UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended September 30, 2007

or

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

For the transition period from _____to______

Commission file number: 0-26028

IMAGING DIAGNOSTIC SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Florida	22-2671269
(State of Incorporation)	(IRS Employer Ident. No.)

6531 N.W. 18th Court, Plantation, FL	33313
(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 x Accelerated filer ¨ Non Accelerated filer

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 September 30, 2007: 318,205,363 shares of common stock, no par value.  As of September 30, 2007, the issuer had no shares of preferred stock outstanding.

IMAGING DIAGNOSTIC SYSTEMS, INC.

(A Development Stage Company)

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Condensed Balance Sheets – (Unaudited) September 30, 2007 and June 30, 2007	3
	Condensed Statements of Operations - (Unaudited) Three months ended September 30, 2007 and 2006, and December 10, 1993 (date of inception) to September 30, 2007	4
	Condensed Statements of Cash Flows - (Unaudited) Three months ended September 30, 2007 and 2006, and December 10, 1993 (date of inception) to September 30, 2007	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Financial Condition and Results	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits	25
Signatures		26

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

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IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheet
Assets
	Sept. 30, 2007			Jun. 30, 2007
Current assets:	Unaudited				*
Cash	$	1,304,040		$	477,812
Accounts receivable, net of allowances for doubtful accounts
of $29,967 and $40,000, respectively		129,579			119,866
Loans receivable		60,383			63,602
Inventories, net of reserve of $408,000 and $108,000, respectively		1,323,614			1,363,156
Prepaid expenses		59,794			36,784
Total current assets		2,877,410			2,061,220
Property and equipment, net		1,993,400			2,030,795
Intangible assets, net		264,868			273,412
Total assets	$	5,135,678		$	4,365,427
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	587,212		$	585,991
Advance on Sale of Building		2,200,000			-
Customer deposits		106,114			88,114
Short term debt		-			250,000
Total current liabilities		2,893,326			924,105
Stockholders equity:
Common Stock		99,365,178			99,120,731
Additional paid-in capital		2,716,507			2,661,650
Deficit accumulated during development stage		(99,839,333	)		(98,341,059	)
Total stockholders' equity		2,242,352			3,441,322
Total liabilities and stockholders' equity	$	5,135,678		$	4,365,427
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial statements.

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IMAGING DIAGNOSTIC SYSTEMS, INC.
A Development Stage Company
(Unaudited)
Condensed Statements of Operations
	Three Months Ended						Since Inception
	September 30,						(12/10/93) to
	2007			2006			Sept. 30, 2007
Net Sales	$	27,543		$	19,862		$	2,060,771
Cost of Sales		13,716			5,184			878,331
Gross Profit		13,827			14,678			1,182,440
Operating Expenses:
General and administrative	$	713,271		$	703,419		$	50,679,016
Research and development		468,328			553,773			18,855,360
Sales and marketing		251,681			302,937			7,341,399
Inventory valuation adjustments		14,774			31,201			4,426,784
Depreciation and amortization		47,333			43,663			2,820,406
Amortization of deferred compensation		-			-			4,064,250
		1,495,387			1,634,993			88,187,215
Operating Loss		(1,481,560	)		(1,620,315	)		(87,004,775	)
Gain on sale of fixed assets		-			-			3,146
Interest income		2,733			5,607			297,121
Other income		-			-			681,463
Interest expense		(19,447	)		(39,258	)		(6,968,528	)
Net Loss		(1,498,274	)		(1,653,966	)		(92,991,573	)
Dividends on cumulative Pfd. stock:
From discount at issuance		-			-			(5,402,713	)
Earned		-			-			(1,445,047	)
Net loss applicable to
common shareholders	$	(1,498,274	)	$	(1,653,966	)	$	(99,839,333	)
Net Loss per common share:
Basic and diluted	$	(0.00	)	$	(0.01	)	$	(0.90	)
Weighted average number of
common shares outstanding:
Basic and diluted		316,602,013			248,208,822			110,344,877
The accompanying notes are an integral part of these condensed financial statements.

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IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows
	Three Months						Since Inception
	Ended September 30,						(12/10/93) to
	2007			2006			Sept. 30, 2007
Cash flows from operations:
Net loss	$	(1,498,274	)	$	(1,653,966	)	$	(92,991,573	)
Changes in assets and liabilities		150,896			284,573			28,412,690
Net cash used in operations		(1,347,378	)		(1,369,393	)		(64,578,883	)
Cash flows from investing activities:
Proceeds from sale of property & equipment		2,200,000			-			2,229,961
Capital expenditures		(1,394	)		(5,972	)		(7,267,145	)
Net cash provided by (used in) investing activities		2,198,606			(5,972	)		(5,037,184	)
Cash flows from financing activities:
Repayment of capital lease obligation		-			-			(50,289	)
Other financing activities - NET		(250,000	)		-			5,835,029
Proceeds from issuance of preferred stock		-			-			18,039,500
Net proceeds from issuance of common stock		225,000			450,000			47,095,867
Net cash provided by (used in) financing activities		(25,000	)		450,000			70,920,107
Net increase (decrease) in cash		826,228			(925,365	)		1,304,040
Cash, beginning of period		477,812			1,467,687			-
Cash, end of period	$	1,304,040		$	542,322		$	1,304,040
The accompanying notes are an intergral part of these condensed financial statements.

