SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended ~~March 31,~~September 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to______

Commission file number: 0-26028

IMAGING DIAGNOSTIC SYSTEMS, INC.

(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	x Non Accelerated filer	¨ 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 ~~May 17,~~November 15, 2010: ~~832,391,485~~884,278,434 shares of common stock, no par value; and 35 shares of Series L convertible preferred stock outstanding.

~~IMAGING DIAGNOSTIC SYSTEMS, INC.~~

~~(A Development Stage Company)~~

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


	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	Page

	Condensed Balance Sheets – (Unaudited) ~~March 31,~~September 30, 2010 and June 30, ~~2009~~2010	3

	Condensed Statements of Operations - (Unaudited) ~~Nine months and three~~Three months ended ~~March 31,~~September 30, 2010 and 2009, and December 10, 1993 (date of inception) to ~~March 31,~~September 30, 2010	4

	Condensed Statements of Cash Flows - (Unaudited) ~~Nine months and three~~Three months ended ~~March 31,~~September 30, 2010 and 2009, and December 10, 1993 (date of inception) to ~~March 31,~~September 30, 2010	5

	Notes to Condensed Financial Statements (Unaudited)	6

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

	Financial Condition and Results	1215

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2124

Item 4.	Controls and Procedures	2124


	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	2225

Item 1A.	Risk Factors	2326

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2326

Item 3.	Defaults Upon Senior Securities	2326

Item 4.	Submission of Matters to a Vote of Security Holders	2326

Item 5.	Other Information	2326

Item 6.	Exhibits	3640

Signatures		3842

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

Table of Contents

IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheets

Assets

		Sept. 30, 2010			June 30, 2010
Current assets:		Unaudited				*
	Cash	$	236,475		$	73,844
	Accounts receivable, net of allowances for doubtful accounts
	of $23,500 and $57,982, respectively		24,540			12,850
	Loans receivable, net of reserve of $57,000
	and $57,000, respectively		3,796			3,796
	Inventories, net of reserve of $399,000 and $408,000, respectively		426,306			436,110
	Prepaid expenses		79,765			61,115

	Total current assets		770,882			587,715

Property and equipment, net			202,607			221,763
Intangible assets, net			162,338			170,882

	Total assets	$	1,135,827		$	980,360


Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
	Accounts payable and accrued expenses	$	1,569,485		$	1,538,748
	Customer deposits		98,114			98,114
	Short term debt		1,506,500			1,506,500

	Total current liabilities		3,174,099			3,143,362

Convertible preferred stock (Series L), 9% cumulative annual dividend,
no par value, 35 and 0 shares issued, respectively			350,000			350,000
	Derivative Liability		221,510			202,155

Stockholders equity (Deficit):
	Common stock		106,903,455			105,927,719
	Common stock - Debt Collateral		(1,150,000	)		(1,150,000	)
	Additional paid-in capital		4,474,110			4,388,006
	Deficit accumulated during development stage		(112,837,347	)		(111,880,882	)

	Total stockholders' equity (Deficit)		(2,609,782	)		(2,715,157	)

	Total liabilities and stockholders' equity (Deficit)	$	1,135,827		$	980,360

* 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)
Condensed Balance Sheet

Assets

Mar. 31, 2010 Jun. 30, 2009
Current assets: Unaudited *
Cash $ 239,846 $ 12,535
Accounts receivable, net of allowances for doubtful accounts
      of $57,982 and $57,982, respectively 24,188 21,514
Loans receivable, net of reserve of $57,000
      and $57,000, respectively 357 357
Other Receivables 50,000 -
Inventories, net of reserve of $399,000 and $408,000, respectively 496,698 527,467
Prepaid expenses 19,517 35,617

Total current assets 830,606 597,490

Property and equipment, net 243,620 332,031
Intangible assets, net 179,426 205,059

Total assets $ 1,253,652 $ 1,134,580

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 1,809,522 $ 1,994,220
Customer deposits 98,114 96,114
Short term debt 1,348,188 -
Convertible debenture, net of debt discount of $0
       and $35,352, respectively - 173,468

Total current liabilities 3,255,824 2,263,802

Convertible preferred stock (Series L), 9% cumulative annual dividend,
       no par value, 35 and 0 shares issued, respectively 350,000 -

Stockholders equity (Deficit):
Common stock 104,982,394 102,280,228
Common stock - Debt Collateral (1,150,000 ) -
Additional paid-in capital 3,953,886 3,499,717
Deficit accumulated during development stage (110,138,452 ) (106,909,167 )

Total stockholders' equity (Deficit) (2,352,172 ) (1,129,222 )

Total assets and stockholders' equity (Deficit) $ 1,253,652 $ 1,134,580

* Condensed from audited financial statements.

The accompanying notes are an integral part of these condensed financial statements.

Table of Contents

IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
IMAGING DIAGNOSTIC SYSTEMS, INC.																	IMAGING DIAGNOSTIC SYSTEMS, INC.
A Development Stage Company																	A Development Stage Company
(Unaudited)	(Unaudited)																(Unaudited)

Condensed Statement of Operations
Condensed Statements of Operations																	Condensed Statements of Operations

																		Three Months Ended						Since Inception
		Nine Months Ended						Three Months Ended						Since Inception				September 30,						(12/10/93) to
		March 31,						March 31,						Dec. 10, 2003 to				2010			2009			Sept. 30, 2010
		2010			2009			2010			2009			Mar. 31, 2010
Net Sales		$	177,079		$	8,294			1,300			-		$	2,320,571			$	11,461		$	158,000		$	2,336,125
Gain on sale of fixed assets			-			1,181,894			-			-			2,794,565				-			-			2,794,565
Cost of Sales			20,361			8,549			166			-			926,466				4,259			17,767			932,876

Gross Profit			156,718			1,181,639			1,134			-			4,188,670				7,202			140,233			4,197,814

Operating Expenses:
General and administrative			2,512,766			1,886,307			583,072			483,390			57,502,180				565,674			397,997			59,139,696
Research and development			429,637			1,028,282			174,350			210,484			22,123,652				239,800			123,462			22,668,758
Sales and marketing			233,594			469,301			53,347			102,114			9,006,415				74,336			83,972			9,187,590
Inventory valuation adjustments			11,456			17,255			4,930			4,308			4,764,127				5,687			4,967			4,826,036
Depreciation and amortization			114,043			157,977			37,516			52,659			3,271,272				27,699			38,717			3,329,373
Amortization of deferred compensation			-			-			-			-			4,064,250				-			-			4,064,250

			3,301,496			3,559,122			853,215			852,955			100,731,896				913,196			649,115			103,215,703

Operating Loss			(3,144,778	)		(2,377,483	)		(852,081	)		(852,955	)		(96,543,226	)			(905,994	)		(508,882	)		(99,017,889	)


Interest income			779			31			-			-			309,180				312			-			309,708
Other income			15,655			3,837			11,209			733			780,047				35,664			411			918,852
Other income - LILA Inventory			-			(66	)		-			(66	)		(69,193	)			-			-			(69,193	)
Derivative Liability																			(19,355	)		-			(83,879	)
Loss on derivative liability																			-			-			(137,631	)
Interest expense			(100,941	)		(474,372	)		(34,121	)		(188,637	)		(7,767,500	)			(67,092	)		(51,975	)		(7,909,555	)

