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EXCEL - IDEA: XBRL DOCUMENT - IMAGING DIAGNOSTIC SYSTEMS INC /FL/Financial_Report.xls
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-1.htm
 


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

FORM 10-Q/A

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

For the quarterly period ended September 30, 2011

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 Terrace, Fort Lauderdale, FL
33309
(Address of Principal Executive Offices)
(Zip Code)

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

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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x     No  o

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
¨  Non Accelerated filer
x  Smaller reporting company
   
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes  ¨    No  x

The number of shares outstanding of each of the issuer’s classes of equity as of November 14, 2011: 1,051,812,364 shares of common stock, no par value; and 20 shares of Series L convertible preferred stock outstanding.


 
 

 
 

EXPLANATORY NOTE
 
This Form 10-Q/A amends the Quarterly Report on Form 10-Q of Imaging Diagnostic Systems, Inc. for the period ended September 30, 2011 filed on November 14, 2011 (the “Form 10-Q”) for the sole purpose of furnishing the Interactive Data File as Exhibit 101 in accordance with Rule 405(a)(2) of Regulation S-T.  No other changes have been made to the Form 10-Q. This Form 10-Q/A speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-Q.
 
Users of this data are advised that pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.
 

 
 

 

 

 
IMAGING DIAGNOSTIC SYSTEMS, INC.
 
 
(A Development Stage Company)
 
     
     
 
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
Page
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
     
 
21
     
Item 3.
41
     
Item 4.
41
     
     
 
PART II - OTHER INFORMATION
 
     
Item 1.
42
     
Item 1A.
43
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
45
     
Item 6.
73
     
76

“We”, “Us”, “Our” and “IDSI” unless the context otherwise requires, means Imaging Diagnostic Systems, Inc.
 


IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
Balance Sheets
 
               
Assets
 
               
     
Sept. 30, 2011
   
June 30, 2011
 
Current assets:
 
Unaudited
      *  
 
Cash
  $ 20,959     $ 189,135  
 
Accounts receivable, net of allowances for doubtful accounts
               
 
    of $23,500 and $23,500, respectively
    10,947       11,198  
 
Inventories, net of reserve of $399,000 and $399,000, respectively
    317,711       322,562  
 
Prepaid expenses
    58,139       49,339  
                   
 
Total current assets
    407,756       572,234  
                   
Property and equipment, net
    141,615       161,713  
Intangible assets, net
    128,161       136,706  
                   
 
Total assets
  $ 677,532     $ 870,653  
                   
                   
Liabilities and Stockholders' (Deficit)
 
Current liabilities:
               
 
Accounts payable and accrued expenses
  $ 1,270,281     $ 1,344,168  
 
Accrued payroll taxes and penalties
    1,295,496       1,141,967  
 
Customer deposits
    92,563       112,563  
 
Short-term derivative liability
    827,253       691,663  
 
Short-term debt, net of debt discount of $398,006 and $78,925
    1,623,689       1,706,018  
                   
 
Total current liabilities
    5,109,282       4,996,379  
                   
Long-Term liabilities:
               
 
Long-term debt, net of debt discount of $122,532 and $184,967
    207,746       301,033  
                   
 
Total long-term liabilities
    207,746       301,033  
                   
Convertible preferred stock (Series L), 9% cumulative annual dividend,
               
     no par value, 20 and 20 shares issued, respectively
    200,000       200,000  
 
Long-term derivative liability
    84,791       102,409  
                   
Stockholders' (Deficit):
               
 
Common stock
    108,199,505       107,476,957  
 
Common stock - Debt Collateral
    (73,970 )     (73,970 )
 
Additional paid-in capital
    5,624,004       5,626,252  
 
Deficit accumulated during development stage
    (118,673,826 )     (117,758,407 )
                   
 
Total stockholders' (Deficit)
    (4,924,287 )     (4,729,168 )
                   
 
Total liabilities and stockholders' (Deficit)
  $ 677,532     $ 870,653  
                   
                   
* Condensed from audited financial statements.
               
                   
The accompanying notes are an integral part of these condensed financial statements.
 

 

 IMAGING DIAGNOSTIC SYSTEMS, INC.
 
A Development Stage Company
 
(Unaudited)
 
Condensed Statements of Operations
 
                   
                   
   
Three Months Ended
   
From Inception
 
   
September 30,
   
December 10, 1993 to
 
   
2011
   
2010
   
September 30, 2011
 
                  *  
Net Sales
  $ 38,409     $ 11,461     $ 2,418,191  
Gain on sale of fixed assets
    -       -       2,794,565  
Cost of Sales
    4,729       4,259       948,611  
                         
Gross Profit
    33,680       7,202       4,264,145  
                         
Operating Expenses:
                       
      General and administrative
    741,813       565,674       62,412,044  
      Research and development
    212,905       239,800       23,535,742  
      Sales and marketing
    101,557       74,336       9,667,778  
      Inventory valuation adjustments
    7,739       5,687       4,923,184  
      Depreciation and amortization
    16,715       27,699       3,419,140  
      Amortization of deferred compensation
    -       -       4,064,250  
                         
      1,080,729       913,196       108,022,138  
                         
Operating Loss
    (1,047,049 )     (905,994 )     (103,757,993 )
                         
                         
Interest income
    187       312       311,021  
Other income
    6,404       35,664       1,000,450  
Other income - LILA Inventory
    -       -       (69,193 )
Change in fair value of derivative liability
    389,528       (19,355 )     460,410  
Interest expense
    (264,489 )     (67,092 )     (9,770,761 )
                         
Net Loss
    (915,419 )     (956,465 )     (111,826,066 )
                         
Dividends on cumulative Preferred stock:
                       
      From discount at issuance
    -       -       (5,402,713 )
      Earned
    -       -       (1,445,047 )
                         
Net loss applicable to
                       
       common shareholders
  $ (915,419 )   $ (956,465 )   $ (118,673,826 )
                         
Net Loss per common share:
                       
      Basic and diluted
  $ (0.00 )   $ (0.00 )   $ (0.41 )
                         
Weighted average number of
                       
      common shares outstanding:
                       
      Basic and diluted
    966,093,349       853,250,235       288,733,313  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
                         
The accompanying notes are an integral part of these condensed financial statements.
 
 
 
 


IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
(Unaudited)
 
Condensed Statement of Cash Flows
 
                   
   
Three Months
   
From Inception
 
   
Ended September 30,
   
December 10, 1993 to
 
   
2011
   
2010
   
September 30, 2011
 
                  *  
Cash flows from operations:
                   
      Net loss
  $ (915,419 )   $ (956,466 )   $ (111,826,066 )
      Changes in assets and liabilities
    239,743       319,097       35,339,668  
      Net cash used in operations
    (675,676 )     (637,369 )     (76,486,398 )
                         
                         
Cash flows from investing activities:
                       
      Proceeds from sale of property & equipment
    -       -       4,390,015  
      Capital expenditures
    -       -       (7,578,436 )
      Net cash provided (used in) investing activities
    -       -       (3,188,421 )
                         
                         
Cash flows from financing activities:
                       
      Repayment of capital lease obligation
    -       -       (50,289 )
      Other financing activities
    507,500       -       9,424,530  
      Proceeds from issuance of preferred stock
    -       -       18,389,500  
      Net proceeds from issuance of common stock
    -       800,000       51,932,037  
                         
      Net cash provided by financing activities
    507,500       800,000       79,695,778  
                         
Net increase (decrease) in cash
    (168,176 )     162,631       20,959  
                         
Cash, beginning of period
    189,135       73,844       -  
                         
Cash, end of period
  $ 20,959     $ 236,475     $ 20,959  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
                         
The accompanying notes are an integral part of these condensed financial statements.
 
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

We have prepared the accompanying unaudited condensed financial statements of Imaging Diagnostic Systems, Inc. in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Operating results for three month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending June 30, 2012.  These condensed financial statements have been prepared in accordance with Financial Accounting Standards guidance for Development Stage Enterprises, and should be read in conjunction with our condensed financial statements and related notes included in our Annual Report on Form 10-K filed on September 22, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management 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 amount of expenses incurred during the reporting period. Actual results could differ from those estimates.
 
 
NOTE 2 - GOING CONCERN

Imaging Diagnostic Systems, Inc. (“IDSI”) is 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.  IDSI has yet to generate a positive internal cash flow, and until significant sales of our product occur, we are dependent upon debt and equity funding.  See Item 2 “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, which would materially impact our ability to continue as a going concern.  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.  Recently we have relied on raising additional capital through our new Private Equity Credit Agreement with Southridge Partners II, L.P. (“Southridge”) dated January 7, 2010, which replaced the Charlton Agreement and through the issuance of short term promissory notes.  We also intend to raise capital through other sources of financing.  See Part II, Item 5. Other Information – “Financing/Equity Line of Credit.”  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.

We currently manufacture and sell our sole product, the CTLM® - Computed Tomography Laser Mammography.  We are appointing distributors and installing collaboration systems as part of our global commercialization program.  We have sold 16 systems as of September 30, 2011; however, we continue to operate as a development stage enterprise because we have yet to produce significant revenues.  We are attempting to create increased product awareness as a foundation for developing markets through an international distributor network.  We may be able to exit reporting as a Development Stage Enterprise upon two successive quarters of sufficient revenues such that we would not have to utilize other funding to meet our quarterly operating expenses.



NOTE 3 - INVENTORY

Inventories included in the accompanying condensed balance sheet are stated at the lower of cost or market as summarized below:

   
Sept. 30, 2011
   
June 30, 2011
 
   
Unaudited
       
Raw materials consisting of purchased parts, components and supplies
  $ 499,371     $ 508,176  
Work-in-process including units undergoing final inspection and testing
    31,662       28,943  
Finished goods
    185,678       184,443  
                 
Sub-Total Inventories
    716,711       721,562  
                 
      Less Inventory Reserve
    (399,000 )     (399,000 )
                 
Total Inventory - Net
  $ 317,711     $ 322,562  
                 

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 quarter ending September 30, 2011, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory due to a CTLM® system being purchased by one of our Distributors in an installment sale.  For the fiscal year ending June 30, 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment.  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, 2010 we identified $399,000 of Inventory that we deem impaired due to the lack of inventory turnover.  There were no changes to Inventory Reserve for the quarter ending September 30, 2011.