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IMAGING DIAGNOSTIC SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

We have prepared the accompanying unaudited condensed financial statements of Imaging Diagnostic Systems, Inc. in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Operating results for the three month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending June 30, 2008.  These condensed financial statements have been prepared in accordance with Financial Accounting Standards No. 7 (FAS 7), Development Stage Enterprises, and should be read in conjunction with our condensed financial statements and related notes included in our Annual Report on Form 10-K filed on September 13, 2007.

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.  We have relied on raising additional capital through our Fifth Private Equity Credit Agreement or other sources of financing; and more recently, the use of funds received as of the date of this report from the pending sale/lease-back of our property.  However, in the event we are unable to draw from this private equity line, alternative financing will be required to continue operations.  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 13 systems as of September 30, 2007; 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 FAS 7 Development Stage Enterprise reporting upon two successive quarters of sufficient revenues such that we would not have to utilize other funding to meet our quarterly operating expenses.

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NOTE 3 - INVENTORY

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

	Sept. 30, 2007			June 30, 2007
Raw materials consisting of purchased parts, components and supplies	$	825,653		$	848,254
Work-in-process including units undergoing final inspection and testing		44,058			44,058
Finished goods		861,902			878,844
Sub-Total Inventories	$	1,731,613		$	1,771,156
Less Inventory Reserve		(408,000	)		(408,000	)
Total Inventory - Net	$	1,323,613		$	1,363,156

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, 2007 we had identified $408,000 of Inventory that we deemed impaired due to the lack of inventory turnover.  For the fiscal year ending June 30, 2006 we had identified $108,000 of Inventory that was in excess of our manufacturing requirements or warranty parts retention policy.  These amounts have been recorded as Inventory Reserve.

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 May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.  We adopted the

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provisions of SFAS No.154, as applicable, at the beginning of fiscal year 2007, and the adoption did not have a material affect on our financial condition or results of operations.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.  This provision is effective for fiscal years beginning after December 15, 2006, which will be our fiscal year 2008.  We adopted Fin 48 and given our substantial loss carry-forward, do not, in the near term, expect it to have any impact of our tax position.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, rather it applies under existing accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, which will be our fiscal year 2009.  We are currently evaluating the impact of SFAS No. 157 on our financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (SAB 108) “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on quantifying financial statement misstatements, including the effects of prior year errors on current year financial statements. SAB 108 is effective for fiscal years beginning after November 15, 2006, which will be our fiscal year 2008.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which will be our fiscal year 2009.  We are currently evaluating the impact this adoption will have on our financial statements.

NOTE 6 – STOCK-BASED COMPENSATION

Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation issued to our employees using the intrinsic value method.  Accordingly, compensation cost for stock options issued was measured as the excess, if any, of the fair value of our common stock at the date of grant over the exercise price of the options.  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 reflected in net income prior to July 1, 2005.  Effective July 1, 2005, the Company adopted SFAS 123(R) “Share-Based Payment” and began recognizing compensation expense for its stock based payments based on the fair value of the rewards under the modified prospective application method.

For purposes of the following disclosures the weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants for the three months ended September 30, 2007: no dividend yield; expected volatility of 68.70%; risk-free interest rate of 5%; and an expected eight-year term for options granted.  For the quarter ending September 30, 2007, the net income and earnings per share reflect the actual deduction for option expense as a non-cash compensation expense.

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Stock-based compensation expense recorded during the three months ended September 30, 2007, was $51,592 compared to $100,492 from the corresponding periods in fiscal 2007.  The decrease for the three months ended September 30, 2007 of $48,900 or 49% was primarily a result of a decline in the total fair value of previously granted options due to options vesting in the prior fiscal year.

The weighted average fair value per option at the date of grant for the three months ended September 30, 2007 and 2006, using the Black-Scholes Option-Pricing Model was $.0671 and $.1156, respectively.  Assumptions were as follows:

	Three Months Ended
	September 30,
	2007	2006
Expected Volatility(1)	68.70%	69.95%
Risk Free Interest Rate(2)	5%	4%
Expected Term(3)	8 yrs	8 yrs

(1)  We calculate expected volatility through a mathematical formula using the last day of the week’s closing stock price for the previous 61 weeks prior to the option grant date.  The expected volatility for the three months ending September 30, 2007 and 2006 in the table above are weighted average calculations.

