IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
(Unaudited)
Condensed Statements of Operations


	Three Months Ended						From Inception
	September 30,						December 10, 1993 to
	2012			2011			September 30, 2012
								*
Net Sales	$	1,000		$	38,409		$	2,592,502
Gain on sale of fixed assets		-			-			2,794,565
Cost of Sales		-			4,729			979,777

Gross Profit		1,000			33,680			4,407,290

Operating Expenses:
General and administrative		179,978			741,813			64,064,394
Research and development		40,074			212,905			24,000,990
Sales and marketing		22,673			101,557			9,947,077
Inventory valuation adjustments		4,215			7,739			4,971,122
Depreciation and amortization		9,782			16,715			3,465,017
Amortization of deferred compensation		-			-			4,064,250

		256,722			1,080,729			110,512,850

Operating Loss		(255,722	)		(1,047,049	)		(106,105,560	)


Interest income		-			187			311,217
Other income		35,322			6,404			1,247,421
Other income - LILA Inventory		-			-			(69,193	)
Change in fair value of derivative liability		795,019			389,528			1,831,737
Interest expense		(164,149	)		(264,489	)		(10,930,429	)

Net Income (Loss)		410,470			(915,419	)		(113,714,807	)

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

Net Income (Loss) applicable to
common shareholders	$	410,470		$	(915,419	)	$	(120,562,567	)

Net Loss per common share:
Basic and diluted	$	0.00		$	(0.00	)	$	(0.35	)

Weighted average number of
common shares outstanding:
Basic and diluted		4,220,775,178			966,093,349			340,792,488


* The numbers presented from inception December 10, 1993 to June 30, 2012 are unaudited by our current auditor.


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

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

	Three Months						From Inception
	Ended September 30,						December 10, 1993 to
	2012			2011			September 30, 2012
								*
Cash flows from operations:
Net Income (loss)	$	410,470		$	(915,419	)	$	(113,714,807	)
Changes in assets and liabilities		(682,673	)		239,743			36,011,393
Net cash used in operations		(272,203	)		(675,676	)		(77,703,414	)


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


Cash flows from financing activities:
Repayment of capital lease obligation		-			-			(50,289	)
Other financing activities		274,100			507,500			10,624,106
Proceeds from issuance of preferred stock		-			-			18,389,500
Net proceeds from issuance of common stock		-			-			51,932,038

Net cash provided by financing activities		274,100			507,500			80,895,355

Net increase (decrease) in cash		1,897			(168,176	)		3,520

Cash, beginning of period		1,623			189,135			-

Cash, end of period	$	3,520		$	20,959		$	3,520


* The numbers presented from inception December 10, 1993 to June 30, 2012 are unaudited by our current auditor.


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

10-Q Table of Contents

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, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending June 30, 2013. These condensed financial statements have been prepared in accordance with Financial Accounting Standards guidance for Development Stage Enterprises, and should be read in conjunction with our condensed financial statements and related notes included in our Annual Report on Form 10-K filed on October 15, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses incurred during the reporting period. Actual results could differ from those estimates.

NOTE 2 - GOING CONCERN

Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage enterprise and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing. IDSI has yet to generate a positive internal cash flow, and until significant sales of our product occur, we are dependent upon debt and equity funding. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

In the event that we are unable to obtain debt or equity financing or we are unable to obtain such financing on terms and conditions acceptable to us, we may have to cease or severely curtail our operations, which would materially impact our ability to continue as a going concern. Management has been able to raise the capital necessary to reach this stage of product development and has been able to obtain funding for capital requirements to date. Recently we have relied on raising additional capital through our new Private Equity Credit Agreement with Southridge Partners II, L.P. ("Southridge") dated January 7, 2010, which replaced the Charlton Agreement and through the issuance of short term promissory notes. We also intend to raise capital through other sources of financing. See Part II, Item 5, Other Information – "Financing/Equity Line of Credit." Since June 2011, we have been unable to draw from this new private equity line, consequently, alternative financing is required to continue operations, and there is no assurance that we will be able to obtain alternative financing on commercially reasonable terms. There is no assurance that, if and when Food and Drug Administration ("FDA") marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.

We currently manufacture and sell our sole product, the CTLM® - Computed Tomography Laser Mammography. We are appointing distributors and installing collaboration systems as part of our global commercialization program. We have sold 17 systems as of September 30, 2012; however, we continue to operate as a development stage enterprise because we have yet to produce significant revenues. We are attempting to create increased product awareness as a foundation for developing markets through an international distributor network. We may be able to exit reporting as a Development Stage Enterprise upon two successive quarters of sufficient revenues such that we would not have to utilize other funding to meet our quarterly operating expenses.

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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, 2012			June 30, 2012
	Unaudited
Raw materials consisting of purchased parts, components and supplies	$	475,060		$	477,681
Work-in-process including units undergoing final inspection and testing		28,915			28,915
Finished goods		129,424			129,424

Sub-Total Inventories		633,399			636,020

Less Inventory Reserve		(390,000	)		(390,000	)

Total Inventory - Net	$	243,399		$	246,020

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, 2012, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory due to a CTLM® system being purchased by one of our Distributors. For the fiscal year ending June 30, 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment. For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 as this CTLM® system is being used as a clinical system at the University of Florida. For the fiscal year ending June 30, 2008 since such finished goods are being utilized for collecting data for our FDA application, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment. For the fiscal year ending June 30, 2009 we identified $408,000 of Inventory that we deem impaired due to the lack of inventory turnover. For the fiscal year ending June 30, 2010 we identified $399,000 of Inventory that we deem impaired due to the lack of inventory turnover. We reduced Inventory Reserve by $9,000 for the fiscal year ending June 30, 2012 due to the sale of the CTLM® system to our distributor Kepter Internacional. For the fiscal year ending June 30, 2012, we identified $390,000 of Inventory that we deem impaired due to the lack of inventory turnover. There were no changes to Inventory Reserve for the quarter ending September 30, 2012.

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.

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NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS

Various accounting pronouncements that have been issued or proposed by the FASB that do not require adoption until a further date are not expected to have a material impact on the Company's financial statements upon adoption.

NOTE 6 – STOCK-BASED COMPENSATION

The Company relies on the guidance provided by ASC 718, ("Share Based Payments"). ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company's stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company's forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company's actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying ASC 718 approximated $36,271 and $2,290, respectively, in additional compensation expense for the three months ended September 30, 2012 and 2011.

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

For purposes of the following disclosures the weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes options-pricing model. For the quarter ending September 30, 2012, the net income and earnings per share reflect the actual deduction for option expense as a non-cash compensation expense.

Stock-based compensation expense recorded during the three months ended September 30, 2012, was $36,271 compared to $2,290 from the corresponding period in fiscal 2011. See "Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back".

The weighted average fair value per option at the date of grant for the three months ended September 30, 2012 using the Black-Scholes Option-Pricing Model was $0.0008. The weighted average fair value per option at the date of grant for the three months ended September 30, 2011 was $0.015. Assumptions were as follows:

	Three Months Ended
	September 30th,
	2012	2011
Expected Volatility⁽¹⁾	182%	126%
Risk Free Interest Rate⁽²⁾	3%	4%
Expected Term⁽³⁾	8 yrs	8 yrs

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(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, 2012 and 2011 in the table above are weighted average calculations.

(2) We lowered our risk-free interest rate from 4% to 3% for stock option expensing effective for the quarter ending September 30, 2012. If a significant increase or decrease occurs in the zero coupon rate of the U.S Treasury Bond, a new rate will be set. The decrease in the risk-free interest rate will decrease compensation expense.

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

NOTE 7 - COMMON STOCK ISSUANCES – PRIVATE EQUITY CREDIT AGREEMENT

During the first quarter ending September 30, 2012, we did not draw from our Private Equity Credit Agreement with Southridge Partners II LP ("Southridge"). See Item 5. Other Information – "Financing/Equity Line of Credit." Subsequent to the end of the first quarter, we did not initiate any put notices from our Private Equity Credit Agreement with Southridge through the date of this report.

NOTE 8 – DEBT DISCOUNT

For the quarter ending September 30, 2012, we received $274,100 from the proceeds of Convertible Short-Term Notes. We recorded interest expense to amortize the debt discount in the amount of $133,632 for the quarter ending September 30, 2012, which includes all of the outstanding Convertible Short-Term Notes. See "Part II, Item 5, Financing/Equity Line of Credit, Issuance of Stock in Connection with Short-Term Loans"

In connection with the sale of a Convertible Promissory Note Agreement on February 23, 2011, with an unaffiliated third party, JMJ Financial (the "Lender" or "JMJ"), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the "Note") providing for advances of a gross amount of $1,600,000 in seven tranches, we recorded interest expense to amortize the debt discount in the amount of $11,814 during the quarter ending September 30, 2012. See "Part II, Item 5, Financing/Equity Line of Credit, Issuance of Stock in Connection with Long-Term Loans"

There remains a total of $416,961 of debt discount yet to be amortized as of September 30, 2012.

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NOTE 9 – SHORT-TERM DEBT

From November 10, 2009 to September 30, 2012 we borrowed $4,032,041 in the aggregate from 14 unaffiliated third party investors.

In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in September 2012. As of September 30, 2012, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $202,917 of which $82,000 is the principal remaining. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of June 30, 2012, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $82,600 of additional premium was accrued as of September 30, 2012.

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 June 30, 2012 for 3% additional premium per month on each note. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $260,250 of additional premium was accrued for the December 2009 notes as the date of this report. As of September 30, 2012, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes. These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000. In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $600,000 principal and $340,099 premium into 384,456,103 shares of our common stock of which 31,056,108 shares were collateral shares and 353,399,995 new shares were issued pursuant to Rule 144. Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares. In connection with these prior extensions through June 30, 2012 and the accrual of the additional premiums through May 31, 2012, a total of $255,647 of additional premium was accrued for the January 2010 notes as of September 30, 2012.

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aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

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

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $25,200 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to November 30, 2012 for this note.

In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes. Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

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In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 23, 2013 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.

In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively. One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount. The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to December 31, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $100,000 note has been paid in full through the conversion to common stock pursuant to Rule 144.

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In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In November 2011, we received $20,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $20,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

On November 21, 2011, Southridge sold their May 12, 2011 $60,000 short-term promissory note to Panache Capital, LLC ("Panache"). The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.

In November 2011, we received $40,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of November 21, 2012. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In November 2011, we received $53,000 from Asher Enterprises pursuant to a short-term promissory note due on or before September 5, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $53,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In December 2011, we received $17,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 18, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $17,000 Principal Amount of the Note plus accrued interest into shares of our

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common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In December 2011, we received $12,000 from an unaffiliated third party investor pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. On January 6, 2012, we amended a promissory note in the principal amount of $12,000 dated December 9, 2011 held by an unaffiliated third-party investor. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. The amendment provided for the issuance of three (3) restricted shares of Series P Preferred Stock having a stated value of $5,000 per share. These shares, having a total value of $15,000, will be used as collateral for the note held by the investor. We received an extension of maturity to June 4, 2012 for this note. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.

In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to August 31, 2012 for these notes for 3% additional premium per month on each note.

In January 2012, we received a total of $175,200 from an unaffiliated third party investor pursuant to five short-term promissory notes with a maturity date ranging from March 5, 2012 to March 20, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 38 Series P Preferred Stock to the investor as collateral with a total stated value of $190,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.