Net Loss			(3,229,285	)		(2,848,053	)		(874,993	)		(1,040,925	)		(103,290,692	)			(956,465	)		(560,446	)		(105,989,587	)

Dividends on cumulative Preferred stock:
Dividends on cumulative Pfd. stock:
From discount at issuance			-			-			-			-			(5,402,713	)			-			-			(5,402,713	)
Earned			-			-			-			-			(1,445,047	)			-			-			(1,445,047	)

Net loss applicable to
common shareholders		$	(3,229,285	)	$	(2,848,053	)	$	(874,993	)	$	(1,040,925	)	$	(110,138,452	)		$	(956,465	)	$	(560,446	)	$	(112,837,347	)

Net Loss per common share:
Basic and Diluted:
Net loss per common share		$	(0.004	)	$	(0.007	)	$	(0.001	)	$	(0.003	)	$	(0.656	)
Basic and diluted																		$	(0.00	)	$	(0.00	)	$	(0.60	)

Weighted average number
of common shares			735,202,223			402,381,227			803,804,978			409,508,056			167,937,064
Weighted average number of
common shares outstanding:
Basic and diluted																			853,250,235			673,167,288			188,010,908


The accompanying notes are an intergral part of these condensed financial statements.

The accompanying notes are an integral part of these condensed financial statements.																	The accompanying notes are an integral part of these condensed financial statements.

Table of Contents

~~IMA~~IMAG~~GING~~ING 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 ~~the~~ three ~~and nine~~ month period ended ~~March 31,~~September 30, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending June 30, ~~2010. 0; These~~2011. T hese 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 October 13, ~~2009.~~2010.

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 Pa rt 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 15 systems as of ~~March 31,~~September 30, 2010; 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.

Table of Contents

NOTE 3 - INVENTORY

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

	March 31, 2010			June 30, 2009			Sept. 30, 2010			June 30, 2010
	Unaudited						Unaudited
Raw materials consisting of purchased parts, components and supplies	$	517,319		$	529,410		$	511,319		$	513,556
Work-in-process including units undergoing final inspection and testing		28,942			28,943			28,942			28,943
Finished goods		349,437			377,114			285,045			292,611

Sub-Total Inventories		895,698			935,467			825,306			835,110

Less Inventory Reserve		(399,000	)		(408,000	)		(399,000	)		(399,000	)

Total Inventory - Net	$	496,698		$	527,467		$	426,306		$	436,110

We review our Inventory for parts that have become obsolete or in excess of our manufacturing requirements and our Finished Goods for valuation pursuant to our Critical Accounting Policy for Inventory. For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 ~~for a~~as this CTLM® system ~~from Inventory to Clinical Equipment because of its use~~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 ~~the PMA,~~our FDA application, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical ~~Equipment.~~equipment. For the fiscal year ending June 30, 2009 we ~~had~~identified $408,000 of Inventory that we deem impaired due to the lack of inventory turnover. For the fiscal year ending June 30, 2010 we identified $399,000 of Inventory that we deem impaired due to the lack of inventory turnover. No further ~~Inven tory~~Inventory Reserve was recorded for the quarter ending ~~March 31,~~September 30, 2010.

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, 2010 as a result of implementing the ~~Codification during the quarter ended September 30, 2009.~~

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

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

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in FASB ASC 855-10-05, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC 855-10-05 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. FASB ASC 855-10-05 is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this pronouncement during the second quarter of 2009. The adoption of this new standard is not expected to have a material impact on the financial statements of the Company. In preparing these financial stateme nts, the Company evaluated events that occurred through the date of this filing for potential recognition or disclosure.

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

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

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

~~Prior~~The Company relies on the guidance provided by ASC 718, (“Share Based Payments”). ASC 718 requires companies to expense the ~~adoption~~value of ~~FASB guidance for “Share-Based-Payment”, we accounted for stock-based compensation issued to our employees using the intrinsic value method. Accordingly, compensation cost for~~employee stock options ~~issued was measured as~~and similar awards and applies to all outstanding and vested stock-based awards.

In computing the ~~excess, if any, of~~impact, the fair value of ~~our common stock at~~each option is estimated on the date of grant ~~over~~based on the ~~exercise price~~Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the ~~options.~~awards. The pro forma net earnings per share amounts were reported as if the fair value method had been used. As awards were granted at an exercise price equal to the market value of the underlying common stock on the date of the grant, no stock-base compensation cost was reflectedassumptions used in net income prior to July 1, 2005. Effective July 1, 2005, the Company adopted FASB guidance for “Share-Based Payment” and began recognizing compens ation expense for its stock based payments based oncalculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the ~~rewards under~~application of management judgment. As a result, if factors change and the ~~modified prospective application method.~~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 Compan y 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 $94,043 and $3,666, respectively, in additional compensation expense for the three months ended September 30, 2010 and 2009.

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

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 ~~March 31,~~September 30, 2010: no dividend yield; no expected volatility ~~as we had no option grants;~~of 174%; risk-free

interest rate of 4%; and an expected eight-year term for options granted. For the quarter ending ~~March 31,~~September 30, 2010, the net income and earnings per share reflect the actual deduction for option expense as a non-cash compensation expense.

Options granted to non-employees, including lenders and consultants, are accounted for in accordance with the provisions provided in the FASB guidance, “Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The Company applies the Black-Scholes method to determine the estimated fair value of such awards, which are periodically re-measured as they vest. The resulting value is recognized as an expense over the period of services received or the term of the related financing.

Stock-based compensation expense recorded during the three months ended ~~March 31,~~September 30, 2010, was ~~$518,643~~$94,043 compared to ~~$76,450~~$3,666 from the corresponding period in fiscal 2009. In connection with the Sale/Lease-Back of our commercial building, we recorded $297 as non-qualified stock option expense for the three months ended ~~March 31, 2010.~~September 30, 2009. 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 ~~March 31,~~September 30, 2010 ~~and 2009,~~ using the Black-Scholes Option-Pricing Model was ~~$.0491 and $.01, respectively.~~$.027. The weighted average fair value per option at the date of grant for the ~~nine~~three months ended ~~March 31, 2010 and~~September 30, 2009 ~~using~~was $.0 because we did not grant any new stock options during the ~~Black-Scholes Option-Pricing Model was $.0491 and $.0124, respectively.~~quarter. Assumptions were as follows:

Expected Volatility(1)

Risk Free Interest Rate(2)

(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 ~~and nine~~ months ending ~~March 31,~~September 30, 2010 and 2009 in the table above are weighted average calculations. There was no Expected Volatility for the quarter ending September 30, 2009 as no stock options were granted during the period.

(2) We lowered our risk-free interest rate from 5% to 4% for stock option expensing effective for the quarter ending ~~December 31,~~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) ~~Our~~We continue to use an expected term assumption of eight years ~~was~~ based ~~upon the~~on guidance provided by SEC Staff Accounting Bulletin 107 ~~enabling~~and subsequently Staff Accounting Bulletin 110. These bulletins enable us to use the simplified method for “plain vanilla” options for this calculation. This provision may be used for grants made on or before December 31, 2007. On December 21, 2007 further guidance was provided by SEC Staff Accounting Bulletin 110 stating that the SEC staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.

