11, 2010, the Board of Directors adopted the Company’s 2010 Non-Statutory Stock Option Plan (the “2010 Plan”), which must be adopted by the shareholders at the annual meeting which must occur within one year of the Board’s adoption of the 2010 Plan.  The 2010 Plan will provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  The maximum number of options that may be granted under the 2010 Plan shall be options to purchase 37,428,466 shares of Common Stock (5% of our issued and outstanding common stock as of March 11, 2010).  Options may be granted under the 2010 Plan for up to 10 years after the date of the 2010 Plan.  The 2010 Non-Statutory Stock Plan replaced the 2007 Non-Statutory Stock Option Plan.

 

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

Notes to Financial Statements (Continued)

(20)           STOCK OPTIONS (Continued)

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

Employee Plan:
 
Incentive Stock Options
 
Non Statutory Stock 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
   Granted
   3,139,459
   .34
 
           -
 
   Exercised
     (770,702)
   .37
 
    (318,676)
   .35
   Canceled
       (64,334)
   .47
 
           -
 
           
Outstanding at June 30, 2000
   3,710,454
   .42
 
  2,250,000
 2.35
   Granted
   1,915,700
 2.59
 
           -
 
   Exercised
  (3,030,964)
   .32
 
    (750,000)
   .31
   Canceled
     (279,982)
   .60
 
 (1,500,000)
 2.75
           
Outstanding at June 30, 2001
   2,315,208
 2.38
 
           -
 
   Granted
   6,839,864
   .68
 
           -
 
   Exercised
            -
 
 
           -
 
   Canceled
  (2,695,482)
1.17
 
           -
 
           
Outstanding at June 30, 2002
   6,459,590
   .85
 
           -
 
   Granted
   1,459,705
   .38
 
           -
 
   Exercised
            -
 
 
           -
 
   Canceled
      (56,788)
   .74
 
           -
 
           
Outstanding at June 30, 2003
  7,862,507
   .76
 
           -
 
   Granted
  1,576,620
 1.12
 
       31,748
   .69
   Exercised
   (517,769)
   .44
 
           -
 
   Canceled
     (97,525)
   .78
 
           -
 
           
           



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

Notes to Financial Statements (Continued)


(20)           STOCK OPTIONS (Continued)

Employee Plan (Continued)
Outstanding at June 30, 2004
   8,823,833  .84           31,748  .69 
    Granted            -        4,253,159 .34
    Exercised       (13,264)  .26               -  
    Canceled     (142,891)  .68               -  
           
Outstanding at June 30, 2005
  8,667,678
   .98
 
  4,284,907
   .34
   Granted
           -
 
 
     532,855
   .18
   Exercised
           -
 
 
           -
 
   Canceled
   (254,277)
   .74
 
     (23,100)
   .26
           
Outstanding at June 30, 2006     8,413,401  .96     4,794,662   .32
   Granted            -       3,927,437   .10
   Exercised
           -
 
 
           -
 
   Canceled
      (4,804)
   .70
 
    (131,684)
   .16
           
Outstanding at June 30, 2007
    8,408,597
  .96
 
    8,590,415
   .22
   Granted
           -
   
    2,336,526
   .05
   Exercised
           -
   
             -
 
   Canceled
       (29,750)
  .60
 
   (2,707,852)
   .14
           
Outstanding at June 30, 2008
    8,378,847
  .90
 
    8,219,089
   .20
   Granted
           -
   
    7,123,300
   .01
   Exercised
           -
   
             -
 
   Canceled
  (1,094,655)
  .60
 
     (495,846)
   .18
           
Outstanding at June 30, 2009
    7,284,152
  .95
 
  14,846,543
  .20
   Granted
           -
   
  18,600,000
   .05
   Exercised
           -
   
             -
 
   Canceled
     (230,913)
  .79
 
     (203,769)
   .08
           
Outstanding at June 30, 2010
    7,053,239
 1.02
 
  33,242,774
  .08
           

** 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 guidance provided by ASC 718.


Director Plan:
 
Incentive Stock Options
 
Non Statutory Stock Options
 
Shares
Wtd. Avg. Price
 
Shares
Wtd. Avg.  Price
           
Outstanding at June 30, 2000
         -0-
   
          -
 
   Granted
     150,000
  $.65
 
          -
 
   Exercised
          -
   
          -
 
   Canceled
          -
   
          -
 
           
Outstanding at June 30, 2001
     150,000
   .65
 
          -
 
   Granted
     300,000
   .55
 
          -
 
   Exercised
          -
   
          -
 
   Canceled
          -
   
          -
 
           



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

Notes to Financial Statements (Continued)

(20)           STOCK OPTIONS (Continued)

Director Plan (Continued)
Outstanding at June 30, 2002
     450,000 .58                -  
    Granted      400,000  .18                 -  
    Exercised            -                  -  
    Canceled            -                  -  
           
Outstanding at June 30, 2003
     850,000
   .40
 
             -
 
   Granted
     100,000
 1.07
 
       700,000
   .76
   Exercised
   (450,000)
   .58
 
             -
 
   Canceled
          -
   
             -
 
           
Outstanding at June 30, 2004
     500,000
   .39
 
       700,000
   .76
   Granted
           -
   
       800,000
   .35
   Exercised
           -
   
             -
 
   Canceled
           -
   
             -
 
           
Outstanding at June 30, 2005
     500,000
   .39
 
    1,500,000
   .54
   Granted
           -
   
       800,000
   .14
   Exercised
           -
   
             -
 
   Canceled
           -
   
             -
 
           
Outstanding at June 30, 2006
     500,000
   .39
 
    2,300,000
   .40
   Granted
           -
   
       800,000
   .08
   Exercised
           -
   
             -
 
   Canceled
           -
   
             -
 
           
Outstanding at June 30, 2007
     500,000
   .39
 
    3,100,000
   .32
   Granted
           -
   
       600,000
   .05
   Exercised
           -
   
             -
 
   Canceled
           -
   
             -
 
           
Outstanding at June 30, 2008
     500,000
   .39
 
    3,700,000
   .27
   Granted
           -
   
           -
 
   Exercised
           -
   
           -
 
   Canceled
           -
   
           -
 
           
Outstanding at June 30, 2009
     500,000
   .39
 
    3,700,000
   .27
   Granted
           -
   
           -
 
   Exercised
           -
   
           -
 
   Canceled
           -
   
           -
 
           
Outstanding at June 30, 2010
     500,000
   .39
 
    3,700,000
   .27


 
A summary of the vested and exercisable stock options of the Company is presented as follows:

 
June 30, 2010
 
June 30, 2009
Employee ISO
    7,053,239
 
    7,284,152
Director ISO
       500,000
 
       500,000
Employee Non-Statutory
  23,442,789
 
    15,084,499
Director Non-Statutory
    3,700,000
 
    3,700,000
       
Total
  34,696,028
 
  26,568,651


 
 

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

Notes to Financial Statements (Continued)


(20)           STOCK OPTIONS (Continued)
 
Shares of authorized common stock have been reserved for the exercise of all options outstanding.  The following summarizes the option transactions that have occurred:
 
On July 5, 1994 the Company issued non-qualified options to its officers and directors to purchase an aggregate of 750,000 shares of common stock at 35% of the fair market value at the date of grant.  Compensation expense of $567,164 was recorded during the year ended June 30, 1996 as a result of the discount from the market value.

On November 7, 1994, the Company granted 300,000 non-qualified options to its general counsel, then 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, 1999.  The exercise price shall be $0.35 per share.  The options did 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 expired 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 expired on September 1, 1999

At various dates during the fiscal year ended June 30, 1996, the Company issued to various employees incentive options to purchase 328,681 shares of common stock at prices ranging from $0.81 to $8.18.  In all instances, the exercise price was established as the fair market value of the common stock at the date of grant, therefore no compensation was recorded on the issuance of the options.  In most cases, one-third of the options vested 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 expired on July 4, 2001.

On July 5, 1996 the Company issued non-qualified options to its officers and directors to purchase an aggregate of 750,000 shares of common stock at 35% of the fair market value at the date of grant.  Deferred compensation of $1,891,500 was recorded on the transaction and was 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 vested one year from the grant date, with one-third vesting each of the next two years.  The options expired in ten years from the grant date.



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

Notes to Financial Statements (Continued)


(20)
STOCK OPTIONS (Continued)

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 expired 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 was 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 vested one year from the grant date, with one-third vesting each of the next two years.  The options expired 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 was amortized over the remaining term of the employment contract (one year).

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

At various dates during the year ended June 30, 2000, the Company issued to its officers and various employees incentive options to purchase 3,139,459 shares of common stock at prices ranging from $.23 to $4.38.  The exercise price was established at the fair market value of the common stock at the date of grant for employees and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options.  The officers’ options vested immediately, while the employees’ options vested one-third from the grant date, with one-third vesting each of the next two years.  The options expired in five years from the grant date.

At various dates during the year ended June 30, 2001, the Company issued to its officers and various employees incentive options to purchase 1,915,700 shares of common stock at prices ranging from $.65 to $2.85.  The exercise price was established as the fair market value of the common stock at the date of grant for employees and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options.  The officers’ options vested immediately, while the employees’ options vested one-third from the grant date, with one-third vesting each of the next two years.  The options expired in five years from the grant date.

In addition, on November 20, 2000 the Company granted to each director a stock option to purchase 50,000 shares (an aggregate of 150,000 shares) of the Company’s common stock at an exercise price of $.65 per share.  The option expires in ten years and became exercisable on a quarterly pro-rata basis (12,500 shares) from the date of grant.  The option is not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.