In February 2012, we received a total of $42,000 from an unaffiliated third party investor pursuant to two short-term promissory notes with a maturity date ranging from April 13, 2012 to April 30, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 9 Series P Preferred Stock to the investor as collateral with a total stated value of $45,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.

On February 23, 2012, Southridge sold their $100,000 short-term promissory note to Panache Capital, LLC ("Panache") of which a balance of $70,000 principal was remaining after Southridge converted $30,000 principal in a debt to equity conversion on February 17, 2012. The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.

In February 2012, we received $25,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of February 28, 2013. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 55% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In March 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before March 18, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at

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a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In April 2012, we received $11,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $11,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In April 2012, we received $2,500 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before April 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $2,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In May 2012, we received a total of $25,000 from an unaffiliated third party investor pursuant to a short-term promissory note with a maturity date of August 2, 2012. The note provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 5 Series P Preferred Stock to the investor as collateral with a total stated value of $25,000. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.

In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In May 2012, we received $13,000 from Linda Grable pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 21, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Ms. Grable may elect at an Event of Default to convert any part or all of the $13,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In May 2012, we received $32,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from May 17, 2013 to May 20, 2013. The notes provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $32,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In June 2012, we received $6,672 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before June 17, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $6,672 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

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the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $14,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In July 2012, we received $20,100 from a private investor pursuant to four short-term promissory notes with a maturity date ranging from July 9, 2013 to July 24, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $20,100 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

In August 2012, we received $25,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice. We reserved 50,000,000 shares of our common stock in connection with this loan.

In August 2012, we received $95,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $95,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 400,000,000 shares of our common stock in connection with this loan.

On August 20, 2012, Southridge sold $70,000 of their original $100,000 short-term promissory note dated October 12, 2011 to Levin Consulting Group. The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $70,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In August 2012, we received $35,000 from Levin Consulting Group pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $35,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

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On August 20, 2012, Southridge sold $30,000 of their original $100,000 short-term promissory note dated October 12, 2011 to SGI Group LLC ("SGI"). The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In August 2012, we received $15,000 from SGI pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $15,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In September 2012, we received $29,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $1,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.

In September 2012, we received $25,000 from Panache pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $5,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 200,000,000 shares of our common stock in connection with this loan.

In September 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 20% on or before December 17, 2012; 25% on or before March 17, 2013; and 30% on or before June 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 700,000,000 shares of our common stock in connection with this loan.

On September 26, 2012, a private investor sold $30,000 of its original $100,000 short-term promissory note dated

November 23, 2009 to OTC Global Partners. The terms of the original note remain the same except that the new note provides for a new redemption premium of 15% of the principal amount on or before September 25, 2013.

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Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174. We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641. We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $2,100 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269. We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $7,650 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278. We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $8,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882. We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $3,300 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

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

On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868. We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688. We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $5,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

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Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

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

On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989. We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $15,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721. We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $9,750 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On November 16, 2011, Southridge executed a debt to equity conversion of a $20,000 short-term promissory note dated May 6, 2011 plus accrued interest of $850. We issued Southridge 6,725,939 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

On December 15, 2011, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $14,415 principal. We issued Panache 5,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.002883 per share.

On January 3, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.

On January 10, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.

On January 18, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,710 principal. We issued Panache 10,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001271 per share.

On January 27, 2012, Panache executed a debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted the final $7,083 in principal. We issued Panache 5,712,097 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001224 per share. We still owe Panache $3,139 in accrued interest associated with this note.

On January 23, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $85,000 principal. We issued Southridge 66,390,690 common shares with a restrictive legend based on an agreed conversion price of $0.0013 per share. The restrictive legend was removed on February 2, 2012 pursuant to Rule 144.

On January 27, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $30,000 principal. We issued Southridge 24,193,548 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0012 per share.

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On February 7, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $18,500 principal and $6,411 interest. We issued Southridge 24,277,321 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.

On February 10, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $16,500 principal and $99 interest. We issued Southridge 17,272,248 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00096 per share.

On February 17, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $30,000 principal and $3,858 interest. We issued Southridge 34,237,571 common shares on February 27, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00099 per share.

On February 23, 2012, Southridge executed a debt to equity conversion of a $7,500 short-term promissory note dated August 23, 2011 in which they converted $7,500 principal and $289 interest. We issued Southridge 7,545,592 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.

On February 28, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $51,000 principal and $3,595 interest. We issued Southridge 60,728,054 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0009 per share.

On March 5, 2012, OTC Global Partners executed a debt to equity conversion of a $50,000 short-term promissory note dated August 30, 2011 in which they converted $50,000 principal and $2,027 interest. We issued OTC Global Partners 72,765,035 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000715 per share.

On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $49,000 principal and $1,096 interest. We issued Southridge 123,693,557 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.

On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2012 in which they converted $4,000 principal and $4,340 interest. We issued Southridge 20,591,916 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.

On May 1, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,765 principal. We issued Panache 21,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000465 per share.

On May 1, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 26,086,957 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00046 per share.

On May 2, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $15,000 principal. We issued Asher 44,117,647 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00034 per share.

On May 10, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.

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On May 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $7,440 principal. We issued Panache 30,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000248 per share.

On May 15, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001866 per share.

On May 21, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $18,500 principal. We issued Asher 102,777,778 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.

On May 22, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.

On May 29, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 66,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.

On May 30, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.

On June 4, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $8,000 principal and $3,140 in interest. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00013 per share.

On June 5, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,920 principal. We issued Panache 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000124 per share.

On June 8, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $12,000 principal. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.

On June 12, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal. We issued Asher 100,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.

On June 15, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.

On June 20, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal and $2,120 in interest. We issued Asher 94,823,529 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00017 per share.

On July 17, 2012, Ms. Grable executed a full debt to equity conversion of a $13,000 short-term promissory note in which she converted $13,000 principal and $148 in interest. We issued Ms. Grable 43,827,215 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.

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On July 17, 2012, a private investor executed a partial debt to equity conversion of five of her notes in which she converted $19,583 principal into 100,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.000177 per share.

On July 25, 2012, a private investor executed a full debt to equity conversion of a $3,000 short-term promissory note in which she converted $3,000 principal into 10,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.

On July 30, 2012, a private investor executed a partial debt to equity conversion of a $10,000 short-term promissory note in which she converted $6,900 principal into 23,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.

On August 7, 2012, a private investor sold their December 2011 short-term promissory notes totaling $21,604 in principal and $5,334 in premium to OTC Global Partners. A new short-term promissory note was issued to OTC Global Partners dated August 7, 2012 with a taking period back to December 7, 2011. OTC Global Partners may elect at an Event of Default to convert any part or all of the $21,604 Principal Amount of the Note plus accrued premium into shares of our common stock at a conversion price $0.00032.

On August 7, 2012, OTC Global Partners executed a partial debt to equity conversion of the $21,604 short-term promissory note in which they converted $21,604 principal and $2,396 in premium. We issued OTC Global Partners 75,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00032 per share.

On September 5, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $85,582 principal. We issued Southridge 380,363,446 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00023 per share.

On September 10, 2012, Levin Consulting Group executed a partial debt to equity conversion of the $70,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $20,000 principal. We issued Levin Consulting Group 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00025 per share. On September 21, 2012 we issued Levin Consulting Group an additional 120,000,000 shares because the closing bid price on the clearing date fell below the Initial closing bid price.

On September 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $14,885 principal. We issued Panache 80,026,882 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.

On September 11, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $10,418 principal and $3,004 in interest. We issued Southridge 89,478,883 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.

On September 11, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $32,500 principal and $7,036 in interest. We issued Southridge 263,570,776 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.

On September 12, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $4,150 principal. We issued Southridge 27,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.

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On September 12, 2012, Panache executed a partial debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $23,250 principal. We issued Panache 125,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.

On September 19, 2012, Panache executed a final debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $16,750 principal and $3,244 in interest. We issued Panache 128,991,484 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000155 per share.

On September 20, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $47,300 principal and $153 in interest. We issued Southridge 379,627,369 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000125 per share.

On September 27, 2012, OTC Global Partners executed a partial debt to equity conversion of the $30,000 short-term promissory note in which they converted $18,000 in principal. We issued OTC Global Partners 180,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On September 28, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $13,200 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00011 per share.

From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to May 18, 2012, Southridge issued notices of conversion to settle $700,000 in principal plus accrued premiums totaling $395,699 into 405,202,769 shares of our common stock, of which 51,802,774 shares were collateral shares and 353,399,995 new shares were issued pursuant to Rule 144.

As of September 30, 2012, we owe a total of $1,784,371 of short term debt of which $1,174,274 is principal, $582,441 is accrued premium and $27,656 is accrued interest. We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $2,343,511 principal, $405,790 in premium, and $61,631 in interest has been converted into 4,411,340,474 shares of our common stock of which 51,802,774 shares were collateral shares and 4,359,537,973 new shares were issued pursuant to Rule 144. Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $300,000 principal of the remaining notes.

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

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NOTE 10 – LONG-TERM DEBT

On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the "Lender" or "JMJ"), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the "Note") providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the "Rights Agreement") dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the "Registration Statement") covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note. Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder's Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder's Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder's Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder's Fee, which is $1,050. The remaining four tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement. For the remaining four tranches, we are obligated to pay a Finder's Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,300,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $260,000 to terminate the agreement.

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

The funding schedule of the seven tranches is as follows:

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

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

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

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

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

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

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

The conditions to funding each payment are as follows:

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

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

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

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

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

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

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

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

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

On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.

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On December 15, 2011, JMJ executed a debt to equity conversion of $63,840 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 20,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.003192 per share.

On January 24, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $43,688 was principal and $412 was consideration for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 30,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00147 per share.

On February 9, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $37,088 was consideration and $7,012 was interest for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 35,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00126 per share.

On February 29, 2012, JMJ executed a debt to equity conversion totaling $39,550 of which $19,988 was interest for the first tranche of $300,000, which we closed on February 24, 2011 and $19,562 was principal for the second tranche of $100,000, which we closed on May 20, 2011. We issued JMJ 50,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000791 per share.

On April 24, 2012, JMJ executed a debt to equity conversion of $29,120 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 52,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00056 per share.

On May 9, 2012, JMJ executed a debt to equity conversion of $28,980 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 69,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00042 per share.

On May 14, 2012, JMJ executed a debt to equity conversion of $4,389 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 19,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000231 per share.

On May 24, 2012, JMJ executed a debt to equity conversion of $22,260 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 106,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.

On May 31, 2012, JMJ executed a debt to equity conversion of $2,940 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 14,000,000 common shares pursuant to Rule based on a conversion price of $0.00021 per share.

On June 6, 2012, JMJ executed a debt to equity conversion totaling $19,551 of which $14,249 was interest for the second tranche of $100,000, which we closed on May 20, 2011 and $5,302 was principal for the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 105,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000186 per share.

On September 7, 2012, JMJ executed a debt to equity conversion of $19,572 in principal of the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 120,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000163 per share.

As of the September 30, 2012, we owe JMJ a total of $96,626 in long-term debt of which $75,126 is principal, $12,500 is consideration on the principal and $9,000 is interest.

