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

Accounts payable and accrued expenses consist of the following:

As of the date of this report, we owe a total of $1,779,332 of short term debt of which $1,296,171 is principal, $472,899 is accrued premium and $10,262 is accrued interest.  A promissory note totaling $60,000 in principal has been extended to May 31, 2011; five promissory notes totaling $575,000 in principal have a maturity date that had been extended to March 31, 2011; two promissory notes totaling $65,000 in principal have a maturity date of March 31, 2011; six promissory notes totaling $332,000 in principal have a maturity date of May 31, 2011 as the new maturity date, four promissory notes totaling $245,000 in principal have a maturity date of July 31, 2011; and one promissory note totaling $19,171 has a maturity date of May 26, 2011.

As of the date of this quarterly report, we have 906,709,168 shares outstanding.  We have reserved 6,587,690 shares to cover the conversion of the 20 shares of outstanding Series L Convertible Preferred Stock and 36,914,854 shares to cover outstanding options.  Pursuant to the Certificate of Designations, Rights and Preferences for the Series L Convertible Preferred Stock, we were obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  The investor agreed to Southridge Partners II, LLP (“Southridge”) 71,244,381a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designations, Rights and Preferences.

On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock outat our next annual meeting to be held on July 12, 2011.  This waiver encompasses a total of 13,333,333 shares issuable upon full conversion 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 24, 2010 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 registration20 shares of the adjusted number of shares available that have not been sold to SouthridgeSeries L Convertible Preferred Stock held by the investor 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,In April 2011, we would have 4,110,756 shares available to be sold to Southridge upon the effectiveness of our Post-Effective Amendment to our Registration Statement on Form S-1.

Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the Certificatelesser of Designation, Rights and Preferences for(a) $0.01 or (b) ninety percent (90%) of the Series L Convertible Preferred Stock, we are obligatedaverage of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior 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 issuancethe conversion notice.

Southridge proposed that we amend the conversion terms of the Preferred Stock).  In October 2010,notes permitting the holder to convert the notes and we obtained a waiver fromagreed to the private investor holding the 35amendment.  From January 12, 2011 to May 16, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of Convertible Preferred Stock inour common stock, of which the investor agreed to convert no more than the 16,587,690 common51,802,774 shares currently reserved as we do not have sufficient authorized commonwere collateral shares to reserve for further conversionsand 1,340,908 new shares were issued 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.Rule 144.

In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers have agreed that they will not exercise any of their respective options to purchase an aggregate of 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn.  As a result of the waivers relating to stock options and our Series L Convertible Preferred Stock described above, we would then have available for issuance 37,247,359 shares of common stock, of which 35,487,756 shares available upon effectiveness ofare covered by our Post-Effective Amendment to ourpending Registration Statement on Form S-1.S-1 filed December 21, 2010, as amended, which has not been declared effective.

We have evaluated all subsequent events through November 15, 2010May 16, 2011 for disclosure purposes.

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, 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.  These forward-looking statements include, among others, statements relating to our business strategy, which is based upon our interpretation and analysis of trends in the healthcare treatment industry, especially those related to the diagnosis and treatment of breast cancer, and upon management’s ability to successfully develop and commercialize its principal product, the CTLM®.  This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to alternative techniques for diagnosing and managing breast cancer.  Factors that could cause actual results to materially differ include, without limitation, the timely and successful completionsubmission of our U.S. Food and Drug Administration (“FDA”) clinical trials; the timely and successful submission of our FDA application to obtain marketing clearance; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrange ments;arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future.  There are also many known and unknown risks, uncertainties and other factors, including, but not limited to, technological changes and competition from new diagnostic equipment and techniques, changes in general economic conditions, healthcare reform initiatives, legal claims, regulatory changes and risk factors detailed from time to time in our Securities and Exchange Commission filings that may cause these assumptions to prove incorrect and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, those described above or elsewhere in this quarterly report.  All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 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 fo rward-lookingforward-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 detectinglaser breast cancer (CTimaging system that uses computed tomography and laser techniques designed to detect breast abnormalities.  The CT Laser Mammography or, "CTLM®"system (“CTLM®”).  We are is currently in the process of commercializing the CTLM®being commercialized in certain international markets where regulatory approvals to market have been secured although CTLM®obtained.  However, it is not yet approved for sale in the U.S. market.  The CTLM® issystem must obtain marketing clearance through the U.S. Food and Drug Administration (“FDA”) before commercialization can begin in the U.S. market.