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

Notes to Financial Statements (Continued)

(20)
STOCK OPTIONS (Continued)

At various dates during the year ended June 30, 2002, the Company issued to its officers and various employees incentive options to purchase 6,839,864 shares of common stock at prices ranging from $.50 to $.93.  The exercise price was established as the fair market value of the common stock at the date of grant for employees and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options.

Vesting for certain of the officers’ options was immediately, while the other officers’ options and the employees’ options vested over varying periods up to three years from the date of grant.  The options expire from four to ten years from the grant date.
 
In addition, on November 20, 2001 the Company granted to each director a stock option to purchase 100,000 shares (an aggregate of 300,000 shares) of the Company’s common stock at an exercise price of $.55 per share.  The option expired in ten years and became exercisable on a quarterly pro-rata basis (25,000 shares) from the date of grant.  The option was not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.

At various dates during the year ended June 30, 2003, the Company issued to its officers and various employees incentive options to purchase 1,459,705 shares of common stock at prices ranging from $.19 to $.79.  The exercise price was established as the fair market value of the common stock at the date of grant for employees and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options.  Vesting for certain of the officers’ options was immediate, while the other officers’ options and the employees’ options vested over varying periods up to three years from the date of grant.  The options expire from four to ten years from the grant date.

In addition, at various dates during the year ended June 30, 2003 the Company granted to each new director a stock option to purchase 100,000 shares (an aggregate of 400,000 shares) of the Company’s common stock at exercise price ranging from $.20 to $.25 per share.  The option expires in ten years and became exercisable on a quarterly pro-rata basis (25,000 shares) from the date of grant.  The option was not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.

At various dates during the year ended June 30, 2004, the Company issued to its officers and various employees incentive options to purchase 1,576,620 shares of common stock at prices ranging from $.81 to $1.25.  At various dates during the year ended June 30, 2004, the Company issued to various employees Non-Statutory options to purchase 31,748 shares of common stock at prices ranging from $.39 to $.78.  The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for an officer, therefore no compensation was recorded on the issuance of the options.  Vesting for certain of the officers’ options is immediate, while the other officers’ options and the employees’ options vested over varying periods up to five years from the date of grant.  The options expire from four to ten years from the grant date.

In addition, at various dates during the year ended June 30, 2004, the Company issued to its Directors stock options to purchase 100,000 shares of the Company’s common stock at prices ranging from $1.03 to $1.11.  At various dates during the year ended June 30, 2004, the Company issued to its Directors Non-Statutory options to purchase 700,000 shares of common stock at prices ranging from $.69 to $.88.  The options expire in ten years and became exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant.  Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.

At various dates during the year ended June 30, 2005, the Company issued to various employees and two consultants Non-Statutory options to purchase 4,253,159 shares of common stock at prices ranging from $.20 to $.44.  The exercise price was established as the fair market value of the common stock at the date of grant for employees and 110% of the fair market value at the date of grant for an officer, therefore no compensation was recorded on the issuance of the options.  Vesting for certain of the officers’ options was

 


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

Notes to Financial Statements (Continued)

(20)
STOCK OPTIONS (Continued)

immediate, while the other officers’ options and the employees’ options vest over varying periods up to five years from the date of grant.  The options expire from four to ten years from the grant date.

At various dates during the year ended June 30, 2005, the Company issued to its Directors Non-Statutory options to purchase 800,000 shares of common stock at prices ranging from $.31 to $.44.  The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant.  Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.
 
At various dates during the year ended June 30, 2006, the Company issued to various employees Non-Statutory options to purchase 532,855 shares of common stock at prices ranging from $.14 to $.30.  The exercise price was established as the fair market value of the common stock on the date of grant for employees.  Options granted during the fiscal year ended June 30, 2006 vest over varying periods from one year up to three years from the date of grant.  The options expire ten years from the grant date.

At various dates during the year ended June 30, 2006, the Company issued to its Directors Non-Statutory options to purchase 800,000 shares of common stock at prices ranging from $.13 to $.14.  The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant.  Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.

For the fiscal year ending June 30, 2006, the total compensation for options recorded was $632,558.  We have $479,717 of non-cash unvested stock option compensation remaining to be expensed over the next three years.  These unvested options are being expensed each quarter over the remaining vesting periods.

At various dates during the year ended June 30, 2007, the Company issued to various employees Non-Statutory options to purchase 3,927,437 shares of common stock at prices ranging from $.085 to $.127.  The exercise price was established as the fair market value of the common stock on the date of grant for employees.  Options granted during the fiscal year ended June 30, 2007 vest over varying periods from six-months up to three years from the date of grant.  The options expire ten years from the grant date.

At various dates during the year ended June 30, 2007, the Company issued to its Directors Non-Statutory options to purchase 800,000 shares of common stock at prices ranging from $.069 to $.089.  The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant.  Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.

For the fiscal year ending June 30, 2007, the total compensation for options recorded was $431,313.  We have $299,911 of non-cash unvested stock option compensation remaining to be expensed over the next three years.  These unvested options are being expensed each quarter over the remaining vesting periods.

At various dates during the year ended June 30, 2008, the Company issued to various employees Non-Statutory options to purchase 2,336,526 shares of common stock at prices ranging from $.042 to $.084.  The exercise price was established as the fair market value of the common stock on the date of grant for employees.  Options granted during the fiscal year ended June 30, 2008 vest over varying periods from one year up to three years from the date of grant.  The options expire ten years from the grant date.

At various dates during the year ended June 30, 2008, the Company issued to its Directors Non-Statutory options to purchase 600,000 shares of common stock at prices ranging from $.05 to $.051.  The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant.  In connection with the resignations of the three outside directors, we agreed to vest their respective options for 200,000 shares each which we granted in late 2007 and early 2008.  Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.



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

Notes to Financial Statements (Continued)

(20)
STOCK OPTIONS (Continued)

In connection with the sale of our commercial property to Bright Investments, LLC, we agreed to grant a two-year Non-Qualified option to purchase 3,000,000 shares of common stock at $.035 upon the receipt of the down payment which was August 2, 2007.

For the fiscal year ending June 30, 2008, the total compensation for options recorded was $183,182.  We have $79,633 of non-cash unvested stock option compensation remaining to be expensed over the next three years.  These unvested options are being expensed each quarter over the remaining vesting periods.
 
At various dates during the year ended June 30, 2009, the Company issued to various employees Non-Statutory options to purchase 7,123,300 shares of common stock at prices ranging from $.01 to $.055.  The exercise price was established as the fair market value of the common stock on the date of grant for employees.  Options granted during the fiscal year ended June 30, 2009 vest over varying periods from immediately up to three years from the date of grant.  The options expire ten years from the grant date.

For the fiscal year ending June 30, 2009, the total compensation for options recorded was $145,577.  We have $10,178 of non-cash unvested stock option compensation remaining to be expensed over the next three years.  These unvested options are being expensed each quarter over the remaining vesting periods.

At various dates during the year ended June 30, 2010, the Company issued to various employees Non-Statutory options to purchase 18,600,000 shares of common stock at prices ranging from $.022 to $.05.  The exercise price was established as the fair market value of the common stock on the date of grant for employees.  Options granted during the fiscal year ended June 30, 2010 vest over varying periods from immediately up to two years from the date of grant.  The options expire ten years from the grant date.

For the fiscal year ending June 30, 2010, the total compensation for options recorded was $588,483.  We have $334,037 of non-cash unvested stock option compensation remaining to be expensed over the next three years.  These unvested options are being expensed each quarter over the remaining vesting periods.

The intrinsic value of a stock option/SSAR is the amount by which the market value of the underlying stock exceeds the exercise price of the option/SSAR.  The intrinsic value for options/SSARs exercised in the fiscal years ended June 30, 2010 and 2009 was $-0- and $-0-, respectively.

The following table summarizes information about all of the stock options outstanding at June 30, 2010:

 
     
Outstanding options
   
Exercisable options
 
           
Weighted
                   
           
average
                   
Range of
         
remaining
   
Weighted
         
Weighted
 
exercise prices
   
Shares
   
life (years)
   
avg. price
   
Shares
   
avg. price
 
$ .01 - 1.25       43,496,012      
6.66
    $ .19       33,696,028     $ .22  
  1.26 - 2.49       -             -       -       -               -  
  2.50 - 2.85       1,000,000       1.00       2.85       1,000,000       2.85  
                                             
$ .01 - 2.85       44,496,012       6.51     $ .25       34,696,028     $ .30  
 
At June 30, 2010, the Company has issued options pursuant to five different stock option plans, which have been previously described.  On March 11, 2010, the Board adopted the Company’s 2010 Non-Statutory Stock Option Plan which will be submitted to the shareholders for adoption within one year.







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

Notes to Financial Statements (Continued)
 

(21)           CONCENTRATION OF CREDIT RISK

During the year, the Company has occasionally maintained cash balances in excess of the Federally insured limits of $250,000.  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 with the bank at June 30, 2010 was $73,844.
 
 
(22)
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, receivables, accounts payable, short-term debt and accrued liabilities approximated their fair values due to the short maturity of these instruments.  After a review of our accounts receivable, the Company has recorded an allowance of $57,982 for doubtful accounts.  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, 2010 and 2009, the aggregate fair value of the Company’s debt obligations approximated its carrying value.