NOTE 4 - REVENUE RECOGNITION

We recognize revenue in accordance with the guidance provided in SEC 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.
 
 
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS

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 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 September 30, 2011 as a result of implementing the Codification.

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.


NOTE 6 – 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 $2,290 and $94,043, respectively, in additional compensation expense for the three months ended September 30, 2011 and 2010.

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.

For purposes of the following disclosures the weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants for the three months ended September 30, 2011: no dividend yield; expected volatility of 126%; risk-free interest rate of 4%; and an expected eight-year term for options granted.  For the quarter ending September 30, 2011, the net income and earnings per share reflect the actual deduction for option expense as a non-cash compensation expense.

Stock-based compensation expense recorded during the three months ended September 30, 2011, was $2,290 compared to $94,043 from the corresponding period in fiscal 2010.  See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back”.

The weighted average fair value per option at the date of grant for the three months ended September 30, 2011 using the Black-Scholes Option-Pricing Model was $0.015.  The weighted


average fair value per option at the date of grant for the three months ended September 30, 2010 was $0.027 because we did not grant any new stock options during the quarter.  Assumptions were as follows:

 
Three Months Ended
 
September 30th,
 
2011
2010
Expected Volatility(1)
126%
174%
Risk Free Interest Rate(2)
4%
4%
Expected Term(3)
8 yrs
8 yrs

(1)  We calculate expected volatility through a mathematical formula using the last day of the week’s closing stock price for the previous 61 weeks prior to the option grant date.  The expected volatility for the three months ending September 30, 2011 and 2010 in the table above are weighted average calculations.

(2)  We lowered our risk-free interest rate from 5% to 4% for stock option expensing effective for the quarter ending September 30, 2008.  If a significant increase or decrease occurs in the zero coupon rate of the U.S Treasury Bond, a new rate will be set.  The decrease in the risk-free interest rate will decrease compensation expense.

(3)  We continue to use an expected term assumption of eight years based on guidance provided by SEC Staff Accounting Bulletin 107 and subsequently Staff Accounting Bulletin 110.  These bulletins enable us to use the simplified method for “plain vanilla” options for this calculation.


NOTE 7 - COMMON STOCK ISSUANCES – PRIVATE EQUITY CREDIT AGREEMENT

During the first quarter ending September 30, 2011, we did not draw from our Private Equity Credit Agreement with Southridge Partners II LP (“Southridge”).  See Item 5.  Other Information – “Financing/Equity Line of Credit.”  Subsequent to the end of the first quarter, we did not initiate any put notices from our Private Equity Credit Agreement with Southridge through the date of this report.


NOTE 8 – DEBT DISCOUNT

In connection with the $507,500 received pursuant to Short-Term Notes from July 1, 2011 to September 30, 2011, we recorded interest expense to amortize the debt discount in the amount of $188,419 during the quarter ending September 30, 2011.  See “Part II, Item 5, Financing/Equity Line of Credit, Issuance of Stock in Connection with Short-Term Loans”

In connection with the sale of a Convertible Promissory Note Agreement on February 23, 2011, with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches, we recorded interest expense to amortize the debt discount in the amount of $62,435 during the quarter ending September 30, 2011.  See “Part II, Item 5, Financing/Equity Line of Credit, Issuance of Stock in Connection with Long-Term Loans”

There remains a total of $520,538 of debt discount yet to be amortized as of September 30, 2011.





NOTE 9 – SHORT-TERM DEBT

From November 10, 2009 to September 30, 2011 we borrowed $2,900,465 in the aggregate from eight unaffiliated third party investors.  As additional consideration for $237,500 of these loans in December 2009, we issued 16,625,000 restricted shares of common stock.  Upon maturity and extensions of the original maturity dates, we are obligated to pay the principal amount and $94,100 in premium.  With respect to $1,000,000 principal amount of these notes, we issued 55,363,907 shares of restricted common stock as collateral.  The fair market value of these collateral shares at the date of issuance were recorded and presented as a contra equity account “Common stock – Debt Collateral” as they remain unearned and subject to be returned once the related debt is repaid.  With respect to $350,000 principal amount of a note, we issued 35 shares of Series L Convertible Preferred Stock as collateral.  On March 31, 2010 one of the third party investors converted these collateral shares, pursuant to the terms of their $350,000 promissory note, and the note was cancelled.  During the third quarter ending March 31, 2010, we repaid an aggregate principal amount of $93,750 and $10,000 in premium on these notes.  During the fourth quarter ending June 30, 2010, we repaid an aggregate principal amount of $48,044 and $644 in premium on the notes.

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.  Further extensions of the notes were made through November 30, 2011 for 3% additional premium per month on each note.  In connection with these extensions a total of $164,800 of additional premium was accrued for the December 2009 notes as of the date of this report.  In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor.  Southridge converted $100,000 principal and $55,600 premium into 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes.  These notes were 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.  Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note.  In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor.  As of the date of this report, Southridge has converted $425,000 principal and $200,051 premium into 32,397,016 shares of our common stock of which 31,056,108 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares.  In connection with these prior extensions and the accrual of the additional premiums through November 30, 2011, a total of $243,000 of additional premium was accrued for the January 2010 notes as of the date of this report.

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).  Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to


reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences.  The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note.  The note is payable on or before January 31, 2011.  As consideration for this loan, we were obligated to pay back his principal, $10,800 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2012.  On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144.  We received an extension of maturity date to November 30, 2011 for this note.

In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes.  Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note.  The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.



In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively.  The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively.  One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount.  The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174.  We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641.  We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $2,100 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269.  We issued


Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $7,650 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278.  We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $8,250 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882.  We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $3,300 in premium associated with this note.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647.  We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $12,000 in premium associated with this note.

On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868.  We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $60,000 principal, $12,000 in premium and $2,683 in interest associated with this note.

On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868.  We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688.  We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $5,250 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315.  We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $9,000 in premium associated with this note.

On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.

From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral.  Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment.  From January 12, 2011 to September 30, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

As of September 30, 2011, we owe a total of $2,021,695 of short term debt of which $1,387,500 is principal, $621,824 is accrued premium and $12,371 is accrued interest.  We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $1,002,000 principal, $255,651 in premium, and $20,761 in interest has been converted


 into 111,092,212 shares of our common stock of which 51,802,774 shares were collateral shares and 59,289,438 new shares were issued pursuant to Rule 144.  Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $475,000 principal of the remaining notes.


NOTE 10 – LONG-TERM DEBT

On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches.  Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.

Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached.  The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee.  The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee.  A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee.  The remaining five tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement.  For the remaining five tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date.  We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount.  As of the date of this report, $1,400,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $280,000 to terminate the agreement.

The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee.  JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of JMJ’s execution.  Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount.  Cancellation of funded portions is not permitted.

The funding schedule of the seven tranches is as follows:

§  
$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.

§  
$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.

§  
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.



§  
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

The conditions to funding each payment are as follows:

§  
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).

§  
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000.  The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.

§  
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.

Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion.  We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 – Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due.  Prepayment of the Note is not permitted.

The Note has a 9% one-time interest charge on the principal sum.  No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.

On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.

On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.

On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.

On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.

As of September 30, 2011, we owe JMJ a total of $330,278 of which $244,278 is principal, $50,000 is consideration on the principal and $36,000 is interest.




NOTE 11 – SERIES L CONVERTIBLE PREFERRED STOCK

On February 25, 2010, we 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 at less than $.0211 per share 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.  On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock at our next annual meeting to be held on July 12, 2011.  At the annual meeting, our shareholders voted to increase our authorized shares to 2,000,000,000 and the waiver was terminated.


NOTE 12 – 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 September 30, 2011, we had 20 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.  For the quarter ending September 30, 2010, we recorded additional Derivative Expense of $19,355 due to a conversion rate adjustment from $.0211 to $.019933 associated with Series L Convertible Preferred Stock issued to the holder.  For the quarter ending December 31, 2010, we recorded additional Derivative Expense of $81,827 due to a conversion rate adjustment from $.019933 to $.015 associated with Series L Convertible Preferred Stock issued to the holder.  On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock at our next annual meeting to be held on July 12, 2011.  Due to this conversion and the receipt of the waiver, we retired $303,337 of Derivative Liability.  At the annual meeting, our shareholders voted to increase our authorized shares to 2,000,000,000 and the waiver was terminated.

For the quarter ending September 30, 2011, we recorded the mark to market changes in the Derivative Liability which required a credit to Derivative Expense of $389,528.

The net Derivative Liability for the quarter ending September 30, 2011is $912,044.





NOTE 13 – 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 $23,500 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 September 30, 2011 and 2010, 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.

The following table sets forth the Company’s financial instruments as of September 30, 2011 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
 
$
   
$
   
$
(200,000
)
$
(200,000
)
Series L Accrued Dividend Payable
             
$
(40,401
)
$
(40,401
)
Derivative Liability
             
$
(912,044
)
$
(912,044
)

At September 30, 2011, 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.


NOTE 14 – PROPERTY AND EQUIPMENT

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

   
Sept. 30, 2011
   
June 30, 2011
 
Furniture and fixtures
  $ 257,565     $ 257,565  
Building and land
    -       -  
Computers, equipment and software
    426,873       426,873  
CTLM® software costs
    352,932       352,932  
Trade show equipment
    298,400       298,400  
Clinical equipment
    435,534       447,462  
Laboratory equipment
    212,560       212,560  
                 
Total Property & Equipment
    1,983,864       1,995,792  
   Less: accumulated depreciation
    (1,842,249 )     (1,834,079 )
                 
Total Property & Equipment - Net
  $ 141,615     $ 161,713  

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.

For the fiscal year ending June 30, 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment.



For the quarter ending September 30, 2011, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory.