NOTE 7 - COMMON STOCK ISSUANCES – PRIVATE EQUITY CREDIT AGREEMENT

NOTE 8 ~~– SALE/~~–SALE/LEASE-BACK OF BUILDING

During the third quarter ending March 31, 2008, we received $1,650,027 in cash pursuant to a Sale/Lease-back Agreement with Superfun B.V., with respect to our commercial building. In our Form 10-Q for the first quarter ending September 30, 2007, we disclosed that we had received advanced payments totaling $2.2 million and had placed the deed to our property in escrow. In our Form 10-Q for the second quarter ending December 31, 2007, we disclosed that we had received advanced payments totaling $550,000.

On March 31, 2008, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V. pursuant to our September 13, 2007 sale/lease-back agreement with Superfun B.V. We received payments of $2,200,000 in the quarter ending September 30, 2007, $550,000 in the quarter ending December 31, 2007, and $1,650,027 in the quarter ending March 31, 2008. We recorded the advanced payments received as a current liability on the Balance Sheet which was carried until we received the full payment of $4.4 million. At that time we conveyed title to our property and executed the five year lease. Pursuant to ~~FAS-98,~~existing FASB guidance at the time of the sale, we recorded the sale, removed the sold property ~~and~~an d its related liabilities from the ~~Balan ce~~Balance Sheet and deferred the gain over the five year term of the operating ~~lease in accordance with the provisions of FAS-13 amended by FAS-28.~~lease. We computed the amount of gain on the sale portion of the sale/lease-back in accordance with the ~~provisions~~existing FASB guidance at the time of ~~FAS-66.~~the sale. In this regard, we recorded a gain of $1,609,525 and recorded a deferred gain of $1,040,000, which is the present value of the lease payments over the five year term of the lease. We planned to amortize the deferred gain in

proportion to the gross rental charged to expense over the lease term. The lease provided a six-month rent holiday with rent payments commencing on September 14, 2008. To account for the rent holiday, we recorded $13,935 for Rent Expense from March 14th14th to March 31st31st and accrued that amount as a deferred rent liability. ; From April 1st1st to September 14th,14th, we recorded rent expense of $24,000 per month and accrued that amount as a deferred rent liability. The $144,000 deferred rent liability was amortized on a straight-line basis over the lease term. See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back.

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

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

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NOTE 9 – DEBT DISCOUNT

In connection with the sale of a $400,000 convertible debenture on November 20, 2008 to Whalehaven Capital Fund Limited (“Whalehaven”) and Alpha Capital Anstalt (“Alpha”), we recorded interest expense to amortize the debt discount in the amount of $12,455 during the prior period which ended December 31, 2009. See “Part II, Item 5, Debenture Private Placement”

NOTE 10 – SHORT-TERM DEBT

From November 10, 2009 to ~~March 31,~~September 30, 2010 we borrowed $1,591,794 in the aggregate from six 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 $258,144 in premium. With respect to $1,000,000 principal amount of these notes, we issued 55,363,637 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 ~~subje ct~~subject to be returned once the related debt is repaid. With ~~respect~~respec t 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 ~~the~~an aggregate principal amount of $93,750 and $10,000 in ~~premium. Subsequent to~~premium on these notes. During the ~~end of the~~fourth quarter ending June 30, 2010, we repaid ~~the~~an aggregate principal amount of $48,044 and $644 in ~~premium.~~premium on the notes. Since July 1, 2010 we have not repaid any principal or premiums due. See “Item 2 Results of Operations, Issuance of Stock in Connection with Short-Term Loans”

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 less than $.0211 on or before the conversion of all of the Series L Convertible Preferred shares. The reset provision triggered a Derivative Liability valuation f or such provision.

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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, 2010, we had 35 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument. ASC 815 requires the Series L Convertible Preferred Stock to be recorded as a liability as it is no longer afforded equity treatment. As a result of the reset provision we recorded a Derivative Liability of $64,524 which accrued on the date of issuance and recorded an increase of $137,631 as a result in changes in the market price of our stock. The total Derivative Liability for the Series L Convertible Preferred Stock for the fiscal year ended June 30, 2010 was $202,156. 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.

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, 2010 and 2009, the aggregate fair value of the Company’s debt obligations approximated its carrying value.

The Company relies upon the guidance of ASC 820 (“Fair Value Measurements and Disclosures”). ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

Upon adoption of ASC 820, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the consolidated financial statements.

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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, 2010 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:


	Quoted Prices in Active Markets for Identical Instruments Level 1	Significant Other Observable Inputs Level 2	Significant Unobservable Inputs Level 3			Assets at Fair Value

Liabilities:
Series L Convertible Preferred Stock	$	$	$	(350,000	)	$	(350,000	)
Series L Accrued Dividend Payable			$	(18,814	)	$	(18,814	)
Derivative Liability				(221,510	)		(221,510	)

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

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NOTE 14 – PROPERTY AND EQUIPMENT

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

	Sept. 30, 2010			June 30, 2010
Furniture and fixtures	$	257,565		$	257,565
Building and land (See Note 8)		-			-
Computers, equipment and software		426,873			426,873
CTLM® software costs		352,932			352,932
Trade show equipment		298,400			298,400
Clinical equipment		440,937			440,937
Laboratory equipment		212,560			212,560

Total Property & Equipment		1,989,267			1,989,267
Less: accumulated depreciation		(1,786,660	)		(1,767,504	)

Total Property & Equipment - Net	$	202,607		$	221,763

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.

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, 2010		June 30, 2010
Accounts payable - trade	$	808,872	$	894,432
Accrued tangible personal property taxes payable		6,000		6,000
Accrued compensated absences		47,529		47,529
Accrued wages payable		609,781		498,424
Other accrued expenses		97,303		92,363

Totals	$	1,569,485	$	1,538,748

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NOTE 16 – SUBSEQUENT EVENTS - UNAUDITED

There was ~~$1.1 million~~$1,539,500 of short term debt which ~~matured on various dates near the recent quarter end. These loans were all~~was extended to ~~June 15,~~October 31, 2010 as the new maturity date. As of the date of this report, we are in default on these promissory notes. The lender has yet to provide a demand notice to exercise the rights to the collateral shares in lieu of repayment of such debt. We continue to negotiate with the lender for an extension of the maturity date of these promissory notes.

We obtained another ~~$650,000~~$100,000 through the issuance of ~~16,718,562~~7,538,692 shares of common stock, after ~~March 31,~~September 30, 2010 under the terms of our Private Equity Credit Agreement with Southridge.

As of the date of this report we have sold to Southridge Partners II, LLP (“Southridge”) 71,244,381 shares of common stock out of the 115,000,000 we initially registered on Form S-1/A1, which was declared effective on February 25, 2010 and subsequently amended pursuant to our Post-Effective Amendment No.1, which was filed on May ~~14,~~24, 2010 ~~there are 53,367,007~~to include our financial statements and related notes to the financial statements for the quarter ending March 31, 2010, and new business information. Our Post-Effective Amendment No.1 was declared effective on May 27, 2010. We will file a Post-Effective Amendment to update our financial disclosures provided in this quarterly report for the period ending September 30, 2010 and to continue the registration of the adjusted number of shares available that have not been sold to Southridge as of the date of this report.