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

In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk (NSR)(“NSR”) 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-radiationradiation such as is used in conventional x-ray mammography or CT scanners.  The advantages of imaging without ionizing radiation may be significant in our markets.  CTLM® is an emerging new imaging modality offering the potential of functional molecular

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 pparentapparent 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, 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 ASC 330 (“Inventory”), our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions.  
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.

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

We are continuing to develop our international markets through our global commercialization program.  In the quarter ended September 30, 2010,March 31, 2011, we recorded revenues of $11,461$12,552 representing a decreasean increase of $146,539$11,252 or 866% from $158,000$1,300 during the quarter ended September 30, 2009.March 31, 2010.  The Cost of Sales during the quarter ended September 30, 2010,March 31, 2011, were $4,259$1,669 representing a decreasean increase of $13,508$1,503 or 905% from $17,767$166 during the quarter ended September 30, 2009.March 31, 2010.  The revenue of $11,461$12,552 and cost of sales of $4,259$1,669 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 September 30, 2010.March 31, 2011.  See Item 5.  Other Information – “Other Recent Events”

Other Income for the three and nine months ended September 30, 2010,March 31, 2011, was $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$1,144 and $39,887, respectively, representing 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 expenses during the three and nine months ended September 30, 2010,March 31, 2011, were $565,674,$747,389 and $2,026,014, respectively, representing an increase of $167,677$164,317 or 42%28% and a decrease of $486,752 or 19%, from $397,997$583,072 and $2,512,766 in the corresponding periods in fiscal 2009.2010.  Of the $565,674,$747,389, compensation and related benefits comprised $445,250 (79%$408,836 (55%) compared to $258,032 (65%$794,922 (76%), during the three months ended September 30, 2009.March 31, 2010.  Of the $445,250$408,836 and $258,032$794,922 compensation and related benefits, $88,654 (20%$88,582 (22%) and $1,728 (1%$513,063 (65%), respectively, were due to equity based compensation related to expensing stock options.

Of the $2,026,014, compensation and related benefits comprised $1,233,261 (61%), compared to $1,333,781 (53%), during the nine months ended March 31, 2010.  Of the $1,233,261 and $1,333,781 compensation and related benefits, $265,817 (22%) and $516,519 (39%), respectively, were due to equity based compensation related to expensing stock options.

The three-month increase of $167,677$164,317 is primarily due to an increasea net result.  The significant increases were $42,000 in placement fees and $37,500 in additional consideration associated with our financing with JMJ Financial, $21,000 in consulting expenses; and the adjustment on $460,000 in loan cost expenses associated with the value of $187,218collateral on a short-term note.

The increases were partially offset by decreases of $386,086 in compensation and related benefits as a result of staff restructuring and an increased amount of stock option expense during the current quarter;prior period and $9,120$9,056 in legal fees associated with the maintenance of our existing patents.

The nine-month decrease of $486,752 is a net result.  The significant decreases were $363,500 in loan costs expenses associated with the value of collateral on a short-term note in the prior period; $100,520 in compensation and related benefits; $38,039 in consulting expenses; $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan; $24,621 in travel related expenses; $17,853 in accounting expenses.  The increase is offset by decreases of $20,685 in consulting services as a result of early termination in December 2009 of the services provided by our Senior Management Business Consultant;fees; and $8,004$13,624 in legal expenses involving corporateCorporate and securitiesSecurities matters.

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

Research and development expenses during the three and nine months ended September 30, 2010,March 31, 2011, were $239,800,$206,758 and $685,396, respectively, representing an increaseincreases of $116,338$32,408 or 94%19% and $255,759 or 60%, from $123,462$174,350 and $429,637 in the corresponding periodperiods in fiscal 2009.2010.  Of the $239,800,$206,758, compensation and related benefits comprised $213,478 (89%$173,311 (84%), compared to $92,069 (75%$158,093 (91%) during the three months ended September 30, 2009.March 31, 2010.  Of the $213,478$173,311 and $92,069$158,093 compensation and related benefits, $4,422$4,272 (2%) and $1,939 (3%$5,580 (4%), respectively, were due to non-cashequity based compensation related to expensing stock options.