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NOTE 11 – PREFERRED STOCK

On February 25, 2010, we issued 35 shares of our Series L Convertible Preferred Stock at a purchase price of $10,000 per share as collateral in connection with a $350,000 short-term loan. On March 31, 2010 the holder converted the note into the collateral shares of 35 preferred shares of Series L Convertible Preferred Stock. We have reserved 16,587,690 shares of common stock to cover the conversion of the 35 shares of Series L Convertible Preferred Stock outstanding. Pursuant to the Certificate of Designation of Series L Convertible Preferred Stock, (iii) Issuance of Securities, a reset provision is provided if common shares are issued at less than $.0211 per share on or before the conversion of all of the Series L Convertible Preferred shares. The reset provision triggered a Derivative Liability valuation for such provision. On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock at our next annual meeting to be held on July 12, 2011. At the annual meeting, our shareholders voted to increase our authorized shares to 2,000,000,000 and the waiver was terminated.

From January 1, 2012 to June 30, 2012, we issued 55 shares of our Series P Preferred Stock which has a stated value of $5,000 per share as collateral in connection with nine short-term promissory notes from an unaffiliated third party investor. The total stated value of the collateral is $275,000.

On March 21, 2012 we entered into a Series Q Preferred Stock Purchase Agreement with our CEO, Linda B. Grable pursuant to which she was issued all of the 51 authorized shares of Series Q Preferred Stock, with a stated value of $0.001 per share as partial consideration for past and future services rendered and recorded the nominal amount of $1.00 for this issuance. The Series Q Preferred Stock has no economic value and was issued solely for voting purposes.

NOTE 12 – DERIVATIVE LIABILITY

Effective June 1, 2010, we adopted the ASC 815 guidance provided for Derivatives and Hedging which applies to any free standing financial instruments or embedded features that have characteristics of a derivative and to any free standing financial instruments that are potentially settled in an entity's own common stock. As of September 30, 2011, we had 20 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument. ASC 815 requires the Series L Convertible Preferred Stock to be recorded as a liability as it is no longer afforded equity treatment. As a result of the reset provision we recorded a Derivative Liability of $64,524 which accrued on the date of issuance and recorded an increase of $137,631 as a result in changes in the market price of our stock. The total Derivative Liability for the Series L Convertible Preferred Stock for the fiscal year ended June 30, 2010 was $202,156. For the quarter ending September 30, 2010, we recorded additional Derivative Expense of $19,355 due to a conversion rate adjustment from $.0211 to $.019933 associated with Series L Convertible Preferred Stock issued to the holder. For the quarter ending December 31, 2010, we recorded additional Derivative Expense of $81,827 due to a conversion rate adjustment from $.019933 to $.015 associated with Series L Convertible Preferred Stock issued to the holder. On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock at our next annual meeting to be held on July 12, 2011. Due to this conversion and the receipt of the waiver, we retired $303,337 of Derivative Liability. At the annual meeting, our shareholders voted to increase our authorized shares to 2,000,000,000 and the waiver was terminated.

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For the quarter ending September 30, 2012, we recorded the mark to market changes in the Derivative Liability which required a credit to Derivative Expense of $795,019.

The net Derivative Liability for the quarter ending September 30, 2012 is $489,427.

NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, receivables, accounts payable, short-term debt and accrued liabilities approximated their fair values due to the short maturity of these instruments. After a review of our accounts receivable, the Company has recorded an allowance of $10,000 for doubtful accounts. The fair value of the Company's debt obligations is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At September 30, 2012 and 2011, the aggregate fair value of the Company's debt obligations approximated its carrying value.

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

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

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

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

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

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

The carrying value of the Company's cash and cash equivalents, accounts payable, short-term borrowings (including convertible notes payable), and other current liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

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The following table sets forth the Company's financial instruments as of September 30, 2012 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:


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

Liabilities:
Series L Convertible Preferred Stock	$	$		$	(200,000	)		$	(200,000	)
Series L Accrued Dividend Payable				$	(58,450	)		$	(58,450	)
Derivative Liability				$	(489,427	)		$	(489,427	)

At September 30, 2012, the carrying amount of the Series L Convertible Preferred Stock at par value is deemed to be the fair value. The balance sheet also reflects a liability for the accrued dividend payable on the Series L Convertible Preferred Stock.

The following table sets forth the Company's financial instruments as of June 30, 2012 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:


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

Liabilities:
Series L Convertible Preferred Stock	$	$		$	(200,000	)		$	(200,000	)
Series L Accrued Dividend Payable				$	(53,914	)		$	(53,914	)
Derivative Liability					(961,058	)			(961,058	)

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At June 30, 2012, the carrying amount of the Series L Convertible Preferred Stock at par value is deemed to be the fair value. The balance sheet also reflects a liability for the accrued dividend payable on the Series L Convertible Preferred Stock.

NOTE 14 – PROPERTY AND EQUIPMENT

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

	Sept. 30, 2012			June 30, 2012
Furniture and fixtures	$	257,565		$	257,565
Computers, equipment and software		426,873			426,873
CTLM® software costs		352,932			352,932
Trade show equipment		298,400			298,400
Clinical equipment		435,534			435,534
Laboratory equipment		212,560			212,560

Total Equipment		1,983,864			1,983,864
Less: accumulated depreciation		(1,853,949	)		(1,852,712	)

Total Equipment - Net	$	129,915		$	131,152

For the fiscal year ending June 30, 2008, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment as these CTLM® systems continue to be used as clinical systems associated with the data collection for our FDA application which we planned to submit to the FDA in December 2008.

For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 of CTLM® systems in Inventory to Clinical equipment as this CTLM® system is being used as a clinical system at the University of Florida.

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

For the fiscal year ending June 30, 2012, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory.

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

	Furniture, fixtures, clinical, computers, laboratory
	equipment and trade show equipment	5-7 years
	Building	40 years
	CTLM® software costs	5 years

Telephone equipment, acquired under a long-term capital lease at a cost of $50,289, is included in furniture and fixtures. The CTLM® software is fully amortized.

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NOTE 15 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

	Sept. 30, 2012		June 30, 2012
Accounts payable - trade	$	889,272	$	928,385
Accrued tangible personal property taxes payable		6,000		6,000
Accrued compensated absences		41,417		41,417
Accrued wages, payroll taxes and penalties		1,969,141		2,100,436
Other accrued expenses		147,349		141,740

Totals	$	3,053,179	$	3,217,978

As of September 30, 2012, we owe $570,264 in accrued wages and $1,398,877 in accrued payroll taxes. The $1,398,877 in accrued payroll taxes represents unfunded payroll taxes, interest and penalties commencing with the quarter ending March 31, 2010. The reason we incurred the penalties and interest was due to the difficulty in raising capital to have sufficient funds to pay the taxes.

From May 2010 to June 2012, claims were made by the IRS for payment of our accrued payroll taxes, interest and penalties, which as of June 30, 2012 was $1,489,640. We engaged tax counsel to handle this matter and intend to fully satisfy our tax obligations. In order to qualify for an IRS Installment Agreement, we must be current in our payment of payroll taxes in the period they are due. We have paid all of our payroll taxes payable for the calendar year 2012.

The IRS sent formal collection demands for each quarter we were delinquent in payment of payroll taxes beginning with the quarter ending March 31, 2010. On November 22, 2011, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $779,996. Subsequently, on February 2, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $140,439; and on June 28, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $1,479. Our tax counsel negotiated an Installment Agreement to make installment payments to satisfy outstanding taxes, penalties and interest due. The Installment Agreement states that we must pay $15,000 a month for 12 months with the first payment due by November 28, 2012; $20,000 a month for 12 months beginning November 28, 2013; and $25,000 a month for 12 months beginning November 28, 2014 until such time as the balance owed is paid in full. In the event that we are able to pay off the balance due to the IRS, our tax counsel would attempt to negotiate a waiver on the penalties.

From July 1, 2012 through September 30, 2012, we have made payments to the IRS totaling $121,584. We have paid all of our payroll taxes payable for the calendar year 2012. Of the $121,584, we paid accrued payroll taxes totaling $67,359 for the quarter ending March 31, 2012 and $21,134 for the quarter ending June 30, 2012. We paid a total of $33,091 for the quarter ending September 30, 2012.

If we ultimately are unable to pay the outstanding payroll tax, penalties and interest on a timetable pursuant to the terms of the Installment Agreement, we may have to cease operations.

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NOTE 16 – SUBSEQUENT EVENTS

In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder's fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000 and the maturity date of the note is March 31, 2013. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2013; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

In October 2012, we received $1,000 from Southridge pursuant to a short-term promissory note. The note provides a maturity date of April 30, 2013. The note provides for a redemption premium of 20% on or before January 22, 2013; 25% on or before April 24, 2013; and 30% after April 24, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

In November 2012, we received $6,250 from SGI Group pursuant to a short-term promissory note of which the principal on the note was $12,500 and the maturity date of the note is May 31, 2013. The note provides for a $6,250 original issue discount. The note provides for a redemption premium of 20% of the principal amount on or before February 10, 2013; 25% on or before May 11, 2013; and 30% after May 11, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $12,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken

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from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

In November 2012, we received $6,250 from Star City Capital to a short-term promissory note of which the principal on the note was $12,500 and the maturity date of the note is May 31, 2013. The note provides for a $6,250 original issue discount. The note provides for a redemption premium of 20% of the principal amount on or before February 10, 2013; 25% on or before May 11, 2013; and 30% after May 11, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $12,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the initial closing bid price, then the purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

On October 1, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $16,050 principal and $219 in interest. We issued Southridge 162,691,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On October 1, 2012, Southridge executed a partial debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $10,900 principal and $1,398 in interest. We issued Southridge 122,983,562 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On October 2, 2012, Southridge executed a final debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $9,100 principal and $18 in interest. We issued Southridge 91,175,304 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On October 3, 2012, SGI Group executed a partial debt to equity conversion of the $30,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $9,000 principal and $106 in interest. We issued SGI Group 182,124,200 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On October 4, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $6,600 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000055 per share.

On October 10, 2012, FLUX Carbon Starter Fund executed a partial debt to equity conversion of a $38,500 short-term promissory note dated October 4, 2012 in which they converted $15,000 principal. We issued FLUX Carbon Starter 150,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On October 11, 2012, OTC Global Partners executed a final debt to equity conversion of the $30,000 short-term promissory note in which they converted $18,000 in principal. We issued OTC Global Partners 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.

On October 18, 2012, Southridge executed a partial debt to equity conversion of a $17,000 short-term promissory note dated December 19, 2011 in which they converted $15,900 principal and $1,125 in interest. We issued Southridge 340,505,205 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On October 23, 2012, Panache executed a final debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $5,200 principal and $1,512 in interest. We issued Panache 122,030,364 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000055 per share.

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On October 24, 2012, Levin Consulting Group executed a partial debt to equity conversion of the $70,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $12,200 principal and $214 in interest. We issued Levin Consulting Group 248,208,400 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On October 24, 2012, SGI Group executed a partial debt to equity conversion of the $30,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $5,100 principal and $88 in interest. We issued SGI Group 103,764,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On November 6, 2012, Southridge executed a final debt to equity conversion of a $17,000 short-term promissory note dated December 19, 2011 in which they converted $1,100 principal and $26 in interest. We issued Southridge 22,521,649 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On November 6, 2012, Southridge executed a debt to equity conversion of a $30,000 short-term promissory note dated March 19, 2012 in which they converted $30,000 principal and $1,433 in interest. We issued Southridge 628,668,493 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

On November 6, 2012, Southridge executed a partial debt to equity conversion of an $11,000 short-term promissory note dated April 9, 2012 in which they converted $2,750 principal and $475 in interest. We issued Southridge 64,499,178 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.

