U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                                   (Mark one)
               /X/ Annual report under section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                    For the fiscal year ended April 30, 2004
                                       OR
             / / Transition report under section 13 or 15(d) of the
                         Securities Exchange Act of 1934
              For the transition Period from ________ to __________

                        Commission file number: 0 - 32093

                           HIENERGY TECHNOLOGIES, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)


           DELAWARE                       3826                   91-2022980
-------------------------------    -----------------      ----------------------
(State or other jurisdiction of    (Primary Standard         (I.R.S. Employer
 incorporation or organization      Industrial Code)      Identification Number)

                    Issuer's telephone number: (949) 757-0855

           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:
                    Common Stock, par value $0.001 per share
                                (Title of class)

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes /X/
No / /

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /

Registrant's revenues for its most recent fiscal year: $0

As of July 30, 2004, representing the last business day of the registrant's most
recently completed fiscal quarter, the registrant had 28,387,163 shares of
common stock outstanding, and the aggregate market value of the voting common
stock held by non-affiliates of the registrant was approximately $28,103,291
million (based on the closing price of $0.99 on that day). For purposes of this
calculation, voting stock held by directors and executive officers of the
registrant and stockholders holding 5% or more of the registrant's outstanding
common stock has been excluded. Such exclusion is not intended, and shall not be
deemed, to be an admission that such directors, executive officers and
stockholders are affiliates of the registrant.

On September 8, 2004, there were 35,987,779 shares of the registrant's common
stock outstanding.

Documents incorporated by reference: None.

          TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES / / NO /X/

<PAGE>

                           HIENERGY TECHNOLOGIES, INC.

                                    INDEX TO
                          ANNUAL REPORT ON FORM 10-KSB
                    FOR THE FISCAL YEAR ENDED APRIL 30, 2004


                                                                            PAGE
PART I

Item 1      Description of Business                                            2
Item 2      Description of Property                                           24
Item 3      Legal Proceedings                                                 24
Item 4      Submission of Matters to a Vote of Security Holders               26

PART II

Item 5      Market for Common Equity and Related Stockholder Matters          50
Item 6      Management's Discussion and Analysis and Plan of Operation        57
Item 7      Financial Statements                                              67
Item 8      Changes in and Disagreements With Accountants on Accounting and
            Financial Disclosure                                             109
Item 8a     Controls and Procedures                                          109

PART III

Item 9      Directors, Executive Officers, Promoters and Control Persons;
            Compliance With Section 16(a) of the Exchange Act                110
Item 10     Executive Compensation                                           116
Item 11     Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters                                  120
Item 12     Certain Relationships and Related Transactions                   124
Item 13     Exhibits and Reports of Form 8-K                                 125
Item 14     Principal Accountant Fees and Services                           127

            SIGNATURES                                                       128


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PART I

Any reference to "we," "us" and "our" herein shall mean HiEnergy Technologies,
Inc., together with its consolidated subsidiaries, comprised of HiEnergy
Microdevices, Inc., HiEnergy Defense, Inc., and HiEnergy Europe, Ltd.

FORWARD LOOKING STATEMENTS

This annual report on Form 10-KSB (the "Report"), the other reports, statements,
and information that we have previously filed or that we may subsequently file
with the Securities and Exchange Commission and public announcements that we
have previously made or may subsequently make include, may include, incorporate
by reference or may incorporate by reference certain statements that may be
deemed to be "forward-looking statements". These forward-looking statements
relate to such matters as, among other things, our anticipated financial
performance, business prospects, technological developments, new products,
future distribution or license rights, international expansion, possible
strategic alternatives, new business concepts, capital expenditures, consumer
trends and similar matters.

Forward looking statements necessarily involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievement expressed or
implied by such forward-looking statements. Readers are cautioned to review
carefully the discussion concerning these and other risks which can materially
affect our business, operations, financial condition and future prospects, which
is found under the heading Risk Factors later in this Report.

In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "intend," "expect," "anticipate," "assume",
"hope", "plan," "believe," "seek," "estimate," "predict," "approximate,"
"potential," "continue", or the negative of such terms. Statements including
these words and variations of such words, and other similar expressions, are
forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable based upon our knowledge of our
business, we cannot absolutely predict or guarantee our future results, levels
of activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements.

We note that a variety of factors could cause our actual results and experience
to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of our business
include, but are not limited to, the following: changes in consumer spending
patterns; changes in consumer preferences and overall economic conditions; the
impact of competition and pricing; the financial condition of the suppliers and
manufacturers from whom we source our merchandise; economic and political
instability in foreign countries or restrictive actions by the governments of
foreign countries in which suppliers and manufacturers from whom we source
products are located or in which we may actually conduct or intend to expand our
business; changes in tax laws, or the laws and regulations governing direct or
network marketing organizations; our ability to hire, train and retain a
consistent supply of reliable and effective participants in our direct or
network marketing operation; general economic, business and social conditions in
the United States and in countries from which we may source products, supplies
or customers; the costs of complying with changes in applicable labor laws or
requirements, including without limitation with respect to health care; changes
in the costs of interest rates, insurance, shipping and postage, energy, fuel
and other business utilities; the reliability, longevity and performance of our
licensors and others from whom we derive intellectual property or distribution
rights in our business; the risk of non-payment by, and/or insolvency or
bankruptcy of, customers and others owing indebtedness to us; threats or acts of
terrorism or war; and strikes, work stoppages or slow downs by unions affecting
businesses which have an impact our ability to conduct our own business
operations.


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<PAGE>

Forward-looking statements that we make, or that are made by others on our
behalf with our knowledge and express permission, are based on a knowledge of
our business and the environment in which we operate, but because of the factors
listed above, actual results may differ from those in the forward-looking
statements. Consequently, these cautionary statements qualify all of the
forward-looking statements we make herein. We cannot assure the reader that the
results or developments anticipated by us will be realized or, even if
substantially realized, that those results or developments will result in the
expected consequences for us or affect us, our business or our operations in the
way we expect. We caution readers not to place undue reliance on these
forward-looking statements, which speak only as of their dates, or on any
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
cautionary statements. We do not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or thereof or to reflect the occurrence of
unanticipated events.

Readers should also note that the safe harbor for forward-looking statements
provided by, among other federal regulations, Section 21E of the Exchange Act
are unavailable to issuers of penny stocks. As we have issued securities at a
price below $5.00 per share, our shares are considered penny stocks and such
safe harbors are therefore unavailable to us.

ITEM 1. BUSINESS

A Glossary of Scientific Terms has been included for the convenience of our
readers, in order to help provide a better understanding of our business, and
begins on page 48 of this Report.

OVERVIEW

HiEnergy Technologies, Inc. ("HiEnergy" or the "Company") is a nuclear
technologies-based company focused on the research and development of
proprietary, neutron-based, "stoichiometric" sensor devices, which have the
ability to determine automatically, in a matter of tens of seconds and with a
high degree of accuracy, whether an object or container carries dangerous or
illicit selected substances, such as explosives, illicit drugs or biological
agents, by deciphering the chemical formula of selected substances. To date, we
have devoted the bulk of our efforts and resources to the research, design,
testing and development of our proprietary, "stoichiometric" sensor devices and
underlying technologies, and we have yet to generate any significant sales
revenues from the sale of any products using our technology. Our primary focus
is currently on the commercialization of our initial prototype devices,
principally our "CarBomb Finder", which we intend to market to governmental and
private entities and to distribute or license through industry partners. The
CarBomb Finder, now in its fourth generation of prototype, has been designed to
identify and confirm the presence of selected explosive substances in vehicles
or containers in a non-invasive manner, such that the vehicle or container need
not be manually inspected and the contained substances need not be physically
tested or otherwise handled. Our stoichiometric technology has also been
incorporated into three additional prototype applications which, if we are able
to raise the funds necessary to commercialize them, will be the next products we
attempt to launch: an anti-tank landmine detector, an unexploded ordnance
detector, which is also useful to detect Improvised Explosive Devices ("IEDs"),
both of which are typically above the ground, and a device we call a
Refractorymeter which can detect fissures or erosions in the ceramic lining of
oil cracking tanks. Additionally, we continue to be focused on the research and
development of additional applications of our technologies and their further
exploitation, both internally and through collaboration with third parties.

Our mailing address and executive offices are located at 1601-B Alton Parkway,
Irvine, California 92606. Our telephone number is (949) 757-0855. Our corporate
website is www.hienergyinc.com. Information contained on our website is not a
part of this Annual Report on Form 10-KSB.


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<PAGE>

BACKGROUND

HiEnergy Technologies, Inc. was originally incorporated under the laws of the
State of Washington on March 22, 2000, under the name SLW Enterprises Inc. ("SLW
Enterprises" or "SLW"). SLW's initial efforts focused on establishing a
web-based nutritional supplement sales business under a different trade name.
The former operations and business of SLW became inactive in 2001.

On April 25, 2002, SLW Enterprises, Inc., which was then a "public shell
company", was taken over by the stockholders of HiEnergy Microdevices, Inc.
("HiEnergy Microdevices"), in a transaction commonly referred to as a "reverse
takeover". Under this transaction, which was structured as a voluntary exchange
of shares, the stockholders of HiEnergy Microdevices, including our present
Chairman of the Board, Chief Executive Officer, President, Treasurer and Chief
Scientific Officer, Dr. Bogdan Maglich, obtained the right to receive up to
sixty-four percent of SLW Enterprises, Inc. Of this amount, as of the date of
this Report, approximately 8% of the shares of HiEnergy Microdevices remain
non-exchanged and are held by several HiEnergy Microdevices stockholders who did
not participate in the voluntary share exchange, and who are not affiliates of
our company. The stockholders of SLW Enterprises prior to the voluntary share
exchange retained, collectively, thirty-six percent of SLW Enterprises. The
reverse takeover was accounted for as a re-capitalization of HiEnergy
Microdevices for accounting purposes, and HiEnergy Microdevices became our
majority-owned subsidiary. Following the reverse-takeover, HiEnergy Microdevices
assigned its right, title and interest in and to our two principal patents to
us, which assignment was recorded at the U.S. Patent and Trademark Office on
November 24, 2003, although it still possesses certain of our intellectual
property rights as our subsidiary, and will continue to do so until a proposed
short-form merger, previously authorized by the Board as described below, is
accomplished. Effective April 26, 2002, the existing members of the HiEnergy
Microdevices' board of directors became members of our Board of Directors, and
the executive officers of SLW were replaced by executive officers of HiEnergy
Microdevices, other than Barry Alter, who remained our President and CEO until
September 25, 2002, and a director through March 7, 2003. On October 22, 2002,
HiEnergy Technologies was redomiciled as a Delaware corporation.

In November 2003, our Board of Directors approved a short form merger to acquire
the remaining outstanding stock of HiEnergy Microdevices. Under the terms of the
proposed merger, we would issue 459,222 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of HiEnergy Microdevices (the same ratio that was used in the
original voluntary share exchange), and all the assets and liabilities of
HiEnergy Microdevices would then become assets and liabilities of HiEnergy. As
of the date of this Report, the merger has not been effected, but we anticipate
its completion by the end of 2004.

HiEnergy Microdevices was originally formed in Delaware in 1995, and was the
vehicle through which our "stoichiometric" technology was initially developed by
Dr. Maglich. We use the term "stoichiometric" to refer to the ability of our
technology to accurately decode and decipher the chemical formula and weight of
selected substances. For example, a stoichiometric sensor device can
non-invasively detect and confirm the presence of a "plastic" explosive (such as
RDX) contained in an object through metal or other barriers without the need for
sampling and conducting analytic chemistry tests. Historically, the practical
determination of the chemical formula for a substance could only be accomplished
invasively, through analytic chemistry, where the substance must be physically
subjected to a series of complex tests involving chemicals, test tubes and a
multitude of instruments.

To our knowledge, our prototypes and other proprietary technologies in
development are the only devices with "stoichiometric" capability. While there
are several products on the market with underlying technologies that "infer" the
presence of explosives, biological agents or illicit drugs based upon the
presence or density of individual chemical elements or utilize pattern
recognition techniques, we do not believe that any other existing product has
the capability to accurately, quickly and definitively identify the chemical
formula and estimated weight of selected substances. Existing products require
the employment of secondary "confirmation" sensors and secondary examinations to


                                      -3-
<PAGE>

determine the chemical formula, and are prone to "false positive" readings which
can result in "false alarms." Since our technology is more aptly used to decode
and identify the actual chemical formula of a substance, once selected for
further inspection following initial examination, we anticipate that it will be
used in combination with current screening, scanning and detection products on
the market. We also believe that our technology will be utilized in tandem with
existing secondary confirmatory examinations, including manual inspection by
humans, in order to provide more reliable confirmation and substantially
eliminate the occurrence of false alarms.

RECENT EVENTS - SEC INVESTIGATION

On March 30, 2004, Dr. Bogdan Maglich, our Chief Executive Officer, Chief
Scientific Officer, Treasurer, President and Chairman, gave an oral and written
presentation at the Investment Opportunities in Homeland Security and Defense
Conference in Washington, D.C. regarding HiEnergy's key markets, business
strategy and financial projections. Copies of the presentation were distributed
at the conference. We subsequently posted the presentation on our website from
April 7, 2004 to April 13, 2004. Approximately 2,731 computer users visited our
website and had access to the presentation. The total number of hits was 96,937,
or a daily average of approximately 13,848. The presentation contained
statements of management's beliefs concerning our key markets, business
strategy, opportunities and financial projections which were not disclosed in a
concurrent registration statement we had filed with the SEC on Form SB-2. In
order to reduce the risk of an investor relying on the presentation, we removed
the presentation from our website on April 13, 2004, in part to allow for a
"cooling off" period so that any possible effect of the presentation would
dissipate, and we subsequently withdrew the registration statement on April 16,
2004.

As more fully described below in the section entitled Legal Proceedings, on
April 12, 2004, we received a subpoena requesting documentary evidence
corroborating our statements in the presentation described above. On May 24,
2004, we received a letter from the SEC requesting us to voluntarily provide
information regarding the nature and chronology of events leading up to our
announcement of a "non-exclusive oral understanding with a consortium which was
assembled by the Dallas-Fort Worth Homeland Security Alliance", as reported in
our Current Report on Form 8-K filed with the SEC on April 8, 2004. We
voluntarily responded through counsel by letter dated June 7, 2004. On June 24,
2004, we received a further letter from the Central Regional Office of the SEC,
in Denver, Colorado, indicating its intention to recommend that the Commission
charge us with violations of several sections of the Securities Exchange Act,
and the rules promulgated under that act, involving the making of false and
misleading statements in our public documents. The false and misleading
statements which the SEC believes were made seem to focus primarily on, among
other things, the undisclosed ownership of our securities by, and actions with
respect to our stock taken by, Barry Alter, Philip Gurian and other of their
affiliates who controlled SLW Inc. at and prior to the time of our
reverse-takeover; the undisclosed identity of, and the origin of funds used to
purchase our stock by, certain of our stockholders; the nature of, and reasons
for, a "dividend" provided to our stockholders; and the terms of other offerings
occurring at the same time as one of our private placements of stock. In
addition, the antifraud violations appear to be based upon private transactions
made by Mr. Alter (formerly a director and executive officer of HiEnergy
Technologies, Inc.) with respect to sales of our stock made by him without
disclosing material facts about us, or our contemporaneous offering of
securities at different prices, to his purchasers. We are currently working with
special securities litigation counsel to assess our legal position and determine
how best to respond to this most recent correspondence from the SEC.

On June 30, 2004, the SEC sent us a Subpoena in which it required us to provide
to it copies of all documents concerning the restatement of our financial
statements, which we reported on June 9, 2004. The subpoena requested
documentary evidence concerning the restatement including, without limitation,
all of our electronic and written correspondence, notes, journal entries,
records, working papers and other documents that pertain to the restatement, and
specifically all communications between us and our auditors, Singer, Lewak,
Greenbaum & Goldstein, LLP ("SLGG"). SLGG also received a similar subpeona from
the SEC. Our restatement was based primarily on changes in certain assumptions
we had used to determine the fair value of the common stock of HiEnergy


                                      -4-
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Microdevices which we received in the voluntary share exchange between us and
HiEnergy Microdevices in April 2002, and more specifically as discussed in Note
2 of the accompanying Notes to the audited Consolidated Financial Statements.
The effect of the restatement on our financial statements was to cause us to
record additional expense of $1,009,531 and $514,415 during the fiscal years
ended April 30, 2002 and April, 30, 2003, respectively, and to increase the
amount of our accumulated deficit and additional paid in capital brought forward
at May 1, 2001 by $3,126,684 and $3,341,019, respectively.

CHEMICAL DETECTION METHODOLOGY--PRIMARY AND SECONDARY DETECTION

The art and science of chemical detection can be broadly divided into (i)
primary or "anomaly" detectors and (ii) secondary or "confirmation" sensors.
Anomaly detectors, such as x-ray or MRI devices, metal detectors, radar
detectors and infrared detectors, can infer that an object or a contained
substance might be an explosive, illicit substance or biological agent based
upon content, density, shape or heat. However, while anomaly detectors are
useful for flagging "suspicious" items, they cannot determine whether the object
or contents in question actually are explosives, illicit substances or
biological agents, or merely some harmless substance. The only way to make this
determination is to subject the object or its contents to supplemental
inspections, or secondary "confirmation" detection methodologies, such as
chemical analysis.

By way of example, the x-ray explosive detection systems currently used for
airport security are anomaly detectors. For each piece of luggage, the operator
must decide whether the image provided by the x-ray detector indicates a
suspicious object. Then the operator must use a secondary means, such as
physical inspection, to determine whether the selected suspicious object is
actually an explosive. X-ray explosive detection systems currently in use have
shown a very high rate of false positives (where innocuous substances are
identified as dangerous), and a lesser, but more troubling, rate of false
negatives (where test explosive simulants are able to avoid detection). Although
some newer x-ray machines are able automatically to determine whether an image
indicates a suspicious object instead of relying on human inference, they cannot
conclusively identify the contents, so the luggage still must be opened and
manually inspected.

Similarly, the metal detectors, radar detectors, and infrared detectors
currently used to detect landmines are also anomaly detectors that can only
detect suspicious objects. The objects are identified based on their metal
content, density, shape or heat. Suspicious objects still have to be excavated
and analyzed by human workers in order to determine whether they contain
dangerous explosives. In a typical minefield, for example, independent analysts
have advised us that for each real landmine found the average rate of false
positive identification can range from 33% to 50%, and has been noted as high as
1,000 false alarms to 1 real landmine. In the context of landmines, high numbers
of false alarms can be generally explained as a result of the presence of
numerous metallic objects in the field, such as shrapnel, nails, wire and other
anomalies which are the residue of war.

Since our stoichiometric technology can decipher the exact chemical formula of
substances, it is characterized as a secondary or "confirmation" detector.

OUR STOICHIOMETRIC TECHNOLOGY; CHEMICALS AND SUBSTANCES IDENTIFIED TO DATE

Our stoichiometric technology identifies and confirms the chemical composition
of objects by irradiating them with fast neutrons, which stimulate the atomic
structure of the object and cause it to emit gamma rays which can then be
analyzed by our sensors. The gamma rays emitted by each substance have a unique
chemical `signature' from which we are able to decipher the exact quantitative
empirical chemical formulation of the substance. For instance, in the area of
explosive identification, our stoichiometric technology identifies and
distinguishes a variety of nitrogen-based explosives known to be used by
terrorists, such as TNT, Semtex, RDX and those made with nitrates (fertilizers).
Our technology also identifies chlorine and potassium-based explosives, which to
our knowledge are the only non-nitrogen based explosives. We can also identify
and differentiate other combustibles, such as carbon-based fuels including
gasoline and diesel fuel. Our stoichiometric technology has also successfully


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been used to identify, and decipher the chemical formula of illicit narcotics
(cocaine) and biological agents (such as an anthrax simulant made from dead
spores).

POTENTIAL PRIMARY MARKETS

We believe that the stoichiometric technologies we are developing will have
broad applications, however due to our limited size and availability of
resources, we have limited our prototype development to two primary potential
markets for our stoichiometric technology: (i) the security and
counter-terrorism market, and (ii) the chemical and petrochemical industry
control market. Within the security and anti-terrorism market, we have focused
our development efforts principally in the field of explosive detection. This
market can be broken-down into further identifiable sub-segments both by
application and user. Explosive detection is generally governmental in nature,
and includes car bomb detection, bomb squad, airport and customs screening;
government facility protection, and military applications. The commercial
courier and private transportation services sectors may also have a need for our
technology. Applications in the chemical and petrochemical industry control
market would include, detection of fissures and erosion in the ceramic liners of
oil cracking tanks, as well as industrial contamination identification and
control, industrial quality control (i.e., detecting impurities in oil, gas or
gemstones) and food and beverage product control. Our initial prototype
development efforts have been focused on the explosive detection segment
(including car bomb, anti-tank landmine and above-ground unexploded ordnance and
Improvised Explosive Devices), and the petrochemical segment (a fissure
detection system), and management expects that our initial product sales, if and
when we make them, will be in these sectors. If we are successfully able to
commercialize one of these prototypes, then our next areas of prototype
development are presently intended to be in the area of advanced screening
activities, with respect to illicit drug and biological agent detection, as well
as explosives.

PROPRIETARY DEVICES

CURRENT PROTOTYPE DEVICES; DEVELOPMENT EFFORTS

Our initial prototype developments have involved the creation of a device that
uses our technology to detect bombs in vehicles, and we are now on our fourth
generation of this device. The Stoichiometric CarBomb Finder is a portable
detector, weighing approximately 110 lbs., designed to inspect automobiles for
both nitrogen-based and chlorine-potassium-based concealed explosives. The 3C4
CarBomb Finder, and its predecessor models, which are effective in identifying
large quantities of explosives, were specifically developed to identify vehicles
packed with explosives with the intent of using the vehicle itself as a bomb. We
believe this product will prove to be of particular interest in regions that
experience a higher than normal incidence of car bombings. This would include
many countries in the Middle East and the Indian subcontinent, Spain, Columbia
and Indonesia, as well as U.S military installations located in these and other
regions. To date, we have not manufactured any CarBomb Finders and, accordingly,
there are no CarBomb Finders ready for commercial sale. On August 5, 2004, we
received an order for one (1) demonstration model of our 3C4 CarBomb Finder from
our Middle Eastern distributor, Electronic Equipment Marketing Company
("EEMCO"), which is purchasing the model at a price which may fall at or below
cost. Our relationship with EEMCO, which is owned by one of our directors, Harb
Al-Zuhair, is described in detail later in this Report in the section entitled
Marketing and Distribution Strategy. Also on August 5, 2004, President Bush
signed the National Defense Authorization Act for Fiscal Year 2005, which
contains an appropriation of $1,000,000 for a stoichiometric explosive detector.
While there can be no assurance that we will be awarded the contract to provide
this technology, management is very hopeful that we will because, to our
knowledge, no other company possesses a commercial prototype or product which
fits this description.

We have not made any commercial product sales and have no significant sales
revenue to date. We do not have a manufacturing capability within our company at
this time (although we will be manufacturing the items necessary to fill the
initial EEMCO order, and possibly a few other individual pieces as necessary to
meet initial demonstration or similar requirements), nor have we arranged for
any third-party to manufacture our devices to date. On August 5, 2004, our Board
of Directors authorized us to sign a Proposal for Detailed Concept Design


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Services with Lockwood-Greene Engineering and Construction Company, of Dallas,
Texas ("Lockwood-Greene"), which has been engaged to provide, among other
things, design and construction management services to us in connection with our
proposed construction and/or build-out of a manufacturing plant capable of
producing commercial quantities of our CarBomb Finder. (See section entitled:
Manufacturing Capacity). Determining the size and configuration of this
manufacturing facility will be part of the services which Lockwood-Greene is
responsible for under the Proposal. Even when we do commence making our initial
sales of products, we believe that, like the EEMCO order, these will be sold at,
or very close to, our cost for "one-off" production, and will result in little,
if any, profit for us. Management believes it will require fulfilling a minimum
of 20 purchase orders for these units before we would expect to see the costs of
manufacturing decrease to the point at which we will generate any significant
profit from the sale of units. At present, it is still premature for us to fix
our pricing on the 3C4 CarBomb Finder. However, based on early cost analysis and
pricing guidance from our component suppliers, we expect that as we shift
manufacturing from one-off production to volume commercial production, and fully
expense certain non-recurring engineering and design costs, we should see a
significant decrease in our cost of goods sold. These estimates are subject to
significant change depending upon a number of factors including, but not limited
to: general economic considerations, the price of our component materials, the
type of manufacturing terms we can negotiate with any third-party manufacturers,
changes in the labor market, and our ability to finance our own in-house
manufacturing capability as contemplated by our arrangement with
Lockwood-Greene. Of course, there can be no assurance that we will be able to
raise the capital necessary to launch our product successfully, or that we will
achieve the minimum number of orders we would need to produce our products at
any given profit margin. These, and other risks, are discussed in more detail
under the heading Risk Factors in this Report.

On October 6, 2003, we entered into a memorandum of understanding with the
Directorate of Spanish Airports and Navigation ("AENA") pursuant to which we
would collaborate with AENA to test our CarBomb Finder. HiEnergy's technical
team was scheduled to conduct a demonstration of our 3C4 CarBomb Finder in Spain
pursuant to this agreement on June 29, 2004. However, certain unanticipated
circumstances caused us to postpone our demonstration in Spain, including timing
constraints caused by our presentation in Turkey and problems with clearing our
equipment held in Spanish customs. We had been invited by the Turkish Ministry
of the Interior, Criminal Police Division, to bring our CarBomb Finder to
Istanbul concurrent with the NATO Summit meeting held on June 28-29, 2004. As a
result, our entire efforts and resources were directed to Istanbul. We delivered
a truck-borne CarBomb Finder with ancillary equipment, and trained two Turkish
engineers and one Bomb Squad policeman during the period June 23-30, 2004. Our
demonstration system was able to identify all explosives to which it was
exposed, including one new explosive.

The demonstration of our explosive detection technology in Spain has been
tentatively rescheduled for October 18 and 19, 2004. Our device will be featured
as the only stoichiometric explosive detection system to be shown at the NATO
Symposium on "Countering Improvised Explosive Devices (IED)". Our ability to
participate at the NATO Symposium, and at other similar demonstrations in the
future, will be dependent upon our ability to obtain the capital and other
resources to support these efforts, which entail the transport of specialized
equipment and a team of approximately 6 technical and business members to the
test location. If management determines that our capital is not sufficient to
make a proper demonstration, or that our scarce resources are better deployed
elsewhere relative to the merits of undertaking the effort, then we may again
postpone or cancel the planned demonstration in Spain and other potential
foreign locations we may be invited to. Our difficulties with customs in Spain
have since been resolved and were predominantly administrative and procedural in
nature.

Previously, we disclosed that the CarBomb Finder had been selected by the
Combating Terrorism Technology Support Office in Phase I of a nationwide
competition for new counter-terrorism technologies. Our subsequent written
proposal in connection with Phase II of this project was ultimately not
accepted. There can be no assurance that AENA, the Turkish or U.S. authorities,
or any other party will purchase our 3C4 CarBomb Finder device.


                                      -7-
<PAGE>

On May 28, 2004, in response to a Broad Agency Announcement by the
Transportation Security Administration ("TSA"), under the Manhattan-II Project,
we proposed a new stoichiometric explosive detector design for aviation security
applications, specifically for the detection and confirmatory screening of
checked baggage, named STOXOR. The "Manhattan-II Project" was established by the
TSA to identify "emerging and revolutionary new technologies" that could
significantly improve aviation security and reduce operational costs. Following
a review of our base proposal, we were invited to participate in a competitive,
nation-wide selection process and, on July 29, 2004, we made a presentation to a
joint evaluation board of the TSA and the National Academy of Science in
Washington D.C. regarding STOXOR. As of the date of this Report, our proposal
featuring STOXOR is under consideration for a proposed cooperative research and
development agreement ("CRADA"), however, there can be no assurance as to our
ability to secure a CRADA. Furthermore, any technology developments or
inventions which we may create using some or all of the funding through the
CRADA will be subject to federal regulations governing the ownership and use of
federally-funded technologies. Accordingly, the federal government may retain
certain non-exclusive or exclusive rights to use the technology for various
purposes, and may obtain, or assign to a third party, ownership of the
technology if we do not timely prosecute our rights in such technology. (See:
Risk Factors - Intellectual Property Risks).

RESEARCH AND DEVELOPMENT ACTIVITIES

Due to our lack of capital and other resources, we have prioritized our entire
research and development activities in order to concentrate our focus on
bringing our 3C4 CarBomb Finder prototype to market, as described above. Our
next priority is to develop additional products based upon the same core
technologies. To date, these activities have included development of an
anti-tank landmine detection device, and a device to detect unexploded ordnance
above the ground. Finally, we have deployed resources to work on developing a
solution to the inability of oil and gas producers to adequately detect and
prevent cracks and fissures appearing in the industrial holding tanks used in
oil cracking operations. We have been working closely with the research center
of Exxon-Mobil, which has provided us with samples of materials for us to use in
testing our fissure detection system, called a "Refractorymeter." The
relationship we have begun with Exxon-Mobil does not involve the payment to us
of any cash, nor the receipt of any property other than certain materials we
have used for testing purposes. Although management is hopeful that the results
of work in this area will result in our being able to sell Refractorymeter
devices to Exxon-Mobil once development efforts are completed, there can be no
assurance that we will ever be requested to sell any product or technology to
Exxon-Mobil, or to any other entity, if and when our development of the
Refractorymeter is completed, or that we will derive any benefit whatsoever as a
result of the informal relationship which now exists with the research center of
Exxon-Mobil.

During the fiscal year ended April 30, 2004, we spent $804,431 in research and
development costs for our existing prototypes and emerging products including
the CarBomb Finder product line, the anti-tank landmine prototype, the
unexploded ordnance/IED prototype and the Refractorymeter prototype.

Two of our developmental stage prototypes, our Stoichiometric BombSquad Detector
3B3 and our Stoichiometric Unexploded Ordnance Sensor 3UXO3, use the same core
technology as the 3C4 CarBomb Finder. We refer to this as our "MiniSenzor"
technology. We are currently field-testing prototypes of these products, which
use a different configuration of our MiniSenzor technology and are smaller and
more portable than our CarBomb Finder devices. While the 3B3 and 3UXO3 devices
are each in the later stages of prototype development, there remain some
engineering issues which we must address relating to their smaller size and
different configuration and electronics before we can bring these devices to
market. As a result of anticipated delays in fully addressing these engineering
issues in view of our current focus on commercializing 3C4 CarBomb Finder, a
date for introducing commercially-viable versions of the BombSquad Detector 3B3
and the Unexploded Ordnance Sensor 3UXO3 to market cannot be determined. As part
of our collaborative effort with AENA, assuming we have the resources available


                                      -8-
<PAGE>

to fund our attendance at this venue, we may conduct field tests of these
prototypes in Spain for the General Directorate of Counter-Terrorism ("TEDAX"),
the Spanish anti-terrorism force, concurrent with our tentatively-scheduled
attendance at the NATO Symposium in Madrid during October 18-19, 2004.

We are also conducting research and development work on a mid-stage product, the
Stoichiometric Anti-Tank Landmine Detector 7AT7, which uses a more sophisticated
advanced version of our technology, which we refer to as our "SuperSenzor"
technology. The SuperSenzor technology employs sophisticated directional
features allowing the device to image the location and shape of the substances
being analyzed in three dimensions. Prospective benefits of our SuperSenzor
technology include the ability to focus upon extremely small, three-dimensional
objects and locations, substantially increased inspection speeds and penetration
depths, and the ability to conduct inspections at a greater distance from an
object. The Anti-Tank Landmine Detector 7AT7 currently remains in the
mid-development stage, as we continue to work on its more sophisticated
component and electronic requirements. We intend, subject to our receipt of
sufficient funding, to conduct early-prototype tests of the Anti-Tank Landmine
Detector AT7 device for the U.S. Army pursuant to a research and development
grant we received from the Army. See Description of Business - Government
Research and Development Grants and Contracts. The anticipated date of
introducing commercial versions of these devices to market is indefinite, and
there can be no assurance that any of our development stage devices will ever
become commercially viable.

Since our SuperSenzor technology employs more sophisticated components and
electronics than our MiniSenzor technology, SuperSenzor-based products will be
approximately two times more expensive than MiniSenzor-based products. Once we
have completed development work on these future devices, our ability to make
commercial sales will depend, in part, on negotiating contracts with customers
which can afford them, and modifying our stoichiometric technology to meet the
unique specifications of those customers,. Because our targeted customers are
primarily governmental agencies, we cannot predict the time frame during which
they may obtain approval to enter into contracts to adopt a new generation of
security technology such as ours. We also cannot predict the extent to which
U.S. and/or foreign governmental agencies may require a commercial prototype of
any given device specific to their desired application to be developed in
advance of entering into a contract to purchase products incorporating our
technology, or our ability to secure sufficient funding to finance the cost of
building such prototypes in advance of sales commitments.

EXPLOSIVE DETECTION SYSTEMS: COMPETING TECHNOLOGIES

DIRECT COMPETITION--SECONDARY OR "CONFIRMATION" SENSOR PRODUCTS

CAR BOMB DETECTORS

To our knowledge, there is only one other car bomb secondary or "confirmation"
detection system on the market, the Vehicle Explosive and Drug Sensor ("V-EDS"),
manufactured by Ancore Corporation, a division of OSI Systems. The 3C4 CarBomb
Finder is distinguishable from the V-EDS product, in that our device can
stoichiometricly determine whether a vehicle contains large enough quantities of
nitrogen to be a car bomb while, based upon the information we have seen, the
V-EDS system can only make a qualitative assessment that nitrogen is present in
the vehicle, and its ability to determine that sufficient quantitative amounts
to be a car bomb are present appears to be marginal. Since the V-EDS Thermal
Neutron Analysis technology uses neutrons that are approximately ten times less
penetrating than the fast neutrons employed by the 3C4 CarBomb Finder, we
believe that its penetration range should be significantly less than that of our
device.

OTHER NEUTRON-BASED SECONDARY EXPLOSIVE DETECTION SYSTEMS

The primary use of neutron-based secondary detection systems is in screening for
explosives, contraband and other items. The foundation of all of these systems
is that explosives, contraband and other items contain chemical elements (for


                                      -9-
<PAGE>

example, nitrogen, oxygen, hydrogen and carbon) in differing quantities and
ratios which can be analyzed to distinguish one form the other, and from other
non-harmful items. These technologies use neutrons and gamma rays to create
radioactive waves which, depending upon the elements present in the object being
analyzed, will provide a unique "fingerprint" for identification of the elements
contained in that object. These detection systems, of which our stoichiometric
technology is one example, all detect the presence of chemical compounds,
however we believe our stoichiometric technology is superior to the other
systems in that it can detect the amount and weight of these chemical compounds
as a mathematical ratio, rather than simply detecting the presence of such
compounds, and can provide the formula of the substance being studied by
analyzing the relative ratios of each chemical element to the others.
Technologies which compete with our stoichiometric technology include thermal
neutron analysis ("TNA"), pulsed fast neutron analysis ("PFNA"), Pulsed
Elemental Analysis with Neutrons ("PELAN") and Nuclear Resonance Absorption of
gamma rays ("NRA").

TNA systems, such as the SP-EDS system marketed by Ancore Corporation (recently
acquired by OSI Systems, Inc.), utilize thermal neutrons to identify explosives
in hand-carried items such as purses, briefcases, portable electronics, letters
and small packages. Thermal neutrons possess less energy, and are therefore
slower than fast neutrons, which makes them more susceptible to "false positive"
detections. (See: Explosives Detection Systems (EDS) for Aviation Security,
Singh and Singh, rev. June 3, 2002, available at www.computerscienceweb.com
(copyright Elsevier Science B.V., 2002), at page 43). Ancore Corporation has
used this same technology

OTHER NON-NEUTRON-BASED SECONDARY DETECTORS

To our knowledge, there are two non-neutron-based secondary or confirmation
detection systems for applications other than car bombs. These include a
quadrupole resonance technology ("QR") developed by Quantum Magnetics with
applications ranging from scanning shoes for explosives to landmine detection,
and x-ray diffraction used in airport scanning products recently introduced by
Yxlon. Each of these companies has been acquired by InVision Technologies. Both
technologies employ pattern recognition techniques to identify certain
crystalline molecules. As such, they are chemical specific as opposed to element
specific, however, they are not stoichiometric insofar as we believe they cannot
empirically determine the exact chemical formula of objects under analysis.
These technologies have limited application insofar as there are only certain
solid substances that respond to their techniques. Further, quadrupole resonance
which uses radio frequency energy cannot penetrate certain barriers and may be
subject to "clutter", and x-ray diffraction has a limited penetration range.

INDIRECT COMPETITION--PRIMARY OR "ANOMALY" DETECTION PRODUCTS

Primary or "anomaly" detection products on the market include x-ray anomaly
detection systems marketed by InVision Technologies; computed tomography
explosive detectors marketed by L-3 Communications; x-ray security cargo
screening devices marketed by OSI Systems, Inc.; backscatter x-ray systems
marketed by American Science and Engineering; and gamma ray-based radiographic
imaging systems marketed by Science Applications International Corporation.
These products all differ from our stoichiometric technology insofar as they
reveal the three-dimensional shape and density of the object being investigated,
but cannot identify the chemical formula of that object. As a consequence,
further secondary or "confirmatory" investigation is necessary. Although our
stoichiometric products will be used in the same markets as these products, we
believe that they will, for the most part, be complementary rather than
competitive insofar as we anticipate that potential users will generally
continue to use these products for their primary identification functions and
use secondary or "confirmation" detection systems, such as our stoichiometric
devices, to handle the inspection of suspicious items flagged by anomaly
detection products.


                                      -10-
<PAGE>

MARKETING AND DISTRIBUTION STRATEGY

Given what our management views to be a broad range of potential applications
and markets for our stoichiometric products, we anticipate that we will
introduce them to their potential markets through a number of different
strategies and approaches as may be appropriate or necessary to build market
penetration and share, and product knowledge and acceptance. These would include
directly selling our products through our own sales and marketing team or that
of our sales subsidiaries, HiEnergy Defense, Inc., and HiEnergy Europe, Ltd.,
and indirectly selling our products through independent sales representatives or
through licensing arrangements or joint ventures with strategic partners that
already have established product lines and distribution channels which could
enable quicker access to our products in targeted markets.

On July 25, 2003, we entered into an International Distribution Agreement with
EEMCO, granting it the exclusive right to sell our CarBomb Finder device to
certain enumerated military forces and governmental agencies in the Kingdom of
Saudi Arabia, in the Middle-Eastern countries of Kuwait, Qatar, Bahrain, Oman,
United Arab Emirates, Iraq, Yemen, and Jordan, and in the North African
countries of Egypt, Morocco, Tunisia, Algeria, and Mauritania. EEMCO is based in
Saudi Arabia and is majority-owned by Harb Al-Zuhair, a member of our Board of
Directors. Pursuant to the terms of the agreement, EEMCO agrees to promote the
sale of prototype models of our CarBomb Finder, maintain a sales organization
and provide HiEnergy with the resale prices for the territory. In certain
instances, HiEnergy may share costs related to the release of bonds, bank
letters or customer holdbacks in connection with orders placed by EEMCO or
customers, as well as costs for technical, marketing or other support in
connection with EEMCO's marketing and distribution activities. We have not yet
provided EEMCO with a full price list for its available prototypes, nor do we
have an estimate of time for providing a price list to EEMCO. In the event EEMCO
makes or facilitates any sales, payments are due to us within 60 days from the
date of shipment. We agreed to remit any amounts due to EEMCO; however, we may
withhold payments due to EEMCO to offset our exposure for bonds, guarantees and
outstanding customer payment retention. EEMCO has agreed to reimburse us for
fees and expenses incurred by us in connection with the filing and maintenance
of bonds, letters of credit and letters of guarantee within the countries
subject to the agreement. We agreed to provide a twelve-month limited warranty
for pre-existing defects in the devices which are the subject of the Agreement.

The term of the EEMCO agreement is one year, with automatic one-year renewals
unless either party terminates the contract. The parties may terminate the
agreement at any time upon 60 days prior written notice, or immediately in the
event of a material breach by the other party or the other party becomes
insolvent. We may immediately terminate the agreement if EEMCO's authorized
representative identified to us ceases to represent EEMCO. The exclusive right
terminates for any of the countries within the territory if there are no sales
during the original term of the agreement, no potential buyers within the first
six months or no sales contact within the first two months. In the event the
agreement continues for a second year, the exclusive right terminates if there
are less than three sales during such year.

On August 5, 2004, our Board of Directors approved the sale of our first model
to EEMCO under this Agreement, for a price of $250,000 (representing our
estimated costs to manufacture the model), with ten percent ($25,000), paid in
advance. We will manufacture this model at our laboratory in the Irvine
facility, and expect to ship it in approximately November, 2004 for
demonstration to potential Saudi customers at our planned demonstration staging
area in Istanbul, Turkey.

Also on August 5, 2004, President Bush signed into effect Public Law 108-287,
the Defense Appropriations Act for Fiscal Year 2005, which authorized, in part,
the expenditure of $1,000,000 for the acquisition of stoichiometric explosive
detection systems for use with the U.S. Army's "Smart Truck" program. While
there can be no assurance that we will be awarded a contract or purchase order
for this equipment, management is very hopeful that we will because, to its
knowledge, no other company can provide the stoichiometric device called for in
the act.


                                      -11-
<PAGE>

If we can obtain the necessary funds to implement our proposed plan of operation
and achieve our marketing objectives, which we estimate to be approximately
$300,000, we plan to exhibit our 3C4 CarBomb Finder at:

      o     the American Society of Industrial Security Technologies, in Dallas,
            Texas, September 27-30, 2004;

      o     the NATO Exhibit of Improvised Explosive Devices, in Madrid, Spain,
            October 18-19, 2004;

      o     the Army Show, in Washington, D.C., October 29-30, 2004; and

      o     the Convention of International Associations of Chiefs of Police, in
            Los Angeles, California, November 13-24, 2004.

While there can be no assurance, management feels it has reason to believe that
our first domestic customer could be the U.S. Army some time in 2005. This
belief results from the fact that the National Defense Appropriation Act, PL
108-287, which passed the Congress recently and was signed into law by President
Bush on August 5, 2004, approved the expenditure of $1 million for the purchase
of a "stoichiometric" detection technology to be installed in the Army RDT&E
Combat vehicle, or Smart Truck (Program Element 0602601A). Federal funds to
satisfy the approved appropriation are expected to be available on or about
October 1, 2004. To the best of our knowledge, there is no other explosive
detector on the market with stoichiometric capability, which is expressly called
for in the Appropriation bill, however there can be no guarantee that any
purchase order for a stoichiometric CarBomb Finder ultimately will be awarded to
us as a result of this appropriation.

Initial production will be handled from our research and assembly facility in
Irvine, California. Production at this facility will be limited and will require
outsourcing some final assembly functions. We are currently seeking a location
to serve as our manufacturing facility and have contracted with Lockwood-Greene,
to help facilitate the location and design for our facility. See the section
entitled "Manufacturing Capacity". Presently we do, and we anticipate doing so
for the foreseeable future, subcontract for specialized services in the assembly
of our prototype devices, and management's philosophy is to outsource our
manufacturing operations as much as possible to minimize our overhead expenses
associated with this work, until such time as we can achieve meaningful levels
of production.

Our management is cognizant of the fact that the manufacture of devices on a
one-off basis until achieving a level of maturity in our manufacturing process
is an inefficient process, and for that reason we have been searching for
various opportunities to create strategic alliances with other technology
companies that can help us in this regard. The Dallas-Fort Worth Homeland
Security Alliance, referenced elsewhere in this Report, has attempted to help us
identify these types of strategic companies which can help us achieve a higher
level of efficiency in our manufacturing, sales and distribution activities. One
example of this is our relationship with Siemens Manufacturing Services, LLC,
described in the following paragraph, which was a direct result of our
discussions with the Dallas-Fort Worth Homeland Security Alliance.

Effective August 4, 2004, we entered into a Teaming Agreement with Siemens
Maintenance Services, LLC ("SMS"), a subsidiary of Siemens A.G., for maintenance
of our detection devices worldwide. Under the terms of this Agreement, SMS
agrees to cooperate with us in making proposals where the maintenance of our
equipment is a factor, and shall be our primary sub-contractor for the provision
of the services and supplies which SMS offers and that are relevant to the given
project. SMS was established in October 2002 as the business unit focused on the
TSA's airport security program and it currently provides complete maintenance
service management for over 445 airports across the U.S. and its territories.
SMS has developed and maintains strong relationships with the TSA, the U.S.
Department of Homeland Security ("DHS"), Boeing and, most notably, regional
airport and airline supervisors and managers, as well as security equipment
manufacturers and OEMs. Currently, SMS has a nationwide presence with a field
service organization of more than 300 technicians that can respond to
maintenance requests within four hours or less to any location. Importantly, the
potential collaboration provided for in the Teaming Agreement may allow us to


                                      -12-
<PAGE>

meet certain certification criteria required by agencies, such as the DHS and
the TSA, as it relates to aftermarket maintenance and support (i.e. equipment
calibration, quality control, etc.). If we have sufficient funding to attend it
ourselves, we plan to invite one or more representatives from SMS to attend our
anticipated demonstration at the testing in Madrid during the NATO Symposium in
October 2004. While this Teaming Agreement evidences the willingness and desire
of SMS to work collaboratively with us on project creation and implementation
generally, readers are cautioned that the agreement does not obligate SMS or any
other party to any specific obligations or performance requirements, nor does it
represent a formal joint venture. There can be no assurance that our entry into
a Teaming Agreement with SMS will result in any business, revenues or other
tangible benefits for us at any time.