The Company relies upon the guidance of ASC 820 (“Fair Value Measurements and Disclosures”).  ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.  ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820 establishes three levels of inputs that may be used to measure fair value:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
 
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
 
Upon adoption of ASC 820, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the consolidated financial statements.
 
The carrying value of the Company’s cash and cash equivalents, accounts payable, short-term borrowings (including convertible notes payable), and other current liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
 
 


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

Notes to Financial Statements (Continued)

 
(22)
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The following table sets forth the Company’s financial instruments as of June 30, 2010 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy.  As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:

 
                           
   
Quoted
Prices in
Active
Markets for
Identical
Instruments
Level 1
 
Significant
Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Assets at
Fair Value
 
                   
Liabilities:
                         
Series L Convertible Preferred Stock
 
$
   
$
   
$
(350,000
)
$
(350,000
)
Series L Accrued Dividend Payable
             
$
(10,874
)
$
(10,874
)
Derivative Liability
               
(202,156
)
 
(202,156
)

At June 30, 2010, the carrying amount of the Series L Convertible Preferred Stock at par value is deemed to be the fair value.  The balance sheet also reflects a liability for the accrued dividend payable on the Series L Convertible Preferred Stock.


(23)           COMMITMENTS AND CONTINGENCIES

In June 1998, IDSI signed an exclusive patent license agreement with Mr. Grable, which encompasses the technology for the CTLM®.  Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001.  Mrs. Grable is the principal beneficiary of Mr. Grable’s estate.  The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination under specific conditions.  The license agreement provides for a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid.  We are obligated to pay royalties based on the formula upon receiving FDA approval to market the CTLM® in the U.S.  In addition, following FDA approval, Mrs. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used.

In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005.  One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor.  We are obligated to pay an additional legal fee of 2,000 Euros in December 2009 in this matter.

The plaintiffs allege that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive FDA approval for the CTLM® and that we would give them exclusive distribution rights in Italy.  The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.

Based on our preliminary investigation of this matter, we believe that this claim is without merit, and we intend to vigorously defend the case.  Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond.  Our counsel filed our defenses in the Court of Venice at a hearing held in June



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

Notes to Financial Statements (Continued)


(23)           COMMITMENTS AND CONTINGENCIES (Continued)

2009.  The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses.  At the hearing, the plaintiffs did not prove all of the facts underlying their claims.  The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”.  At that time, our counsel will present our demand for damages from “vexatious litigation” by the plaintiffs.
 
On March 5, 2010, the Company entered into a six month Finders Agreement with an entity to provide introductions to potential investors so that the Company would be able to obtain financing in the amount of up to Twenty Million dollars ($20,000,000).  As compensation for its services under the agreement, the Finder shall be entitled to receive an amount equal to 7% of gross proceeds received in cash by the Company and resulting from introductions made by the Finder which resulted in financing to the Company during the term.  On August 26, 2010, the Company extended the Finders Agreement for six (6) additional months automatically term9nating on March 5, 2011.

On March 22, 2010, the Company entered into two-year employment agreement and accompanying stock option agreement with Linda B. Grable, our Chief Executive Officer.  The agreement provided an annual base salary of $168,000.  Ms. Grable was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  Ms. Grable’s new employment agreement replaces her previous employment agreement which expired on April 15, 2010.

On March 22, 2010, the Company entered into two-year employment agreement and accompanying stock option agreement with Allan L. Schwartz, our Executive Vice-President and Chief Financial Officer.  The agreement provided an annual base salary of $192,400.  Mr. Schwartz was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  His previous employment agreement expired on March 22, 2010.

On March 22, 2010, the Company entered into two-year employment agreement with Deborah O’Brien, our Senior Vice-President.  The agreement provided an annual base salary of $138,000.  Ms. O’Brien was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  Her previous employment agreement expired on September 14, 2008.

We previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales.  As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 15,000 patient scans worldwide.  We are now self-insuring the risk of product liability.


(24)           SUBSEQUENT EVENTS - UNAUDITED

From July 1, 2010 through October 13, 2010, we raised a total of $1,000,000 after expenses through the sale of 42,440,812 shares of common stock to Southridge pursuant to our Southridge Private Equity Credit Agreement.

As of October 13, 2010, we owe a total of $1,539,500 in short-term debt.  Of the $1,539,500 we owe a total of $1,089,356 in principal and $450,144 in premium.  We have received loan extensions on all of our short-term notes to October 31, 2010.

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





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

None
 

Item 9A.  Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our fourth fiscal quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.





Item 9B.  Other Information –

None





The remainder of this page is intentionally blank.



Part III

 
Item 10.  Directors, Executive Officers and Corporate Governance

 
Directors, Executive Officers and Corporate Governance

 
Compensation Discussion and Analysis
This section describes the material elements of compensation awarded to, earned by or paid to the individuals who served as our former chief executive officer, our current chief executive officer, our executive vice president & chief financial officer, and our senior vice president during fiscal 2010.  These individuals are listed in the “Summary Compensation Table” below and are referred to as the “Named Executive Officers”.

Our executive compensation programs were determined and proposed by our Compensation Committee and approved by our Board of Directors, for so long as the Compensation Committee was in existence.  None of the Named Executive Officers were members of the Compensation Committee or otherwise had any role in determining the compensation of other Named Executive Officers, although the Compensation Committee did consider the recommendations of our CEO in setting compensation levels for our other executive officers.  Our Compensation Committee was comprised of three out of our four independent directors.  On February 27, 2008, Edward Rolquin, a member of the Compensation Committee, announced his retirement from the Board of Directors.  On April 16, 2008, we received and accepted the resignations of our three outside directors:  Jay Bendis; Patrick Gorman; and Sherman Lazrus.  Mr. Gorman was not a member of the Compensation Committee.  These resignations were tendered to comply with a request by outside funding sources as a condition to such funding.  Upon their resignations, the Board of Directors assumed the duties of the Compensation Committee.  Thus, the Board of Directors performed the duties of the Compensation Committee for fiscal 2009 and fiscal 2010.


Executive Compensation Program Objectives and Overview.

The Compensation Committee conducts an annual review of our executive compensation programs to ensure that:

 
the program is designed to achieve our goals of promoting financial and operational success by attracting, motivating and facilitating the retention of key employees with outstanding talent and ability; and
 
the program adequately rewards performance which is tied to creating stockholder value.
 
Our current executive compensation program is based on two components, which are designed to be consistent with our compensation philosophy: (1) base salary and (2) grants of stock options.

In structuring executive compensation packages, the Compensation Committee considers how each component promotes retention and/or motivates performance by the executive.  Base salaries, perquisites and personal benefits, and severance and other termination benefits are primarily intended to attract and retain highly qualified executives. We believe that in order to attract and retain top executives, we need to provide them with compensation levels that reward their continued productive service.  At the present time the Compensation Committee does not award annual incentive bonuses while we are in the development stage but does believe that such annual awards do motivate executive officers to achieve specific strategies and operating objectives and also help us to attract and retain top executives.  The Compensation Committee has discussed the implementation of long-term equity incentives which are primarily intended to align executive officers’ long-term interests with stockholders’ long-term interests, although we believe they also play a role in helping us to attract and retain top executives.  Currently, stock option grants are the part of our executive compensation program designed to reward performance and thus the creation of stockholder value.

We view our current executive compensation program as one in which the individual components combine together to create a total compensation package for each executive officer that we believe achieves our compensation objectives.  In determining our current executive compensation program and the amounts of compensation for each component of our program, the Compensation Committee evaluates the current executive compensation data for companies in our industry.  The Compensation Committee believes that our current executive compensation program is appropriate based on the evaluation of the compensation paid by companies in our industry.



All references below to the Compensation Committee refer to the Board of Directors since April 16, 2008, except where the context requires otherwise.

Current Executive Compensation Program Elements.

Base Salaries
Salaries for our three executive officers are reviewed by the Compensation Committee on an annual basis.  During fiscal 2010, the cash salaries paid to Linda Grable, Allan Schwartz and Deborah O’Brien were $156,000, $192,400, and $105,859, respectively.  During fiscal 2009, the cash salaries paid to Linda Grable, Allan Schwartz and Deborah O’Brien were $143,878, $188,237, and $137,832, respectively.  During fiscal 2008, the cash salaries paid to Linda Grable, Allan Schwartz and Deborah O’Brien were $30,000, $185,802, and $139,588, respectively.

Annual Incentive Bonuses
The Compensation Committee may elect to award incentive bonuses as part of total compensation to executive officers who have rendered services during the year that exceed those normally required or anticipated or who have achieved specific targeted objectives with regard to sales performance, financial performance, inventory efficiencies and other criteria which may be established from time to time.  These bonuses are intended to reflect the Compensation Committee’s determination to reward any executive who, through extraordinary effort, has substantially benefited the Company and its stockholders during the year.  During fiscal 2010, no annual incentive bonuses were paid.

Stock Option Grants
Our policy is that the long-term compensation of our Named Executive Officers and other executive officers should be directly linked to the value provided to stockholders.  Therefore, we have periodically made grants of stock options to provide further incentives to our executives to increase stockholder value.  During fiscal 2010, the stock option grants made to Linda Grable, Allan Schwartz and Deborah O’Brien were 6,000,000, 6,000,000 and 6,000,000, respectively.  During fiscal 2009, the stock option grants made to Linda Grable, Allan Schwartz and Deborah O’Brien were 3,000,000, 3,000,000 and 0, respectively.  During fiscal 2008, the stock option grants made to Linda Grable, Allan Schwartz and Deborah O’Brien were 1,000,000, 250,000 and 250,000, respectively.  Stock options are granted with an exercise price that is equal to the closing price of our common stock on the grant date.  Thus, the recipients will realize value on their stock options if our stockholders realize value on their shares.