(2)  The Company raised its risk-free interest rate from 4% to 5% for stock option expensing effective for the quarter ending December 31, 2006.  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 increase in the risk-free interest rate will increase compensation expense.

(3)  Our expected term assumption of eight years was based upon the guidance provided by SEC Staff Accounting Bulletin 107 enabling us to use the simplified method for “plain vanilla” options for this calculation.  This provision may be used for grants made on or before December 31, 2007.

NOTE 7 - COMMON STOCK ISSUANCES – PRIVATE EQUITY CREDIT AGREEMENT

During the first quarter ending September 30, 2007, we raised a total of $225,000 after expenses through the sale of 6,667,325 shares of common stock to Charlton Avenue LLC (Charlton).  For the three months ended September 30, 2007, we recorded a total of $19,447 of deemed interest expense as a result of the 7% discount off the market price under the Fifth Private Equity Credit Agreement.  The interest was paid to Charlton with common shares.  See Item 5.  Other Information – “Financing/Equity Line of Credit”  Subsequent to the end of the first quarter, no shares of common stock were sold to Charlton through the date of this report.

NOTE 8 – ADVANCE ON SALE OF BUILDING

During the first quarter ending September 30, 2007, we received $2.2 million in cash pursuant to a Sale/Lease-back Agreement with SUPERFUN B.V. and placed the deed to our property in escrow.  We recorded the $2.2 million we received as a current liability on the Balance Sheet which will be carried until we receive the full payment of $4.4 million.  At that time we will convey title to our property and execute the five year lease.  Pursuant to FAS-98, we will then record the sale, remove the sold property and its related liabilities from the Balance Sheet and defer the gain over the five year term of the lease.  See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back”.

NOTE 9 – SHORT-TERM LOANS

On June 27, 2007, we borrowed the sum of $250,000 from Charlton Avenue LLC, and we repaid the loan plus a $20,000 premium on August 2, 2007.

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

FORWARD LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of Imaging Diagnostic Systems, Inc. should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations; the Condensed Financial Statements; the Notes to the Financial Statements; the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, which are incorporated herein by reference; and all our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.  This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “projects”, “potential,” or “continue,” or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future.  These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements.  Factors that could cause actual results to materially differ include, without limitation, the timely and successful completion of our U.S. Food and Drug Administration (“FDA”) pre-market approval (“PMA”) clinical trials; the timely and successful submission of our PMA application to the FDA; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future. These risks and uncertainties include, but are not limited to, those described above or elsewhere in this quarterly report.  All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, are made as of the date of this report based on information available to us as of the date of this report, and we assume no obligation to update any forward-looking statements or risk factors.  You are cautioned not to place undue reliance on these forward-looking statements.

OVERVIEW

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

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

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

As of the date of this report we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through September 30, 2007 of approximately $99,839,333 after discounts and dividends on preferred stock.  We anticipate that losses from operations will continue for at least the next 12 months, primarily due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA Pre-Market Approval (“PMA”) process, and the costs associated with advanced product development activities.  There can be no assurances that we will obtain the PMA, that the CTLM®will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM®to allow us to operate profitably.

CRITICAL ACCOUNTING POLICIES

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

Critical accounting policies are defined as those involving significant judgments and uncertainties which could potentially result in materially different results under different assumptions and conditions.  Application of these policies is particularly important to the portrayal of the financial condition and results of operations.  We believe the accounting policy described below meets these characteristics.  All significant accounting policies are more fully described in the notes to the financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2007.

Inventory

Our inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost (first-in, first-out) or market.  As a designer and manufacturer of high technology medical imaging equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage.  These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and reliability, replacement and availability of key components from our suppliers.  We evaluate on a quarterly basis, using the guidance of ARB 43, Chapter 4, Statement 5, our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purposes; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions.  Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case excess and obsolete inventory would have to be adjusted in the future.  If we determined that inventory was overvalued, we would be required to make an inventory valuation adjustment at the time of such determination.  Although every effort is made to ensure the accuracy of our forecasts

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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.  SFAS 123(R) is a relatively new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation.  We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options.  We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data.  However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.  SFAS 123(R) requires the recognition of the fair value of stock compensation in net income.  Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.