The staging, operator training and technical support bases for our marketing and
sales efforts in the Middle East, led by EEMCO under our International
Distribution Agreement with EEMCO, are planned to be in Istanbul, Turkey, and we
are seeking to structure a collaboration arrangement with a local technology
company to assist us there.

MANUFACTURING CAPACITY

We currently manufacture our stoichiometric prototype devices, on a one-off, as
needed basis, at our facilities in Irvine, California using components acquired
from suppliers. The principal components in our stoichiometric devices, the
neutron generators and gamma ray detectors, are advanced devices manufactured by
suppliers to our specifications. Certain of the components that we use in our
devices, such as the neutron generator and the germanium detector, are
manufactured by only a limited number of companies worldwide. We order these
products on a purchase order basis, as needed, and our management believes that
if we were to experience an interruption or delay in delivery we could find
alternative sources of supply without material hardship. However, there can be
no assurance that if the current global supply situation for these components
were to change, or if we were to adopt a more customized version of a neutron
generator or other components we use, that we would be able to find suitable
sources of supply quickly and under terms we would consider acceptable, or at
all. (See: "Risk Factors-Manufacturing Risks"). The other components of our
products are standard parts which will be available from multiple supply sources
at competitive prices.

Initial production of our first commercial product, the 3C4 CarBomb Finder, will
be handled from our research and assembly facility in Irvine, California.
Production at this facility will be limited and will require outsourcing some
final assembly functions. We are currently seeking a location to serve as our
manufacturing facility and, as discussed below, we have contracted with the firm
of Lockwood-Greene to help facilitate the location and design of our facility,
as well as to assist us with the development of an optimal flow process and
other manufacturing efficiencies. Together with Lockwood-Greene, we are
currently reviewing different locations and expect to choose a location before
the end of the current fiscal quarter. We are seeking approximately 60,000
square feet of space which, once fully operational, would have a production
capacity of up to 1,000 CarBomb Finder units per year. Build out of the
projected facility, assuming we can raise the cash resources necessary to
achieve that goal, is expected to be completed in early- to mid-2005.
Construction costs are estimated at approximately $2.5 million, and we are
negotiating with local municipalities for monetary incentives to locate the
facility in their area.

We currently do not have the capacity to manufacture the CarBomb Finder, or any
of our prototype devices, at commercial levels. In order to begin to achieve
some sales of our device until we can afford to ramp up to commercial
production, we intend to commence manufacturing of the first 10 CarBomb Finders
at our Irvine facility, commencing with the model necessary to fulfill our
initial order from EEMCO. We currently have only 11 full-time employees, so it
is anticipated that we will need to hire additional personnel who are capable of
manufacturing these initial units. While we do maintain a network of available
technicians who are able to fill certain of our manpower requirements, there can
be no guarantee that we will be able to access the help we need to fulfill any
manufacturing requirement in the future as and when it may arise.


                                      -13-
<PAGE>

Manufacturing at our Irvine facility on a one-off basis is expected to be both
costly and inefficient, as we cannot take advantage of any of the economies of
scale which generally occur when multiple units can be produced by a
manufacturer following ramp-up of a particular product line. As a result, we may
be required to hire additional personnel, buy components and raw materials at a
premium to the prices we might otherwise be able to obtain if we could purchase
in larger quantities, and we may not be able to afford to implement the most
efficient manufacturing methodologies given the size and nature of the
laboratory environment in which we will manufacture these initial units. As a
result, we do not anticipate being able to sell these units at a price in excess
of our cost to manufacture them, and therefore do not expect any profit from
such sales. It is also possible we may incur losses if our costs to manufacture
exceed the purchase price at which we will have to sell the first few commercial
models, until such time as the product is firmly established in the market. Our
management has determined that these costs represent an investment in the market
introduction of our first product, and the results to our business and
operations, if we can launch the product and gain initial market acceptance in
this manner, outweigh the costs of doing so. Of course, there can be no
assurance that we will be able to successfully introduce our CarBomb Finder or
any other of our prototype devices to market as planned and, as discussed in the
Risk Factors section of this Report, our inability to do so would have a
materially adverse impact upon our business and financial condition.

On August 5, 2004, our Board of Directors authorized our acceptance of a
Proposal for Detailed Concept Design Services with Lockwood-Greene Engineering
and Construction, which has been engaged, among other things, to provide design
and construction management services to us in connection with our proposed
construction of a manufacturing plant capable of producing commercial quantities
of our CarBomb Finder. Under the terms of the proposal, Lockwood-Greene is
responsible for designing and implementing a facility which is suitable for its
intended purposes, including creating a flow process recommendation, designing
the optimum configuration for the facility, providing construction management,
assisting with supplier relationships, and reviewing transportation, parking,
laboratory testing and other logistical issues pertaining to the manufacture of
our CarBomb Finder at commercial levels which, management believes, will allow
us to take advantage of better operating efficiencies and lower our costs of
production as we ramp up to our anticipated levels of production. The price
which we are obligated to pay Lockwood-Greene in consideration for its services
as described in the Proposal is $82,875, plus actual expenses anticipated not to
exceed $4,000.

Even if we are successful in arranging for manufacturing facilities which will
meet our physical production needs, transforming our technology into commercial
production will involve refinement of our prototypes, including the CarBomb
Finder device, into finished vendible units. Final production models must take
into account all relevant commercial standards for durability, usage and
shielding, as well as specific customer requirements for detection, and physical
unit packaging and installation. Some of our components are the first of their
kind, and we expect that they will naturally encounter initial design,
performance, reliability and maintenance problems. We intend to conduct this
work both internally and with the assistance of outside strategic partners,
consultants, or through collaborative associations such as that entered into
with Siemens Maintenance Services, LLC. At present, it is still premature for
the Company to fix suggested manufacturer's pricing on the 3C4 CarBomb Finder.
However, based on early cost analysis and pricing guidance from our component
suppliers, we expect that as we shift manufacturing from one-off production to
volume commercial production, and fully expense certain non-recurring
engineering and design costs, we should see significant decrease in the cost of
our goods sold. With regard to our anti-tank landmine, unexploded ordnance and
Refractorymeter prototype designs, which are the next products that we intend to
bring to market if our CarBomb Finder launch is successfully accomplished, we
are unable to provide any meaningful estimate at this time as to what the cost
to bring these devices into commercial production might be. There can be no
assurance that we will be able to transform any of our individual prototype
designs into commercially-saleable products meeting the requirements referenced
above for a successful product launch.

DEVELOPMENT OF STOICHIOMETRY

The concept upon which our stoichiometric technology is based, associated
particle imaging or "API", was first conceived in 1982. A U.S. Department of


                                      -14-
<PAGE>

Energy committee reported, in 1989, that the concept was scientifically valid,
but impractical within the capabilities of the equipment then available, which
failed to return stoichiometric results that identified the chemical formula of
the target compound. Based upon his belief in the potential of the technology,
our CEO, Chairman and Chief Scientist, Dr. Bogdan C. Maglich, formed HiEnergy
Microdevices, Inc. in 1995 to pursue the development and ultimate
commercialization of the API technology. With the assistance and cooperation of
an industry-university-governmental lab cooperative effort that included the
U.S. Army's Night Vision and Electronic Sensors Directorate, the Department of
Energy's Special Technologies Laboratory, the Lawrence Berkeley National
Laboratory, the University of California, the Massachusetts Institute of
Technology, and EG&G ORTEC (now a division of American Measurement Technology,
Inc.), HiEnergy succeeded in 1997 in reviving associated particle imaging by
incorporating recent developments in microchip electronics, and called the
technology "atometry." Stoichiometry was first scientifically validated in tests
conducted at the U.S. Department of Energy's Special Technologies Laboratory in
Santa Barbara in 1998, and the results of these tests were publicly presented
for the first time at the White House International Symposium on Drug Control
Policy in 1999 and published in the symposium's proceedings: [Proc. of 1999
ONDCP Intern. Technology Symposium, the White House Executive Office of the
President, p. 9-37; Gov. Dvc: NCJ-176972]. The Office of National Drug Control
Policy at this time was one of the primary proponents of the use of pulsed fast
neutron interrogation technology to detect illicit drugs through the
non-invasive identification of chemical formulae. The various military branches
of the United States soon began to explore the efficacy of fast neutron-based
technologies to detect explosives, however, it is only within the last few years
that technological advances have made this technology sufficiently accurate and
mobile to be truly practicable in the field.

THE ADVENT OF THE "MINISENZOR"

In the course of research on the stoichiometric API (imaging) detector , Dr.
Maglich realized from the results collected by our research team in 2002 and
2003 that a stoichiometric explosive detector could be made without imaging,
that is, without the use of the elaborate API technique. He has named this
invention "MiniSenzor", in order to distinguish it from the API detector which
had previously been named "SuperSenzor". Our use of the letter "z" in these
names was for trademark purposes, however we have not yet filed any applications
to register such names with the U.S. Patent and Trademark Office or with any
state.

The stoichiometric detector without API is slower, its range much shorter and it
has no imaging ability, but it would cost approximately 30% to 50% less, would
be much more portable (smaller and lighter) and could be used for some important
applications by bomb squads such as the detection of car bombs, unexploded
ammunition, improvised (terrorist) bombs on the road, in airports, and so forth.
Moreover, its lead time from the lab to product is much shorter and it is
covered by our previously-filed patent application. An early-stage prototype of
the CarBomb Finder was first built in August 2003, and in September, 2003. This
device was successfully tested by the Spanish AENA inspectors. Its further
development has occurred as described elsewhere in this Report.


PRODUCT VALIDATION AND TESTING

The following testing activities have been conducted to date to validate our
proprietary stoichiometric technology:

      o     As noted above, our stoichiometric technology was initially
            developed over the period 1997 to 2002 by an
            industry-university-governmental lab consortium financed by private
            funds and government contracts. The technology was first
            scientifically validated in tests conducted at the U.S. Department
            of Energy's Special Technologies Laboratory in Santa Barbara. The
            results of these tests were publicly presented for the first time,
            in co-authorship with the United States Customs Service, at the
            White House International Symposium on Drug Control Policy in 1999
            and published in the symposium's proceedings: [Proc. of 1999 ONDCP


                                      -15-
<PAGE>

            Intern. Technology Symposium, the White House Executive Office of
            the President, p. 9-37; Gov. Dvc: NCJ-176972]. The results were
            subsequently removed from the website maintained by the White House
            Executive Office for security reasons at the request of the United
            States military.

      o     During the period 1998-2002, in tests conducted for the U.S. Customs
            Office, our stoichiometric technology demonstrated the ability to
            identify, from three feet away, (1) explosive simulant through steel
            or soil; and (2) cocaine simulant through rice. These tests were
            conducted in the presence of U.S. Customs Office officials using
            unknown samples selected by the officials.

      o     During the period 1998-2002, in tests conducted for the Department
            of Defense at the Special Technologies Laboratory of the U.S.
            Department of Energy in Santa Barbara, California, our
            stoichiometric technology demonstrated the ability to identify, from
            three feet away, anthrax simulant (dead spores) through paper. These
            tests were conducted in the presence of Department of Defense
            officials using unknown samples selected by the officials.

      o     On January 9, 2003, in open-air field tests conducted by the U.S.
            Navy at its Naval base in Indian Head, Maryland, our stoichiometric
            technology demonstrated the ability to determine chemically, from
            the outside, whether or not the enclosed contents of an artillery
            shell and other containers was an explosive or an inert substance.
            In these tests, our stoichiometric technology was able to
            differentiate TNT explosive from the plastic explosive "Semtex";
            gasoline from diesel fuel; and fertilizer from the military grade
            explosive "RDX."

      o     In September 2003, at our laboratory facility in Irvine, California,
            we performed two days of on-site demonstrations of our explosives
            detection technology on unmarked samples for the Security Manager
            and Director of Equipment and Installations of the Directorate of
            Spanish Airports and Navigation (AENA). The Spanish officials
            performed dozens of tests with our stoichiometric technology, and
            successfully detected both nitrogen-based and potassium
            chlorine-based explosives. We had planned to hold further testing in
            Spain in June 2004, but that meeting has been tentatively
            rescheduled for October 18 and 19, 2004 at the NATO Symposium in
            Madrid, Spain.

      o     On October 9, 2003, a technical inspector from the Transportation
            Security Agency conducted tests at our laboratory facility in
            Irvine, California, and concluded that our stoichiometric technology
            easily differentiated peanut butter from explosives.

      While each of these tests has forwarded the validation of our
      stoichiometric technology as an accurate means for detecting explosives
      and contraband, as of the date of this report none of such tests have led
      to the commercial sale of any of our devices, nor can we provide any
      assurance that any of the agencies or organizations involved will ever
      actually purchase any products from us in the future.

PRODUCT LIABILITY

Inherent in the manufacturing, sale and maintenance of explosive detection
products are potential product liability risks. At present, we do not maintain
product liability insurance, but we anticipate obtaining product liability
insurance in order to contain potential liabilities associated with our devices.
As referenced under the heading Government Regulation, we also intend to address
product liability issues by pursuing the designation and certification of our
products by the U.S. Department of Homeland Security ("DHS") as Qualified
Anti-Terrorism Technologies ("QATTs"), and relying upon certain protections
provided for under the Support Anti-Terrorism by Fostering Effective
Technologies Act of 2002, Public Law 107-296 (the "SAFETY Act").

We cannot be certain that we will be able to obtain on acceptable terms, if at
all, sufficient insurance coverage to contain liabilities, or if we will be able
successfully to qualify our products and services as QATTs under the SAFETY Act.


                                      -16-
<PAGE>

In the event that we are held liable for any claim as to which we do not have
insurance, or resulting in damages exceeding our levels of insurance coverage,
we may be required to make substantial payments. In addition, the failure of any
product to detect explosives, even if due to operator error and not to the
mechanical failure of a product, could result in public and customer perception
that our products are ineffective or defective, any of which circumstances could
have a material adverse effect on our business, operations and financial
condition.

GOVERNMENT RESEARCH AND DEVELOPMENT GRANTS AND CONTRACTS

The development of our stoichiometric technology had been partially funded to
date by government grants and research and development contracts, and we will
continue aggressively to pursue these government grants and contracts to assist
us in financing the further development of our technology.

Since inception, we have been awarded government grants and contracts, including
a grant for $97,750 from the U.S. Army Night Vision and Electronic Sensors
Directorate in 1996; a $25,000 grant from the U.S. Department of Energy in 1996;
a $40,000 grant from the U.S. Customs Service in 1998; an $80,000 grant from the
Defense Advanced Research Projects Agency/Special Operations Command in 2000;
and a $117,000 grant from the U.S. Defense Advanced Research Projects
Agency/Special Operations Command in 2001.

We are currently in Phase II of a Small Business Innovation Research ("SBIR")
contract awarded to us in August 2002 by the U.S. Army Night Vision and
Electronic Sensor Directorate. Under the contract, we are to develop and test
our Anti-Tank Landmine Detector 7AT7 over a two year period, which may be
extended at the option of the U.S. Army. and the U.S. Army will pay a portion of
our research and development costs on a periodic basis during the term of the
contract. We received $70,000 in SBIR proceeds to complete Phase I and, on
January 15, 2003, we executed a contract with the U.S. Army for Phase II valued
at $415,000. Work commenced in January 2003 under Phase II of the contract. In
January 2004, the U.S. Army exercised its option for the second year of Phase
II, valued at approximately $364,000. Work commenced on the second year of Phase
II on March 1, 2004. Phase II ends in March 2005. Our anticipated cost to
complete Phase II is $1,400,000. If further research and development work is
required upon the expiration of Phase II, we have the ability to submit a
request for additional Phase II or Phase III funding, which the government would
consider based upon our progress to date and the merits of the project. The U.S.
Army is under no obligation to continue to assist in funding our research and
development costs beyond Phase II or any subsequent extension, or to purchase
the Anti-Tank Landmine Detector 7AT7 once we have completed development
activities.

We conducted a series of in-field tests of our Anti-Tank Landmine Detector for
the U.S. Army's Night Vision and Electronic Sensors Directorate at their
compound in Fort Belvoir, Virginia during the week of March 15, 2004. According
to the U.S. Army SBIR Phase II Contract No. DAAB07-03-C-P002, the results of the
tests and other all work performed under our contract with them must remain
confidential.

In January 2003, we competed in a research and development grant program focused
on the detection of anthrax and other biological chemical agents sponsored by
the U.S. Naval Surface Warfare Center. Our demonstration received a score of
"good", meaning that our then-current prototype was able to perform as claimed
for 50% or more of the performance characteristics claimed by us. We were unable
to obtain this grant, however, because one of the requirements we had to fulfill
was to obtain a Certificate of Competency from the U.S. Small Business
Administration certifying our financial condition as being adequate to
responsibly complete the grant work if it were awarded to us. Due to our
financial condition, we were not awarded the requisite Certificate of
Competency, nor was the Small Business Administration's determination reversed
in June, 2003 when we requested reconsideration of this decision. Management
believes that the requirement to obtain Certificates of Competency will continue
to be a bar to our ability to win certain government grants in the future, and
is seeking the additional capital necessary to meet the minimum competency
requirements for the projects it desires to participate in. It is impossible to
state how much money is necessary to obtain a Certificate of Competency, because
it varies from grant to grant and we have never received a specific dollar


                                      -17-
<PAGE>

amount that would need to be obtained in order to qualify. However, management
will seek to raise two to four million dollars in additional equity
capitalization, following the filing of this Report, and believes that with that
additional capitalization it should be able to meet its operating plans,
including seeking additional research and development grants requiring a
Certificate of Competency. There can be no assurance that we will ever obtain
the additional equity capitalization that we need to obtain Certificates of
Competency in respect of any given grant opportunity or, even if we do, that we
will be awarded any research and development grants. (See: "Risk Factors-General
Business Risks".)

PATENTS

To date, we have filed a total of six patent applications and one provisional
patent application with the U.S. Patent and Trademark Office (PTO), and these
six applications, plus one earlier application, have been filed in the foreign
jurisdictions listed below, as follows:

      o     We filed patent applications captioned "Method and Apparatus for
            Detecting, Locating and Analyzing Chemical Compounds Using Subatomic
            Particle Activation" with patent agencies in Canada, Japan and the
            European Union on August 14, 2000, August 18, 2000 and September 14,
            2000, respectively.

      o     On February 20, 2001, we filed an application captioned "Method and
            Apparatus for Detecting, Locating and Analyzing Chemical Compounds
            Using Subatomic Particle Activation" with the United States Patent
            and Trademark Office. The U.S. Patent and Trademark Office has since
            split this application into four inventions and requested that we
            write four separate patent applications. The process for the first
            application has been completed and a meeting at the U.S. Patent and
            Trademark Office with experts and the patent examiner took place in
            January 2004. The process of examination was also stopped in the
            period of October 2002 to April 2003 as the result of a Secrecy
            Order placed on the application by the U.S. Army. This order was
            removed in March 2003 on the grounds that the same disclosure has
            been published in Europe in our other patent application. We
            consider that other than these delays, the patent approval process
            is proceeding as should be expected.

      o     On June 18, 2001, we filed an application with the U.S. Patent and
            Trademark Office captioned "Method and Apparatus for Neutron
            Microscopy with Stoichiometric Imaging".

      o     On June 18, 2002, we filed an application with The International
            Bureau of World Intellectual Property Organization captioned "Method
            and Apparatus for Neutron Microscopy with Stoichiometric Imaging".

      o     On March 11, 2004, we filed an application for a Provisional Patent
            with the U.S. Patent and Trademark Office captioned "Method and
            Apparatus for Detecting Flaws in a Fluid Conduit."

The original inventor on all of our patent applications, except for the one
filed in March 2004, was Dr. Bogdan Maglich, who serves as, among other
executive positions, our Chief Scientific Officer. Our March 2004 patent names
Dr. Kevin McKinny, our Senior Scientist and Project Team Leader, as the original
inventor. In accordance with our Company policy, both individuals have fully
assigned their rights in and to the technology, including any corresponding
patents awarded through the U.S. Patent and Trademark Office, to HiEnergy
Technologies. All of our scientific personnel have executed non-disclosure
agreements that reserve ownership of intellectual property solely with us.

In the development of our stoichiometric technology, we have not used any
third-party intellectual property or other rights, and we have no licensing or
use arrangements of any kind with respect to any aspect of our technology. We
presently do not anticipate the need to do so in the future, although this may
be subject to change.


                                      -18-
<PAGE>

As noted in the Section entitled Risk Factors: Intellectual Property Risks, our
ability to obtain patent protection with respect to any future inventions we may
create or develop could be jeopardized to the extent that some or all of the
funding we used in creating or developing such invention came by way of an SBIR
grant, or from other governmental sources of research and development funding,
which require that certain royalty-free rights be granted to the federal or
other government providing the funds. Furthermore, the federal government does
not agree to protect proprietary rights developed under SBIR grants for more
than four years, and other granting agencies may have similar or letter terms
which could result in the public release of proprietary information
significantly earlier than would be the case in a purely private funding
relationship. To date, none of our technologies has been impacted by this risk,
but there can be no assurance that we will not rely on SBIR grants or other
similar funding, if available, to develop additional technology and, if we do,
our rights to exploit the intellectual property we develop could be impacted as
described above and in the Risk Factors section of this Report.

NON-PATENTED PROPRIETARY TECHNOLOGY

To prevent the proprietary stoichiometric software and associated algorithms
from potentially falling into the hands of terrorists or other unauthorized
users, we are in the process of converting our proprietary software into
firmware. This consists of a programmable chip, containing the entire code,
which is automatically erased if invaded. The use of the chip eliminates the
need for a laptop, and renders it possible to have the entire complex program
handled by a palm computer or tablet p.c. Management estimates that it will need
to allocate approximately $80,000 in additional funding to develop this item as
a serially-produced component, and so our ability to continue this development
is dependent upon our receipt of sufficient capital resources to permit us to
make that allocation and, to the extent this estimate is too low to complete the
work, the allocation of all additional amounts that may ultimately be required.
(See: "Risk Factors: General Business Risks").

GOVERNMENT REGULATION

RADIATION SAFETY

The devices which incorporate our stoichiometric technology utilize a process
that involves the neutron radiating of items selected during the course of the
inspection. The issue of radiation safety of the operator of our devices, as
well as bystanders, is properly addressed by optimizing the distance from the
neutron source and/or shielding thickness (if any) and operating procedures we
have employed, consistent with the standards adopted by the U.S. Nuclear
Regulatory Commission ("NRC"). These standards have been subsequently recognized
by 33 U.S. states, and many national bodies within the European Union.

Our technology has several advantages from the perspective of radiation safety,
which are:

      o     The CarBomb Finder does not require a customized neutron source or
            emission methodology to work with our application. Our device uses a
            standard neutron source, known as the `sealed tube neutron
            generator', the properties of which have been well established for
            decades. This type of neutron generator is routinely used in
            hospitals, general industry, oil prospecting, controlling the
            quality of coal, cement and mineral ores, and for medical and
            general academic research, among other uses.

            Between 500 and 1,000 sealed tube neutron generators are
            manufactured annually by over ten established companies both in the
            U.S. and in Europe. The primary manufacturers of these standard
            sealed tube generators are: ThermoMF Physics, Halliburton,
            Schlumberger, Baker-Hughes, EADS-SODERN and High Voltage Engineering
            Europa B.V.

      o     A manufacturer of products incorporating sealed tube neutron
            generators does not require any special license to sell such
            products. Rather, each end user organization which employs such
            devices must, normally within three to six weeks after its purchase
            of the device, select one member of its staff to serve as the end
            user's "radiation officer". Such individual must have a technical


                                      -19-
<PAGE>

            background in radiation activities, and pass an examination (usually
            administered by the state in which the radiation officer will
            perform his or her activities) in order to obtain a license to use
            the device containing the sealed tube neutron generator. Other than
            end user licensing requirements, no radiation license or permit is
            required by us, so long as we do continue to use the standard sealed
            tube neutron generator in our products. If we were to begin using
            another, customized neutron source at any time in the future, we
            would most likely be required to obtain additional licensing from
            the NRC at that time, and there is no guarantee that such license
            would be available in a reasonable period of time, or at all. At
            present, we have no plans to deviate from our usage of sealed tube
            neutron generators in our devices in the foreseeable future.

      o     The CarBomb Finder is typically turned on for a period of only 10 to
            30 seconds, with a maximum of 2 minutes in difficult to decipher
            cases. Once the inspection is over, the residual radiation from the
            metal components of the neutron generator is insignificant (measured
            in mini-Sieverts), has a range of about one foot to three feet in
            the air and ordinarily lasts only about 30 minutes. Accordingly,
            there is no known danger to persons who later handle the objects
            that have been exposed to neutrons through examination by our
            devices.

As the manufacturer of a device involving a fast neutron generator, as stated
above, we must comply with NRC regulations governing radiation exposure in the
design and manufacturing of our products, including those relating to the
shielding of workers in our facilities. The type and thickness of the material
used to shield our personnel and the nature of the procedures (including how
close an operator of our devices may be to the source of radiation) are defined
by the NRC and other regulatory authorities. Radiation workers, who have been
trained to work with radiation as part of their job functions, can be subjected
to radiation levels that are 50 times greater than the exposure levels permitted
for members of the general public. Accordingly, depending on the configuration
and application of our devices, or whether or not trained radiation workers are
only present, the shielding and operating procedures will vary based on the
duration and level of radiation emissions and possible exposure to both the
operator and the general public. For example, our 3C4 CarBomb Finder in its
vehicle or van configuration, which may require the operator to remain in the
driver's compartment during use for lengths of time, would require extraordinary
shielding between the compartment and the radiation zone, which, in this case,
includes a metal barrier and other insulation. In wireless configurations, in
which the operator can execute all procedures remotely, and the public is not
exposed directly or residually, shielding and operating procedures would be less
stringent. Although the radiation exposure to the public from use of our devices
is negligible, our policy is to avoid its use in public places as much as
possible (although we have no control over what customers will do with the
devices in the future once they pass out of our possession). Bomb Squad police
have informed us during past demonstrations that in any event they routinely
first clear the affected area of public bystanders to within 100 feet before
turning on our stoichiometric device.

Currently, 33 U.S. states, including California where we have our principal
place of business, adhere to the NRC's licensing and regulatory standards. Other
U.S. states where we will market our devices may have licensing and/or other
regulatory standards which are more or less stringent than those adopted by the
NRC. As far as management can see, no current state requirements in the U.S. are
so materially different from those of the NRC as to preclude an end user from
using our devices in that state. The laws of foreign countries or jurisdictions
also may vary significantly from those in use within the United States,
including in areas where we will want to market and sell our devices in the
future, although numerous jurisdictions (such as within the European Union, for
example) have recognized the regulatory standards and requirements of the NRC.

Management believes that all of our radiation safety policies and procedures,
both relating to the design and operation of our products as well as the
construction and operation of our facilities, are in conformity with current,
applicable U.S. federal and state law regulations. Although fast neutron
radiation demonstrates some properties different than other forms of radiation,
management does not believe that fast neutron radiation presents any
difficulties or creates any risks beyond those ordinarily encountered in
connection with the fabrication and operation of other forms of radiation
emitting devices commonly used in the general population, such as x-ray


                                      -20-
<PAGE>

machines. For example, measurements we have taken with radiation survey
instruments show that a three-minute, direct, unshielded exposure to our
MiniSenzor technology at a distance of one meter would deliver a dose of 0.1
milli-Sieverts (mSv), which is significantly lower than that of a medical CT
x-ray scan. Further, the design and incorporation of appropriate shielding in
our products, and the development of appropriate operating procedures in view of
their intended use, will not be difficult in management's opinion. Nevertheless,
compliance with these rules, regulations and licensing requirements does entail
additional cost, effort and time in bringing our products to market, and there
can be no guarantee that we will be able to comply with future U.S. federal,
state and international radiation safety requirements within our existing
policies and procedures, nor that we will be able to implement compliant
policies and procedures in a commercially viable manner or within our resource
capabilities, as further described under the heading Risk Factors later in this
Report.

EXPORT CONTROLS

Management has determined that its current devices, incorporating the standard
neutron generator described above, is not within the scope of the United States
Munitions List, maintained by the U.S. Department of State under the
International Trafficking in Arms Act, and therefore no license is required to
market and sell our current devices. Future products we may develop, or future
changes in the existing U.S. federal regulations governing the classification of
items defined as "munitions", may require us to obtain U.S. federal licensing,
and there can be no guarantee that we will be able to obtain such licenses at
that time.

Management believes that the sale of the CarBomb Finder, and any future
explosive detection equipment developed by us to be used by civil authorities to
fight criminal activities outside of the United States, would be subject to
export control regulations administered by the U.S. Department of Commerce,
Bureau of Industry and Security (BIS). The licensing program effected under the
Bureau of Export Administration is designed to monitor exports of items which
could adversely affect regional stability or the military balance within a given
region, and to protect the national security and foreign policy interests of the
United States. These regulations have been expanded to include controls on
explosive detection equipment technology, and classified such equipment,
including related software and technology, under Export Commodity Control Number
(ECCN) 2A983 in April 2003. Although we have not submitted a formal commodity
classification request to the BIS, we believe that the CarBomb Finder would most
likely be classified under ECCN 2A983. The effect of this classification would
be to impose a license requirement for Regional Stability reasons for the export
of explosive detection equipment, software and technology to all destinations
except members of the North Atlantic Treaty Organization (NATO), Australia,
Japan, and New Zealand.

According to the BIS' own website [www.bxa.doc.gov/PoliciesAndRegulations/
04ForPolControls/Chap3_ RegStability.htm, "the U.S. Government will generally
consider applications for such licenses favorably, on a case-by-case basis,
unless the export would significantly affect regional stability." Accordingly,
if sales of our currently-anticipated products are made to countries which are
not restricted pursuant to the Commerce Department's listings for "Region
Stability (RS-2)", "Anti-Terrorism (AT-1)", and/or "Non-Proliferation (NP-1)",
no special licensing will be required. Sales to restricted countries will
require licenses to be obtained for export, but we expect that we would fall
into the category of items receiving "favorable consideration" due to the
non-aggressive nature of our planned products. However, future sales to
countries of concern, future products we may develop, or future changes in the
existing federal regulations governing the administration of export controls by
the Department of Commerce, may require us to obtain federal licensing, and
there can be no guarantee that we will be able to obtain such licenses at that
time. Some of our products in development may be deemed regulated military
devices subject to special export restrictions under the U.S. Department of
State regulations and/or subject to the U.S. International Trafficking in Arms
Act. However, in the event that any of our future products are conferred "dual
use" status (meaning that they can be utilized for both commercial and
governmental/defense applications), such as our landmine detection equipment
currently in development, their export could instead be subject to the control
regulations administered by the BIS, which generally are less stringent.


                                      -21-
<PAGE>

THE SAFETY ACT

On October 10, 2003, in response to the tragedy of the attacks on September 11,
2001 and the alarming rise of terrorism generally since that date, Tom Ridge,
the U.S. Secretary for Homeland Defense, signed the first regulations
implementing the Support Anti-Terrorism by Fostering Effective Technologies Act
of 2002, Public Law 107-296 (the "SAFETY Act"). The SAFETY Act was enacted to
encourage the rapid development and deployment of anti-terrorism technologies by
ensuring that the threat of liabilities and extensive litigation associated with
the manufacture and sale of products used in inherently dangerous circumstances
does not deter businesses from developing and commercializing these
technologies. Specifically, the SAFETY Act creates certain liability limitations
for "claims arising out of, relating to, or resulting from an act of terrorism",
if a technology which has been designated as a qualified anti-terrorism
technology ("QATT") has been used. All forms of technology, including products,
software, services, and various forms of intellectual property, may qualify for
Safety Act protection. Two separate protections are available to applicants
depending on the results of a classification and designation process.

In order to be designated as a QATT by the US Department of Homeland Security
("DHS"), a company must file an application with that agency showing that the
technology "will prevent, detect, identify or deter acts of terrorism or
mitigate the harm that such acts might otherwise cause". Companies can also
apply to be certified as an "Approved Product (or Service) for Homeland
Security." There are substantial benefits to any company which does receive such
designation or certification, including that such companies, if sued as a result
of any claim arising out of a terrorist act:

      o     can invoke the exclusive jurisdiction of the federal courts of the
            United States, for suits against the Sellers of "qualified
            anti-terrorism technologies", thereby eliminating concerns about
            defending against litigation in multiple jurisdictions;

      o     a cap on the amount of liability which can be assessed against the
            seller of a QATT to a minimum, insurable amount for premiums which
            are not commercially unreasonable or burdensome such that they will
            distort the sales price of the designated product;

      o     a prohibition on joint and several liabilities for non-economic
            damages, so that sellers of certified anti-terrorism technologies
            can only be held responsible for their actual, proportionate share
            of any liability;

      o     an absolute bar against punitive damages and prejudgment interest;

      o     a requirement that plaintiffs reduce the amount of any damages they
            awarded from seller's of certified products by any amounts such
            plaintiffs receive from "collateral sources", such as insurance
            benefits or other government benefits; and

      o     an initial presumption, albeit rebuttable, that the seller of
            certified products is entitled to use the so-called "government
            contractor defense" (which provides certain limitations on the
            ability of plaintiffs to recover damages from manufacturers who
            provide products that meet government specifications, if they have a
            faulty design), on sales made to both government or private sector
            purchasers.

As part of our risk management and litigation management strategies, we intend
to apply for designation and certification from the DHS for our stoichiometric
devices. If the DHS approves our products for certification and/or designation
as QATTs, we would enjoy some or all of the benefits described above. There can
be no assurance that any application we submit for either certification or
designation by the DHS will be approved or, even if it is, that we will be able
to afford even the minimum amounts of liability insurance which the sellers of
designated QATTs and certified Approved Products and Services generally must
maintain. Furthermore, it should be noted that the SAFETY Act affords no
protection against any claims or liabilities arising out of circumstances other


                                      -22-
<PAGE>

than acts of terrorism, and that the designation or certification by DHS of any
product should not be expected to assist in any way with respect to either
purchases by, or the receipt of grants from, governmental agencies or other
organizations with respect to such product or its manufacturer.

GOVERNMENT CONTRACTING AND GRANTS

During our early stages of commercial sale, we anticipate that government
agencies will be the principal customers for the products we develop. We will be
required to comply with the Federal Acquisition Regulations, a comprehensive set
of regulations governing how vendors do business with the U.S. federal
government, to the extent we contract with departments or agencies of the U.S.
government, as well as similar regulations to the extent we contract with state
or local governments. We will also continue applying for grants from
governmental agencies, which will be subject to regulation by the granting
agencies. Sales to or grants from foreign governments or organizations will have
their own regulatory framework, which may or may not be similar to present U.S.
standards or requirements. As a hedge against our reliance on government grants
and sales, we have been looking at purely industrial applications of our
technology. The first such application we have been working on is our
Refractorymeter, which uses our stoichiometric technology to examine the ceramic
linings of oil cracking cylinders in order to detect fissures or erosions which
could cause significant losses if left undetected. Although this project has
been undertaken with input from the research department of Exxon-Mobil, there
can be no assurance that this oil company or any other commercial entity, will
buy our refractorymeter technology. (See the further description of our informal
relationship with the research center of Exxon-Mobil, in the Section
"Proprietary Devices: Research and Development Activities").

SUBSIDIARIES

We have three subsidiaries, HiEnergy Defense, Inc., HiEnergy Europe, Ltd., and
HiEnergy Microdevices, Inc. HiEnergy Defense, Inc. was incorporated under the
laws of the State of Delaware in July 2003, and is a wholly-owned subsidiary.
HiEnergy Defense focuses on marketing military and defense applications of our
technology within the Washington D.C. area from its office in Arlington,
Virginia. HiEnergy Europe Ltd. was incorporated under the laws of the State of
Delaware in March 2004, and is a wholly-owned subsidiary. HiEnergy Europe is
presently not operating, but will focus on marketing our technology throughout
the European Union (EU). HiEnergy Microdevices, Inc., which is currently
inactive, is a majority-owned subsidiary incorporated in the State of Delaware.
HiEnergy Microdevices was formed in 1995 by Dr. Bogdan Maglich to develop and
commercialize our stoichiometric technology. In November 2003, our Board of
Directors approved a short form merger to acquire the remaining outstanding
stock of HiEnergy Microdevices. Under the merger, we would issue 459,222 shares
of common stock to the remaining stockholders of HiEnergy Microdevices on the
basis of 22.3524 HiEnergy shares to 1 share of HiEnergy Microdevices (the same
ratio that was used in the original voluntary share exchange whereby we acquired
HiEnergy Microdevices in April 2002), and all the assets and liabilities of
HiEnergy Microdevices would then become assets and liabilities of HiEnergy. As
of the date of this Report, the merger has not been effected, but we anticipate
its completion by the end of 2004. None of the shares not owned by us and which
remain outstanding in HiEnergy Microdevices is owned by any affiliate or our
company.

EMPLOYEES

We have eleven (11) full-time employees as of the date of this Report, comprised
of 1 executive officer; a controller; a director of sales and marketing; 4
full-time research and development employees; 3 administrative employees; and 1
executive officer of our wholly owned subsidiary, HiEnergy Defense. Inc. We also
have 1 part-time research scientist, and 3 independent consultants as of the
date of this Report, comprised of a paralegal consultant, a scientific research
consultant and a finance consultant. We believe that our employee relations are
favorable. None of our employees are represented by a collective bargaining
unit. To the extent we may need additional manpower support especially as our
one-off manufacturing efforts commerce in earnest, we have been granted access
to a fully-equipped machine shop by Del Mar Avionics, Inc., which maintains its
principal place of business in our same building, and we are able to use its
staff of machinists on an hourly-rate basis.


                                      -23-
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY


On September 30, 2002, we relocated our offices to 1601-B Alton Parkway, Irvine,
California 92606. Our new offices consist of approximately 6,600 square feet. We
entered into a three-year operating lease agreement with an affiliate of Bruce
Del Mar, one of our former directors, for its offices in Irvine, California. The
lease provides for monthly rent of $8,000, for months 1 through 18, and $8,320
per month for months 19 through 36. In January 2004, we executed an addendum to
the lease agreement to lease an additional 4,470 square feet of space within the
same building in which our offices are located. The addendum begins on February
1, 2004 and expires in September 2005. The additional monthly rent will be
$4,373 per month for months 17 and 18, and $4,545 per month for the remainder of
the lease term.

In the new space we have built one open-air testing facility and two enclosed
testing facilities, which are equipped with two test/demonstration vehicles for
car bomb detection, an airport luggage testing setup, and an open pit for
landmine tests. A temporary wall provides more than adequate radiation shielding
to the scientists and other observers, who analyze results and demonstrate the
technology from within an on-site portable building. The new test site consists
of approximately 2,400 square feet. The term of the lease was originally from
July 1, 2003 to December 1, 2003, but was changed to an ongoing month-to-month
lease, with payments due at a monthly rate of $1,200 under an agreement with the
same landlord. The standards adopted by the State of California, which we are
observing in our laboratory shielding designs, are the strictest in the United
States. The University of California Radiation Safety Officer, licensed by the
State of California, has determined the degree of thickness for both borated
polyethylene and concrete shielding required for operators and for public
safety. Our test site has been designed in compliance with these requirements
and our design was approved by the Radiation Safety Officer on July 16, 2003.

ITEM 3. LEGAL PROCEEDINGS

RICHARD ECKHOUSE.

We received a letter dated December 5, 2002, from an attorney representing
Richard T. Eckhouse, a consultant, demanding payment for accounting services
allegedly performed by Mr. Eckhouse pursuant to a Letter Agreement dated
November 7, 2001, between Mr. Eckhouse and HiEnergy Microdevices, Inc. The
Letter Agreement provided that Mr. Eckhouse was to be paid $350 per hour, as
follows: (i) one-third (or $117 per hour) in cash; (ii) one-third (or $117 per
hour) evidenced by a Promissory Note at 10% annual interest, maturing when
HiEnergy Technologies received government funding equaling $900,000 or an
investment totaling at least $300,000, and (iii) one-third (or $117 per hour)
paid in shares of Class A common stock of HiEnergy Microdevices at a valuation
of $5.00 per share. On May 2, 2003, Mr. Eckhouse filed a lawsuit alleging a
breach of contract against us, HiEnergy Microdevices and Dr. Bogdan Maglich,
individually (who was subsequently dismissed by the Court). We subsequently
filed a cross-complaint in the action, alleging various common law and contract
claims against Mr. Eckhouse. The Complaint alleged that HiEnergy Microdevices
owed Mr. Eckhouse a total of $313,580 for services rendered, plus interest,
attorney's fees and costs. We ultimately settled this dispute by entry into a
settlement agreement and mutual release with Mr. Eckhouse pursuant to which he
received a cash payment of $10,000 and 10,500 shares of stock.

PHILIP GURIAN AND BARRY ALTER: OUR REVERSE TAKEOVER.

After reading news reports that connected our reverse takeover of HiEnergy
Microdevices with known stock manipulators, our Board of Directors directed our
then President to hire a team of independent investigators to investigate
whether we or any of our officers and directors had engaged in any wrongdoing.
The core team of independent investigators consisted of two former U.S. federal
prosecutors, a former Assistant U.S. Attorney in the civil division who has been


                                      -24-
<PAGE>

in private practice since 1981 with experience in securities litigation and
regulatory and investigative proceedings, and a former supervisory agent from
the Federal Bureau of Investigation. In their review, the independent
investigators obtained evidence that some of our stockholders who purchased
significant amounts of HiEnergy shares prior to the reverse takeover knew, or
had business dealings with, Phil Gurian, a person who we later learned had
previously been involved in stock manipulation, and that one of these
stockholders was a company reportedly owned by Mr. Gurian's mother, which
disposed of its shares in April 2002 at a profit believed to be between $500,000
and $600,000. Mr. Barry Alter, a person who later served as one of our directors
and, for a short time, as our interim President, was found to have been aware of
these purchases of HiEnergy shares. The independent investigators believe the
evidence is inconclusive whether Phil Gurian had control over these HiEnergy
shares and, if so, whether our former president and director had any knowledge
of that control.

On June 24, 2004, we received a letter from the Central Regional Office of the
SEC, in Denver, Colorado, indicating its intention to recommend that we be
charged with violations of several sections of the Securities Exchange Act, and
the rules promulgated under that act, involving the making of false and
misleading statements in our public documents. The false and misleading
statements which the SEC believes were made seem to focus primarily on, among
other things, the undisclosed ownership of our securities by, and actions with
respect to our stock taken by, Philip Gurian, Barry Alter and certain of their
affiliates who controlled SLW Enterprises, Inc. at the time of our reverse
takeover transaction; the undisclosed identity of, and the origin of funds used
to purchase our stock by, certain of our stockholders; the nature of, and
reasons for, a "dividend" provided to our stockholders; and the terms of other
offerings occurring at the same time as one of our private placements of stock.
In addition, the antifraud violations would be based upon private transactions
made by Mr. Alter (formerly a director and executive officer of HiEnergy
Technologies, Inc.) with respect to sales of our stock made by him without
disclosing material facts about us, or our contemporaneous offering of
securities at different prices, to his purchasers. We are currently working with
special securities litigation counsel to assess our legal position and determine
how best to respond to this correspondence from the SEC.

BARRY ALTER

On May 27, 2003, Mr. Alter brought a lawsuit against us in the New Castle County
Court of Chancery in Delaware to recover the advancement of expenses in the
amount of $20,000 he allegedly incurred and future expenses he would incur in
response to an SEC investigation which mirrored our investigation by the SEC,
and for which Mr. Alter obtained separate legal counsel to represent him. That
action was identified as Civil Action No. 20320NC. On June 17, 2003, Mr. Alter
notified us that this action had been voluntarily dismissed without prejudice.
However, to the date of this Report there has been no settlement of our dispute
with Mr. Alter, and there can be no assurance that the claims he asserted
against us will not be resuscitated at some time in the future.

YEFFET SECURITY CONSULTANTS, INC.

HiEnergy is currently arbitrating a dispute with a former consultant, Yeffet
Security Consultants, Inc. ("YSCI"). We entered into a consulting agreement with
YSCI in July 2002. Under the terms of this agreement, YSCI was to provide
consulting services to us to further our marketing and business objectives. On
October 29, 2003, we notified Yeffet Security Consultants that we were
terminating its contract on the grounds of inadequate performance. YSCI alleged
that we breached the consulting agreement and is seeking to recover $449,540.91.
We deny this allegation and intend to defend it vigorously in arbitration. Our
arbitration hearing in this matter has been set to begin on September 28, 2004,
in New Jersey.