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.


NOTE 15 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

   
Sept. 30, 2011
   
June 30, 2011
 
Accounts payable - trade
  $ 953,892     $ 877,449  
Accrued tangible personal property taxes payable
    6,000       6,000  
Accrued compensated absences
    53,063       53,063  
Accrued wages, payroll taxes and penalties
    1,432,072       1,287,800  
Other accrued expenses
    120,749       261,823  
                 
Totals
  $ 2,565,776     $ 2,486,135  

As of September 30, 2011, we owe $136,576 in accrued wages and $1,295,496 in accrued payroll taxes.  The $1,295,496 in accrued payroll taxes represents unfunded payroll taxes, interest and penalties for the last seven quarters commencing with the quarter ending March 31, 2010.  The reason we incurred the penalties and interest was due to the difficulty in raising capital to have sufficient funds to pay the taxes.


NOTE 16 – SUBSEQUENT EVENTS - UNAUDITED

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.


In October 2011, we received $32,250 from JMJ after deduction of $2,750 for a 7% Finder’s Fee.  This third tranche of $35,000 is from the Convertible Promissory Note Agreement we entered into with JMJ on February 23, 2011.

In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.  As of the date of this report, we now owe JMJ a total of $172,028 of which $107,528 is principal, $37,500 is consideration and $27,000 is interest associated with this first tranche.

On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989.  We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721.  We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

As of the date of this report, we owe a total of $2,203,201 of short term debt of which $1,501,000 is principal, $688,724 is accrued premium and $13,477 is accrued interest.  Thirteen promissory notes totaling $80,000 in principal have been extended to November 30, 2011; five promissory notes totaling $457,500 in principal have a maturity date of December 31, 2011; one promissory note with $100,000 in principal has a maturity date of January 12, 2012; one promissory note with $100,000 in principal has a maturity date of January 26, 2012; five promissory notes totaling $575,000 in principal have a maturity date of November 30, 2011; one promissory note with $60,000 in principal from a private investor has a maturity date of November 30, 2011; one promissory note with $50,000 in principal has a maturity date of March 1, 2012; one promissory note with $78,500 in principal has a maturity date of July 26, 2012.  We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $1,167,000 principal, $255,651 in premium, and $27,471 in interest has been converted into 145,434,239 shares of our common stock of which 51,802,774 shares were collateral shares and 93,631,465 new shares were issued pursuant to Rule 144.  Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $475,000 principal of the remaining notes.

As of the date of this report, we owe JMJ a total of $336,053 in long-term debt of which $242,528 is principal, $54,375 is consideration on the principal and $39,150 is interest.

We have evaluated all subsequent events for disclosure purposes.



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
FORWARD LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of Imaging Diagnostic Systems, Inc. should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations; the Condensed Financial Statements; the Notes to the Financial Statements; the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, which are incorporated herein by reference; and all our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.  This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using 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 submission of our U.S. Food and Drug Administration (“FDA”) application to obtain marketing clearance; 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 quarterly report.  All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, 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.


OVERVIEW

Imaging Diagnostic Systems, Inc. (“IDSI”) is a development stage medical technology company.  Since inception in December 1993, we have been engaged in the development and testing of a laser breast imaging system that uses computed tomography and laser techniques designed to detect breast abnormalities.  The CT Laser Mammography system (“CTLM®”) is currently being commercialized in certain international markets where regulatory approvals have been obtained.  However, it is not yet approved for sale in the U.S. market.  The CTLM® system must obtain marketing clearance through the U.S. Food and Drug Administration (“FDA”) before commercialization can begin in the U.S. market.

Our financial statements have been prepared assuming that we will continue as a going concern.  Our auditors, in their report for the fiscal year ended June 30, 2011, stated that we have incurred recurring operating losses and will have to obtain additional capital to sustain operations.  These conditions raise substantial doubt about our ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2 “Going Concern”, in the Notes to the Financial Statements.  The accompanying financial statements to this report 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.

Originally, the FDA determined the CTLM® to be a “new medical device” for which there was no predicate device and designated it as a Class III medical device.  Consequently; the CTLM® was required to go through the FDA Premarket approval (“PMA”) application process.  In May 2003 we filed a PMA application for the CTLM® with the FDA.  In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies.  We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension.  In March 2004 we received an extension to respond with the amendment; however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA 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.

In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue.  The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the most success at obtaining marketing clearance from the FDA.  Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.

In 2006, we made changes to bring the CTLM® system to its most current design level.  We believe these changes improved the CTLM®’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.  The objective was to demonstrate the safety and efficacy of the CTLM® system when used per the “Intended Use” statement.  The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.

We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images.  Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow.  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 had participated in the clinical trial and at the time we believed we had sufficient clinical data to support our PMA application but only our independent biostatistician could make that determination.  However, at the time we did not have sufficient financing to perform the statistical analysis study, support the clinical sites, initiate the reading phase and complete the submission of the PMA application to the FDA.

Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification of intent to market (a “Section 510(k) premarket notification”).  In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process.  In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process.  We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.

A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA.  Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims.  A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process.  The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.

To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:

To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:

 
has the same intended use as the predicate; and
 
has the same technological characteristics as the predicate; or

 
has the same intended use as the predicate; and
 
has different technological characteristics when compared to the predicate, and
 
does not raise new questions of safety and effectiveness; and
 
demonstrates that the device is at least as safe and effective as the legally marketed device.

One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”.  The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate.  The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III.  The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.

The De Novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device.  The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.

Although we did not have a final determination on whether the clinical collection allotment for the PMA study was complete, in March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other


medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”).  Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010.  We began the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.

In July 2010, we made our decision to select as our predicate device the breast MRI.  This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast.  We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.

On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review.  We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner.  FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.

On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application.  A request for additional information is quite common during the FDA review process.  Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.

On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process.  This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities.  Although the FDA did not use the term “rejected” in the NSE letter, the effect of this letter is that our Section 510(k) premarket notification of intent to market the device (CTLM®) has been rejected.  Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”).  All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.

The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device.  Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval.  We have begun the PMA process and plan to use clinical studies previously collected from 2006 to 2010, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.

Essentially, the FDA has stated that the CTLM® technology will require a full PMA application based on a DOT clinical imaging format.  Previously collected patient data from 2006 to 2010 was based on a protocol identifying CTLM® as an “adjunct to mammography”.  We believe that our technology has always been based on a DOT scientific principle, that our patient collection technique will not change with a future DOT protocol, and that the patient inclusion/exclusion criteria for the new study will not change.  Consequently, it is


our belief that previously collected and non-analyzed patient data may be allowed by the FDA to be included in a future DOT protocol.  This belief will either be accepted or rejected during the official pre- IDE meeting, which is a pre-clinical meeting, to be held at the FDA.

Although we have collected substantial clinical data from 2006 to 2010, it is very likely that additional cases will be needed to support the statistical analysis protocol devised to demonstrate safety and efficacy of the CTLM® system.  Ultimately, the FDA must decide as to how many patient cases will need to be bio-statistically analyzed to support the CTLM® “intended use” claims.  We would rely on our independent bio-statistician regarding the actual number of case studies required; however, the FDA has the ultimate authority to determine the number of clinical cases needed for the PMA application.  Like other governmental institutions, the FDA prefers to reserve the right to make bio-statistical determinations on an individual case-by-case basis.  Therefore, it is very likely that a clinical trial will need to begin again, which will require approval by an IRB (Institutional Review Board - an organization required to review and approve clinical protocols outlining the study to be conducted at the hospital or imaging sites).  In addition, after the collection of clinical data is completed, a “radiologist reading study” of the clinical cases will be required and a statistical analysis of the results of the “reading study” will have to be performed in order to support the "Intended Use" and demonstrate safety and efficacy of the CTLM® system prior to PMA submission.

We need to secure funding to continue with the PMA process.  If funding is obtained, then we can begin to: contract with the FDA regulatory consultants, contract with the identified clinical sites (hospitals and imaging centers) to collect the clinical data, seek an IRB approval of the clinical protocol, which could take up to 30 to 120 days, place the CTLM® system at the selected sites, train the clinical staff on the CTLM® system and the clinical protocol at the selected sites, and recruit patients to volunteer for the clinical study.

Our main hurdle for completion of the PMA application is our lack of financial resources.  Historically, we have contracted with outside FDA consultants both for guidance and to ensure that our FDA related submissions meet FDA requirements, as we did not have sufficient resources to hire qualified full-time FDA clinical staff.  Further, this approach is more cost effective than employing full time FDA experienced staff that will not be required once FDA marketing clearance has been obtained.  Our management has identified FDA regulatory consultants who have proven ability in achieving FDA marketing clearance for diagnostic imaging devices.  We cannot move forward until such time as we secure sufficient financing to engage these FDA regulatory consultants.

In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process.  This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device.  While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”.  Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway.  One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.

“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate.  The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.

De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined


to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device.  The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II.  The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.

The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.

FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.

Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.

De Novo is rare in the realm of low-risk medical devices – a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”

Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”

Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission.  Other considerations such as comparing time frames between De Novo and the PMA process were taken into account.  The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days.  In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen.  Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.

In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.

The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner.  Its energy source is a laser beam and not ionizing 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 by the radiologist 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.  While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images.  Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site.  We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; 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.  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.  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 September 30, 2011 of $118,673,826 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 marketing clearance process, and the costs associated with advanced product development activities.  We will need sufficient financing through the sale of equity or debt securities to complete the FDA approval process and, in the event that we obtain marketing clearance, to have sufficient funding to launch the CTLM® in the U.S.  There can be no assurance that we will obtain this financing.  Finally, there can be no assurance that we will obtain FDA marketing clearance, 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.


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 customer programs and incentives, 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 are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those involving significant judgments and uncertainties which could potentially result in materially different results under different assumptions and conditions.  Application of these policies is particularly important to the portrayal of the financial condition and results of operations.  We believe the accounting policy described below meets these characteristics.  All significant accounting policies are more fully described in the notes to the financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2011.