We have not yet received an extension of maturity dates on $322,750 principal of notes from a private investor and are in technical default of the notes. We are negotiating with the lender to extend the maturity dates.

We received $10,000 from a partial closing on the fourth tranche with JMJ on October 3, 2012. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $700.

On October 3, 2012, JMJ executed a debt to equity conversion totaling $42,000 of which $14,501 was principal and $3,150 was interest for the third tranche of $35,000, which we closed on October 7, 2011; and $24,349 was principal of the fourth tranche of $25,000, which we closed on February 8, 2012. We issued JMJ 300,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00014 per share.

On October 24, 2012, JMJ executed a debt to equity conversion totaling $10,500 of which $3,776 was principal and $2,250 was interest for the fourth tranche of $25,000, which we closed on February 8, 2012; and $4,474 was principal of the fifth tranche of $25,000, which we closed on February 29, 2012. We issued JMJ 150,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00007 per share.

As of the date of this report, we owe a total of $1,773,948 of short term debt of which $1,147,875 is principal, $594,179 is accrued premium and $31,895 is accrued interest. We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $2,487,615 principal, $405,790 in premium, and $67,837 in interest has been converted into 6,863,828,211 shares of our common stock of which 51,802,774 shares were collateral shares and 6,812,025,437 new shares were issued pursuant to Rule 144. Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $338,550 principal of the remaining notes.

As of the date of this report, we owe a total of $56,151 in long-term debt. Of the $56,151 we owe a total of $45,526 in principal, $6,125 is consideration on the principal and $4,500 is interest.

We have evaluated all subsequent events for disclosure purposes.

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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, 2012, which are incorporated herein by reference; and all our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "projects", "potential," or "continue," or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements. These forward-looking statements include, among others, statements relating to our business strategy, which is based upon our interpretation and analysis of trends in the healthcare treatment industry, especially those related to the diagnosis and treatment of breast cancer, and upon management's ability to successfully develop and commercialize its principal product, the CTLM®. This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to alternative techniques for diagnosing and managing breast cancer. Factors that could cause actual results to materially differ include, without limitation, the timely and successful submission of our U.S. Food and Drug Administration ("FDA") application to obtain marketing clearance; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future. There are also many known and unknown risks, uncertainties and other factors, including, but not limited to, technological changes and competition from new diagnostic equipment and techniques, changes in general economic conditions, healthcare reform initiatives, legal claims, regulatory changes and risk factors detailed from time to time in our Securities and Exchange Commission filings that may cause these assumptions to prove incorrect and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described above or elsewhere in this quarterly report. All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, 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.

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OVERVIEW

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

Our financial statements have been prepared assuming that we will continue as a going concern. Our auditors, in their report for the fiscal year ended June 30, 2012, stated that we have incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about our ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 "Going Concern", in the Notes to the Financial Statements. The accompanying financial statements to this Annual Report do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

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

In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk ("NSR") study when used for our intended use.

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

In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®'s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.

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

As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had 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.

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

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

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

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

	has the same intended use as the predicate; and

	has the same technological characteristics as the predicate; or

	has the same intended use as the predicate; and

	has different technological characteristics when compared to the predicate, and

	does not raise new questions of safety and effectiveness; and

	demonstrates that the device is at least as safe and effective as the legally marketed device.

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

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

In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the "breast MRI"). Other sources of our research were obtained through reading medical imaging industry publications, the FDA's website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began

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

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

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

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

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

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

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

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commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.

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

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

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

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

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

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

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

Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being "not substantially equivalent" and furthermore, accepting their

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recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.

Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the "ground work" for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.

During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA "Pre- IDE" meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the "Pre-IDE" meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .

During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.

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

The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.

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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, 2012 of $120,562,567 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 approval process, and the costs associated with advanced product development activities. We will need sufficient financing through the sale of equity or debt securities to complete the approval process and, in the event that we obtain marketing clearance, to have sufficient funding to launch the CTLM® in the U.S. There can be no assurance that we will obtain this financing. Finally, there can be no assurance that we will obtain FDA marketing clearance, that the CTLM® will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM® to allow us to operate profitably.

CRITICAL ACCOUNTING POLICIES

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

Critical accounting policies are defined as those involving significant judgments and uncertainties which could potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of the financial condition and results of operations. We believe the accounting policy described below meets these characteristics. All significant accounting policies are more fully described in the notes to the financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2012.

Inventory

Our inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost (first-in, first-out) or market. As a designer and manufacturer of high technology medical imaging equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and reliability, replacement and availability of key components from our suppliers. We evaluate on a quarterly basis, using the guidance provided in ASC 330 ("Inventory"), our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions. Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case excess and obsolete inventory would have to be adjusted in the future. If we determined that inventory was overvalued, we would be required to make an inventory valuation adjustment at the time of such determination. Although every effort is made to ensure the accuracy of our forecasts of future product demand, significant unanticipated changes in demand could have a significant negative impact on the value of our inventory and our reported operating results. Additionally, purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.

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Stock-Based Compensation

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

Impact of Derivative Accounting

As a result of recent financing transactions we have entered into, our financial statements for the year ended June 30, 2011 and future periods have and will be impacted by the accounting effect of the application of derivative accounting. The application of EITF 07-05 "Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock," which was effective on January 1, 2009 will significantly affect the application of ASC Topic 815 and ASC Topic 815-40 for both freestanding and embedded derivative financial instruments in our financial statements. Generally, warrants, conversion features in debt, and similar terms that include "full-ratchet" or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.

RESULTS OF OPERATIONS

SALES AND COST OF SALES

We are continuing to develop our international markets through our global commercialization program. In the quarter ended September 30, 2012, we recorded revenues of $1,000 representing a decrease of $37,409 from $38,409 during the quarter ended September 30, 2011. The Cost of Sales during the quarter ended September 30, 2012, were $0 representing a decrease of $4,729 from $4,729 during the quarter ended September 30, 2011. The revenue of $1,000 is from servicing the CTLM® from one of our distributors. See Item 5. Other Information – "Other Recent Events"

Other Income for the three months ended September 30, 2012, was $35,322, of which $34,619 represented the extinguishment of debt and $703 represented the use of our facilities by Bioscan and consulting with our engineers pursuant to the Bioscan Agreement (See Part II, Item 5, Other Information, "Laser Imager for Lab Animals").

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GENERAL AND ADMINISTRATIVE

General and administrative expenses during the three ended September 30, 2012, were $179,978, representing a decrease of $561,835 or 76%, from $741,813 in the corresponding period in fiscal 2011. Of the $179,978, compensation and related benefits comprised $55,094 (31%) compared to $298,985 (40%), during the three months ended September 30, 2011. Of the $55,094 and $298,985 compensation and related benefits, $18,000 (47%) and $1,419 (1%), respectively, were due to equity based compensation related to expensing stock options.

The decrease of $561,835 is primarily due to a decrease of $243,891 in compensation and related benefits as a result of a reduction of staff and the executives not accruing any compensation for the quarter; $88,090 in premium expense due to a reduction in the principal amount of new short-term promissory notes issued during the quarter; $91,000 in original issue discounts associated with our short-term promissory notes; $39,285 in payroll tax penalty and interest expense; $27,364 in consulting expenses; $13,496 in Directors and Officers' Liability insurance; $10,647 in rent expense; $9,953 in legal fees for the maintenance of patents; and $4,774 in legal expenses involving corporate and securities matters.

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

RESEARCH AND DEVELOPMENT

Research and development expenses during the three months ended September 30, 2012, were $40,074, representing a decrease of $172,831 or 81%, from $212,905 in the corresponding period in fiscal 2011. Of the $40,074, compensation and related benefits comprised $40,074 (100%), compared to $174,475 (82%) during the three months ended September 30, 2011. Of the $40,074 and $174,475 compensation and related benefits, $14,271 (34%) and $758 (1%) respectively, were due to non-cash compensation related to expensing stock options.

The decrease of $172,831 is primarily due to a decrease of $134,402 in compensation and related benefits as a result of a reduction of staff; $21,200 in consulting expenses; and $3,630 in legal expenses involving FDA matters.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2013 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with conducting the clinical trial and preparing the FDA application. See Item 5. Other Information. CTLM® Development History, Regulatory and Clinical Status.

SALES AND MARKETING

Sales and marketing expenses during the three months ended September 30, 2012, were $22,673, representing a decrease of $78,884 or 78% from $101,557 in the corresponding period in fiscal 2011. Of the $22,673, compensation and related benefits comprised $21,058 (93%), compared to $12,345 (3%) during the three months ended September 30, 2011. Of the $21,058 and $12,345 compensation and related benefits, $4,000 (19%) and 113 (1%), respectively, were due to non-cash compensation related to expensing stock options.

The decrease of $78,884 is primarily due to a decrease of $34,651 in trade show expenses; $19,769 in travel expenses; $5,071 in public relations expense (cost of issuing press releases); and $4,567 in freight expenses.

We expect a significant increase in our sales and marketing expenses during the fiscal year ending June 30, 2013 due to the continued implementation of our global commercialization program. We expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase due to this program.

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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, 2012 and 2011, which were $256,720 and $1,080,729, we had a decrease of $824,009 or 76%.

The decrease of $824,009 was primarily due to decreases in general and administrative expenses of $561,835; research and development expenses of $172,831; and sales and marketing expenses of $78,884.

Inventory Valuation Adjustments during the three months ended September 30, 2012, were $4,215, representing a decrease of $3,524, or 46%, from the corresponding period in fiscal 2011.

Compensation and related benefits during the quarter ended September 30, 2012, were $116,226, representing a decrease of $369,579 or 76% from $485,805 during the quarter ended September 30, 2011. Of the $116,226 and $485,805 compensation and related benefits, $36,281 (31%) and $2,290 (1%), respectively, were due to non-cash compensation associated with expensing stock options. The net decrease of $369,579 was due to a decrease in cash compensation of $403,561 and a $33,981 increase in the recording of non-cash compensation related to the expensing of stock options.

Interest expense during the three months ended September 30, 2012, was $164,149, representing a decrease of $100,340 or 38%, from $264,489 during the corresponding period in fiscal 2011. The interest expense is primarily comprised of $145,446 associated with the amortization of the debt discount on the convertible notes at below market prices on the Short-Term and Long-Term Promissory Notes. See Item 5. Other Information – "Financing/Equity Line of Credit".

BALANCE SHEET DATA

Our combined cash and cash equivalents totaled $3,520 as of September 30, 2012. This is an increase of $1,897 from $1,623 as of June 30, 2012. During the quarter ending September 30, 2012, we received no cash from the sale of common stock through our private equity agreement with Southridge, and we received a net of $275,100 from short term loans. See Part II. Item 5, – "Financing/Equity Line of Credit"

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

Property and Equipment was valued at $129,915 net as of September 30, 2012. The overall decrease of $1,237 from June 30, 2012 is due primarily to depreciation recorded for the first quarter.

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LIQUIDITY AND CAPITAL RESOURCES

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

Since inception we have financed our operating and research and product development activities through several Regulation S and Regulation D private placement transactions, with loans from unaffiliated third parties, and through a sale/lease-back transaction involving our former headquarters facility. Net cash used for operating and product development expenses during the three months ending September 30, 2012, was $272,203, 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, 2012, we had negative working capital of ($4,725,574) compared to negative working capital of ($5,650,805) at June 30, 2012.