From time to time, we may be subject to other routine litigation incidental to
the ordinary course of business, for actual or perceived violations of our
agreements, or for other civil matters.


                                      -25-
<PAGE>

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

As described earlier in this report under the heading Recent Events - SEC
Investigation, we have received two Subpoenas for information from the
Securities and Exchange Commission ("SEC"). One, dated April 12, 2004, required
us to supply them with documents pertaining to a presentation which Dr. Bogdan
Maglich, our Chief Executive Officer, Chief Scientific Officer, Treasurer,
President and Chairman, gave at the Investment Opportunities in Homeland
Security and Defense Conference in Washington, D.C. in March 2004, regarding
HiEnergy's key markets, business strategy and financial projections, and which
included information that was not disclosed in a concurrent registration
statement we filed with the SEC on Form SB-2. A subsequent letter, dated May 24,
2004, requested documents substantiating statements we had previously released
in a press release regarding our discussions with a consortium calling itself
the Dallas-Fort Worth Homeland Security Alliance. We voluntarily responded to
both requests for documents, as well as to a second Subpoena, dated June 30,
2004 received from the SEC which pertained to all documents and information we
have with respect to the restatement of our 2002 and 2003 financial statements,
which we had announced on June 9, 2004. Our auditors, Singer, Lewak, Greenbaum &
Goldstein, LLP also received a similar Subpoena from the SEC. As of the date of
this Report, these Subpoenas had both been responded to, and we have received no
further word from the SEC on the progress of this aspect of its investigation.

On June 24, 2004, despite the responses which we provided to the SEC, we
received a further letter from the Central Regional Office of the SEC, in
Denver, Colorado, indicating its intention to recommend that the Commission
charge us with violations of several sections of the Securities Exchange Act,
and the rules promulgated under that act, involving the making of false and
misleading statements in our public documents. The false and misleading
statements which the SEC believes were made seem to focus primarily on, among
other things, the undisclosed ownership of our securities by, and actions with
respect to our stock taken by, Barry Alter, Philip Gurian and other of their
affiliates who controlled SLW Inc. at and prior to the time of our
reverse-takeover; the undisclosed identity of, and the origin of funds used to
purchase our stock by, certain of our stockholders; the nature of, and reasons
for, a "dividend" provided to our stockholders; and the terms of other offerings
occurring at the same time as one of our private placements of stock. In
addition, the antifraud violations appear to be based upon private transactions
made by Mr. Alter (formerly a director and executive officer of HiEnergy
Technologies, Inc.) with respect to sales of our stock made by him without
disclosing material facts about us, or our contemporaneous offering of
securities at different prices, to his purchasers. We are currently working with
special securities litigation counsel to assess our legal position and determine
how best to respond to this most recent correspondence from the SEC.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the stockholders of the Registrant during the
fourth quarter of the fiscal year ended April 30, 2003.


                                      -26-
<PAGE>

RISK FACTORS

We are a development stage company, and an investment, or maintaining an
ownership position, in our common stock is inherently risky. Some of these risks
pertain to our business in general, and others are risks which would only affect
our common stock. The price of our common stock could decline and/or remain
adversely affected due to any of these risks, and investors could lose all or
part of an investment in our company as a result of any of these risks coming to
pass. Readers of this Report should, in addition to considering these risks
carefully, refer to the other information contained in this Report, including
disclosures in our financial statements and all related notes, before making any
determination with respect to our stock. If any of the events described below
were to occur, our business, prospects, financial condition, or results of
operations or cash flow could be materially adversely affected. When we say that
something could or will have a material adverse effect on it, we mean that it
could or will have one or more of these effects. We also refer readers to the
information at the front of this Report, discussing the impact of
Forward-Looking Statements on the descriptions contained in this Report and
included in the Risk Factors discussed below.

RISKS RELATED TO OUR BUSINESS

GENERAL BUSINESS RISKS

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED STOCKHOLDERS' DEFICIT OF
$21,815,596 AS OF APRIL 30, 2004, AND WE MAY NEVER ACHIEVE PROFITABILITY.

We have not generated any revenue from operations during the past two fiscal
years, and we have incurred net losses available to common stockholders every
year since our inception, including $8,183,346 in 2004 and $6,771,471 in 2003.
We expect that our operating expenses will increase in the near term, due in
part to investments that we intend to make in connection with our plans to
commercialize, manufacture and market our initial prototype device: the CarBomb
Finder. To achieve profitability, we will need to generate significant revenue,
while achieving reasonable costs and expense levels. We may not be able to
generate enough revenue to achieve profitability. If we cannot achieve or
sustain profitability, we may not be able to fund our expected cash needs or
continue our operations.

WE WILL NEED ADDITIONAL CAPITAL TO MEET OUR OPERATING NEEDS, AND ADDITIONAL
CAPITAL MAY NOT BE AVAILABLE ON FAVORABLE TERMS OR AT ALL.

For the last two fiscal years, we have experienced average monthly operating
expenses of approximately $270,000, and no revenues from operations to offset
that amount. As such, we must continually raise capital from the sale of equity
or debt to private investors, or from government grants or development
contracts, in order to fund our operations at current levels or at all. Our
ability to raise additional funds in the public and private markets will be
adversely affected if the results of our business operation are not favorable,
or if the commercialization of the CarBomb Finder is not well-received or fails
altogether. Although we intend to seek additional funding through corporate
collaborations or from loans or investments from new or existing stockholders,
additional capital may not be available to us and, even if available, it may not
be on terms which our Board of Directors would be willing to accept. If we
cannot obtain the capital we need to fund our operations on terms which we can
accept, we may be required to curtail our operations significantly, or cease our
operations altogether, which would have a material adverse effect on our
business, our operations and our financial condition.


                                      -27-
<PAGE>

AS A DEVELOPMENT STAGE COMPANY WITH AN UNPROVEN BUSINESS STRATEGY, WE MAY NOT BE
ABLE TO ACHIEVE POSITIVE CASH FLOWS AND OUR LIMITED HISTORY OF OPERATIONS MAKES
EVALUATION OF OUR BUSINESS AND PROSPECTS DIFFICULT.

While we have developed a prototype of our CarBomb Finder, and are preparing to
introduce our first commercial products, which include the CarBomb Finder 3C3
and the CarBomb Finder 3C4 models, we have made no sales of our initial product
other than one order placed by our exclusive distributor in the Middle East,
EEMCO, which is owned by one of our Directors, and the device will be priced
effectively at our cost to manufacture the item with no allocable profit to us.
Because of that situation, and that the markets of the CarBomb Finder remain
largely untested and undefined in general, we are still classified as a
development stage company with a limited operating history. Since April 25,
2002, we have focused our resources on the development of products using our
proprietary stoichiometric technology. We believe that we are the only company
working on a commercial product using stoichiometric technology, and so there is
no proven market for our products once development is complete. To date, we have
no commercialization experience with our technology, and it is difficult to
evaluate our prospects for sustained growth and profitability. Our future
success is more uncertain than if we had a more established and proven history
of operations and greater experience in executing similar business strategies.
Furthermore, it is expected that our current business and marketing approach
will be modified from time to time, as we continue to assess the markets and
applications for our technology as well as evaluate prospective customer
interest. No assurance can be made that the current strategies or any future
changes in our business model, and the marketing of products, will be met with
success. For the last two fiscal years we have not generated any significant
revenues and, as a result, we have limited resources and our potential ability
to generate and maintain income also remains unproven.

THE COMMERCIAL VIABILITY OF THE CARBOMB FINDER IS UNPROVEN, AND MAY NEVER BE
REALIZED.

To the best of our knowledge, as of the date of this Report, no customer,
industry partner or governmental entity has used a CarBomb Finder device to
detect explosives, other than in demonstrations. We have not had independent
testing of the CarBomb Finder device to rate or certify its functionality in
explosive detection, nor have we commissioned an independent market or research
study to determine its market potential. Consequently, the commercial viability
of the CarBomb Finder is unproven at this time. We also are unable at this time
to qualify the amount and frequency of maintenance to be required by the CarBomb
Finder, as we have no reference data regarding real world use of the devices and
we have limited experience in causing, or simulating, extensive usage. A
significant increase in the amount of maintenance required to keep the devices
operating may result in unforeseen problems or customer dissatisfaction. If this
were to occur, prospective customers could very well perceive that there are
reliability problems with our products, which could reduce the demand for our
products. If commercial opportunities are not realized from the use of the
CarBomb Finder device and we have difficulty attracting and maintaining
customers, our ability to generate revenues will be adversely affected. We also
have not had the ability to undertake extensive testing in real-world
situations, and cannot with certainty explain how the device would be impacted
by severe weather, burning or excessive heat, a wartime environment, various
topographies or other circumstances which maybe of particular importance to
certain prospective customers or in certain regions. Without internal data in
respect of these kinds of testing, customers may be reluctant to spend the funds
necessary to purchase our CarBomb Finder, or any of our other prototype
developments, and the sales cycle may be longer than we have anticipated or may
not materialize at all, either of which events would have a materially adverse
effect on our business, operations and financial condition.

WE HAVE LIMITED RESOURCES TO DEVOTE TO PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. IF THE COMMERCIALIZATION OF THE CARBOMB FINDER PROVES
UNSUCCESSFUL, ANY REALLOCATION OF RESOURCES COULD SUBSTANTIALLY HARM OUR
BUSINESS.

Our business strategy is to develop, manufacture and market products
incorporating our stoichiometric technology to address initially the security
and counter-terrorism market and the chemical and petrochemical industry control


                                      -28-
<PAGE>

market. Our current and primary objective is to commercialize our proprietary
CarBomb Finder devices. We believe that in the near term our revenue growth and
profitability, if any, will substantially depend upon several factors, including
the following:

      o     our ability to raise additional capital to manufacture and market
            our current prototype device, the CarBomb Finder;

      o     our ability to raise additional capital for general and
            administrative costs relating to our operations;

      o     our ability to manufacture the CarBomb Finder in commercial
            quantities, at a reasonable profit margin;

      o     receipt of any requisite approvals from the Nuclear Regulatory
            Commission (NRC), the Department of State, the Department of
            Commerce, the Department of Defense, and similar state or foreign
            authorities, as applicable;

      o     market acceptance of the CarBomb Finder and after-market
            satisfaction related to performance and maintenance issues;

      o     legislative or other government actions driven, in part, by the
            public's perception of the threats facing the population and
            unrelated political circumstances, which may leading to significant
            fluctuations in demand for our products and services;

      o     the availability and cost of key components for the CarBomb Finder;

      o     the timing of completion of acceptance testing for the CarBomb
            Finder; and

      o     changes in pricing policies by us, our competitors or our suppliers,
            including possible decreases in average selling prices of the
            CarBomb Finder, caused by promotional offerings, customer volume
            orders, or competitive pricing pressures.

We have introduced our prototype device, the CarBomb Finder, only recently, and
all other applications of our technology are still in the early stages of
development. These include, at present, our BombSquad Detector, our Unexploded
Ordnance Sensor, our Anti-tank Landmine Detector and our Refractorymeter. For
the fiscal year ended April 30, 2003, we spent $695,000, or 12% of total
operating expenses, on research and development, and for the fiscal year ended
April 30, 2004, we spent $804,000, or 14% of total operating expenses, on
research and development. For the fiscal year 2003, we spent $4,945,000, or 88%
of total operating expenses, on general and administrative expenses and for the
fiscal year 2004, we spent $4,796,000, or 86% of total operating expenses, on
general and administrative expenses. We anticipate an increase in general and
administrative expenses due to additional operating expenses demanded for
commercialization of the CarBomb Finder. We anticipate research and development
costs to stay approximately at the same level, to the extent that independent
testing of the CarBomb Finder device will be required in order to obtain
approvals from regulatory authorities or gain better market acceptance by
industry partners or governmental officials.

If we fail to commercialize the CarBomb Finder, we will have no other products
to sell until we complete their development and commercialization, which will
require additional capital and time. As a result, our ability to generate
revenues will decrease, which could substantially harm our business. Because we
have limited resources to devote to product development and commercialization,
any reallocation of resources to commercialization of the CarBomb Finder device
that proves unsuccessful may delay or jeopardize the development of other
products. The development of new products may require time and financial
resources much greater than what we currently anticipate and, despite
significant investments in research and development, may not yield commercially
successful products. The development of our products for the detection of
explosives, illicit drugs, biological agents and other contraband is highly
complex.


                                      -29-
<PAGE>

DUE TO OUR LOSSES AND ACCUMULATED DEFICIT, OUR AUDITORS HAVE RAISED CONCERNS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our independent certified public accountants qualified their opinion contained
in our consolidated financial statements as of and for the years ended April 30,
2004, 2003 and 2002 to include an explanatory paragraph related to our ability
to continue as a going concern, stating that "during the year ended April 30,
2004, we incurred a net loss available to common stockholders of $8,183,346, and
had negative cash flows from operations of $2,846,157. In addition, we had an
accumulated deficit of $21,815,596 and was in the development stage as of April
30, 2004. These factors, among others, as discussed in "Note 3- Going Concern"
to our consolidated financial statements, raise substantial doubt about our
ability to continue as a going concern." The auditors recognize that the cash
flow uncertainty makes their basic assumptions about value uncertain. When it
seems uncertain whether an asset will be used in a "going concern" or sold at
auction, the auditors assume that the business is a "going concern" for purposes
of all their work, and then they disclose that there is material uncertainty
about that assumption. It is definitely a consequence of our negative cash flows
from operations that we continually need additional cash. At any time, a serious
deficiency in cash flows could occur and it is not always possible or convenient
to raise additional capital. A problem in raising capital could result in
temporary or permanent insolvency and consequently potential lawsuits by unpaid
creditors and perhaps closure of the business. All of these things are
possibilities. It is certain, in any case, that analysts and investors view
unfavorably any report of independent auditors mentioning substantial doubt
about a company's ability to continue as a going concern. Consequently, we urge
potential investors to review the report of our independent certified public
accountants and our consolidated financial statements before making a decision
to invest in us, and not to invest in our common stock unless they can afford
the potential loss of their entire investment.

COMPANIES WHICH POSSESS MUCH GREATER FINANCIAL AND OTHER RESOURCES, AND MORE
MANUFACTURING, MARKETING, SALES AND DISTRIBUTION EXPERIENCE, THAN WE HAVE COULD
CREATE A TECHNOLOGY WHICH COMPETES EFFECTIVELY WITH OUR STOICHIOMETRIC
TECHNOLOGY, AND WE MAY BE UNABLE TO MAINTAIN OUR EXISTING, OR CAPTURE
ADDITIONAL, MARKET SHARE IN OUR CHOSEN MARKETS.

Based upon our review of the industry, we believe that no other company today
markets a technology which is similar to, or competitive with, our
stoichiometric technology used in our CarBomb Finder and the other prototype
devices referenced in this Report. The market for explosives and contraband
detection equipment generally is dominated by a few very large corporations (or
their subsidiaries), which have greater access to capital, manpower, technical
expertise, distribution channels and other elements which would give them a huge
competitive advantage over us were they to begin to compete in our market. Our
ability to market our technology as "unique" is dependent upon the fact that
these larger, better-established companies do not have the ability to determine
the exact identity, amount and weight of each element their equipment detects.
If one of these competitors was to throw sufficient capital and other resources
at developing a competitive technology, notwithstanding our efforts to secure
protection of our core intellectual property rights, they might be able to do
so, in which case it would be very difficult for us to compete and we might not
be able to maintain our existing market share as of that point, or capture any
additional market share, with our products. Furthermore, if one of these
competitors were to develop a technology which was viewed as an improvement over
our existing technology, our ability to maintain any segment of the
neutron-based detection market might disappear altogether, which would have a
materially adverse effect upon our business, operations and financial condition.

It is possible that competitors may implement new technologies before we are
able to, allowing them to provide more effective products at more competitive
prices. Any number of future technological developments could:

      o     adversely impact our competitive position;

      o     require write-downs of obsolete technology;


                                      -30-
<PAGE>

      o     require us to discontinue production of obsolete products before we
            can recover any or all of our related research, development and
            commercialization expenses; or

      o     require significant capital expenditures beyond those currently
            contemplated.

We cannot assure investors that we will be able to achieve the technological
advances to remain competitive and profitable, that new products and services
will be developed and manufactured on schedule or on a cost-effective basis,
that anticipated markets will exist or develop for new products or services, or
that any marketed product will not become technologically obsolete.

WE DEPEND ON KEY MANAGEMENT AND PERSONNEL AND MAY NOT BE ABLE TO HIRE OR RETAIN
ADDITIONAL KEY MANAGERS, EMPLOYEES AND TECHNICAL AND SCIENTIFIC PERSONNEL WHEN
NEEDED.

Our future success will be due, in part, to the continued services of our senior
management team. Losing the services of one or more members of our management
and scientific teams could negatively affect our business and development
strategies. During the fiscal year, we lost several members of its executive and
scientific team and we could be seriously harmed by the loss of any of our
executive officers, including Dr. Maglich. In order to meet our objectives, we
will need to recruit additional members for our senior management team. We also
anticipate hiring additional skilled personnel, such as advanced engineering
professionals, as part of a product development team that could be self
sufficient and operate with minimal supervision. As a result, our future growth
and success will depend in large part upon our need and ability to attract and
retain qualified personnel.

WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM AND
THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE PUBLIC
MAY HAVE ON OUR FINANCIAL CONDITION AND ABILITY TO CONTINUE TO IMPLEMENT THE
GOVERNMENT SALES PORTION OF OUR BUSINESS PLAN.

The terrorist attacks in the U.S. and other countries have brought devastation
to many people, shaken consumer confidence and disrupted commerce throughout the
world. The continuing threat of terrorism in the U.S. and other countries and
heightened security measures, as well as current and any future military and
civil action in response to such threat, may cause significant disruption to the
global economy, including widespread recession. We are unable to predict whether
the continuing threat of terrorism or the responses to such threat will
interfere with our efforts to raise additional capital to fund our operations
through the development stage. If we are unable to raise a sufficient amount of
capital due to economic conditions, we will not be able to finalize development
of our detection systems under government contracts and to bring them to
military, civil or commercial markets as planned.

OUR BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS THAT COULD MATERIALLY HARM
OUR BUSINESS.

We are pursuing various international business opportunities, including
opportunities in Turkey, Spain and the Middle East. We anticipate a number of
additional risks associated with our international activities, which could
adversely affect our business including, among others, the following:

      o     changes in domestic and foreign regulatory requirements;

      o     political instability in the countries where we sell products;

      o     differences in technology standards;

      o     possible foreign currency controls;

      o     longer payment cycles and inadequate collection system;


                                      -31-
<PAGE>

      o     fluctuations in currency exchange rates;

      o     inconsistent intellectual property protections in foreign
            jurisdictions;

      o     export restrictions, tariffs, embargoes or other barriers;

      o     prejudicial employment laws and business practices;

      o     difficulties in obtaining and managing distributors; and

      o     potentially negative tax consequences.


MANUFACTURING RISKS

WE HAVE NO MANUFACTURING EXPERIENCE AND OUR ABILITY TO BE ABLE SUCCESSFULLY TO
EXECUTE A MANUFACTURING PLAN IS UNTESTED.

To be successful, we must be able to manufacture, or contract for the
manufacture of, the CarBomb Finder in a scalable and cost effective manner,
producing sufficient quantities on a timely basis, under strict quality
guidelines and in compliance with regulatory requirements. To date, we have not
manufactured any CarBomb Finders for commercial sale, nor have we contracted
with any third parties to manufacture the product for us. In order to move
toward commercial production, we recently retained Lockwood-Greene Engineering
and Construction to develop a detailed conceptual plan for a manufacturing
facility. We anticipate that we will need to make a substantial capital
investment and recruit qualified personnel in order to build, equip and/or
operate our proposed manufacturing facility. Although we have not yet determined
the timing as to the construction or build-out of a manufacturing facility, we
intend to begin the initial phases of production of the first 10 CarBomb Finders
at our facilities in Irvine and to continue this effort for the remainder of
2004, or until a manufacturing facility is constructed and/or equipped, or an
outsourced manufacturing contract is secured.

Our manufacturing strategy, as contemplated, depends on the following:

      o     the ability to raise additional capital for the costs of
            constructing and equipping a facility and for the manufacturing of
            the CarBomb Finder in quantities necessary to meet anticipated
            demand if it is approved by regulatory authorities;

      o     the ability to manufacture products that have minimal defects;

      o     the ability to obtain product liability insurance;

      o     the ability to obtain approvals from any state or federal regulatory
            agencies which may be or become applicable;

      o     unexpected changes in regulatory requirements;

      o     inadequate protection of intellectual property; and

      o     risks of fire, earthquake, or other man-made or natural acts
            affecting manufacturing facilities.

Any of these factors, and the failure to execute them, could delay the
manufacturing and commercialization of the CarBomb Finder, lead to higher costs,
irreparably damage our reputation with future customers due to factors such as
poor quality goods or delays in order fulfillment, and result in our being
unable to effectively sell the CarBomb Finder and substantially harm our
business.


                                      -32-
<PAGE>

BEFORE WE CAN AFFORD TO HAVE OUR OWN MANUFACTURING FACILITY, OR ENGAGE A
THIRD-PARTY TO MANUFACTURE UNITS FOR US ON AN OEM BASIS, WE MUST MANUFACTURE THE
INITIAL UNITS WE SELL IN OUR LABORATORY FACILITY WITH LIMITED STAFF ON A ONE-OFF
BASIS, WHICH RENDERS US UNABLE TO CREATE ANY MANUFACTURING EFFICIENCIES OR TO
REALIZE A PROFIT FROM THE RESULTING SALES. IF WE ARE NOT ABLE SUCCESSFULLY TO
TRANSITION OUR MANUFACTURING TO FULL-SCALE COMMERCIAL PRODUCTION, IT WILL HAVE A
MATERIALLY ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.

We anticipate that at least the first 10 units of our CarBomb Finders which we
may be able to sell will have to be manufactured in-house, one at a time, with
limited staff and resources and without the ability to take advantage of the
economic efficiencies which we would expect if our product is successfully
launched and can be manufactured at higher numbers in full production. We may
never reach that level of production and, if we don't, then our manufacturing
efforts will not produce any profit for us or our stockholders, and we may
potentially have to sell units at a loss (if our cost of goods, including
manufacturing of each unit, exceeds the purchase price we are able to charge our
customers for these initial units). If we cannot turn our commercial
manufacturing operation into a profit center for our company, it will have a
materially adverse impact on our business and operations, and our overall
financial condition.

WE RELY SUBSTANTIALLY ON THIRD-PARTY SUPPLIERS AND DEPEND UPON A LIMITED NUMBER
OF SUPPLIERS OF ONE OF OUR COMPONENTS FOR OUR CARBOMB FINDER (THE GAMMA RAY
DETECTOR). THE INABILITY TO OBTAIN PARTS FROM THESE SUPPLIERS ON A TIMELY BASIS
AND THE LOSS OF PRODUCT OR DELAYS IN PRODUCT AVAILABILITY FROM ONE OR MORE
THIRD-PARTY SUPPLIERS COULD SUBSTANTIALLY HARM OUR BUSINESS.

We currently rely on third-party suppliers for various parts of the CarBomb
Finder device, including neutron generators with custom modifications and
certain sub-assemblies. We have placed orders for these key components for the
first 10 CarBomb Finders from a small number of sources. For example, we obtain
the standard sealed tube neutron generators we use from a single source,
EADS-Sodern, on a purchase order basis, and the sub-assemblies from a single
source, PMB 322, on a purchase order basis. We believe that alternative sources
for these components in the event of a delay or interruption in supply would be
readily available on a timely basis, however, any inability by us to find
alternative sources of key components, alternative third party manufacturers or
sub-assemblers, or sufficient quantities of these key components, would impair
our ability to manufacture and sell the CarBomb Finder and result in delays or
interruptions in shipments, which could cause current or potential customers to
seek out competitors. In addition, if we are unable to pay for these components
on a timely basis, or cannot arrange sufficient available credit, our
third-party suppliers may delay or cease the supply, which would also impair our
ability to manufacture and sell the CarBomb Finder. We currently do not have
long-term agreements with any of these suppliers. Furthermore, in view of the
high cost of many key components, we would strive to avoid excess supplies. If
our suppliers experience financial, operational, production or quality assurance
difficulties, or our sole source suppliers are acquired or otherwise influenced
by our competitors, the supply of components to us would be reduced or
interrupted. In the event that a supplier ceases operations, discontinues a
product or withholds or interrupts supply for any reason, we may be unable to
acquire the product from alternative sources within a reasonable period of time,
which would impair our ability to manufacture and sell the CarBomb Finder and
cause substantial harm to our business.

INTERRUPTIONS, DELAYS OR COST INCREASES AFFECTING OUR MATERIALS, PARTS,
EQUIPMENT OR SUPPLIERS MAY ADVERSELY AFFECT OUR MANUFACTURING OPERATIONS.

Our manufacturing operations depend upon obtaining adequate supplies of
materials, parts and equipment on a timely basis from third parties. In
particular, there are few manufacturers worldwide of particle accelerators and
gamma ray detectors; sophisticated and expensive equipment which are the key
components of our products. Our reliance on third party suppliers limits our
control over product delivery schedules or product quality. Our results of
operations could be adversely affected if we are unable to obtain adequate
supplies of materials, parts and equipment of adequate quality in a timely
manner or if the costs of materials, parts or equipment increase significantly.
From time to time, suppliers may extend lead times, limit supplies or increase


                                      -33-
<PAGE>

prices due to capacity constraints or other factors. In the event that any of
our suppliers were to experience financial, operational, production or quality
assurance difficulties resulting in a reduction or interruption in supply to us,
our operating results could suffer until alternate suppliers, if any, were to
become available.

OUR COMPETITORS COULD PURCHASE THE SAME COMPONENTS FROM OUR SUPPLIERS AND
ATTEMPT TO COPY OUR PRODUCTS TO THE EXTENT NOT COVERED BY PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS.

We, like most companies, purchase components for our products from third party
suppliers. We have patent applications pending that are directed to various
combinations of some of these components, but do not cover any of these
components separately. Competitors could purchase the same components from the
same suppliers and assemble similar products to the extent not prevented by our
patent or other intellectual property rights. We cannot assure you that our
competitors will not independently develop comparable or superior technologies
using similar or identical components or that our competitors will not obtain
unauthorized access to our proprietary technology and utilize it where we have
no patents or where our patents do not cover the competitor's technology. Areas
of the world where we do not have patent applications include, for instance, the
Middle East, Russia, Africa, and South America. We believe that we have applied
for patents in countries where we expect the largest markets for our products
and we intend to expand our patent portfolio. We have applied for patents in the
United States, the European Union, Canada, and Japan and as improvements are
made we intend to file also elsewhere for any potential patent protection. See,
also, the discussion under the heading "Intellectual Property Risks".

WE MAY BE UNABLE TO SECURE ANTICIPATED GOVERNMENTAL FUNDING FOR FUTURE PRODUCTS;
WE ARE CURRENTLY UNABLE TO OBTAIN AN SBA CERTIFICATE OF COMPETENCY.

We plan to apply for several government contracts for the development of future
projects in the future; however, such contracts may not be obtained. We have
successfully obtained a total of seven government development contracts to date
from the U.S. Department of Defense, U.S. Department of Energy and U.S. Customs
Service to finance our research and development. These contracts may be denied
for reasons that include funding of the program, our financial position and
abilities, or for other reasons. We cannot assure investors that additional
government research and development contracts or funding will become available
in the future or that we will receive any additional funds due under previously
secured contracts. If the government discontinues its sponsorship for our
technology, we would have to raise or divert additional capital for product
development, which could adversely affect our business. Furthermore, we are
aware that competitors and potential competitors in the explosive detection
market have also received development grants. Any future grants to competitors
or potential competitors may improve their ability to develop and market
advanced detection products that could compete with our technologies.

In the past, we failed to receive a research grant from the U.S. Navy because of
our inability to obtain a Certificate of Competency from the U.S. Small Business
Administration certifying our financial condition as being adequate to
responsibly complete the grant work if it were awarded to us. Due to our
financial condition, we were not awarded the requisite Certificate of
Competency, nor was the Small Business Administration's determination reversed
in June, 2003 when we requested reconsideration of this decision. Management
believes that, in our present condition, the requirement to obtain Certificates
of Competency will continue to be a bar to our ability to win certain government
grants in the future, and is seeking the additional capital necessary to meet
the minimum competency requirements for the projects in which it desires to
participate. It is impossible to state how much money is necessary to obtain a
Certificate of Competency, because it varies from grant to grant and we have
never received a specific dollar amount that would need to be obtained in order
to qualify. However, management intends to raise two to three million dollars in
additional equity capitalization, following the filing of this Report, and
believes that with that additional capitalization it should be able to meet its
operating plans, including seeking additional research and development grants
requiring a Certificate of Competency. There can be no assurance that we will
ever obtain the additional equity capitalization that we need to obtain
Certificates of Competency in respect of any given grant opportunity or, even if
we do, that we will be awarded any research and development grants.


                                      -34-
<PAGE>

GOVERNMENTAL AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH CREATE
ADDITIONAL RISKS.

In contracting with governmental agencies, we are subject to public agency
contract requirements that vary from jurisdiction to jurisdiction. Any potential
sales to public agencies will depend, in part, on our ability to satisfy their
contract requirements, which may be difficult or impossible in certain cases.
Moreover, government contracts typically contain unilateral termination
provisions unfavorable to us and are subject to discretionary auditing and
modification by the government, which subject us to additional risks. The U.S.
government can terminate any of its contracts with us either for its convenience
or if we default by failing to perform in accordance with the contract schedule
and terms. Termination for convenience provisions generally enable us to recover
only our costs incurred or committed, and settlement expenses and profit on the
work completed prior to termination. Termination for default provisions do not
permit these recoveries and make us liable for excess costs incurred by the U.S.
government in procuring undelivered items from another source. Any potential
contracts with foreign governmental agencies or bodies may contain similar
provisions. Consequently, our backlog on government contracts cannot be deemed a
true indicator of our future revenues. The government's termination of one or
more of the contracts for products under development would harm our business. In
addition, U.S. government contracts are conditioned upon the continuing
availability of Congressional appropriations which are readdressed on an annual
basis. Consequently, our contracts with certain government agencies generally
are only funded in part at the outset and commit additional monies only as
appropriations are made by Congress for future periods. The inability or failure
by the government in funding one or more of the contracts for our products under
development would harm our business.

In addition, contracts with governmental agencies are frequently awarded through
a formal bidding processes, which can be often protracted and contain
cancellation provisions in the event said public agency loses its funding. There
can be no assurance that we will be awarded any of the contracts for which our
products will be bid and even if we are awarded contracts, substantial delays or
cancellations of purchases could result from complaints filed by competing
bidders.

IF OUR LOSSES CONTINUE INTO THE FUTURE, OUR BUSINESS AND OUR STOCKHOLDERS WILL
BE ADVERSELY AFFECTED. THUS WE ARE REDUCING OUR DEPENDENCE ON GOVERNMENTAL
CUSTOMERS, WHICH CAN REQUIRE LONGER THAN AVERAGE LEAD TIMES BEFORE SALES ARE
MADE.

We have incurred net losses since our inception. For the fiscal year ended April
30, 2004, we reported a net loss available to common stockholders of
approximately $8,183,346, as compared to a net loss available to common
stockholders of approximately $6,771,471 for the fiscal year ended April 30,
2003. Our accumulated deficit through April 30, 2004 was approximately
$21,815,596. We expect that our losses will continue in fiscal year 2005 and
farther into the future. It appears that our financial requirements until we can
generate sufficient revenues from sales to cover our operating costs are between
$8,000,000 and $10,000,000. One of the reasons for the continuation of such
anticipated losses is that we are highly dependent on governmental customers,
which typically require long lead times before sales are made.

MARKETING RISKS

A FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH INDUSTRY PARTNERS MAY
HARM OUR BUSINESS.

We will depend on establishing and maintaining relationships with industry
partners. Our ability to produce and market the CarBomb Finder device is
dependent upon our ability to establish and maintain relationships with other
companies and individuals. We may not be able to enter into relationships with


                                      -35-
<PAGE>

these companies on commercially reasonable terms or at all. Even if we enter
into these relationships, not all such relationships may result in benefits for
our company.

WE HAVE GRANTED A THIRD PARTY SUBSTANTIAL MARKETING RIGHTS TO THE CARBOMB FINDER
DEVICE IN AN IMPORTANT MARKET. IF THE THIRD PARTY IS UNSUCCESSFUL IN MARKETING
THE CARBOMB FINDER, OUR MARKETING PLAN IN THE RELEVANT TERRITORY COULD BE
INTERRUPTED.

We have entered into an exclusive distribution agreement for the initial model
of our CarBomb Finder with an equipment marketing company, EEMCO, for our
marketing and sales efforts in 11 countries in the Middle East and North Africa.
EEMCO is owned by a director of our company, Harb Al-Zuhair. This agreement
covers one of our primary anticipated regional markets, and so our success in
penetrating this marketplace will depend, in large part, on EEMCO's ability to
make sales within its territory. Provided that it has met its minimum sales
requirement to maintain exclusivity for any country within its territory (which
is a minimum of four sales in each country within the territory by August 2005),
we will not be able to offer marketing rights to our prototype CarBomb Finder to
any other entity to make sales within the relevant territory. If EEMCO meets its
minimum sales requirement by August 2005, it will not be required to do anything
further to retain its exclusivity for that product. Although we have the right
to terminate the agreement upon 60 days notice for any reason, or immediately if
there is a material breach, there may be significant costs associated with
extricating ourselves from the agreement and market share could be compromised
if a smooth transition to another distributor is not made.

INTELLECTUAL PROPERTY RISKS

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND MAY INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

The protection of our intellectual property and the establishment of patents and
other proprietary rights is important to our success and our competitive
position. Accordingly, we devote substantial resources to the establishment and
protection of intellectual property through various methods such as patents and
patent applications, trademarks, copyrights, confidentiality and non-disclosure
agreements. We also rely on trade secrets, proprietary methodologies and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees. However, it is possible that
these agreements may be breached and that the available remedies for any breach
will not be sufficient to compensate us for damages incurred.

We currently have pending patent and provisional patent applications in the
United States and various foreign countries. There can be no assurance that our
patent applications will result in the issuance of any patents or that the
claims allowed under any patents held by us will be sufficiently broad to
protect our technology against competition from third parties with similar
technologies or products. Moreover, we cannot assure you that others will not
assert rights in, or ownership of, patents and other proprietary rights we may
establish or acquire or that we will be able to successfully resolve such
conflicts. In addition, we cannot assure investors that any patents issued to us
will not be challenged, invalidated or circumvented or that the rights granted
under these patents will provide a competitive advantage to us. Moreover, the
laws of some foreign countries do not protect intellectual property rights to
the same extent as the laws of the United States, and we could experience
various obstacles and high costs in protecting our intellectual property rights
in foreign countries. If we are unable to obtain or maintain these protections,
we may not be able to prevent third parties from using our intellectual
property.

INFORMATION RELATING TO ANY INVENTION THAT IS INVENTED UNDER A SMALL BUSINESS
INNOVATION RESEARCH CONTRACT MAY BECOME PUBLIC AT SOME FUTURE TIME.

A portion of our research and development costs relating to the development of
our advanced SuperSenzor technology for anti-tank landmine identification


                                      -36-
<PAGE>

purposes is being funded under a Small Business Innovation Research ("SBIR")
contract. This development work essentially involves the incorporation of
sophisticated directional features into our core MiniSenzor technology. To date,
none of the funding we have received from SBIR grants has been utilized for the
development of technology which was incorporated in any patent we have filed
for, or otherwise comprises a portion of our proprietary rights in our
technology. However, in the future it is conceivable that we could undertake a
material technology development utilizing funding from an SBIR grant, in whole
or in part. If that were to occur, there is a risk that the concerns addressed
below could become applicable.

If an invention is made under an SBIR contract, it must be reported to the
granting agency. The U.S. federal government has royalty-free rights when
purchasing the products from our federal government SBIR contracts. We
nevertheless own the data and title to the products resulting from those
contracts and are permitted to obtain patent protection. The U.S. federal
government does not contractually undertake to protect data or inventions from
public disclosure beyond four years after the term of an SBIR contract.
Therefore, our competitors possibly could gain access to certain information
relating to our SuperSenzor advancements or any other technologies we develop
under SBIR contracts. The U.S. government however, has no rights over our
patents because the inventions occurred when we had no SBIR contracts. Also, the
U.S. federal government might also create competition by utilizing its own right
and license to any technology developed under the SBIR contract if it is not
being developed by the inventor. The U.S. government in exercising these rights
to produce or have produced for the U.S. government competing products using the
technology developed under the SBIR could harm us and limit the marketability of
our products. Furthermore, if we ever participate in any research and
development projects jointly with one of the U.S. or foreign military branches,
where the relevant government is deemed to be the owner of the resulting
technology, we may be foreclosed from using, or protecting as our own,
technology which we helped to develop and which might otherwise be protectible
if we had developed it independently. Accordingly, technology which we develop
could end up becoming used by our competitors and against us. If either of these
events were to occur, it might lessen the value of that technology, or of our
company, to prospective future investors or candidates for our acquisition,
which could have a material effect upon the market for our shares.

LITIGATION AS TO ENFORCEMENT OR DEFENSE AGAINST CLAIMS OF INTELLECTUAL PROPERTY
INFRINGEMENT COULD BE EXPENSIVE, AND ANY JUDGMENT AGAINST US MAY PREVENT US FROM
SELLING OUR PRODUCTS.

We may be called to enforce our protections against intellectual property and
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Any subsequent litigation, regardless of the outcome, could be
costly and divert the efforts of key management and technical and scientific
personnel. Both domestic and international competitors may have pre-existing
claims and patents against intellectual property that may prevent, limit or
interfere with our ability to manufacture and sell our products. As of date, we
have not conducted an independent review of patents issued to third parties.
Because of the perceived market opportunity we face, companies possessing
technology rights that they believe we may be infringing upon will be motivated
to assert claims of infringement against us. Any adverse outcome in the defense
of an infringement matter could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties, or prohibit
us from selling our products.

REGULATORY AND LEGAL RISKS

THE CARBOMB FINDER AND ANY FUTURE PRODUCTS IN DEVELOPMENT UTILIZING OUR
TECHNOLOGY WOULD BE SUBJECT TO RADIATION SAFETY REGULATIONS AND LICENSING
REQUIREMENTS. COMPLYING WITH THESE REQUIREMENTS MAY RESULT IN DELAYS IN THE
DEPLOYMENT AND CUSTOMER UTILIZATION OF THE CARBOMB FINDER AND FUTURE PRODUCTS.

Our CarBomb Finder and any future products in development utilize a process that
results in neutron radiation. As a potential manufacturer of a fast neutron
emitting device, we and our customers must comply with applicable governmental
laws and regulations and licensing requirements, which may include those


                                      -37-
<PAGE>

promulgated by the U.S. Nuclear Regulatory Commission ("NRC") and the U.S. Food
and Drug Administration ("FDA"), governing the design and operation of our
products, including appropriate radiation shielding. Although fast neutron
radiation demonstrates some properties different than other forms of radiation,
we do not believe that fast neutron radiation presents any difficulties or
creates any risks beyond those ordinarily encountered in connection with the
fabrication and operation of other forms of radiation emitting devices commonly
used in the general population, such as x-ray machines. Further, we believe that
the design and incorporation of appropriate shielding in our products and the
development of appropriate operating procedures in view of their intended use
are, as an engineering and public safety matter, relatively straight-forward
matters. Nevertheless, compliance with these rules and regulations and licensing
requirements entails additional costs, effort and time in bringing our products
to market.

THE MANUFACTURE AND SALE OF DEVICES WHICH EMIT RADIATION ARE SUBJECT TO THE
REGULATORY CONTROLS AND STANDARDS OF VARIOUS DOMESTIC AND FOREIGN JURISDICTIONS.
THESE REGULATIONS MAY BECOME MORE RESTRICTIVE AS POLICIES, GUIDELINES AND
STANDARDS CHANGE AND OUR ACTIVITIES AS TO CURRENT AND FUTURE PRODUCTS MAY BE
CURTAILED OR INTERRUPTED.

Currently, our prototype CarBomb Finder device and other devices incorporating
our stoichiometric technology for detection purposes utilize a sealed tube
neutron generator to create the stream of fast neutrons which is emitted from
the device. These generators are off-the-shelf neutron generators which do not
require licensing by the NRC or other regulatory body to manufacture. However,
if we were to customize our own proprietary neutron generator for use with our
products, such new generator would be subject to review and licensing by the
NRC, and potentially by any other jurisdiction in which we may manufacture or
sell our products in the future. Today, the end users of our devices may be
required to obtain NRC and other permits in order to operate them. There can be
no assurance that the need to obtain end-user permits, and/or to comply with any
future regulations which may be adopted by the NRC or other U.S. or foreign
regulatory bodies will not limit, or be a bar, to our potential customers
purchasing our products in the future. Furthermore, the imposition of stricter
permitting regulations on the manufacturing of devices that utilize the sealed
tube neutron generator, or the increase in regulatory requirements if we were to
develop our own customized neutron source, could be prohibitively expensive or
adversely affect our ability to manufacture our devices as currently
contemplated, which could have a materially adverse effect upon our future sales
and financial condition.

IF CURRENT EXPORT ADMINISTRATION ACT REGULATIONS WERE TO CHANGE, OR IF OUR
DEVICES BECOME PURCHASED IN COUNTRIES WHICH ARE VIEWED AS A THREAT TO REGIONAL
STABILITY, WE COULD BECOME SUBJECTED TO THE MORE STRINGENT RULES OF THE U.S.
DEPARTMENT OF STATE, AND CERTAIN CURRENTLY PERMISSIBLE SALES ACTIVITIES COULD BE
LIMITED OR PROHIBITED ALTOGETHER.

Although we have not submitted a formal commodity classification request to the
BIS, we believe that the CarBomb Finder would most likely be classified under
ECCN 2A983, and subject to export control regulations administered by the U.S.
Department of Commerce, Bureau of Industry and Security ("BIS"). Accordingly,
sales of our currently-anticipated products made to countries which are not
restricted pursuant to the BIS' listings for "Region Stability (RS-2)",
"Anti-Terrorism (AT-1)", and/or "Non-Proliferation (NP-1)", require no special
licensing. Sales to other countries will require licenses to be obtained for
export, but we expect that we would fall into the category of items receiving
"favorable consideration" due to the non-aggressive nature of our planned
products. However, future sales to countries of concern, future products we may
develop, or future changes in the existing federal regulations governing the
administration of export controls by the U.S. Department of Commerce, may
require us to obtain federal licensing, or become subject to more stringent
rules of the U.S. Department of State. There can be no guarantee that we will be
able to obtain such licenses at that time, or if we can that costs of doing so
will not be prohibitive or significantly our poll of available customers


                                      -38-
<PAGE>

IF FUTURE PRODUCTS, SUCH AS THE CARBOMB FINDER, FAIL TO DETECT OR CONFIRM
EXPLOSIVES, WE COULD BE EXPOSED TO PRODUCT LIABILITY AND RELATED CLAIMS AND MAY
FAIL TO ACHIEVE MARKET ACCEPTANCE.

Inherent in the manufacturing, sale and maintenance of explosive detection
products are potential product liability risks. If our products malfunction, it
is possible that explosive material could pass undetected through our products,
which could lead to product liability claims. There are also many other factors
beyond our control that could lead to liability claims, such as the reliability
and competence of the customer's operators and the training of the operators.
The cost of defending product liability claims brought against us could be
significant and any adverse determination may result in liabilities in excess of
insurance coverage. We do not currently maintain product liability insurance,
but we anticipate obtaining product liability insurance. We also intend to
address product liability issues by pursuing the designation and certification
of our products by the U.S. Department of Homeland Security (" DHS") as
Qualified Anti-Terrorism Technologies ("QATTs") and relying upon certain
protections provided for under The Support Anti-terrorism by Fostering Effective
Technologies Act of 2002, Public Law 107-296 (the "Safety Act"). We cannot be
certain that we will be able to attain on acceptable terms, if at all, insurance
coverage sufficient to contain liabilities in a meaningful way, or be able to
qualify our products and services as QATTs under the Safety Act. In addition,
the failure of any product to detect explosives, even if due to operator error
and not to the mechanical failure of a product, could result in public and
customer perception that our products are ineffective. In the event that we are
held liable for a claim against which we do not have insurance or for damages
exceeding our levels of insurance coverage, or which even if insured results in
significant adverse publicity against us or our products, we may be required to
make substantial payments and lose or fail to achieve market acceptance.

WE HAVE RECEIVED A WELLS NOTICE AND REQUESTS FOR INFORMATION FROM THE SEC. WE
COULD BE REQUIRED TO PAY CIVIL PENALTIES AND BE SUBJECT TO A PERMANENT
INJUNCTION.