Of the $685,396, compensation and related benefits comprised $556,595 (81%), compared to $355,757 (83%) during the nine months ended March 31, 2010.  Of the $556,595 and $355,757 compensation and related benefits, $12,965 (2%) and $8,224 (2%), respectively, were due to equity based compensation related to expensing stock options.

The three-month increase of $116,338$32,408 is due primarily due to an increase of $121,382$15,218 in compensation and related benefits as a result of staff restructuringrestructuring; $12,957 in consulting expenses; and an increased amount of stock option expense during the current quarter.  The increase is offset by decreases of $2,446$5,290 in legal patent expenses associated with new patentspending patent applications.

The nine-month increase of $255,759 is due primarily to $200,838 in compensation and $1,830related benefits as a result of staff restructuring; $41,868 in legal expenses involving FDA matters; and $22,739 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines.

We expect aanticipate significant increaseincreases in our research and development expenses, consulting expenses and professional fees 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 pending Pre-Market Notification 510(k) application filed with the FDA application.on November 22, 2010.  See Item 5. Other Information - “Recent Developments, Regulatory Matters”.

Sales and marketing expenses during the three and nine months ended September 30, 2010,March 31, 2011, were $74,336,$112,194 and $368,885, respectively, representing a decreaseincreases of $9,636$58,847 or 11%110% and $135,291 or 58%, from $83,972in$53,347 and $233,594 in the corresponding periodperiods in fiscal 2009.2010.  Of the $74,336,$112,194, compensation and related benefits comprised $14,281 (19%$19,612 (17%), compared to $2,333 (3%)$0 during the three months ended September 30, 2009.March 31, 2010.  Of the $14,281$19,612 and $2,333$0 compensation and related benefits, $968 (7%(5%) and $0, respectively, were due to equity based compensation related to expensing stock options.

Of the $368,885, compensation and related benefits comprised $49,991 (14%), compared to $762 (0%) during the nine months ended March 31, 2010.  Of the $49,991 and $762 compensation and related benefits, $2,903 (6%) and $0 (0%), respectively, were due to non-cashequity based compensation related to expensing stock options.

The decreasethree-month increase of $9,636$58,847 is a net result.  The relevant decreases were $34,691 in trade show expenses due primarily to the recordingan increase of RSNA 2010 and ECR 2011 invoices in 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 closed our representative office in Beijing, China as part of our cost savings initiative; and $1,069 in advertising and promotion related expenses.  These decreases were partially offset by increases of $21,863 in regulatory expenses; $11,948$19,612 in compensation and related benefits as a result of staff restructuring anddue to an increased amount of stock option expense during the current quarter; and $6,366increase in marketing support staff; $12,775 in freight expenses; $3,218 in travel expenses for sales calls, installation, training and service; and $1,687 in regulatory expenses.

The nine-month increase of $135,291 is due primarily to an increase of $49,229 in compensation and related benefits due to an increase in marketing support staff; $16,302 in advertising and promotion; $10,952 in freight expenses; $16,643 in travel expenses for sales calls, installation, training and service; and $30,054 in regulatory 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.

In comparing our total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) in the three months ended September 30,March, 2011 and 2010, and 2009, which were $913,196$1,096,162 and $649,115,$853,215 respectively, we had an increase of $264,081$242,947 or 41%28%.

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, 2011 and 2010, which were $3,176,183 and $3,301,495 respectively, we had a decrease of $125,313 or 4%.

The increase of $264,081$242,947 in the three-month comparative period was primarily due to an increases of $164,317 in general and administrative expenses; $32,408 in research and development expenses and $58,847 in sales and marketing expenses.

The decrease of $125,313 in the nine-month comparative period was primarily due to a decrease of $486,752 in general and administrative expenses which was partially offset by increases of $167,677;$255,759 in research and development expenses of $116,338; combined with a decreaseand $135,291 in sales and marketing expenses of $9,636.expenses.

We expect aanticipate significant increaseincreases in our research and development expenses, consulting expenses and professional fees 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 pending Pre-Market Notification 510(k) application filed with the FDA application.on November 22, 2010.