We now have 884,278,434 shares outstanding, and after reservation of 16,587,690 shares to cover the conversion of the 35 shares of outstanding Series L Convertible Preferred Stock and 45,023,120 shares to cover outstanding options, we would have 4,110,756 shares available to ~~issue on a fully diluted basis. Although~~be sold to Southridge upon the ~~open~~effectiveness of our Post-Effective Amendment to our Registration Statement ~~provides~~on Form S-1.

On November 11, 2010, we borrowed the sum of $80,000 from Southridge Partners II LP which was evidenced by a Promissory Note with a maturity date of March 31, 2011. The note provided for ~~90,892,568~~a redemption premium of 15% of the principal amount on or before March 31, 2011. 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 Principal Amount of the Note plus accrued interest into shares ~~hence there is~~of our common stock at a ~~limit~~conversion price equal to the lesser of (a) $0.01 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.

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 sell or issue 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 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 ~~how many~~reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor has agreed to a conversion floor price of $.015, which would require us to reserve an additional 6,745,643 common shares.

In order to increase the availability of additional shares ~~can be issued under~~for use with our Southridge Equity Credit Line, our three executive officers have agreed that they will not exercise any of their respective options to purchase an aggregate of 31,377,000 shares of the Company’s common stock until all shares covered by the Registration ~~Statement.~~Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn. As a result of the waivers, we would then have 35,487,756 shares available upon effectiveness of our Post-Effective Amendment to our Registration Statement on Form S-1.

We have evaluated all subsequent events through ~~May 14,~~November 15, 2010 for disclosure purposes.

Item 2.

~~Management’s~~

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, ~~2009,~~2010, 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~~FDA application to ~~the FDA;~~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 ~~a s~~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 ~~capi tal~~capital financing ~~arrangements;~~arrange ments; 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, ~~2009,~~2010, 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~~fo rward-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 marketing clearance from the ~~Food and Drug Administration’s PreMarket Approval based upon clinical studies.~~FDA. The CTLM® study has been declared a Non-Significant ~~risk~~Risk (NSR) ~~device~~study 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.~~les ions. 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 ~~bene fits~~benefits constitute substantial markets for our products well into the future.

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 a pparent 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, ~~2009.~~2010.

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 ~~by FASB,~~in ASC 330 (“Inventory”), our ability to realize the value of our inventory based on a combination of factors ~~in cluding~~including the following: how long a system has been used for demonstration or clinical collaboration ~~purposes;~~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. 60;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. ~~The guidance provided by FASB for stock-based compensation~~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. WeThe Company currently ~~use~~uses a Black-Scholes option pricing model to calculate the fair value of ~~our~~its stock options. WeThe Company primarily ~~use~~uses historical data to determine the assumptions to be used in the Black-Scholes model and ~~have~~has no reason to believe that future data is likely to differ materially from historical data. However, ~~changes~~change s in the ~~assumpti ons~~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. ~~The guidance~~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

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 ~~March 31,~~September 30, 2010, we recorded revenues of ~~$1,300~~$11,461 representing ~~an increase~~a decrease of ~~$1,300~~$146,539 from $0$158,000 during the quarter ended ~~March 31,~~September 30, 2009. The Cost of Sales during the quarter ended ~~March 31,~~September 30, 2010, were ~~$166~~$4,259 representing ~~an increase~~a decrease of ~~$1,134~~$13,508 from $0$17,767 during the quarter ended ~~March 31,~~September 30, 2009. The revenue of ~~$1,300~~$11,461 and cost of sales of ~~$166~~$4,259 are primarily from the installment sale of our CTLM® system to one of our distributors. No new CTLM® Systems were sold in the quarter ended ~~March 31,~~September 30, 2010. See Item 5. Other Information – “Other Recent Events”

Revenues for the nine months ended March 31, 2010, were $177,079 representing an increase of $168,785 or 2,035% from $8,294 in the corresponding period in 2009. The Cost of Sales during the nine months ended March 31, 2010, was $20,361 representing an increase of $11,812 or 138% from $8,549 in the corresponding period in 2009. During the nine months ended March 31, 2010, we sold one CTLM® System which was installed in August 2009 at the Catherine Women’s Medical Center in Petaling Jaya, Malaysia.

Other Income for the three ~~and nine months~~ ended ~~March 31,~~September 30, 2010, was ~~$11,209 and $15,655, respectively, representing~~$35,664, of which $34,482 represented the extinguishment of debt from prior fiscal years which was originally recorded as allowance for doubtful accounts. Subsequently, we were able to collect receivables from our customers enabling us to reduce our allowance for doubtful accounts. Of the $35,664, $1,182 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 ~~and nine months~~ ended ~~March 31,~~September 30, 2010, were ~~$583,072 and $2,512,765, respectively,~~$565,674, representing ~~increases~~an increase of ~~$99,682~~$167,677 or ~~21% and $626,458 or 33%~~42%, from ~~$483,390 and $1,886,307~~$397,997 in the corresponding periods in fiscal 2009. Of the $583,072, there was a one time credit adjustment of $460,000 due to recording the issuance of 24,000,000 shares to be used as collateral in connection with loans in December 2009. Of the $1,043,072,$565,674, compensation and related benefits comprised ~~$794,922 (76%~~$445,250 (79%) compared to ~~$365,209 (76%~~$258,032 (65%), during the three months ended ~~March 31,~~September 30, 2009. Of the ~~$794,922~~$445,250 and ~~$365,209~~$258,032 compensation and related benefits, ~~$513,063 (65%~~$88,654 (20%) and ~~$72,679 (25%), respectively, were due to equity based compensation related to expensing stock options.~~

Of the $2,512,765, compensation and related benefits comprised $1,333,781 (53%), compared to $1,108,581 (59%), during the nine months ended March 31, 2009. Of the $1,333,781 and $1,108,581 compensation and related benefits, $516,519 (39%) and $104,777 (10%$1,728 (1%), respectively, were due to equity based compensation related to expensing stock options.

The ~~three-month~~ increase of ~~$99,682~~$167,677 is ~~a net result. The significant increases were $429,713~~primarily due to an increase of $187,218 in compensation and related ~~benefits; $123,644~~benefits as a result of staff restructuring and an increased amount of stock option expense during the current quarter; and $9,120 in ~~premium expenses associated with the short-term loans; and $20,195 in travel related~~accounting expenses.

The ~~increases were partially~~increase is offset by decreases of ~~$460,000 due to recording the issuance of 24,000,000 shares to be used as collateral~~$20,685 in ~~connection with loans in December 2009; and $11,535 in proxy service expenses~~consulting services as a result of ~~not having~~early termination in December 2009 of the services provided by our ~~Annual Meeting in the period.~~

~~The nine-month increase of $626,458 is a net result. The significant increases were $225,201 in compensation~~Senior Management Business Consultant; and related benefits; $465,500 in loan costs expense associated with the issuance of additional consideration for short-term loans; $231,144 in premium expenses associated with the short-term loans; and $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan.