On April 12, 2004, we received a subpoena issued by the SEC requesting
documentary evidence corroborating our statements in a presentation made on
March 30, 2004 by Dr. Bogdan Maglich, our Chief Executive Officer, Chief
Scientific Officer, Treasurer, President and Chairman, at the Investment
Opportunities in Homeland Security and Defense Conference in Washington, D.C.
Our presentation, which was made in both oral and written form, and subsequently
posted for a short period on our website, provided information regarding our key
markets, our business strategy and financial projections. On May 24, 2004, we
received another letter from the SEC requesting us to voluntarily provide
information regarding the nature and chronology of events leading up to our
announcement of a "non-exclusive oral understanding with a consortium which was
assembled by the Dallas-Fort Worth Homeland Security Alliance", as reported in
our Current Report on Form 8-K filed with the SEC on April 8, 2004. We
voluntarily responded through counsel by letter dated June 7, 2004.

On June 24, 2004, despite the responses which we provided to the SEC in response
to their prior inquiries, we received a further letter, commonly referred to as
a Wells Notice, from the Central Regional Office of the SEC, in Denver,
Colorado, indicating its intention to recommend that the Commission charge us
with violations of several sections of the Securities Exchange Act, and the
rules promulgated under that act, involving the making of false and misleading
statements in our public documents. The false and misleading statements which
the SEC believes were made seem to focus primarily on, among other things, the
previously undisclosed ownership of our securities, and actions with respect to
our stock taken, by Barry Alter, Philip Gurian and certain of their affiliates
who controlled SLW, Inc. at the time of our reverse transaction; the undisclosed
identity of, and the origin of funds used to purchase our stock by, certain of
our stockholders; the nature of, and reasons for, a "dividend" provided to our
stockholders; and the terms of other offerings occurring at the same time as one
of our private placements of stock. In addition, the antifraud violations would
be based upon private transactions made by Mr. Alter (formerly a director and
executive officer of HiEnergy Technologies, Inc.) with respect to sales of our
stock made by him without disclosing material facts about us, or our
contemporaneous offering of securities at different prices, to his purchasers.
We are currently working with special securities litigation counsel to assess
our legal position and determine how best to respond to this most recent
correspondence from the SEC.


                                      -39-
<PAGE>

The price of our stock declined sharply in connection with our announcements
concerning our SEC investigation. Our stockholders could suffer a continued loss
in value of their shares based upon the circumstances alleged in the Wells
Notice. For instance, if Mr. Alter committed any wrongful act while serving as
our agent, we could have liability for any resulting damages. Also, our
stockholders, customers and others could lose confidence in us if they believe
this incident is a result of unresolved problems or intentional misconduct.
There may be material additional costs and expenses, including legal expenses,
that could be involved in sorting out these issues and assisting the SEC with
such work. Much worse yet, this incident could materially damage the public's
perception of us, and any adverse public sentiment may have a materially adverse
effect on the market price of our common stock and our financial results. One of
the possible effects on us could be a depressed stock price, which may hinder
our ability to raise capital on favorable terms. Current management may also
consider pursuing legal action or litigation against the individuals who may
have perpetrated the actions being questioned by the SEC, based on the
conclusions of the SEC inquiry. Such litigation could also involve material
costs that could affect our financial position. These costs may include the cost
of indemnifying the defendants or advancing costs to the defendants pending the
outcome of the suit. Finally, if the SEC does seek permanent injunctive action
against us, and if it is successful in that objective, we will have a record
that may hinder, or make unavailable, certain types of investment in the future.

WE MAY OWE INDEMNIFICATION OBLIGATIONS TO OUR CURRENT AND FORMER DIRECTORS AND
OFFICERS.

Our certificate of incorporation and bylaws contain provisions that provide for
indemnification of officers and directors, in each instance to the maximum
extent permitted by law. To the extent indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of HiEnergy Technologies under the above provisions, or otherwise, we
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In May 2003, our former director Barry Alter engaged his own
separate legal counsel with respect to the SEC investigation regarding SLW
Enterprises and demanded that we advance him in excess of $24,000 in connection
with the investigation that the SEC has conducted. We did not advance him these
expenses, and he brought an action against us in Delaware seeking payment of his
costs and expenses, then he subsequently informed us that the action had been
voluntarily dismissed without prejudice. Mr. Alter could make further demands
for advancement of expenses, and the voluntary dismissal of his action does not
prevent him from initiating a new action to recover past, present, and future
expenses from us. See section entitled: "Legal Proceedings" for more
information. A stockholder's investment in our company may be adversely affected
to the extent that we pay costs of settlement and damage awards against
directors or officers under the indemnification provisions of the certificate of
incorporation and bylaws. The impact on a stockholder's investment in terms of
the costs of defending a lawsuit on behalf of a director or officer may also
deter us from bringing suit against former directors or officers. Claims for
indemnification under our certificate of incorporation or bylaws may also
dissuade us from bringing lawsuits against current or former directors or
officers.

UNDER THE FEDERAL SECURITIES LAWS, PURCHASERS OF OUR COMMON STOCK IN A PRIOR
PRIMARY OFFERING MAY HAVE THE WAIVABLE RIGHT TO SELL THEIR SHARES BACK TO THE
US.

In 2003, we engaged in a public offering of our shares to purchasers who bought
in reliance upon a prospectus that did not, at the time the sales were made,
contain a fixed price for our shares. These sales were made through private
negotiation of the prices paid by each investor, and the prices were not
consistent during this offering. The rules and regulations governing the sale of
securities through a prospectus under the Securities Act of 1933 do not permit
companies of our size to conduct a continuous public offering at prices which
are negotiated, and vary by investor. As a result of this violation, the people
who purchased our common stock in the public primary offering would have the
right, which may but does not have to be waived by them, to require us to buy
back their shares at the price they paid for them. This right continues until
two years form the date of the last sale made in violation of the fixed price
rules.


                                      -40-
<PAGE>

During the year ended April 30, 2003 and the quarter ended July 31, 2003 we sold
1,400,000 and 900,000 shares of common stock, respectively, using the prospectus
that did not include the fixed pricing information required by the Securities
Act. The purchase prices were all between $0.33 and $0.35 per share. As of April
30, 2004, of the 2,300,000 shares of common stock that were sold to investors
and are subject to buy-back as described above, we have obtained signed waivers
from investors representing 300,000 shares of the purchased common stock.
Because we believe that we may still obtain waivers from investors who purchased
an additional 600,000 shares of common stock and, based on information provided
to us by our transfer agent, that the remaining 1,400,000 shares of common stock
have been sold by the original purchasers, management feels that the probability
of any investor requesting the repurchase of common stock subject to buy-back
for the reason stated above to be remote, and such shares of common stock have
been included in our calculation of our stockholders' deficit on our balance
sheet. Nevertheless, we will continue to record the potential repurchase
obligation, estimated at $694,000, as a liability until the two-year waiver
period has lapsed.

UNDER THE FEDERAL SECURITIES LAWS, THE PRIVATE OFFERING OF OUR SECURITIES BY US
WHILE CERTAIN SELLING STOCKHOLDERS' SHARES WERE IN REGISTRATION WITH THE SEC MAY
BE DEEMED TO BE "INTEGRATED" UNDER THE FEDERAL SECURITIES LAWS OF THE UNITED
STATES AND PURCHASERS OF SHARES THROUGH THE PRIVATE OFFERING MAY DEMAND
RESCISSION OF THE OFFERING.

During the period from September 3, 2003 through April 16, 2004, we had on file
with the Securities and Exchange Commission registration statements on Form SB-2
seeking to register for public sale shares of our common stock. A total of 5
million of those shares to be registered were for the sale of newly issued
shares, and the remainder was to be registered for the account of selling
stockholders who purchased our shares in private placements conducted by us
previously. On September 19, 2003, we withdrew the registration statement
containing the shares to be registered for our own public offering, and re-filed
a registration statement solely seeking to register the shares of our selling
stockholders. This registration statement was withdrawn on April 16, 2004.

While our registration statements were on file with the SEC, we also raised
capital through the sale of our securities in a private placement to accredited
investors. While it is true that rules and regulations under the Securities Act
of 1933 do not permit us to conduct a public offering on a continuous basis at
varying prices or a negotiable price, the only overlap occurred with respect to
the selling stockholders' registration statement. Although we, as an issuer,
were not selling stock publicly and privately at the same time, it is possible
that the contemporaneous, private offering of our securities by us while the
selling stockholders' shares were in registration with the SEC may be deemed to
be "integrated" under the federal securities laws of the United States.
Integration occurs where two offerings that are close in time are deemed to
constitute only one, single offering, and the effect of integration can be to
destroy an exemption upon which a company has relied in issuing its securities
privately, which makes rendering such offering and unregistered public offering
illegal. In such event, the persons who purchased securities in such an offering
may be entitled to, among other penalties or fines which may be assessed against
the issuing company, the right to demand rescission of the offering. In that
case, we would be required to pay each investor the amount it received as
consideration for the illegally issued securities, plus any interest accrued
with respect to such amount at the applicable rate, and the securities would be
cancelled.

While we have not completed an independent investigation into whether or not the
rescission rights are in fact due to certain stockholders or whether or not
there may be defenses which could negate the requirement to offer buy-back or
rescission rights to your prior investors (for example, the effect of Rule 155,
which is a safe harbor with respect to integration if one of the simultaneous
offerings that caused the integration has been abandoned), we do not anticipate
receiving any demands for repurchase of these shares. Nevertheless, until such
time as we have determined with our legal advisors whether or not integration
has occurred, we will record the potential costs of rescission, estimated at
$1,294,153 (without regard to penalties or other amounts that might be
assessable by any state), as a liability on our balance sheet.


                                      -41-
<PAGE>

CURRENT AND PRIOR STOCKHOLDERS WHO PURCHASED OUR SHARES COULD ATTEMPT TO ASSERT
CLAIMS AGAINST US IF OUR DISCLOSURES THEY RELIED UPON IN MAKING SUCH PURCHASES
ARE DEEMED INADEQUATE.

Facts related to Mr. Gregory Gilbert and a separate investigation by the SEC
involving persons suspected of stock manipulation, which are described elsewhere
in this Report, were not known to us and were not disclosed in sales materials
or filings with the SEC until February 2003. We do not believe that the
information was material to the value of our company, and we believe that we
have valid defenses against liability under the Securities Act of 1933, the
Securities Exchange Act of 1934 and other state and federal securities laws.
However, if a court decides to the contrary, we could be subject to liability
under the Securities Act and/or under the Securities Exchange Act. Additionally,
we may have liability under certain U.S. state securities laws, which laws may
apply similar or different standards as the federal laws. In such case, we would
pursue all of our rights and remedies, if any, against our former officers and
directors to the extent, if any, they were culpable. Naturally, we have
disclosed these matters to our stockholders and the public and, therefore,
purchasers of shares of our common stock subsequent to our making such
disclosure in February 2003 would have no cause of action for our previously
having failed to ascertain and disclose such facts.

OUR FORMER DIRECTOR'S OUTSIDE LEGAL PROCEEDINGS WERE NOT PROMPTLY DISCLOSED TO
THE PUBLIC.

Mr. Gregory F. Gilbert, a former director of ours, was involved in several legal
proceedings that were not disclosed by us in various reports with the SEC until
we became aware of them in February 2003. Details of these legal proceedings are
available in filings subsequent to that date. Stockholders could potentially
assert that we acted negligently in failing to uncover a personal involvement of
a director in such legal proceedings. Any related litigation could result in
significant financial penalties and could have a negative effect on our
financial condition.

CORPORATE RISKS

ONE OF OUR STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM OTHER OF OUR
STOCKHOLDERS, HAS SUBSTANTIAL INFLUENCE OVER THE DIRECTION OF THE COMPANY.

Dr. Bogdan C. Maglich , our Chief Executive Officer, Chairman, Chief Scientific
Officer, Treasurer and President, beneficially owns 24.1% of our outstanding
shares as of the date of this Report. Accordingly, he has a substantial
influence in determining the outcome of certain corporate transactions or other
matters submitted to stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, the
election of directors, and other significant corporate actions. He also has the
power to prevent or cause a change in control. It is assumed that in certain
instances the interests of Dr. Maglich may differ from the interests of the
other stockholders, and may limit the ability of other stockholders to affect
our management and affairs.

WE HAVE IDENTIFIED AREAS OF WEAKNESSES IN OUR INTERNAL CONTROLS WHICH EXISTED AT
THE END OF OUR FISCAL YEAR ENDED APRIL 2004. ALTHOUGH WE HAVE TAKEN STEPS TO
REMEDY THESE WEAKNESSES, OUR ABILITY TO IMPLEMENT AND MAINTAIN A FULL SYSTEM OF
INTERNAL CONTROLS AND PROPER CORPORATE GOVERNANCE WILL DEPEND UPON OUR ABILITY
TO ATTRACT BOTH CAPITAL AND HUMAN RESOURCES, AND IF WE ARE UNSUCCESSFUL WE RISK
BEING IN VIOLATION OF OUR PUBLIC COMPANY REPORTING OBLIGATIONS IN THE FUTURE,
WHICH COULD GIVE RISE TO POTENTIAL REGULATORY AND/OR SHAREHOLDER ACTIONS THAT
COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS AND FINANCIAL CONDITION,
AND THE MARKET VALUE OF OUR STOCK.

For the year ended April 30, 2004, our management identified material weakness
in our internal controls and a lack of segregation of duties which resulted
from, among other things, a lack of capital and human resources, a lack of a
systematic and formal system of checks and balances in our corporate governance,
the departure of key personnel and the resignation of various of our directors.
We previously experienced a general weakness in recording equity transactions


                                      -42-
<PAGE>

involving the grant of options and warrants which caused us to record these
transactions at a later date than they occurred although, to our knowledge, this
weakness did not result in any improper reporting on our financial statements.
We also have a very small finance and accounting staff and, due to our limited
resources, it is not always possible to have optimum segregation of accounting
and finance duties. We believe that our current system of internal controls, in
light of the changes we have made since the end of fiscal year 2004, are
generally adequate. However, if we are unsuccessful in attracting the capital
and human resources necessary to implement and maintain an effective system of
internal controls, and if as a result we were to fail to disclose timely
material items as required under the Securities Exchange Act, it could give rise
to potential regulatory and/or shareholder actions, which could have a material
adverse effect on our business and financial condition, and on the market value
of our shares.

WE MAY HAVE INCREASING DIFFICULTY TO ATTRACT AND RETAIN OUTSIDE MEMBERS OF OUR
BOARD OF DIRECTORS.

The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure and liability with regard
to lawsuits and stockholder claims, as well as governmental and creditor claims
which may be made against them in connection with their positions with
publicly-held companies. Outside directors are also becoming increasingly
concerned with the availability of directors and officers' liability insurance
and a carrier's ability to pay on a timely basis the costs incurred in defending
stockholder claims. Director's and officer's liability insurance has recently
become much more expensive and difficult to obtain than it had been. If we are
unable to continue obtaining directors and officer's liability insurance at
affordable rates, it may become increasingly more difficult to attract and
retain qualified outside directors to serve on our Board. It is anticipated that
the fees of directors will rise in response to increased exposure to such risks.

ELIMINATION OF MONETARY LIABILITY OF OUR CURRENT AND FORMER DIRECTORS MAY
DISCOURAGE LAWSUITS AGAINST DIRECTORS.

Our certificate of incorporation and bylaws contain provisions that eliminate or
limit the liability of our corporate directors for monetary damages to the
maximum extent permitted by law. These provisions may discourage stockholders
from bringing a lawsuit against directors and officers for breaches of fiduciary
duty and may also reduce the likelihood of derivative litigation against
directors and officers even though such action, if successful, might otherwise
have benefited the stockholders.

RISKS RELATED TO OUR STOCK

WE WILL PAY ACCRUING PENALTIES TO CERTAIN HOLDERS OF OUR SECURITIES BASED ON OUR
FAILURE TO REGISTER THEIR SECURITIES.

After August 2003, we entered into certain agreements for the purchase of
certain shares of stock, convertible notes and warrants in private transactions.
The terms of these securities purchase agreements require us to register the
shares of common stock, and the underlying shares of common stock issuable upon
exercise of the warrants and/or conversion of the convertible notes, with the
SEC for public trading as of certain dates which are specified in each purchase
agreement. If the subject securities are not registered within the dates
specified in the applicable agreement, we must pay (or accrue, as the case may
be) a penalty through the issuance of like securities. In accordance with the
relevant provisions in these securities purchase agreements, we have paid or
accrued penalties due purchasers in these offerings because we failed to meet
the specified deadlines for having a Registration Statement on Form SB-2
declared and maintained effective. Some of these penalties began to accrue as of
October 15, 2003, and we are obligated to continue to issue and pay these
securities as penalties until all of our obligations under the applicable
registration rights provisions in our agreements are satisfied in full, or the
penalties become impermissible as a matter of law.

The amount of the penalties paid or accrued as a result of the defaults
described above through August 30, 2004 is 803,565 shares of common stock,


                                      -43-
<PAGE>

$7,000 in aggregate face amount of additional convertible notes, and warrants to
purchase an additional 178,983 shares of common stock. Our existing stockholders
have suffered, and will continue to suffer, substantial dilution as a result of
the issuance and payment of these securities as penalties. Such dilution can
have a material and adverse impact upon the actual and perceived value of our
shares, which can be a depressive force upon the price of our stock at market
and cause losses for our existing stockholders, as well as render it much more
difficult for us to use our equity capital to raise funds in the future.

OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT
IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US.

From February 27, 2002, when trading in our shares commenced, through the date
of this Report, the high and low closing bid prices of our common stock were
$3.10 and $0.30, respectively. The market price of our common stock may exhibit
significant fluctuations in the future in response to various factors, many of
which are beyond our control and include:

      o     variations in our quarterly financial results, which variations
            could result from, among other things, the availability of funding;

      o     changes in market valuations of similar companies and stock market
            price and volume fluctuations generally;

      o     economic conditions specific to the industries in which we operate;

      o     legislative and regulatory developments related to homeland security
            and industry controls

      o     announcements by us or our competitors of new or enhanced products,
            technologies or services, and the formation or cancellation of
            significant contracts, acquisition, strategic relationships, joint
            ventures or capital commitments;

      o     changes in key customer and supplier relationships;

      o     recommendations of research analysts and guidance;

      o     additions or departures of key management or scientific personnel;
            and

      o     future sales of our common stock or other debt or equity securities.

If our operating results in future quarters fall below the expectations of
market makers, securities analysts and investors, the price of our common stock
will likely decline, perhaps substantially. In the past, plaintiffs have often
initiated securities class action litigation against a company following periods
of volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Additionally, the stock market has periodically experienced significant price
and volume fluctuations that have particularly affected the market prices of
common stock of technology companies. These changes have been generally
unrelated to the operating performance or fundamentals of particular companies.
These broad market fluctuations may also negatively affect the market price of
our common stock and the notes.

WE MAY NOT BE ABLE TO PAY AN ACCRUED PAYROLL TAX LIABILITY.

As of April 30, 2004, we identified an additional payroll tax liability of
$393,000 for stock compensation given during the period from June 1997 through
February 2002. The stock given during this period was HiEnergy Microdevices


                                      -44-
<PAGE>

stock which in April 2002 was exchanged, in a transaction treated as a reverse
takeover. Because, at the time, HiEnergy Microdevices was a closely-held
corporation with negative net worth, no marketable product, no meaningful
revenue potential and no dividend paying capacity, the value originally assigned
to the stock was nil.

We identified a public sale of the closely-held HiEnergy Microdevices stock
where a HiEnergy Microdevices shareholder filed for chapter 7 bankruptcy
protection and his stock was sold by the bankruptcy trustee in February 2002. We
have calculated the $393,081 payroll tax liability by treating this sale as an
arms length transaction and recognizing employment taxes, withholding
requirements, penalties and interest. We engaged tax advisors regarding the
nature of our obligations, and we plan to settle this liability as soon as we
have the resources to do so.

If we are unable to obtain the capital resources necessary to resolve this
liability quickly, the penalties and interest associated with it will continue
to accrue. Furthermore, many of our research and development funds are the
result of federal grants, and to the extent we are delinquent in the payment of
accrued federal taxes, we may be precluded from receiving such grants in the
future. Either of these results could have a materially adverse effect upon our
business, operations and financial condition.

THERE IS A RISK OF DILUTION RESULTING FROM CONTINUED ISSUANCES OF SECURITIES TO
MANAGEMENT AND CONSULTANTS, WHICH MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK, AND MAY ALSO LEAD TO POTENTIAL DIFFICULTY IN OBTAINING ADDITIONAL EQUITY
CAPITAL.

We issued 456,717 options to Dr. Bogdan Maglich in fiscal year 2003 and 313,221
options in fiscal year 2004 for services rendered as our Chief Executive
Officer, President, Treasurer, Chief Scientific Officer and Chairman, pursuant
to his employment contract. Also, pursuant to his terms of employment, we issued
32,455 shares of our common stock, 1,400,000 options and 1,695,686 warrants to
various consultants in fiscal year 2003 and 558,500 shares, 2,358,221 options
and 7,787,068 warrants in fiscal year 2004. Likewise, we issued notes payable to
our former legal counsel during fiscal years 2003 and 2004 that are convertible
into 693,726 shares of common stock as of April 30, 2004. Under the terms of Dr.
Maglich's employment agreement, we are obligated to issue options to Dr. Maglich
annually for the term of the agreement. (See: "Employment Contracts" under Item
10 in this Report). Continued issuances of securities of this magnitude may have
a dilutive effect on the market price for our common stock and of the
percentages of ownership of stockholders, if the options and warrants are
exercised, or the notes are converted. The terms upon which we will be able to
obtain additional equity capital could also be adversely affected.

WE PLAN TO ISSUE A SIGNIFICANT NUMBER OF ADDITIONAL EQUITY SECURITIES IN THE
FUTURE AND THAT WILL DILUTE THE PERCENTAGE OWNERSHIP OF THE PRESENT HOLDERS OR
PURCHASERS OF OUR COMMON STOCK.

There are 35,987,779 shares of our common stock outstanding as of August 15,
2004, which does not include 19,870,148 new shares we have committed to issue
upon exercise of options and warrants and convertible notes. If we issue all of
the shares underlying currently outstanding warrants, options and convertible
notes, this will result in approximately 29% dilution of the ownership interest
of holders of our common stock. If all currently outstanding warrants, options
and convertible notes were immediately exercised and converted, we would receive
up to $15,518,705 in cash and up to 1,282,435 in forgiveness of indebtedness.
While this amount exceeds the current market value of the stock that would be
issued, exercise and conversion might take place when the total value received
by us is much less than the market value of the stock that would be issued.
Under our current business plan, we must also raise funds in part by issuing new
equity securities, which would have a dilutive effect on the percentages of
ownership of stockholders. The shares issued in such transactions could be very
large and may even exceed the number of shares issued and outstanding today,
which would significantly decrease the percentage ownership of current
stockholders. Our requirement for new equity capital for the financing of
operating deficits will continue until we successfully commercialize a product
and achieve a sufficient level of positive operating cash flow. Possible costs
which would require funding include investments in capital equipment, technology


                                      -45-
<PAGE>

and research and development, marketing initiatives, inventory, accounts
receivable and human resources, as well as financial contributions toward
potential joint ventures, acquisitions, collaborative projects and other general
corporate purposes.

We also intend to issue up to 459,222 shares of our common stock in exchange for
the remaining 20,540 shares of the common stock of HiEnergy Microdevices, our
majority-owned subsidiary, on substantially the same terms as the voluntary
share exchange by which we acquired 92% of HiEnergy Microdevices' common stock.
We also may issue up to 324,020 additional shares of our common stock to former
holders of options and warrants to acquire HiEnergy Microdevices common stock.
We may be required to sell restricted equity securities at prices less than the
market price for unrestricted shares. We have thus far sold restricted equity
securities at prices less than prevailing market prices of our stock and have
issued convertible debt. When the shares that are issuable in connection with
those securities become available for public sale, the additional supply of
shares may adversely affect the market price of our common stock. Also, our
anticipated private financings, and the exercise or conversion of securities
outstanding, may dilute the voting or other rights of other holders at the time,
or be prior and senior or receive rights that the holders of common stock do not
have, which could reduce the economic value of our common stock.

BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.

Our common stock has been traded under the symbol "HIET" on the OTC Bulletin
Board(R) since May 3, 2002 and previously under the symbol "SLWE" from February
22, 2002 through May 3, 2002. Because our stock trades on the OTC Bulletin
Board(R) rather than on a national securities exchange or Nasdaq, you may find
it difficult to either dispose of, or to obtain quotations as to the price of,
our common stock. Once we meet applicable listing requirements and
qualifications we intend to apply for listing of our stock on a national
securities exchange.

BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.

Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, like shares of our common stock, generally are equity
securities with a price of less than $5.00, other than securities registered on
some national securities exchanges or quoted on Nasdaq. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market, and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, broker-dealers who sell these securities to persons other than
established customers and "accredited investors" must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security subject to the penny
stock rules, and investors in our common stock may find it difficult to sell
their shares. We would like to raise financing in the range that might qualify
us for a time for an AMEX listing and a Nasdaq small cap listing. However, doing
so would be very dilutive of existing stockholders.

IF PERSONS ENGAGE IN SHORT SALES OF OUR COMMON STOCK, INCLUDING SALES OF SHARES
TO BE ISSUED UPON EXERCISE OF WARRANTS AND OPTIONS, THE PRICE OF OUR COMMON
STOCK MAY DECLINE.

Selling short is a technique used by a stockholder to take advantage of an
anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time


                                      -46-
<PAGE>

can create downward pressure on the market price of a security. Further sales of
common stock issued upon exercise of our warrants and options could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.

DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN
OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE FOR THEIR SHARES.

Provisions of Delaware law and our certificate of incorporation and bylaws could
make an acquisition of us by means of a tender offer, a proxy contest, or
otherwise, and the removal of incumbent officers and directors more difficult.
These provisions include:

      o     Section 203 of the Delaware General Corporation Law, which prohibits
            a merger with a 15%-or-greater stockholder, such as a party that has
            completed a successful tender offer, until three years after that
            party became a 15%-or-greater stockholder; and

      o     the authorization in our certificate of incorporation of
            undesignated preferred stock, which could be issued without any
            further vote or action by our stockholders in a manner designed to
            prevent or discourage a takeover or provide preferences for the
            investor ahead of holders of common stock.

Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.



                                      -47-
<PAGE>

                          GLOSSARY OF SCIENTIFIC TERMS

The following terms, where used in this Report, have the meanings given below:

ANOMALY SENSORS            Also known as a primary detector system.
                           Chemically-blind detection sensors that cannot
                           chemically identify explosive materiel, biological
                           agents or other objects but can remotely alert an
                           operator of "possible" explosives or "possible
                           bioagents" by the fact that their shape, size and
                           density appear different from the objects in the
                           normal surroundings, thus `anomalies'. Anomaly
                           detectors require secondary inspection, usually a
                           manual one or one using confirmation sensors (see
                           below). Anomalies that turn out to be innocuous
                           substances are referred to as false alarms.

API                        Refer to "associated particle imaging", below.

ASSOCIATED                 A process using a combined action of neutrons, alpha
PARTICLE IMAGING           particles and gamma rays, which is, in principle,
                           capable of providing three-dimensional images of
                           objects hidden behind a barrier, as well as the
                           presence of some chemical elements but not the
                           stoichiometry (chemical formula) of the object. API
                           is the concept upon which stoichiometric technology
                           was founded.

ATOMETRY                   Non-invasive stoichiometry by means of fast neutrons
                           and gamma rays, as opposed to the historically
                           standard invasive technique accomplished with test
                           tubes. The term `atometry' was first coined in 1998,
                           when the process was first performed, and it has not
                           yet become an industry standard term.

CONFIRMATION               Also known as a secondary detection system. Detection
SENSORS                    sensors which either by intrusive or non-intrusive
                           chemical analysis and/or human involvement determine
                           whether or not an identified anomaly contains
                           explosive materials or bio agents.

FAST NEUTRON               a neutron produced by a nuclear reaction (such as
                           fusion or fission), and which has a kinetic energy
                           level of more than one million electronvolts (MeV).

GAMMA RAYS                 electromagnetic rays emitted during radioactive decay
                           which have a much shorter wavelength, and penetrate
                           materials deeper, than x-rays.

MINISENZOR                 A prototype product developed by HiEnergy
                           Technologies, Inc. which accomplishes the detection
                           of explosive materials through stoichiometry without
                           the need for associated particle imaging, making it
                           less expensive to use and more portable, though
                           slower and without the same range of detection than
                           the SuperSenzor (see below).

MILLI-SIEVERT              A metric measurement of radiation dosage equivalent
                           to a thousandth of a Sievert, as defined below.

NEUTRON                    A sub-atomic particle having no net electric charge
                           and which, together with protons, make up the nucleus
                           of an atom. Neutrons are unstable, and have a
                           half-life of approximately 15 minutes. Neutrons can
                           be either "fast" or "thermal".

RDX                        Also known as cyclonite or hexogen. A military
                           explosive, about twice as strong as TNT, used in
                           making bonded "plastic" explosive devices, known as
                           C-3 and C-4, which can be stored for long periods of
                           time without losing its strength.


                                      -48-
<PAGE>

SEMTEX                     A highly-explosive, plastic material which has
                           historically been very difficult to detect and
                           requires only very small quantities to cause large
                           amounts of damage.

SIEVERT                    A metric measurement (i.e. 1 sievert is equivalent to
                           100 mrem or 0.1 rem) of "rem", or "radiation
                           equivalent for mammals", which is a unit of doses of
                           ionizing radiation absorbed by the body and deposited
                           in body tissue that includes an adjustment for the
                           intensity of the damage to one or more cells
                           equivalent. For example, an average person is exposed
                           to an aggregate of 300 mrem per year or 3 Sieverts.

STOICHIOMETRY              The art and science of deciphering the chemical
                           formula of a given compound, generally expressed as a
                           numerical ratio, enabling one to determine the
                           accurate atomic proportions of oxygen, nitrogen and
                           carbon. Prior to the advent of atometry,
                           stoichiometry was possible only via the invasive
                           method of chemical analysis using test tubes.

SUPERSENZOR                A prototype product developed by HiEnergy
                           Technologies, Inc., which accomplishes the detection
                           of explosive materials through stoichiometry
                           utilizing associated particle imaging.

THERMAL NEUTRON            A neutron which has a kinetic energy level of less
                           than .025 electronvolts (eV), which is similar to the
                           energy level of a gas at room-temperature.

TNT                        An explosive substance, in use since the Second World
                           War, which consists of a flammable yellow compound
                           derived from the chemical toluene (methylbenzene).

X-RAYS                     Electromagnetic rays, also known as roentgen rays,
                           which are emitted when high-speed electrons strike a
                           solid object. X-ray images give sharp contours and
                           the mass of objects, but are chemically blind (that
                           is, they cannot determine the chemical formula of the
                           object irradiated).



                                      -49-
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Below are the high and low closing bid prices of our common stock for the
periods shown, as obtained from Pink Sheets LLC, a research service that
compiles quote information reported on the National Association of Securities
Dealers' composite feed or other qualified interdealer quotations' media and
from other public sources. The quotations listed below reflect interdealer
prices, without retail mark-up, markdown or commissions, and may not reflect
actual transactions. Our common stock commenced trading on the OTC Bulletin
Board(R) operated by the NASD under the symbol "SLWE" on February 22, 2002. In
connection with the change of SLW Enterprises' name to HiEnergy Technologies,
Inc. on April 30, 2002, our ticker symbol was changed from "SLWE" to "HIET"
effective as of May 3, 2002.

                                                               -------   ------
                                                                 HIGH      LOW
                                                               -------   ------
    FISCAL YEAR 2003-2004
    Fourth Quarter (February 1, 2004 to April 30, 2004)
      (interim)                                                  $3.49    $1.11
    Third Quarter (November 1, 2003 to January 31, 2004)         $1.29    $0.77
    Second Quarter (August 1, 2003 to October 31, 2003)          $1.86    $0.61
    First Quarter (May 1, 2003 to July 31, 2003)                 $0.62    $0.40

    FISCAL YEAR 2002-2003
    Fourth Quarter (February 1, 2003 to April 30, 2003)          $2.35    $0.30
    Third Quarter (November 1, 2002 to January 31, 2003)         $3.10    $2.11
    Second Quarter (August 1, 2002 to October 31, 2002)          $2.60    $1.41
    First Quarter (May 1, 2002 to July 31, 2002)                 $2.09    $0.20


As of July 30, 2004, we had 35,987,779 shares of common stock issued and
outstanding, held by approximately 250 stockholders of record. Within the
holders of record of our common stock are depositories, such as Cede & Co., that
hold shares of stock for several brokerage firms which, in turn, hold shares of
stock for one or more beneficial owners. Accordingly, it is impossible for us to
determine exactly how many beneficial stockholders we actually have.

DIVIDENDS

We have not paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. We currently anticipate
that we will retain any earnings for use in the continued development of our
business. Investors also must evaluate an investment in our company solely on
the basis of anticipated capital gains. The board of directors has sole
authority to declare dividends payable to our stockholders. However, common
stock dividends are prohibited if, at the time they are declared or paid, we are
in default under certain of our promissory notes. Also dividends will and could
from time to time be prohibited further by credit agreements, terms of series of
certificates of determination or preferred stock adopted by the Board in the
future, other senior debts or securities, or otherwise.

RECENT SALES OF UNREGISTERED SECURITIES

Set forth below is information regarding the issuance and sale of our securities
without registration from April 30, 2003 to the date of this Report.


                                      -50-
<PAGE>

      o     In September 2004, we issued a convertible note payable for
            $100,000, which is convertible into shares of common stock at $0.52
            per share, to Maria Pilar Galera Escobedo in exchange for $100,000
            in cash. We believe the issuances of these securities were exempt
            under Regulation S and/or Section 4(2) under the Securities Act.

      o     In August 2004, we committed to issue 262,359 shares of our common
            stock, par value $0.001 ("Shares"), and warrants to purchase 177,775
            Shares at various exercise prices, to various holders of securities
            with registration rights as penalties, due to our inability to file
            and maintain effective a registration statement within certain
            specified deadlines. We believe the issuances of these securities
            are exempt under Section 3(a)(9) of the Securities Act.

      o     In August 2004, we committed to issue warrants to purchase 6,933
            Shares with an exercise price of $1.51 to Julian Eguizabal
            Echeverria as a consulting and finder's fee. We believe the
            issuances of these securities are exempt under Regulation S and/or
            Section 4(2) under the Securities Act.

      o     In August 2004, we committed to issue 21,000 Shares to the board
            members of HiEnergy Technologies, Inc. as compensation for meeting
            attendance. We believe the issuances of these securities are exempt
            under Section 4(2) under the Securities Act.

      o     In July 2004, we committed to issue 9,000 Shares to the board
            members of HiEnergy Technologies, Inc. as compensation for meeting
            attendance. We believe the issuances of these securities are exempt
            under Section 4(2) under the Securities Act.

      o     In July 2004, we issued 241,440 Shares and warrants to purchase
            176,975 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In July 2004, we issued warrants to purchase 100,000 Shares with an
            exercise price of $0.99 to Jim Hertzog for consulting services,
            pursuant to his employment agreement. We believe the issuance of
            these securities was exempt under Section 4(2) of the Securities
            Act.

      o     In July 2004, we issued 182,955 Shares to Richardson & Patel, LLP
            for legal and consulting services. We believe the issuance of these
            securities was exempt under Section 4(2) of the Securities Act.

      o     In June 2004, we issued a convertible promissory note for $240,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 1,578,666 Shares at various exercise prices between $0.45
            and $1.25, to Richard Melnick. We believe the issuances of these
            securities were exempt under Section 4(2) under the Securities Act.

      o     In June 2004, we issued a convertible promissory note for $60,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 394,666 Shares at various exercise prices between $0.45 and
            $1.25, to Sherbrooke Partners, LLC. We believe the issuances of
            these securities were exempt under Section 4(2) under the Securities
            Act.

      o     In June 2004, we amended a previously issued convertible promissory
            note in the amount of $50,000, which was convertible into Shares at
            $0.45 per share, and warrants to purchase 312,222 Shares at various
            exercise prices to Richard Melnick. Under the amended offering, we
            issued separate convertible promissory notes of $40,000 and $10,000,
            in lieu of the prior note, to Richard Melnick and Sherbrooke
            Partners. LLC, respectively, and certain warrants were repriced such
            that we issued additional warrants to purchase 77,778 at various
            exercise prices between $0.45 and $1.25. We believe the issuances of
            these securities were exempt under Regulation D and/or Section 4(2)
            under the Securities Act.


                                      -51-
<PAGE>

      o     In June 2004, we committed to issue 9,000 Shares to the members of
            the Board of Directors of HiEnergy Technologies, Inc. as
            compensation for meeting attendance. We believe the issuances of
            these securities are exempt under Section 4(2) under the Securities
            Act.

      o     In June 2004, we issued 10,500 Shares to Richard Eckhouse to settle
            a lawsuit. We believe the issuances of these securities were exempt
            under Regulation S and/or Section 4(2) under the Securities Act.

      o     In June 2004, we issued 99,010 Shares and warrants to purchase
            32,673 Shares with an exercise price of $2.50 to Josefa Nazabal
            Aguirre in exchange for $100,000 in cash. We believe the issuances
            of these securities were exempt under Regulation S and/or Section
            4(2) under the Securities Act.

      o     In June 2004, we issued 19,868 Shares and warrants to purchase 6,623
            Shares with an exercise price of $2.75 to Benicio Alonso Perez in
            exchange for $30,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In June 2004, we issued 66,225 Shares and warrants to purchase
            22,075 Shares with an exercise price of $2.75 to Las Chafiras S.A.
            in exchange for $100,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In June 2004, we issued 19,868 Shares and warrants to purchase 6,623
            Shares with an exercise price of $2.75 to Miguel Gay Rogel in
            exchange for $30,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In June 2004, we issued 33,113 Shares and warrants to purchase
            11,038 Shares with an exercise price of $2.75 to Jose M. Sanclimens
            Genesca in exchange for $50,000 in cash. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In June 2004, we issued 66,225 Shares and warrants to purchase
            22,075 Shares with an exercise price of $2.75 to Orovales
            Investment, Inc. in exchange for $100,000 in cash. We believe the
            issuances of these securities were exempt under Regulation S and/or
            Section 4(2) under the Securities Act.

      o     In June 2004, we issued 13,245 Shares and warrants to purchase 4,415
            Shares with an exercise price of $2.75 to Alcia Vicens Hernandez in
            exchange for $20,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In June 2004, we issued 219,251 Shares and warrants to purchase
            163,491 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In May 2004, we issued 29,801 Shares and warrants to purchase 9,934
            Shares with an exercise price of $2.75 to Luis Lopez Echeto in
            exchange for $45,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In May 2004, we committed to issue warrants to purchase 199 Shares
            with an exercise price of $2.75 to Julian Eguizabal Echeverria as a
            consulting and finder's fee. We believe the issuances of these
            securities are exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In May 2004, we issued 3,500 Shares to Publex Ventures LLC as
            compensation for consulting services. We believe the issuances of
            these securities are exempt under Regulation S and/or Section 4(2)
            under the Securities Act.


                                      -52-
<PAGE>

      o     In May 2004, we issued 168,976 Shares and warrants to purchase
            156,277 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In May 2004, we issued a convertible promissory note for $425,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 3,891,111 Shares at various exercise prices between $0.45
            and $1.25, to Platinum Partners Value Arbitrage Fund, LP. We believe
            the issuances of these securities were exempt under Regulation D
            and/or Section 4(2) under the Securities Act.

      o     In May 2004, we issued 351,452 Shares to Platinum Partners Value
            Arbitrage Fund, LP, which converted a convertible promissory note
            plus accrued interest in the amount of $158,153 into Shares. We
            believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act.

      o     In May 2004, we issued or committed to issue 95,000 Shares to Stern
            Consulting for consulting services. We believe the issuance of these
            securities was exempt under Section 4(2) of the Securities Act.

      o     In April 2004, we issued 37,500 Shares to each of Shai Stern and
            Seth Farbman for consulting services. We believe the issuance of
            these securities was exempt under Section 4(2) of the Securities
            Act.

      o     In April 2004, we issued warrants to purchase 50,000 Shares at an
            exercise price of $2.85 to Vintage Filings, LLC for Edgar services.
            We believe the issuance of these securities was exempt under Section
            4(2) of the Securities Act.

      o     In April 2004, we issued warrants to purchase 50,000 Shares at an
            exercise price of $2.06 and warrants to purchase 50,000 Shares at an
            exercise price of $2.95 to C3P, Inc. for marketing and consulting
            services. We believe the issuance of these securities was exempt
            under Section 4(2) of the Securities Act.

      o     In April 2004, we issued 30,303 Shares and warrants to purchase
            10,101 Shares with an exercise price of $1.75 to Jose Manuel Cabrera
            Venero in exchange for $30,000 in cash. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In April 2004, we issued 141,385 Shares and warrants to purchase
            50,167 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In March 2004, we issued 120,464 Shares and warrants to purchase
            34,018 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In March 2004, we issued 40,000 Shares and warrants to purchase
            13,333 Shares with an exercise price of $1.00 to Hodgson Asesores,
            S.L. in exchange for $30,000 in cash. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In March 2004, we issued 40,000 Shares and warrants to purchase
            13,333 Shares with an exercise price of $1.00 to Ricardo Santoma
            Boixeda in exchange for $30,000 in cash. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.