Inventory Valuation Adjustments during the three and nine months ended September 30, 2010,March 31, 2011, were $5,687,$6,405 and $17,919, respectively, representing an increaseincreases of $720,$1,475 or 14%30% and $6,463 or 56%, from $4,930 and $11,456, respectively, during the corresponding period in fiscal 2009.three and nine months ended March 31, 2010.  The increases 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 quarterthree and nine months ended September 30, 2010,March 31, 2011, were $673,009,$601,760 and $1,839,847, respectively, representing a decrease of $351,239 or 37% and an increase of $320,548$149,547 or 91%9% from $352,461during$952,999 and $1,690,300, respectively, during the quarterthree and nine months ended September 30, 2009.March 31, 2010.  Of the $673,009$601,760 and $352,461$1,839,847 compensation and related benefits, $94,043 (14%$93,821 (16%) and $3,666 (1%$281,685 (15%), respectively, were due to non-cashequity based compensation associated with expensing stock options.  The net increaseoptions, which was a decrease of $320,548 was due to an increase in cash compensation of $230,171$424,822 or 82% and a $90,377 increase in$243,058 or 46% from $518,643 and $524,743 during the recording of non-cash compensation related to the expensing of stock options.three and nine months ended March 31, 2010.

Our combined cash and cash equivalents totaled $236,475$5,906 as of September 30, 2010.March 31, 2011.  This is an increasea decrease of $162,631$67,938 from $73,844 as of June 30, 2010.  During the quarter ending September 30, 2010,March 31, 2011, we received a net of $800,000$0 from the sale of common stock through our private equity agreement with Southridge.Southridge, and we received $307,000 from short term loans and $300,000 from long-term loans.  See Part II. Item 5, – “Financing/Equity Line of Credit”Credit.”

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

Property and Equipment was valued at $202,607$175,951 net as of September 30, 2010.March 31, 2011.  The overall decrease of $19,156$45,812 from June 30, 2010 is due primarily to depreciation recorded for the first quarter.and second quarters.

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

Since inception we have financed our operating and research and product development activities through several Regulation S and Regulation D private placement transactions, with loans from unaffiliated third parties, and through a sale/lease-back transaction involving our former headquarters facility.  Net cash used for operating and product development expenses during the threenine months ending September 30, 2010,March 31, 2011, was $637,369,$1,779,938, primarily due to the costs of wages and related benefits, legal and consulting expenses, research and development expenses, clinical expenses, and travel expenses associated with clinical and sales and marketing activities.  At September 30, 2010,March 31, 2011, we had working capital of $(2,403,217)$(3,129,698) compared to working capital of $(2,555,646)$(2,555,647) at June 30, 2010.

During the firstthird quarter ending September 30, 2010,March 31, 2011, we raised $800,000did not raise any money through the sale of shares of common stock pursuant to our Amended Private Equity Credit Agreement with Southridge dated January 7, 2010.2010 and we received $307,000 from short-term loans and $300,000 from long-term loans.  See Item 5. Other Information “Financing – Equity Line of Credit.”  We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, in the international market and the expense of continuing our ongoing product development program.  We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering.  If additional funds are raised by issuing equity securities, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.

Capital expenditures for the threenine months ending September 30, 2010,March 31, 2011, were $0 as compared to $0 for the threenine months ending September 30, 2009.March 31, 2011.  We anticipate that the balance of our capital needs for the fiscal year ending June 30, 2011 will be approximately $20,000.$5,000.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30, 2010.March 31, 2011.  Our fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are substantial and are likely to increase as additional agreements are entered into and additional personnel are retained.  We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs.  Our future capital requirements will depend on many factors, including the following:

We do not expect to generate a positive internal cash flow for at least 12 months as substantial costs and expenses continue due principally to the international commercialization of the CTLM®, activities related to our FDA approval process, and advanced product development activities.  We intend to use the proceeds from the sale of convertible debentures, convertible preferred shares, 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 Ba nkBank N.A.