During the first quarter ending September 30, 2012, we did not raise any money through the sale of shares of common stock pursuant to our Amended Private Equity Credit Agreement with Southridge dated January 7, 2010 and we received a net of $274,100 from short-term loans. See Item 5. Other Information "Financing – Equity Line of Credit." We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, in the international market and the expense of continuing our ongoing product development program. We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering. If additional funds are raised by issuing equity securities, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.

Capital expenditures for the three months ending September 30, 2012, were $0 as compared to $0 for the three months ending September 30, 2011. We anticipate that the balance of our capital needs for the fiscal year ending June 30, 2013 will be approximately $25,000.

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months beginning November 28, 2014 until such time as the balance owed is paid in full. In the event that we are able to pay off the balance due to the IRS, our tax counsel would attempt to negotiate a waiver on the penalties.

If we ultimately are unable to pay the outstanding payroll tax, penalties and interest on a timetable pursuant to the terms of the Installment Agreement, we may have to cease operations.

There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30, 2012. Our fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are substantial and are likely to increase as additional agreements are entered into and additional personnel are retained. We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs. Our future capital requirements will depend on many factors, including the following:

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

We do not expect to generate a positive internal cash flow for at least 12 months as substantial costs and expenses continue due principally to the international commercialization of the CTLM®, activities related to our FDA approval process, and advanced product development activities. We intend to use the proceeds from the sale of convertible debentures, convertible preferred shares, convertible promissory notes, and draws from our new Private Equity Agreement with Southridge and any successor private equity agreements and/or alternative financing facilities as our sources of working capital. There can be no assurance that the equity credit financing will continue to be available on acceptable terms. We plan to continue our policy of investing excess funds, if any, in a High Performance Money Market savings account at Wells Fargo Bank, N.A.

BUSINESS LEASE AGREEMENT

On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35^th Terrace, Ft. Lauderdale, Florida. The term of the lease is five years and one month; with the first monthly rent payment due September 1, 2008; and with an option to renew for one additional period of three years. The monthly base rent for the initial year is $6,580 plus applicable sales tax. During the term and any renewal term of the lease, the base annual rent shall be increased each year. Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax. IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses, which is estimated to be $3,084.37 per month for the first 12 months of the lease. The total monthly rent including Florida sales tax for the first 12 months is $10,244.23. Upon the execution of the lease, we paid the first month's rent of $10,244.23 and a security deposit of $13,160.00. In August 2008, we moved into our new headquarters facility. We believe that our new facility is adequate for our current and reasonably foreseeable future needs and provides us

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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.

On July 21, 2011, we entered into an agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for an additional 4,800 square feet of commercial office space at 5301 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease will run concurrent with our original lease commencing on September 1, 2011 and terminating on September 30, 2013. The monthly base rent for the initial year is $4,500 plus applicable sales tax and increase by 3.5% each year to the lease expiration. We terminated this lease agreement and obtained a release dated August 2, 2012 from Ft. Lauderdale Business Plaza Associates.

Issuance of Stock for Services/Dilutive Impact to Shareholders

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

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

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

Issuance of Stock in Connection with Short-Term Loans

In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in September 2012. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $194,241 of which $82,000 is the principal remaining. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $87,700 of additional premium was accrued as of the date of this report.

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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 June 30, 2012 for 3% additional premium per month on each note. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $276,363 of additional premium was accrued for the December 2009 notes as of the date of this report. In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 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 May 31, 2012 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. From January 2011 to June 2012, Southridge fully converted the $600,000 principal and $344,550 premium into 413,172,232 shares of our common stock of which 31,056,108 shares were collateral shares and 382,116,124 new shares were issued pursuant to Rule 144.

On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $27,600 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to November 30, 2012 for this note.

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March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

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In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.

In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

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In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to June 30, 2012 for these notes for 3% additional premium per month on each note.

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In June 2012, we received $14,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from June 6, 2013 to June 20, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $14,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

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Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 200,000,000 shares of our common stock in connection with this loan.

On September 26, 2012, a private investor sold $30,000 of its original $100,000 short-term promissory note dated November 23, 2009 to OTC Global Partners. The terms of the original note remain the same except that the new note provides for a new redemption premium of 15% of the principal amount on or before September 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder's fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000 and the maturity date of the note is March 31, 2013. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken

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from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

In October 2012, we received $1,000 from Southridge pursuant to a short-term promissory note. The note provides a maturity date of April 30, 2013. The note provides for a redemption premium of 20% on or before January 22, 2013; 25% on or before April 24, 2013; and 30% after April 24, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

In November 2012, we received $6,250 from SGI Group pursuant to a short-term promissory note of which the principal on the note was $12,500 and the maturity date of the note is May 31, 2013. The note provides for a $6,250 original issue discount. The note provides for a redemption premium of 20% of the principal amount on or before February 10, 2013; 25% on or before May 11, 2013; and 30% after May 11, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $12,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

In November 2012, we received $6,250 from Star City Capital to a short-term promissory note of which the principal on the note was $12,500 and the maturity date of the note is May 31, 2013. The note provides for a $6,250 original issue discount. The note provides for a redemption premium of 20% of the principal amount on or before February 10, 2013; 25% on or before May 11, 2013; and 30% after May 11, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $12,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

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

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

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

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

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

On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315. We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

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144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.

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From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to November 19, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

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

Issuance of Stock in Connection with Long-Term Loans

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

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder's Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder's Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder's Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder's Fee, which is $1,050. A partial closing on the fourth tranche of $10,000 closed on October 3, 2012 and we received $10,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $700. Although we are not being funded based on the on achievement of milestones relating to the Registration Statement, we continue to draw funds from

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the Promissory Note from time to time based on the lender's ability to fund us. For the remaining three tranches, we are obligated to pay a Finder's Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,290,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $258,000 to terminate the agreement.

The funding schedule of the seven tranches is as follows:

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

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

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

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

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

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

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

The conditions to funding each payment are as follows:

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

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

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conversion loss in cash or add the conversion loss to the balance of principal due. Prepayment of the Note is not permitted.

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As of the date of this report, we owe a total of $56,151 in long-term debt. Of the $56,151 we owe a total of $45,526 in principal, $6,125 is consideration on the principal and $4,500 is interest.

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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.

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

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005. One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor.

The plaintiffs alleged that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive PMA approval for the CTLM® and that we would give them exclusive distribution rights in Italy. The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.

Based on our preliminary investigation of this matter, we believed that this claim was without merit, and we vigorously defended the case. Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond. Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009. The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses. At the hearing, the plaintiffs did not prove all of the facts underlying their claims. The Judge set a hearing for November 10, 2010 for the "clarification of conclusions". At that time, our counsel planned to present our demand for damages from "vexatious litigation" by the plaintiffs. The November 10, 2010 hearing was postponed until November 17, 2010. At the hearing, the plaintiffs failed to present their statements to the court in a timely manner and therefore, we believe that the plaintiffs should no longer be able to pursue any legal remedy in this matter. The last hearing of the case was held on November 17, 2010. A hearing was held on September 28, 2011 and the Judge declared that the case was closed. Our counsel requested a copy of the order of the court to be sent to the Plaintiffs notifying them that the case was closed. Because the court is sending notice to the plaintiffs, the time for appeal is reduced from one year to one month. If the plaintiffs do not appeal, the court's decision becomes final. We received a copy of the order of the court notifying us that the case was closed on September 12, 2012.

Item 1A. Risk Factors.

Our Annual Report on Form 10-K for the year ended June 30, 2012, 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 our first quarter ended September 30, 2012, there were no material changes in risk factors as previously disclosed in our Form 10-K filed on October 15, 2012.

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

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Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Submission of Matters to a Vote of Security-Holders.

None

Item 6. Other Information.

CTLM® DEVELOPMENT HISTORY, REGULATORY AND CLINICAL STATUS

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

In order to market and sell the CTLM® in the United States, we must obtain marketing clearance from the Food and Drug Administration. Initially, we were seeking marketing clearance through an application through Pre-Market Approval (PMA) which must be supported by extensive data, including pre-clinical and clinical trial data, as well as evidence to prove the safety and effectiveness of the device.

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

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

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

In May 2003, we filed a PMA application for the CTLM® to the FDA. In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies. We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension. In March

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2004 we received an extension to respond with the amendment however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA in a simpler and more clinically and technically robust filing.

In November 2004, we received a letter from the FDA stating that the CTLM® study had been declared a Non-Significant Risk (NSR) study when used for our intended use.

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

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

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

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

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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.

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

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

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

	has the same intended use as the predicate; and

	has the same technological characteristics as the predicate; or

	has the same intended use as the predicate; and

	has different technological characteristics when compared to the predicate, and

	does not raise new questions of safety and effectiveness; and

	demonstrates that the device is at least as safe and effective as the legally marketed device.

In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead

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

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potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.

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

Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to

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

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intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.

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

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

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

	Designing a new clinical study protocol and a modified intended use,

	Identifying qualified clinical sites and retaining them to proceed with our clinical study,

	Obtaining the necessary approvals from the Institutional Review Boards ("IRB"),

	Updating the CTLM® system to its most current design level,

	Our research and development team finalizing the improvements regarding the reconstruction algorithm by enhancing the CTLM® images by reducing the number of artifacts which would enable the physician to interpret the images more easily,

	Low patient volume following the inclusion criteria of our clinical protocol,

	Lack of cancer cases required for the PMA statistical analysis, and

	Lack of sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the preparation and submission of the PMA application to the FDA.

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

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

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

In addition, sales of medical devices outside the U.S. may be subject to international regulatory requirements that vary from country to country. The time required to gain approval for international sales may be longer or shorter

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than required for FDA marketing clearance and the requirements may differ. Also, we believe that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.

Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® may be marketed. In addition, to obtain these approvals, the FDA and certain foreign regulatory authorities may impose numerous other requirements which medical device manufacturers must comply with. Product approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.

Any products manufactured or distributed by us pursuant to FDA marketing clearance will be subject to pervasive and continuing regulation by the FDA. Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. In addition, the marketing and use of our products may be regulated by various state agencies. The export of medical devices is also subject to regulation in certain instances. Both the FDA and the individual states may inspect the manufacturers of our products on a routine basis for compliance with current QSR regulations and other requirements.

In addition to the foregoing, we are subject to numerous federal, state, and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, and fire hazard control. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations and that such compliance will not have a material adverse effect upon our ability to conduct business. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Cautionary Statements – Extensive Government Regulation, No Assurance of Regulatory Approvals".

The development chronology stated above details how complicated the process is to develop a brand new medical imaging technology. We believe that we have a strong patent portfolio and are the world leader in optical tomography. We have received marketing approval in China and Canada; the CE Mark for the European Union; ISO 13485:2003 registration; UL Electrical Test Certificate; and Product registrations in Brazil and Argentina. The registrations for Brazil and Argentina were not renewed in 2009 because of the costs associated with new testing requirements by UL. We have now completed the Electromagnetic Compatibility ("EMC") testing required by UL and plan to submit our renewal application for these product registrations in 2011. Worldwide, our end users have completed more than 25,000 patient scans, and we have sold 17 CTLM® systems as of the date of this report. Our decision to fund the Company primarily through the sale of equity has enabled us to reach this important milestone.