                                      -53-
<PAGE>

      o     In March 2004, we issued 40,000 Shares and warrants to purchase
            13,333 Shares with an exercise price of $1.00 to Jose Manuel Cabrera
            Venero in exchange for $30,000 in cash. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In March 2004, we issued warrants to purchase 801 Shares with an
            exercise price of $1.00 to Julian Eguizabal Echeverria as a
            consulting and finder's fee. We believe the issuances of these
            securities are exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In February 2004, we issued 133,333 Shares and warrants to purchase
            56,000 Shares with an exercise price of $1.00 to the Robert J.
            Neborsky M.D. Inc., Combination Retirement Trust in exchange for
            $100,000 in cash. We believe the issuances of these securities were
            exempt under Regulation D and/or Section 4(2) under the Securities
            Act.

      o     In February 2004, we issued 333,333 Shares and warrants to purchase
            686,450 Shares with at various exercise prices to Bullbear Capital
            Partners, LLC in exchange for $150,000 in cash. We believe the
            issuances of these securities were exempt under Section Regulation D
            and/or 4(2) under the Securities Act.

      o     In February 2004, we issued 6,000 Shares and warrants to purchase
            26,667 Shares with an exercise price of $0.75, and warrants to
            purchase 15,000 Shares with an exercise price of $0.45 to Brian
            Corday as a consulting and finder's fee. We believe the issuances of
            these securities are exempt under Regulation D and/or Section 4(2)
            under the Securities Act.

      o     In February 2004, we issued 99,332 and warrants to purchase 28,268
            Shares at various exercise prices to Shares to various holders of
            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In February 2004, we issued 25,049 Shares (in two transactions of
            7,677 and 17,372) to an investor, Richard Melnick, in cashless
            exercises of warrants. We believe the issuances of these securities
            were exempt under Section 3(a)(9) of the Securities Act.

      o     In January 2004, we issued 78,259 Shares and warrants to purchase
            25,107 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In January 2004, we issued 55,000 Shares to Stern Consulting for
            consulting services. We believe the issuance of these securities was
            exempt under Section 4(2) of the Securities Act.

      o     In January 2004, we issued warrants to purchase 30,000 Shares at an
            exercise price of $1.25 to Vintage Filings, LLC for Edgar services.
            We believe the issuance of these securities was exempt under Section
            4(2) of the Securities Act.

      o     In January 2004, we issued 97,053 Shares (in two transactions of
            43,000 and 54,053) to an investor, Richard Melnick, in cashless
            exercises of warrants. We believe the issuance of these securities
            was exempt under Section 3(a)(9) of the Securities Act.

      o     In January 2004, we issued a convertible promissory note for
            $50,000, which is convertible into Shares at $0.45 per share, and
            warrants to purchase 362,222 Shares at exercise prices between $0.75
            and $1.50, to Richard Melnick, with an option to purchase an
            additional $300,000 in convertible promissory notes, and warrants to
            purchase 1,506,667 Shares on the same terms. We believe the
            issuances of these securities were exempt under Regulation D and/or


                                      -54-
<PAGE>

            Section 4(2) under the Securities Act. (This transaction was amended
            in June 2004, simultaneous with the option exercise).

      o     In January 2004, we issued a convertible promissory note for
            $150,000, which is convertible into Shares at $0.45 per share, and
            warrants to purchase 520,000 Shares at exercise prices between $0.75
            and $1.50, to Platinum Partners Arbitrage Value Fund LP, with an
            option to purchase an additional $850,000 convertible promissory
            notes, and warrants to purchase 6,548,148 Shares on the same terms.
            We believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act. (This
            transaction was amended in April 2004, simultaneous with the option
            exercise).

      o     In January 2004, we issued a convertible promissory note for
            $185,000, which is convertible into Shares at $0.45 per share, and
            warrants to purchase 929,111 Shares at exercise prices between $0.75
            and $1.50 to Nicholas J. Yocca, with an option to purchase an
            additional $400,000 convertible promissory note, plus 1,120,000
            warrants on the same terms. We believe the issuances of these
            securities were exempt under Regulation D and/or Section 4(2) under
            the Securities Act.

      o     In January 2004, we issued warrants to acquire 845 Shares at a price
            of $0.87 per share to Julian Eguizabal Echeverria as a consulting
            and finder's fee. We believe the issuances of these securities are
            exempt under Regulation S and/or Section 4(2) under the Securities
            Act.

      o     In December 2003, we issued 59,853 Shares and warrants to purchase
            19,458 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In December 2003, we issued 42,254 Shares to Eusebio Jainaga
            Narbaiza in exchange for $30,000 in cash. We believe this issuance
            of securities was exempt under Regulation D and/or Section 4(2)
            under the Securities Act.

      o     In December 2003, we issued 33,334 Shares to James Hertzog and
            Barbara Tawil in exchange for $25,000 in cash. We believe the
            issuances of these securities were exempt under Regulation D and/or
            Section 4(2) under the Securities Act.

      o     In November 2003, we issued 42,077 Shares, and warrants to purchase
            13,730 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In November 2003, we issued 200,000 Shares, and warrants to purchase
            40,000 Shares at an exercise price of $1.00 per share to Robert J.
            Neborsky in exchange for $150,000 in cash. We believe the issuances
            of these securities were exempt under Regulation D and/or Section
            4(2) under the Securities Act.

      o     In November 2003, we issued 2,000 shares and warrants to acquire
            10,000 Shares at an exercise price of $0.75 per share to Brian
            Corday as a consulting and finder's fee. We believe the issuances of
            these securities are exempt under Regulation D and/or Section 4(2)
            under the Securities Act.

      o     In November 2003, we issued 35,212 Shares to each of Keith Moore and
            Ryan Patch in exchange for $25,000 in cash from each. We believe the
            issuances of these securities were exempt under Regulation D and/or
            Section 4(2) under the Securities Act.

      o     In October 2003, we issued 25,246 Shares, and warrants to purchase
            8,453 Shares at various exercise prices to various holders of


                                      -55-
<PAGE>

            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In October 2003, we issued 31,500 Shares to each of Carlos S. De la
            Cuesta Nazabal and Luis Lopez Echeto in exchange for $60,001. We
            believe the issuances of these securities were exempt from
            registration under Regulation S and/or Section 4(2) under the
            Securities Act.

      o     In October 2003, we issued warrants to acquire 15,750 Shares at a
            price of $1.25 per share to Julian Eguizabal Echeverria as a
            consulting and finder's fee. We believe the issuances of these
            securities are exempt under Regulation S and/or Section 4(2) under
            the Securities Act.

      o     In August 2003, we issued 666,666 Shares, and warrants to acquire
            220,000 Shares at exercise prices of $0.75 per share, to Platinum
            Partners Value Arbitrage Fund LP in exchange for $500,000. We
            believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act.

      o     In August 2003, we issued 86,957 Shares, and warrants to acquire
            28,697 Shares at an exercise price of $0.75 per share, to Nicholas
            Yocca, Danny M. Beadle and Patrick Bevilacqua for $60,000. We
            believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act.

      o     In August 2003, we issued 600,000 Shares (in two transactions of
            400,000 Shares and 200,000 Shares), and warrants to acquire an
            additional 150,000 Shares at exercise prices between $0.69 and $0.75
            per share, to Bullbear Capital Partners LLP in exchange for $346,000
            in cash. We believe the issuances of these securities were exempt
            under Regulation D and/or Section 4(2) under the Securities Act.

      o     In August 2003, we issued 217,392 Shares (in two transactions of
            72,464 Shares and 144,928 Shares), and warrants to acquire 65,942
            shares at an exercise price of 0.69 and $0.75, to Richard Melnick in
            exchange for $150,000 in cash. We believe the issuances of these
            securities were exempt under Regulation D and/or Section 4(2) under
            the Securities Act.

      o     In August 2003, we issued a total of 222,222 Shares, and warrants to
            acquire an additional 55,556 Shares at an exercise price of $0.60
            per share, to Mark Yocca, Nicholas Yocca, Paul Kim, and Central
            Answering Service, Inc. in exchange for $100,000 in cash. Mark
            Yocca, Nicholas Yocca and Paul Kim are each attorneys associated
            with Yocca Patch & Yocca, LLP. We believe the issuance of these
            securities was exempt under Regulation D and/or Section 4(2) under
            the Securities Act.

      o     In August 2003, we issued warrants to acquire 60,000 Shares at a
            price of $0.8625 per share to Dunwoody Brokerage Services as a
            consulting and finder's fee. We believe the issuances of these
            securities are exempt under Regulation D and/or Section 4(2) under
            the Securities Act.

      o     In June 2003, we issued 11,178 Shares to a former employee as
            payment of a bonus in accordance with her employment contract with
            us. We believe the issuance of these securities was exempt under
            Section 4(2) under the Securities Act.

      o     In May 2003, we issued 2,129,314 Shares, which include 62,582 Shares
            issued as penalties for late registration, to holders of Series A
            convertible, redeemable preferred stock, par value $0.001 per share
            ("Series A Preferred"), who elected to surrender and exchange the
            Series A Preferred for Shares at a conversion price of $0.45 per
            share. We believe the issuance of these securities was exempt under
            Section 3(a)(9) of the Securities Act.


                                      -56-
<PAGE>

      o     In May 2003, we issued 91,526 Shares to certain stockholders who
            invested in a private placement, dated October 29, 2002, as
            penalties, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. We
            believe the issuance of these securities was exempt under Section
            3(a)(9) of the Securities Act.

      o     In May 2003, we issued 34,000 Shares to Sherbrooke Partners, LLC,
            who exercised warrants to purchase our common stock . We believe the
            issuance of securities was exempt under Regulation D and/or Section
            4(2) under the Securities Act.

      o     In May, June, & July 2003, we issued options to purchase an
            aggregate of 250,000 Shares and 490,000 Shares to employees and
            other service providers, respectively, with exercise prices of $0.50
            and $0.75, respectively, with terms of six years, pursuant to the
            HiEnergy Technologies 2003 Stock Incentive Plan. We believe the
            issuance of these securities was exempt under Regulation D and/or
            Section 4(2) under the Securities Act.

      o     In May 2003, we issued warrants to purchase 165,000 Shares, with an
            exercise price of $0.45 and terms of two to five years, to H.C.
            Wainwright & Co., Inc., and designated beneficiaries, as
            compensation for placement services. We believe the issuance of
            these securities was exempt under Regulation D and/or Section 4(2)
            under the Securities Act.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and accompanying Notes, included herein.
Certain statements contained herein may constitute forward-looking statements,
as discussed at the beginning of Part I of this Annual Report on Form 10-KSB.
Our actual results could differ materially from the results anticipated in these
statements as a result of a variety of factors, including those discussed in our
filings with the Securities and Exchange Commission and as discussed in the
sections under the heading "Risk Factors" in this Report and in "Note 5 - Risks
and Uncertainties to the Consolidated Financial Statements".

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its Subsidiaries, the
"Company") is a nuclear technologies-based company focused on the research and
development of proprietary, neutron-based, "stoichiometric" sensor devices. To
date, we have devoted the bulk of our efforts and resources to the research,
design, testing and development of our proprietary, "stoichiometric" sensor
devices and underlying technologies, and have yet to generate any sales revenues
from the sale of any products using said technology. Our primary focus is
currently on the commercialization of our initial prototype devices, which we
intend to market to governmental and private entities and to distribute or
license through industry partners. Our stoichiometric technology has also been
incorporated into three additional prototype applications which, if we are able
to raise the funds necessary to commercialize them, will be the next products we
attempt to launch: anti-tank landmine detector, unexploded ordinance detector,
which is used to detect Improvised Explosive Devices ("IEDs"), both of which are
typically above the ground, and the Refractorymeter, which can detect fissures
or erosions in the ceramic lining of oil cracking tanks. Additionally, we
continue to be focused on the research and development of additional
applications of our technologies and the further exploitation of our technology
assets both internally and through collaboration with third parties.

HiEnergy Technologies, Inc. was originally incorporated under the laws of the
State of Washington on March 22, 2000, under the name SLW Enterprises Inc.
("SLW") and was redomiciled on October 22, 2002, as a Delaware corporation. At
present we have two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy
Defense") and HiEnergy Europe, Inc. ("HiEnergy Europe"), which were incorporated
under the laws of the state of Delaware in August 2003 and March 2003,
respectively, and one majority owned subsidiary, HiEnergy Microdevices, Inc.,
which was incorporated in Delaware in 1995 ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). We currently hold an
approximate 92% interest in Microdevices, which was the vehicle through which
our "stoichiometric" technology was initially developed by the Company's
Chairman and CEO, Dr. Bogdan Maglich. In November 2003, our Board of Directors
approved a short form merger to acquire the remaining outstanding stock of
Microdevices. Under the merger, 459,222 shares of common stock would be issued
to the remaining shareholders of Microdevices in exchange for each share of
Microdevices owned by them (the same ratio we used in our initial voluntary
share exchange described below. As a result of the short-form merger, all the
assets and liabilities of Microdevices would become direct assets and
liabilities of HiEnergy. As of April 30, 2004, the merger had not been effected.

On April 25, 2002, SLW Enterprises, Inc., which was then a "public shell
company", was taken over by the shareholders of Microdevices, including our
Chairman and CEO, Dr. Bogdan Maglich, pursuant to a voluntary share exchange
whereby the shareholders of Microdevices exchanged 92% of the outstanding shares
of Microdevices for approximately 64% of the outstanding shares of SLW. The
costs of this "reverse takeover" transaction were approximately $451,000 and
were expensed as a general and administration expense in the periods incurred.

Our common shares currently trade on the National Association of Securities
Dealers ("NASD") OTC Bulletin Board ("OTCBB") under the symbol "HIETE". Prior to
August 19, 2004, our shares were traded on the OTCBB under the symbol "HIET".
Upon receipt by the NASD of notification that HiEnergy Technologies has filed
this Report, the "E" is expected to be removed and our trading symbol reverted
to "HIET".


                                      -57-
<PAGE>

BASIS OF PRESENTATION

For accounting purposes, the reverse takeover by Microdevices of HiEnergy was
accounted for as a re-capitalization of Microdevices in a manner similar to a
pooling of interests, with Microdevices as the accounting acquirer (reverse
acquisition). Since HiEnergy (formerly SLW) was a "public shell company", with
limited assets and liabilities at the date of the acquisition and no significant
operations prior to the acquisition, no pro forma information has been
presented.

We have prepared our audited Consolidated Financial Statements on a going
concern basis in accordance with accounting principles generally accepted in the
United States of America. This going concern basis of presentation assumes that
we will continue operations for the foreseeable future and will be able to
realize our assets and discharge our liabilities and commitments in the normal
course of business. As described under the heading "Risk Factors: Risks Related
to Our Business", there is substantial uncertainty about our ability to continue
as a going concern. Our financial statements do not include adjustments that
might result from the outcome of this uncertainty.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis of 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.

LONG-LIVED ASSETS

Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated life of five years. Determining the
estimated life of our property and equipment requires judgment and changes to
the estimated life could materially impact the amount of depreciation expense
recognized in the statement of operations and the amount recognized as property
and equipment in the consolidated balance sheet.

STOCK-BASED COMPENSATION

We account for stock-based awards to employees and directors using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under
the intrinsic value method, where the exercise price of our employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized in our Consolidated Statements
of Operations.

                                      -58-
<PAGE>

Where the exercise price of our employee stock options is less than the market
price of the underlying stock on the date of grant ("in-the-money"),
compensation expense is recorded in our Consolidated Statement of Operations.
From August 21, 1995 (inception) until April 25, 2002 (date of reverse
takeover), the fair value of the common stock was determined by calculating the
weighted average price at which we sold the stock in the month or nearest the
month the stock option was issued. For subsequent periods, the fair value of our
common stock was the quoted market price of the common stock on the date an
instrument was granted.

We account for stock options and warrants issued to non-employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123),
EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18"), and related interpretations.

The application of SFAS No. 123 in determining the fair value of the equity
instruments granted requires judgment, including the expected life, stock price
volatility for stock options and warrants and expected dividends. Changes in any
of these factors could materially impact the amount of expense recognized in the
consolidated statement of operations for goods and services received from
non-employees.

RESEARCH AND DEVELOPMENT COSTS

We account for research and development costs in accordance with SFAS No. 2,
"Accounting for Research and Development Costs". Research and development costs
are charged to operations as incurred. As described in section 3.50 of the
Government Contract Audit Guide for Fixed-Price Best-Efforts Cost Sharing
Arrangements, amounts earned under our development contracts with the U.S.
Department of Defense have been offset against research and development costs,
in accordance with the provisions of that section, in all periods presented.

YEAR ENDED APRIL 30, 2004 COMPARED TO YEAR ENDED APRIL 30, 2003

For the fiscal year ended April 30, 2004, we incurred a net loss of $7,600,000,
as compared to a net loss of $5,926,000 for the year ended April 30, 2003.
Included in the losses are equity based expenses of $3,773,000 and $2,487,000,
respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $4,796,000 for the fiscal year ended
April 30, 2004, a decrease of $149,000 from the prior year. In lieu of cash, we
have often engaged service providers by offering common stock, warrants, options
and convertible notes payable (CNP) as compensation. Through various
arrangements these providers have provided services such as business
development, business and financial consulting, Edgar services and directorship.
Some of these warrants and options that were issued and subsequently expensed
have been forfeited causing no dilution to the Company. The major components of
general and administration expenses, both cash and equity, are as follows:

<TABLE>
<CAPTION>

                                 Year Ended April 30, 2004                   Year Ended April 30, 2003
                             ---------------------------------   ------------------------------------------------
                              Cash &       Equity                 Cash &       Equity
                             Accrued       Based                 Accrued        Based                    Increase/
                             Expenses   Compensation   Total     Expenses   Compensation     Total       (Decrease)
                             ---------------------------------   -------------------------------------------------

<S>                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
 Wages and benefits       $  881,000   $1,650,000   $2,531,000   $1,019,000   $1,882,000   $2,901,000   $ (370,000)

 Legal fees                  772,000      127,000      899,000      705,000           --      705,000      194,000

 Accounting fees             233,000           --      233,000      163,000           --      163,000       70,000
 Investor  & public
relations                    420,000       47,000      467,000      530,000      323,000      853,000     (386,000)

 Insurance                   147,000           --      147,000       90,000           --       90,000       57,000

 Travel                      194,000           --      194,000      107,000           --      107,000       87,000

 Other                       325,000           --      325,000      126,000           --      126,000      199,000
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
                  Total   $2,972,000   $1,824,000   $4,796,000   $2,740,000   $2,205,000   $4,945,000   $ (149,000)
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------

</TABLE>

For the fiscal year ended April 30, 2004, cash and accrued wages and benefits
expense decreased $138,000 from the prior year. This decrease was due to cash
saving measures instituted in March 2003 that included a reduction in head
count, and unpaid payroll taxes of $107,000 for 2003. In 2003, we recorded an
expense of $107,000 for unpaid payroll taxes and penalties discussed in "Note 7
- Accrued Payroll and Payroll Taxes". We plan to settle this liability as soon
as resources are available to do so.


                                      -59-
<PAGE>

Equity based wages and benefits expense decreased $232,000 from the prior fiscal
year. However, included in the equity based wages and benefits expense for the
prior year was $1,033,000 for an in-the-money stock option issued to a former
CEO in September 2002, which subsequently was forfeited in May of 2003.
Excluding this charge, equity based wages and benefits expense increased year
over year by $801,000. This expense increase was attributed to: (i) option
compensation of $374,000 paid to directors of both HiEnergy and HiEnergy
Defense, a subsidiary created in fiscal 2004 which had paid no director
compensation for the prior year; and (ii) expensing of an option upon
termination of a consulting agreement entered into in 2003, which added $318,000
of additional equity based compensation over fiscal year 2003.

Legal fees increased $194,000 for fiscal year 2004 from the prior year due to
costs related to certain litigation and regulatory matters concerning disputes
with former directors, employees and consultants, certain SEC inquiries and the
Wells Notice described in the Section . Accounting fees expense increased
$70,000 for fiscal year 2004 from the prior year due to increased company
filings and auditing costs We expect legal and accounting fees to remain high
for the first half of fiscal 2005 and to decrease during the second half of
fiscal 2005, as we attempt to settle current SEC issues and pending legal
matters disclosed in this Report, and finish the restatement of our annual and
quarterly financial results.

Investor and public relations expense decreased $386,000 for the fiscal year
ended April 30, 2004 as compared to the prior fiscal year. Related cash and
accrued expenses decreased $110,000 as a result of our cost-cutting measures
instituted in March of 2003, which included the replacement of our investor
relations firm. Related equity based compensation expense decreased $276,000 as
we ceased certain equity based compensation programs from 2003 in which we
issued options to two different investor relations firms with an aggregate fair
value of $370,000. For the fiscal year ended April 30, 2004, we amortized the
fair value of granted options over the life of each contract and wrote off the
remaining amount.

Insurance expense increased $57,000 over the prior year, because the Directors
and Officers liability policy we purchased in fiscal 2004 was obtained at a much
higher rate than that of the prior fiscal year. Notably, in May 2004, we were
able to renew our policy for an additional year without incurring a substantial
cost increase. At present, we maintain $2,000,000 of Directors and Officers
liability insurance.

Travel expenses for the current year increased $87,000 in fiscal year 2004, in
connection with our expanded business development activities during that period.

Other expenses for the current year increased $199,000 in fiscal year 2004,
which include cost increases for edgar filing services and stock transfer agent
fees, as well as, telephone, postal and shipping, office equipment and supplies,
licenses and permits, and web design and development, that are consistent with
our expanded business development and international efforts during that period.

RESEARCH AND DEVELOPMENT

Net research and development expenses increased $109,000 over the prior year. No
equity based expenses were recorded for research and development. The major
components of research and development expenses are as follows:

                             Years Ended
                      ------------------------ ------------
                       April 30,     April 30,   Increase/
                        2004         2003       (Decrease)
                      ------------------------ ------------

Wages and benefits    $ 742,000    $ 537,000    $ 205,000

Supplies                134,000       42,000       92,000

Travel                   17,000       65,000      (48,000)

Depreciation            128,000       90,000       38,000

Other                   155,000      106,000       49,000

Grant income           (372,000)    (145,000)    (227,000)
                      ---------    ---------    ---------

                Net   $ 804,000    $ 695,000    $ 109,000
                      ---------    ---------    ---------

                                      -60-
<PAGE>

Wages and benefits related to research and development activities increased
$205,000 in the current fiscal year compared to the prior fiscal year, as we
added additional scientific personnel to advance the development of our
technology and devices.

The increase of $92,000 in supplies related to research and development
activities over the prior fiscal year was due to the purchase of components for
our technology and devices.

Travel expenses for the current year decreased $48,000 in fiscal year 2004,
because of a decrease in funding proposal and grant application activity which
requires significant cross-continental travel. Also, we internalized various
scientific and technical functions and reduced our dependency on sub-contracting
or employing consultants for research activity, which had previously required
significant travel expense reimbursements.

We added additional equipment expense of $482,000 in fiscal 2003 and $246,000 in
fiscal 2004. The additional equipment increased depreciation expense year over
year.

Other expenses for the current year increased $49,000 in fiscal year 2004, which
include cost increases for telephone, furniture and fixture rentals, and
building lease costs during that period as a result of our expanding in order to
internalize various scientific and technical functions.

For the fiscal year ended April 30, 2004, we received grant money of $372,000
compared to $145,000 for the prior year. In August 2002, our project to develop
and test an anti-tank landmine detection system over a two year period was
selected by the U.S. Department of Defense under a Small Business Innovation
Research (SBIR) contract. Under this contract, the U.S. Army pays a portion of
our research and development costs on a periodic basis during the term of the
contract. We previously received $70,000 in SBIR contract proceeds to complete
Phase I, and are entitled to receive an additional $780,000 in SBIR proceeds to
complete Phase II, of which $415,000 has been earned to date. Under the terms of
the SBIR, we are required to submit monthly written reports detailing our
progress accompanied with an invoice for one-twelfth of the annual amount. When
the written report is accepted by the U.S. Department of Defense, we receive
payment in about 30 to 45 days.

DEPRECIATION

Total depreciation expense for the fiscal years ended April 30, 2004 and 2003
was $144,000 and $92,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the intervening period.

INTEREST EXPENSE AND INCOME

Interest expense for fiscal year 2004 increased to $538,000 from $11,000 for the
prior year. The increase was primarily due to $493,000 of non-cash charges we
recorded upon issuance of convertible notes payable (CNP).

During the fiscal year ended April 30, 2004, we expensed as interest the total
proceeds of $385,000 derived from the sale of CNP with detachable warrants to
investors, since the combined fair value of the beneficial conversion feature
and the detachable warrants exceeded $385,000 under GAAP accounting rules. The
CNP were convertible immediately, therefore, the fair value of beneficial
conversion feature was determined by taking the spread between the market price
of our common stock at the date of issuance and the conversion price, multiplied
by the number of shares underlying the CNP. The valuation of the warrants was
determined by using the Black-Scholes model.


                                      -61-
<PAGE>

During the fiscal year ended April 30, 2004, we expensed as interest a
beneficial conversion feature of $108,000 against $647,000 in CNP issued to our
former legal counsel. The CNP were convertible immediately; therefore, the fair
value of beneficial conversion feature was determined by taking the difference
between the market price of the common stock at the date of issuance and the
conversion price, multiplied by the number of shares underlying the CNP.

The CNP to the investors for $385,000 carry a 5% interest rate, and the CNP to
our former legal counsel for $647,000 carry a 10% interest rate. These notes and
other notes payable of lesser amount generated interest expense of $45,000 for
the fiscal year ended April 30, 2004.

Interest income during the fiscal year 2004 was $1,000 compared to $8,000 for
the prior fiscal year. During the current fiscal year, we had an average balance
of $60,000 in our cash investment account compared to $375,000 for the prior
fiscal year.

FINANCING EXPENSES

During the fiscal year ended April 30, 2003, we expensed $224,000 for a warrant
to purchase 150,000 shares of common stock issued to a shareholder and former
director of the Company. We granted the warrant because we were in default on a
note payable for $150,000 to said shareholder. The fair value of the warrant was
determined using the Black-Scholes model.

PENALTIES ON DEBT AND EQUITY ISSUANCES

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, and common stock and warrants with registration rights, as a result of
our inability to file and maintain effective a registration statement within
certain specified deadlines. The penalties will stop accruing on all of the
instruments once a registration statement covering the instruments is filed and
maintained effective, or when the penalties become impermissible as a matter of
law as prescribed in the instrument.

In April 2004, we recorded a $7,000 expense upon the issuance of CNP as
penalties with a face value of $7,000. Certain holders of previously issued CNP
will continue to receive each month additional CNP equal to 2% of their original
notes. In addition, since the original CNP included detachable warrants, these
investors also received, and will continue to receive each month, additional
detachable warrants to purchase 2% of the amount of shares underlying the
original warrants. In April 2004, we recorded a $41,000 expense upon issuance of
warrants to purchase 10,044 common shares as penalties to these investors. The
fair value of these warrants was determined using the Black-Scholes model.

During the year ended April 30, 2004, we recorded $1,225,000 as penalty expense
upon the issuance or the committed issuance of 803,565 shares of common stock.
Certain holders of unregistered common stock received, and will continue to
receive each month, additional shares as a percentage of the original number of
shares they purchased. In addition, since the original shares included
detachable warrants, these investors also received and will continue to receive
each month additional detachable warrants to purchase common stock as a
percentage of the amount of common stock underlying the original warrants.
During the fiscal year ended April 30, 2004, we recorded a $191,000 expense upon
issuance of warrants to purchase 168,497 common shares as penalties to these
investors. The fair value of these warrants was determined using the
Black-Scholes model.

During the fiscal year ended April 30, 2003, we issued or committed to issue
128,136 shares of common stock as a penalties and recorded $58,000 for penalties
expense.

BENEFICIAL CONVERSION FEATURE GRANTED ON PREFERRED STOCK

During the fiscal year ended April 30, 2003, we sold 97.93 shares of Convertible
Series A Preferred stock for net cash proceeds of $800,000. At the time of
issuance, the conversion price of the shares underlying the convertible
preferred stock was $1.15 and the market value of our common stock was $2.05.
Since the Series A Preferred stock was convertible immediately, we recorded a
beneficial conversion expense in the amount of $767,431. Using the intrinsic
value method, the 851,755 underlying shares were multiplied by the beneficial
conversion feature price of $0.90 per share.


                                      -62-
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

The subsection of Note 3 to the audited Notes to the Financial Statements
entitled Recently Issued Accounting Pronouncements is incorporated herein.

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2004, we had cash and cash equivalents of $43,000, stock
subscription receivable of $425,000, and a receivable from an equipment supplier
for $150,000. Both of these receivables were collected in May 2004. The
receivable from the equipment supplier was included in other current assets, and
the stock subscription receivable, which was for the sale of 944,444 shares of
common stock with 3,891,111 warrants, was offset against other current
liabilities - common stock subject to rescission rights (see Note 12 - Sales of
Common Stock Subject to Rescission).

Other current assets, as of April 30, 2004, consisted primarily of the
previously mentioned $150,000 receivable from an equipment supplier and $52,000
for prepaid consulting services which will be recognized as an expense in fiscal
year 2005.

During the fiscal year ended April 30, 2004, our sources of cash were as
follows:

                                                                Amount
                                                              -----------
          Sales of common stock                               $ 1,309,000
          Sales of common stock subject to rescission rights      475,000
          Sales of common stock subject to buy-back               200,000
          Sales of convertible notes payable                      385,000
          Proceeds from exercise of warrants                       54,000
          Loans from our Chairman and CEO                         244,000
          Collection of equity subscription receivable            443,000
                                                              -----------
                                                              $ 3,110,000
                                                              -----------

During the fiscal year ended April 30, 2004, accounts payable and accrued
expenses when combined were relatively unchanged compared to the prior fiscal
year. Accrued expenses consisted primarily of a $23,000 legal settlement with a
former consultant and a $50,000 fee payable to an investment bank.

The fee payable to the investment bank was accrued upon execution of an
agreement in August 2003, pursuant to which we would receive a guarantee to
support our bid for a $1,600,000 grant under a contract with the U.S. Navy. In
exchange for this guarantee, the Company was obligated to pay the investment
bank a fee which ranged from $50,000 to $150,000, depending upon whether or not
the contract with the U.S. Navy was awarded to us. A guarantee was provided to
the U.S. Navy in which the investment bank committed to fund between $2.5
million and $4 million through common stock purchases, so that we could
demonstrate sufficient funding to perform against the 18-month contract.
Although, we had been approved for the grant of $1,600,000, the Contracting
Office of the Naval Surface Warfare Center ultimately disqualified us on the
basis of our financial condition. (See: "Government Research and Development
Grants and Contracts".)

As of April 30, 2004, we expensed an accrued payroll and payroll tax liability
for the most recent period of $65,000, and an accrued payroll tax liability of
$393,000 for stock compensation (in the form of Microdevices shares) given for
services rendered by officers, employees, directors, legal advisors and
consultants during the period from June 1997 through February 2002. We had
previously reported an accrual of $350,000 for the fiscal year ended April 30,
2002, which we subsequently reversed in fiscal year 2003 because we believed we
had no liability for payroll taxes and penalties based upon information supplied
to us by a tax consultant. At that time, the value originally assigned to the
stock was nil, as Microdevices was a closely held corporation with negative net
worth, no immediate prospective earnings power, no marketable product, and no
dividend paying capacity. In August 2004, following a reassessment, we engaged
additional tax advisors to determine if the Microdevices shares had a
determinable value. Based upon the determinable value they advised us of our
liability and we calculated the current amount at $393,000. (See: Note - 7
Accrued Payroll and Payroll Taxes.)


                                      -63-
<PAGE>

For the fiscal year ended April 30, 2003, we had an accrued payroll and payroll
tax liability for the most recent period of $28,000, and accrued a payroll tax
liability of $364,000 for the Microdevices stock.

As of April 30, 2004, we were in default on a note payable totaling $40,000 with
a shareholder and related party. The note payable has been in default since
November 1997.

As of April 30, 2004, we issued unsecured convertible promissory notes totaling
$647,000 to our former legal counsel. The legal fees were expensed as a general
and administration expense in the periods incurred. The notes bear 10% annual
interest and are due in April 2005.

Under a previous arrangement, an investor in our common stock has the option to
purchase an additional $650,000 worth of common stock on the terms described in
Note - 17 to our Consolidated Financial Statements. The additional purchases can
be made at any time prior to the underlying common stock being registered
provide our stock prices equals or exceeds $0.92. The agreement also provide for
the issuance of warrants to purchase up to 1,648,086 shares at varying terms.
The exercise prices of these warrants range between $0.83 and $1.65, and the
warrants expire between 120 days and three and one-half years after issuance.

Under a previous arrangement, an investor in our CNP has the option to purchase
an additional $400,000 worth of CNP on the terms described in Note 12 to our
Consolidated Financial Statements. The additional purchases can be made at any
time prior to the underlying common stock being registered. The additional CNP
also provide for the issuance of warrants to purchase up to 1,120,000 shares at
varying terms. The exercise prices of these warrants range between $0.45 and
$1.50, and the warrants expire between 120 days and three and one-half years
after issuance.

During the fiscal year ended April 30, 2004, we sold to various investors an
aggregate of $385,000 of CNP with detachable warrants. In April 2004, one of the
CNP for $150,000 plus $8,000 of accrued interest was converted into 351,452
committed shares of unregistered common stock. As of April 30, 2004, the
remaining original CNP balance of $235,000 plus the $1,000 CNP given as a
penalty were are convertible into 524,444 shares of common stock. The notes may
be subject to rescission rights and therefore have all been included in current
liabilities even though they don't mature until fiscal year 2006. (See: "Note 11
- Convertible Notes Payable Subject to Recission Rights".)

During the period from April 2003 through June 2003, we sold common stock at
prices between $0.33 and $0.35 per share, which are subject to buy-back. As of
April 30, 2004, 2,000,000 shares remain subject to buy-back however, information
provided by our transfer agent indicates that many of these shares have been
sold by the original purchaser. We have reserved a current liability of $694,000
for these shares and will continue to record the potential repurchase obligation
as a liability until the two-year waiver period has lapsed. See: "Note 12 -
Sales of Common Stock Subject To Buy-Back by the Company".

During the fiscal year ended April 30, 2004, we sold 770,424 shares of common
stock, and committed to issue 1,295,896 shares of common stock that may be
subject to rescission rights. See: "Note 13 - Sales of Common Stock Subject to
Rescission". We have reserved a net current liability of $633,000 against these
shares until such time as we have determined with our legal advisors whether or
not the rescission rights are valid. This net current liability included a
$425,000 subscription receivable for 944,444 committed shares which was
collected in May.


                                      -64-
<PAGE>

As of April 30, 2004, we had total liabilities of approximately $3.8 million,
which includes $1.6 million of liabilities related to rescission and buy-back
obligations on our securities. Since we currently have no sales revenue, and the
amount of liabilities significantly exceeds our cash on hand, we will be
required to continue to sell equity or debt instruments in order to pay present
liabilities and fund on-going operations.

Between May and August 2004, we sold 347,355 shares of common stock at various
prices raising $443,250, net of commissions. The sales included warrants to
purchase 261,151 of our common shares with exercise prices between $2.50 and
$2.75. In addition to a cash commission of $31,750, we also issued a finders fee
in the form of warrants to purchase 4,420 of our common shares exercisable at
prices between $2.50 and $2.75.

In June 2004, we issued $300,000 of CNP to two investors. The CNP have a two
year term, bear annual interest at 5% and convert into common stock at $0.45 per
share. The CNP also have detachable warrants to purchase common shares with a
three and one-half year term as follows: 1,333,332 shares at $0.45 per share;
400,000 shares at $0.75 per share and 240,000 shares at $1.25 per share. If the
securities are not registered by us before October 30, 2004, the investors are
entitled to receive as penalties, additional detachable warrants to purchase 2%
of the amount of shares exercisable under the original warrants and CNP equal to
2% of the principal balance of the original CNP, for each subsequent month until
a registration statement is filed and maintained effective by us, or the
penalties become impermissible as a matter of law as prescribed in the
instrument. Additionally, if we sell new shares below $0.45 before January 15,
2005, in unrelated transactions, the conversion price of the CNP will be reduced
to equal the price of the new shares.

In April and May 2004, we issued purchase orders for $2.4 million to two vendors
for the purchase of components for our bomb detection units. In April 2004, we
ordered ten neutron generators at a cost of approximately $1,033,000 through
vendor financing. These generators are scheduled to be delivered at a rate of
approximately one per month beginning July 2004. We will lease purchase these
units from the vendor for up to 12 months with estimated monthly payments of
$5,800, whereas 80% of the lease payments shall be applied to the purchase
price. In May 2004, we ordered 60 neutron detectors for $1,368,000. We expect to
receive deliveries of the detectors in the period between July 2004 and April
2005. Payment terms for these detectors require 50% down payment upon order with
the balance due upon our receipt and acceptance.

Below is a summary of our agreements presently in effect showing their monthly
and annual minimum cost:

<TABLE>
<CAPTION>
                                                                    Minimum      Annual
                                  Beginning           Ending        Monthly     Minimum
         Commitments                 Date              Date           Cost        Cost            Status
---------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>                  <C>        <C>        <C>
Employment agreement
  with Chairman and CEO       January 2002      December 2006        $ 18,820  $ 225,600     In effect
Building lease agreement      September 2002    September 2005       $ 12,623  $ 151,476     In effect
Investor relations services   January  2004     June 2004            $  5,000  $  60,000     In effect
Public relations services     November  2002    February 2003        $ 12,500  $ 150,000     Month-to-Month

</TABLE>


                                      -65-
<PAGE>

PLAN OF OPERATION

Our overriding corporate focus for fiscal year 2005 is to commercialize and
bring to market our explosives identification prototypes. Our Middle Eastern
distributor (EEMCO) has had various discussions with potential customers and has
deposited $25,000 towards the purchase of a prototype unit, which EEMCO plans to
display in Istanbul, Turkey. Istanbul is being considered as a final staging and
technical support base for sales to the Middle East. EEMCO is wholly owned by a
member of our Board of Directors who is also a shareholder of the Company.
Initial assembly will be handled from our research and development facility
located in Irvine, California. Assembly at this facility will be very limited
and we may be required to outsource certain functions and/or hire additional
technicians on a needs basis. We are currently seeking a location to serve as
our assembly facility and have contracted with an engineering and construction
company to help facilitate the location and design. Together, we are currently
reviewing different locations and expect to choose a location within the current
quarter. We are seeking approximately 60,000 square feet of space which will
allow us to expand production based on demand. We have received positive
feedback regarding demand for our explosives identification products but have
not finalized our pricing or marketing plans. Accordingly, we will scale
production as we are better able to ascertain our applicable sales parameters.
We expect that the facility will be operational in 2005. Construction and/or
build-out costs are estimated to fall between $1 million and $2.5 million and we
are negotiating with local municipalities for monetary incentives to locate to
their area.

We plan to continue to be focused on the research and development of additional
applications of our technologies and the further exploitation of our technology
assets both internally and through collaboration with third parties. We intend
to also build upon our investments in the base unit and technologies comprising
our explosives identifications prototypes and introduce more sophisticated
applications and configurations. We will use the proceeds of existing government
grants and any new grants or research and development contracts, as well as
other available funds and financing means to forward these objectives.

We believe that general and administrative costs will remain high in the first
half of fiscal year 2005 and show improvement in the second half as we reduce
legal and accounting expenses associated with the restatement of the Company's
financial statements and certain litigation concerning disputes with former
directors, employees and consultants and certain regulatory matters related to
SEC investigations.

Materials and production costs for our explosive identification units will be
significant in fiscal year 2005, increasing throughout the year. Working capital
requirements are also expected to grow throughout the year as necessary
components are purchased. Initial sales are projected to be at or near cost with
margins expected to improve from economies of scale upon opening of our
production facility and increased demand following the introduction of our
products into the market place. We are also evaluating service and warranty
plans and are negotiating and have entered into certain outsourcing servicing
arrangements.


                                      -66-
<PAGE>

We anticipate significant increases in personnel throughout our organization.
Our production facility when operational will require the hiring or contracting
of approximately 40 new personnel. As we begin the commercialization phase of
our products and expand our operating structures, significant enhancements to
corporate management will be necessary. We anticipate the need to hire
individuals to manage the new functions in product manufacturing and
distribution and to fill and upgrade key executive positions in the last quarter
of calendar year 2004, including, among others, a Chief Financial Officer. Other
areas that may need additional personnel include serving various sales and
marketing and customer service functions. As funds are available, we also
anticipate hiring additional skilled personnel, such as advanced engineering
professionals, as part of a product development team that could be self
sufficient and operate with minimal supervision, additional scientists and
experienced technicians. Our current facilities will be adequate to conduct our
administrative, research and development activities as well as some assembly and
distribution.

Historically, we have financed operations with periodic cash infusions through
various financing vehicles. The uncertainties of financing has limited our
capacity to make investments in more extensive research and development,
inventory and component procurement, and human resources, as well as the
commercialization of our products. We are currently seeking a larger capital
infusion in the range of $2 to $4 million and we estimate that our total
financial requirements for fiscal 2005 will be between $8 to $10 million. This
will cover facility build out, inventory procurement and operations. Currently,
we have no current commitments for obtaining necessary capital.







ITEM 7. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
  INDEPENDENT AUDITOR'S REPORT                                                68

           CONSOLIDATED FINANCIAL STATEMENTS
           Consolidated Balance Sheet                                          1
           Consolidated Statements of Operations                               2
           Consolidated Statements of Stockholders' Equity (Deficit)           4
           Consolidated Statements of Cash Flows                              12
           Notes to Consolidated Financial Statements                         71



                                      -67-
<PAGE>

INDEPENDENT AUDITOR'S REPORT


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
HiEnergy Technologies, Inc.
Irvine, California

We have audited the accompanying consolidated balance sheet of HiEnergy
Technologies, Inc. and Subsidiaries as of April 30, 2004, and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the two years then ended and the period from August 21, 1995 (inception) to
April 30, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HiEnergy
Technologies, Inc. as of April 30, 2004 and the results of its operations and
its cash flows for the two years then ended, and the period from August 21, 1995
(inception) to April 30, 2004, in conformity with accounting principles
generally accepted in the United States of America.

As described in Note 2 to the financial statements, the April 30, 2003 and 2002
financial statements have been restated.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and its total liabilities exceeds its total assets. In addition, the Company has
an accumulated deficit of $21,815,596 and a shareholders' deficit of $2,883,152.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Note 16 to the financial statements, the Company is involved in
various litigation matters. The effect of such litigation on the Company's
financial statements is indeterminable at this time.