~~The increases were partially offset by decreases of $41,422~~$8,004 in legal expenses involving ~~Corporate~~corporate and Securities matters; $81,588 in rent expense; $64,000 in placement fees associated with the sale of Convertible Debentures in August and November 2008; $76,429 in proxy service expenses as a result of not having our Annual Meeting in the period; $22,565 in maintenance and repairs; $32,975 in insurance premiums; and $13,494 in freight expenses.securities matters.

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

RESEARCH AND DEVELOPMENT

Research and development expenses during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2010, were ~~$174,350 and $429,637, respectively,~~$239,800, representing ~~decreases~~an increase of ~~$36,134~~$116,338 or ~~17% and $598,645 or 58%~~94%, from ~~$210,484 and $1,028,282~~$123,462 in the corresponding ~~periods~~period in fiscal 2009. Of the ~~$174,350,~~$239,800, compensation and related benefits comprised ~~$158,093 (91%~~$213,478 (89%), compared to ~~$161,824 (77%~~$92,069 (75%) during the three months ended ~~March 31,~~September 30, 2009. Of the ~~$158,093~~$213,478 and ~~$161,824~~$92,069 compensation and related benefits, ~~$5,580 (4%~~$4,422 (2%) and ~~$3,246 (2%~~$1,939 (3%), respectively, were due to ~~equity based compensation related to expensing stock options.~~

Of the $429,637, compensation and related benefits comprised $355,757 (83%), compared to $602,533 (59%) during the nine months ended March 31, 2009. Of the $355,757 and $602,533 compensation and related benefits, $8,224 (2%) and $10,118 (2%), respectively, were due to equity basednon-cash compensation related to expensing stock options.

The ~~three-month decrease~~increase of ~~$36,134~~$116,338 is primarily due ~~primarily~~ to ~~$3,731~~an increase of $121,382 in compensation and related benefits as a result of ~~a reduction~~staff restructuring and an increased amount of stock option expense during the current quarter. The increase is offset by decreases of $2,446 in ~~staff;~~legal patent expenses associated with new patents and ~~$33,328~~$1,830 in ~~clinical~~consulting expenses due to our decreased use of consultants in the ~~variable costs associated with our PMA~~field of scientific and clinical ~~trials.~~disciplines.

We expect a significant increase in our research and development expenses induring the fiscal ~~2010~~year ending June 30, 2011 due to increased costs associated with preparing our FDA application and submitting it to the ~~cost of completing our PMA clinical trials in the United States.~~FDA. We also expect our consulting expenses and professional fees to increase due to ~~PMA activities.~~the costs associated with our FDA application. See Item 5. Other Information - “Recent Developments, Regulatory Matters”.

Sales and marketing expenses during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2010, were ~~$53,347 and $233,594, respectfully,~~$74,336, representing ~~decreases~~a decrease of ~~$48,767~~$9,636 or ~~48% and $235,707 or 51%,~~11% from ~~$102,114 and $469,301 in~~$83,972in the corresponding ~~periods~~period in fiscal 2009. Of the ~~$53,347,~~$74,336, compensation and related benefits comprised ~~$0,~~$14,281 (19%), compared to ~~$25,765 (25%~~$2,333 (3%) during the three months ended ~~March 31,~~September 30, 2009. Of the $0$14,281 and ~~$25,765~~$2,333 compensation and related benefits, ~~$0 (0%~~$968 (7%) and ~~$525 (2%~~$0 (0%), respectively, were due to ~~equity based compensation related to expensing stock options.~~

Of the $233,594, compensation and related benefits comprised $762 (0%), compared to $84,519 (18%) during the nine months ended March 31, 2009. Of the $762 and $84,519 compensation and related benefits, $0 (0%) and $1,544 (2%), respectively, were due to equity basednon-cash compensation related to expensing stock options.

The ~~three-month~~ decrease of ~~$48,767~~$9,636 is a net result. The ~~significant~~relevant decreases were ~~$25,781~~$34,691 in ~~compensation and related benefits~~trade show expenses due to ~~a reduction~~the recording of RSNA 2010 and ECR 2011 invoices in ~~marketing support staff; and $74,502~~prior accounting periods; $13,900 in representative office expense as a result of our new strategic marketing plan to appoint a distributor and dealers and ~~close our representative office in Beijing, China as part of our cost savings initiative.~~

The decreases were partially offset by increases of $9,422 in trade show expenses; $5,207 in advertising and promotion; $6,059 in printing expenses; $2,209 in regulatory expenses and $25,390 in travel expenses.

The nine-month decrease of $235,707 is a net result. The significant decreases were $83,757 in compensation and related benefits due to a reduction in marketing support staff; $151,253 in representative office expense as a result of our new strategic marketing plan to appoint a distributor and dealers and closeclosed our representative office in Beijing, China as part of our cost savings initiative; ~~$14,451~~and $1,069 in advertising and ~~promotion; $9,924 in freight expenses; and $8,605 in regulatory~~promotion related expenses.

~~The~~ These decreases were partially offset by increases of ~~$26,375~~$21,863 in ~~trade show expenses~~regulatory expenses; $11,948 in compensation and ~~$7,671~~related benefits as a result of staff restructuring and an increased amount of stock option expense during the current quarter; and $6,366 in travel related expenses.

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

AGGREGATED OPERATING EXPENSES

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 ~~March,~~September 30, 2010 and 2009, which were ~~$853,215~~$913,196 and ~~$852,955 respectively,~~$649,115, we had an increase of ~~$260~~$264,081 or ~~0%.~~

In comparing our total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) in the nine months ended March 31, 2010 and 2009, which were $3,301,495 and $3,559,122 respectively, we had a decrease of $257,627 or 7%41%.

The increase of ~~$14,782 in the three-month comparative period~~$264,081 was primarily due to ~~an increase of $99,682~~increases in general and administrative expenses ~~which was offset by decreases~~ of ~~$36,134 in~~$167,677; research and development expenses ~~and $48,767~~of $116,338; combined with a decrease in sales and marketing ~~expenses.~~expenses of $9,636.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2011 due to increased costs associated with preparing our FDA application and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application.

Inventory Valuation Adjustments during the three months ended September 30, 2010, were $5,687, representing an increase of $720, or 14%, from the corresponding period in fiscal 2009.

Compensation and related benefits during the quarter ended September 30, 2010, were $673,009, representing an increase of $320,548 or 91% from $352,461during the quarter ended September 30, 2009. Of the $673,009 and $352,461 compensation and related benefits, $94,043 (14%) and $3,666 (1%), respectively, were due to non-cash compensation associated with expensing stock options. The net increase of $320,548 was due to an increase in cash compensation of $230,171 and a $90,377 increase in the recording of non-cash compensation related to the expensing of stock options.

Interest expense during the three months ended September 30, 2010, was $67,092, representing a increase of $15,117 or 29%, from $51,975during the corresponding period in fiscal 2009. The interest expense is primarily comprised of the imputed interest of $66,487 associated with our equity credit line with Southridge Partners II, LLP (“Southridge”) as

The decrease of $207,894 in the nine-month comparative period was primarily due to decreases of $598,645 in research and development expenses and $235,707 in sales and marketing expenses, which was offset by an increase of $626,458 in general and administrative expenses.