In fiscal 2010, fiscal 2011, fiscal 2012 and thus far in fiscal 2013, we have used the proceeds from short-term loans, long-term loans and proceeds from our Southridge Private Equity Credit Agreement for working capital. Going forward we intend to use the proceeds from short term and long term loans and issuance of convertible preferred stock, as our sources of working capital. We may also seek to raise fund through our Private Equity Credit Agreement with Southridge which requires an effective S-1 Registration Statement. Substantial additional financing will be required before and after receipt of FDA marketing clearance, assuming it is received, as to which there can be no assurance. See Item 5. "Financing/Equity Line of Credit."

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Clinical Collaboration Sites Update

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

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

We were pleased to learn in June 2012 that a clinical paper produced by Dr. J. Qi, an independent CTLM® researcher based in Tianjin Medical University Cancer Institute and Hospital Tianjin, China, is pending publication in "Clinical Imaging," a highly respected radiology journal based in New York, NY. Each article accepted for publication undergoes a through review for content and accuracy by an editorial board of Radiologists.

The paper by Dr. Qi titled, "CTLM as an adjunct to Mammography in the diagnosis of Patients with Dense Breasts", reported that when a CTLM® study was combined with a (digital) x-ray based mammogram -breast cancer detection rate otherwise medically referred to as test "sensitivity" was significantly improved from a low of 34.40% to a new high of 81.57% when dealing with Extremely Dense Breasts (ACR classification). In addition, the researchers "could distinguish malignant from benign lesions".

We are very pleased that the clinical benefits of a CTLM® breast exam have been validated by a group of independent researchers. We believe that Dr. Qi's results will be further validated upon completion of our PMA application to the FDA.

The abstract of the article can be found at www.clinicalimaging.org and searched under the title "CTLM as an adjunct to mammography in the diagnosis of patients with dense breasts".

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

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International Distributors - Global Commercialization

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

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

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(1) Will be renewed upon appointment of new distributor.

(2)	Distributor will renew ANVISA.

(3)	MOH - Ministry of Health

(4)	DOH - Department of Health

(5)	CICI - The Croatian Institute for Health Insurance

(6)	JFDA – Jordan Food and Drug Administration

(7)	BHDT - Bureau of Health Devices and Technology

(8) TGA had requested additional documentation of our initial approval from our former distributor, which they did not provide timely. The initial approval was canceled and our new distributor will resubmit the application.

(9) CDSCO – Medical Device Division, Not required as this time but will be required for some classes of medical devices in 2011 or 2012.

(10)	BPFK – Malaysia National Pharmaceutical Control Bureau, Registration is voluntary

(11)	COFEPRIS – Mexico Ministry of Health

(12) DirJenPOM – We received a deposit from our distributor Jainsons Pty Ltd. and the system was installed in Jakarta, Indonesia. Our distributor is responsible for registering the CTLM® with the Indonesia Director General of Food and Drugs ("DirJen POM") who controls the registration of medical devices. Product registrations for medical devices issued from certain designated countries such as Canada can be used to support the registration in Indonesia with the DirJen POM. The CTLM® system has received international certifications and licenses from the European Union, CE mark; Canada, CMDCAS Canadian Health screening; China, SFDA; and ISO 13485 issued by UL.

(13) Our distributor, National Diagnostic Service and Management LLC of Novi, Michigan, through its affiliate Phoenix Med of Moscow, Russia, has submitted an application to the Ministry of Health which is currently pending.

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

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

In March 2009, we announced that we had redefined our marketing strategy and launched a new campaign focusing on the international market. Because of our disappointment with the performance of many of our previous distributors, we have terminated their distribution agreements for non-performance or allowed their agreements to expire. In April 2009, we were pleased to announce that we renewed our distribution agreement with EDO MED Sp. Z.o.o. as our exclusive distributor in Poland. EDO MED will continue to market and provide technical service support for the CTLM® throughout Poland, as well as to assist with and promote the ongoing research efforts utilizing CTLM® technology at the Comprehensive Cancer Centre in Gliwice, Poland and other institutes and research centers. Currently, the CTLM® system is in use at the Comprehensive Cancer Centre, Maria Sklodowska-Curie Memorial Institute, in Gliwice.

In the Asia-Pacific Region, we previously announced that we contracted with BAC, Inc. to manage our representative office in Beijing, existing distributors and develop new areas. As part of our continuing cost cutting initiatives, we closed our representative office in January 2009, and in December 2008, we terminated our contract with BAC, Inc. for non-performance. In March 2009, we announced the appointment of Jainsons Pty Ltd Company as our new distributor for Australia and New Zealand. In July 2010, we announced that we installed a CTLM® system at Tata Memorial Hospital, the national cancer comprehensive cancer center in Mumbai, India. The system was placed by Anto Puthiry, Managing Director of High-Tech Healthcare Equipments Pvt. Ltd. We continue to seek qualified distribution channels in China but as of the date of this report we have not secured such channels.

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In September 2007, we announced the installation of a CTLM® system at the Tianjin Medical University's Cancer Institute and Hospital ("Tianjin"), the largest breast disease center in China. The hospital evaluated the CTLM® under three research protocols designed to improve current methods of addressing breast cancer imaging and treatment follow-up. We previously announced that we installed a CTLM® system at Beijing's Friendship Hospital, which enabled CTLM® clinical procedures to become listed on the Regional and subsequently the National Schedule for patient payments.

In December 2008, we announced that a recent study of the CTLM® was one of the featured scientific abstracts at the Radiological Society of North America ("RSNA") from November 30th to December 5th. Dr. Jin Qi, a radiologist at the Tianjin Medical University Cancer Institute and Hospital, Tianjin, China was selected for her clinical paper, "CTLM as an Adjunct to Mammography in the Diagnosis of Patients with Dense Breasts." Dr. Qi attended RSNA with IDSI and was present at our exhibit. Dr. Qi's clinical paper was accepted as one of the European Congress of Radiology's conference presentations in March 2009. The study demonstrated that: "when the CTLM® system was used as an adjunct to mammography in heterogeneously and extremely dense breasts, the sensitivity (detecting cancer) increased significantly."

We previously signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment was surging due to publicity surrounding their former First Lady, who succumbed to the disease. In September 2007, we announced the installation of a CTLM® system at the Univeriti Putra Malaysia ("UPM") in Kuala Lumpur, Malaysia. The CTLM® was installed at UPM's academic facility within the jurisdiction of the Ministry of Education and was evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur. Following the evaluation at UPM, we appointed a new distributor, Daichi Holding Berhad ("Daichi") of Penasng, Malaysia. The CTLM® was removed from UPM academic facility at the conclusion of the evaluation period. Daichi issued a purchase order for this system and it was initially installed in August 2009 at Catherine Women's Medical Center in Petaling Jaya, Malaysia. On September 22, 2009, we announced that Daichi completed the purchase of the system with full payment. In June 2010, Daichi notified us that they were relocating the system and is now installed at the Breast Wellness (M) SDN. BHD (a public limited liability company) in Petaling Jaya, Malaysia.

Activities in Europe and the Middle East are top marketing priorities for IDSI. As a result of our participation as an exhibitor at the Arab Health Medical Conference in January 2010 in Dubai, UAE, and at the European Congress of Radiology ("ECR") in March 2010 in Vienna, Austria, we were able to meet with qualified distributors to discuss their interest in representing us in their respective territories. While attending Arab Health, we hired a Managing Director to market the CTLM® in the UAE and parts of the Middle East. We are not marketing or seeking distributors and will not market the CTLM® directly or indirectly in Iran, Sudan and/or Syria and other Middle Eastern countries that are subject to U.S. economic sanctions and export controls.

Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, and Belgrade. In April 2009, we signed a non-exclusive agreement with Neomedica d.o.o. Beograd to market the CTLM® system to the private and public sectors of Slovenia, Croatia, Serbia, Montenegro, and Macedonia. In October 2008, we announced that our distributor, Laszlo Meszaros of Kardia Hungary Kft. purchased the first CTLM® system for Budapest, Hungary. The CTLM® system has been installed at the new MeDoc HealthCare Center ("MDHC") located in Budapest, in collaboration with Dr. Maria Gergely, Chief Radiologist of Uzsoki Hospital.

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

In December 2008, we announced that a new study evaluating the CTLM system as an adjunct to mammography was featured in the December 2008 issue of Academic Radiology. Alexander Poellinger, M.D., a radiologist at Charite Hospital in Berlin. Germany, authored "Near-infrared Laser Computed Tomography of the Breast: A Clinical Experience" along with colleagues at Charite and IDSI's Director of Advanced Development as co-author. Their work demonstrated an increase in accuracy of diagnosing malignant and benign breast lesions in patients who were examined with mammography and CTLM adjunctively compared to mammography alone. Dr. Poellinger's

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clinical paper was distributed to doctors and distributors visiting our booth at the European Congress of Radiology in March 2009.

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

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

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

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

In January 2011, we exhibited the CTLM® at the Arab Health 2011 medical conference held from January 24 – 27 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE). We presented clinical images obtained from the CTLM® system, identified potential distributors for the Middle East region and obtained prospective sales leads. The Arab Health Exhibition and Congress is one of the largest and most prestigious healthcare events in the Middle East, with over 2,700 exhibitors from 141 countries and more than 65,000 medical professionals.

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

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

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

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

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In October 2011, we announced that the CTLM® purchase was confirmed after a successful rigorous evaluation of our CTLM® system at the Hang Lekiu Medical Center in Jakarta, Indonesia. This positive outcome reinforces DOT as a valuable new breast imaging modality. Hang Lekiu Medical Center is a leading provider of advanced multi-disciplined medical care in a modern patient friendly environment. The evaluation was initiated February 2011 by introducing the unique clinical benefits of CTLM® to Indonesia's Health Minister Endang Rahayu Sedyaningsih, local officials and key news organizations.

In November 2011, we announced that our exclusive distributor for Mexico, Kepter Internacional ("Kepter"), placed an order for five CTLM® systems with one system to be delivered and installed the third week of December 2011. In connection with the first system, Kepter paid a $45,000 deposit. Kepter advised us that they were unable to accept delivery in December so we shipped the system in January 2012. In August 2012, the CTLM® was installed at the Centro Medico Ave in Monterrey, Mexico. On September 12, 2012, Linda Grable Chairman/CEO and Deborah O'Brien, Senior Vice-President attended the official inauguration of the CTLM® installation at the Centro Medico Ave. The event was attended by the medical community, government officials and local community leaders. IDSI's exclusive distributor in Mexico, Kepter, has created a new company, "Sistemas de Diagnostico e Imagenologia de Mexico S.A. de C.V.", committed to establishing other CTLM® sites throughout Mexico. A video of the event can be viewed at http://vimeo.com/49416717.

In November 2011, we announced that we would be exhibiting our CTLM® at the 97th annual Radiological Society of North America (RSNA) Scientific Assembly meeting in Chicago, IL from November 27th to December 2nd. This meeting gave us the opportunity to present the CTLM® system which has been recently recognized as Diffuse Optical Tomography (DOT) to the national and international markets.

In December 2011, we announced that we signed an exclusive distribution agreement with ID Matrix Systems to market and sell our CTLM® systems to private and government hospitals and private imaging centers throughout China and Hong Kong. The agreement stipulates that ID Matrix must purchase a minimum of 15 CTLM® systems within the first year of the contract along with a 50% deposit with each order to remain our exclusive distributor for the territories.

