In connection with the sale of a $400,000 convertible debenture on August 1, 2008 to Whalehaven Capital Fund Limited. (“Whalehaven”), we recorded a debt discount of $333,333$233,333 for this convertible debenture and related warrant during the period ending September 30,December 31, 2008.  We recorded two months of interest expense to amortize the debt discount in the amount of $67,667$100,000 during the period ending September 30,December 31, 2008.

In connection with the sale of a $400,000 convertible debenture on November 21, 2008 to Whalehaven and Alpha Capital Anstalt (“Alpha”), we recorded a debt discount of $92,308 for this convertible debenture during the period ending December 31, 2008.  There was no interest expense recorded to amortize the debt discount on this convertible debenture during the period ending December 31, 2008.  See “Part II, Item 5, Financing/Equity Line of Credit, Debenture Private Placement”Placement.”

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, 2008, 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.  Factors that could cause actual results to materially differ include, without limitation, the timely and successful completion of our U.S. Food and Drug Administration (“FDA”) pre-market approval (“PMA”) clinical trials; the timely and successful submission of our PMA application to the FDA; 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. 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, 2008, 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.

Imaging Diagnostic Systems, Inc. (“IDSI”) is a development stage medical technology company.  Since its inception in December 1993, we have been engaged in the development and testing of a Computed Tomography Laser Breast Imaging System for detecting breast cancer (CT Laser Mammography or, "CTLM®").  We are currently in the process of commercializing the CTLM® in certain international markets where approvals to market have been secured although CTLM® is not yet approved for sale in the U.S.  CTLM® is a Class III medical device and we are continuing efforts to secure the Food and Drug Administration’s PreMarket Approval based upon clinical studies.  CTLM® has been declared a Non-Significant risk (NSR) device when used for our intended use.

The CTLM® system is a CT-like scanner, but its energy source is a laser beam and not ionizing x-radiation such as is used in conventional x-ray mammography or CT scanners.  The advantages of imaging without ionizing radiation may be significant in our markets.  CTLM® is an emerging new imaging modality offering the potential of molecular functional imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue.  X-ray mammography is a well-established method of imaging the breast but has

limitations especially in dense breast cases.  Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site.  The CTLM® is being marketed as an adjunct to mammography not a replacement for it, to provide the radiologist with additional information to manage the clinical case. We believe that the adjunctive use of CT Laser Mammography may help diagnose breast cancer earlier, reduce diagnostic uncertainty especially in mammographically dense breast cases, and may help decrease the number of biopsies performed on benign lesions.  The CTLM® technology is unique and patented.  We intend to develop our technology into a family of related products.  We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.

As of the date of this report we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through September 30,December 31, 2008 of $103,289,080$104,771,866 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 Pre-Market Approval (“PMA”) process, and the costs associated with advanced product development activities.  There can be no assurances that we will obtain the PMA, 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.

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, 2008.

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 of ARB 43, Chapter 4, Statement 5, 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 purposes; 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.

The computation of the expense associated with stock-based compensation requires the use of a valuation model.  SFAS 123(R) 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.  We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options.  We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have 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.  SFAS 123(R) 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.

We are continuing to develop our international markets through our global commercialization program.  In the quarter ended September 30,December 31, 2008, we recorded revenues of $0$8,294 representing a decrease of $27,543$1,115 or 100%12% from $27,543$9,409 during the quarter ended September 30,December 31, 2007.  The Cost of Sales during the quarter ended September 30,December 31, 2008, were $0$8,549 representing a decreasean increase of $13,716$4,016 or 100%89% from $13,716$4,533 during the quarter ended September 30,December 31, 2007.  The revenue of $8,294 and cost of sales of $8,549 is from the sale of parts and service kits to one of our distributors.  No new CTLM® Systems were sold in the quarter ended September 30, 2007.December 31, 2008.  See Item 5.  Other Information – “Other Recent Events”

Other Income for the three and six months ended September 30,December 31, 2008, was $1,688were $1,416 and $3,104, respectively, representing the use of our facilities 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 expenses during the three and six months ended September 30,December 31, 2008, were $776,171,$626,744 and $1,402,918, respectively, representing an increasedecreases of $62,900$133,186 or 9%18% and $70,562 or 5%, from $713,271$759,930 and $1,473,480 in the corresponding periodperiods in 2007.  Of the $776,171,$626,744, compensation and related benefits comprised $378,431 (49%$364,941 (60%), compared to $464,545 (65%$481,019 (63%), during the three months ended September 30,December 31, 2007.  Of the $378,431$364,941 and $464,545$481,019 compensation and related benefits, $27,651 (7%$4,447 (1%) and $48,403 (10%$36,642 (8%), respectively, were due to non-cash compensation related to expensing stock options.