/s/ Singer Lewak Greenbaum & Goldstein LLP
------------------------------------------
Los Angeles, California
September 2, 2004


                                      -68-
<PAGE>


                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                                      CONSOLIDATED BALANCE SHEET
                                                                  APRIL 30, 2004
--------------------------------------------------------------------------------

                                     ASSETS
                                                                     April 30,
                                                                       2004
                                                                   ------------
CURRENT ASSETS
    Cash and cash equivalents                                      $     42,857
    Accounts receivable                                                  30,412
    Other current assets                                                224,817
                                                                   ------------
        Total current assets                                            298,086

PROPERTY AND EQUIPMENT, net                                             610,468
                                                                   ------------
TOTAL ASSETS                                                       $    908,554
                                                                   ============

                       LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES
    Accounts payable                                               $    578,283
    Accrued expenses                                                     88,291
    Accrued payroll and payroll taxes                                   458,204
    Accrued interest                                                     74,173
    Notes payable                                                        12,368
    Notes payable - related parties                                     348,934
    Convertible notes payable - related parties                         609,374
    Convertible notes payable subject to rescission rights              236,000
    Common stock subject to buy-back, 2,000,000 shares                  694,000
    Common stock subject to rescission rights, less subscription
        receivable of $425,000.  770,424 shares issued and
        outstanding, 1,295,896 shares committed                         633,153
                                                                   ------------
        Total current liabilities                                     3,732,780

LONG-TERM LIABILITIES
    Notes payable                                                         1,942
    Convertible note payable - related party                             38,061
                                                                   ------------
        Total liabilities                                             3,772,783
                                                                   ------------
MINORITY INTEREST IN SUBSIDIARY, 20,540 MICRODEVICES SHARES
    ISSUED AND OUTSTANDING                                               18,923
                                                                   ------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT
    Preferred stock, $0.001 par value 20,000,000 shares authorized
        no shares issued and outstanding                                     --
    Common stock, $0.001 par value
        100,000,000 shares authorized
        30,652,482 shares issued and outstanding                   $     30,652
    Additional paid-in capital                                       19,181,421
    Deferred compensation                                              (459,308)
    Committed common stock, 101,986 shares                              179,679
    Deficit accumulated during the development stage                (21,815,596)
                                                                   ------------
              Total shareholders' deficit                            (2,883,152)
                                                                   ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                        $    908,554
                                                                   ============


   The accompanying notes are an integral part of these financial statements

                                       -1-
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED APRIL 30, 2004 AND 2003 AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   For the
                                                                                 Period from
                                                                                 August 21,
                                                     For the Years Ended            1995
                                                ----------------------------   (Inception) to
                                                  April 30,       April 30,       April 30,
                                                    2004            2003            2004
                                                                  Restated        Restated
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
OPERATING EXPENSES
      General and administration                $  4,795,541    $  4,944,929    $ 15,647,575
      Research and development                       804,431         695,042       2,412,109
                                                ------------    ------------    ------------

TOTAL OPERATING EXPENSES                           5,599,972       5,639,971      18,059,684

LOSS FROM OPERATIONS                              (5,599,972)     (5,639,971)    (18,059,684)
                                                ------------    ------------    ------------

OTHER INCOME (EXPENSE)
      Interest income                                  1,011           7,886           8,897
      Other income                                     1,192             231           1,423
      Interest expense                              (538,063)        (10,855)       (578,973)
      Financing expense                                   --        (223,710)       (223,710)
      Penalty expense on issuance of
           convertible promissory notes
           as a penalty for late registration        (47,748)             --         (47,748)
      Penalty expense on issuance of
           common stock and warrants
           as a penalty for late registration     (1,415,723)        (57,661)     (1,473,384)
                                                ------------    ------------    ------------

Total other income (expense)                      (1,999,331)       (284,109)     (2,313,495)
                                                ------------    ------------    ------------

LOSS BEFORE PROVISION FOR INCOME TAXES            (7,599,303)     (5,924,080)    (20,373,179)

PROVISION FOR INCOME TAXES                               800           1,600          13,383
                                                ------------    ------------    ------------

NET LOSS                                        $ (7,600,103)   $ (5,925,680)   $(20,386,562)
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                       -2-


<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED APRIL 30, 2004 AND 2003 AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   For the
                                                                                 Period from
                                                                                 August 21,
                                                     For the Years Ended            1995
                                                ----------------------------   (Inception) to
                                                  April 30,       April 30,       April 30,
                                                    2004            2003            2004
                                                                  Restated        Restated
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
BENEFICIAL CONVERSION FEATURE GRANTED
      ON PREFERRED STOCK                                  --        (767,431)       (767,431)

PREFERRED STOCK DIVIDEND                            (583,243)        (78,360)       (661,603)
                                                ------------    ------------    ------------

NET LOSS AVAILABLE TO COMMON
      SHAREHOLDERS                              $ (8,183,346)   $ (6,771,471)   $(21,815,596)
                                                ============    ============    ============

Net loss per share                              $      (0.27)   $      (0.25)
                                                ============    ============

BENEFICIAL CONVERSION FEATURE GRANTED
      ON PREFERRED STOCK PER SHARE              $         --    $      (0.03)
                                                ============    ============

PREFERRED STOCK DIVIDENDS PER SHARE             $      (0.02)   $      (0.01)
                                                ============    ============


BASIC AND DILUTED LOSS AVAILABLE TO
      COMMON SHAREHOLDERS PER SHARE             $      (0.29)   $      (0.29)
                                                ============    ============

BASIC AND DILUTED WEIGHTED AVERAGE
      COMMON SHARES OUTSTANDING                   28,294,578      23,269,612
                                                ============    ============
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                       -3-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
BALANCE, AUGUST 21, 1995 (INCEPTION)                                                    -        $     -              -    $     -
RECAPITALIZATION UPON REVERSE MERGER                                                                          6,470,000      6,470
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            08/31/95      $ 0.01                                  715,277        715
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            09/05/95      $ 0.01                                   11,623         12
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            02/13/96      $ 0.01                                    7,871          8
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 1996  (RESTATED)                                                     -              -      7,204,771      7,205

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/02/96      $ 0.01                                    1,162          1
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/16/96      $ 0.01                                    1,788          2
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/20/96      $ 0.01                                      269          -
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 1997   (RESTATED)                                                    -              -      7,207,990      7,208

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/20/97      $ 0.28                                   13,411         13
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/02/97      $ 0.28                                  135,903        136
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/03/97      $ 0.28                                  588,762        589
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/08/97      $ 0.28                                    5,901          6
ISSUANCE OF COMMON STOCK FOR CASH                         06/14/97      $ 0.28                                   35,766         36
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/16/97      $ 0.28                                  290,331        290
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/18/97      $ 0.28                                    4,918          5
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/23/97      $ 0.28                                  206,167        206
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            07/28/97      $ 0.28                                    8,941          9
ISSUANCE OF COMMON STOCK FOR CASH                         08/11/97      $ 0.14                                   40,237         40
ISSUANCE OF COMMON STOCK FOR CASH                         08/19/97      $ 0.14                                   17,883         18
ISSUANCE OF COMMON STOCK FOR CASH                         09/04/97      $ 0.28                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         09/04/97      $ 0.35                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         09/12/97      $ 0.28                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         10/14/97      $ 0.22                                   89,417         89
ISSUANCE OF COMMON STOCK FOR CASH                         12/17/97      $ 0.14                                   53,650         54
ISSUANCE OF COMMON STOCK FOR CASH                         12/17/97      $ 0.28                                   42,920         43
ISSUANCE OF COMMON STOCK FOR CASH                         12/17/97      $ 0.49                                   42,920         43
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/31/97      $ 0.29                                   49,175         49
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            01/29/98      $ 0.28                                   53,646         54
ISSUANCE OF COMMON STOCK FOR CASH                         01/30/98      $ 0.28                                   44,708         45
ISSUANCE OF COMMON STOCK FOR CASH                         03/23/98      $ 0.05                                   45,603         46
ISSUANCE OF COMMON STOCK FOR CASH                         03/23/98      $ 0.28                                   62,771         63
ISSUANCE OF COMMON STOCK FOR CASH                         03/25/98      $ 0.11                                    4,471          4
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            03/25/98      $ 0.22                                    1,788          2
ISSUANCE OF COMMON STOCK FOR CASH                         03/25/98      $ 0.28                                   89,417         89
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/04/98      $ 0.22                                   89,410         89
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/14/98      $ 0.22                                    2,682          3
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/28/98      $ 0.22                                      893          1
NET LOSS
                                                                                 --------        -------    -----------    -------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                    Additional      Committed                       during the
                                                     Paid-in         Common         Deferred        Development
                                                     Capital          Stock       Compensation         Stage            Total
                                                   ------------     ---------     ------------     -------------     ------------
<S>                                                 <C>              <C>            <C>            <C>               <C>
BALANCE, AUGUST 21, 1995 (INCEPTION)                $         -      $      -       $        -     $           -     $          -
RECAPITALIZATION UPON REVERSE MERGER                     (6,456)                                                               14
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            7,297                                                             8,012
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              118                                                               130
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED               80                                                                88
NET LOSS                                                                                                 (39,387)         (39,387)
                                                   ------------     ---------       ----------     -------------     ------------

BALANCE, APRIL 30, 1996  (RESTATED)                       1,039             -                -           (39,387)         (31,143)

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED               11                                                                12
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED               19                                                                21
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                3                                                                 3
NET LOSS                                                                                                (110,004)        (110,004)
                                                   ------------     ---------       ----------     -------------     ------------

BALANCE, APRIL 30, 1997   (RESTATED)                      1,072             -                -          (149,391)        (141,111)

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            3,737                                                             3,750
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           37,861                                                            37,997
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          164,023                                                           164,612
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            1,644                                                             1,650
ISSUANCE OF COMMON STOCK FOR CASH                         9,964                                                            10,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           80,884                                                            81,174
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            1,370                                                             1,375
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           57,436                                                            57,642
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            2,491                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                         5,585                                                             5,625
ISSUANCE OF COMMON STOCK FOR CASH                         2,482                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                         2,491                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                         3,116                                                             3,125
ISSUANCE OF COMMON STOCK FOR CASH                         2,491                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                        19,911                                                            20,000
ISSUANCE OF COMMON STOCK FOR CASH                         7,446                                                             7,500
ISSUANCE OF COMMON STOCK FOR CASH                        11,957                                                            12,000
ISSUANCE OF COMMON STOCK FOR CASH                        20,957                                                            21,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           14,229                                                            14,278
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           14,945                                                            14,999
ISSUANCE OF COMMON STOCK FOR CASH                        12,455                                                            12,500
ISSUANCE OF COMMON STOCK FOR CASH                         2,204                                                             2,250
ISSUANCE OF COMMON STOCK FOR CASH                        17,489                                                            17,552
ISSUANCE OF COMMON STOCK FOR CASH                           496                                                               500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              398                                                               400
ISSUANCE OF COMMON STOCK FOR CASH                        24,911                                                            25,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           19,936                                                            20,025
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              598                                                               601
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              197                                                               198
NET LOSS                                                                                                (655,432)        (655,432)
                                                   ------------     ---------       ----------     -------------     ------------
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -4-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
BALANCE, APRIL 30, 1998   (RESTATED)                                                    -              -      9,256,507      9,257

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/05/98      $ 1.64                                    4,470          4
ISSUANCE OF COMMON STOCK FOR CASH                         05/05/98      $ 1.64                                   17,883         18
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/01/98      $ 0.28                                   28,879         29
ISSUANCE OF COMMON STOCK FOR CASH                         06/01/98      $ 0.28                                   53,649         54
ISSUANCE OF COMMON STOCK FOR CASH                         08/03/98      $ 0.28                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         08/10/98      $ 0.28                                    8,942          9
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            09/16/98      $ 0.28                                   74,501         75
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            10/01/98      $ 0.46                                   29,818         30
ISSUANCE OF COMMON STOCK FOR CASH                         10/01/98      $ 0.36                                   13,815         14
ISSUANCE OF COMMON STOCK FOR CASH                         10/01/98      $ 0.56                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         10/30/98      $ 0.56                                    4,471          4
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/02/98      $ 0.40                                    4,470          4
ISSUANCE OF COMMON STOCK FOR CASH                         11/02/98      $ 0.28                                   44,708         45
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/12/98      $ 0.40                                    8,941          9
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/14/98      $ 0.40                                   89,410         89
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/18/98      $ 0.40                                   15,647         16
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/19/98      $ 0.40                                   75,998         76
ISSUANCE OF COMMON STOCK FOR CASH                         11/24/98      $ 0.89                                   11,177         11
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/28/98      $ 0.40                                  447,048        447
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                11/30/98      $ 0.27
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/02/98      $ 0.91                                    4,470          4
ISSUANCE OF COMMON STOCK FOR CASH                         12/02/98      $ 0.75                                    3,353          3
ISSUANCE OF COMMON STOCK FOR CASH                         12/02/98      $ 0.78                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         12/02/98      $ 0.93                                    2,683          3
ISSUANCE OF COMMON STOCK FOR CASH                         12/02/98      $ 2.80                                      894          1
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/17/98      $ 0.91                                    5,208          5
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/31/98      $ 0.91                                    2,012          2
ISSUANCE OF COMMON STOCK FOR CASH                         01/08/99      $ 0.72                                   44,708         45
ISSUANCE OF COMMON STOCK FOR CASH                         01/15/99      $ 0.38                                    9,389          9
ISSUANCE OF COMMON STOCK FOR CASH                         01/15/99      $ 1.41                                    4,471          4
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            03/01/99      $ 0.57                                  223,524        224
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            03/16/99      $ 0.57                                   22,352         22
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            03/17/99      $ 0.57                                1,034,979      1,035
ISSUANCE OF COMMON STOCK FOR CASH                         03/17/99      $ 0.57                                   17,883         18
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/28/99      $ 0.57                                   84,716         85
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/30/99      $ 0.57                                   11,177         11
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 1999   (RESTATED)                                                    -              -     11,688,979     11,689

ISSUANCE OF COMMON STOCK FOR CASH                         05/03/99      $ 0.10                                   35,767         36
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/05/99      $ 0.10                                  117,216        117
ISSUANCE OF COMMON STOCK FOR CASH                         06/05/99      $ 0.56                                   17,883         18
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/09/99      $ 0.45                                   89,410         90
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/28/99      $ 0.45                                  277,170        277
ISSUANCE OF COMMON STOCK FOR CASH                         06/28/99      $ 0.02                                    4,471          4
ISSUANCE OF COMMON STOCK FOR CASH                         07/12/99      $ 0.52                                    2,861          3
ISSUANCE OF COMMON STOCK FOR CASH                         07/14/99      $ 0.28                                   44,708         45
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                   Accumulated
                                                   Additional      Committed                       during the
                                                    Paid-in         Common         Deferred        Development
                                                    Capital          Stock       Compensation         Stage            Total
                                                  ------------     ---------     ------------     -------------     ------------
<S>                                                <C>              <C>            <C>            <C>               <C>
BALANCE, APRIL 30, 1998   (RESTATED)                   544,776             -                -          (804,823)        (250,790)

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           7,307                                                             7,311
ISSUANCE OF COMMON STOCK FOR CASH                       29,232                                                            29,250
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           8,045                                                             8,074
ISSUANCE OF COMMON STOCK FOR CASH                       14,946                                                            15,000
ISSUANCE OF COMMON STOCK FOR CASH                        2,491                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                        2,491                                                             2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          20,755                                                            20,830
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          13,686                                                            13,716
ISSUANCE OF COMMON STOCK FOR CASH                        4,986                                                             5,000
ISSUANCE OF COMMON STOCK FOR CASH                        4,991                                                             5,000
ISSUANCE OF COMMON STOCK FOR CASH                        2,496                                                             2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           1,794                                                             1,798
ISSUANCE OF COMMON STOCK FOR CASH                       12,435                                                            12,480
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           3,588                                                             3,597
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          35,876                                                            35,965
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           6,278                                                             6,294
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          30,494                                                            30,570
ISSUANCE OF COMMON STOCK FOR CASH                        9,989                                                            10,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         179,379                                                           179,826
STOCK OPTIONS ISSUED FOR SERVICES RENDERED             659,684                                                           659,684
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           4,080                                                             4,084
ISSUANCE OF COMMON STOCK FOR CASH                        2,497                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                        6,991                                                             7,000
ISSUANCE OF COMMON STOCK FOR CASH                        2,497                                                             2,500
ISSUANCE OF COMMON STOCK FOR CASH                        2,499                                                             2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           4,753                                                             4,758
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           1,836                                                             1,838
ISSUANCE OF COMMON STOCK FOR CASH                       32,355                                                            32,400
ISSUANCE OF COMMON STOCK FOR CASH                        3,591                                                             3,600
ISSUANCE OF COMMON STOCK FOR CASH                        6,296                                                             6,300
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         127,266                                                           127,490
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          12,727                                                            12,749
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         589,278                                                           590,313
ISSUANCE OF COMMON STOCK FOR CASH                       10,182                                                            10,200
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          48,203                                                            48,288
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           6,360                                                             6,371
NET LOSS                                                                                             (1,956,565)      (1,956,565)
                                                  ------------     ---------       ----------     -------------     ------------

BALANCE, APRIL 30, 1999   (RESTATED)                 2,457,130             -                -        (2,761,388)        (292,569)

ISSUANCE OF COMMON STOCK FOR CASH                        3,629                                                             3,665
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          11,894                                                            12,011
ISSUANCE OF COMMON STOCK FOR CASH                        9,982                                                            10,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          40,307                                                            40,397
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         124,953                                                           125,230
ISSUANCE OF COMMON STOCK FOR CASH                           96                                                               100
ISSUANCE OF COMMON STOCK FOR CASH                        1,497                                                             1,500
ISSUANCE OF COMMON STOCK FOR CASH                       12,455                                                            12,500
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -5-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
ISSUANCE OF COMMON STOCK FOR CASH                         07/14/99      $ 0.56                                   17,883         18
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            07/22/99      $ 0.37                                  247,218        247
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/30/99      $ 0.42                                   52,305         52
ISSUANCE OF COMMON STOCK FOR CASH                         11/30/99      $ 0.39                                   53,650         54
ISSUANCE OF COMMON STOCK FOR CASH                         11/30/99      $ 0.56                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         12/29/99      $ 0.56                                   80,475         81
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            03/20/00      $ 0.59                                    2,235          2
ISSUANCE OF COMMON STOCK FOR CASH                         04/03/00      $ 0.56                                  107,301        107
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/03/00      $ 0.59                                1,307,700      1,308
ISSUANCE OF COMMON STOCK FOR CASH                         04/03/00      $ 0.72                                    2,794          3
ISSUANCE OF COMMON STOCK FOR CASH                         04/03/00      $ 0.89                                    8,383          8
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/10/00      $ 0.59                                   50,159         50
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/24/00      $ 0.59                                   22,352         22
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/26/00      $ 0.59                                    2,235          2
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 2000   (RESTATED)                                                    -              -     14,242,097     14,242

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            07/28/00      $ 0.59                                   11,177         11
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            08/10/00      $ 0.59                                  223,542        224
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            08/22/00      $ 0.59                                   22,354         22
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            09/28/00      $ 0.24                                   11,177         11
ISSUANCE OF COMMON STOCK FOR CASH                         09/28/00      $ 0.24                                   21,214         21
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            10/09/00      $ 0.24                                   35,767         36
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/30/00      $ 0.24                                      448          1
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/31/00      $ 0.24                                  510,793        511
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 2001   (RESTATED)                                                    -              -     15,078,569     15,079

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/10/01      $ 0.24                                  116,903        117
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            06/18/01      $ 0.45                                   67,057         67
ISSUANCE OF COMMON STOCK FOR CASH                         06/18/01      $ 0.45                                   22,354         22
ISSUANCE OF COMMON STOCK FOR CASH                         07/31/01      $ 0.45                                   22,354         22
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            07/31/01      $ 0.64                                  350,933        351
ISSUANCE OF COMMON STOCK FOR CASH                         07/31/01      $ 1.12                                    8,942          9
ISSUANCE OF COMMON STOCK FOR CASH                         09/07/01      $ 0.22                                  223,542        224
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            09/23/01      $ 0.22                                  525,281        525
ISSUANCE OF COMMON STOCK FOR CASH                         09/23/01      $ 0.22                                   67,062         67
WARRANTS ISSUED FOR SERVICES RENDERED                     09/23/01      $ 0.09
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            10/31/01      $ 0.22                                   13,411         14
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/02/01      $ 0.22                                   67,057         67
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/07/01      $ 0.22                                   11,176         11
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/10/01      $ 0.22                                  217,176        217
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/13/01      $ 0.22                                   87,235         87
ISSUANCE OF COMMON STOCK FOR CASH                         12/13/01      $ 0.22                                  223,542        224
ISSUANCE OF COMMON STOCK FOR CASH                         12/20/01      $ 0.22                                    3,577          4
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/20/01      $ 0.22                                1,230,276      1,230
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/21/01      $ 0.22                                   22,352         22
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            12/30/01      $ 0.22                                  212,348        212
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                   Accumulated
                                                   Additional      Committed                       during the
                                                    Paid-in         Common         Deferred        Development
                                                    Capital          Stock       Compensation         Stage            Total
                                                  ------------     ---------     ------------     -------------     ------------
<S>                                                <C>              <C>            <C>            <C>               <C>
ISSUANCE OF COMMON STOCK FOR CASH                        9,982                                                            10,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          90,402                                                            90,649
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          21,675                                                            21,727
ISSUANCE OF COMMON STOCK FOR CASH                       20,946                                                            21,000
ISSUANCE OF COMMON STOCK FOR CASH                        4,991                                                             5,000
ISSUANCE OF COMMON STOCK FOR CASH                       44,919                                                            45,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           1,309                                                             1,311
ISSUANCE OF COMMON STOCK FOR CASH                       59,893                                                            60,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         765,802                                                           767,110
ISSUANCE OF COMMON STOCK FOR CASH                        1,997                                                             2,000
ISSUANCE OF COMMON STOCK FOR CASH                        7,492                                                             7,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          29,374                                                            29,424
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          13,090                                                            13,112
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           1,309                                                             1,311
NET LOSS                                                                                             (1,247,576)      (1,247,576)
                                                  ------------     ---------       ----------     -------------     ------------

BALANCE, APRIL 30, 2000   (RESTATED)                 3,735,124             -                -        (4,008,964)        (259,598)

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           6,546                                                             6,557
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         130,908                                                           131,132
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          13,091                                                            13,113
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           2,623                                                             2,634
ISSUANCE OF COMMON STOCK FOR CASH                        4,979                                                             5,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           8,394                                                             8,430
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED             105                                                               106
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         119,878                                                           120,389
NET LOSS                                                                                               (452,754)        (452,754)
                                                  ------------     ---------       ----------     -------------     ------------

BALANCE, APRIL 30, 2001   (RESTATED)                 4,021,648             -                -        (4,461,718)        (424,991)

ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          27,940                                                            28,057
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          29,930                                                            29,997
ISSUANCE OF COMMON STOCK FOR CASH                        9,978                                                            10,000
ISSUANCE OF COMMON STOCK FOR CASH                        9,978                                                            10,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         223,917                                                           224,268
ISSUANCE OF COMMON STOCK FOR CASH                        9,991                                                            10,000
ISSUANCE OF COMMON STOCK FOR CASH                       49,776                                                            50,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         116,965                                                           117,490
ISSUANCE OF COMMON STOCK FOR CASH                       14,933                                                            15,000
WARRANTS ISSUED FOR SERVICES RENDERED                   24,924                                                            24,924
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           2,986                                                             3,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          14,932                                                            14,999
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           2,489                                                             2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          48,359                                                            48,576
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          19,425                                                            19,512
ISSUANCE OF COMMON STOCK FOR CASH                       49,776                                                            50,000
ISSUANCE OF COMMON STOCK FOR CASH                          796                                                               800
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED         273,948                                                           275,178
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           4,978                                                             5,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          47,284                                                            47,496
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -6-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                01/08/02      $ 0.11
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            01/14/02      $ 0.22                                   33,529         34
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                01/31/02      $ 0.11
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                02/08/02      $ 0.09
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            02/14/02      $ 0.22                                2,235,241      2,235
ISSUANCE OF COMMON STOCK FOR CASH                         03/13/02      $ 0.24                                   10,283         10
ISSUANCE OF COMMON STOCK IN PRIVATE
     PLACEMENT FOR CASH                                   04/30/02      $ 1.00                                1,225,000      1,225
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 2002   (RESTATED)                                                    -              -     22,075,200     22,075

COMMON STOCK COMMITTED ON EXERCISE OF STOCK
     OPTIONS IN SUBSIDIARY                                05/23/02      $ 0.16
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/24/02      $ 2.15                                    5,589          6
FINANCING EXPENSE IN CONNECTION WITH
     ISSUANCE OF WARRANTS                                 05/31/02      $ 1.49
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK       06/04/02      $ 1.00                                    5,780          6
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK       06/20/02      $ 1.00                                    5,438          5
ISSUANCE OF COMMON STOCK IN PRIVATE PLACEMENT FOR
     CASH                                                 06/25/02      $ 1.00                                  500,000        500
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                07/12/02      $ 1.52
CONVERSION OF NOTES PAYABLE - RELATED
     PARTIES INTO COMMON STOCK                            07/16/02      $ 1.00                                   15,000         15
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK       07/22/02      $ 1.00                                   11,680         12
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                08/01/02      $ 0.47
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            08/24/02      $ 1.67                                    5,589          6
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                09/25/02      $ 1.10
STOCK OPTIONS ISSUED IN EXCHANGE FOR SETTLEMENT
     OF ACCOUNTS PAYABLE                                  09/25/02      $ 1.10
ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
     IN PRIVATE PLACEMENT FOR CASH                        10/07/02  $10,000.00      97.93              1
OFFERING COSTS ON ISSUANCE OF SERIES A CONVERTIBLE
     PREFERRED STOCK IN PRIVATE PLACEMENT FOR CASH        10/07/02
DIVIDENDS ON SERIES A PREFERRED STOCK                     10/07/02                                               68,150         68
BENEFICIAL CONVERSION FEATURE ON ISSUANCE OF
     SERIES A PREFERRED STOCK                             10/07/02
ISSUANCE OF COMMON STOCK IN PRIVATE PLACEMENT FOR
     CASH                                                 10/29/02      $ 1.35                                1,349,934      1,350
OFFERING COSTS ON ISSUANCE OF COMMON STOCK IN
     PRIVATE PLACEMENT FOR CASH                           10/29/02
COMMON STOCK COMMITTED FOR SERVICES RENDERED              11/24/02      $ 2.35
WARRANTS ISSUED FOR SERVICES RENDERED                     12/09/02      $ 2.60
WARRANTS ISSUED FOR SERVICES RENDERED                     12/09/02      $ 0.65
STOCK OPTIONS ISSUED IN EXCHANGE FOR SETTLEMENT
     OF ACCOUNTS PAYABLE                                  12/19/02      $ 0.55
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                12/31/02      $ 0.13
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                      Additional      Committed                     during the
                                                       Paid-in         Common         Deferred      Development
                                                       Capital          Stock       Compensation       Stage            Total
                                                     ------------     ---------     ------------   -------------     ------------
<S>                                                   <C>              <C>            <C>          <C>               <C>
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                  1,402                                                           1,402
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              7,465                                                           7,499
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                  2,142                                                           2,142
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                  3,809                                                           3,809
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            497,725                                                         499,960
ISSUANCE OF COMMON STOCK FOR CASH                           2,410                                                           2,420
ISSUANCE OF COMMON STOCK IN PRIVATE
     PLACEMENT FOR CASH                                 1,223,775                                                       1,225,000
NET LOSS                                                                                              (2,399,061)      (2,399,061)
                                                     ------------     ---------       ----------   -------------     ------------

BALANCE, APRIL 30, 2002   (RESTATED)                    6,743,681             -                -      (6,860,779)         (95,023)

COMMON STOCK COMMITTED ON EXERCISE OF STOCK
     OPTIONS IN SUBSIDIARY                                                7,164                                             7,164
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED             12,010                                                          12,016
FINANCING EXPENSE IN CONNECTION WITH
     ISSUANCE OF WARRANTS                                 223,710                                                         223,710
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK         5,774                                                           5,780
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK         5,435                                                           5,440
ISSUANCE OF COMMON STOCK IN PRIVATE PLACEMENT FOR
     CASH                                                 499,500                                                         500,000
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                761,007                                                         761,007
CONVERSION OF NOTES PAYABLE - RELATED
     PARTIES INTO COMMON STOCK                             14,985                                                          15,000
CONVERSION OF CONVERTIBLE NOTES PAYABLE - RELATED
     PARTIES AND ACCRUED INTEREST INTO COMMON STOCK        11,664                                                          11,676
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                187,163                                                         187,163
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              9,328                                                           9,334
STOCK OPTIONS ISSUED FOR SERVICES RENDERED              3,305,542                     (3,305,542)                               -
STOCK OPTIONS ISSUED IN EXCHANGE FOR SETTLEMENT
     OF ACCOUNTS PAYABLE                                   50,000                                                          50,000
ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
     IN PRIVATE PLACEMENT FOR CASH                        979,300                                                         979,301
OFFERING COSTS ON ISSUANCE OF SERIES A CONVERTIBLE
     PREFERRED STOCK IN PRIVATE PLACEMENT FOR CASH       (178,902)                                                       (178,902)
DIVIDENDS ON SERIES A PREFERRED STOCK                      78,292                                        (78,360)               -
BENEFICIAL CONVERSION FEATURE ON ISSUANCE OF
     SERIES A PREFERRED STOCK                             767,431                                       (767,431)               -
ISSUANCE OF COMMON STOCK IN PRIVATE PLACEMENT FOR
     CASH                                               1,821,056                                                       1,822,406
OFFERING COSTS ON ISSUANCE OF COMMON STOCK IN
     PRIVATE PLACEMENT FOR CASH                         (196,793)                                                        (196,793)
COMMON STOCK COMMITTED FOR SERVICES RENDERED                             13,134                                            13,134
WARRANTS ISSUED FOR SERVICES RENDERED                    390,409                                                          390,409
WARRANTS ISSUED FOR SERVICES RENDERED                    162,792                                                          162,792
STOCK OPTIONS ISSUED IN EXCHANGE FOR SETTLEMENT
     OF ACCOUNTS PAYABLE                                  15,000                                                           15,000
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                59,373                                                           59,373
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -7-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
ISSUANCE OF COMMON STOCK ON CASHLESS EXERCISE OF
     WARRANTS                                             01/02/03                                               33,909         34
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF THE SERIES A CONVERTIBLE PREFERRED STOCK          01/24/03                  (1.05)                        9,162          9
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF THE SERIES A CONVERTIBLE PREFERRED STOCK          01/27/03                  (1.06)                        9,174          9
AMORTIZATION OF DEFERRED COMPENSATION                     01/31/03
WARRANTS ISSUED FOR SERVICES RENDERED                     02/17/03      $ 1.63
COMMON STOCK COMMITTED FOR SERVICES RENDERED              02/24/03      $ 0.79
REVERSAL OF DEFERRED COMPENSATION                         02/25/03
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/21/03      $ 0.48                                   21,277         21
COMMON STOCK COMMITTED FOR SERVICES RENDERED              04/21/03      $ 0.48
WARRANTS ISSUED FOR SERVICES RENDERED                     04/28/03      $ 0.37
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
      TO BUYBACK FOR CASH                                 04/23/03
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
      TO BUYBACK FOR CASH                                 04/28/03
ISSUANCE OF COMMON STOCK FOR SUBSCRIPTION RECEIVABLE      04/30/03      $ 0.40                                   10,000         10
COMMON STOCK COMMITTED TO INVESTORS AS A PENALTY
     FOR DELAYED REGISTRATION OF COMMON STOCK             04/30/03      $ 0.45
NET LOSS
                                                                                 --------        -------    -----------    -------

BALANCE, APRIL 30, 2003   (RESTATED)                                                95.82        $     1     24,125,882    $24,126

WARRANTS ISSUED FOR SERVICES RENDERED                     05/01/03      $ 0.16
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            05/13/03      $ 0.48                                   45,000         45
WARRANTS ISSUED FOR SERVICES RENDERED                     05/16/03      $ 0.24
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                05/16/03      $ 0.18
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF SERIES A PREFERRED STOCK                          05/16/03                 (95.82)            (1)     2,129,316      2,129
DIVIDEND ON INDUCED CONVERSION OF SERIES A
     PREFERRED STOCK                                      05/16/03
ISSUANCE OF COMMITTED COMMON STOCK                        05/16/03                                              128,136        128
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     05/16/03      $ 0.45                                   25,952         26
ISSUANCE OF COMMITTED COMMON STOCK                        05/21/03                                               20,000         20
ISSUANCE OF COMMON STOCK ON EXERCISE OF
     WARRANTS                                             05/27/03      $ 0.01                                   34,000         34
ISSUANCE OF COMMITTED COMMON STOCK                        06/19/03                                               11,178         11
ISSUANCE OF COMMON STOCK ON CONVERSION OF
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES          06/24/03      $ 0.33                                  300,000        300
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                07/16/03      $ 0.26
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            07/16/03      $ 0.50                                    6,000          6
ISSUANCE OF COMMITTED COMMON STOCK                        08/14/03                                               44,705         45
ISSUANCE OF COMMON STOCK FOR CASH                         08/15/03      $ 0.45                                  222,222        222
ISSUANCE OF COMMON STOCK FOR CASH                         08/20/03      $ 0.52                                  400,000        400
ISSUANCE OF COMMON STOCK FOR CASH                         08/25/03      $ 0.69                                  272,464        272
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            08/27/03      $ 1.06                                    6,000          6
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                08/27/03      $ 0.79
</TABLE>

<TABLE>
<CAPTION>
                                                                                                        Deficit
                                                                                                      Accumulated
                                                        Additional      Committed                     during the
                                                         Paid-in         Common         Deferred      Development
                                                         Capital          Stock       Compensation       Stage           Total
                                                       ------------     ---------     ------------   -------------    ------------
<S>                                                     <C>              <C>            <C>          <C>              <C>
ISSUANCE OF COMMON STOCK ON CASHLESS EXERCISE OF
     WARRANTS                                                   (34)                                                             -
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF THE SERIES A CONVERTIBLE PREFERRED STOCK                 (9)                                                             -
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF THE SERIES A CONVERTIBLE PREFERRED STOCK                 (9)                                                             -
AMORTIZATION OF DEFERRED COMPENSATION                                                    1,032,981                       1,032,981
WARRANTS ISSUED FOR SERVICES RENDERED                       130,712                                                        130,712
COMMON STOCK COMMITTED FOR SERVICES RENDERED                                4,415                                            4,415
REVERSAL OF DEFERRED COMPENSATION                        (2,272,561)                     2,272,561                               -
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED               10,288                                                         10,309
COMMON STOCK COMMITTED FOR SERVICES RENDERED                                9,691                                            9,691
WARRANTS ISSUED FOR SERVICES RENDERED                        18,284                                                         18,284
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
      TO BUYBACK FOR CASH                                   (20,000)                                                       (20,000)
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
      TO BUYBACK FOR CASH                                   (24,500)                                                       (24,500)
ISSUANCE OF COMMON STOCK FOR SUBSCRIPTION RECEIVABLE          3,972                                                          3,982
COMMON STOCK COMMITTED TO INVESTORS AS A PENALTY
     FOR DELAYED REGISTRATION OF COMMON STOCK                              57,661                                           57,661
NET LOSS                                                                                                (5,925,680)      (5,925,680)
                                                       ------------     ---------       ----------   -------------    ------------

BALANCE, APRIL 30, 2003   (RESTATED)                   $ 13,573,900      $ 92,065       $        -   $ (13,632,250)   $     57,842

WARRANTS ISSUED FOR SERVICES RENDERED                         8,079                                                          8,079
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED               21,555                                                         21,600
WARRANTS ISSUED FOR SERVICES RENDERED                        35,598                                                         35,598
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                    5,458                                                          5,458
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
     OF SERIES A PREFERRED STOCK                             (2,128)                                                             -
DIVIDEND ON INDUCED CONVERSION OF SERIES A
     PREFERRED STOCK                                        583,243                                       (583,243)              -
ISSUANCE OF COMMITTED COMMON STOCK                           57,533       (57,661)                                               -
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK        11,653                                                         11,679
ISSUANCE OF COMMITTED COMMON STOCK                            9,671        (9,691)                                               -
ISSUANCE OF COMMON STOCK ON EXERCISE OF                                                                                          -
     WARRANTS                                                   306                                                            340
ISSUANCE OF COMMITTED COMMON STOCK                           17,538       (17,549)                                               -
ISSUANCE OF COMMON STOCK ON CONVERSION OF
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES             99,700                                                        100,000
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                   52,742                                                         52,742
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                2,994                                                          3,000
ISSUANCE OF COMMITTED COMMON STOCK                            7,119        (7,164)                                               -
ISSUANCE OF COMMON STOCK FOR CASH                            99,778                                                        100,000
ISSUANCE OF COMMON STOCK FOR CASH                           207,600                                                        208,000
ISSUANCE OF COMMON STOCK FOR CASH                           187,728                                                        188,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                6,354                                                          6,360
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                   31,514                                                         31,514
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -8-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      08/28/03
ISSUANCE OF COMMON STOCK FOR CASH                         08/28/03      $ 0.69                                   86,957         87
ISSUANCE OF COMMON STOCK FOR CASH                         08/29/03      $ 0.69                                  144,928        145
ISSUANCE OF COMMON STOCK FOR CASH                         08/29/03      $ 0.75                                  666,666        667
OFFERING COSTS ON ISSUANCE OF COMMON STOCK
     FOR CASH                                             08/29/03
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     10/15/03      $ 1.29                                  148,260        148
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         10/15/03      $ 0.73
ISSUANCE OF COMMON STOCK FOR CASH                         10/27/03      $ 0.95                                   63,000         63
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                11/07/03      $ 0.90
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/07/03      $ 1.25                                   12,000          2
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     11/15/03      $ 1.04                                   44,187         44
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         11/15/03      $ 0.52
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                        11/21/03
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            11/21/03      $ 0.75                                    2,000          2
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                12/05/03      $ 0.60
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     12/15/03      $ 0.90                                   61,242         61
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         12/15/03      $ 0.41
ISSUANCE OF COMMON STOCK FOR CASH                         12/22/03      $ 0.71                                   42,254         42
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            01/06/04      $ 0.89                                   27,500         28
WARRANTS ISSUED FOR SERVICES RENDERED                     01/06/04      $ 0.59
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     01/15/04      $ 0.88                                   75,739         76
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         01/15/04      $ 0.39
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 01/15/04                                               54,053         54
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            01/15/04      $ 0.88                                   12,000         12
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     01/16/04      $ 0.89                                    2,520          3
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      01/16/04
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES          01/16/04      $ 0.18
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            01/23/04      $ 1.18                                   55,000         55
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      01/26/04
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      01/28/04
</TABLE>

<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                                                     Accumulated
                                                           Additional    Committed                   during the
                                                            Paid-in       Common       Deferred      Development
                                                            Capital        Stock     Compensation       Stage          Total
                                                          ------------   ---------   ------------   -------------   ------------
<S>                                                        <C>            <C>          <C>          <C>             <C>
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE                                                                                   -
     NOTES PAYABLE - RELATED PARTIES                               341                                                       341
ISSUANCE OF COMMON STOCK FOR CASH                               59,913                                                    60,000
ISSUANCE OF COMMON STOCK FOR CASH                               99,855                                                   100,000
ISSUANCE OF COMMON STOCK FOR CASH                              499,333                                                   500,000
OFFERING COSTS ON ISSUANCE OF COMMON STOCK
     FOR CASH                                                  (40,000)                                                  (40,000)
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK          191,107                                                   191,255
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                                6,009                                                     6,009
ISSUANCE OF COMMON STOCK FOR CASH                               59,938                                                    60,001
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                     278,142                                                   278,142
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  14,988                                                    15,000
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK           45,910                                                    45,954
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                                7,143                                                     7,143
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                              (5,250)                                                   (5,250)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                   1,498                                                     1,500
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                      24,104                                                    24,104
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK           55,057                                                    55,118
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                                7,937                                                     7,937
ISSUANCE OF COMMON STOCK FOR CASH                               29,958                                                    30,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  24,447                                                    24,475
WARRANTS ISSUED FOR SERVICES RENDERED                           17,775                                                    17,775
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK           66,574                                                    66,650
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                                9,837                                                     9,837
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                          (54)                                                        -
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  10,548                                                    10,560
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK            2,240                                                     2,243
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                            58,245                                                    58,245
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES                91,755                                                    91,755
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  64,845                                                    64,900
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                             4,026                                                     4,026
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                            41,196                                                    41,196
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       -9-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES          01/28/04      $ 0.15
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 01/30/04                                               48,000         48
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      01/31/04
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES          01/31/04      $ 0.12
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      01/31/04
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 02/04/04                                               25,049         25
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                        02/06/04
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            02/06/04      $ 1.23                                    3,333          3
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     02/15/04      $ 1.25                                   99,332         99
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         02/15/04      $ 0.69
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            02/25/04      $ 1.26                                    2,667          3
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                        02/25/04
COMMON STOCK COMMITTED FOR SERVICES RENDERED              03/10/04      $ 1.42
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                03/10/04      $ 0.55
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     03/15/04      $ 1.75                                  120,464        121
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         03/15/04      $ 1.13
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 03/15/04                                                2,958          3
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      03/16/04
ISSUANCE OF COMMON STOCK FOR CASH                         03/19/04      $ 0.75                                   40,000         40
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 03/23/04                                               17,334         17
ISSUANCE OF COMMON STOCK FOR CASH                         03/25/04      $ 0.75                                   40,000         40
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED AND
     TO BE RENDERED                                       03/25/04      $    -                                  200,000        200
ISSUANCE OF COMMON STOCK FOR CASH                         03/26/04      $ 0.75                                   40,000         40
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/01/04                                                7,879          8
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         04/01/04      $ 1.03
WARRANTS ISSUED FOR SERVICES RENDERED                     04/07/04      $ 1.57
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/07/04      $ 2.95                                   12,000         12
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/12/04                                              302,638        303
</TABLE>

<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                                                     Accumulated
                                                          Additional      Committed                  during the
                                                           Paid-in         Common       Deferred     Development
                                                           Capital          Stock     Compensation      Stage          Total
                                                          -----------     ---------   ------------  -------------   ------------
<S>                                                       <C>              <C>          <C>         <C>             <C>
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES              143,804                                                    143,804
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                         (48)                                                         -
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                            6,046                                                      6,046
ISSUANCE OF WARRANTS IN CONJUNCTION WITH
     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES               43,954                                                     43,954
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                            9,558                                                      9,558
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                         (25)                                                         -
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                             (5,250)                                                    (5,250)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  4,097                                                      4,100
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK         124,066                                                    124,165
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                              19,415                                                     19,415
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                  3,357                                                      3,360
OFFERING COSTS ON ISSUANCE OF COMMON STOCK SUBJECT
     TO RESCISSION RIGHTS FOR CASH                             (7,000)                                                    (7,000)
COMMON STOCK COMMITTED FOR SERVICES RENDERED                                  9,940                                        9,940
STOCK OPTIONS ISSUED FOR SERVICES RENDERED                     15,917                                                     15,917
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK         210,691                                                    210,812
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                              38,323                                                     38,323
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                          (3)                                                         -
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                           15,831                                                     15,831
ISSUANCE OF COMMON STOCK FOR CASH                              29,960                                                     30,000
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                         (17)                                                         -
ISSUANCE OF COMMON STOCK FOR CASH                              29,960                                                     30,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED AND
     TO BE RENDERED                                           323,800                     (324,000)                            -
ISSUANCE OF COMMON STOCK FOR CASH                              29,960                                                     30,000
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                          (8)                                                         -
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                              10,735                                                     10,735
WARRANTS ISSUED FOR SERVICES RENDERED                          78,297                                                     78,297
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                 35,388                                                     35,400
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                        (303)                                                         -
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                      -10-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                      Price per    Series A Convertible,
                                                                        Equity       Preferred Stock             Common Stock
                                                            Date         Unit     Shares         Amount        Shares      Amount
                                                          --------    ---------  --------        -------    -----------    -------
<S>                                                       <C>           <C>      <C>             <C>        <C>            <C>
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED            04/12/04      $ 2.78                                  100,000        100
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/14/04                                               12,701         13
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/15/04                                               18,235         18
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK     04/15/04      $ 2.55                                  141,383        141
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         04/15/04      $ 1.88
ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS          04/16/04      $ 1.50                                   35,776         36
WARRANTS ISSUED FOR SERVICES RENDERED
     AND TO BE RENDERED                                   04/16/04         $ -
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED
     AND TO BE RENDERED                                   04/16/04         $ -                                   75,000         75
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                      04/19/04
ISSUANCE OF COMMON STOCK FOR CASH                         04/20/04      $ 0.99                                   30,303         30
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/23/04                                                6,269          6
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                 04/28/04                                                2,000          2
WARRANTS ISSUED FOR SERVICES RENDERED                     04/29/04      $ 1.09
COMMON STOCK COMMITTED FOR LEGAL SETTLEMENT               04/30/04      $ 1.28
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         04/30/04      $ 1.62
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         04/30/04      $ 1.71
COMMON STOCK COMMITTED TO INVESTORS AS A PENALTY
     FOR DELAYED REGISTRATION OF COMMON STOCK             04/30/04      $ 1.85       1.85
WARRANTS ACCRUED BUT NOT ISSUED TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                         04/30/04      $ 1.22
AMORTIZATION OF DEFERRED COMPENSATION
NET LOSS
                                                                                 --------        -------    -----------    -------
BALANCE, APRIL 30, 2004                                                                 -        $     -     30,652,482    $30,652
                                                                                 --------        -------    -----------    -------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                           Additional    Committed                  during the
                                                            Paid-in       Common      Deferred      Development
                                                            Capital        Stock    Compensation       Stage            Total
                                                          ------------   ---------  ------------   -------------     ------------
<S>                                                        <C>            <C>         <C>          <C>               <C>
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED                 277,900                                                    278,000
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                          (13)                                                         -
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                          (18)                                                         -
ISSUANCE OF COMMON STOCK TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF COMMON STOCK          360,386                                                    360,527
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                               74,639                                                     74,639
ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS                53,628                                                     53,664
WARRANTS ISSUED FOR SERVICES RENDERED
     AND TO BE RENDERED                                         75,461                   (75,461)                               -
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED
     AND TO BE RENDERED                                        213,675                  (213,750)                               -
BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE
     NOTES PAYABLE - RELATED PARTIES                            78,024                                                     78,024
ISSUANCE OF COMMON STOCK FOR CASH                               29,970                                                     30,000
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                           (6)                                                         -
ISSUANCE OF COMMON STOCK ON CASHLESS
     EXERCISE OF WARRANTS                                           (2)                                                         -
WARRANTS ISSUED FOR SERVICES RENDERED                           54,675                                                     54,675
COMMON STOCK COMMITTED FOR LEGAL SETTLEMENT                                 13,440                                         13,440
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                               11,738                                                     11,738
ISSUANCE OF WARRANTS TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                               17,790                                                     17,790
COMMON STOCK COMMITTED TO INVESTORS AS A PENALTY
     FOR DELAYED REGISTRATION OF COMMON STOCK                              156,299                                        156,299
WARRANTS ACCRUED BUT NOT ISSUED TO INVESTORS AS A
     PENALTY FOR DELAYED REGISTRATION OF THE UNDERLYING
     COMMON STOCK                                               27,717                                                     27,717
AMORTIZATION OF DEFERRED COMPENSATION                                                    153,903                          153,903
NET LOSS                                                                                              (7,600,103)      (7,600,103)
                                                          ------------   ---------    ----------   -------------     ------------
BALANCE, APRIL 30, 2004                                   $ 19,181,421   $ 179,679    $ (459,308)  $ (21,815,596)    $ (2,883,152)
                                                          ------------   ---------    ----------   -------------     ------------
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                      -11-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                FOR THE YEARS ENDED APRIL 30, 2004 AND 2003, AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                 For the
                                                                                                               Period from
                                                                                                                August 21,
                                                                                                                   1995
                                                                                    For the Years Ended       (Inception) to
                                                                                          April 30,             April 30,
                                                                                   2004            2003            2004
                                                                                                 Restated        Restated
                                                                              ----------------------------------------------
<S>                                                                           <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                 $ (7,600,103)   $ (5,925,680)   $(20,386,562)
     Adjustments to reconcile net loss to net cash
        used in operating activities
           Depreciation                                                            144,113          91,993         243,538
           Issuance of common stock for services rendered                          468,256          31,659       4,721,429
           Common stock committed for services rendered                              9,940          27,240          37,180
           Common stock committed for legal settlement                              13,440              --          13,440
           Issuance of common stock as compensation expense
               for services rendered from minority shareholders                         --              --          18,923
           Warrants issued for services rendered                                   210,341         702,197         937,462
           Financing expense in connection with the issuance
               of warrants                                                              --         223,710         223,710
           Stock options issued for services rendered                              391,960       1,007,543       2,066,540
           Additional compensation to officer in the form of
               convertible note payable - related party                                 --              --          42,171
           Amortization of deferred compensation                                   153,903       1,032,981       1,186,884
           Amortization of debt discount on convertible
               notes payable - related parties                                     492,780              --         492,780
           Issuance of convertible notes payable as a penalty
                for the late registration of the underlying common stock
               that $385,000 of convertible notes payable - related parties
               are convertible into                                                  7,000              --           7,000
           Issuance of common stock as a penalty for late registration
                of common stock that was issued
               for cash                                                          1,068,403          57,661       1,126,064
           Issuance of warrants as a penalty for the late registration
               of the underlying common stock that warrants are
               exercisable into                                                    231,282              --         231,282
           Common stock committed as a penalty for the late
               registration of common stock
               which were issued for cash                                          156,299              --         156,299
           (Increase) decrease in
               Restricted cash                                                      71,234         (71,234)             --
               Accounts receivable                                                   4,171          (5,417)        (30,412)
               Other current assets                                                202,833        (410,150)       (214,817)
               Other assets                                                        295,948        (295,948)             --
           Increase (decrease) in
               Accounts payable                                                    623,818         572,718       1,406,431
               Accrued expenses                                                     86,691        (149,967)         88,291
               Accrued payroll and payroll taxes                                    80,496         135,279         849,072
               Accrued interest                                                     41,038           8,417          79,222
                                                                              ------------    ------------    ------------

Net cash used in operating activities                                           (2,846,157)     (2,966,998)     (6,704,073)
                                                                              ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                                           (245,680)       (481,849)       (849,529)
                                                                              ------------    ------------    ------------

Net cash used in investing activities                                             (245,680)       (481,849)       (849,529)
                                                                              ------------    ------------    ------------
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                      -12-

<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                FOR THE YEARS ENDED APRIL 30, 2004 AND 2003, AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                 For the
                                                                                                               Period from
                                                                                                                August 21,
                                                                                                                   1995
                                                                                    For the Years Ended       (Inception) to
                                                                                          April 30,             April 30,
                                                                                   2004            2003            2004
                                                                                                 Restated        Restated
                                                                              ----------------------------------------------
<S>                                                                           <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from issuance of common stock in
        private placement                                                     $         --    $  2,322,406    $  3,547,406
     Offering costs on issuance of common stock in
        private placement                                                               --        (196,793)       (196,793)
     Proceeds from issuance of common stock                                      1,366,001              --       1,993,268
     Offering costs on issuance of common stock                                    (57,500)             --         (57,500)
     Proceeds from issuance of preferred stock                                          --         979,301         979,301
     Offering costs on issuance of preferred stock                                      --        (178,902)       (178,902)
     Proceeds from issuance of common stock subject to rescission
        rights                                                                     475,000              --         475,000
     Proceeds from issuance of common stock subject to buy-back                    200,000              --         200,000
     Recapitalization of reverse merger                                                 --              --              14
     Proceeds from exercise of stock options in subsidiary                              --           7,164           7,164
     Proceeds from issuance of common stock on exercise of warrants                 54,004              --          54,004
     Payments on notes payable                                                        (507)             --            (507)
     Proceeds from notes payable - related parties                                 243,840          24,640         471,853
     Payments on notes payable - related parties                                        --        (546,331)       (546,331)
     Proceeds from convertible notes payable - related parties                          --              --          55,400
     Payments on convertible notes payable - related parties                       (10,400)         (5,000)        (35,400)
     Proceeds from convertible notes payable subject to rescission
        rights                                                                     385,000              --         385,000
     Proceeds from collection of subscription receivable                           443,482              --         443,482
                                                                              ------------    ------------    ------------

Net cash provided by financing activities                                        3,098,920       2,406,485       7,596,459
                                                                              ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                                 7,083      (1,042,362)         42,857

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                      35,774       1,078,136              --
                                                                              ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                            42,857    $     35,774    $     42,857
                                                                              ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     Interest paid                                                                      --    $      2,888    $      2,888
                                                                              ============    ============    ============

     Income taxes paid                                                        $      2,400    $        800    $     14,183
                                                                              ============    ============    ============
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                      -13-

<PAGE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 300,000, 22,898, and
322,898 shares of common stock, respectively, for the outstanding principal on
convertible notes payable-related parties, plus accrued interest, of $100,000,
$22,896, and $122,896, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 15,000, and 15,000
shares of common stock, respectively, for the outstanding principal on notes
payable-related parties, plus accrued interest, of $0, $15,000 and $15,000,
respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued stock options to purchase
0, 72,726, and 72,726 shares of common stock, respectively, in exchange for $0,
$65,000, and $65,000 of accounts payable due to consultants, respectively. Stock
options to purchase 45,454 shares of common stock are exercisable at $1 per
share, vesting over a one-year period, and expiring in September 2012. The
remaining stock options to purchase 27,272 shares of common stock are
exercisable at $2.24 per share, vesting over a one-year period and expiring in
December 2012.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 68,150, and 68,150
shares of common stock, respectively, for dividends accrued on its Series A
convertible preferred stock of $0, $78,360, and $78,360, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 2,129,316, 18,336, and
2,147,652 shares of common stock, respectively, for the conversion of 95.82,
2.11, and 97.93 Series A Convertible Preferred shares, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 497,116, 33,909, and
531,025 shares of common stock, respectively, on the cashless exercise of
warrants to purchase 800,470, 47,000, and 847,470 shares of common stock
respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company recorded a beneficial conversion
feature granted in connection with the issuance of Series A Convertible
Preferred stock in the amount of $0, $767,431, and $767,431.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company recorded preferred stock
dividends in connection with the induced conversion of the Series A Convertible
Preferred stock of $583,243, $0 and $583,243, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued unsecured convertible
notes payable-related party, in exchange for accounts payable due to legal
counsel for the Company of $700,718, $46,717 and $747,435, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued unsecured notes
payable-related party for salary and severance deferrals to its former CEO of
$0, $0 and $177,608, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued unsecured notes
payable-related parties to various employees in exchange for deferred salaries
of $10,240, $0 and $10,240, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued secured notes payable for
purchase financing of property and equipment of $4,477, $0, and $4,477,
respectively.