On September 13, 2007, we entered into an agreement to sell for $4.4 million and lease-back our commercial building at 6531 NW 18th Court, Plantation, Florida.  The Agreement was made with an unaffiliated third party, Superfun B.V., a Netherlands corporation (“Purchaser”).  This transaction was a result of a proposal we submitted on July 26, 2007, offering to sell the property for $4.4 million cash in a sale/lease-back transaction, which was accepted on July 31, 2007.  In connection with the proposed transaction, we received an initial deposit of $1.1 million on August 2, 2007.  We further agreed to grant the Purchaser a two-year option to purchase 3,000,000 shares of IDSI’s common stock at an exercise price equal to the market price on the date of the initial deposit.  T heThe 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.

Florida.  The term of the lease is five years and one month,month; with the first monthly rent payment due September 1, 2008,2008; and with an option to renew for one additional period of three years.  The monthly base rent for the initial year is $6,580 plus applicable sales tax.  During the term and any renewal term of the lease, the base annual rent shall be increased each ye ar.year.  Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax.  IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses, which is estimated to be $3,084.37 per month for the first 12 months of the lease.  The total monthly rent including Florida sales tax for the first 12 months is $10,244.23.  Upon the execution of the lease, we paid the first month's rent of $10,244.23 and a security deposit of $13,160.00.  In August 2008, we moved into our new headquarters facility.  We believe that our new facility is adequate for our current and reasonably foreseeable future needs and provides us with a monthly cost savings of $23,196 per month.  We intend to assemble the CTLM® at our facility from hardware components that will be made by vendors to our specifications.

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

Since we have generated no significant revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services.  Since July 1, 1996, we have issued an aggregate of 2,306,500 shares of common stock according to registration statements on Form S-8.  The aggregate fair market value of the shares registered on Form S-8 when issued was $2,437,151.  On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value.  The term of the Agreement was six months, with payment for services being made with shares of IDS I’sIDSI’s common stock with a restricted legend to Richard E. Barsom.  The total payment was 5,000,000 restricted shares, with the first payment of 2,500,000 restricted shares paid on July 16, 2008, and the second payment of 2,500,000 restricted shares paid on October 3, 2008.  The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000.  The Company agreed to register as soon as practicable the aggregate of 5,000,000 shares in an S-1 Registration Statement.  In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for additional investor relation services.  The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.

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

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

In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes.  These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000.  In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes.  The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  Further extensions of the notes were made through May 31, 2011 for 3% additional premium per month on each note.  In connection with these three extensions a total of $97,400$119,800 of additional premium was accrued.  Asaccrued for the December 2009 notes as of the date of this report, we have not repaid anyreport.  In April 2011, Southridge Partners II LP purchased a total of $200,000 in principal value of promissory notes from the aggregate principa lprivate investor.  Southridge converted $100,000 principal and $55,600 premium on these short term notes.into 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes.  These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000.  In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  Further extensions of the notes were made through March 31, 2011 for 3% additional premium per month on each note.  In connection with these three extensionsJanuary 2011, Southridge Partners II LP purchased a total of $141,000$600,000 in principal value of additional premium was accrued.promissory notes from the private investor.  As of the date of this report Southridge has converted $425,000 principal and $200,051 premium into 32,397,016 shares of our common stock of which 31,056,108 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Although we have not repaid anyare in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares.  In connection with these prior extensions and the accrual of the aggregate principal andApril & May additional premiums, a total of $216,750 of additional premium on these short term notes.was accrued for the January 2010 notes as of the date of this report.

On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note.  We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral.  This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010.  The Note was cancelled upon this conversion.  The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock).  Pursuant to the Certificate of Designation,Designations, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and res ervereserve additional shares for conversion if we sellsold or issueissued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation,Designations, Rights and Preferences.  The investor has agreed to a conversion floor price of $.015, which would requirerequired 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$1,779,332 of $1,089,356short term debt of which $1,296,171 is principal, $472,899 is accrued premium and $10,262 is accrued interest.  A promissory note totaling $60,000 in principal has been extended to May 31, 2011; five promissory notes totaling $575,000 in principal have a maturity date that had been extended to March 31, 2011; two promissory notes totaling $65,000 in principal have a maturity date of March 31, 2011; six promissory notes totaling $332,000 in principal have a maturity date of May 31, 2011 as the new maturity date, four promissory notes totaling $245,000 in principal have a maturity date of July 31, 2011; and $450,144 in premium.  We have received loan extensions on allone promissory note totaling $19,171 has a maturity date of our short-term notes to October 31, 2010.May 26, 2011.  We have repaid aggregate principal and premium in the amount of $147,500$152,438 on allthese short-term notes and a total of $525,000 principal and $255,651 in premium has been converted into 53,143,682 shares of our short-term notes.  Ascommon stock of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Out of the dateoriginal 55,363,637 shares of this report, we are in defaultcommon stock held as collateral, a balance of 3,561,133 shares remains 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$475,500 principal of the maturity date of these promissoryremaining notes.