$32,098 (5%) and $85,046 (9%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month increasedecrease of $62,900$133,186 is a net result.  The relevant increasessignificant decreases were $104,009 in office rent expense as a result of recording the rent expense in connection with the Sale/Lease back of our Plantation facility; $37,800 in consulting expenses as a result of the recording of the $55,000 value of 5,000,000 shares given to R.H. Barsom for financial services consulting; $32,000 in placement fees issued in connection with the sale of our convertible debenture to Whalehaven Capital Fund Limited (“Whalehaven”); and $23,795 in legal expenses involving corporate and securities matters.  The increases

The six-month decrease of $70,562 is a net result.  The significant decreases were $202,194 in compensation and related benefits as a result of fewer employees and a reduced amount of stock option expense during the period; $63,920 in Board Meeting expenses as a result of not having independent directors during the period; $4,686 in travel expenses; and as a result of the sale of our Plantation facility $20,518 in maintenance and repairs, $59,565 in insurance costs, and $17,202 in utility and telephone expenses.  The decreases were partially offset by increases of $144,986 in rent expense; $52,778 in legal expenses involving Corporate and Securities matters; $34,408 in consulting expenses due to the hiring of an unaffiliated third-party to provide IDSI with investor relations consultant.services; and $64,000 in placement fees in connection with the sale of our two $400,000 convertible debentures.

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

Research and development expenses during the three and six months ended September 30, 2007,December 31, 2008, were $512,196,$303,429 and $817,785, respectively, representing an increasedecreases of $43,868$155,229 or 9%34% and $109,087 or 13%, from $468,328$458,658 and $926,872 in the corresponding periodperiods in 2007.  Of the $512,196,$303,429, compensation and related benefits comprised $224,503 (44%$216,206 (71%), compared to $299,955 (64%$260,649 (57%), during the three months ended September 30,December 31, 2007.  Of the $224,503$216,206 and $299,955$260,649 compensation and related benefits, $7,761 (3%$(889.50) (0%) and $2,413 (1%$7,295 (3%), respectively, were due to non-cash compensation related to expensing stock options.

Of the $817,785, compensation and related benefits comprised $440,709 (54%), compared to $560,604 (60%) during the six months ended December 31, 2007.  Of the $440,709 and $560,604 compensation and related benefits, $6,872 (2%) and $9,707 (2%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month increasedecrease of $43,868$155,229 is due primarily to $44,443 in compensation and related benefits as a net result.  The relevant increases were $102,123result of a reduction in staff; $31,735 in clinical expenses due to the variable costs associated with our PMA clinical trials; $27,589 in consulting expenses primarily associated with the monitoring and data management of our PMA application process,PMA; $20,927 in travel related expenses; $3,720 in the maintenance of our patent applications; $8,214 in FDA legal expenses; and software$13,186 in research and development by outside contractors; $53,807expenses.

The six-month decrease of $109,087 is a net result.  The significant decreases were $119,895 in freight chargescompensation and related costbenefits as a result of dutiesa reduction in staff; $48,178 in research and taxes for an international clinical system; $14,074 in legal patent expenses associated with new patents;development expenses; and $7,260$24,474 in clinical expenses due to the variable costs associated with our PMA clinical trials.  The increasesdecreases were partially offset by decreasesincreases of $75,452$74,534 in compensationconsulting expenses primarily associated with the monitoring and related benefits as perdata management of our cost savings initiatives; $18,918 in reduced travel related costs;PMA and $34,992 invarious consultants involved with design engineering, software engineering and research by our consulting radiologist; and development expenses as a result of parts being transferred$10,554 in the same period in 2007.maintenance of our patent applications.

We expect a significant increase in research and development expenses in fiscal 2009 due to the cost of conductingcompleting our PMA clinical trials in the United States.  We also expect consulting expenses and professional fees to increase due to PMA activities.  See Item 5. Other Information - “Recent Developments, Regulatory Matters”.