RESULTS OF OPERATIONS

SALES AND COST OF SALES

We are continuing to develop our international markets through our global commercialization program.  In the quarter ended September 30, 2007, we recorded revenues of $27,543 representing an increase of $7,681 or 39% from $19,862 during the quarter ended September 30, 2006.  The Cost of Sales during the quarter ended September 30, 2007, were $13,716 representing an increase of $8,532 or 165% from $5,184 during the quarter ended September 30, 2006.  No new CTLM® Systems were sold in the quarter ended September 30, 2007.  See Item 5.  Other Information – “Other Recent Events”

GENERAL AND ADMINISTRATIVE

General and administrative expenses during the three months ended September 30, 2007, were $713,271, representing an increase of $9,852 or 1%, from $703,419 in the corresponding period in 2006.  Of the $713,271, compensation and related benefits comprised $464,545 (65%), compared to $489,372 (70%) during the three months ended September 30, 2006.  Of the $464,545 and $489,372 compensation and related benefits, $48,403 (10%) and $83,612 (17%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month increase of $9,852 is a net result.  The relevant increases were $17,200 in consulting expenses as a result of placement fees paid for new hires; $12,362 in maintenance and repairs for our building; and $11,953 in legal expenses involving Corporate and Securities matters.  The increases were partially offset by decreases of $24,827 in compensation and related benefits as a result of a reduced amount of stock option expense during the current quarter.

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

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RESEARCH AND DEVELOPMENT

Research and development expenses during the three months ended September 30, 2007, were $468,328, representing a decrease of $85,445 or 15%, from $553,773 in the corresponding period in 2006.  Of the $468,328, compensation and related benefits comprised $299,955 (64%), compared to $379,286 (68%) during the three months ended September 30, 2006.  Of the $299,955 and $379,286 compensation and related benefits, $2,413 (1%) and $10,393 (3%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month decrease of $85,445 is a net result.  The relevant decreases were $79,331 in compensation and related benefits as a result of a reduction in staff; $38,179 in legal patent expenses as a result of a reduced number of new patent filings; and $17,078 in clinical expenses due to the variable costs associated with our PMA clinical trials.  The decreases were partially offset by increases of $25,019 in consulting expenses primarily associated with the monitoring of our PMA; $12,169 in travel; and $22,069 in research and development expenses due to the costs associated with our research collaboration with Florida International University (FIU).

We expect a significant increase in research and development expenses in fiscal 2008 due to the cost of conducting our PMA clinical trials in the United States.  We also expect consulting expenses and professional fees to increase due to PMA activities.  See Item 5. Other Information - “Recent Developments, Regulatory Matters”.

SALES AND MARKETING

Sales and marketing expenses during the three months ended September 30, 2007, were $251,681, representing a decrease of $51,256 or 17% from $302,937in the corresponding period in 2006.  Of the $251,681, compensation and related benefits comprised $46,844 (19%), compared to $103,572 (34%) during the three months ended September 30, 2006.  Of the $46,844 and $103,572 compensation and related benefits, $776 (2%) and $6,487 (6%), respectively, were due to non-cash compensation related to expensing stock options.

The three-month decrease of $51,256 is a net result.  The relevant decreases were $56,728 in compensation and related benefits as a result of fluctuation in staffing; $40,499 in representative office expense as a result of not incurring one-time operating costs associated with last year’s opening of our representative office in Beijing, China; and $20,163 in travel expenses for sales calls, installation, training and service.  The decreases were partially offset by increases of $4,999 in parts for upgrading CTLM® systems already sold; and $53,055 in freight charges as a result of transportation charges, customs fees, duties and taxes associated with CTLM® systems we shipped internationally.

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 September 30, 2007 and 2006, which were $1,495,387 and $1,634,993, we had a decrease of $139,606 or 9%.

The decrease of $139,606 in the three-month comparative period was primarily due to decreases in research and development expenses of $85,445 and in sales and marketing expenses of $51,256, which were partially offset by general and administrative expenses increasing by $9,852.

We expect a significant increase in research and development expenses throughout the balance of fiscal 2008 due to the cost of conducting PMA clinical trials in the United States.  We also expect consulting expenses and professional fees to increase due to PMA activities.

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Inventory Valuation Adjustments during the three months ended September 30, 2007, were $14,774, representing a decrease of $16,427, or 53%, from the corresponding period in 2006.  The decrease is due to the reduction in write-downs of obsolete components that are no longer used in the manufacture of the CTLM®.

Compensation and related benefits during the quarter ended September 30, 2007, were $811,344, representing a decrease of $160,886 or 17% from $972,230 during the quarter ended September 30, 2006.  Of the $811,344 and $972,230 compensation and related benefits, $51,592 (6%) and $100,492 (10%), respectively, were due to non-cash compensation associated with expensing stock options.  The net decrease of $160,886 was due to a $48,900 decrease in the recording of non-cash compensation related to the expensing of stock options combined with a decrease of cash compensation of $111,986.