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company sold 0, 1,400,000, and 1,400,000
shares of common stock subject to buy-back, respectively, in exchange for a
subscription receivable of $0, $494,000, and $494,000, respectively.

In connection with the sale of 1,400,000 shares of common stock subject to
buy-back during the year ended April 30, 2003, the Company recorded an offset of
$50,518 against the subscription receivable of $494,000, which represents
$40,518 of offering costs and a $10,000 retainer to the Company's legal counsel.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company sold 0, 10,000, and 10,000
shares, respectively, of common stock for subscriptions receivable of $0,
$3,982, and $3,982, respectively.


                                      -69-
<PAGE>

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued unsecured notes
payable-related parties to the Company's Chief Scientist / Chairman for salary
and bonus deferrals of $4,381, $159,083, and $202,920, respectively, and expense
reimbursements of accounts payable of $15,713, $0, and $15, 713, respectively.

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 204,019, 0 and 204,019
shares of common stock, respectively, which were previously committed to be
issued.

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



                                      -70-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

                                     GENERAL

HiEnergy Technologies, Inc. ("HiEnergy", together with its Subsidiaries, the
"Company") is a nuclear technologies-based company focused on the research and
development of proprietary, neutron-based, "stoichiometric" sensor devices. To
date, the Company has devoted the bulk of its efforts and resources to the
research, design, testing and development of its proprietary, "stoichiometric"
sensor devices and underlying technologies, and has yet to generate sales
revenues from the sale of any products using this technology. HiEnergy's primary
focus is currently on the commercialization of the Company's initial prototype
devices, primarily the "CarBomb Finder", which the Company intends to market to
governmental and private entities and to distribute or license through industry
partners. The Company's stoichiometric technology has also been incorporated
into three additional prototype applications which, if the Company is able to
raise the funds necessary to commercialize them, will be the next products it
attempts to launch: an anti-tank landmine detector, an unexploded ordnance
detector, which is also useful to detect Improvised Explosive Devices (IEDs),
both of which are typically above the ground, and a device the Company calls a
Refractorymeter which can detect fissures or erosions in the ceramic lining of
oil cracking tanks. Additionally, the Company continues to be focused on the
research and development of additional applications of the Company's
technologies and their further exploitation, both internally and through
collaboration with third parties.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, HiEnergy
has two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy Defense")
and HiEnergy Europe, Ltd. ("HiEnergy Europe"), which were incorporated under the
laws of the state of Delaware on July 28, 2003 and March 11, 2004, respectively,
and one majority owned subsidiary, HiEnergy Microdevices, Inc., which was
incorporated in Delaware on August 21, 1995 ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). HiEnergy holds an
approximate 92% interest in Microdevices, which was the vehicle through which
the Company's "stoichiometric" technology was initially developed by its
Chairman and CEO, Dr. Bogdan Maglich.

In November 2003, our Board of Directors approved a short form merger to acquire
the remaining outstanding stock of HiEnergy Microdevices. Under the terms of the
proposed merger, we would issue 459,222 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of HiEnergy Microdevices (the same ratio that was used in the
original voluntary share exchange), and all the assets and liabilities of
HiEnergy Microdevices would then become assets and liabilities of HiEnergy. As
of the date of this Report, the merger has not been effected, but we anticipate
its completion by the end of 2004.

       RECAPITALIZATION BETWEEN HIENERGY AND SHAREHOLDERS OF MICRODEVICES

On April 25, 2002, SLW, which was then a "public shell company", was taken over
by the stockholders of Microdevices in a transaction commonly referred to as a
"reverse takeover". Under this transaction, which was structured as a voluntary
exchange of shares, the stockholders of Microdevices, including the Company's
present Chairman of the Board, Chief Executive Officer, President, Treasurer and
Chief Scientific Officer, Dr. Bogdan Maglich, obtained the right to receive up
to 64% percent of the outstanding shares of SLW. Of this amount, as of the date
of this Report, approximately 8% of the shares of Microdevices remain
non-exchanged and are held by several Microdevices stockholders who did not
participate in the voluntary share exchange, and who are not affiliates of the
Company. The stockholders of SLW prior to the voluntary share exchange retained,
collectively, 36% of SLW. The reverse takeover was accounted for as a
re-capitalization of Microdevices for accounting purposes, in a manner similar
to a pooling of interests, with Microdevices as the accounting acquirer (reverse
acquisition). Since the Company (formerly SLW) was a "public shell company",
with limited assets and liabilities at the date of the acquisition and no
significant operations prior to the acquisition, no pro forma information has
been presented. As a result of the reverse takeover, Microdevices became the
Company's majority-owned subsidiary.


                                      -71-
<PAGE>

NOTE 2 - RESTATEMENT AND RECLASSIFICATIONS

In June 2004, the Company announced that it had revised its assumptions used to
determine the fair value of the common stock of Microdevices. Furthermore, a
change in the fair value of Microdevices common stock resulted in changes to the
Company's financial statements, as the fair value was used as a basis to
determine the value of:

      o     Stock Options and warrants granted to employees and non-employees
            during fiscal years 1996 through 2002 which were valued using the
            Black-Scholes valuation model, in accordance with SFAS No. 123,
            "Accounting for Stock-Based Compensation" and related
            interpretations.

      o     Shares of common stock issued for services rendered during fiscal
            years 1996 through 2002, which were recorded as compensation
            expense.

As a result of this revision and the change in how the Company determines the
fair value of Microdevices common stock, the Company's financial results for the
fiscal years ended April 30, 2002 and 2003 have been restated to correct certain
accounting errors made in preparing those financial statements as well as other
reclassifications and adjustments. The Company has also made additional
corrections to previously unrecognized accounting discrepancies discovered
during the restatement process, including adjustments for estimated payroll tax
liability as discussed in items 8 and 9 below.

Below is the reclassification effect as of and for the year ended April 30,
2002:

<TABLE>
<CAPTION>
                                        As Originally        Restatement                    As
                                           Reported           Adjustment                 Restated
                                     ------------------- -----------------        -------------------
<S>                                        <C>                <C>                       <C>
 BALANCE SHEET
 Current assets                            $  1,114,802       $         -               $  1,114,802
                                     ------------------- -----------------        -------------------
     Total assets                             1,229,370                 -                  1,229,370
                                     =================== =================        ===================

 Accrued payroll and payroll taxes              350,000          (350,000)   8
                                                                  257,150    8               257,150
                                     ------------------- -----------------        -------------------

 Total current liabilities                    1,398,320          (350,000)   8
                                                                  257,150    8             1,305,470
                                     ------------------- -----------------        -------------------

 Minority interest                               18,923                 -                     18,923
                                     ------------------- -----------------        -------------------

 SHAREHOLDERS' DEFICIT

 Common stock                                     2,208            19,867   11                22,075
                                     ------------------- -----------------        -------------------

 Additional paid-in capital                   2,534,483         3,792,564    1
                                                                  667,037    2
                                                                 (255,460)   3
                                                                   24,924   10
                                                                  (19,867)  11             6,743,681
                                     ------------------- -----------------        -------------------
 Deficit accumulated during the
   development stage                         (2,724,564)          350,000    8
                                                               (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                  (24,924)  10
                                                                 (257,150)   8            (6,860,779)
                                     ------------------- -----------------        -------------------

 Total stockholders' equity                    (187,873)          350,000    8
                                                                 (257,150)   8               (95,023)
                                     =================== =================        ===================
</TABLE>




                                      -72-
<PAGE>

<TABLE>
<CAPTION>
                                        As Originally        Restatement                    As
                                           Reported           Adjustment                 Restated
                                     ------------------- -----------------        -------------------
<S>                                        <C>                <C>                       <C>
 STATEMENT OF OPERATIONS
 Contract revenues                          $   148,166      $   (148,166)   4           $         -

 General & Administration                     1,525,276          (558,184)   5
                                                                1,091,362    6
                                                                  (33,349)   7
                                                                   94,241    8
                                                                    7,353    2
                                                                   24,924   10             2,151,623
                                     -------------------- ----------------        -------------------

 Research & development                               -          (148,166)   4
                                                                  558,184    5
                                                                 (175,000)   8               235,018
                                     -------------------- ----------------        -------------------

 Total operating expenses                     1,525,276          (148,166)   4
                                                                1,091,362    6
                                                                  (33,349)   7
                                                                   94,241    8
                                                                 (175,000)   8
                                                                    7,353    2
                                                                   24,924   10             2,386,641
                                     -------------------- ----------------        -------------------

 Loss from operations                        (1,377,110)       (1,091,362)   6
                                                                   33,349    7
                                                                  (94,241)   8
                                                                  175,000    8
                                                                   (7,353)   2
                                                                  (24,924)   10           (2,386,641)
                                     -------------------- ----------------        -------------------

 Loss before tax provision                   (1,387,596)       (1,091,362)   6
                                                                   33,349    7
                                                                  (94,241)   8
                                                                  175,000    8
                                                                   (7,353)   2
                                                                  (24,924)  10            (2,397,127)
                                     -------------------- ----------------        -------------------

 Net loss                                    (1,389,530)       (1,091,362)   6
                                                                   33,349    7
                                                                  (94,241)   8
                                                                  175,000    8
                                                                   (7,353)   2
                                                                  (24,924)  10            (2,399,061)
                                     ==================== ================        ===================
</TABLE>



                                      -73-
<PAGE>

Below is the reclassification effect as of and for the year ended April 30,
2003:

<TABLE>
<CAPTION>
                                        As Originally        Restatement                    As
                                           Reported           Adjustment                 Restated
                                     ------------------- -----------------        -------------------
<S>                                        <C>                <C>                       <C>
 BALANCE SHEET

 Current assets                            $  1,012,723        $        -               $  1,012,723
                                     -------------------- -----------------       ------------------
   Total assets                               1,813,095                 -                  1,813,095
                                     ==================== =================       ==================

 Accounts payable                               670,895                 1                    670,896
 Accrued payroll and payroll taxes               28,525           363,904    9               392,429
 Common stock subject to buy-back                     -           494,000   13               494,000
 Total current liabilities                      878,425           363,904    9
                                                                  494,000   13
                                                                        1                  1,736,330
                                     -------------------- -----------------       ------------------

 Minority interest                               18,923                 -                     18,923
                                     -------------------- -----------------       ------------------

 SHAREHOLDERS' DEFICIT

 Common stock                                    25,526            (1,400)  13                24,126
                                     -------------------- -----------------       ------------------

 Additional paid-in capital                   9,837,436         3,792,564    1
                                                                  667,037    2
                                                                 (255,460)   3
                                                                   24,924   10
                                                                 (492,600)  13
                                                                       (1)                13,573,900
                                     -------------------- -----------------       ------------------

 Committed common stock                          34,404            57,661   12                92,065
                                     -------------------- -----------------       ------------------
 Deficit accumulated during the
   development stage                         (8,981,620)       (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                  (24,924)  10
                                                                  (57,661)  12
                                                                 (363,904)   9           (13,632,250)
                                     -------------------- -----------------       ------------------

 Total stockholders' equity                     915,746          (363,904)   9
                                                                 (494,000)  13                57,842
                                     -------------------- -----------------       ------------------
 Total liabilities & shareholders'
   equity                                     1,813,094                 1                  1,813,095
                                     ==================== =================       ==================
</TABLE>



                                      -74-
<PAGE>

<TABLE>
<CAPTION>
                                        As Originally        Restatement                    As
                                           Reported           Adjustment                 Restated
                                     ------------------- -----------------        -------------------
<S>                                        <C>                <C>                       <C>
 STATEMENT OF OPERATIONS

 General & Administration                  $  4,488,175       $   350,000    9
                                                                  106,754    9          $  4,944,929
                                     -------------------- -----------------       ------------------

 Research & development                         695,042                 -                    695,042
 Total operating expenses                     5,183,217           350,000    9
                                                                  106,754    9             5,639,971
                                     -------------------- -----------------       ------------------

 Loss from operations                        (5,183,217)         (350,000)   9
                                                                 (106,754)   9            (5,639,971)
                                     -------------------- -----------------       ------------------

 Penalties on equity                                  -           (57,661)  12               (57,661)
 Total other expense                           (226,448)          (57,661)  12              (284,109)
 Loss before provision for income
   taxes                                     (5,409,665)         (350,000)   9
                                                                 (106,754)   9
                                                                  (57,661)  12            (5,924,080)
                                     -------------------- -----------------       ------------------

 Net loss                                    (5,411,265)         (350,000)   9
                                                                 (106,754)   9
                                                                  (57,661)  12            (5,925,680)
                                     -------------------- -----------------       ------------------
 Net loss available to
   shareholders                              (6,257,056)         (350,000)   9
                                                                 (106,754)   9
                                                                  (57,661)  12            (6,771,471)
                                     ==================== =================       ==================
</TABLE>



                                      -75-
<PAGE>

Below is the reclassification effect for the period from August 21, 1995
(inception) to April 30, 2003:

<TABLE>
<CAPTION>
                                        As Originally        Restatement                    As
                                           Reported           Adjustment                 Restated
                                     ------------------- -----------------        -------------------
<S>                                        <C>                <C>                       <C>
 STATEMENT OF OPERATIONS

 General & Administration                  $  5,909,064      $  3,792,564    1
                                                                  667,037    2
                                                                  350,000    9
                                                                 (255,460)   3
                                                                  363,904    9
                                                                   24,924   10
                                                                        1              $  10,852,034
                                       -------------------- -----------------       ------------------

 Research & development                       1,957,679          (350,000)   8
                                                                       (1)                 1,607,678
                                       -------------------- -----------------       ------------------

 Total operating expenses                     7,866,743         3,792,564    1
                                                                  667,037    2
                                                                 (255,460)   3
                                                                  363,904    9
                                                                   24,924   10            12,459,712
                                       -------------------- -----------------       ------------------

 Loss from operations                        (7,866,743)       (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                 (363,904)   9
                                                                  (24,924)  10           (12,459,712)
                                       -------------------- -----------------       ------------------
 Penalties on equity & debt
   issuances                                          -           (57,661)  12               (57,661)
 Total other expense                           (256,503)          (57,661)  12              (314,164)
 Loss before provision for income
   taxes                                     (8,123,246)       (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                 (363,904)   9
                                                                  (24,924)  10
                                                                  (57,661)  12           (12,773,876)
                                       -------------------- -----------------       ------------------

 Net loss                                    (8,135,829)       (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                 (363,904)   9
                                                                  (24,924)  10
                                                                  (57,661)  12           (12,786,459)
                                       -------------------- -----------------       ------------------

 Net loss available to shareholders          (8,981,620)       (3,792,564)   1
                                                                 (667,037)   2
                                                                  255,460    3
                                                                 (363,904)   9
                                                                  (24,924)  10
                                                                  (57,661)  12           (13,632,250)
                                       ==================== =================       ==================
</TABLE>

1)   For the period from August 21, 1995 (inception) to April 30, 2002 the
     Company issued common stock, options and warrants in lieu of cash to its
     founder, company directors and certain other service providers as
     compensation for services rendered. The Company determined the fair value
     of the stock issued for this purpose as the value of the service provided
     by the service provider. The Company later determined that a more
     appropriate fair value for the common stock was the weighted average per



                                      -76-
<PAGE>

     share value of cash received upon the sale of common stock during the same
     period. Accordingly the Company increased compensation expense during the
     period by $3,792,564, as well as increasing additional paid in capital and
     accumulated deficit.

2)   For the period from August 21, 1995 (inception) to April 30, 2002 the
     Company issued stock options and initially undervalued the options using
     the "services provided" method described above in item 1 as the fair value
     of the company's common stock. The Company later determined that using the
     "stock sold for cash" method to determine the fair value of the underlying
     stock that the options were of greater value adding additional compensation
     expense of $7,353 for the year ended April 30, 2002 and $667,037 for the
     period from August 21, 1995 (inception) to April 30, 2002. In fiscal 1999
     the Company granted an option to purchase 2,482,011 shares of common stock
     to its founder with an exercise price of $0.13 per share. Using the "stock
     sold for cash" method to determine that the fair value of the underlying
     stock was $0.40 per share, the stock option was in-the-money by $0.27. The
     Company determined that the compensation expense associated with this stock
     option grant was $659,684. For the year ended April 30, 2002 both
     additional paid in capital and accumulated deficit increased by $667,037.

3)   For the period ended April 30, 2002, the Company reversed $255,460 of
     expense for the issuance of common stock for cash that was originally
     recorded as stock for services. Accordingly, accumulated deficit was
     reduced by the same amount.

4)   For the year ended April 30, 2002, the Company reclassified $148,166 of
     grant proceeds as an offset against research and development costs in
     accordance with section 3.50 of the Government Contract Audit Guide for
     Fixed-Price Best-Efforts Cost Sharing Arrangements.

5)   For the year ended April 30, 2002, the Company reclassified $558,184 from
     general and administrative expenses to research and development expenses.

6)   For the period from August 21, 1995 (inception) to April 30, 2002, the
     Company issued common stock to its founder, company directors and other
     service providers as compensation for services rendered in lieu of cash.
     The Company determined the fair value of the stock issued for this purpose
     as the value of the service provided by the service provider. The Company
     later determined that a more appropriate fair value for the common stock
     was the weighted average per share value of cash received upon the sale of
     common stock during the same period. The Company has determined that the
     difference in the valuation method increased compensation expense
     $1,091,362 for the year ended April 30, 2002. The increase to additional
     paid in capital and accumulated deficit is included in the $3,792,564
     adjustment mentioned in item 1 above.

7)   For the year ended April 30, 2002, the Company reclassified $33,349 from
     general and administrative expense to additional paid in capital to reverse
     the expensing of stock actually issued for cash.

8)   For the year ended April 30, 2002 and the period from August 21, 1995
     (inception) to April 30, 2002, the Company reversed $175,000 and $350,000
     from research and development for an estimated and accrued payroll tax
     liability. Accordingly current liabilities and accumulated deficit
     decreased by $350,000 for the period ended April 30, 2002. The Company then
     recorded a new estimated payroll tax liability of $94,241 for the year
     ended April 30, 2002 and $257,150 for the period from August 21, 1995
     (inception) through April 30, 2002. Accordingly, current liabilities and
     accumulated deficit increased by $257,150 for the period ended April 30,
     2002. The Company has accrued the liability for its failure to timely file
     payroll tax returns and issue W-2s and 1099s.

9)   For the year ended April 30, 2003, the company increased general and
     administrative expense by $350,000 to offset a credit for this amount in
     general and administrative expenses originally reported. This increased
     current liabilities and accumulated deficit but was netted against the
     reversal of this amount in item 8 above. For the year ended April 30, 2003,
     the company then recorded a new estimated payroll tax liability of $106,754
     for the year ended April 30, 2003 and $$363,904 for the period from August
     21, 1995 (inception) through April 30, 2003. Accordingly, current
     liabilities and accumulated deficit increased by $363,904 for the period
     ended April 30, 2003. The company has accrued the liability for its failure
     to timely file payroll tax returns and issue W-2s and 1099s.

10)  For the year ended April 30, 2002 the Company issued warrants and initially
     undervalued the warrants using the "services provided" method described
     in item 1 above as the fair value of the Company's common stock. The
     Company later determined that using the "stock sold for cash" method to
     determine fair value of the underlying stock that the fair value of the
     warrants added additional compensation expense of $24,924 for the year
     ended April 30, 2002. Additional paid in capital and accumulated deficit
     were increased by the same amount.

11)  As of April 30, 2002, common stock was increased $19,867 as a result of
     previously using the incorrect par value, additional paid in capital was
     reduced accordingly.

12)  For the year ended April 30, 2003, the Company recorded an expense of
     57,661 for the issuance of common stock as a penalty for delayed
     registration. The issuance was originally recorded as a cost of capital.
     Accumulated deficit and committed common stock were increased accordingly.


                                      -77-
<PAGE>

13)  For the year ended April 30, 2003, the Company reclassified $494,000 from
     stockholders' equity to current liabilities. In April 2003, the Company
     engaged in a public offering of its shares to purchasers who bought
     1,400,000 in reliance upon a prospectus that did not, at the time the sales
     were made, contain a fixed price for its shares. These sales were made
     through private negotiation of the prices to be paid by each investor, and
     the prices were not consistent during the offering. The rules and
     regulations governing the sale of securities through a prospectus under the
     Securities Act of 1933 do not permit companies of our size to conduct a
     continuous public offering at prices which are negotiated, and vary by
     investor. As a result of this violation, the people who purchased the
     Company's common stock in the public primary offering would have the right,
     which may but does not have to be waived by them, to require the Company to
     buy back their shares at the price they paid for them. This right continues
     until two years from the date of the last sale made in violation of the
     fixed price rules.


NOTE 3 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which contemplate continuation of the Company as a going concern.
However, during the years ended April 30, 2004 and 2003 and the period from
August 21, 1995 (inception) to April 30, 2004, the Company incurred net losses
available to common shareholders of $8,183,346, $6,771,471, and $21,815,596,
respectively, and it had negative cash flows from operations of $2,846,157,
$2,966,998, and $6,704,073, respectively. The Company was in the development
stage as of April 30, 2004. These factors raise substantial doubt about the
Company's ability to continue as a going concern.

Recovery of the Company's assets is dependent upon future events, the outcome of
which is indeterminable. Successful completion of the Company's development
program and its transition to the attainment of profitable operations is
dependent upon the Company achieving a level of sales adequate to support its
cost structure. In addition, realization of a major portion of the assets on the
accompanying balance sheets is dependent upon the Company's ability to meet its
financing requirements and the success of its plans to develop and sell its
products. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.

In addition to the capital raised as of April 30, 2004 through private
placements, the Company is currently negotiating with certain investors about
raising additional capital through private placement offerings. Unless the
Company raises additional funds, either by debt or equity issuances, management
believes that its current cash on hand will be insufficient to cover its working
capital needs until the Company's sales volume reaches a sufficient level to
cover operating expenses.

Furthermore, the Company is involved in various litigation matters. The effect
of such litigation on the Company's financial statements is indeterminable at
this time.


NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                           PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
HiEnergy, its 92%-owned subsidiary, Microdevices, and its wholly-owned
subsidiaries, HiEnergy Defense and HiEnergy Europe. All significant
inter-company accounts and transactions have been eliminated.

                          DEVELOPMENT STAGE ENTERPRISE

The Company is a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises." The Company is devoting all of its present efforts to its
formation and to fundraising, and its planned principal operations have not yet
commenced. All losses accumulated since inception have been considered as part
of the Company's development stage activities.

                              COMPREHENSIVE INCOME

The Company presents comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in the
Company's consolidated financial statements since it did not have any of the
components of comprehensive income in any period presented.


                                      -78-
<PAGE>

                            CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of unrestricted balances only. The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.

The Company maintains its cash deposits at a bank located in California.
Deposits at the bank are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000. From time to time, deposits at the bank exceed the
$100,000 FDIC insurance limit. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk on cash and
cash equivalents.

                               ACCOUNTS RECEIVABLE

Accounts receivable consist of amounts due under a governmental grant. Contract
amounts are billed as monthly reports and are submitted detailing work performed
under the contract and are generally due in 30 days.

                              OTHER CURRENT ASSETS

Other current assets consist primarily of prepaid insurance, prepaid consulting
and services, and an equipment deposit that was refunded to the Company in May
2004, following the return of the equipment to the supplier. Prepaid insurance
and prepaid consulting and services are capitalized and amortized over the
estimated period for which such services are provided.

                             PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less depreciation and amortization.
Expenditures for additions and major improvements are capitalized. Repair and
maintenance costs are expensed as incurred. When property and equipment are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts. Gains or losses from retirements and disposals
are credited or charged to income. Depreciation and amortization are computed
using the straight-line method over the shorter of the estimated useful life of
the respective assets or terms of the related leases. The useful lives and lease
terms for depreciable assets are as follows:

                 Prototype Equipment                5 years
                 Laboratory Equipment               5 years
                 Furniture and Fixtures             5 years
                 Website Development                5 years
                 Leasehold Improvements             20 months

                                LONG-LIVED ASSETS

The carrying value of long-lived assets is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value of such assets
may not be recoverable. Measurement of the impairment loss is based on the fair
value of the asset. Generally, fair value will be determined using valuation
techniques such as the present value of expected future cash flows.

                                     PATENTS

The Company has filed several patent applications within and outside the United
States. The outcome is indeterminable. Patent costs consisting mainly of legal
expenses are expensed as incurred.

                       FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair values because of the short term
maturity of these instruments.

The fair value of the Company's debt, which consists of notes payable, notes
payable - related parties, convertible notes payable - related parties and
convertible notes payable subject to rescission rights, is estimated on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Such fair
value approximates the respective carrying values of its debt.

          CONVERTIBLE NOTES PAYABLE WITH BENEFICIAL CONVERSION FEATURES

The Company accounts for convertible notes payable ("CNP") with non-detachable
conversion options that are in-the-money ("beneficial conversion features"), at
the commitment date, in accordance with EITF Issue No. 98-5, "Accounting for



                                      -79-
<PAGE>

Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF Issue No. 00-27 , "Application of Issue
No. 98-5 to Certain Convertible Instruments".

The Company has issued convertible notes payable with beneficial conversion
features, with and without detachable warrants.

Where the Company has issued convertible notes payable with beneficial
conversion features without detachable warrants the difference between the
conversion price and the fair value of the common stock, at the commitment date,
is recorded as a debt discount and is amortized to interest expense over the
redemption period of the convertible note payable, in accordance with EITF Nos.
98-5 and 00-27. The redemption period is the shorter of the period to maturity,
conversion, or other event which requires the Company to rescind the convertible
note payable.

Where the Company has issued convertible notes payable with beneficial
conversion features with detachable warrants, the Company allocates the proceeds
between the convertible note payable and the warrants using the relative fair
value of the individual elements at the time of issuance. The difference between
the conversion price, adjusted for the relative fair value of the convertible
notes payable, and the fair value of the common stock, which is limited to the
relative fair value of the convertible note payable, is recorded as a debt
discount. The relative fair value of the warrants is also recorded as a debt
discount. The total debt discount is amortized to interest expense over the
redemption period of the convertible note payable.

           PENALTIES ASSOCIATED WITH LATE REGISTRATION OF COMMON STOCK

The Company has entered into Stock Purchase Agreements ("SPA") and Convertible
Note Purchase Agreements ("CNPA") that include a provision that requires the
Company to register, as freely trading, the shares of common stock and the
shares of common stock issuable upon exercise of warrants or conversion of the
convertible notes payable within certain deadlines, in a Registration Statement
on Form SB-2. Furthermore, if such shares of common stock are not registered
within certain deadlines, a penalty is payable or accruable in like securities.
The common stock, warrants and convertible notes payable (the "penalty
securities") issued for late registration are described in Notes 12, 18, 19 and
23, and the commitment to issue such penalty securities is described in Note 16.

The Company accounts for penalty securities issued as a penalty for late
registration as a penalty expense, which is recognized in the period the penalty
securities are earned. The fair value of the penalty securities is determined as
follows: Common Stock is valued at the fair value of the common stock on the
date earned; Warrants have been valued using the Black-Scholes option-pricing
valuation model on the date earned and Convertible Notes Payable are valued at
the face value of the note on the date earned.

                          CASHLESS EXERCISE OF WARRANTS

The Company has issued warrants to purchase common stock where the holder is
entitled to exercise the warrant via a cashless exercise, when the exercise
price is less than the fair value of the common stock. The Company accounts for
the issuance of common stock on the cashless exercise of warrants as a cost of
capital.

                         RESEARCH AND DEVELOPMENT COSTS

The Company accounts for research and development costs in accordance with SFAS
No. 2, "Accounting for Research and Development Costs". Research and development
costs are charged to operations as incurred. As described in section 3.50 of the
Government Contract Audit Guide for Fixed-Price Best-Efforts Cost Sharing
Arrangements, amounts earned under the Company's grants with the U.S. Department
of Defense have been offset against research and development costs, in
accordance with the provisions of that section.

                            STOCK-BASED COMPENSATION

The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". In accordance with SFAS No. 123, the Company has
elected the disclosure-only provisions related to employee stock options and
follows the Accounting Principles Board Opinion (APB) No, 25 in accounting for
stock options issued to employees. Under APB No, 25, compensation expense, if
any, is recognized as the difference between the exercise price and the fair
value of the common stock on the measurement date, which is typically the date
of grant, and is recognized over the vesting period.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123 and
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in financial statements about the effects of
stock-based compensation. The Company adopted the disclosure requirements in the
third quarter of 2003.

The weighted average fair value of stock options granted during the years ended
April 30, 2004 and 2003 were $0.73 and $1.63, respectively. Fair value was


                                      -80-
<PAGE>

determined using the Black-Scholes option-pricing model. For stock options
granted in the year ended April 30, 2004, the weighted average assumptions for
grants were a risk free interest rate of 1.8%, an expected life of 2 years, an
expected volatility of 140% and an expected dividend yield of 0%. For stock
options granted in the year ended April 30, 2003, the weighted average
assumptions for grants were a risk free interest rate of 1.8%, an expected life
of 2 years, an expected volatility of 125% and an expected dividend yield of 0%.

The following table compares net loss attributable to common stockholders and
loss per share as reported, for the years ended April 30, 2004 and 2003, to the
pro forma amounts that would be recorded had compensation expense for
stock-based compensation been determined based on the fair value on the grant
dates consistent with the method of SFAS No. 123:

<TABLE>
<CAPTION>
                                                                   2004             2003
                                                              ------------    ------------
<S>                                                             <C>             <C>
     Net loss attributable to common stockholders               (8,183,346)     (6,771,471)
     Stock-based employee compensation expense included
              in reported net loss, net of related tax
     effects                                                            --       1,092,354
     Total stock-based employee compensation expense
              determined under fair value based methods
              for all awards, net of related tax effects        (1,269,333)     (1,157,841)
                                                              ------------    ------------
     Pro forma net loss attributable to common stockholders     (9,432,679)     (6,836,958)

     Basic loss per share:
              As reported                                            (0.29)          (0.29)
              Pro forma                                              (0.33)          (0.29)
     Diluted loss per share:
              As reported                                            (0.29)          (0.29)
              Pro forma                                              (0.33)          (0.29)
</TABLE>


Stock options and warrants issued to non-employees are accounted for in
accordance with SFAS No. 123, EITF Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services", and related interpretations.

                 WARRANTS ISSUED AS FINANCING AND OFFERING COSTS

The Company accounts for warrants issued to investors who purchased common stock
and to finders' who arranged with third parties to invest in the Company's
common stock as offering costs. Such warrants are therefore accounted for as a
cost of capital.

                                  INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

                               NET LOSS PER SHARE

The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic loss per share is computed by dividing the net loss
available to common shareholders by the weighted-average common shares
outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. In the
calculation of basic net loss per share, the common stock subject to buy-back
and the common stock subject to rescission rights are not considered to be
equivalent to common stock and are excluded. Because the Company has incurred
net losses, basic and diluted loss per share is the same.

The following potential shares of common stock have been excluded from the
computation of diluted net loss per share for the periods presented because the
effect would have been anti-dilutive for the fiscal years ended April 30:


                                      -81-
<PAGE>

                                                          2004          2003
                                                       ----------   ----------
      Stock Options                                     6,768,675    5,439,937
      Warrants                                          8,544,614    1,645,686
      Series A convertible preferred stock                     --    2,129,316
      Convertible notes payable-related parties
            and accrued interest                          688,820       57,272
      Convertible notes payable subject to
            rescission rights                             530,883           --
      Common stock subject to buy-back                  2,000,000    1,400,000
      Common stock subject to rescission rights           770,424           --
      Microdevices minority shareholders                  459,222      459,222
      Microdevices options and warrants                   324,020      368,725
                                                       ----------   ----------
                                                       20,086,658   11,500,158
                                                       ----------   ----------


                                    ESTIMATES

The preparation of financial statements requires management to 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 amounts of revenue and expenses during the reporting
period. Actual results could differ materially from those estimates.

                    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standards, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As a result of the adoption
of SFAS No. 150, the Company has disclosed common stock subject to rescission
rights and buy-back as liabilities. The Company continues to evaluate the
potential significance of SFAS No. 150, but does not anticipate this will have
any additional material impact on its consolidated results of operations, cash
flows or financial position. SFAS No. 150 continues to be interpreted by the
FASB and it is possible that significant changes could be made by the FASB
during such future deliberations. Therefore, the Company is not able to conclude
as to whether such future changes would be likely to materially affect the
amounts already recorded and disclosed under the provisions of SFAS No. 150.


NOTE 5 - RISKS AND UNCERTAINTIES

In addition to considering these risks and uncertainties, readers should refer
to the other information contained in the Company's 2004 Annual Report as filed
on Form 10-KSB (the "Report"), before making any determination with respect to
the Company, including the information under the heading entitled "Risk
Factors", as well as review the disclosures as related to Forward-Looking
Statements at the front of this Report.

The Company is a development stage company, and an investment, or maintaining an
ownership position, in its common stock is inherently risky. The Company
operates in a dynamic and highly competitive industry and, accordingly, can be
affected by a variety of factors. The most critical risks and uncertainties
relate to obtaining financing to continue operations and fund anticipated
losses, and the timing and success of product introductions. Some of these risks
pertain to its business in general, and others are risks which would only affect
its common stock.

If any of the following events described below were to occur, the Company's
business, prospects, financial condition, or results of operations or cash flow
could be materially adversely affected:

     o    an inability to raise capital from the sale of equity or debt to
          private investors or from government grants or development contracts,
          in order to fund the Company's operations at current levels;

     o    an inability to obtain additional financing on commercially reasonable
          terms;

     o    an inability to shift resources toward the implementation of the
          Company's plan to commercialize, manufacture and market the Company's
          initial prototype device

     o    an inability to transition the Company's prototype into a commercial
          product meeting certain specifications which satisfy the demands of
          prospective customers;


                                      -82-
<PAGE>

     o    an inability to manufacture, or contract for the manufacture in a
          scalable and cost effective manner, producing sufficient quantities on
          a timely basis, under strict quality guidelines and in compliance with
          regulatory requirements;

     o    an inability to defend against and resolve pending litigation
          including investigative matters brought forth by the U..S. Securities
          and Exchange Commission ("SEC") and several disputes involving former
          consultants and employees;

     o    an inability to reconcile potential securities sales violations,
          including potential rescission and buy-back penalties;

     o    ability to reconcile any potential payroll tax liabilities;

     o    limitations on the Company's intellectual property rights and the
          ability to enforce or defend against claims of intellectual property
          infringement;

     o    an inability of the Company to recruit and maintain quality
          management, improve internal controls of operations and attain optimal
          distribution of executive powers;

     o    an inability to obtain approvals from the U.S. Nuclear Regulatory
          Commission, U.S. Department of Commerce, U.S. Department of the State,
          and any other state or federal regulatory agency where applicable;

     o    changes in other regulatory and legislative environment affecting
          governmental laws and licensing requirements;

     o    risks associated with budget processes of governmental agencies and
          departments affecting the availability of future government funding
          for future product development and sales;

     o    risks associated with international sales including, but not limited
          to, changes in domestic and foreign regulatory requirements; political
          instability in targeted foreign markets; differences in technology
          standards; possible foreign currency controls; longer payment cycles
          and inadequate collection system; fluctuations in currency exchange
          rates; inconsistent intellectual property protections in foreign
          jurisdictions; export restrictions, tariffs, embargoes or other
          barriers; prejudicial employment laws and business practices;
          difficulties in obtaining and managing distributors; and potentially
          negative tax consequences;

     o    changes in pricing policies by us, the Company's competitors or its
          suppliers, including possible decreases in average selling prices of
          the CarBomb Finder, caused by promotional offerings, customer volume
          orders, or competitive pricing pressures;

     o    an inability to adapt to rapid technological change;

     o    dependence upon a limited number of suppliers for component parts;

     o    an inability to anticipate and resolve problems with, or customer
          service issues related to, unqualified variables in product
          performance, dependability and usage, as well as maintenance
          requirements that could affect market's acceptance and perception of
          the Company's products;

     o    product liability and related claims if products malfunction or fail
          to detect substances, such as explosives;

     o    limited number of customers and an inability to identify and address
          markets;

     o    sales cycle duration, which if protracted could result in not being
          able to obtain sales orders;

     o    risks associated with special contracting requirements by governmental
          agencies and the Company's ability to meet agency certifications, such
          as the TSA, regarding its future products;

     o    public's perception of the threats facing the population and unrelated
          political circumstances, which may lead to significant fluctuations in
          demand for the Company's products and services; and

     o    economic and social impact of natural disasters and acts of terrorism.


NOTE 6 - OTHER CURRENT ASSETS

Other current assets at April 30, 2004 consisted of the following:

          Prepaid consulting and services             $    52,021
          Prepaid insurance                                 9,634
          Equipment deposits                              150,000
          Other                                            13,162
                                                      -----------
                                                      $   224,817
                                                      ===========



                                      -83-
<PAGE>

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment at April 30, 2004 consisted of the following:

          Prototype equipment                           $   228,399
          Laboratory equipment                              501,445
          Furniture and fixtures                             58,610
          Leasehold improvements                             51,150
          Web site development                               14,400
                                                        -----------
                                                            854,004
          Less accumulated depreciation and amortization    243,536
                                                        -----------
                                                        $   610,468
                                                        ===========

Depreciation and amortization expense for the years ended April 30, 2004 and
2003 and the period from August 21, 1995 (inception) to April 30, 2004 was
$144,113, $91,993 and $243,538, respectively.


NOTE 8 - ACCRUED PAYROLL AND PAYROLL TAXES

Microdevices has not filed, or needs to amend, certain of its 1099's, W-2's and
payroll tax returns for the tax years ended December 31, 1997 through 2002, with
respect to the issuance of shares of Microdevices common stock for services
rendered by officers, employees, directors, legal advisors and consultants. As
of April 30, 2004, the Company has accrued $393,081 for payroll taxes, penalties
and interest. The Company intends to file, or amend as necessary, its 1099's,
W-2's and payroll tax returns and pay any amounts due as soon as possible.

Excluding the payroll tax liability mentioned above, the Company has salaries
and wages payable of $65,123 as of April 30, 2004.


NOTE 9 - NOTES PAYABLE

Notes payable at April 30, 2004 consisted of the following:

<TABLE>
<CAPTION>
<S>                                                                                 <C>
      Note payable to an equipment supplier, secured by equipment, payable in
        monthly installments of $169, plus interest at 18% per annum, due
        in January 2007.                                                            $     3,970

      Note payable to employee for salary deferral, unsecured, non-
        interest bearing, due in May 2004.  The note was repaid in May 2004.              2,500

      Notes payable to employees for salary deferral, unsecured, bearing
        interest at 5% per annum, due at varying dates
        from July 2004 to October 2004.                                                   7,840
                                                                                    -----------
                                                                                         14,310

      Less current portion                                                               12,368
                                                                                    -----------

        LONG-TERM PORTION                                                           $     1,942
                                                                                    ===========
</TABLE>



                                      -84-
<PAGE>

NOTE 10 - NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties at April 30, 2004 consisted of the following:

<TABLE>
<CAPTION>
<S>                                                                                 <C>
         Notes payable to a shareholder of the Company, unsecured, bearing
           interest at 10.5% per annum, or 15% per annum upon default, and due
           in November 1997. As of April 30,
           2004, the notes were in default.                                         $    40,000

         Note payable to a shareholder of the Company, unsecured,
           bearing interest at 10.5% per annum, and due on
           demand. The note was repaid in May 2004.                                      45,000

         Note payable to legal counsel of the Company, unsecured,
           bearing interest at 5% per annum and due on demand.                           14,000

         Notes payable to the Chairman of the Company, unsecured,
           bearing interest at 5% per annum, and due on demand.                         249,934
                                                                                    -----------
                                                                                        348,934

         Less current portion                                                           348,934
                                                                                    -----------
          LONG-TERM PORTION                                                         $         -
                                                                                    ===========
</TABLE>


NOTE 11 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

Convertible notes payable - related parties at April 30, 2004 consisted of the
following:

<TABLE>
<CAPTION>
<S>                                                                                 <C>
          Convertible notes payable to legal counsel of the Company, unsecured,
            bearing interest at 10% per annum and due in April 2005. The holder
            of the notes has the option to convert the principal and interest
            into shares of common stock of the company at $1.00 per share at any
            time.                                                                   $   571,142

          Convertible note payable to legal counsel of the Company, unsecured,
            bearing interest at 10% per annum and due in April 2005. The holder
            of the note has the option to convert the principal and interest
            into shares of common stock of the company at $0.85 per share at
            any time.                                                                    38,232

         Convertible note payable to legal counsel of the Company, unsecured,
            bearing interest at 10% per annum and due in May 2005. The holder of
            the note has the option to convert the principal and interest into
            shares of common stock of the company at $1.00 per share at anytime.    $    38,061
                                                                                    -----------
                                                                                        647,435

         Less current portion                                                           609,374
                                                                                    -----------

          LONG-TERM PORTION                                                         $    38,061
                                                                                    ===========
</TABLE>


NOTE 12 - CONVERTIBLE NOTES PAYABLE SUBJECT TO RESCISSION RIGHTS

Convertible notes payable subject to rescission rights as of April 30, 2004
consisted of the following:


                                      -85-
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                 <C>
   Convertible note payable, unsecured, bearing interest at 5% per annum and due
    in January 2006. The holder of the note has the option to convert the
    principal and accrued interest into shares of common stock at $0.45 per
    share at any time until the later of the prepayment date or the maturity
    date. The convertible note payable has detachable warrants to purchase
    shares of common stock with a three and one-half year term as follows:
    222,222 at $0.45 per share; 66,667 at $0.75 per share; 40,000 shares at
    $1.25 per share and 33,333 shares at $1.50 per share. The investor also has
    registration rights on the underlying shares, and, as of April 30, 2004,
    receives as penalties, (i) additional detachable warrants to purchase 2% of
    the amount of shares exercisable under the original warrants and (ii) 2% of
    the amount of the convertible note payable equal to 2% of the original
    principal balance, for each subsequent month until a registration statement
    is filed and maintained effective by the Company, or the penalties become
    impermissible as a matter of law as prescribed in the instrument.
    Additionally, the convertible note payable provides the investor with
    ratchet rights, whereby the conversion price of the convertible note payable
    will be reduced to equal the price of any new shares sold in unrelated
    transactions before January 15, 2005 at a price per share below $0.45. If
    shares are to be sold at a price per share under $0.45, the investor also
    has a first right of refusal to purchase said shares offered. The holder
    also has rights to a second closing at the similar terms.                       $    50,000

   Convertible note payable, unsecured, bearing interest at 5% per annum and due
    in May 2006, issued as a penalty to the holder of the convertible note
    payable as a result of the Company's inability to file a registration
    statement within certain specified deadlines, and reflecting the same terms
    of, the convertible note payable above.                                               1,000

   Convertible note payable, unsecured, bearing interest at 5% per annum and due
    in January 2006. The holder of the note has the option to convert the
    principal and accrued interest into shares of common stock at $0.45 per
    share at any time until the later of the prepayment date or the maturity
    date. The convertible note payable has detachable warrants to purchase
    shares of common stock with a three and one-half year term as follows:
    411,111 at $0.45 per share; 246,667 at $0.75 per share; 148,000 shares at
    $1.25 per share and 123,333 shares at $1.50 per share. The investor also has
    registration rights on the underlying shares. The holder also has rights to
    a second closing for up to $400,000 of convertible note payable at similar
    terms.                                                                              185,000
                                                                                    -----------
                                                                                        236,000
                                                                                    -----------
   Less current portion                                                             $   236,000
                                                                                    -----------
    LONG-TERM PORTION                                                               $         -
                                                                                    ===========
</TABLE>

In accordance with EITF No.98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its convertible notes payable and
detachable warrants for the beneficial conversion feature. The Company has
allocated the proceeds from the placement of the debt to the warrants and the
debt based on their relative pro-rated values. This resulted in $43,954 being
allocated to warrants and $6,046 to debt. The value attributed to the warrants
was capitalized as debt issue costs and amortized over the term of note. As of
April 30, 2004, the entire value allocation of the warrant had been fully
expensed.