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

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

A PMA is the Food, Drug,FDA process of scientific and Cosmetic Act,regulatory review to evaluate the safety and effectiveness of Class III medical devices.  Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potentially unreasonable risk of illness or injury.  Due to the level of risk associated with Class III devices, the FDA has updetermined that general and special controls alone are insufficient to 180 days to reviewassure the safety and effectiveness of Class III devices.  Therefore, these devices require a submitted PMA application although in certain casesorder to obtain marketing clearance.

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

In May 2003, we filed a PMA application for the CTLM® to the FDA.  In August 2003, we received a letter from the FDA citing some deficiencies in our PMA application requiring a response to the PMA application.  Initially wedeficiencies.  We initially planned on submitting an amendment to make the PMA approvableapplication to resolve the deficiencies and requested an extension. In March 2004 we received an extension of time in March 2004 to respond with the amendment. Inamendment however, in October 2004, we made a decision to voluntarily withdraw our currentthe original PMA application and resubmit the entire packagea modified PMA in a simpler and more clinically and technically robust filing.  The new PMA application would contain a rephrased intended use statement better supported by our data, the inclusion of new clinical cases to improve the biometrics, and with a new clinical protocol to fully support the adjunctive use of CTLM® in clinical mammography settings.

In November 2004, we received a letter from the FDA stating that it had determined that the CTLM® proposed clinical investigation wasstudy had been declared a non-significant riskNon-Significant Risk (NSR) device study. We believed this new classification would be helpful in securing new research and development collaborative agreements.study when used for our intended use.

In January 2005, we determined thatinitiated the PMA process by designing a new clinical study weprotocol and a modified intended to submit touse, which limited 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 improvementsparticipants in the scanning subsystems, image reconstruction and image display software.  We had also improved quality assurance routinesstudy to ensure better operator and physician training, and improved image quality control.  We therefore announced our intention to collect data using our latest systemspatients with dense breast tissue.  The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the results would yieldCTLM® system’s intended use and have the

One of the regulatory requirements for a strongercompany (sponsor) to conduct a clinical study within a hospital or imaging center is the regulatory body’s Institutional Review Board (“IRB”) within each hospital or imaging center, which must approve the clinical research the sponsor is requesting.  We understood the IRB approval process based on prior experience encountered with the first clinical trial.  The IRBs of hospital or imaging centers do not necessarily have a set time frame for reviewing and approving proposed clinical research for a sponsor.  Therefore, there is no way a sponsor can anticipate the length of time it will take each IRB to support our PMA application.  Consequently, we decidedapprove the clinical study.  We were delayed in this process due to install updated CTLM® systems in the U.S. which extended the time it took to actual PMA submission from what we were earlier anticipating, but we believed this approach would better support the application.

In 2006, 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.  ThoseWe believe these changes were made and do, we believe, improveimproved the device’sCTLM®’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.  WeThe data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.

In our clinical trial, the physician at each hospital or imaging center who oversees the clinical study is responsible for ensuring that each patient meets the requirements of the study.  However, there is no way to determine if the patient that is having her standard x-ray mammogram qualifies for the clinical study of the CTLM® system.  For example, each hospital or imaging center has a variable amount of patients scheduled for their mammogram, but it is impossible to determine whether or not a particular patient would meet the inclusion criteria (requirement) of the clinical study.  So if there are continuing13 patients scheduled for a mammogram, we may get only one, or even none that qualify for the clinical study because it is based on the specific inclusion and exclusion criteria determined in the protocol.

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

We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improvesimproved the visualization of angiogenesis (cancer) in the CTLM® images.  Angiogenesis is the process by which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow.  The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier.  We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.

As of May 2009, 10 clinical sites havehad participated in the clinical trials and at the time we believebelieved we havehad sufficient clinical data to support our PMA application.  However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.