Interest expense during the three months ended September 30, 2007, was $19,447, representing a decrease of $19,811, or 50%, from the corresponding period in 2006.  The interest expense is primarily comprised of the imputed interest associated with our equity credit line with Charlton Avenue, LLC (“Charlton”) as per the terms and conditions of our private equity credit agreement.  Our utilization of the credit line fluctuates during the year and therefore causes increases and decreases in interest expense from quarter to quarter.  See Item 5.  Other Information – “Financing/Equity Line of Credit”.

BALANCE SHEET DATA

Our combined cash and cash equivalents totaled $1,304,040 as of September 30, 2007.  This is an increase of $826,228 from $477,812 as of June 30, 2007.  During the quarter ending September 30, 2007, we received a net of $225,000 from the sale of common stock through our private equity agreement with Charlton.  See – “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 an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA PMA process, the costs associated with product development activities and the time required for homologations from certain countries.

Property and Equipment was valued at $1,993,400 net as of September 30, 2007.  The overall decrease of $37,395 from June 30, 2007 is due primarily to depreciation recorded for the first quarter.

LIQUIDITY AND CAPITAL RESOURCES

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

Since inception we have financed our operating and research and product development activities through several Regulation S and Regulation D private placement transactions and with loans from unaffiliated third parties.  Net cash used for operating and product development expenses during the three months ending September 30, 2007, was $1,347,378 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.  On June 27, 2007, we borrowed the sum of $250,000 from Charlton Avenue LLC, and we repaid the loan plus a $20,000 premium on August 2, 2007.  At September 30, 2007, we had working capital of ($15,916) compared to working capital of $2,282,621 at September 30, 2006, and $1,137,115 at June 30, 2007.

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During the first quarter ending September 30, 2007, we raised a total of $225,000 after expenses through the sale of 6,667,325 shares of common stock to Charlton.  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.  Accordingly, we will continue to use proceeds from the sale of our building for continuing operations and our Fifth Private Equity Credit Agreement with Charlton to raise any additional funds required to continue operations.  In the event that we are unable to utilize the Fifth Private Equity Credit Agreement or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering.  If additional funds are raised by issuing equity securities, whether to Charlton or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  Our new $15 million Fifth Private Equity Credit Agreement with Charlton was signed on March 21, 2006, and replaced our Fourth Private Equity Credit Agreement.  We intend to seek an extension from Charlton of our Fifth Private Equity Credit Agreement, which expires on March 21, 2008.  There can be no assurance that the extension will be granted.

Capital expenditures for the three months ending September 30, 2007, were $1,394 as compared to $5,972 for the three months ending September 30, 2006.  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, 2008 will be approximately $25,000.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30, 2007.  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 process, and advanced product development activities.  We intend to use the Fifth Private Equity Credit Agreement with Charlton as our principal sources of additional capital.  There can be no assurance that this 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 account at Wachovia Bank N.A.

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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.  The closing market price of IDSI’s stock on August 2, 2007, was $.035.  The sale agreement requires additional payments of $1.1 million each on September 24, 2007, November 8, 2007, and December 23, 2007, with the closing to occur upon receipt of the final payment.  As of the date of this report we have received $2.2 million on this transaction.

Upon the closing of the sale/lease-back transaction, the Purchaser and IDSI will execute the lease.  The term of the triple net lease is five years with the first monthly rent payment due six months from the commencement date of the lease.  The monthly rent for the base year is $24,000 plus applicable sales tax.  During the term and any renewal term of the lease, the minimum annual rent shall be increased each year.  Commencing with the first day of the second lease year and on each lease year anniversary thereafter, the minimum annual rent shall be cumulatively increased by $24,000 per each lease year or $2,000 per month plus applicable sales tax.  Either party may cancel the lease without penalty or fault upon 180 days prior notice given to the other party.

Issuance of Stock for Services/Dilutive Impact to Shareholders

We have issued through 2003 and may in the future issue stock for services performed and to be performed by consultants.  Since we have generated no substantial revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services.  From July 1, 1996 to February 21, 2003 we issued an aggregate of 2,306,500 shares of common stock to consultants, which were registered on Registration Statements on Form S-8.  The aggregate fair market value of the shares was $2,437,151.  The issuance of large amounts of common stock for services rendered or to be rendered and the subsequent sale of such shares may depress the price of the common stock.  In addition, since each new issuance of common stock dilutes existing shareholders, the issuance of substantial additional shares may effectuate a change in our control.  No shares have been issued for services from February 21, 2003 to the date of this report.

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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.   Legal Proceedings.

      None

Item 1A.  Risk Factors.

Our Annual Report on Form 10-K for the year ended June 30, 2007, 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 first quarter ended September 30, 2007, there were no material changes in risk factors as previously disclosed in our Form 10-K filed on September 13, 2007.

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

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

Item 3.  Defaults Upon Senior Securities.

None

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

None

Item 5.  Other Information.