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, 2011 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 exempt from 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

SALES AND COST OF SALES

We are continuing to develop our international markets through our global commercialization program.  In the quarter ended September 30, 2011, we recorded revenues of $38,409 representing an increase of $26,948 from $11,461 during the quarter ended September 30, 2010.  The Cost of Sales during the quarter ended September 30, 2011, were $4,729 representing an increase of $470 from $4,259 during the quarter ended September 30, 2010.  The revenue of $38,409 and cost of sales of $4,729 are primarily from the installment sales of our CTLM® system to two of our distributors.  Of the two installment sales, one new CTLM® System was sold during the quarter ended September 30, 2011.  See Item 5.  Other Information – “Other Recent Events”

Other Income for the three months ended September 30, 2011, was $6,604, of which $5,650 represented the extinguishment of debt and $754 represented the use of our facilities by Bioscan and consulting with our engineers pursuant to the Bioscan Agreement (See Part II, Item 5, Other Information, “Laser Imager for Lab Animals”).


GENERAL AND ADMINISTRATIVE

General and administrative expenses during the three ended September 30, 2011, were $741,813, representing an increase of $176,139 or 31%, from $565,674 in the corresponding period in fiscal 2010.  Of the $741,813, compensation and related benefits comprised $298,985 (40%) compared to $445,250 (79%), during the three months ended September 30, 2010.  Of the $298,985 and $445,250 compensation and related benefits, $1,419 (1%) and $88,654 (20%), respectively, were due to equity based compensation related to expensing stock options.

The increase of $176,139 is primarily due to an increase of $131,475 in premium expense associated with our short-term promissory notes; $92,000 in original issue discount associated with our short-term promissory notes; $39,285 in payroll tax penalty and interest expense; $22,049 in consulting expenses; $13,496 in Directors and Officers’ Liability insurance; $12,226 in rent expense; $10,983 in legal expenses involving corporate and securities matters.  The increase is partially offset by a decrease of $146,265 in compensation and related benefits during the current quarter of which $87,235 was a reduction in the equity based compensation related to expensing stock options.

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

Research and development expenses during the three months ended September 30, 2011, were $212,905, representing a decrease of $26,895 or 11%, from $239,800 in the corresponding period in fiscal 2010.  Of the $212,905, compensation and related benefits comprised $174,475 (82%), compared to $213,478 (89%) during the three months ended September 30, 2010.  Of the $174,475 and $213,478 compensation and related benefits, $758 (1%) and $4,422 (2%) respectively, were due to non-cash compensation related to expensing stock options.

The decrease of $26,895 is primarily due to a decrease of $39,002 in compensation and related benefits as a result of a reduction of staff.  The decrease is partially offset by increases of $6,200 in consulting expenses and $3,630 in legal expenses associated with FDA related matters.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2012 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the


costs associated with conducting the clinical trial and preparing the FDA application.  See Item 5. Other Information.  CTLM® Development History, Regulatory and Clinical Status.


SALES AND MARKETING

Sales and marketing expenses during the three months ended September 30, 2011, were $101,557, representing an increase of $27,221 or 37% from $74,336 in the corresponding period in fiscal 2010.  Of the $101,557, compensation and related benefits comprised $12,345 (3%), compared to $14,281 (19%) during the three months ended September 30, 2010.  Of the $12,345 and $14,281 compensation and related benefits, $113 (1%) and $968 (7%), respectively, were due to non-cash compensation related to expensing stock options.

The increase of $27,221 is a net result.  The relevant increases were $21,184 in trade show expenses; $4,567 in freight expenses; and $4,135 in public relations expense (cost of issuing press releases).  These increases were partially offset by a decrease of $1,936 in compensation and related benefits.

We expect a significant increase in our sales and marketing expenses during the fiscal year ending June 30, 2012 due to the continued implementation of our global commercialization program.  We expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase due to this program.


AGGREGATED OPERATING EXPENSES

In comparing our total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) in the three months ended September 30, 2011 and 2010, which were $1,080,729 and $913,196, we had an increase of $167,533 or 18%.

The increase of $167,533 was primarily due to increases in general and administrative expenses of $176,139; in sales and marketing expenses of $27,221; combined with a decrease in research and development expenses of $26,895.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2012 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the costs associated with conducting the clinical trial and preparing the FDA application.

Inventory Valuation Adjustments during the three months ended September 30, 2011, were $7,739, representing an increase of $2,052, or 36%, from the corresponding period in fiscal 2010.

Compensation and related benefits during the quarter ended September 30, 2011, were $485,805, representing a decrease of $187,204 or 28% from $673,009 during the quarter ended September 30, 2010.  Of the $485,805and $673,009 compensation and related benefits, $2,290 (1%) and $94,043 (14%), respectively, were due to non-cash compensation associated with expensing stock options.  The net decrease of $187,204 was due to a decrease in cash compensation of $95,450 and a $91,754 decrease in the recording of non-cash compensation related to the expensing of stock options.

Interest expense during the three months ended September 30, 2011, was $264,489, representing a increase of $197,397 or 294%, from $67,092 during the corresponding period in fiscal 2010.  The interest expense is primarily comprised of $250,854 associated with the amortization of the debt discount on the convertible notes at below market prices on the Southridge and JMJ Financial Promissory Notes.  See Item 5.  Other Information – “Financing/Equity Line of Credit”.




BALANCE SHEET DATA

Our combined cash and cash equivalents totaled $20,959 as of September 30, 2011.  This is a decrease of $168,176 from $189,135 as of June 30, 2011.  During the quarter ending September 30, 2011, we received no cash from the sale of common stock through our private equity agreement with Southridge, and we received a net of $415,500 from short term loans.    See Part II. Item 5, – “Financing/Equity Line of Credit”

We do not expect to generate a positive internal cash flow for at least the next 12 months due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA, an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, and the costs associated with product development activities and the time required for homologations from certain countries.

Property and Equipment was valued at $141,615 net as of September 30, 2011.  The overall decrease of $20,098 from June 30, 2011 is due primarily to depreciation recorded for the first quarter.


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.

Since inception we have financed our operating and research and product development activities through several Regulation S and Regulation D private placement transactions, with loans from unaffiliated third parties, and through a sale/lease-back transaction involving our former headquarters facility.  Net cash used for operating and product development expenses during the three months ending September 30, 2011, was $675,676, primarily due to the costs of wages and related benefits, legal and consulting expenses, research and development expenses, clinical expenses, and travel expenses associated with clinical and sales and marketing activities.  At September 30, 2011, we had working capital of $(4,701,525) compared to working capital of $(4,424,145) at June 30, 2011.

During the first quarter ending September 30, 2011, we did not raise any money through the sale of shares of common stock pursuant to our Amended Private Equity Credit Agreement with Southridge dated January 7, 2010 and we received a net of $415,500 from short-term loans.  See Item 5. Other Information “Financing – Equity Line of Credit.”  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.



Capital expenditures for the three months ending September 30, 2011, were $0 as compared to $0 for the three months ending September 30, 2010.  We anticipate that the balance of our capital needs for the fiscal year ending June 30, 2012 will be approximately $25,000.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30, 2011.  Our fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are substantial and are likely to increase as additional agreements are entered into and additional personnel are retained.  We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs.  Our future capital requirements will depend on many factors, including the following:

1)
The progress of our ongoing product development projects;
2)
The time and cost involved in obtaining regulatory approvals;
3)
The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
4)
Competing technological and market developments;
5)
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;
6)
The development of commercialization activities and arrangements; and
7)
The costs associated with compliance to SEC regulations.

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 approval process, and advanced product development activities.  We intend to use the proceeds from the sale of convertible debentures, convertible preferred shares, convertible promissory notes, and draws from our new Private Equity Agreement with Southridge and any successor private equity agreements and/or alternative financing facilities as our sources of working capital.  There can be no assurance that the equity credit financing will continue to be available on acceptable terms.  We plan to continue our policy of investing excess funds, if any, in a High Performance Money Market savings account at Wells Fargo Bank, N.A.


BUSINESS LEASE AGREEMENT

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; and 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 $3,084.37 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.




Issuance of Stock for Services/Dilutive Impact to Shareholders
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 was 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 was 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 paid on October 3, 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 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.  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.  As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $180,100 of which $100,000 is the principal remaining from one note and $80,100 is the balance of premium due from three notes.  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.  Further extensions of the $100,000 note were made through November 30, 2011 for 3% additional premium per month.  In connection with all of the extensions, a total of $46,600 of additional premium was accrued as of the date of this report.

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.  Further extensions of the notes were made through November 30, 2011 for 3% additional premium per month on each note.  In connection with these extensions a total of $164,800 of additional premium was accrued for the December 2009 notes as of the date of this report.  In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor.  Southridge converted $100,000 principal and $55,600 premium into 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes.  These notes were 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.  Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note.  In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor.  As of the date of this report, Southridge has converted $425,000 principal and $200,051 premium into 32,397,016 shares of our common stock of which 31,056,108 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares.  In connection with these prior extensions and the accrual of the additional premiums through November 30, 2011, a total of $243,000 of additional premium was accrued for the January 2010 notes as of the date of this report.

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).  Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences.  The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note.  The note is payable on or before January 31, 2011.  As consideration for this loan, we were obligated to pay back his principal, $10,800 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our
 

shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2012.  OnSeptember 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144.  We received an extension of maturity date to November 30, 2011 for this note.

In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes.  Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note.  The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the


$150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively.  The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes were $100,000 and $100,000, respectively.  One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount.  The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174.  We issued


Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641.  We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $2,100 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269.  We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $7,650 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278.  We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $8,250 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882.  We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $3,300 in premium associated with this note.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647.  We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $12,000 in premium associated with this note.

On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868.  We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $60,000 principal, $12,000 in premium and $2,683 in interest associated with this note.

On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868.  We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688.  We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $5,250 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315.  We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $9,000 in premium associated with this note.

On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.