In December 2011, we received an order for one CTLM® system with a deposit of $50,000 from our exclusive distributor, ID Matrix, which was initially scheduled to ship to China during the first week of January 2012. The distributor was not ready to take delivery so we will wait for their instructions for delivery.

In January 2012, we exhibited the CTLM® at the 37th annual Arab Health 2012 medical conference held from January 23 – 26 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE). . This meeting gave us the opportunity to present the CTLM® system which has been recently recognized as Diffuse Optical Tomography (DOT) to the Middle East markets. We presented clinical images obtained from the CTLM® system, identified potential distributors for the Middle East region and obtained prospective sales leads. The Arab Health Exhibition and Congress is the largest and most prestigious healthcare event in the Middle East, with over 3,000 exhibitors from 100 countries and more than 70,000 medical professionals.

On May 14, 2012, we signed a distribution agreement with Shimadzu Medical to market the CTLM® in Australia, New Zealand and the Pacific Islands. Shimadzu Medical Systems (Oceania) Pty Ltd is an Australasian subsidiary of Shimadzu Corporation, Kyoto, Japan.

In November 2012, we announced that we shipped a CTLM® system to the Euromedica Hospital in Baia Mare, Romania. This exciting event was possible through the joint efforts of the exclusive CTLM® distributor for Romania, Lebada USA, Inc. and the Romanian American Board of Trade. Euromedica Hospital, the first Romanian private Hospital accredited by CoNAS, the National Hospital Accreditation Committee, provides a wide range of care from outpatient medical consultations, laboratory tests, clinical investigations, hospitalization, surgery and post-surgery hospitalization. The hospital is equipped with the latest technical equipment for examinations and treatments. Ovidius T. Lebada, CEO of the Lebada USA, Inc., states, "The recent shipment to Euromedica Hospital is just one of several CTLM® systems planned for the Romanian market.

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Among our global users, we have three systems in Poland, two in Italy, two in the Czech Republic, two systems in the United Arab Emirates, two systems in India, and two systems in China as well as one system each in Germany, Hungary, Malaysia, Israel, Indonesia, Brazil, Mexico and Romania. As of the date of this report, IDSI's users have performed over 25,000 CT Laser Mammography (CTLM®) patient scans worldwide.

Other Recent Events

On August 2, 2012, the Board approved an increase in the number of authorized shares of Common Stock from 4,000,000,000 shares of Common Stock to 10,000,000,000 shares of Common Stock (the "Authorized Share Increase") and recommended to Linda B. Grable, our majority voting stockholder, that the Authorized Share Increase be approved. On August 2, 2012, the majority voting stockholder approved the Authorized Share Increase by written consent in lieu of a meeting in accordance with Florida law. The increase was necessary to provide authorized shares to be available for issuance in connection with debt to equity conversions of convertible promissory notes that became eligible for conversion pursuant to Rule 144.

On October 30, 2012, the Board approved a 1-for-500 reverse stock split of our issued and outstanding shares of Common Stock (the "Reverse Stock Split") and recommended to the majority voting stockholder that she approve the Reverse Stock Split. On October 30, 2012, the majority voting stockholder approved the Reverse Stock Split by written consent in lieu of a meeting, in accordance with Florida law. Accordingly, shareholder consent is not required and was not solicited in connection with the approval of the Reverse Stock Split.

Our Board believes that the stockholders of IDSI will benefit from the Reverse Stock Split because they believe that the Reverse Stock Split could be a catalyst for an increase in the stock price of the Common Stock, which in turn could increase the marketability and liquidity of the Common Stock, as well as increase the profile of IDSI for private investment, acquisitions and other future opportunities that become available to us. Our Board also believes the excessively high number of outstanding shares of Common Stock has contributed to a lack of investor interest in IDSI and has made it difficult for the Company to attract new investors and potential business partners.

Laser Imager for Lab Animals

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

IDSI's strategic thrust for the LILA project has changed, as we decided to focus on women's health business markets with a family of CTLM® systems and related devices and services. The animal imager did not fit our business model although the fundamental technology is related to the human breast imager. Consequently, we sought to align the project with a company already in the animal imaging market that might complete the LILA and commercialize it.

On August 30, 2006 we announced an exclusive license agreement under which Bioscan, Inc. would integrate LILA technology into their animal imaging portfolio. Under the agreement we would transfer technology to Bioscan by December 2006 upon receipt of the technology transfer fee. We have received full payment of $250,000 for the technology transfer fee and $69,000 for the parts associated with the agreement. The agreement also provides for royalties on future sales. Bioscan has commenced its work on the LILA project and placed one of their engineers at our facility so that he can confer with our engineers if necessary. Bioscan pays us for use of the space and consulting fees if they require our engineering assistance. There can be no assurance that it will be successful or that we will receive any royalties from Bioscan.

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Financing/Equity Line of Credit

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

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

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

Prior Equity Agreements

From August 2000 to February 2004, we obtained funding through three Private Equity Agreements with Charlton. Each equity agreement provided that the timing and amounts of the purchase by the investor were at our sole discretion. The purchase price of the shares of common stock was set at 91% of the market price. The market price, as defined in each agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche. The only fee associated with the private equity financing was a 5% consulting fee payable to Spinneret. In September 2001 Spinneret proposed to lower the consulting fee to 4% provided that we pay their consulting fees in advance. We reached an agreement to pay Spinneret in advance as requested and paid them $250,000 out of proceeds from a put.

From the date of our first put notice, January 25, 2001 to our last put notice, February 11, 2004, under our Third Private Equity Credit Agreement, we drew a total of $20,506,000 and issued 49,311,898 shares to Charlton. As each of the obligations under these prior agreements was satisfied, the agreements were terminated. The Third Private Equity Agreement was terminated on March 4, 2004 upon the effectiveness of our first Registration Statement for the Fourth Private Equity Credit Agreement.

On January 9, 2004, we and Charlton entered into a new "Fourth Private Equity Credit Agreement" which replaced our prior private equity agreements. The terms of the Fourth Private Equity Credit Agreement were more favorable to us than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms were: (i) The put option price was 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, (ii) the commitment period was two years from the

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effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by us as we had the option of setting a floor price for each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee to Spinneret, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars. The previous requirement in the Third Private Equity Credit Agreement was $20,000.

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

On March 21, 2006, we and Charlton entered into a new "Fifth Private Equity Credit Agreement" which has replaced our prior Fourth Private Equity Credit Agreement. The terms of the Fifth Private Equity Credit Agreement were similar to the terms of the prior Fourth Private Equity Credit Agreement. The new credit line's terms were (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the "Valuation Period"), (ii) the commitment period was two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, (v) the minimum stock price, also known as the floor price was computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day fell more than 18% below the closing trade price on the trading day immediately prior to the date of the Company's Put Notice (a "Low Bid Price"), for each such Trading Day the parties had no right and were under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount accordingly would be deemed reduced by such amount. In the event that during a Valuation Period there existed a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party's right and obligation to purchase and sell the Investment Amount under such Put Notice would terminate on such third Trading Day ("Termination Day"), and the Investment Amount would be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equaled or exceeded the Low Bid Price and (vi) there were no fees associated with the Fifth Private Equity Credit Agreement.

We made sales under the Fifth Private Equity Credit Agreement from time to time in order to raise working capital on an "as needed" basis. Prior to the expiration of the Fifth Private Equity Credit Agreement on March 21, 2008, we drew down $5,967,717 and issued 82,705,772 shares of common stock.

The Sixth Private Equity Credit Agreement

On April 21, 2008, we and Charlton entered into a new "Sixth Private Equity Credit Agreement" which has replaced our prior Fifth Private Equity Credit Agreement. The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement. This new credit line's terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the "Valuation Period"), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, (v) the minimum stock price, also known as the floor price is computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company's Put Notice (a "Low Bid Price"), for each such

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Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount. In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party's right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day ("Termination Day"), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.

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

As of the date of this report, since January 2001, we have drawn an aggregate of $42,714,650 in gross proceeds from our equity credit lines with Charlton and have issued 425,676,012 shares as a result of those draws.

The Southridge Private Equity Credit Agreement

On November 23, 2009, we and Southridge entered into a new "Southridge Private Equity Credit Agreement" which has replaced our prior Sixth Private Equity Credit Agreement with Charlton. On January 7, 2010, we and Southridge amended the terms of the "Southridge Private Equity Credit Agreement" and revised the language to clarify that Southridge is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.

The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton. This new credit line's terms are (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche (the "Valuation Period"), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, and (v) there are no fees associated with the Southridge Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.

We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, the "Registration Period"), which Registration Statement (including any amendments or supplements, thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

We are further obligated to prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.

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On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement. This Registration Statement was declared effective on February 25, 2010. On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010. We reduced the amount of shares registered to 85,744,007 shares. This amended Registration Statement was declared effective on May 27, 2010.

As of the date of this report, we have drawn down $2,000,000 and issued 71,244,381 shares of common stock under the Private Equity Credit Agreement with Southridge, all pursuant to the Registration Statement declared effective in May 2010.

On December 21, 2010, we filed a new Registration Statement on Form S-1 covering 35,487,756 shares to be issued pursuant to the Southridge Private Equity Agreement. This Registration Statement, as amended, has not yet been declared effective. As of the date of this report, since January 2001, we have drawn an aggregate of $44,714,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 496,920,393 shares as a result of those draws.

Southridge Partners II, LP - Short-Term Loans

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8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.

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In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

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prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.

In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000 and the maturity date of the note is March 31, 2013. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

In October 2012, we received $1,000 from Southridge pursuant to a short-term promissory note. The note provides a maturity date of April 30, 2013. The note provides for a redemption premium of 20% on or before January 22, 2013; 25% on or before April 24, 2013; and 30% after April 24, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.

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

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

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

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

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

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

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From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to November 19, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

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From November 2010 through November 19, 2012, we received a total of $1,635,672 from Southridge pursuant to short-term promissory notes. As of the date of this report, we may be obligated to issue Southridge a total of 5,829,946,467 shares to redeem short-term notes totaling $290,337 of which $236,422 is principal, $40,514 is premium and $13,401 is interest.

Other Short-Term Loans

In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in September 2012. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $194,241 of which $82,000 is the principal remaining. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $87,700 of additional premium was accrued as of the date of this report.

In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes. These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000. In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through June 30, 2012 for 3% additional premium per month on each note. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $276,363 of additional premium was accrued for the December 2009 notes as of the date of this report. In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 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 May 31, 2012 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. From January 2011 to June 2012, Southridge fully converted the $600,000 principal and $344,550 premium into 413,172,232 shares of our common stock of which 31,056,108 shares were collateral shares and 382,116,124 new shares were issued pursuant to Rule 144.

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dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $27,600 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to November 30, 2012 for this note.

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In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to June 30, 2012 for these notes for 3% additional premium per month on each note.

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conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.

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before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $15,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder's fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.

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the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

In November 2012, we received $6,250 from Star City Capital to a short-term promissory note of which the principal on the note was $12,500 and the maturity date of the note is May 31, 2013. The note provides for a $6,250 original issue discount. The note provides for a redemption premium of 20% of the principal amount on or before February 10, 2013; 25% on or before May 11, 2013; and 30% after May 11, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $12,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 125,000,000 shares of our common stock in connection with this loan.