Recent Developments

Regulatory and Clinical Status

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

In our initial PMA application we followed the guidelines of the “Standardized Shell for Modular Submission” for the FDA approval process.  We filed four modules from September 2000 to May 2001, which were accepted, and then filed our PMA application in April 2003.  In June 2003 we received notification from FDA that an initial review of our PMA had been conducted and was sufficiently complete to permit a substantive review and was, therefore, suitable for filing.  An in-depth evaluation of the safety and effectiveness of the device was conducted as part of the PMA application process.

On November 14, 2003 we announced that we received notification from the Medical Device Bureau of Health Canada that our application for a “New Medical Device” license was approved.  The license was issued in accordance with the Medical Device Regulations, Section 36.  Furthermore, we possess the CAN/CSA ISO 13485-2003 certification, which is an additional regulatory requirement that is evidence of compliance to the quality system of the medical device.

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In August 2003, we received a letter from the FDA citing some deficiencies in the PMA application.  The FDA identified measures to make the PMA approvable, and we worked with our FDA counsel and consultants to prepare an appropriate amendment.

In February 2004, we received a warning letter from the FDA specifically regarding the biomonitoring section of an inspection of our facility conducted August 13-18^th, 2003.  We submitted our response on February 9, 2004.  On March 29, 2004, we announced in an 8-K filing that our responses to the FDA’s warning letter addressed each of the issues and no further response to the FDA was required at that time.

In March 2004, we received an extension of time to respond with an amendment to the FDA’s August, 2003 letter regarding our pre-market approval application.

In September 2004, we announced that our CT Laser Mammography System, CTLM®, had received Chinese State Food and Drug Administration (SFDA) marketing approval.  The People’s Republic of China SFDA issued the registration “Certificate for Medical Device”.  The medical device registration number is 20043241646.

In October 2004, we issued a press release of a shareholder letter written by our CEO, Tim Hansen, detailing the steps he had taken in FDA and other corporate development matters during his first three months as CEO of the Company.  In the letter he stated among other things, the following: “the PMA involves a process which has, unfortunately, taken far longer than expected.  We have been working on amending the PMA application at the request of the FDA.  Our team recommended rephrasing the Computed Tomography Laser Mammography System (CTLMâ) intended use statement and modifying the patient study protocols.  They also recommended adding more clinical cases.  Meanwhile the PMA clock was ticking and these well advised changes would have taken more time to complete.  Also, as we earlier reported, our PMA amendment and processes were briefly interrupted by a bio monitoring inspection audit of our clinical trials and subsequent warning letter and, although that matter was resolved, the sum of these influences caused serious delays in our filings.

These are complex matters, but after conferring with the FDA and our outside consultants, I recently made the decision to simply withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing.  Consequently, IDSI will submit a new PMA application with 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.

The key factor in my decision was the belief that re-filing should not additionally delay our previous schedule.  The schedule should remain unchanged because the FDA indicated that Modules 1 through 4 would be ‘grandfathered’ so to speak, and because our clinical case read program will continue in its current form.  We are not starting over in any sense of the word.  We will, however, submit a fresh and concise PMA application without amendments or extensions.  Of course, this approach requires another filing fee but we believe it yields a higher confidence scenario.  So, to be very clear, we will submit a new PMA application and there should be no additional delays in our overall schedule.  You have all waited patiently for CTLM® to become a US market reality, and I would appreciate your continuing support through this next important phase.  I am very satisfied with this new approach.”

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 because it did not meet the definition of a significant risk (SR) device under section 812.3(m) of the investigational device exemptions (IDE) regulation 21 CFR 812.  We view this new classification as helpful in securing new research and development collaborative agreements.

In January 2005 we issued a press release of a shareholder letter written by Tim Hansen, CEO.  The letter contained a brief status update of the three top priorities stated in Mr. Hansen’s initial letter to shareholders released in October 2004.  Specific to our PMA activities, the letter stated, “…we are altering course.  The clinical study we had analyzed and which we intended to submit to the FDA did not, in our opinion, adequately reflect the capabilities of

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CTLM® as an adjunctive mammography tool.  Our clinical cases were collected on CTLM® systems dating back to 2001.  Since that time IDSI has developed significant improvements in the scanning subsystems, image reconstruction and image display software.  We have also improved quality assurance routines to ensure better operator and physician training, and improved image quality control.  These enhancements were routinely implemented as they became validated on our international CTLM® shipments, but the same changes were not made to the 2001 units in order to maintain our PMA modules in their original forms.  We now intend to collect data using our latest systems because we believe the results will yield a stronger study to support our PMA application.

Consequently, we will install updated CTLM® systems in the U.S. and upgrade several international units to collect data under a new protocol.  Our plan will extend the time to actual PMA submission from what we were anticipating in October, but we believe this approach will better support the application.”