On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989.  We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721.  We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral.  Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment.  From January 12, 2011 to November 14, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

As of the date of this report, we owe a total of $2,203,201 of short term debt of which $1,501,500 is principal, $688,724 is accrued premium and $13,477 is accrued interest.  Thirteen promissory notes totaling $80,000 in principal have been extended to November 30, 2011; five promissory notes totaling $457,500 in principal have a maturity date of December 31, 2011; one promissory note with $100,000 in principal has a maturity date of January 12, 2012; one promissory note with $100,000 in principal has a maturity date of January 26, 2012; five promissory notes totaling $575,000 in principal have a maturity date of November 30, 2011; one promissory note with $60,000 in principal from a private investor has a maturity date of November 30, 2011; one promissory note with $50,000 in principal has a maturity date of March 1, 2012; one promissory note with $78,500 in principal has a maturity date of July 26, 2012.  We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $1,167,000 principal, $255,651 in premium, and $27,471 in interest has been converted into 145,434,239 shares of our common stock of which 51,802,774 shares were collateral shares and 93,631,465 new shares were issued pursuant to Rule 144.  Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $475,000 principal of the remaining notes.

There can be no assurances that we will be able to pay our short-term loans when due.  If we default on any or all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.


Issuance of Stock in Connection with Long-Term Loans

On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches.  Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.

Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached.  The first tranche of $300,000 was closed on February 24, 2011, and we received
 

$258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee.  The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee.  A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee.  The remaining five tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement.  For the remaining five tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date.  We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount.  As of the date of this report, $1,400,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $280,000 to terminate the agreement.
 
The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee.  JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of JMJ’s execution.  Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount.  Cancellation of funded portions is not permitted.

The funding schedule of the seven tranches is as follows:

§  
$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.

§  
$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.

§  
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

The conditions to funding each payment are as follows:

§  
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).

§  
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000.  The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.

§  
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.



Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion.  We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 – Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due.  Prepayment of the Note is not permitted.

The Note has a 9% one-time interest charge on the principal sum.  No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.

On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.

On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.

On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.

On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.

On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.  As of the date of this report, we now owe JMJ a total of $172,028 of which $107,528 is principal, $37,500 is consideration and $27,000 is interest associated with this first tranche.

As of the date of this report, we owe JMJ a total of $336,053 in long-term debt of which $242,528 is principal, $54,375 is consideration on the principal and $39,150 is interest.

 


Item 3.  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 4.  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 our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the 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.

As of June 30, 2011 we had a material weakness in our internal controls over financial reporting and have made the following change to correct this material weakness.  We have amended our internal controls over financial reporting whereby we will internally review newly implemented accounting principles and if necessary, seek an outside opinion from a qualified consultant on newly implemented accounting principles and complex accounting transactions.  There have been no other changes in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II
OTHER INFORMATION

Item 1.   Legal Proceedings.

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 PMA 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 believed that this claim was without merit, and we vigorously defended 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 planned to present our demand for damages from “vexatious litigation” by the plaintiffs.  The November 10, 2010 hearing was postponed until November 17, 2010.  At the hearing, the plaintiffs failed to present their statements to the court in a timely manner and therefore, we believe that the plaintiffs should no longer be able to pursue any legal remedy in this matter.  The last hearing of the case was held on November 17, 2010.  A hearing was held on September 28, 2011 and the Judge declared that the case was closed.  Our counsel requested a copy of the order of the court to be sent to the Plaintiffs notifying them that the case was closed.  Because the court is sending notice to the plaintiffs, the time for appeal is reduced from one year to one month.  If the plaintiffs do not appeal, the court’s decision becomes final.

On March 1, 2011, a lawsuit was filed against us in the United States District Court, Southern District of New York, by Shraga Levin (“Levin”), an individual who provided services as a placement agent in connection with arranging financing for us.  In July 2008, Mr. Levin arranged financing for up to $800,000 through 8% Senior Secured Convertible Debentures to be purchased by Whalehaven Capital Fund Limited (“Whalehaven”) or its registered assigns.  A first closing occurred on August 1, 2008 for a gross amount of $400,000 and a second closing occurred on November 20, 2008, for a gross amount of $400,000.  Subsequent to the first closing Whalehaven assigned a portion of its Debenture to Alpha Capital Anstalt (“Alpha”).  Mr. Levin was paid a total of $44,000 cash and received a Common Stock Purchase Warrant (“Warrant”) for 1,866,666 shares at an exercise price of $0.0228 for his services as a placement agent.  The Warrant provided a feature for cashless exercise and a re-pricing provision for the exercise price in the event that any shares were sold or granted at a price less than $0.0228 while Mr. Levin’s warrant was outstanding.  There was a re-pricing of the Whalehaven and Alpha warrants based on those investors’ agreement to immediately exercise their warrants and on October 16, 2009, Mr. Levin exercised his warrant at $0.005 per share as a result of the re-pricing he exercised as to the entire 1,866,666 shares, electing the cashless exercise feature, and received a net of 1,392,891 shares.  The Warrant was cancelled upon delivery of the shares.

In his complaint dated March 1, 2011, Mr. Levin was seeking an additional 5,814,665 shares based on his belated contention that the Warrant language required an increase in the number of shares covered by the Warrant as a result of the re-pricing.  He was also seeking liquidated damages for the late issuance of the shares claimed equal to 2% of the value of the stock per trading day.



On April 15, 2011, we entered into a settlement with Mr. Levin.  While we believe that we have substantial defenses to Mr. Levin’s claim because we believe he was paid in full for his services and received all of the shares due from the exercise in full of the Warrant at $0.005 per share, we settled the matter to avoid costly litigation.  Pursuant to the settlement, we agreed to issue to Mr. Levin, based on a cashless exercise as to 50% of the disputed shares, 2,907,333 shares of common stock upon the receipt of shareholder approval of the increase in authorized shares.  The cashless exercise is based on the market price of IDSI stock on December 28, 2010 ($.04), when Mr. Levin tendered his warrant exercise as to the disputed shares.  The settlement stipulation was filed with the court on May 18, 2011, and the 2,907,333 shares were issued on July 18, 2011. This case is now closed.
 


Item 1A.   Risk Factors.

Our Annual Report on Form 10-K for the year ended June 30, 2010, includes a detailed discussion of our risk factors. The risks described in our Form 10-K are not the only risks facing IDSI.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  During first quarter ended September 30, 2011, there were no material changes in risk factors as previously disclosed in our Form 10-K filed on September 22, 2010.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

See Item 5. Other Information –“Financing/Equity Line of Credit”.


Item 3. Defaults Upon Senior Securities.

None


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

On July 12, 2011, we held our annual meeting of stockholders at the Sheraton Suites Cypress Creek, 555 NW 62nd Street, Fort Lauderdale, Florida for the following purposes:

1.
To elect two directors to serve until the next annual meeting;
2.
To approve a proposal to amend the Company's Articles of Incorporation to increase the number of authorized shares of the Company's common stock, no par value, from 950,000,000 to 2,000,000,000;
3.
To consider and act upon a proposal to adopt the Company's 2010 Non-Statutory Stock Option Plan;
4.
To ratify the appointment by the Board of Directors of Sherb & Co., LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2011;
5.
To hold an advisory vote on the compensation of our named executive officers as described in the accompanying proxy statement;
6.
To hold an advisory vote on how frequently (every one, two or three years) you prefer we conduct an advisory vote of stockholders on the compensation of our named executive officers; and
7.
To conduct any other business properly brought before the meeting.
 
 
As to proposal no. 1, the stockholders elected two incumbent directors with the following votes:

Linda B. Grable
FOR     93,997,847
WITHHELD     12,912,365
Allan L. Schwartz
FOR     92,811,350
WITHHELD     14,098,862




As to proposal no. 2, the stockholders voted in favor of the proposal.  The affirmative vote of a majority of the outstanding shares of the Common Stock present in person or by proxy at the Annual Meeting and entitled to vote was required to approve the proposal to amend the Company’s Articles of Incorporation to increase the number of authorized shares from 950,000,000 to 2,000,000,000.  The vote was as follows:

FOR   598,801,481
AGAINST   115,527,185
ABSTAIN     2,097,143

 
 
As to proposal no. 3, the stockholders voted to adopt the Company's 2010 Non-Statutory Stock Option Plan.  The affirmative vote of a majority of the outstanding shares of the Common Stock present in person or by proxy at the Annual Meeting and entitled to vote was required to approve the proposal.  The vote was as follows:

FOR   80,416,167
AGAINST    24,548,748
ABSTAIN   1,945,297

 
 
As to proposal no. 4, the stockholders voted to ratify the Board of Directors’ appointment of Sherb & Co., LLP as independent auditors of the Company for the fiscal year ending June 30, 2011.  The affirmative vote of a majority of the outstanding shares of the Common Stock present in person or by proxy at the Annual Meeting and entitled to vote was required to ratify the proposal.

FOR   687,596,229
AGAINST    22,485,887
ABSTAIN   6,343,693

 
 
As to proposal no. 5, the stockholders voted to hold an advisory vote on the compensation of our named executive officers as described in our proxy statement.  To be approved the advisory vote on the compensation of our named executive officers, must receive a "For" vote from the majority of shares present and entitled to vote either in person or by proxy.  If you "Abstain" from voting, it will have the same effect as an "Against" vote.  Broker non-votes will have no effect.

FOR   91,350,893
AGAINST    13,161,967
ABSTAIN   2,397,352

 
 
As to proposal no. 6, the stockholders voted to hold an advisory vote on how frequently (every one, two or three years) they prefer the Company conducts an advisory vote of stockholders on the compensation of our executive officers as described in our proxy statement.  The stockholders voted to hold the advisory vote on executive compensation each year.

1 YEAR   94,587,673
2 YEARS    4,998,424
3 YEARS   5,582,930
ABSTAIN 1,741,185





Item 5.Other Information.


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.  Initially, we were seeking marketing clearance through an application through Pre-Market Approval (PMA) which 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.

A PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices.  Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potentially unreasonable risk of illness or injury.  Due to the level of risk associated with Class III devices, the FDA has determined that general and special controls alone are insufficient to assure the safety and effectiveness of Class III devices.  Therefore, these devices require a PMA application in order to obtain marketing clearance.