We expect a significant increase in research and development expenses throughout the balance of fiscal 2010 due to the cost of finishing our PMA clinical trials in the United States and submission of our PMA application to the FDA. We also expect consulting expenses and professional fees to increase due to PMA activities.

Inventory Valuation Adjustments during the three and nine months ended March 31, 2010, were $4,930 and $11,456, respectively, representing an increase of $622 or 14% and decrease of $5,799 or 34%, from $4,308 and $17,255, respectively, during the three and nine months ended March 31, 2009. The fluctuations are a result of write-down of systems that have lost value due to usage as demonstrators on consignment.

Compensation and related benefits during the three and nine months ended March 31, 2010, were $952,999 and $1,690,300, respectively, representing an increase of $400,201 or 72% and a decrease of $105,332 or 6% from $552,798 and $1,795,632, respectively, during the three and nine months ended December 31, 2009. Of the $952,999 and $1,690,300 compensation and related benefits, $518,643 (54%) and $524,743 (31%), respectively, were due to equity based compensation associated with expensing stock options, which was an increase of $442,193 or 578% and $408,303 or 351% from $76,450 and $116,439 during the three and nine months ended March 31, 2009.

Interest expense during the three and nine months ended March 31, 2010, was $34,121 and $100,941, respectively, representing decreases of $154,516 or 82% and $373,431 or 79% from $188,637 and $474,372, respectively, during the three and nine months ended December 31, 2009. The interest expense is primarily comprised of the amortization of the debt discount on our convertible debenture and the imputed interest associated with our equity credit line with Charlton Avenue, LLC in the first and second quarter and Southridge Partners II LLP in the third quarter as per the terms and conditions of our private equity credit agreements. Our utilization of the credit line decreased significantly as we used the proceeds from short-term loans for current operations, which resulted in a reduction of interest expense for the period s.agreement. See ~~Part II.~~ Item 5. Other Information – “Financing/Equity Line of Credit”.

Our combined cash and cash equivalents totaled ~~$239,846~~$236,475 as of ~~March 31,~~September 30, 2010. This is an increase of ~~$227,311~~$162,631 from ~~$12,535~~$73,844 as of June 30, ~~2009.~~2010. During the quarter ending ~~March 31,~~September 30, 2010, we received a net of ~~$300,000~~$800,000 from the sale of common stock through our private equity agreement with ~~Southridge, and we received $954,294 from short term loans.~~Southridge. See Part II. Item 5, – “Financing/Equity Line of Credit” ~~and “Short-Term Loans”.~~

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

Property and Equipment was valued at ~~$243,620~~$202,607 net as of ~~March 31,~~September 30, 2010. The overall decrease of ~~$88,411~~$19,156 from June 30, ~~2009~~2010 is due primarily to depreciation recorded for the first ~~second and third quarters.~~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.

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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 ~~nine~~three months ending ~~March 31,~~September 30, 2010, was ~~$1,961,702,~~$637,369, primarily due to the costs of wages and related benefits, legal and consulting expenses, research and development expenses, clinical expenses, and travel expenses associated with clinical and sales and marketing activities. At ~~March 31,~~September 30, 2010, we had working capital of ~~$(2,425,218)~~$(2,403,217) compared to working capital of ~~$(1,666,312)~~$(2,555,646) at June 30, ~~2009.~~2010.

During the ~~third~~first quarter ending ~~March 31,~~September 30, 2010, we raised ~~$350,000~~$800,000 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 $954,294 from short term loans.~~2010. 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.

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Capital expenditures for the ~~nine~~three months ending ~~March 31,~~September 30, 2010, were $0 as compared to ~~$1,231~~$0 for the ~~nine~~three months ending ~~March 31,~~September 30, 2009. ~~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, ~~2010~~2011 will be approximately ~~$5,000.~~$20,000.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of ~~March 31,~~September 30, 2010. 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 ~~PMA~~approval process, and advanced product development activities. We intend to use the proceeds from the sale of convertible debentures,

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convertible preferred shares, 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 Wachovia ~~Bank~~Ba nk N.A.

SALE/LEASE-BACK

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. T he 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. We 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

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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 ~~wa s~~was entitled to cancel the lease without penalty or fault upon 180 days prior notice given to the other party.

On April 29, 2008, we gave six months prior written notice of termination of our lease of our Plantation, Florida facility. On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease is five years and one month, with the first monthly rent payment due September 1, 2008, with an option to renew for one additional period of three years. The monthly base rent for the initial year is $6,580 plus applicable sales tax. During the term and any renewal term of the lease, the base annual rent shall be increased each ye ar. 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 ~~through 2003~~ and may ~~in the future~~continue to issue stock for services ~~performed and to be performed~~rendered by ~~consultants. The issuance~~consultants, all 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.~~whom have been unaffiliated.

Since we have generated no ~~material~~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 ~~7,306,500~~2,306,500 shares of common stock ~~covered by~~according to registration statements on Form S-8. The aggregate fair market value of ~~those~~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 IDS I’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

~~Table~~ was $55,000. The Company agreed to register as soon as practicable the aggregate of ~~Contents~~

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.

~~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 $5 5,000.

Issuance of Stock in Connection with Short-Term Loans

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70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500.

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

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to atwo short-term promissory ~~note. This note was~~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 ~~has been~~was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. In connection with these three extensions a total of $141,000 of additional premium was accrued. As of the date of this report, we have not repaid any of the aggregate principal and premium on these short term notes.

On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). 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 res erve additional shares for conversion if we sell or issue 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 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 has agreed to a conversion floor price of $.015, which would require us to reserve an additional 6,745,643 common shares.

As of the date of this report, we owe a total of $1,539,500 in short-term debt. Of the $1,539,500 we owe a total of $1,089,356 in principal and $450,144 in premium. We have received loan extensions on all of our short-term notes to October 31, 2010. We have repaid ~~the~~ aggregate principal and premium in the amount of $147,500 on all of our ~~short term notes connected~~short-term notes. As of the date of this report, we are in default on these promissory notes. The lender has yet to provide a demand notice to exercise the rights to the collateral shares in lieu of repayment of such debt. We continue to negotiate with the ~~issuance~~lender for an extension of ~~stock for collateral and additional consideration.~~the maturity date of these promissory notes.

There can be no assurances that we will be able to pay these notes when due. If we default on the notes due to the lack of new funding, we could be materially adversely affected.

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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.

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.

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PART II

OTHER INFORMATION

Item 1.1. 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 believe that this claim is without merit, and we intend to vigorously defend the case. Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond. Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009. The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses. At the hearing, the plaintiffs did not prove all of the facts underlying their claims. The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”. At that time, our counsel will present our demand for damages from “vexatious litigation” by the plaintiffs.&# 160; The November 10, 2010 hearing was postponed until November 17, 2010. Our counsel reported that the plaintiffs failed to present their statements to the court in a timely manner and therefore, should no longer be able to pursue any legal remedy in this matter.