We reported in our December 14, 2005 S-1 filing that “We have 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 have experienced in obtaining the necessary approvals from the hospitals and their respective Institutional Review Boards (“IRB”), we have made good progress in advancing PMA activities.  Several sites have been installed and we have begun collecting clinical data.  We intend to install 8-10 sites depending on patient volume.  Following data collection we plan to submit the PMA application in its entirety.

In our S-1 Registration Statement filed on March 23, 2006, we reported that changes would be incorporated to bring the CTLM® system to its most current design level.  Those changes have been substantially made and will, we believe, improve the device’s image quality and reliability.  Upgraded CTLM® systems have been installed at several U.S. clinical sites and data collection is proceeding in accordance with our clinical protocol.  We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality.

On October 17, 2006, our CEO, Tim Hansen, issued a shareholder letter in advance of our November 8^th annual shareholder’s meeting to inform our shareholders about progress on our key initiatives and to share our enthusiasm for the future.  The entire letter may be found in Part II, Other Information, Item 5 Recent Developments-Regulatory and Clinical Status in our Form 10-Q for the quarter ended December 31, 2006, which is incorporated by reference.

Summarizing the key initiatives, Mr. Hansen explained the issues which slowed our progress in establishing the U.S. clinical sites.  When the FDA determined that CTLM® trials under our intended use would constitute a Non-Significant Risk device study, we assumed such a reclassification would have enabled us to more quickly engage U.S. clinical “partners.”  We also learned that the processes through Investigational Review Boards and legal departments had become much more complex and lengthy in recent years.  We also experienced delays because many of our preferred sites were simply too busy to participate in our study due to serious understaffing and workload issues, a recurring theme in the larger departments we contacted.  We are working diligently towards finalizing the remaining sites and are continuing to contact others as back-ups.  Our practice is to limit public identification of the sites so that the study members may participate without publicity or distraction.  There remain uncertainties about the time it may take to accrue the total number of cases needed for final PMA submission because each site has a unique workload and patient volunteer recruitment process.  All of the U.S clinical sites are using the latest CTLM configurations.  Because the CTLM imaging technique is completely new to doctors and technologists and training could affect results, we improved our certified training programs and added computerized calibration and QA software to the systems.  These improvements take full advantage of the experience we have gained through more than 9,000 international breast exams and our service histories.

CTLM® systems have been installed at nine U.S. clinical sites and data collection is proceeding in accordance with our clinical protocol.  We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality.

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Global Commercialization Update

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

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

Elsewhere in the Asia-Pacific region, BAC is pursuing business connections in Australia, Singapore, Malaysia, New Zealand, Hong Kong, Macao, Taiwan, and the Philippines to enhance our existing representation in South Korea and China.  We have signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment is surging due to publicity surrounding their First Lady, who succumbed to the disease.  We are pleased with BAC’s efforts, and we are gaining momentum through their experience and connections.  In September, we announced the installation of a CTLM® system at the Univeriti Putra Malaysia (UPM) in Kuala Lumpur, Malaysia.  The CTLM® was installed at UPM’s academic facility within the jurisdiction of the Ministry of Education and will be evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur.

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

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)	Charles University Hospital, Prague, Czech Republic
5)	Friendship Hospital, Beijing, Peoples Republic of China
6)	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

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similar programs in other global regions.  These investments may accelerate CTLM® market acceptance while providing valuable clinical experiences.

Other Recent Events

In September, we announced completion of a financing arrangement intended to reduce our dependency on equity financing through the sale of our headquarters building for $4.4 million in cash pursuant to a sale/lease-back agreement.  See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back”.

In November 2007, we announced that we exhibited CTLM® results at the Fourth Congress of the World Society of Breast Health in Tianjin, China from October 18-21, 2007.  The Congress attracted more that 500 breast health experts from 23 different countries and offered 29 clinical and academic studies on breast health.  Our local representatives from Beijing exhibited clinical imaging cases from international sites.  Several attendees visited our recent CTLM® installation at the Tianjin Medical University’s Cancer Institute and Hospital, where clinical studies are currently under way.

Annual Meeting

The Board of Directors of IDSI postponed the annual meeting which was tentatively set for November 7, 2007.  On November 7^th the Board set a new annual meeting date for May 14, 2008 at 9:00 AM local time to be held at our corporate offices in Plantation, Florida.