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From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to November 19, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

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Issuance of Stock in Connection with Long-Term Loans

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

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder's Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder's Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder's Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder's Fee, which is $1,050. A partial closing on the fourth tranche of $10,000 closed on October 3, 2012 and we received $10,000. In connection with this partial third tranche we will pay a 7% Finder's Fee, which is $700. Although we are not being funded based on the on achievement of milestones relating to the Registration Statement, we continue to draw funds from the Promissory Note from time to time based on the lender's ability to fund us. For the remaining three tranches, we are obligated to pay a Finder's Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,290,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $258,000 to terminate the agreement.

The funding schedule of the seven tranches is as follows:

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

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

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

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

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

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

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

The conditions to funding each payment are as follows:

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

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

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principal of the fifth tranche of $25,000, which we closed on February 29, 2012. We issued JMJ 150,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00007 per share.

As of the date of this report, we owe a total of $56,151 in long-term debt. Of the $56,151 we owe a total of $45,526 in principal, $6,125 is consideration on the principal and $4,500 is interest.

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

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Item 7. Exhibits

3.27	Articles of Amendment-Certificate of Designation of Series Q Preferred Stock filed with the Florida Department of State on March 16, 2012. Incorporated by reference to our Form 8-K filed on March 26, 2012.
10.78	Agreement of Sale by and between Imaging Diagnostic Systems, Inc. and Superfun B.V. dated September 13, 2007 including Form of Lease Agreement (Exhibit D). Incorporated by reference to our Form 8-K filed on September 13, 2007.
10.79	Lease Agreement by and between Bright Investments, LLC ("Landlord") and Imaging Diagnostic Systems, Inc. ("Tenant") dated March 14, 2008. Incorporated by reference to our Form 8-K filed on April 3, 2008.
10.80	Consulting Agreement between Imaging Diagnostic Systems, Inc. and Tim Hansen dated as of January 1, 2008. Incorporated by reference to our Form 8-K filed on December 27, 2007.
10.81	Sixth Private Equity Credit Agreement between IDSI and Charlton Avenue LLC dated April 21, 2008 without exhibits. Incorporated by reference to our Form 8-K filed on April 21, 2008.
10.82	Two-Year Employment Agreement dated as of April 16, 2008 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chairman of the Board and Interim Chief Executive Officer. Incorporated by reference to our Form 8-K filed on May 5, 2008.
10.83	Stock Option Agreement dated as of August 30, 2007 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chairman of the Board and Interim Chief Executive Officer. Incorporated by reference to our Form 8-K filed on May 5, 2008.
10.84	Business Lease Agreement by and between Ft. Lauderdale Business Plaza Associates ("Lessor") and Imaging Diagnostic Systems, Inc. ("Lessee") dated June 2, 2008. Incorporated by reference to our Form 8-K filed on June 5, 2008.
10.85	Financial Services Agreement by and between Imaging Diagnostic Systems, Inc. (the "Company" or "IDSI") and R.H. Barsom Company, Inc. (the "Consultant") dated July 15, 2008. Incorporated by reference to our Form 8-K filed on July 18, 2008.
10.86	Securities Purchase Agreement by and between Imaging Diagnostic Systems, Inc. (the "Company" or "IDSI") and Whalehaven Capital Fund Limited (the "Purchaser" and collectively, the "Purchasers") dated July 31, 2008. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.87	Form of 8% Senior Secured Convertible Debenture, Exhibit A. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.88	Registration Rights Agreement, Exhibit B. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.89	Common Stock Purchase Warrant, Exhibit C. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.90	Form of Legal Opinion, Exhibit D. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.91	Security Agreement, Exhibit E. Incorporated by reference to our Form 8-K filed on August 5, 2008.
10.92	Amendment Agreement by and between Imaging Diagnostic Systems, Inc. (the "Company" or "IDSI") and Whalehaven Capital Fund Limited (the "Purchaser" and collectively, the "Purchasers") dated October 23, 2008. Incorporated by reference to our Form 8-K filed on October 23, 2008.
10.93	Securities Purchase Agreement by and between Imaging Diagnostic Systems, Inc. (the "Company" or "IDSI") and Whalehaven Capital Fund Limited (the "Purchasers") dated November 20, 2008. Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.94	Form of 8% Senior Secured Convertible Debenture, Exhibit A. Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.95	Registration Rights Agreement, Exhibit B. Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.96	Form of Legal Opinion, Exhibit D. Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.97	Security Agreement, Exhibit E. Incorporated by reference to our Form 8-K filed on November 26, 2008.
10.98	Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 10, 2008. Incorporated by reference to our Form 8-K filed on December 12, 2008.

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10.99	Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 31, 2008. Incorporated by reference to our Form 8-K filed on January 5, 2009.
10.100	Amendment Agreement (Revised) by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of December 31, 2008. Incorporated by reference to our Form 8-K/A filed on January 7, 2009.
10.101	Amendment Agreement by and among Imaging Diagnostic Systems, Inc., Whalehaven Capital Fund Limited, and Alpha Capital Anstalt dated as of March 20, 2009. Incorporated by reference to our Form 8-K filed on March 26, 2009.
10.102	One-Year Employment and Stock Option Agreement dated March 23, 2009 between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chief Executive Officer. Incorporated by reference to our Form 8-K filed on March 27, 2009.
10.103	One-Year Employment and Stock Option Agreement dated March 23, 2009 between Imaging Diagnostic Systems, Inc. and Allan L. Schwartz, Executive Vice President and Chief Financial Officer. Incorporated by reference to our Form 8-K filed on March 27, 2009.
10.104	Private Equity Credit Agreement between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated November 23, 2009. Incorporated by reference to our Form 8-K filed on November 25, 2009.
10.105	Registration Rights Agreement between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated November 23, 2009. Incorporated by reference to our Form 8-K filed on November 25, 2009.
10.106	Private Equity Credit Agreement (Amended) between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated January 7, 2010. Incorporated by reference to our Form S-1 filed on January 12, 2010.
10.107	Registration Rights Agreement (Amended) between Imaging Diagnostic Systems, Inc. and Southridge Partners II LP dated January 7, 2010. Incorporated by reference to our Form S-1 filed on January 12, 2010.
10.108	Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Linda B. Grable, Chief Executive Officer. Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.109	Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Allan L. Schwartz, Executive Vice President and Chief Financial Officer. Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.110	Employment Agreement and Stock Option Agreement dated March 22, 2010, between Imaging Diagnostic Systems, Inc. and Deborah O'Brien, Senior Vice-President. Incorporated by reference to our Form 8-K filed on March 25, 2010.
10.111	2010 Non-Statutory Stock Option Plan dated March 11, 2010. Incorporated by reference to our Form S-1 Amendment No. 1 filed on May 24, 2010.
10.112	Convertible Promissory Note by and between Imaging Diagnostic Systems, Inc. (the "Company" or "Borrower") and JMJ Financial (the "Lender or "JMJ'') dated February 23, 2011, Exhibit A. Incorporated by reference to our Form 8-K/A filed on March 2, 2011.
10.113	Letter Addendum to Promissory Note dated February 23, 2011, Exhibit B. Incorporated by reference to our Form 8-K/A filed on March 2, 2011.
10.114	Registration Rights Agreement dated February 23, 2011, Exhibit C. Incorporated by reference to our Form 8-K/A filed on March 2, 2011.

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10.115	Patent Licensing Agreement, originally filed as Exhibit 10.2 to Form S-2 on July 21, 1998 as a text document. Incorporated by reference to our Form S-1 Amendment No. 2 filed on March 15, 2011.
10.116	U.S. Patent 5.692,511 issued Dec. 2, 1997, Exhibit A to Patent Licensing Agreement filed as Exhibit 10.115. Incorporated by reference to our Form S-1 Amendment No. 3 filed on April 26, 2011.
10.117	Employment Agreement and Stock Option Agreement dated December 8, 2011, between Imaging Diagnostic Systems, Inc. and Michael W. Addley, Chief Operating Officer. Incorporated by reference to our Form 8-K filed on December 9, 2010.
10.118	Preferred Stock Purchase Agreement dated March 21, 2012 by and between the Company and Linda B. Grable. Incorporated by reference to our Form 8-K filed on March 26, 2012.
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 19, 2012		Imaging Diagnostic Systems, Inc.

	By:	/s/ Linda B. Grable
		Linda B. Grable
		Chief Executive Officer


	By:	/s/ Allan L. Schwartz
		Allan L. Schwartz, Executive Vice-President and Chief Financial Officer
		(PRINCIPAL ACCOUNTING OFFICER)

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

5307 NW 35^th Terrace, Fort Lauderdale, FL	33309
(Address of Principal Executive Offices)	(Zip Code)

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

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

Assets

	Sept. 30, 2012			June 30, 2012
Current assets:	Unaudited				*
Cash	$	3,520		$	1,623
Accounts receivable, net of allowances for doubtful accounts
of $10,000 and $18,750, respectively		30,000			56,250
Inventories, net of reserve of $390,000 and $390,000, respectively		243,399			246,020
Prepaid expenses		25,424			24,124

Total current assets		302,343			328,017

Property and equipment, net		129,915			131,152
Intangible assets, net		93,985			102,530

Total assets	$	526,243		$	561,699


Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable and accrued expenses	$	1,654,302		$	1,728,338
Accrued payroll taxes and penalties		1,398,877			1,489,640
Customer deposits		142,563			142,563
Short-term derivative liability		412,542			961,058
Short-term debt, net of debt discount of $364,739 and $156,539		1,419,633			1,657,223

Total current liabilities		5,027,917			5,978,822

Long-Term liabilities:
Long-term debt, net of debt discount of $52,222 and $60,553		44,404			55,645
Long-term derivative liability		76,885			-

Total long-term liabilities		121,289			55,645

Convertible preferred stock (Series L), 9% cumulative annual dividend,
no par value, 20 and 20 shares issued, respectively		200,000			200,000


Stockholders' (Deficit):
Preferred stock, Series P, no par value, 55 and 0 shares issued, respectively		-			-
Preferred stock, Series Q, $.001 par value, 51 and 0 shares issued, respectively		1			1
Common stock		110,141,501			109,743,826
Common stock - Debt Collateral		(73,970	)		(73,970	)
Additional paid-in capital		5,672,072			5,630,411
Deficit accumulated during development stage		(120,562,567	)		(120,973,036	)

Total stockholders' (Deficit)		(4,822,963	)		(5,672,768	)

Total liabilities and stockholders' (Deficit)	$	526,243		$	561,699


* Derived from audited financial statements.

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

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


	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	Page

	Balance Sheets – (Unaudited) September 30, 2012 and June 30, 2012	3

	Condensed Statements of Operations - (Unaudited) Three months ended September 30, 2012 and 2011, and December 10, 1993 (date of inception) to September 30, 2012	4

	Condensed Statements of Cash Flows - (Unaudited) Three months ended September 30, 2012 and 2011, and December 10, 1993 (date of inception) to September 30, 2012	5

	Notes to Condensed Financial Statements (Unaudited)	6

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

	Financial Condition and Results	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67

Item 4.	Controls and Procedures	67


	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	68

Item 4.	Mine Safety Disclosures	69

Item 5.	Submission of Matters to a Vote of Security Holders	69

Item 6.	Other Information	69

Item 7.	Exhibits	108

Signatures		111