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Item 1AA. Risk Factors. ~~Risk Factors.~~

Our Annual Report on Form 10-K for the year ended June 30, ~~2009,~~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 the ~~third~~first quarter ended ~~March 31,~~September 30, 2010, there were no material changes in risk factors as previously disclosed in our Form 10-K filed on October 13, ~~2009.~~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~~As of the date of this report, we are in default on promissory notes that had a maturity date which was extended to October 31, 2010. The lender has yet to provide a demand notice to exercise the rights to the collateral shares in lieu of repayment of such debt. We continue to negotiate with the lender for an extension of the maturity date of these promissory notes. See “Item 2 Results of Operations, Issuance of Stock in Connection with Short-Term Loans”

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

None

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

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

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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.~~ 0;~~ 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.

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

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

We reported in our Prospectus dated December 27, 2005 that we experienced further delays because of difficulties in designing a revised clinical protocol and in enlisting hospitals and imaging centers to participate in acquiring new clinical cases. In spite of the delays we experienced in obtaining the necessary approvals from the hospitals and their respective Institutional Review Boards (“IRB”), we made good progress in advancing PMA activities. We further reported on March 23, 2006 that changes would be incorporated to bring the CTLM® system to its most current design level. Those changes were made and do, we believe, improve the device’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality. As of May 2009, 10 clinical sites have participated in the clinical trials and we believe we have sufficient clinical data to support our PMA application. While we anticipate that the remaining PMA process consisting of the reading phase, the statistical tabulation phase and submission of the application to the FDA should be completed in 2009, these milestones cannot be met unless we obtain sufficient financing through the sale of equity or debt securities.

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

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

The development chronology stated above details how complicated the process is to develop a brand new medical imaging technology. We believe that we have a strong patent portfolio and are the world leader in optical tomography. We have received marketing approval in China and ~~Canada,~~Canada; the CE Mark for the European ~~Union,~~Union; ISO 13485:2003 ~~registration,~~registration; UL Electrical Test ~~Certificate,~~Certificate; and Product registrations in Brazil and Argentina. The registrations for Brazil and Argentina were not renewed in 2009 because of the costs

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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 ~~14,000~~15,000 patient scans, and we have sold 15 CTLM® systems as of the date of this report. Our decision to fund the Company primarily through the sale of equity has enabled us to reach this important milestone. In fiscal ~~2009~~2010 we used the proceeds from ~~the sale of convertible debentures~~short-term loans and proceeds from our Southridge Private Equity Credit Agreement for working capital. ~~Go ing~~Going forward ~~from March 2010,~~ we intend to use the proceeds of draws from our Southridge ~~Private~~P rivate Equity Credit Agreement and any successor private equity agreements with Southridge and/or alternative financing facilities, which may include issuance of convertible preferred stock, as our sources of working capital. Substantial additional financing will be required before and after the filing of the ~~PMA~~FDA application. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit.”

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Clinical Collaboration Sites Update

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

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

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

Global Commercialization Update

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 C TLM® 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 ~~April 2009,~~July 2010, we announced that we ~~hired Dr. Rajesh Suresh Sheth as our~~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 ~~for India. Dr. Sheth, a radiologist with more than 18 years~~ of ~~experience, will be responsible for marketing and promoting~~High-Tech Healthcare Equipments Pvt. Ltd. We continue to seek qualified distributi on channels in China but as of the ~~CTLM® system to hospitals and imaging centers throughout Mumbai and New Delhi. 0;We are currently negotiating with a new distributor for China.~~date of this report we have not secured such channels.

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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

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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~~th e 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 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 p eriod. Daichi issued a purchase order for this system and it was 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 continued 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 2009~~ in Vienna, Austria, we were able to meet with qualified distributors to discuss their interest in representing us in their respective territories. While attending Arab Health INin January 2009, 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 because of U.S. economic sanctions and export controls.

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 2009, we announced the appointment of Shihab Muscat United LLC (“SMU”) as our exclusive distributor for the country of Oman.~~ Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, 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.~~ 0; Also in April 2009 we announced that Socrate Medical SRL located in Milan, Italy, has been selected as a distributor for the CTLM® system in Northern and Central Italy.~~

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

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

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

Among our global users, we have three systems in Poland, four in Italy, two in the Czech Republic, two systems in the United Arab Emirates, and two systems in China as well as one system each in Germany, Hungary and Malaysia. As of the date of this report IDSI’s users have performed over 14,000 CT Laser Mammography (CTLM®) patient scans worldwide.

~~Other Recent Events~~

In January 2010, we announced the appointment of Ultra-X BH as the exclusive distributor for the CTLM® for Brazil. Ultra-X was founded in 1987 specializing in software and hardware diagnostic solutions with locations in Brazil, Europe and Asia. Ultra-X Brazil will introduce the CTLM® system to the private and public sector, including government officials, exhibit at local trade shows, and support additional clinical studies for future applications of the CTLM® technology.

In February 2010, we announced that the Australian Department of Health and Ageing Therapeutic Goods Administration (TGA) has approved the CTLM® for inclusion in the Australian Register of Therapeutic Goods. The TGA must approve the inclusion of all medical devices in the Register before devices can be sold in Australia. Approval was obtained through the efforts of Jainsons Pty Ltd., our distributor for the CTLM® in Australia.

OnIn March ~~22,~~ 2010, we ~~entered into two-year employment agreements (the “Agreements”)~~exhibited our CTLM® system and ~~accompanying stock option agreements with Linda B. Grable, Chairman~~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 ~~Board~~largest medical meetings in Europe and ~~Chief Executive Officer, (“Grable”) Allan L. Schwartz, Executive Vice President~~the second largest radiology meeting in the world and ~~Chief Financial Officer, (“Schwartz”)~~currently has 45,000 members.

Among our global users, we have three systems in Poland, two in Italy, two in the Czech Republic, two systems in the United Arab Emirates, and Deborah O’Brien, Senior Vice President, (“O’Brien”). Each Agreement is for a two-year term commencing March 22, 2010. The Agreements provide annual base salaries of $168,000 per annum for Grable, $192,000 for Schwartz,two systems in China as well as one system each in Germany, Hungary, Malaysia and ~~$138,000 for O’Brien. Each executive officer’s option agreement provides an option to purchase 6,000,000 shares~~India. As of the ~~Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective~~ date of this report, IDSI’s users have performed over 15,000 CT Laser Mammography (CTLM®) patient scans worldwide.

Other Recent Events

From November 8 to 10, 2010, we exhibited our CTLM® system with our Canadian distributor, Arc Diagnostic at the ~~employment agreement~~Health Achieve 2010 in Toronto, Canada. This exposition provided IDSI the opportunity to introduce and ~~3,000,000 shares shall vest~~showcase the CTLM® system for the first time in Canada to prestigious hospitals, decision makers and ~~become exercisable on March 22, 2011. The option exercise price per share is $.05,~~Ministry of Health and business leaders in the closing price of the Company’s common stock on March 22, 2010. Grable’s new employment agreement replaces her previous employment agreement which was set to expire on April 15, 2010. The prior employment agreements for Mr. Schwartz and Ms. O’Brien expired on March 22, 2010 and September 14, 2008, respectively.area.

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.

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IDSI’s strategic thrust for the LILA project shas 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

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~~$69,000~~ $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~~eng ineering 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 sal aries 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 Ch arlton, 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

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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 ~~consu lting~~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.