The Compensation Committee bases its grants of stock options to executives on a number of factors, including:

 
the executive’s position with us and total compensation package;
 
the executive’s performance of his or her individual responsibilities; and
 
the executive’s contribution to the success of our financial performance.
 
 
Compensation Committee Report

The following statement shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under either of these acts.

Due to the resignation of our independent directors, the Compensation Committee did not review and discuss with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K.


Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee was an officer or employee of our Company during the prior year or was formerly an officer of our Company.  During the fiscal year ended June 30, 2010, none of our executive officers served on the Compensation Committee of any other entity, any of whose directors or executive officers served either on our Board of Directors or on our Compensation Committee.



The following table sets forth certain information concerning our directors and executive officers:

Name
Age
Position
Year Elected or Appointed
       
Linda B. Grable
73
Chief Executive Officer and
2008
   
Chairman of the Board
 
       
Allan L. Schwartz
68
Executive Vice-President, Chief
1994
   
Financial Officer and Director
 
       
Deborah O’Brien
47
Senior Vice-President
2003

Linda Grable and Allan Schwartz are co-founders and as such may be deemed "promoter" and "parent" 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.

We have adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

Linda Grable
Linda Grable was appointed our Chief Executive Officer and a Director of the Company in April 2008.  Ms. Grable had previously served as our Chief Executive Officer from August 2001 until April 2004, and, from inception in 1993 until April 2004, had served as Chairman of the Board and Director of the Company.  Ms. Grable retired as our CEO and Chairman of the Board on April 16, 2004.  Upon the resignations of our independent directors, Ms. Grable volunteered to come out of retirement to serve as our Chief Executive Officer and a Director.  She has played a major role in raising approximately $46 million in debt and equity funding for the research and development of the CTLM® device.  She has over 40 years experience in negotiating funding with banking institutions for both medical and real estate development businesses.  Ms. Grable has over 25 years of executive experience in the medical device industry, for both sales and marketing in the U.S. and foreign countries.  She is a graduate of Ohio State University and holds a BA in Journalism and Marketing.

Allan L. Schwartz
Mr. Schwartz is Executive Vice-President and Chief Financial Officer of the Company and is responsible for its financial affairs.  He has a wide range of management, marketing, field engineering, construction, and business development experience.  Prior to joining the Company as a founder in 1993, he developed the Chronometric Trading System for analyzing stock market trends using neural networks and developed pre-engineered homes for export to Belize, Central America for S.E. Enterprises of Miami, Florida.  In 1991 he formed Tron Industries, Inc. for the development of low-voltage neon novelty items and self-contained battery powered portable neon.  He is a graduate of C.W. Post College of Long Island University with a B.S. in Business Administration.  Previous innovations by Mr. Schwartz before relocating to Florida have included the use of motion detection sensors in commercial burglar alarm systems for Tron-Guard Security Systems. Inc. and the use of water reclamation systems with automatic car wash equipment.  Mr. Schwartz has been a Director and Officer of the Company since its inception.

Deborah O’Brien
Deborah O’Brien was appointed Senior Vice President on September 15, 2003.  Ms. O’Brien has been employed at IDSI since 1995.  During her tenure, she has held the positions of Director of Investor Relations, Vice President of Corporate Communications and most recently, since September 2001, Vice President of Business Development.  Her responsibilities have included developing and executing a strategic corporate communications campaign, managing internal communications, outside public relations, marketing, and clinical applications.  In addition, Ms. O’Brien was directly responsible for the development and establishment of consumer and industry awareness of our CTLM® System via a media outreach which targeted industry publications, national network television, radio, nationally-circulated publications and high traffic internet sites.  As Vice President of Business Development, she was closely involved with various regulatory and marketing projects and played an integral role in the development and preparation of our FDA Application.  She also supervised and managed the collection of clinical data for the FDA approval process.  Prior to joining IDSI, she worked for seven years in the financial arena, managing investor


accounts, and in the medical device industry, marketing medical equipment.  Ms. O’Brien began her career in the mortgage loan industry as an account executive with Citibank.

Due to the resignation on April 16, 2008 of our three remaining independent directors, the following committees have no members until such time as new independent members are appointed to fill these committees: Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee.  Until such time as we secure sufficient funding to enable the Company to obtain additional qualified independent directors, the responsibilities of these committees will continue to be served by the two current executive officers/directors.


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 ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership, furnishing us with copies of all Section 16(a) forms they file.  To the best of our knowledge, based solely on review of the copies of such reports furnished to us, all Section 16(a) filing requirements applicable to our officers and directors were complied with during the year ended June 30, 2010.




SUMMARY COMPENSATION TABLE – FISCAL 2010

Item 11.  Executive Compensation
 
The following table sets forth the compensation awarded to, earned by or paid to our Chief Executive Officer, former Chief Executive Officer, Executive Vice President & CFO, and Senior Vice President for services rendered to us during fiscal 2010.
 
SUMMARY COMPENSATION TABLE – FISCAL 2010

             
Change in
   
             
Pension Value
   
             
and
   
             
Nonqualified
   
           
Non-Equity
Deferred
   
       
Stock
Option
Incentive Plan
Compensation
All other
 
Name and
 
Salary
Bonus
Awards
Awards
Compensation
Earnings
Compensation
Total
Principal Position
Year
($)(5)
($)
($)(6)
($)(7)
($)
($)
($)
($)
Linda B. Grable
2010
      156,000
        -
  5,000
  190,625
                  -
                  -
                   -
          351,625
CEO and COB(1),(2)
2009
      143,878
        -
     800
    60,333
                  -
                  -
                   -
          205,011
 
2008
        30,000
        -
        -
     1,667
                  -
                  -
                   -
            31,667
                   
                   
Allan L. Schwartz
2010
      192,400
        -
  5,000
  190,625
                  -
                  -
                   -
          388,025
Exec V.P.,CFO and Director(1),(3)
2009
      188,237
        -
     800
    31,667
                  -
                  -
                   -
          220,704
 
2008
            185,802      
        -
        -
    12,500
                  -
                  -
                   -
          198,302
                   
                   
Deborah O'Brien
2010
      105,859
        -
  5,000
 190,625
                  -
                  -
                   -
          301,484
Senior Vice- President(1),(4)
2009
      137,832
        -
     800
     3,109
                  -
                  -
                   -
          141,741
 
2008
      139,588
        -
        -
   16,018
                  -
                  -
                   -
          155,606
 
 
(1)
All Named Executive Officers receive reimbursement for auto expense in the amount of $500 per month.  However, during f/y 2010 the Executive Officers agreed to accrue various monthly auto expenses until a time where the Company secures additional financing.  During f/y 2009 the Executive Officers agreed to accrue all monthly auto expenses until a time where the Company secures additional financing.  The Company secured the additional financing and paid the Executive Officers all of their accrued auto expense from f/y 2009.
(2)
Salary recorded for f/y 2010 includes base salary of $168,000.  Effective January 1, 2010, Ms. Grable’s salary increased from $144,000 to $168,000.   Salary recorded for f/y 2009 includes base salary of $144,000.  Previously, from January 1, 2009 through June 30, 2009, Ms. Grable deferred $39,000 of her salary which was accrued until such time as the Company secures additional financing.  The Company secured the additional financing and Ms. Grable was paid the $39,000 of deferred salary in f/y 2010.  On April 16, 2008, Ms. Grable came out of retirement and rejoined the company as Chairman of the Board and CEO.
(3)
Salary recorded for f/y 2010 includes base salary of $192,400.  Previously, from January 1, 2009 through June 30, 2009, Mr. Schwartz deferred $52,108 of his salary which was accrued until such time as the Company secures additional financing.  The Company secured the additional financing and Mr. Schwartz was paid the $52,108 of deferred salary in f/y 2010.  Salary recorded for f/y 2009 includes base salary of $192,400.  From July 1, 2008 through July 31, 2008, Mr. Schwartz deferred $4,008 of his salary until a time where the Company secures additional financing. Salary recorded for f/y 2008 includes base salary of $179,142 plus $6,660 vacation pay.  From April 1, 2008 through June 30, 2008, Mr. Schwartz deferred $12,025 of his salary until a time where the Company secures additional financing.  As of June 30, 2010, Mr. Schwartz is owed a total of $16,033 of his salary from previous fiscal years.
(4)
Salary recorded for f/y 2010 includes base salary of $138,000.  However, Ms. O’Brien took a temporary leave of absence during f/y 2010 and was only paid $105,859.  Previously, from January 1, 2009 through June 30, 2009, Ms. O’Brien deferred $37,375 of her salary which was accrued until such time as the Company secures additional financing.  The Company secured the additional financing and Ms. O’Brien was paid the $37,375 of deferred salary in f/y 2010.  Salary recorded for f/y 2009 includes base salary of $138,000.  Salary recorded for f/y 2008 includes base salary of $135,342 plus $4,246 vacation pay.
(5)
During the third and fourth quarter of f/y 2009, the Executive Officers were paid a portion of their respective salaries with the balance due accrued until such time as the Company secured additional funds.  The Company secured the additional financing and all three Executive Officers were paid their deferred salary in f/y 2010 except Mr. Schwartz is owed a total of $16,033 of his salary from previous fiscal years.
(6)
During December 2009, 250,000 shares of common stock were issued as a bonus to all Company employees.  However, the executive officers’ shares were issued with a restrictive legend while the other employees’ shares were issued without restrictive legend due to the de-minimus size of the issuance.  Compensation expense of $5,000 per employee was recorded as the fair market value of the common stock on the date of issuance was $.02 per share.  During March 2009, 100,000 shares of restricted stock were issued as a bonus to all Company employees.  Compensation expense of $800 per employee was recorded as the fair market value of the common stock on the date of issuance was $.008 per share.
(7)
Amount listed represents the dollar amount we recognized for financial reporting purposes under FASB guidance, “Share Based Payment”.  Assumptions made for the purpose of computing this amount are discussed in Note 2(j) to the Notes to our Financial Statements contained in this report.