Laser Imager for Lab Animals

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

IDSI’s strategic thrust for the LILA project changed in 2006.  As we previously announced, IDSI is focusing on women’s health business markets with a family of CTLM® systems and related devices and services.  The animal imager does 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 a $250,000 technology transfer fee.  The agreement also provides for royalties on any future sales of LILA products. We have received full payment of the technology transfer fee, and Bioscan commenced the project during the second quarter of fiscal 2008  On May 9, 2007 we announced that a new patent for our optical CT scanner for small laboratory animals was issued on May 1, 2007 as U.S. Patent 7,212,848.  This second patent adds the concept of a second laser which will provide a geographic reference for the fluorescence image.  Our first patent covered the basic CT fluorescent imaging of small laboratory animals.

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International Patents Update

In November, we announced the issuance of Chinese patent ZL 99 8 16608.1, issued July 11, 2007, entitled “Laser Imaging Apparatus using Biochemical Markers that Bind to Cancer Cells.”  The patent is granted for a period 20 years from date of filing, until April 1, 2019.  This patent, equivalent to US patent 5,952,664, protects the concept of imaging and activating a photodynamic therapy agent in an optical CT scanner.  “We are very pleased to have been issued this patent in China and to extend our protection in another important market,” stated Tim Hansen, CEO. “With this patent comes additional hope that breast cancer may someday be imaged and treated with light-activated compounds. Our current proprietary CT Laser Mammography System (CTLM®) is uniquely capable in these applications.”

Financing/Equity Line of Credit

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

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

From November 2000 to April 2001, Charlton converted 445 shares of Series K convertible preferred stock into 5,600,071 common shares and we redeemed 50 Series K shares for $550,000 using proceeds from the Charlton private equity line.  Spinneret converted 5 Series K shares for $63,996.  All Series K convertible preferred stock has been converted or redeemed and there are no convertible preferred shares outstanding.

Prior Equity Agreements

From August 2000 to February 2004, we obtained funding through three Private Equity Agreements with Charlton.  Each equity agreement provided that the timing and amounts of the purchase by the investor were at our sole discretion.  The purchase price of the shares of common stock was set at 91% of the market price.  The market price, as defined in each agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche.  The only fee associated with the private equity financing was a 5% consulting fee payable to Spinneret.  In September 2001 Spinneret proposed to lower the consulting fee to 4% provided that we pay their

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consulting fees in advance.  We reached an agreement to pay Spinneret in advance as requested and paid them $250,000 out of proceeds from a put.

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

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

On January 9, 2004, we and Charlton entered into a new “Fourth Private Equity Credit Agreement” which replaced our prior private equity agreements.  The terms of the Fourth Private Equity Credit Agreement were more favorable to us than the terms of the prior Third Private Equity Credit Agreement.  The new, more favorable terms were: (i) The put option price was 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, (ii) the commitment period was two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by us as we had the option of setting a floor price for each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee to Spinneret, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars.  The previous requirement in the Third Private Equity Credit Agreement was $20,000.

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

The Fifth Private Equity Credit Agreement

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 are similar to the terms of the prior Fourth Private Equity Credit Agreement.  The 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 two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount we must draw through the end of the commitment period is $1,000,000,  (v)  the minimum stock price, also known as the floor price is computed as follows:  In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount.  In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Fifth Private Equity Credit Agreement.  The conditions to our ability to draw under this private equity line, as described above, may

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materially limit the draws available to us.  We intend to seek an extension from Charlton of our Fifth Private Equity Credit Agreement which expires on March 21, 2008.  There can be no assurance that this extension will be granted.

We have made sales under the Fifth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis.  Beginning in August 2007, we used and will use the proceeds from the sale of our building for continuing operations and then utilize our Fifth Private Equity Credit Agreement to raise any additional funds required to continue operations.  As of the date of this report, under the Fifth Private Equity Credit Agreement we have drawn down $5,917,717 and issued 81,646,450 shares of common stock and have an available balance to draw of $9,082,283.

As of the date of this report, since January 2001, we have drawn an aggregate of $40,622,258 in gross proceeds from our equity credit lines with Charlton and have issued 197,616,690 shares as a result of those draws.

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

Item 6.                           Exhibits

10.75	One-Year Employment and Stock Option Agreement dated as of August 30, 2007 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 September 6, 2007.
10.76	One-Year Employment and Stock Option Agreement dated as of August 30, 2007 between Imaging Diagnostic Systems, Inc. and Deborah O’Brien, Senior Vice President.  Incorporated by reference to our Form 8-K filed on September 6, 2007.
10.77	2007 Non-Statutory Stock Option Plan.  Incorporated by reference to our Form 10-K filed on September 13, 2007.
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.
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:   November 9, 2007		Imaging Diagnostic Systems, Inc.
	By:	/s/ Timothy B. Hansen
		Timothy B. Hansen
		Chief Executive Officer
	By:	/s/ Allan L. Schwartz
		Allan L. Schwartz, Executive Vice-President and
		Chief Financial Officer
		(PRINCIPAL ACCOUNTING OFFICER)

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