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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 C redit 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.

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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.

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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 comm itment 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 adjuste d 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 d raw 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

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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

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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~~s tate 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 ~~$1,000,000~~$2,000,000 and issued ~~24,107,432~~71,244,381 shares of common stock under the Private Equity Credit Agreement with Southridge.

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

Sale of Building

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

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

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

Debenture Private Placement

On August 1, 2008, we entered into a Securities Purchase Agreement (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”). We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock

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underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration ~~Sta tement~~Statement promptly after the filing of our Annual Report on Form 10-K.

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

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

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

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

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

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

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

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

On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective. On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”). We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha

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promptly following our annual meeting of shareholders, which was held on ~~Decembe r~~December 29, 2008. At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”). We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable, and no later than 75 days after filing. In the case of a review by the Securities and Exchange Commission the effectiveness date deadline extended to 120 days. In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~~As of September 30, 2009, Whalehaven held Warrants to purchase 11,666,667 shares of common stock at an exercise price of $0.005.~~ On October 14, 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022. The shares were issued pursuant to Rule 144. Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.

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

~~As of September 30, 2009, Alpha held Warrants to purchase 3,555,555 shares of common stock at an exercise price of $0.005.~~ On October 13, 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.029. The shares were issued pursuant to Rule 144.

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

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

~~Short Term~~

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Short-Term Loans

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

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as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 ~~has been~~was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. In connection with these three extensions a total of $97,400 of additional premium was accrued. As of the date of this report, we have not repaid any of the aggregate principa l and premium on these short term notes.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to atwo short-term promissory ~~note. This note was~~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.~~ 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 ~~has been~~was first extended to June 15, ~~2010.~~

~~On February 23,~~ 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. In connection with these three extensions a total of $141,000 of additional premium was accrued. As of the date of this report, we ~~borrowed $4,293 from an employee pursuant to a short-term promissory note. This note is payable April 23, 2010 in~~have not repaid any of the ~~amount of~~aggregate principal ~~plus 15%~~and premium ~~so that the total amount due was $4,938. This note was paid in full~~ on ~~April 19, 2010.~~these short term notes.

As of the date of this report, we owe a total of $1,539,500 in short-term debt. Of the $1,539,500 we owe a total of $1,089,356 in principal and $450,144 in premium. We have received loan extensions on all of our short-term notes to October 31, 2010. We have repaid aggregate principal and premium in the amount of $147,500 on all of our short-term notes. As of the date of this report, we are in default on these promissory notes. The lender has yet to provide a demand notice to exercise the rights to the collateral shares in lieu of repayment of such debt. We continue to negotiate with the lender for an extension of the maturity date of these promissory notes.

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On February 23, 2010, we borrowed $4,293 from an employee pursuant to a short-term promissory note. This note is payable April 23, 2010 in the amount of principal plus 15% premium, so that the total amount due was $4,938. This note was paid in full on April 19, 2010.

As of the date of this report, we have repaid the aggregate principal and premium on our short term notes in the amount of $152,438.

There can be no assurances that we will be able to pay these notes when due. If we default on the notes due to the lack of new funding, we could be materially adversely affected.

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.

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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.

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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.
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.

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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: ~~May 17,~~November 15, 2010		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)

38 42

IMAGING DIAGNOSTIC SYSTEMS, INC.
IMAGING DIAGNOSTIC SYSTEMS, INC.											IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)	(A Development Stage Company)										(A Development Stage Company)
Condensed Statement of Cash Flows	Condensed Statement of Cash Flows										Condensed Statement of Cash Flows

		Nine Months						Since Inception				Three Months						Since Inception
		Ended March 31,						(12/10/93) to				Ended September 30,						(12/10/93) to
		2010			2009			Mar. 31, 2010				2010			2009			Sept. 30, 2010
Cash flows from operations:
Net loss		$	(3,229,285	)	$	(2,848,053	)	$	(103,290,692	)		$	(956,466	)	$	(560,445	)	$	(105,989,587	)
Changes in assets and liabilities			1,267,583			718,724			30,755,888				319,097			311,764			31,851,412
Net cash used in operations			(1,961,702	)		(2,129,329	)		(72,534,804	)			(637,369	)		(248,681	)		(74,138,175	)


Cash flows from investing activities:
Proceeds from sale of property & equipment			-			2,400			4,390,015				-			-			4,390,015
Capital expenditures			-			(1,231	)		(7,578,436	)			-			-			(7,578,436	)
Net cash provided by (used in) for investing activities			-			1,169			(3,188,421	)
Net cash provided (used in) investing activities													-			-			(3,188,421	)


Cash flows from financing activities:
Repayment of capital lease obligation			-			-			(50,289	)			-			-			(50,289	)
Other financing activities			1,241,794			800,000			7,876,823				-			-			7,876,823
Proceeds from issuance of preferred stock			350,000			-			18,389,500				-			-			18,389,500
Net proceeds from issuance of common stock			597,219			1,350,971			49,747,037				800,000			277,500			51,347,037

Net cash provided by financing activities			2,189,013			2,150,971			75,963,071
Net cash provided by (used in) financing activities													800,000			277,500			77,563,071

Net increase in cash			227,311			22,811			239,846
Net increase (decrease) in cash													162,631			28,819			236,475

Cash, beginning of period			12,535			49,433			-				73,844			12,535			-

Cash, end of period		$	239,846		$	72,244		$	239,846			$	236,475		$	41,354		$	236,475


The accompanying notes are an intergral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.											The accompanying notes are an integral part of these condensed financial statements.

IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheet

Assets

		Mar. 31, 2010			Jun. 30, 2009
Current assets:		Unaudited				*
	Cash	$	239,846		$	12,535
	Accounts receivable, net of allowances for doubtful accounts
	of $57,982 and $57,982, respectively		24,188			21,514
	Loans receivable, net of reserve of $57,000
	and $57,000, respectively		357			357
	Other Receivables		50,000			-
	Inventories, net of reserve of $399,000 and $408,000, respectively		496,698			527,467
	Prepaid expenses		19,517			35,617

	Total current assets		830,606			597,490

Property and equipment, net			243,620			332,031
Intangible assets, net			179,426			205,059

	Total assets	$	1,253,652		$	1,134,580


Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
	Accounts payable and accrued expenses	$	1,809,522		$	1,994,220
	Customer deposits		98,114			96,114
	Short term debt		1,348,188			-
	Convertible debenture, net of debt discount of $0
	and $35,352, respectively		-			173,468

	Total current liabilities		3,255,824			2,263,802

Convertible preferred stock (Series L), 9% cumulative annual dividend,
no par value, 35 and 0 shares issued, respectively			350,000			-

Stockholders equity (Deficit):
	Common stock		104,982,394			102,280,228
	Common stock - Debt Collateral		(1,150,000	)		-
	Additional paid-in capital		3,953,886			3,499,717
	Deficit accumulated during development stage		(110,138,452	)		(106,909,167	)

	Total stockholders' equity (Deficit)		(2,352,172	)		(1,129,222	)

	Total assets and stockholders' equity (Deficit)	$	1,253,652		$	1,134,580

* Condensed from audited financial statements.


The accompanying notes are an integral part of these condensed financial statements.