 


 
 
 
OUTSTANDING EQUITY AWARDS AT FISCAL 2010 YEAR-END

The following table sets forth information concerning unexercised options outstanding for each of our Named Executive Officers at June 30, 2010.

 
                                                   
   
Option Awards
 
Stock Awards
 
                                               
Equity
 
                                               
Incentive
 
               
Equity
                       
Equity Incentive
   
Plan Awards:
 
               
Incentive
                       
Plan Awards:
   
Market or
 
               
Plan Awards:
                 
Market
   
Number of
   
Payout Value
 
   
Number of
   
Number of
   
Number of
           
Number of
   
Value of
   
Unearned
   
of Unearned
 
   
Securities
   
Securities
   
Securities
           
Shares or
   
Shares or
   
Shares, Units
   
Shares, Units
 
   
Underlying
   
Underlying
   
Underlying
           
Units of
   
Units of
   
or Other
   
or Other
 
   
Unexercised
   
Unexercised
   
Unexercised
   
Option
     
Stock That
   
Stock That
   
Rights That
   
Rights That
 
   
Options
   
Options
   
Unearned
   
Exercise
 
Option
 
Have Not
   
Have Not
   
Have Not
   
Have Not
 
     
(#)
     
(#)
   
Options
   
Price
 
Expiration
 
Vested
   
Vested
   
Vested
   
Vested
 
Name
 
Exercisable
   
Unexercisable
     
(#)
   
($)
 
Date
   
(#)
   
($)
     
(#)
   
($)
 
Linda B. Grable      500,000        -       -     $ 2.85   
 8/30/2010
                               
CEO and Chairman      500,000        -         -     0.77   
       8/30/2011
                               
of the Board(1)       2,250,000        -       -     0.60   
       12/1/2011
                               
      1,000,000        -       -     0.045           4/16/2018                                
      3,000,000        -       -     .01     3/23/2019                                
      3,000,000        3,000,000              $ .05     3/22/2020                                
                                                                   
                                                                   
Allan L. Schwartz     
500,000
     
-
     
-
    $
2.85
 
 8/30/2010
   
 
     
 
     
 
     
 
 
Exec V.P., CFO and    
500,000
     
-
     
-
    $
0.77
 
 8/30/2011
                               
Director(2)
   
500,000
     
-
     
-
    $
0.30
 
8/30/2012
                               
     
500,000
     
-
     
-
    $
1.21
 
8/30/2013
                               
     
500,000
     
-
     
-
    $
0.30
 
8/30/2014
                               
     
100,000
     
-
     
-
    $
0.20
 
9/12/2015
                               
     
250,000
     
-
     
-
    $
0.11
 
9/12/2016
                               
      250,000       -       -     0.058   
      8/30/2017
                               
      3,000,000       -       -     $ .01    3/23/2019                                
      3,000,000       3,000,000              $ .05    3/22/2020                                 
                                                                   
                                                                   
Deborah O'Brien
   
200,000
     
-
     
-
    $
0.56
 
 10/25/2011
   
 
     
 
     
 
     
 
 
Senior Vice-
   
25,000
     
-
     
-
    $
0.50
 
 2/02/2012
                               
President(3)    
302,000
     
-
     
-
    $
1.13
 
 9/15/2013
                               
     
250,000
     
-
     
-
    $
0.11
 
 9/12/2016
                               
       250,000       -       -     0.084   
       9/15/2017
                               
      3,000,000       3,000,000              .05     3/22/2020                                

 

(1)
Ms. Grable had 13,250,000 stock options outstanding as of June 30, 2010 of which 10,250,000 are fully vested.
(2)
Mr. Schwartz had 12,100,000 stock options outstanding as of June 30, 2010 of which 9,100,000 are fully vested.
(3)
Ms. O’Brien had 7,027,000 stock options outstanding as of June 30, 2010 of which 4,027,000 are fully vested.


 


OPTION EXERCISES AND STOCK VESTED - FISCAL 2010

The following table sets forth information concerning each exercise of stock options for each of our Named Executive Officers during the year ended June 30, 2010.


 
Option Awards
 
Stock Awards
 
Number of
   
Number of
 
 
Shares Acquired
Value Realized
 
Shares Acquired
Value Realized
 
on Exercise
on Exercise
 
on Vesting
on Vesting
Name
(#)
($)
 
(#)
($)
Linda B. Grable
         
CEO and Chairman
         
of the Board
                    -                     -                      -                    -
           
Allan L. Schwartz
         
Exec V.P., CFO
         
and Director
-
-
 
-
-
           
Deborah O'Brien
         
Senior Vice-President
-
-
 
-
-

 
 
Employment Agreements

Linda Grable

On April 16, 2008, Ms. Grable came out of retirement and rejoined the company as Chairman of the Board and CEO.  Previously, on April 15, 2004 Ms Grable retired.  On April 28, 2008, we entered into a two-year employment agreement and an accompanying stock option agreement with Ms. Grable.  The Agreement is for a two-year term commencing April 16, 2008, and provides an annual base salary of $144,000 per annum.  The option agreement provides an option to purchase 1,000,000 shares of the Company’s common stock which shall vest and become exercisable in one year from the date of the grant.  The option exercise price per share is $.045.

On March 23, 2009, we entered into a one-year employment agreement effective March 23, 2009 at an annual salary of $144,400.  Ms. Grable was also granted an option to purchase 3,000,000 shares of the Company’s common stock which shall vest and become exercisable on March 24, 2009.  The option exercise price per share is $.01 based on the closing price on March 23, 2009 of $.0085.  The new agreement supersedes her April 16, 2008 employment Agreement except that the 1,000,000 options granted in that agreement remain in effect and vested on April 16, 2009.

On March 22, 2010, we entered into two-year employment agreement and accompanying stock option agreement with Ms. Grable.  The agreement provided an annual base salary of $168,000.  She was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  Ms. Grable’s new employment agreement replaces her previous employment agreement which expired on April 15, 2010.
 
 
Allan L. Schwartz

On August 30, 2004 Allan L. Schwartz, our Executive Vice-President and Chief Financial Officer, entered into a one-year Employment Extension Agreement, which provided for an annual salary of $185,000 and options to purchase up to an aggregate of 500,000 shares of our common stock at an exercise price of $.30 per share, in accordance with our 2004 Non-Statutory Stock Option Plan.  These options vested on August 30, 2005.  On September 12, 2005, we entered into a one-year employment agreement effective August 30, 2005 with Mr. Schwartz,

 

at an annual salary of $185,000.  Mr. Schwartz was also granted 100,000 non-statutory stock options at an exercise price of $.20 per share, the fair market value at the date of the grant, which will vest on August 30, 2006.  On September 12, 2006, we entered into a one-year employment agreement effective August 30, 2006 with Mr. Schwartz at an annual salary of $185,000.  Mr. Schwartz was also granted 250,000 non-statutory stock options at an exercise price of $.114 per share, the fair market value at the date of the grant, which will vest on August 30, 2007.  On August 30, 2007, we entered into a one-year employment agreement effective August 30, 2006 with Mr. Schwartz at an annual salary of $192,400.  Mr. Schwartz was also granted 250,000 non-statutory stock options at an exercise price of $.058 per share, in accordance with our 2007 Non-Statutory Stock Option Plan.  The exercise price was the fair market value at the date of the grant, and the options vested on August 30, 2008.  On March 23, 2009, we entered into a one-year employment agreement effective March 23, 2009 at an annual salary of $192,400.  Mr. Schwartz was also granted an option to purchase 3,000,000 shares of the Company’s common stock which shall vest and become exercisable on March 24, 2009.  The option exercise price per share is $.01 based on the closing price on March 23, 2009 of $.0085.

On March 22, 2010, we entered into two-year employment agreement with Mr. Schwartz at an annual salary of $192,400.  Mr. Schwartz was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  His previous employment agreement expired on March 22, 2010.
 
 
Deborah O’Brien

On September 15, 2003, we entered into a three-year employment agreement with Deborah O’Brien, our Senior Vice-President at an annual salary of $95,000.  The Senior Vice-President was also granted 302,000 incentive stock options at an exercise price of $1.13 per share, the fair market value at the date of the grant, which will vest ratably over the three-year period.  On September 12, 2006, we entered into a one-year employment agreement with Ms. O’Brien at an annual salary of $125,000.  The Senior Vice-President was also granted a $25,000 performance bonus opportunity (which later expired) and 250,000 non-statutory stock options at an exercise price of $.114 per share, the fair market value at the date of the grant, which will vest in one year.  On August 30, 2007, we entered into a one-year employment agreement commencing on September 15, 2007 with Ms. O’Brien at an annual salary of $138,000.  The Senior Vice-President was also granted 250,000 non-statutory stock options on September 15, 2007 at an exercise price of $.084 based on the fair market value at the date of the grant.  These options vested on September 15, 2008.  From September 15, 2008, until March 22, 2010, Ms. O’Brien worked without an employment agreement.