Sales and marketing expenses during the three and six months ended September 30,December 31, 2008, were $101,284,$268,063 and $367,187, respectfully, representing a decreasedecreases of $150,397$125,634 or 60%32% and $278,306 or 43%, from $251,681$393,697 and $645,493 in the corresponding periodperiods in 2007.  Of the $101,284,$268,063, compensation and related benefits comprised $28,970 (29%$29,783 (11%), compared to $46,844 (19%$47,135 (12%) during the three months ended September 30,December 31, 2007.  Of the $28,970$29,783 and $46,844$47,135 compensation and related benefits, $495$525 (2%) and $776 (2%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month decrease of $150,397$125,634 is a net result.  The relevantsignificant decreases were $17,874$17,352 in compensation and related benefits as per our cost savings initiatives; $12,000 due to a decreased reliance of outside sales consultants; $37,403reduction in marketing support staff; $101,327 in travel expenses for sales calls, installation, training and service; $11,045 in advertising and promotion; $10,699$5,361 in representative office expenses associated with our office in Beijing, China; and $52,819$13,040 in advertising and promotion.  The decreases were partially offset by increases of $14,360 in marketing related consulting expenses.

The six-month decrease of $278,306 is primarily due to the recordingdecreases of $35,225 in compensation and related benefits partially due to a reduction in marketing support staff; $138,730 in travel expenses for sales calls, installation, training and service; $52,169 in freight charges as a result of transportation charges, customs fees, duties and taxes associated with CTLM® systems we shipped internationally in the corresponding periodprevious period; $24,085 in 2007.advertising and promotion; $26,360 in marketing related consulting expenses; and $5,388 in representative office expense.

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

Our combined cash and cash equivalents totaled $6,450$66,923 as of September 30,December 31, 2008.  This is a decreasean increase of $42,983$17,490 from $49,433 as of June 30, 2008.  During the quarter ending September 30,December 31, 2008, we received a net of $710,000$132,193 from the sale of common stock through our private equity agreement with Charlton.Charlton, we received a net of $368,000 from the sale of convertible debentures and we received a net of $161,000 from the exercise of warrants.  See Part II. Item 5, – “Financing/Equity Line of Credit”Credit.”

We do not expect to generate a positive internal cash flow for at least the next 12 months due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA PMA process, the costs associated with product development activities and the time required for homologations from certain countries.

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 most recently, through a

sale/lease-back transaction involving our headquarters facility.facility, and most recently through sale of convertible debentures and exercise of related warrants.  Net cash used for operating and product development expenses during the threesix months ending September 30,December 31, 2008, was $1,154,152,$1,861,872, 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,December 31, 2008, we had working capital of $(280,004)$(944,050) compared to working capital of $(77,137) at June 30, 2008.

During the firstsecond quarter ending September 30,December 31, 2008, we raised $710,000a net of $132,193 through the sale of shares of common stock to Charlton and $400,000$368,000 through the sale of a second convertible debenture to Whalehaven.Whalehaven and Alpha, and $161,000 through the exercise by Whalehaven and Alpha of warrants issued in connection with our August 2008 debenture sale. See “Part II,II. Item 55.  Debenture Private Placement”.  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.  On April 21, 2008, we replaced our Fifth Private Equity Credit Agreement, which expired on March 21, 2008, with a new Sixth Private Equity Agreement with Charlton.  We expect to use our Sixth Private Equity Credit Agreement with Charlton 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 Sixth Private Equity Credit Agreement 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 Charlton 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 threesix months ending September 30,December 31, 2008, were $1,231 as compared to $1,394$5,690 for the threesix months ending September 30, 2007.December 31, 2008.  These expenditures were a direct result of purchases of computer and miscellaneous equipment.  We anticipate that the balance of our capital needs for the fiscal year ending June 30, 2009 will be approximately $25,000.$5,000.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30,December 31, 2008.  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:

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 PMA process, and advanced product development activities.  We intend to use the proceeds from the sale of convertible debentures, convertible preferred shares, and draws from our Sixth Private Equity Credit Agreement and any successor private equity agreements with Charlton 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 Wachovia Bank N.A.

On September 13, 2007, we entered into an agreement to sell for $4.4 million and lease-back our commercial building at 6531 NW 18th Court, Plantation, Florida.  The Agreement was made with an unaffiliated third party, Superfun B.V., a Netherlands corporation (“Purchaser”).  This transaction was a result of a proposal we submitted on July 26, 2007, offering to sell the property for $4.4 million cash in a sale/lease-back transaction, which was accepted on July 31, 2007.  In connection with the proposed transaction, we received an initial deposit of $1.1 million on August 2, 2007.  We further agreed to grant the Purchaser a two-year option to purchase 3,000,000 shares of IDSI’s common stock at an exercise price equal to the market price on the date of the initial deposit.  The closing market price of IDSI’s stock on August 2, 2007, was $.035.  The sale agreement required additional payments of $1.1 million each on September 24, 2007, November 8, 2007, and December 23, 2007, with the closing to occur upon receipt of the final payment.  As of the date of this report weWe have received payment in full of $4,400,027 for this transaction.