The FDA automatically classifies new technologies in Class III when limited safety information is available and no predicate device is available.  It allows for multiple clinical studies to be pursued to gather the necessary data to obtain safety and clinical information to be used for future FDA submissions.  At the time that we were developing the CTLM® system and considering marketing clearance there was not enough data on laser based technologies nor were there approved other new medical devices dedicated to breast imaging other than the traditional x-ray technology.  As a result, the FDA recommended that we seek a PMA application.

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.

In May 2003, we filed a PMA application for the CTLM® to the FDA.  In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies.  We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension. In March 2004 we received an extension to respond with the amendment however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA 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.

In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue.  The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the


most success at obtaining marketing clearance from the FDA.  Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.

One of the regulatory requirements for a company (sponsor) to conduct a clinical study within a hospital or imaging center is the regulatory body’s Institutional Review Board (“IRB”) within each hospital or imaging center, which must approve the clinical research the sponsor is requesting.  We understood the IRB approval process based on prior experience encountered with the first clinical trial.  The IRBs of hospital or imaging centers do not necessarily have a set time frame for reviewing and approving proposed clinical research for a sponsor.  Therefore, there is no way a sponsor can anticipate the length of time it will take each IRB to approve the clinical study.  We were delayed in this process due to the time it took to obtain the necessary approvals from the IRBs since certain IRBs took longer than others to approve the clinical research.

In 2006, we made changes to bring the CTLM® system to its most current design level.  We believe these changes improved the CTLM®’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.  The objective was to demonstrate the safety and efficacy of the CTLM® system when used per the "Intended Use" statement.  The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.

In our clinical trial, the physician at each hospital or imaging center who oversees the clinical study is responsible for ensuring that each patient meets the requirements of the study.  However, there is no way to determine if the patient that is having her standard x-ray mammogram qualifies for the clinical study of the CTLM® system.  For example, each hospital or imaging center has a variable amount of patients scheduled for their mammogram, but it is impossible to determine whether or not a particular patient would meet the inclusion criteria (requirement) of the clinical study.  So if there are 13 patients scheduled for a mammogram, we may get only one, or even none that qualify for the clinical study because it is based on the specific inclusion and exclusion criteria determined in the protocol.

The inclusion and exclusion criteria can outline as little or as much as necessary to prove a study, whether it takes five criteria or 15 criteria to prove the study.  In order for a patient to qualify, she must meet all the criteria.  Otherwise, she cannot be examined and cannot participate as a patient.  Therefore, it is impossible to determine how many patients getting their mammogram will qualify each day for the CTLM clinical study because they must meet all the inclusion and exclusion criteria of the study protocol.  As a result, it has been impossible for us to anticipate how many cancer cases we will collect as the study proceeded.

In September 2008, we were advised that we did not have sufficient cancer cases to finish the clinical study required for the PMA statistical analysis to be processed by our independent bio-statistician.  The clinical study participants were not from a pre-selected patient population.  Therefore, we did not know whether the patients had cancer or did not have cancer before they participated in the clinical study.

We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images.  Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow.  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 had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application but only our independent biostatistician could make that determination.  However, at the time we did not have sufficient financing to perform the statistical analysis study, support the clinical sites, initiate the reading phase and complete the submission of the PMA application to the FDA.



Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification.  In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process.  In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process.  We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.

A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA.  Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims.  A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process.  The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.

To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:

To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:

 
has the same intended use as the predicate; and
 
has the same technological characteristics as the predicate; or

 
has the same intended use as the predicate; and
 
has different technological characteristics when compared to the predicate, and
 
does not raise new questions of safety and effectiveness; and
 
demonstrates that the device is at least as safe and effective as the legally marketed device.

One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”.  The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate.  The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III.  The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.

The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device.  The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.

Although we did not have a final determination on whether the clinical collection allotment for the PMA study was complete, in March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”).  Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010.  We began


the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.

In July 2010, we made our decision to select as our predicate device the breast MRI.  This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast.  We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.

On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review.  We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner.  FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.

On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application.  A request for additional information is quite common during the FDA review process.  Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.

On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process.  This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities.  Although the FDA did not use the term “rejected” in the NSE letter, the effect of this letter is that our Section 510(k) premarket notification of intent to market the device (CTLM®) has been rejected.  Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”).  All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.

The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device.  Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval.  We have begun the PMA process and plan to use clinical studies previously collected from 2006 to 2010, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.
 
Essentially, the FDA has stated that the CTLM® technology will require a full PMA application based on a DOT clinical imaging format.  Previously collected patient data from 2006 to 2010 was based on a protocol identifying CTLM® as an “adjunct to mammography”.  We believe that our technology has always been based on a DOT scientific principle, that our patient collection technique will not change with a future DOT protocol, and that the patient inclusion/exclusion criteria for the new study will not change.  Consequently, it is
our belief that previously collected and non-analyzed patient data may be allowed by the FDA to be included in a future DOT protocol.  This belief will either be accepted or rejected during the official pre- IDE meeting, which is a pre-clinical meeting, to be held at the FDA.

 

Although we have collected substantial clinical data from 2006 to 2010, it is very likely that additional cases will be needed to support the statistical analysis protocol devised to demonstrate safety and efficacy of the CTLM® system.  Ultimately, the FDA must decide as to how many patient cases will need to be bio-statistically analyzed to support the CTLM® “intended use” claims.  We would rely on our independent bio-statistician regarding the actual number of case studies required; however, the FDA has the ultimate authority to determine the number of clinical cases needed for the PMA application.  Like other governmental institutions, the FDA prefers to reserve the right to make bio-statistical determinations on an individual case-by-case basis.  Therefore, it is very likely that a clinical trial will need to begin again, which will require approval by an IRB (Institutional Review Board - an organization required to review and approve clinical protocols outlining the study to be conducted at the hospital or imaging sites).  In addition, after the collection of clinical data is completed, a “radiologist reading study” of the clinical cases will be required and a statistical analysis of the results of the “reading study” will have to be performed in order to support the "Intended Use" and demonstrate safety and efficacy of the CTLM® system prior to PMA submission.

We need to secure funding to continue with the PMA process.  If funding is obtained, then we can begin to: contract with the FDA regulatory consultants, contract with the identified clinical sites (hospitals and imaging centers) to collect the clinical data, seek an IRB approval of the clinical protocol, which could take up to 30 to 120 days, place the CTLM® system at the selected sites, train the clinical staff on the CTLM® system and the clinical protocol at the selected sites, and recruit patients to volunteer for the clinical study.

Our main hurdle for completion of the PMA application is our lack of financial resources.  Historically, we have contracted with outside FDA consultants both for guidance and to ensure that our FDA related submissions meet FDA requirements, as we did not have sufficient resources to hire qualified full-time FDA clinical staff.  Further, this approach is more cost effective than employing full time FDA experienced staff that will not be required once FDA marketing clearance has been obtained.  Our management has identified FDA regulatory consultants who have proven ability in achieving FDA marketing clearance for diagnostic imaging devices.  We cannot move forward until such time as we secure sufficient financing to engage these FDA regulatory consultants.

In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process.  This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device.  While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”.  Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway.  One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.

“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate.  The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.

De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device.  The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II.  The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level


of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.

The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.

FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.

Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.

De Novo is rare in the realm of low-risk medical devices – a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”

Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”

Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission.  Other considerations such as comparing time frames between De Novo and the PMA process were taken into account.  The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days.  In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen.  Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.

In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.

The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner.  Its energy source is a laser beam and not ionizing 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 by the radiologist 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.  While x-ray mammography and ultrasound produce


two dimensional images (2D) of the breast, the CTLM® produces 3D images.  Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site.  We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; 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.  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.  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.

While we believed the net benefits of submitting a 510(k) application outweighed those of a PMA application for the shareholders, patients and customers, the FDA determined that we must file a PMA application to obtain marketing clearance.  The high costs and lengthened review period associated with a PMA application are much greater than with a 510(k) submission.

The procedural and substantive differences in the FDA marketing clearance process between a 510(k) application and a PMA application are in the costs associated with the applications and the duration of the review process.  The 510(k) filing fee for small business is $2,174, and the fees of the FDA regulatory consultant assisting with the submission and pre-submission review process were approximately $55,000.  The PMA filing fee for a small business is $59,075. We estimate that the fees of the FDA regulatory consultants assisting with the PMA submission and the completion of the data collection phase will be approximately $1,000,000.

In our prior SEC filings, we included disclosure regarding the estimated dates by which we believed that we would be able to file our PMA application including December 2008, March 2009, June 2009, March 2010, April 2010 and July 2010.  All of these projections proved incorrect.  There were many factors contributing to why we were not able to achieve our projected timelines.  After each delay, we disclosed in subsequent SEC filings a new projected date based on what we believed at that point in time would be a reasonable estimate of when we would be able to file our application for FDA marketing clearance.  The factors contributing to these delays include, but are not limited to, the following:

 
·
Designing a new clinical study protocol and a modified intended use,
 
·
Identifying qualified clinical sites and retaining them to proceed with our clinical study,
 
·
Obtaining the necessary approvals from the Institutional Review Boards (“IRB”),
 
·
Updating the CTLM® system to its most current design level,
 
·
Our research and development team finalizing the improvements regarding the reconstruction algorithm by enhancing the CTLM® images by reducing the number of artifacts which would enable the physician to interpret the images more easily,
 
·
Low patient volume following the inclusion criteria of our clinical protocol,
 
·
Lack of cancer cases required for the PMA statistical analysis, and
 
·
Lack of sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the preparation and submission of the PMA application to the FDA.

We believed that our Private Equity Credit Agreements would provide substantially all of the financing needed by IDSI for its operations and the costs associated with the filing of our FDA application for marketing clearance.  Unfortunately, the continued sale of stock through our Private Equity Credit Agreements caused dilution, a decline in the stock price, and the depletion of our available authorized shares.