On March 22, 2010, we entered into two-year employment agreement with Ms. O’Brien at an annual salary of $138,000.  Ms. O’Brien was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011.  The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010.  Her previous employment agreement expired on September 14, 2008.


Potential Payments Upon Termination or Change in Control

Linda B. Grable

Upon termination of Ms. Grable’s employment agreement for any reason other than voluntary termination; termination “without cause” or termination by the Company for “Cause” as defined below, the following will apply:

(b)         Termination without Cause.  The Company may terminate the Executive’s employment without cause.  Such termination will become effective upon the date specified in the termination notice, provided that such date is at least 60 days from the date of such notice.  In the event of such termination without cause:

(i)              For the remainder of the Term following the effective date of termination, the Company will continue to pay the Executive her salary pursuant to Section 3(a).

(ii)              The Company will continue to maintain for the remainder of the Term following the effective date of termination, for the benefit of the Executive, the employee benefit programs referred to in Section 3(b) as in effect on the date of termination.



(iii)              On the effective date of termination, all options that were scheduled to vest will vest and will remain exercisable for a period of three years from the date of termination.

(c)         Termination for Cause.  The Company may terminate the Executive’s employment at any time for cause by giving written notice of termination setting forth such cause.  Such termination shall become effective upon the giving of such notice, except that, where the basis for cause is capable of cure within 30 days, termination based upon cause shall not become effective unless Executive shall fail to complete such cure within 30 days of receipt of written notice of the existence of such cause. Upon such termination the Executive shall have no right to compensation, commission, bonus, benefits or reimbursement pursuant to this Agreement, for any period subsequent to the effective date of termination.  Further, upon termination for cause, all of the Executive’s unvested stock options shall terminate. For purposes of this section, “cause” shall mean; (1) the Executive is convicted of a felony; (2) the Executive, in carrying out her duties hereunder, commits gross negligence or willful misconduct resulting, in either case, in material harm to the Company; (3) the Executive misappropriates Company funds or otherwise defrauds the Company; (4) the Executive materially breaches any provision of this Agreement; or (5) the Executive materially fails to perform her duties under section 4.

(d)         Death or Disability.  Upon the death or disability of the Executive, the Executive shall be entitled to and the Company will pay the Executive’s salary from the date of death or from the date of disability through the end of the Term. (For purposes of this Section, “disability” shall mean that for a period of six months in any 12-month period the Executive is incapable of substantially fulfilling her duties because of physical, mental or emotional incapacity arising from injury, sickness or disease.)  Should the Executive be rendered disabled, the Company will continue to maintain for the benefit of the Executive the employee benefit programs referred to in Section 3(b) that were in effect on the date of the disability.

(e)         Special Termination.  In the event that (i) the Company materially breaches this Agreement or the performance of its duties and obligations hereunder; or (ii) any entity or person not now an executive officer of the Company becomes either individually or as part of a group the beneficial owner of 20% or more of the Company’s common stock, the Executive, by written notice to the Company, may elect to deem the Executive’s employment hereunder to have been terminated by the Company without cause under Section 2(b) hereof, in which event the Executive shall be entitled to the compensation provided for in Section 2(b).

(f)         Voluntary Termination. The Executive, on 30 days prior written notice to the Company, may terminate her employment voluntarily.  Upon such termination, the Company will pay the Executive’s compensation through the date of such termination.  After such date, the Executive shall no longer be entitled to receive any compensation, reimbursement or benefits and all unvested stock options shall terminate upon termination of the Executive’s employment.

Upon termination of Ms. Grable’s employment agreement without “cause” or by change of control as defined in paragraph (e) Special Termination (ii), we will be obligated to pay the balance of compensation due on her two-year contract which commenced on March 22, 2010.  Assuming such termination occurred on June 30, 2010, we estimate that amount to be $294,000.


Allan L. Schwartz

Upon termination of Mr. Schwartz’s employment agreement for any reason other than voluntary termination; termination “without cause” or termination by the Company for “Cause” as defined below, the following will apply:

(b)         Termination without Cause.  The Company may terminate the Executive’s employment without cause.  Such termination will become effective upon the date specified in the termination notice, provided that such date is at least 60 days from the date of such notice.  In the event of such termination without cause:

(i)              For the remainder of the Term following the effective date of termination, the Company will continue to pay the Executive his salary pursuant to Section 3(a).

(ii)              The Company will continue to maintain for the remainder of the Term following the effective date of termination, for the benefit of the Executive, the employee benefit programs referred to in Section 3(b) as in effect on the date of termination.



(iii)              On the effective date of termination, all options that were scheduled to vest will vest and will remain exercisable for a period of three years from the date of termination.

(c)         Termination for Cause.  The Company may terminate the Executive’s employment at any time for cause by giving written notice of termination setting forth such cause.  Such termination shall become effective upon the giving of such notice, except that, where the basis for cause is capable of cure within 30 days, termination based upon cause shall not become effective unless Executive shall fail to complete such cure within 30 days of receipt of written notice of the existence of such cause. Upon such termination the Executive shall have no right to compensation, commission, bonus, benefits or reimbursement pursuant to this Agreement, for any period subsequent to the effective date of termination.  Further, upon termination for cause, all of the Executive’s unvested stock options shall terminate. For purposes of this section, “cause” shall mean; (1) the Executive is convicted of a felony; (2) the Executive, in carrying out his duties hereunder, commits gross negligence or willful misconduct resulting, in either case, in material harm to the Company; (3) the Executive misappropriates Company funds or otherwise defrauds the Company; (4) the Executive materially breaches any provision of this Agreement; or (5) the Executive materially fails to perform her duties under section 4.

(d)         Death or Disability.  Upon the death or disability of the Executive, the Executive shall be entitled to and the Company will pay the Executive’s salary from the date of death or from the date of disability through the end of the Term. (For purposes of this Section, “disability” shall mean that for a period of six months in any 12-month period the Executive is incapable of substantially fulfilling her duties because of physical, mental or emotional incapacity arising from injury, sickness or disease.)  Should the Executive be rendered disabled, the Company will continue to maintain for the benefit of the Executive the employee benefit programs referred to in Section 3(b) that were in effect on the date of the disability.

(e)         Special Termination.  In the event that (i) the Company materially breaches this Agreement or the performance of its duties and obligations hereunder; or (ii) any entity or person not now an executive officer of the Company becomes either individually or as part of a group the beneficial owner of 20% or more of the Company’s common stock, the Executive, by written notice to the Company, may elect to deem the Executive’s employment hereunder to have been terminated by the Company without cause under Section 2(b) hereof, in which event the Executive shall be entitled to the compensation provided for in Section 2(b).

(f)         Voluntary Termination. The Executive, on 30 days prior written notice to the Company, may terminate her employment voluntarily.  Upon such termination, the Company will pay the Executive’s compensation through the date of such termination.  After such date, the Executive shall no longer be entitled to receive any compensation, reimbursement or benefits and all unvested stock options shall terminate upon termination of the Executive’s employment.

Upon termination of Mr. Schwartz’s employment agreement without “cause” or by change of control as defined in paragraph (e) Special Termination (ii), we will be obligated to pay the balance of compensation due on his two-year contract which commenced on March 22, 2010.  Assuming such termination occurred on June 30, 2010, we estimate that amount to be $336,700.


Deborah O’Brien

Upon termination of Ms. O’Brien’s employment agreement for any reason other than voluntary termination; termination “without cause” or termination by the Company for “Cause” as defined below, the following will apply:

(b)         Termination without Cause.  The Company may terminate the Executive’s employment without cause.  Such termination will become effective upon the date specified in the termination notice, provided that such date is at least 60 days from the date of such notice.  In the event of such termination without cause:

(i)              For the remainder of the Term following the effective date of termination, the Company will continue to pay the Executive his salary pursuant to Section 3(a).

(ii)              The Company will continue to maintain for the remainder of the Term following the effective date of termination, for the benefit of the Executive, the employee benefit programs referred to in Section 3(b) as in effect on the date of termination.


(iii)              On the effective date of termination, all options that were scheduled to vest will vest and will remain exercisable for a period of three years from the date of termination.

(c)         Termination for Cause.  The Company may terminate the Executive’s employment at any time for cause by giving written notice of termination setting forth such cause.  Such termination shall become effective upon the giving of such notice, except that, where the basis for cause is capable of cure within 30 days, termination based upon cause shall not become effective unless Executive shall fail to complete such cure within 30 days of receipt of written notice of the existence of such cause. Upon such termination the Executive shall have no right to compensation, commission, bonus, benefits or reimbursement pursuant to this Agreement, for any period subsequent to the effective date of termination.  Further, upon termination for cause, all of the Executive’s unvested stock options shall terminate. For purposes of this section, “cause” shall mean; (1) the Executive is convicted of a felony; (2) the Executive, in carrying out his duties hereunder, commits gross negligence or willful misconduct resulting, in either case, in material harm to the Company; (3) the Executive misappropriates Company funds or otherwise defrauds the Company; (4) the Executive materially breaches any provision of this Agreement; or (5) the Executive materially fails to perform her duties under section 4.