On March 31, 2008, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V., and executed the lease.  The term of the triple net lease was five years with the first monthly rent payment due six months from the commencement date of the lease.  The monthly rent for the base year was $24,000 plus applicable sales tax.  During the term and any renewal term of the lease, the minimum annual rent was to be increased each year.  Commencing with the first day of the second lease year and on each lease year anniversary thereafter, the minimum annual rent was to be cumulatively increased by $24,000 per each lease year or $2,000 per month plus applicable sales tax.  Either party was entitled to cancel the lease without penalty or fault upon 180 days prior notice given to the other party.

We have issued through 2003 and may in the future issue stock for services performed and to be performed by consultants.  The issuance of large amounts of common stock for services rendered or to be rendered and the subsequent sale of such shares may depress the price of the common stock and dilute existing shareholders.

Since we have generated no material revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services.  Since July 1, 1996, we have issued an aggregate of 7,306,500 shares of common stock covered by registration statements on Form S-8.  The aggregate fair market value of those shares when issued was $2,492,151.  The issuance of large amounts of our common stock, sometimes at prices well below

market price, for services rendered or to be rendered and the subsequent sale of these shares may further depress the price of our common stock and dilute the holdings of our shareholders.  In addition, because of the possible dilution to existing shareholders, the issuance of substantial additional shares may cause a change-in-control.  On July 15, 2008, we entered into a Financial Services Consulting Agreement with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value.  The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000.

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

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 Interim 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.

There has been no change 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.

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 allege that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive 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 believe that this claim is completely without merit, and we intend to vigorously defend the case.  We have engagedOur Italian counsel for this case.  Our responseresponded to the lawsuit in November 2008 and requested and was granted an extension to May 27, 2009 to respond.

In December 2008, we were served with a lawsuit against us in Cuyahoga County, Ohio, by Plexar Associates, Inc. (“Plexar”), a company that provides software and algorithm development for medical imaging companies.  On January 23, 2008, we engaged the services of Plexar to provide work over a three-month period relating to artifact reduction.  The initial purchase order was limited to an amount not to exceed $48,700.  A second purchase order for a three-month period was signed on July 8, 2008 with a limit not to exceed $61,000.  Thus, the total commitment was $109,700. As of the date of this prospectus, we have paid Plexar the sum of $93,910.66 and have not received any useful work product that would help us reduce artifacts in our images.  In their complaint, Plexar is dueseeking the sum of $65,076.25.  Our counsel is reviewing this complaint and on November 19, 2008.January 8, 2009 requested a 30 day extension which was granted.  We intend to vigorously dispute this case and are contemplating filing a counter-claim for non-performance.  Our counsel filed a response on February 6, 2009.

Our Annual Report on Form 10-K for the year ended June 30, 2008, 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 the firstsecond quarter ended September 30,December 31, 2008, there were no material changes in risk factors as previously disclosed in our Form 10-K filed on September 12, 2008.

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

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

cases the FDA may increase that time period through requests for additional information or clarification of existing information.

We received FDA approval to begin our non-pivotal clinical study in February 1999.  The first CTLM® was installed at Nassau County (NY) Medical Center in July 1999 and a second CTLM® was installed at the University of Virginia Health System.  We submitted the non-pivotal clinical data to the FDA in May 2001.  In spite of our efforts to control operating temperatures with thermal cooling cabinets for the lasers and voltage stabilizers to control power, our engineering team led by Mr. Grable decided that they would re-design the CTLM® system into a compact, robust system using surface-mount technology for the electronics and a solid state diode laser that did not require a separate chiller to control its operating temperature. It was a case where technology had to catch up with the invention.  Unfortunately, Mr. Grable passed away unexpectedly in 2001.   It took several years to re-design and test but our efforts were successful and we began to collect the clinical data necessary to file the PMA application. The application was filed in April 2003.