There was no assurance that the Section 510(k) premarket notification would result in marketing clearance.  Since we were unsuccessful in our pursuit of Section 510(k) marketing clearance, we would have to return to the PMA process, which would take substantial additional time and funding, with no assurance of success.



We are engaging the services of FDA regulatory consultants who specialize in FDA matters.  If we are unable to obtain prompt FDA marketing clearance, it will have a material adverse effect on our business and financial condition and would result in postponement of the commercialization of the CTLM®.

In addition, sales of medical devices outside the U.S. 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 marketing clearance and the requirements may differ.  Also, we believe that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.

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.

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”.

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 17,000 patient scans, and we have sold 16 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, fiscal 2011 and thus far in fiscal 2012, we have used the proceeds from short-term loans, long-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 additional short term and long term loans and issuance of convertible preferred stock, as our sources of working capital.  Substantial additional financing will be required before and after receipt of FDA marketing clearance, assuming it is received, as to which there can be no assurance.  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
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.




Global Commercialization Update

The following table details the regulatory requirement and status of each country in which we have sold or marketed the CTLM®.

Country
Sold
Marketed
Regulatory Requirement
Regulatory Status
United States
No
No
Food & Drug Administration
510(k) Pending
Argentina
Yes
Yes
ANVISA
Expired(1)
Australia
No
Yes
TGA Approval
Pending(8)
Austria
No
Yes
CE Mark
Approved
Brazil
No
Yes
ANVISA
Expired(2)
Canada
No
Yes
Health Canada Approval
Approved
China
Yes
Yes
SFDA Approval
Approved
Croatia
No
Yes
CIHI(4)
Not Submitted Yet
Colombia
No
Yes
Register with MOH(3)
Not Submitted Yet
Curacao
No
Yes
MOH
Submitted by distributor
Czech Republic
Yes
Yes
CE Mark
Approved
Egypt
No
Yes
CE Mark & Egypt MOH
Not Submitted Yet
Germany
No
Yes
CE Mark
Approved
Hong Kong
No
Yes
CE/SFDA
Not Submitted Yet
Hungary
Yes
Yes
CE Mark
Approved
India
Yes
Yes
CE Mark & BIS Certification
Not Required(9)
Indonesia
Yes
Yes
DirJen POM
Pending(12)
Israel
No
Yes
Import License
Approved
Italy
Yes
Yes
CE Mark
Approved
Jordan
No
Yes
JFDA(6)
Not Submitted Yet
Kazakhstan
No
Yes
Registration Cert. & GOSTR Cert.
Not Submitted Yet
Macedonia
No
Yes
CE Mark
Not Submitted Yet
Malaysia
Yes
Yes
BPFK
Not Required(10)
Mexico
No
Yes
MOH - COFERPRIS
Pending(11)
Montenegro
No
Yes
MOH
Not Submitted Yet
New Zealand
No
Yes
CE Mark
Not Submitted Yet
Oman
No
Yes
MOH
Not Submitted Yet
Philippines
No
Yes
BHDT(7)
Not Submitted Yet
Poland
Yes
Yes
CE Mark
Approved
Romania
No
Yes
CE Mark
Approved
Russia
No
Yes
ROSZDRAVNADZOR
Pending(13)
Saudi Arabia
No
Yes
CE Mark & MOH
Not Submitted Yet
Serbia
No
Yes
CE Mark
Approved
Slovenia
No
Yes
CE Mark
Approved
South Africa
No
Yes
CE Mark & DOH(4)
Not Submitted Yet
Turkey
Yes
Yes
CE Mark
Approved
Ukraine
No
Yes
CE Mark
Not Submitted Yet
United Arab Emirates
Yes
Yes
UAE/MOH
Approved
Vietnam
No
Yes
MOH
Not Submitted Yet




        (1)   Will be renewed upon appointment of new distributor.
 
(2)
Distributor will renew ANVISA.
 
(3)
MOH - Ministry of Health
 
(4)
DOH - Department of Health
 
(5)
CICI - The Croatian Institute for Health Insurance
 
(6)
JFDA – Jordan Food and Drug Administration
 
(7)
BHDT - Bureau of Health Devices and Technology
 
(8)
TGA has requested additional documentation which we are providing.
        (9)   CDSCO – Medical Device Division, Not required as this time but will be required for some classes of medical devices in 2011 or 2012.
      (10)
BPFK – Malaysia National Pharmaceutical Control Bureau, Registration is voluntary
      (11)
COFEPRIS – Mexico Ministry of Health
      (12)   DirJenPOM – We received a deposit from our distributor Jainsons Pty Ltd. and the system was installed in Jakarta, Indonesia.  Our distributor is responsible for registering the CTLM® with the Indonesia Director General of Food and Drugs (“DirJen POM”) who controls the registration of medical devices.   Product registrations for medical devices issued from certain designated countries such as Canada can be used to support the registration in Indonesia with the DirJen POM.  The CTLM® system has received international certifications and licenses from the European Union, CE mark; Canada, CMDCAS Canadian Health screening; China, SFDA; and ISO 13485 issued by UL.
     (13) Our distributor, National Diagnostic Service and Management LLC of Novi, Michigan, through its affiliate Phoenix Med of Moscow, Russia, has submitted an application to the Ministry of Health which is currently pending.

We market our CTLM® system in the countries listed in the table above, where permitted.  Product registration is not necessarily required to market our CTLM® in a particular country.  Prior to processing a Purchase Order, we would contact either a regulatory service or the distributor in that particular country to determine what, if any, product registration is required.

We have never shipped nor would we ever ship a CTLM® system to any country without first obtaining the necessary regulatory approvals or product registration, if required.  Any medical device that is shipped into a country without approval or registration would be quarantined in customs and the shipper would be advised that the device would be sent back to them.  However, we are permitted to ship CTLM® systems for product demonstration or exhibition at trade shows without registering the product in that country.

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 2010 in Dubai, UAE, and at the European Congress of Radiology (“ECR”) in March 2010 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.  We are not marketing or seeking distributors and will not market the CTLM® directly or indirectly in Iran, Sudan and/or Syria and other Middle Eastern countries that are subject to U.S. economic sanctions and export controls.

Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, and Belgrade.  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.

Our distributor, The Oyamo Group (“Oyamo”) placed an order for the first CTLM® system for Israel in October 2008.  Oyamo obtained the import license from The Israeli Ministry of Health for the CTLM® system and the system was installed in November 2010 at Sheba Medical Center at Tel Hashomer, which is outside of Tel Aviv.

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 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.

In November 2010, we exhibited our CTLM® system with our Canadian distributor, Arc Diagnostic at the Health Achieve 2010 in Toronto, Canada.  This exposition provided IDSI the opportunity to introduce and showcase the CTLM® system for the first time in Canada to prestigious hospitals, decision makers and Ministry of Health and business leaders in the area.

In November 2010, we exhibited our CTLM® system at the 96th RSNA show in Chicago, IL from November 28th to December 2nd.

In December 2010, we announced that we received a deposit for two CTLM® systems from our distributor, Jainsons Pty Ltd for India and Indonesia.  The first CTLM® system was installed at a private imaging center in Ahmedabad, India on December 11, 2010.

In January 2011, we exhibited the CTLM® at the Arab Health 2011 medical conference held from January 24 – 27 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE).  We presented clinical images obtained from 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 2,700 exhibitors from 141 countries and more than 65,000 medical professionals.

In February 2011, we announced that we completed installation and applications training of a CTLM® system at the Hang Lekiu Medical Center in Jakarta, Indonesia.  This was the second CTLM® system installed to complete the order from our distributor, Jainsons Pty Ltd, received in December 2010.

On April 26, 2011, we announced that we have signed an exclusive distribution agreement with Kepter Internacional (“Kepter”) of Monterrey, Mexico to promote our CTLM® systems throughout Mexico.  Kepter is headquartered in Monterrey, Mexico with operations in Central and South America.  The company represents innovative technologies nationally and internationally providing solutions for various aspects of the healthcare industry and infectious control.  Kepter's strategy is to offer environmental friendly and cost effective alternatives to conventional operations in the healthcare and commercial construction industry.  Currently, Kepter’s representatives are working closely with the Mexican Health Ministry to gain national acceptance for the CTLM® system; however, there can be no assurance that this acceptance will be obtained.

In July 2011, we announced that we signed an exclusive distribution agreement with National Diagnostic Service and Management LLC (“NDSM”) of Novi, Michigan and its affiliate Phoenix Med of Moscow, Russia to promote our CTLM® systems throughout Russia.  NDSM and its partners distribute medical diagnostic and medical laser equipment and service support throughout Russia.  As an independent distributor with over 15 years of experience within the Russian medical market and employing only product certified engineers, NDSM and Phoenix Med have a long established reputation within the women’s health medical community.  NDSM has initiated the medical device registration process required to import medical equipment into Russia.

On August 2011, we announced that we would be exhibiting our CTLM® at the FIME 2011 medical trade fair conference to be held on August 10th to 12th in Miami Beach, FL.  Dr. Jose Cisneros, our Director of Clinical Research was invited to present, “New Imaging Modalities for Breast Cancer” featuring our CTLM® system at the FIME conference.

In October 2011, we announced that the CTLM® purchase was confirmed after a successful rigorous evaluation of our CTLM® system at the Hang Lekiu Medical Center in Jakarta,


Indonesia.  This positive outcome reinforces DOT as a valuable new breast imaging modality.  Hang Lekiu Medical Center is a leading provider of advanced multi-disciplined medical care in a modern patient friendly environment.  The evaluation was initiated February 2011 by introducing the unique clinical benefits of CTLM® to Indonesia’s Health Minister Endang Rahayu Sedyaningsih, local officials and key news organizations.

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, two systems in India, and two systems in China as well as one system each in Germany, Hungary, Malaysia, Israel, Indonesia and Brazil.  As of the date of this report, IDSI’s users have performed over 17,000 CT Laser Mammography (CTLM®) patient scans worldwide.