(d)         Death or Disability.  Upon the death or disability of the Executive, the Executive shall be entitled to and the Company will pay the Executive’s salary from the date of death or from the date of disability through the end of the Term. (For purposes of this Section, “disability” shall mean that for a period of six months in any 12-month period the Executive is incapable of substantially fulfilling her duties because of physical, mental or emotional incapacity arising from injury, sickness or disease.)  Should the Executive be rendered disabled, the Company will continue to maintain for the benefit of the Executive the employee benefit programs referred to in Section 3(b) that were in effect on the date of the disability.

(e)         Special Termination.  In the event that (i) the Company materially breaches this Agreement or the performance of its duties and obligations hereunder; or (ii) any entity or person not now an executive officer of the Company becomes either individually or as part of a group the beneficial owner of 20% or more of the Company’s common stock, the Executive, by written notice to the Company, may elect to deem the Executive’s employment hereunder to have been terminated by the Company without cause under Section 2(b) hereof, in which event the Executive shall be entitled to the compensation provided for in Section 2(b).

(f)         Voluntary Termination. The Executive, on 30 days prior written notice to the Company, may terminate her employment voluntarily.  Upon such termination, the Company will pay the Executive’s compensation through the date of such termination.  After such date, the Executive shall no longer be entitled to receive any compensation, reimbursement or benefits and all unvested stock options shall terminate upon termination of the Executive’s employment.

Upon termination of Ms. O’Brien’s employment agreement without “cause” or by change of control as defined in paragraph (e) Special Termination (ii), we will be obligated to pay the balance of compensation due on her two-year contract which commenced on March 22, 2010.  Assuming such termination occurred on June 30, 2010, we estimate that amount to be $241,500.


Director Compensation – Fiscal 2010

During fiscal 2010, we had no independent directors, and we paid no separate compensation for service on our Board.  Our directors received all of their compensation in their capacities as executives.


Stock Option Plans
Our 1995 Stock Option Plan was approved by our Board of Directors and adopted by the shareholders at the March 1995 annual meeting.  The plan provided for the granting, exercising and issuing of incentive options pursuant to Internal Revenue Code, Section 422.

On August 30, 1999, we established an equity incentive plan.  The shareholders had to approve this plan within one year.  The maximum number of shares that could be granted under this plan was 15,000,000 shares of common stock and 5,000,000 shares of preferred stock.  The series, rights and preferences of the preferred stock were to be determined by our Board of Directors.  This plan also included any stock available for future stock rights under our 1995 Stock Option Plan.  On January 3, 2000 the Board of Directors decided to replace this

 

equity incentive plan and adopted our 2000 Non-Statutory Stock Option Plan so as to provide a critical long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  On May 10, 2000 our shareholders approved the 2000 Non-Statutory Stock Option Plan, which was replaced with our 2002 Incentive and Non-Statutory Stock Option Plan approved by our shareholders on March 13, 2002.  Our Board of Directors has direct responsibility for the administration of the plan.

On February 4, 2004, the Board of Directors adopted our 2004 Non-Statutory Stock Option Plan (the “2004 Plan”), which was adopted by the shareholders on March 24, 2004 at our annual meeting to provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company and its subsidiaries.  The maximum number of options that may be granted under the 2004 Plan shall be options to purchase 8,432,392 shares of Common Stock (5% of our issued and outstanding common stock as of February 4, 2004).  Options may be granted under the 2004 Plan for up to 10 years after the date of the 2004 Plan.  The 2004 Non-Statutory Stock Plan replaced the 2002 Incentive and Non-Statutory Stock Option Plan.

On August 24, 2005, the Board Of Directors resolved that the Company’s 1995, 2000, 2002 and 2004 Stock Option Plans and Stock Options Agreements that were entered into pursuant to these plans, be amended to increase the post-termination exercise period following the termination of the Optionee’s employment/directorship or in the event of change of control of the Company, to be three years from the date of termination or change of control, subject to those options that were vested as of the date of termination or change of control and subject to the original term of the option, which ever time is less.

On July 26, 2007, the Board of Directors adopted the Company’s 2007 Non-Statutory Stock Option Plan (the “2007 Plan”), which was adopted by the shareholders at our annual meeting held on December 29, 2008.  The 2007 Plan will provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  The maximum number of options that may be granted under the 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (5% of our issued and outstanding common stock as of July 26, 2007).  Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan.  The 2007 Non-Statutory Stock Plan replaced the 2004 Non-Statutory Stock Option Plan.

The purposes of the 2007 Plan is to provide directors, officers and employees of, consultants, attorneys and advisors to the Company and its subsidiaries with additional incentives by increasing their ownership interest in the Company.  Directors, officers and other employees of the Company and its subsidiaries are eligible to participate in the 2007 Plan.  Options in the form of Non-Statutory Stock Options ("NSO") may also be granted to directors who are not employed by the Company and consultants, attorneys and advisors to the Company providing valuable services to the Company and its subsidiaries.  In addition, individuals who have agreed to become an employee of, director of or an attorney, consultant or advisor to the Company and/or its subsidiaries are eligible for option grants, conditional in each case on actual employment, directorship or attorney, advisor and/or consultant status.  The 2007 Plan provides for the issuance of NSO's only, which are not intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, as amended.

The maximum number of options that may be granted under the 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (4.99% of the Company's issued and outstanding common stock as of July 26, 2007).

Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan.  The Board of Directors of the Company or a Compensation Committee will administer the 2007 Plan with the discretion generally to determine the terms of any option grant, including the number of option shares, exercise price, term, vesting schedule and the post-termination exercise period.  Notwithstanding this discretion (i) the term of any option may not exceed 10 years and (ii) an option will terminate as follows: (a) if such termination is on account of termination of employment for any reason other than death, without cause, such options shall terminate one year thereafter; (b) if such termination is on account of death, such options shall terminate 15 months thereafter; and (c) if such termination is for cause (as determined by the Board of Directors and/or Compensation Committee), such options shall terminate immediately.  Unless otherwise determined by the Board of Directors or Compensation Committee, the exercise price per share of Common Stock subject to an option shall be equal to no less than 100% of the fair market value of the Common Stock on the date such option is granted.  No NSO shall be assignable or otherwise transferable except by will or the laws of descent and distribution or except as permitted in accordance with SEC Release No.33-7646 as effective April 7, 1999 and in particular that portion thereof which expands upon transferability as is contained in Article III entitled "Transferable Options and Proxy Reporting" as indicated in Section A, 1 through 4 inclusive and Section B thereof.

The 2007 Plan may be amended, altered, suspended, discontinued or terminated by the Board of Directors without further stockholder approval, unless such approval is required by law or regulation or under the rules of the stock exchange or automated quotation system on which the Common Stock is then listed or quoted.  Thus, stockholder approval will not


necessarily be required for amendments which might increase the cost of the 2007 Plan or broaden eligibility except that no amendment or alteration to the Plan shall be made without the approval of stockholders which would (a) increase the total number of shares reserved for the purposes of the Plan or decrease the exercise price (except as provided in Article X of the 2007 Plan relating to recapitalizations and mergers) or change the classes of persons eligible to participate in the Plan or (b) extend the exercise period or (c) materially increase the benefits accruing to 2007 Plan participants or (d) materially modify Plan participation eligibility requirements or (e) extend the expiration date of the Plan.  Unless otherwise indicated the 2007 Plan will remain in effect until terminated by the Board of Directors.

On March 11, 2010 the Board of Directors adopted the Company’s 2010 Non-Statutory Stock Option Plan (the “2010 Plan”).  The Board will include a proposal for the shareholders to adopt the 2010 plan at our next annual meeting tentatively scheduled for December 2010.  The 2010 Plan will provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company.  The maximum number of options that may be granted under the 2010 Plan shall be options to purchase 37,428,466 shares of Common Stock (5% of our issued and outstanding common stock as of March 10, 2010).  Options may be granted under the 2010 Plan for up to 10 years after the date of the 2010 Plan.  The 2010 Non-Statutory Stock Plan replaced the 2007 Non-Statutory Stock Option Plan.




Item 12.  Security Ownership of Certain Beneficial Owners and Management.

The following table shows the beneficial ownership of our common stock as of October12, 2010 regarding:

 
·
each person that we know of who beneficially owns more than 5% of the outstanding shares of our common stock,
 
·
each current director and executive officer, and
 
·
all executive officers and directors as a group.
 
 
Name and Address
Number of Shares Owned
% of Outstanding
of Beneficial Owner
Beneficially(1)(2)(7)
Shares of Common Stock
     
Linda B. Grable
                     26,760,274(3)
    3.36%
5307 NW 35th Terrace
   
Fort Lauderdale, FL 33309
   
     
Allan L. Schwartz
                    13,255,520(4)
    1.84%
5307 NW 35th Terrace
   
Fort Lauderdale, FL 33309
   
     
Deborah O’Brien
                      5,137,000(5)
     0.92%
5307 NW 35th Terrace
   
Fort Lauderdale, FL 33309
   
     
     
All officers and directors
                   45,152,794(6)
     6.12%
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 884,278,434 shares of common stock outstanding as of October 12, 2010 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 12, 2010 are deemed outstanding for computing the percentage of that person and the group.
(3)
Includes 9,750,000 shares subject to options and 17,010,274 shares owned by Linda B. Grable.
(4)
Includes 8,600,000 shares subject to options and 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership.
(5)
Includes 4,027,000 shares subject to options.
(6)
Includes 22,377,000 shares subject to options held by Linda Grable, Allan Schwartz and Deborah O’Brien.  Also includes 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership.
(7)
Linda Grable, Allan Schwartz and Deborah O’Brien have signed waivers agreeing that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn.