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

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

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

We reported in our Prospectus dated December 27, 2005 that we experienced further delays because of difficulties in designing a revised clinical protocol and in enlisting hospitals and imaging centers to participate in acquiring new clinical cases.  In spite of the delays we experienced in obtaining the necessary approvals from the hospitals and their respective Institutional Review Boards (“IRB”), we made good progress in advancing PMA activities. We further reported on March 23, 2006 that changes would be incorporated to bring the CTLM® system to its most current design level.  Those changes were made and do, we believe, improve the device’s image quality and reliability.  Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection is proceeding in accordance with our clinical protocol.  We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality.  As of November 2008,February 2009, 10 clinical sites are participating in the clinical trials and we believe we are on schedule to complete the data collection and submit the PMA application in its entirety in December 2008.during the quarter ending June 30, 2009.

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 9001:2000 registration, ISO 13485:2003 registration, UL Electrical Test Certificate, and Product registrations in

Brazil and Argentina. Worldwide our end users have completed more than 14,000 patient scans and we have sold 13 CTLM® systems.  Our decision to fund the Company through the sale of equity has enabled us to reach this important milestone.  We intend to useused the proceeds from the sale of convertible debentures for working capital.  We intend to use the proceeds of any convertible preferred shares andif sold, draws from our Sixth Private Equity Credit Agreement and any successor private equity agreements with Charlton and/or alternative financing facilities as our sources of working capital.  Additional financing maywill be required before and after the filing of the PMA application.

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

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.

In the Asia-Pacific Region, we previously announced that we contracted with BAC, Inc. to manage our existing distributors and develop new areas.  BAC is now managing our China distributor activities and has led IDSI in establishing a representative office in Beijing.  We have a full-time manager (BAC contract) and a marketing specialist, and a lead service supervisor: three dedicated Chinese nationals in Beijing.  Reimbursement for CTLM exams was approved for the Beijing region.  We had also previously announced that we had changed our exclusive distribution agreement with our Distributor to non-exclusive, thus paving the way for IDSI to add more distributors to cover the large China market.

In September 2007, we announced the installation of a CTLM® system at the Tianjin Medical University’s Cancer Institute and Hospital, the largest breast disease center in China.  The hospital will evaluate the CTLM® under three research protocols designed to improve current methods of addressing breast cancer imaging and treatment follow-up.  The Tianjin system is the second research system in China.  The first, at Beijing’s Friendship Hospital, enables CTLM® clinical procedures to become listed on the Regional schedule for patient payments. We plan to install several more research CTLM® systems in China to accelerate market adoption of the new laser breast imaging technique.

Elsewhere in the Asia-Pacific region, BAC is pursuing business connections in Australia, Singapore, Malaysia, New Zealand, Hong Kong, Macao, Taiwan, and the Philippines to enhance our existing representation in South Korea and China.  We have signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment is surging due to publicity surrounding their First Lady, who succumbed to the disease.  We are pleased with BAC’s efforts, and we are gaining momentum through their experience and connections.  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 will be evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur.

Activities in Europe and the Middle East are top marketing priorities for IDSI.  Our previously announced first IDSI Users Meeting, which was held in Berlin in April 2006, yielded the sharing of clinical work by our international users.  These users have made a meaningful contribution to our Image Interpretation Manual and User Training Program.  In 2006, we announced the receipt of an order for six CTLM systems from our Polish distributor.  The first of those systems shipped in June 2006, giving us three systems in Poland, all serving major oncology centers.  The remaining CTLM units on the order have not yet been scheduled for shipment.  Among our global users, we have three systems in Poland, four in Italy, two each in the Czech Republic, two systems in the United Arab Emirates, and two systems in China as well as systems in Germany and Malaysia.

As of the date of this report IDSI’s users have performed over 14,000 CT Laser Mammography (CTLM®) clinical casespatient scans worldwide.

In October 2008, we announced that our distributor, The Oyamo Group (“Oyamo”) placed an order for the first CTLM® system for Jerusalem, Israel.  Oyamo obtained the import license from The Israeli Ministry of Health and the CTLM® system. Our distributor has recently advised us that he plans to install the system will be installed at the Hadassah UniversitySheba Medical Center at Tel Hashomer, which is known for pioneering new medical techniques.outside of Tel Aviv.

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 will behas been installed at the new MeDoc HealthCare Center (“MDHC”) located in Budapest, in collaboration with Dr. Maria Gergely, Chief Radiologist of Uzsoki Hospital.

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 s 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.

We have received notice that U.S. Patent 7,446,875, entitled “Apparatus and Method for Acquiring Time Resolved Measurements Utilizing Direct Digitization of the Temporal Point Spread Function of the Detected Light”, was issued on November 4, 2008.

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.