Other Recent Events

In July 2011, we were granted U.S. Patent 7,977,619, entitled “Detector Array for Use in a Laser Imaging Apparatus”.  This patent protects the use of a number of different types of photo-detectors and several detector geometries for our Diffuse Optical Tomography (“DOT”) application.

In July 2011, we announced that we established a scientific advisory panel to assist with product development, future clinical studies and additional applications of our CTLM®.  The advisory panel will consist of leading physicians and scientists.  The initial members are Huabei Jiang, PH.D., Professor in the J. Crayton Pruitt Family Department of Biomedical Engineering at the University of Florida; Alexander Poellinger, MD, head of the Outpatient’s Care Center of Charite Hospital, (Radiology) in Berlin, Germany; and Eric Milne, MD, FFR, FRCP, FRCP&S, our former Director of Clinical Research and former Chairman of Radiology and Chief of Chest Radiology at UC Irvine.

In September 2011, we were granted U.S. Patent 8,027,711, entitled “Laser imaging apparatus with variable patient positioning.”  This invention is designed to simplify patient positioning thus providing better image quality and simplified operator setup.


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 has 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.



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.

Under the Sixth Private Equity Credit Agreement we have drawn down $2,042,392 and issued 227,000,000 shares of common stock.  On November 23, 2009, we terminated our Sixth Private Equity Credit Agreement in connection with the execution of our Private Equity Credit Agreement with Southridge, which was amended on January 7, 2010.

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, all pursuant to the Registration Statement declared effective in May 2010.

On December 21, 2010, we filed a new Registration Statement on Form S-1 covering 35,487,756 shares to be issued pursuant to the Southridge Private Equity Agreement.  This Registration Statement, as amended, has not yet been declared effective.  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.
 
 
Southridge Partners II, LP - Short-Term Loans
In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011.  We received an extension of maturity date to July 31, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes.  Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note.  The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or


before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively.  The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes were $100,000 and $100,000, respectively.  One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount.  The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our


common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174.  We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641.  We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $2,100 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269.  We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $7,650 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278.  We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $8,250 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882.  We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $3,300 in premium associated with this note.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647.  We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $12,000 in premium associated with this note.

On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868.  We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $60,000 principal, $12,000 in premium and $2,906 in interest associated with this note.

On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868.  We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688.  We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $5,250 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315.  We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $9,000 in premium associated with this note.



On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.

On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989.  We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721.  We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral.  Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment.  From January 12, 2011 to October 24, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

From November 2010 through November 2011, we received a total of $1,379,500 from Southridge pursuant to short-term promissory notes.  As of the date of this report, we may be obligated to issue Southridge a total of 136,919,195 shares to redeem short-term notes totaling $956,800 of which $737,500 is principal, $206,925 is premium and $12,375 is interest.


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.  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.  As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $180,100 of which $100,000 is the principal remaining from one note and $80,100 is the balance of premium due from three notes.  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.  Further extensions of the $100,000 note were made through November 30, 2011 for 3% additional premium per month.  In connection with all of the extensions, a total of $46,600 of additional premium was accrued as of the date of this report.

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.  Further extensions of the notes were made through November 30, 2011 for 3% additional premium per month on each note.  In connection with these extensions a total of $164,800 of additional premium was accrued for the December 2009 notes as of the date of this report.  In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor.


Southridge converted $100,000 principal and $55,600 premium into 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes.  These notes were 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.  Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note.  In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor.  As of the date of this report, Southridge has converted $425,000 principal and $200,051 premium into 32,397,016 shares of our common stock of which 31,056,108 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares.  In connection with these prior extensions and the accrual of the additional premiums through November 30, 2011, a total of $243,000 of additional premium was accrued for the January 2010 notes as of the date of this report.

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).  Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences.  The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note.  The note is payable on or before January 31, 2011.  As consideration for this loan, we were obligated to pay back his principal, $10,800 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2012.  On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144.  We received an extension of maturity date to November 30, 2011 for this note.

In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  


Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes.  Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note.  The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we borrowed a total of $19,171 from a private investor pursuant to a short-term promissory note.  The note was payable on or before May 26, 2011 and was extended to June 30, 2011 with additional premium equal to 2% per month.  The note was paid in full on June 27, 2011.

In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to November 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively.  The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the
 

Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes were $100,000 and $100,000, respectively.  One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount.  The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000.  The note provides for a $33,000 original issue discount.  The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174.  We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641.  We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $2,100 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269.  We issued


Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $7,650 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278.  We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $8,250 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882.  We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $3,300 in premium associated with this note.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647.  We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $12,000 in premium associated with this note.

On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868.  We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $60,000 principal, $12,000 in premium and $2,683 in interest associated with this note.

On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868.  We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688.  We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $5,250 in premium associated with this note.

On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315.  We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share.  We still owe Southridge $9,000 in premium associated with this note.

On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.

On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989.  We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.

On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721.  We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share.  We still owe Southridge $15,000 in premium associated with this note.



From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral.  Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment.  From January 12, 2011 to November 14, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

As of the date of this report, we owe a total of $2,203,201 of short term debt of which $1,501,500 is principal, $688,724 is accrued premium and $13,477 is accrued interest.  Thirteen promissory notes totaling $80,000 in principal have been extended to November 30, 2011; five promissory notes totaling $457,500 in principal have a maturity date of December 31, 2011; one promissory note with $100,000 in principal has a maturity date of January 12, 2012; one promissory note with $100,000 in principal has a maturity date of January 26, 2012; five promissory notes totaling $575,000 in principal have a maturity date of November 30, 2011; one promissory note with $60,000 in principal from a private investor has a maturity date of November 30, 2011; one promissory note with $50,000 in principal has a maturity date of March 1, 2012; one promissory note with $78,500 in principal has a maturity date of July 26, 2012.  We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $1,167,000 principal, $255,651 in premium, and $27,471 in interest has been converted into 145,434,239 shares of our common stock of which 51,802,774 shares were collateral shares and 93,631,465 new shares were issued pursuant to Rule 144.  Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $475,000 principal of the remaining notes.

There can be no assurances that we will be able to pay our short-term loans when due.  If we default on any or all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.


Issuance of Stock in Connection with Long-Term Loans

On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches.  Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.

Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached.  The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee.  The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee.  A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee.  The remaining five tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement.  For the remaining five tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date.  We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount.  As of the date of this report, $1,400,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $280,000 to terminate the agreement.



The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee.  JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of JMJ’s execution.  Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount.  Cancellation of funded portions is not permitted.

The funding schedule of the seven tranches is as follows:

§  
$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.

§  
$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.

§  
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

The conditions to funding each payment are as follows:

§  
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).

§  
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000.  The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.

§  
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.

Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion.  We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 – Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due.  Prepayment of the Note is not permitted.

The Note has a 9% one-time interest charge on the principal sum.  No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.



On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.

On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.

On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.

On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.

On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.  As of the date of this report, we now owe JMJ a total of $172,028 of which $107,528 is principal, $37,500 is consideration and $27,000 is interest associated with this first tranche.

As of the date of this report, we owe JMJ a total of $336,053 in long-term debt of which $242,528 is principal, $54,375 is consideration on the principal and $39,150 is interest.

There can be no assurance that adequate financing will be available to us when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent us from implementing our business plan or may require us to delay, scale back, or eliminate certain of our research and product development programs or to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves.  To the extent that we utilize our Private Equity Credit Agreements, or additional funds are raised by issuing equity securities, especially convertible preferred stock and convertible debentures, dilution to existing shareholders will result and future investors may be granted rights superior to those of existing shareholders.  Moreover, substantial dilution may result in a change in our control.




Item 6.                      Exhibits


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.
10.80
Consulting Agreement between Imaging Diagnostic Systems, Inc. and Tim Hansen dated as of January 1, 2008.  Incorporated by reference to our Form 8-K filed on December 27, 2007.
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 21, 2008.
10.82
Two-Year Employment Agreement dated as of April 16, 2008 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chairman of the Board and Interim Chief Executive Officer.  Incorporated by reference to our Form 8-K filed on May 5, 2008.
10.83
Stock Option Agreement dated as of August 30, 2007 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chairman of the Board and Interim Chief Executive Officer.  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” or “IDSI”) and Whalehaven Capital Fund Limited (the “Purchaser” and collectively, the “Purchasers”) dated 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.
10.112
Convertible Promissory Note by and between Imaging Diagnostic Systems, Inc. (the “Company” or “Borrower”) and JMJ Financial (the “Lender or “JMJ’’) dated February 23, 2011, Exhibit A.  Incorporated by reference to our Form 8-K/A filed on March 2, 2011.
10.113
Letter Addendum to Promissory Note dated February 23, 2011, Exhibit B.  Incorporated by reference to our Form 8-K/A filed on March 2, 2011.
10.114
Registration Rights Agreement dated February 23, 2011, Exhibit C.  Incorporated by reference to our Form 8-K/A filed on March 2, 2011.



10.115
Patent Licensing Agreement, originally filed as Exhibit 10.2 to Form S-2 on July 21, 1998 as a text document.  Incorporated by reference to our Form S-1 Amendment No. 2 filed on March 15, 2011.
10.116
U.S. Patent 5.692,511 issued Dec. 2, 1997, Exhibit A to Patent Licensing Agreement filed as Exhibit 10.115.  Incorporated by reference to our Form S-1 Amendment No. 3 filed on April 26, 2011.
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.
101.INS  XBRL Instance Document 
101.SCH  XBRL Taxonomy Extension Schema
101.CAL  XBRL Taxonomy Extension Calculation Linkbase
101.LAB  XBRL Taxonomy Extension Label Linkbase
101.PRE  XBRL Taxonomy Extension Presentation Linkbase

 


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Dated:  December 13, 2011
 
Imaging Diagnostic Systems, Inc.
     
 
By:
/s/ Linda B. Grable
   
Linda B. Grable
   
Chief Executive Officer
     
     
 
By:
/s/ Allan L. Schwartz
   
Allan L. Schwartz, Executive Vice-President and Chief Financial Officer
   
(PRINCIPAL ACCOUNTING OFFICER)


 
 
 
 
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