Dividend Policy
To date, we have not declared or paid any dividends with respect to our common stock, and the current policy of the Board of Directors is to retain any earnings to provide for our growth.  We do not anticipate paying cash dividends on our common stock in the foreseeable future.




Item 13.  Certain Relationships and Related Transactions

The late Richard and Linda Grable were husband and wife.  Mrs. Grable continues to control a substantial portion of our outstanding stock.

In June 1998, IDSI signed an exclusive patent license agreement with Richard Grable.  The term of the license is for the life of the patent (17 years) and any renewals, subject to termination under specific conditions.  As consideration for this license, we issued Mr. Grable 7,000,000 shares of common stock and granted a royalty ranging from 6% to 10% of the dollar amount earned from each CTLM® sale before taxes minus the cost of the goods sold and commissions or discounts paid.  The royalty provisions do not apply to any sales prior to receipt of the FDA approval for the CTLM®.  In addition, following issuance of FDA approval, IDSI Mr. Grable would be paid a minimum royalty of at least $250,000 per year.  Mr. Grable’s interest in the patent license agreement passed to his estate, of which Linda Grable is the principal beneficiary.


Item 14.  Principal Accounting Fees and Services

For the Fiscal Years ended June 30, 2010 and 2009, we paid audit fees totaling $67,000 and $38,000 respectively, and paid fees for tax services totaling $2,500 and $2,500 respectively.


   
June 30,
 
   
2010
   
2009
 
Audit Fees
  $ 67,000     $ 38,000  
Tax Services
  $ 2,500     $ 2,500  
                 
Totals
  $ 69,500     $ 40,500  


 
 
Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
 
(a)  Exhibits

EXHIBIT
DESCRIPTION
 
3.1
Articles of Incorporation (Florida)- Incorporated by reference to Exhibit 3(a) of our Form 10-KSB for the fiscal year ending June 30, 1995.
3.2
Amendment to Articles of Incorporation (Designation of Series A Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.  (i). 6 of our Form 10-KSB for the fiscal year ending June 30, 1996.  File number 033-04008.
3.3
Amendment to Articles of Incorporation (Designation of Series B Convertible Preferred Shares).  Incorporated by reference to our Registration Statement on Form S-1 dated July 1, 1997.
3.4
Amendment to Articles of Incorporation (Designation of Series C Convertible Preferred Shares).  Incorporated by reference to our Form 8-K dated October 15, 1997.
3.5
Amendment to Articles of Incorporation (Designation of Series D Convertible Preferred Shares).  Incorporated by reference to our Form 8-K dated January 12, 1998.
3.6
Amendment to Articles of Incorporation (Designation of Series E Convertible Preferred Shares).  Incorporated by reference to our Form 8-K dated February 19,1998.
3.7
Amendment to Articles of Incorporation (Designation of Series F Convertible Preferred Shares).  Incorporated by reference to our Form 8-K dated March 6, 1998.
3.8
Amendment to Articles of Incorporation (Designation of Series H Convertible Preferred Shares).  Incorporated by reference to our Registration Statement on Form S-2 File Number 333-59539.
3.9
Certificate of Dissolution - is incorporated by reference to Exhibit (3)(a) of our Form 10-KSB for the fiscal year ending June 30, 1995.
3.10
Articles of Incorporation and By- Laws (New Jersey) -are incorporated by reference to Exhibit 3 (i) of our Form 10-SB, as amended, file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11
Certificate and Plan of Merger - is incorporated by reference to Exhibit 3(i) of the Form 10-SB.
3.12
Certificate of Amendment - is incorporated by reference to Exhibit 3(i) of the Form 10-SB.
3.13
Amended Certificate of Amendment-Series G Designation.
3.14
Certificate of Amendment-Series I Designation
3.15
Amended Certificate of Amendment-Series B Designation
3.16
Certificate of Amendment-Series K Designation.  Incorporated by reference to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on September 14, 2000.
3.17
Certificate of Amendment-Series L Designation.
10.2
Patent Licensing Agreement.  Incorporated by reference to our Registration Statement on Form S-2, File Number 333-59539.
10.70
License Agreement dated as of June 16, 2006, as amended as of August 30, 2006, between Bioscan, Inc. and Imaging Diagnostic Systems, Inc.  Incorporated by reference to our Form 8-K, filed on September 5, 2006.
10.77
2007 Non-Statutory Stock Option Plan
10.78
Agreement of Sale by and between Imaging Diagnostic Systems, Inc. and Superfun B.V. dated September 13, 2007 including Form of Lease Agreement (Exhibit D).  Incorporated by reference to our Form 8-K filed on September 13, 2007.
10.79
Lease Agreement by and between Bright Investments, LLC (“Landlord”) and Imaging Diagnostic Systems, Inc. (“Tenant”) dated March 14, 2008.  Incorporated by reference to our Form 8-K filed on April 3, 2008.
10.81
Sixth Private Equity Credit Agreement between IDSI and Charlton Avenue LLC dated April 21, 2008 without exhibits.  Incorporated by reference to our Form 8-K filed on April 22, 2008.
10.82
Two-Year Employment Agreement dated as of April 16, 2008 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Interim CEO.  Incorporated by reference to our Form 8-K filed on May 5, 2008.
10.83
Stock Option Agreement dated as of April 16, 2008 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Interim CEO.  Incorporated by reference to our Form 8-K filed on May 5, 2008.
10.84
Business Lease Agreement by and between Ft. Lauderdale Business Plaza Associates (“Lessor”) and Imaging Diagnostic Systems, Inc. (“Lessee”) dated June 2, 2008.  Incorporated by reference to our Form 8-K filed on June 5, 2008.
10.85
Financial Services Agreement by and between Imaging Diagnostic Systems, Inc. (the “Company” or “IDSI”) and R.H. Barsom Company, Inc. (the “Consultant”) dated July 15, 2008.  Incorporated by reference to our Form 8-K filed on July 18, 2008.


 


10.86
Securities Purchase Agreement by and between Imaging Diagnostic Systems, Inc. (the “Company” or “IDSI”) and Whalehaven Capital Fund Limited (the “Purchaser” and collectively, the “Purchasers”) dated July 31, 2008.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.87
Form of 8% Senior Secured Convertible Debenture, Exhibit A.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.88
Registration Rights Agreement, Exhibit B.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.89
Common Stock Purchase Warrant, Exhibit C.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.90
Form of Legal Opinion, Exhibit D.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.91
Security Agreement, Exhibit E.  Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.92
Amendment Agreement by and between Imaging Diagnostic Systems, Inc. (the “Company”) and Whalehaven Capital Fund Limited (“Whalehaven”, or the “Holder”) dated as of October 23, 2008.  Incorporated by reference to our Form 8-K filed on October 23, 2008.
10.93
Securities Purchase Agreement by and between Imaging Diagnostic Systems, Inc. (the “Company” or “IDSI”) and Whalehaven Capital Fund Limited (the “Purchasers”) dated November 20, 2008.  Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.94
Form of 8% Senior Secured Convertible Debenture, Exhibit A.  Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.95
Registration Rights Agreement, Exhibit B.  Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.96
Form of Legal Opinion, Exhibit D.  Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.97
Security Agreement, Exhibit E.  Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.98
Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 10, 2008. Incorporated by reference to our Form 8-K filed on December 12, 2008.
10.99
Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 31, 2008.  Incorporated by reference to our Form 8-K filed on January 5, 2009.
10.100
Amendment Agreement (Revised) by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 31, 2008.  Incorporated by reference to our Form 8-K/A filed on January 7, 2009.
10.101
Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of March 20, 2009.  Incorporated by reference to our Form 8-K filed on March 26, 2009.
10.102
One-Year Employment and Stock Option Agreement dated March 23, 2009 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chief Executive Officer.  Incorporated by reference to our Form 8-K filed on March 27, 2009.
10.103
One-Year Employment and Stock Option Agreement dated March 23, 2009 between Imaging Diagnostic Systems, Inc. and Allan L. Schwartz, Executive Vice President and Chief Financial Officer.  Incorporated by reference to our Form 8-K filed on March 27, 2009.
10.104
Private Equity Credit Agreement between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated November 23, 2009.  Incorporated by reference to our Form 8-K filed on November 25, 2009.
10.105
Registration Rights Agreement between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated November 23, 2009.  Incorporated by reference to our Form 8-K filed on November 25, 2009.
10.106
Private Equity Credit Agreement (Amended) between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated January 7, 2010.  Incorporated by reference to our Form S-1 filed on January 12, 2010.
10.107
Registration Rights Agreement (Amended) between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated January 7, 2010.  Incorporated by reference to our Form S-1 filed on January 12, 2010.



10.108
Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chief Executive Officer.  Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.109
Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Allan L. Schwartz, Executive Vice President and Chief Financial Officer.  Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.110
Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Deborah O’Brien, Senior Vice-President.  Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.111
2010 Non-Statutory Stock Option Plan dated March 11, 2010.  Incorporated by reference to our Form S-1 Amendment No. 1 filed on May 24, 2010.
14.1
Code of Ethics.
31.1
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






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,  Chief Executive Officer and Chairman of the Board of Directors

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

Signatures
Title
Date
     
     
/s/Linda B. Grable
Chief Executive Officer
October 13, 2010
Linda B. Grable
and Chairman of the Board of Directors
 
     
     
/s/Allan L. Schwartz
Director, Executive Vice-President,
October 13, 2010
Allan L. Schwartz
and Chief Financial Officer
 
 
(Principal Accounting and Financial
 
 
Officer)
 


 
 
 
 
140