Furthermore, after allocating the proceeds to the warrants, the Company then
evaluated the embedded benefit conversion feature for potential beneficial
discount. This evaluation resulted in the Company recording a $6,156 of
beneficial discount that is to be amortized over the term of the convertible
note payable. As of April 30, 2004, the discount realized to the embedded
conversion feature had been fully expensed.

In accordance with EITF No.98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its convertible notes payable and
detachable warrants for the beneficial conversion feature. The Company has


                                      -86-
<PAGE>

allocated the proceeds from the placement of the debt to the warrants and the
debt based on their relative pro-rated values. This resulted in $143,804 being
allocated to warrants and $41,196 to debt. The value attributed to the warrants
was capitalized as debt issue costs and amortized over the term of note. As of
April 30, 2004, the entire value allocation of the warrant had been fully
expensed.

Furthermore, after allocating the proceeds to the warrants, the Company then
evaluated the embedded benefit conversion feature for potential beneficial
discount. This evaluation resulted in the Company recording $23,536 of
beneficial discount that is to be amortized over the term of the convertible
note payable. As of April 30, 2004, the discount realized to the embedded
conversion feature had been fully expensed.

The above convertible notes payable were sold by the Company to investors in a
private offering, while the Company had on file a registration statement with
the SEC. Such a contemporaneous, private offering may have resulted in a
violation of certain federal securities laws of the United States and
effectively rendered such private offering illegal. If this is the case, the
purchasers of convertible notes payable may have similar rescission rights
available to certain shareholders as described in Note 14. (See: "Note 14" for a
full description of the circumstances surrounding the rescission rights of
investors). Accordingly, the Company may be required to pay each rescinding
holder of convertible notes payable the amount it received as consideration,
plus any interest with respect to such amount at the applicable rate and any
penalties due the holders of securities with registration rights, and the
convertible notes payable would be cancelled. To date, the Company has not made
a final determination as to whether or not a violation has occurred. Even though
it does not anticipate receiving any demands for repurchase of these convertible
notes payable, the Company has recorded the $236,000 from the sales of
convertible notes payable, effected during this period when the registration
statement was on file, as a current liability as of April 30, 2004.

NOTE 13 - SALES OF COMMON STOCK SUBJECT TO BUY-BACK BY THE COMPANY

During April and June 2003, the Company engaged in a public offering of its
shares of common stock to purchasers who bought in reliance upon a prospectus
that did not, at the time the sales were made, contain a fixed price for the
Company's shares. These sales were made through private negotiation of the
prices to be paid by each investor, and the prices were not consistent during
this offering. The rules and regulations governing the sale of securities
through a prospectus under the Securities Act of 1933 do not permit issuers of
the Company's size to conduct a continuous public offering at prices which are
negotiated, and vary by investor. As a result of this violation, the people who
purchased the Company's common stock in the public primary offering would have
the right, which may but does not have to be waived by them, to require the
Company to buy back their shares at the price they paid for them. This right
continues until two years from the date of the last sale made in violation of
the fixed price rules.

During the years ended April 30, 2004 and 2003, the Company sold 900,000 and
1,400,000 shares of common stock, respectively, using the prospectus that did
not include the fixed pricing information required by the Securities Act. The
purchase prices were between $0.33 and $0.35 per share. As of April 30, 2004, of
the 2,300,000 shares of Common stock that were sold to investors and are subject
to buy-back as described above, the Company obtained signed waivers from
investors representing 300,000 shares of the purchased common stock. The Company
considers the probability of any investor requesting the repurchase of common
stock subject to buy-back to be remote. Nevertheless, the Company will continue
to record the potential repurchase obligation as a current liability until the
two-year waiver period has lapsed, in April and June 2005.

As of April 30, 2004, the Company had issued 2,000,000 shares of common stock
subject to buy-back for $694,000 in cash. Of this, $694,000 was reflected as of
April 30, 2003, as restated.

NOTE 14 - SALES OF COMMON STOCK SUBJECT TO RESCISSION

During the period from September 3, 2003 through April 16, 2004, the Company had
on file with the SEC registration statements on Form SB-2 seeking to register
for public sale shares of its common stock. A total of 5 million of those shares
to be registered were for the sale of newly issued shares, and the remainder was
to be registered for the account of selling stockholders who purchased the
Company's shares in private placements conducted previously. On September 19,
2003, the Company withdrew the registration statement containing the shares to
be registered for its public offering, and re-filed a registration statement
solely seeking to register the shares of selling stockholders. This registration
statement was withdrawn on April 16, 2004.

While the Company's registration statements were on file with the SEC, the
Company also raised capital through the sale of its securities in a private
placement to accredited investors. While it is true that rules and regulations
under the Securities Act of 1933 do not permit issuers such as the Company to
conduct a public offering on a continuous basis at varying prices or a
negotiable price, the only overlap occurred with respect to the selling
stockholders' registration statement. Although the Company, as an issuer, was
not selling stock publicly and privately at the same time, it is possible that
the contemporaneous, private offering of the Company's securities by the Company
while the selling stockholders' shares were in registration with the SEC may be
deemed to be "integrated" under the federal securities laws of the United
States. Integration occurs where two offerings that are close in time are deemed
to constitute only one, single offering, and the effect of integration can be to



                                      -87-
<PAGE>

destroy an exemption upon which a company has relied in issuing its securities
privately, which makes rendering such offering and unregistered public offering
illegal. In such event, the persons who purchased securities in such an offering
may be entitled to, among other penalties or fines which may be assessed against
the issuing company, the right to demand rescission of the offering. In that
case, the Company would be required to pay each rescinding investor the amount
it received as consideration for the illegal securities, plus any interest
accrued with respect to such amount at the applicable rate, and the securities
would be cancelled.

While the Company has not completed any independent investigation into whether
or not the rescission rights are in fact due to certain shareholders or whether
or not there may be defenses which could negate the requirement to offer
buy-back or rescission rights to prior investors (for example, the effect of
Rule 155, which is a safe harbor with respect to integration if one of the
simultaneous offerings that caused the integration has been abandoned), the
Company does not anticipate receiving any demands for repurchase of these
shares. Nevertheless, until such time as the Company has determined with the
Company's legal advisors whether or not integration has occurred, the Company
has recorded $1,058,153 from the sales of 2,066,320 shares of common stock (of
which 770,424 shares of common stock were issued and 1,295,896 shares of common
stock were committed to be issued), effected during this period when the
registration statement was on file, as a liability as of April 30, 2004. The
liability has been offset by a $425,000 subscription receivable, which was
received by the Company subsequent to the fiscal year end.

NOTE 15 -RESEARCH AND DEVELOPMENT COSTS

The Company has been engaged in commercializing a proprietary technology for
assembling sensor systems for numerous governmental and commercial applications
and markets. The Company's technology has the ability to determine
automatically, in a matter of tens of seconds and with a high degree of
accuracy, whether an object or container carries dangerous substances, such as
explosives, illicit drugs or biological agents, by deciphering the chemical
formula of selected substances, is believed by Company management to have
numerous applications.

The Company's research and development expenses consist primarily of salaries
and benefits, facilities, depreciation, consulting services, supplies and
travel. The Company accounts for research and development costs in accordance
with SFAS No. 2, "Accounting for Research and Development Costs". Research and
development costs are charged to operations as incurred. As described in section
3.50 of the Government Contract Audit Guide for Fixed-Price Best-Efforts Cost
Sharing Arrangements, amounts earned under the Company's grants with the U.S.
Department of Defense ("DoD") have been offset against research and development
costs, in accordance with the provisions of that section, in all periods
presented.

Since inception, the Company has been able to obtain various governmental grants
and development contracts. During the years ended April 30, 2004 and 2003, the
Company worked on different phases of two separate development contracts with
the DoD.

The Company is currently in Phase II of a Small Business Innovation Research
("SBIR") contract awarded to the Company in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate. Under the contract, the Company is to
develop and test the Company's Anti-Tank Landmine Detector 7AT7 over a two year
period, which may be extended at the option of the U.S. Army. The Company
received $70,000 in SBIR proceeds to complete Phase I, and on January 15, 2003,
the Company executed a contract with the U.S. Army for Phase II valued at
$415,000. Work commenced in January 2003 under Phase II of the contract. In
January 2004, the U.S. Army exercised its option for the second year of Phase
II, valued at approximately $364,000. Work commenced on the second year of Phase
II in March 2004. Phase II ends in March 2005. The Company's anticipated cost to
complete Phase II is $1,400,000. If further research and development work is
required upon the expiration of Phase II, the Company has the ability to submit
a request for additional Phase II or Phase III funding, which the government
would consider based upon the Company's progress to date and the merits of the
project. The U.S. Army is under no obligation to continue to assist in funding
these research and development costs beyond Phase II or any subsequent
extension, or to purchase the Anti-Tank Landmine Detector 7AT7 once the Company
has completed development activities.

Under the terms of the contract, the U.S. Army pays a portion of the Company's
research and development costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress under the contract. When the written report is accepted
by the U.S. Army, the Company receives payment in about 30 to 45 days. The
Company recognizes one-twelfth of the annual contract amount as an offset
against research and development expenses each month.

Below is a summary of research and development costs for the following periods:



                                      -88-
<PAGE>

<TABLE>
<CAPTION>
                                                                                  For the
                                                                                Period from
                                                                                August 21,
                                                                                   1995
                                                                              (Inception) to
                                                Years Ended April 30,            April 30,
                                           -------------------------------- ------------------
                                                 2004             2003             2004
                                           ----------------- -------------- ------------------
<S>                                         <C>               <C>              <C>
      Research and development costs        $ 1,176,502       $   839,629      $ 3,254,683
      Grant proceeds                           (372,071)         (144,587)        (842,574)
                                           ----------------- -------------- ------------------
      Net research and development costs    $   804,431           695,042        2,412,109
                                           ----------------- -------------- ------------------
</TABLE>


NOTE 16 - COMMITMENTS AND CONTINGENCIES

                              EMPLOYMENT AGREEMENTS

In March 2002, Microdevices entered into an employment agreement with its Chief
Scientist/Chairman of the Board. In May 2002, the Company assumed the employment
agreement, which was subsequently amended in December 2002 and July 2003. Major
commitments included in the agreement, as amended, are as follows:

     o    The Company must pay an annual bonus, which must not be less than 20%
          of the total amount of bonuses paid to officers of the Company. If the
          pretax profit in any fiscal year exceeds $0.20 per share, then his
          bonus in that year must not be less than $50,000.

     o    The Company will grant its Chief Scientist/Chairman of the Board
          annually, during the term of the employment agreement, stock options
          to exercise a number of shares of common stock equal to the greater of
          (i) 1% per annum of the Company's stock issued and outstanding or (ii)
          10% of the total number of options granted by the Company for services
          in that year. In either case, the exercise price on the stock options
          is equal to the average price of the Company's traded shares for the
          preceding 30 days prior to the date of the grant.

     o    The Company will provide its Chief Scientist/Chairman of the Board
          with a car, family health insurance, life and disability insurance,
          and reimbursements for reasonable out-of-pocket expenses, not to
          exceed $39,200 in any one year, and any personal tax liabilities
          arising up to $75,000.

     o    The Company must pay its Chief Scientist/ Chairman of the Board a base
          salary in cash as follows:

                  January 1, 2004 to December 31, 2004      $175,000 per year
                  January 1, 2005 to December 31, 2005      $175,000 per year
                  January 1, 2006 to December 31, 2006      $283,013 per year

     o    The Company must pay its Chief Scientist/ Chairman of the Board a
          supplemental salary of $2,800 per month for the duration he serves as
          the Company's Chief Executive Officer, pursuant to an authorization
          from the Board of Directors in July 2003.

     o    If the employment agreement is terminated by the Company without
          cause, the Company must pay its Chief Scientist/Chairman of the Board,
          on the termination date, an amount equal to two years of the minimum
          annual base salary.

     o    The employment agreement between the Company and its Chief
          Scientist/Chairman of the Board is effective until December 31, 2006.


                              CONSULTING AGREEMENTS

The Company is currently arbitrating a dispute with a former consultant, Yeffet
Security Consultants, Inc. See the description in the Litigation section below
in this Note.

In January 2004, the Company signed a six month agreement with an investor
relations firm. The minimum monthly fee will be $5,000 for up to 30 hours per
month, plus additional expenses. After the Company's registration statement is
effective, the minimum monthly fee will increase to $7,500 for up to 50 hours
per month, plus additional expenses. The agreement can be terminated upon
90-days written notice.

                                 LEASE AGREEMENT

In October 2002, the Company entered into a three-year operating lease agreement
with one of its directors at that time for its corporate offices in Irvine,
California. The lease provides for monthly rent of $8,000 for the first 18
months and $8,320 for months 19 through 36. In January 2004, the Company
executed an addendum to the lease agreement to lease an additional 4,570 square
feet of space within the same building in which the Company's offices are


                                      -89-
<PAGE>

located. The new space will be used for production and testing of the Company's
products. The addendum begins in February 2004 and expires in September 2005.
The additional monthly rent will be $4,123.

Rent expense for the years ended April 30, 2004 and 2003 was $122,639 and
$68,200, respectively. Future minimum payments at April 30, 2004 under these
lease agreements were as follows

                           Year Ending
                             April 30,
                         ----------------
                               2005                   $ 149,316
                               2006                      66,375
                                                   -------------
                               TOTAL                  $ 215,691
                                                   =============


                               COMPONENT PURCHASES

The Company has issued purchase orders to obtain necessary components for its
prototype units. In April the Company issued a purchase order for ten neutron
generators at a total cost of approximately (euro)867,000, or an estimated
$1,049,070. The generators are scheduled to be delivered approximately two per
month starting in August 2004. The company has the option to lease these units
from the vendor for up to 12 months for approximately (euro)9,600, or an
estimated $11,616 per unit every 2 months following an initiation fee of
approximately (euro)10,200, or an estimated $12,342 per unit. At the end of the
lease the Company has the option to purchase each unit for (euro)30,420, or an
estimated $36,808 (U.S. Dollar figures are based on an periodic exchange rate of
1.21 euros for 1 U.S. Dollar).

In May 2004, the Company ordered 60 neutron detectors for a total cost of
approximately $1,368,000. The Company began receiving the detectors in May 2004
and will continue to receive these units at varying intervals. Payment terms for
the detectors are 50% due upon order and the balance due 30 days following
receipt and acceptance by the Company.

                           PLACEMENT AGENT AGREEMENTS

In July 2004, the Company entered into an exclusive agreement with a placement
agent to arrange for the sale of debt or equity securities. Major terms of the
agreement are as follows:

     o    The term of the agreement will be until the proposed financing is
          completed or at such time either the Company or the placement agent
          gives 10 days' written notice of termination.

     o    The Company will pay a success fee equal to 8% of any of the gross
          proceeds received by the Company derived from the efforts of the
          placement agent, plus $5,000 in anticipated legal expenses at closing,
          to be paid from the proceeds of such closing.

     o    The Company will issue warrants to purchase 10% of the amounts of
          securities placed with investors through the efforts of the placement
          agent. The exercise price of the warrants will be equal to the price
          at which the security was placed. The warrants vest immediately,
          expire four years from the date of grant, and include "piggyback"
          registration rights.

                         INVESTMENT BANKING RELATIONSHIP

In August 2003, the Company signed an agreement with an investment bank to
support its bid to obtain a $1,600,000 grant under a contract with the U.S. Navy
to develop a prototype SuperSenzor for detection of biological agents in sealed
containers. Pursuant to the agreement, the investment bank provided to the U.S.
Navy a guarantee that it would provide a minimum of $2,500,000 and a maximum of
$4,000,000, by purchasing common stock of the Company, at prices to be
negotiated, in order for the Company to demonstrate that it had sufficient
funding to perform against the 18-month contract. The Company estimates that
related contract costs, consisting mainly of research and development personnel
costs and prototype equipment purchases, will be in the range from $800,000 to
$1,200,000. If the Company was awarded the proposed contract, it is anticipated
that the contract payments would finance the contract expenses.

In exchange for this guarantee, the Company is obligated to pay the investment
bank a fee ranging from $50,000 to $150,000, depending upon whether or not the
contract with the U.S. Navy is awarded to the Company. Although, the Company had
been approved for a grant of $1,600,000, the Contracting Office of the Naval
Surface Warfare Center disqualified the Company on the basis of its financial
condition. As of April 30, 2004, the Company has recorded the minimum liability
due the investment bank as an accrued expense, per the terms of the contract.


                                      -90-
<PAGE>

                               SEC INVESTIGATIONS

After reading news reports that connected the Company's reverse takeover of
Microdevices with known stock manipulators, its Board of Directors directed the
Company's President to hire a team of independent investigators to investigate
whether we or any of the Company's officers and directors had engaged in any
wrongdoing. The core team of independent investigators consisted of two former
U.S. federal prosecutors, a former Assistant U.S. Attorney in the civil division
who has been in private practice since 1981 with experience in securities
litigation and regulatory and investigative proceedings, and a former
supervisory agent from the Federal Bureau of Investigation. In their review, the
independent investigators obtained evidence that some of the Company's
stockholders who purchased significant amounts of HiEnergy shares prior to the
reverse takeover knew, or had business dealings with, Phil Gurian, a person who
the Company later learned had previously been involved in stock manipulation,
and that one of these stockholders was a company reportedly owned by Mr.
Gurian's mother, which disposed of its shares in April 2002 at a profit believed
to be between $500,000 and $600,000. Mr. Barry Alter, a person who later served
as one of the Company's directors and, for a short time, as our interim
President, was found to have been aware of these purchases of HiEnergy shares.
The independent investigators believe the evidence is inconclusive whether Phil
Gurian had control over these HiEnergy shares and whether, if so, whether the
Company's former president and director had any knowledge of such that control.

In April 2003, the Enforcement Division of the SEC commenced a formal
investigation as to the undisclosed ownership of the Company's securities by,
and actions with respect to its stock taken by, Philip Gurian, Barry Alter and
other of their affiliates who controlled SLW at the time of the Company's
reverse takeover, and the undisclosed identity of, and the origin of funds used
to purchase the Company's stock by, certain of the Company's shareholders. The
Company has supplied the Enforcement Division of the SEC attorneys with reports
developed by the its independent investigators and the Company has cooperated in
a transparent and timely manner, and intends to continue to cooperate with the
investigation. The Company also agreed to voluntarily provide the Enforcement
Division of the SEC with other documents they have requested in its informal
investigation.

On March 30, 2004, Dr. Bogdan Maglich, the Company's Chief Executive Officer,
Chief Scientific Officer, Treasurer, President and Chairman, gave an oral and
written presentation at the Investment Opportunities in Homeland Security and
Defense Conference in Washington, D.C. regarding HiEnergy's key markets,
business strategy and financial projections. Copies of the presentation were
distributed at the conference. The Company subsequently posted the presentation
on the Company's website from April 7, 2004 to April 13, 2004. Approximately
2,731 computer users visited the its website and had access to the presentation.
The total number of hits was 96,937, or a daily average of approximately 13,848.
The presentation contained statements of management's beliefs concerning the
Company's key markets, business strategy, opportunities and financial
projections which were not disclosed in a concurrent registration statement the
Company had filed with the SEC on Form SB-2. In order to reduce the risk of an
investor relying on the presentation, the Company removed the presentation from
the Company's website on April 13, 2004, in part to allow for a "cooling off"
period so that any possible effect of the presentation would dissipate, and the
Company subsequently withdrew the registration statement on April 16, 2004.

As described earlier in this Report under the heading Recent Events - SEC
Investigation, the Company received a Subpoenas for information from the SEC, on
April 12, 2004, which required the Company to supply them with documents
pertaining to the presentation given by Dr. Bogdan Maglich at the Investment
Opportunities in Homeland Security and Defense Conference in Washington, D.C. in
March 2004. A subsequent letter, dated May 24, 2004, requested documents
substantiating statements the Company had previously reported in a press release
regarding the Company's discussions with a consortium calling itself the
Dallas-Fort Worth Homeland Security Alliance. The Company voluntarily responded
to both requests for documents.

On June 24, 2004, the Company received a further letter from the Central
Regional Office of the SEC, in Denver, Colorado, indicating its intention to
recommend that the SEC charge the Company with violations of several sections of
the Securities Exchange Act, and the rules promulgated under that act, involving
the making of false and misleading statements in its public documents. The false
and misleading statements which the SEC believes were made seem to focus
primarily on, among other things, the undisclosed ownership of the Company's
securities by, and actions with respect to its stock taken by, Barry Alter,
Philip Gurian and other of their affiliates who controlled SLW at and prior to
the time of the Company's reverse takeover; the undisclosed identity of, and the
origin of funds used to purchase the Company's stock by, certain of the
Company's stockholders; the nature of, and reasons for, a "dividend" provided to
its stockholders; and the terms of other offerings occurring at the same time as
one of the Company's private placements of stock. In addition, the antifraud
violations appear to be based upon private transactions made by Mr. Alter
(formerly a director and executive officer of HiEnergy) with respect to sales of
the Company's stock made by him without disclosing material facts about the
Company, or its contemporaneous offering of securities at different prices, to
his purchasers. The Company is currently working with special securities
litigation counsel to assess the Company legal position and determine how best
to respond to this most recent correspondence from the SEC.

On June 30, 2004, the SEC sent to the Company a Subpoena in which it required
the Company to provide to it copies of all documents concerning the restatement
of the Company's financial statements of the years ended April 30, 2002 and
2003, announced on June 9, 2004. The subpoena requested documentary evidence to
the restatement, including, without limitation, all of the Company's electronic


                                      -91-
<PAGE>

and written correspondence, notes, journal entries, records, working papers and
other documents that pertain to the restatement, and specifically all
communications between the Company and its auditors. The Company's auditors also
received a similar subpoena from the SEC. The effect of the restatement of the
Company's financial statements was to cause the Company to record additional
expense to the Company of $1,009,531 and $514,415 during the fiscal years ended
April 30, 2002 and April, 30, 2003, respectively, and to increase the amount of
the Company's accumulated deficit and additional paid in capital brought forward
at May 1, 2001 by $3,126,684 and $3,123,749, respectively.

                                   LITIGATION

In March, 2002, Keith Cowan, a former CEO and President of Microdevices, filed a
lawsuit against Microdevices, Dr. Maglich, and Mr. Richard Alden in the Superior
Court of the State of California, County of Orange, Central Justice Center. The
plaintiff served as the CEO and President of Microdevices from December 2001
through March 9, 2002. The plaintiff had an employment agreement with
Microdevices. The Complaint contains the following claims: (A) failure to pay
wages due in violation of the Labor Code against Microdevices and Dr. Maglich;
(B) breach of contract against Microdevices and Dr. Maglich; (C) false
representation regarding the kind and character of the work against all three
defendants; and (D) fraud against all three defendants. In the prayer for
relief, Mr. Cowan sought damages in the amount of $873,455, plus interest,
penalties, attorney's fees, and costs. The parties to the lawsuit executed a
settlement agreement in January 2003. The settlement agreement provided that
HiEnergy would pay Mr. Cowan $50,000: $25,000 in the form of wages that would be
subject to payroll taxes and $25,000 in the form of a reimbursement for moving
expenses and legal fees. In addition, Mr. Cowan received 80,000 shares of
restricted common stock of HiEnergy with registration rights providing that if
the 80,000 shares were not sold through a registered offering before April 1,
2003, then Mr. Cowan has the option of tendering the shares to HiEnergy and
demanding payment of $125,000 held in escrow. As of April 1, 2003, the shares
were not registered and, subsequently, Mr. Cowan tendered the 80,000 shares and
received a payment of $125,000.

The Company received a letter dated December 5, 2002, from an attorney
representing Richard T. Eckhouse, a consultant, demanding payment for accounting
services allegedly performed by Mr. Eckhouse pursuant to a Letter Agreement
dated November 7, 2001, between Mr. Eckhouse and Microdevices. The Letter
Agreement provides that Mr. Eckhouse was to be paid $350 per hour, which was to
be paid as follows:

     (i) one-third or $117 in cash; (ii) one-third or $117 paid by a Promissory
     Note at 10% annual interest, maturing when HiEnergy receives government
     funding of $900,000 or an investment totaling $300,000 or more; and (iii)
     one-third or $117 paid by Class A common stock of Microdevices at $5.00 per
     share.

In May 2003, Mr. Eckhouse filed a lawsuit against the Company, Microdevices and
Dr. Bogdan Maglich in the Superior Court of the State of California, County of
Orange, Central Justice Center, and an amended complaint in June 2003, alleging
that Microdevices owes Mr. Eckhouse a total of $313,580 for services rendered,
plus interest, attorney's fees and costs.

In June 2004, the Company reached a settlement in the legal matter with Mr.
Eckhouse. The Company agreed to pay Mr. Eckhouse $10,000 and 10,500 shares of
the Company's common stock valued at $13,440 in exchange for a mutual release.

In May 2003, Mr. Alter brought a lawsuit against the Company in the New Castle
County Court of Chancery in Delaware to recover the advancement of expenses in
the amount of $24,000 he allegedly incurred in response to an SEC investigation
which mirrored the Company's investigation by the SEC, and for which Mr. Alter
obtained separate legal counsel to represent him. That action was identified as
Civil Action No. 20320NC. On June 17, 2003, Mr. Alter notified the Company that
this action had been voluntarily dismissed without prejudice. However, to date,
there has been no settlement with Mr. Alter, and there can be no assurance that
the claims he asserted against the Company will not be resuscitated at some time
in the future.

The Company is currently arbitrating a dispute with former consultant, Yeffet
Security Consultants, Inc. ("YSCI") and Isaac Yeffet, President of YSCI. The
Company entered into a three-year consulting agreement with YSCI in July 2002
whereby the consultant would assist the Company with business development,
product and corporate image advertising, and access to government grants and
purchases. For his consulting service, the agreement provided that YSCI would be
paid $20,000 per month, plus 5% of any gross revenues collected in cash from
government grants or business and other third-party business that YSCI produces
for the Company.

In October 2003, the Company notified YSCI that it was terminating its contract.
In February 2004, YSCI filed a Demand for Arbitration, alleging that the Company
breached the consulting agreement and seeking to recover $450,000. In April
2004, YSCI amended its Demand for Arbitration to include a claim for commissions
that YSCI claims it is owed in connection with investments made by individuals
who purchased shares of the Company's stock. The Amended Demand for Arbitration
also seeks a determination as to whether Mr. Yeffet is entitled to exercise
options to purchase 500,000 shares of common stock issued to him under the
Company's Stock Option Agreement. In June 2004, the Company filed an answer
generally denying YSCI's allegations set forth in the original and amended
Demands for Arbitration. The Company also filed a cross Demand for Arbitration
seeking disgorgement of all monies paid to YCSI and rescission of the consulting
agreement and stock option agreement. The parties are in the process of
exchanging discovery. The Company intends to vigorously defend itself in and
prosecute this arbitration.

From time to time, the Company may be subject to other routine litigation
incidental to the ordinary course of business.


                                      -92-
<PAGE>

Prior to his termination, YSCI was granted options to purchase 1,000,000 shares
of common stock with an exercise price of $1 per share and exercisable for six
years from the date of grant. Of these options, 500,000 vested immediately, and
the remaining 500,000 were to vest one year after certain milestones. The vested
500,000 stock options were valued at $761,000. The fair value of the options was
determined using the Black-Scholes model. The assumptions used to determine the
valuation are as follows:

         Value of warrants per share                  $1.52
         Stock price on grant date                    $2.13
         Exercise price                               $1.00
         Expected life                            2.0 years
         Risk-free rate of return                     3.02%
         Expected annual volatility                    105%
         Annual rate of dividends                        0%

During the years ended April 30, 2004 and 2003, the Company expensed these
options and included in general and administration expenses $550,000 and
$211,000, respectively.

                              MINORITY SHAREHOLDERS

As of April 30, 2004, Microdevices has 20,540 minority shares issued and
outstanding. In November 2003, our Board of Directors approved a short form
merger to acquire the remaining outstanding stock of HiEnergy Microdevices.
Under the terms of the proposed merger, we would issue 459,222 shares of common
stock to the remaining stockholders of HiEnergy Microdevices on the basis of
22.3524 HiEnergy shares for 1 share of HiEnergy Microdevices (the same ratio
that was used in the original voluntary share exchange), and all the assets and
liabilities of HiEnergy Microdevices would then become assets and liabilities of
HiEnergy. As of the date of this Report, the merger has not been effected, but
we anticipate its completion by the end of 2004.

                            CONVERTIBLE NOTES PAYABLE

During the years ended April 30, 2004 and 2003, the Company issued convertible
notes payable ("CNP") with two-year maturities in which the holder of the note
has the option to convert the principal and accrued interest into shares of
common stock at conversion prices between $0.45 and $0.83 per share at any time
until the later of the prepayment date or the maturity date. The conversion
price is subject to adjustment for stock splits, stock dividends, combinations,
and other similar structural events and the CNP provide for full-ratchet
anti-dilution protection, subject to standard exceptions, with respect to the
issuance of the Company's common stock before January 15, 2005 at a purchase
price per share which is below $0.45, or with respect to the issuance of CNP
before January 15, 2005 with a conversion price below $0.45. Most of the CNP
also have detachable warrants to purchase shares of common stock with a three
and one-half year term at prices between $0.45 and $1.65. All CNP have
registration rights on the underlying shares, and in certain cases, if the
shares of common stock issuable upon conversion of the CNP or exercise of the
detachable warrants are not registered within certain specified deadlines, the
holder is due penalties in the form of (i) 2% of the amount of the convertible
note payable equal to 2% of the original principal balance and (ii) additional
detachable warrants to purchase 2% of the amount of shares exercisable under the
original warrants, for each subsequent month until a registration statement is
filed and maintained effective by the Company, or the penalties become
impermissible as a matter of law as prescribed in the instrument. Additionally,
in certain cases, the CNP provide the holder with rights of first refusal if
shares are to be sold at a price per share under $0.45 to purchase said shares
offered. As of April 30, 2004, the Company issued 1,517,716 of CNP, which were
convertible into 1,595,896 shares of common stock, all of which were
in-the-money as of April 30, 2004. Of the 1,517,716 CNP that were issued,
$425,000 are subscription receivables. Of the 1,595,896 shares of common stock
issued upon conversion, 1,295,896 are committed common stock as of April 30,
2004.

                               PENALTY SECURITIES

After August 2003, the Company entered into certain SPAs and CNPAs, which
include a provision that requires the Company to (i) register, as freely
trading, the shares of common stock and the shares of common stock issuable upon
exercise of warrants or conversion of the convertible notes payable within
certain deadlines, in a Registration Statement on Form SB-2; and (ii) pay or
accrue a penalty in like securities if such shares of common stock are not
registered within the specified deadlines. In accordance with the relevant
registration rights provisions in these agreements, the Company has paid or
accrued penalties due purchasers in these offerings, because the Company failed
to meet the specified deadlines for having a Registration Statement on Form SB-2
declared and maintained effective.

As of this date, the Company remains obligated to these registration rights and
subject to related penalties, and will incur additional financial costs or
penalties, until such time as all registrable shares under the agreements have
in fact been registered, or until the penalties become impermissible as a matter
of law. The Company and its stockholders are subject to substantial dilution as
a result of the Company's inability to register shares as required by the
Company's agreements.


                                      -93-
<PAGE>

For illustration purposes only, the table below estimates the amounts of penalty
securities to be issued by the Company through April 30, 2005, on a monthly
basis in connection with current agreements in which the Company is, or may be,
delinquent in satisfying registration requirements:

                           Shares of         Number of
                            Common         Shares Under
                            Stock            Warrants            CNP
                       -------------------------------------------------

           May-04           187,864           156,280        $    1,000
           Jun-04           213,596           164,711             1,000
           Jul-04           235,585           171,537             1,000
           Aug-04           257,576           178,364             1,000
           Sep-04           279,567           185,190             1,000
           Oct-04           301,554           192,018             1,000
           Nov-04           323,544           238,311             7,000
           Dec-04           345,536           245,137             7,000
           Jan-05           367,524           251,964             7,000
           Feb-05           389,517           258,792             7,000
           Mar-05           411,506           265,618             7,000
           Apr-05           433,494           272,446             7,000
                       -------------------------------------------------
           Total          3,746,863         2,580,368        $   48,000
                       =================================================


                         GOVERNMENT CONTRACT COMMITMENTS

The Company is currently in Phase II of a Small Business Innovation Research
("SBIR") contract awarded to the Company in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate. Under the terms of the contract, the
Company is to develop and test its Anti-Tank Landmine Detector 7AT7 over a
two-year period, which may be extended at the option of the U.S. Army, and the
U.S. Army pays a portion of the Company's research and development costs on a
periodic basis during the term of the contract, for which the Company is
required to submit monthly written reports detailing its progress under the
contract. The Company's entitlement to SBIR funds is conditioned upon compliance
with the terms and conditions of the SBIR contract and applicable federal
regulations, including auditing of the expenditure of the resources for
allowable purposes by grantor agencies of the federal government or their
designees. As of April 30, 2004, the Company believes that any commitments or
obligations that may arise from cost disallowance or sanctions as a result of
those audits are not expected to be material to its financial statements.

NOTE 17 - SERIES A CONVERTIBLE PREFERRED STOCK

In August 2002, the Board of Directors approved an amendment to the Company's
Articles of Incorporation to authorize 20,000,000 shares of Preferred Stock, of
which 345 shares are designated the Series A convertible, redeemable preferred
stock (the "Series A"), par value $0.001 per share.

The Series A is convertible (a) any time at the option of the holder at $1.15
per share or (b) mandatorily, two years following the issuance date at $1.15 per
share. Under certain circumstances the conversion price is subject to
adjustment. Furthermore, upon a certain major transaction or triggering event,
the holder of the Series A has the right to require the Company to redeem all or
a portion of the Series A at a price per share equal to the liquidation
preference, plus any accrued but unpaid dividends and liquidated damages. The
liquidation preference is $10,000 per share. The holders of the Series A are
entitled to receive, when and as declared by the Board of Directors, dividends
at a rate of 8%, or $800 per share in advance for each of the first two years.
The dividends may be paid in cash or common stock at the election of the Board
of Directors. The Series A has certain class voting rights and general voting
rights.

In October 2002, the Company sold 97.93 shares of the Series A for gross cash
proceeds of $979,301, less offering costs of $178,901 for net cash proceeds of
$800,400. At the time of issuance, the conversion price of the preferred stock
was $1.15 which is less than the fair market value of the common stock which was
$2.05. Since the Series A was convertible immediately, the Company recorded a
beneficial conversion feature upon issuance of $767,431 using the intrinsic
value method. The number of shares issued upon conversion of 851,755 multiplied
by the beneficial conversion feature price per share of $0.90 or $767,431.

In January 2003, 2.11 shares of the Series A were converted into 18,336 shares
of the Company's common stock at a conversion price of $1.15 per share.


                                      -94-
<PAGE>

In May 2003, the Company induced the conversion of the remaining 95.82 shares of
the Series A into 2,129,316 shares of the Company's common stock, by reducing
the conversion price on the Series A to $0.45 from $1.15 per share. In
accordance with EITF D-42, "The Effect on the Calculation of Earnings Per Share
for the Redemption or Induced Conversion of Preferred Stock", the Company
recorded a preferred stock dividend of $583,243. The dividend is calculated as
the difference between the fair value of the common stock issuable upon
conversion of the Series A pursuant to the original and revised terms.

Following the conversion of all the issued and outstanding Series A, the Company
cancelled the Series A Convertible Preferred Stock designation in September
2003.

NOTE 18 - COMMON STOCK

                                  STOCK SPLITS

In September 1998 and May 1999, the Company effectuated 2-for-1 stock splits.
All share and per share data have been retroactively restated to reflect these
stock splits.

                          COMMON STOCK ISSUED FOR CASH

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 2,048,794, 0, and
3,898,223, shares of common stock, respectively, in exchange for cash of
$1,366,001, $0 , and $1,993,268, respectively.

               OFFERING COSTS ON ISSUANCE OF COMMON STOCK FOR CASH

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company paid offering costs of $57,500,
$0, and $57,500, respectively.

               COMMON STOCK ISSUED IN PRIVATE PLACEMENTS FOR CASH

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 1,849,934, and
3,074,934, shares of common stock, respectively, in exchange for cash proceeds
of $0, $2,322,406, and $3,547,406, respectively, raised by the Company in
private placements.

    OFFERING COSTS ON ISSUANCE OF COMMON STOCK IN PRIVATE PLACEMENTS FOR CASH

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company paid offering costs of $0,
$196,793 and $196,793, respectively.

                COMMON STOCK ISSUED FOR SUBSCRIPTIONS RECEIVABLE

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 10,000, and 10,000,
shares of common stock, respectively, in exchange for subscriptions receivable
of $0, $3,982, and $3,982, respectively. Subsequent to April 30, 2003, the
Company collected the subscription receivable of $3,982.

           COMMON STOCK ISSUED FOR SERVICES RENDERED OR TO BE RENDERED

During the years ended April 30, 2004 and 2003 and the period from August 31,
1995 (inception) to April 30, 2004, HiEnergy issued 558,500, 32,455, and 590,955
shares of common stock, respectively, in exchange for services rendered valued
at the fair market of the common stock issued of $1,006,006, $31,659 and
$1,037,665, respectively.

Details of the services performed, in consideration for the common stock, during
the years ended April 30, 2004 are as follows:

     o    For the year ended April 30, 2004, HiEnergy issued a total of 48,000
          shares of common stock valued at $70,320 to members of the Board of
          Directors for their attendance at scheduled meetings. Each member
          received 2,000 restricted shares of common stock for each meeting
          attended, and following an increase authorized by the Compensation
          Committee on November 7, 2003, each member received 3,000 restricted
          shares of common stock for each meeting attended thereafter.

     o    In May 2003 and March 2004, HiEnergy issued 45,000 and 200,000 shares
          of common stock, respectively, valued at $21,600 and $324,000,
          respectively, for legal counsel and advisory services received by
          HiEnergy on general corporate legal matters, including the
          transactional oversight and the preparation of transactional and
          regulatory documentation.


                                      -95-
<PAGE>

     o    In January 2004 and April 2004, HiEnergy issued 27,500 and 75,000
          shares of common stock, respectively, valued at $24,475 and $213,751,
          respectively, for electronic filing submittals and compliance services
          during the year, with regard to SEC's Edgar reporting system.

     o    In January 2004, HiEnergy issued 55,000 shares of common stock valued
          at $64,900 to a contracted consultant for services which included
          strategic planning, development and assisting in the implementation of
          short- and long-term strategic planning initiatives to enhance and
          accelerate the commercialization of the Company's business objectives.

     o    In November 2003 and February 2004, the Company issued 2,000 and 6,000
          shares of common stock, respectively, valued at $1,500 and $7,460,
          respectively, to a consultant for services including the negotiating
          and arranging of financing.

     o    In April 2004, HiEnergy issued 100,000 shares of common stock to a
          placement agent, and designated beneficiaries, valued at $278,000 as
          compensation for placement services and financial advisory services.

Details of the services performed, in consideration for the common stock, during
the year ended April 30, 2003 are as follows:

     o    In May and August 2002, HiEnergy issued 5,589 and 5,589 shares of
          common stock, respectively, valued at $12,016 and $9,334,
          respectively, to an employee as a bonus for the quarters ended July
          31, 2002 and October 31, 2002; per the terms of an employment
          agreement.

     o    In April 2003, HiEnergy issued 21,277 shares of common stock valued at
          $10,309, to a consultant for services which included developing a
          marketing plan and contacts for the expansion into Europe, and to act
          as a liaison with a specialist firm in Germany seeking an exchange
          listing for the Company in that country for the period from April 2003
          through April 2004.

For the period from August 21, 1995 (Inception) to April 30, 2004, the Company
issued 8,146,697 shares of common stock to the founder of the Company which had
a fair value of $2,432,831, and issued 4,963,852 shares of common stock with a
fair value of $2,804,538 to other non-employee directors and consultants for
services rendered. The services rendered include such things as serving as a
director, legal services, scientific consulting, business and financial
consulting, investor relations, business development consulting, SEC filing
services and administrative work.

            COMMON STOCK ISSUED FOR SERVICES RENDERED BY MICRODEVICES

During the period from August 21, 1995 (inception) through April 30, 2002,
Microdevices, which was a privately held entity prior to the voluntary share
exchange with HiEnergy on April 25, 2002, issued 8,146,697 shares of common
stock, valued at $2,494,598, to its chief Scientist / Chairman of the Board for
services rendered in lieu of cash. Microdevices further issued 4,384,074 shares
of common stock, valued at $1,726,916 to employees, non-employee directors and
consultants for services rendered in lieu of cash. The services rendered
included attendance by directors at board of directors meetings, legal services,
scientific consulting, business and financial consulting and administrative
work.

          COMMON STOCK COMMITTED AND ISSUANCE OF COMMITTED COMMON STOCK

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company committed to issue 7,000, 31,178
and 38,178 shares of common stock, respectively, in exchange for services
rendered valued at the fair value of the common stock on the commitment date
(which typically is the date the services are performed) of $9,940, $27,240 and
$37,180, respectively.

Details of the services performed, in consideration for the committed common
stock, during the year ended April 30, 2004, are as follows:

     o    In March 2004, the Company committed to issue 7,000 shares of common
          stock valued at $9,940 to the 3 directors of HiEnergy Defense, as
          compensation for attendance at the March 10, 2004 board of directors
          meeting.

Details of the services performed, in consideration for the committed common
stock, during the year ended April 30, 2003 are as follows:

     o    In November 2002 and February 2003, the Company committed to issue
          5,589 and 5,589 shares of common stock, respectively, valued at
          $13,134 and $4,415, respectively, to an employee as a bonus for the
          quarters ended January 31, 2003 and April 30, 2003; per the terms of
          the employees' employment agreement. In June 2003 the Company issued
          the 11,178 shares of common stock that had been committed to the
          employee as a bonus.

     o    In April 2003, the Company committed to issue 20,000 shares of common
          stock valued at $9,691, to a consultant who received 21,277 shares of
          common stock in April 2003, to ensure that the fair value of the
          common stock issued and committed to be issued equals $20,000, per the
          terms of the consulting agreement. In May 2003, the Company issued the
          20,000 shares of common stock that had been committed to the
          consultant.


                                      -96-
<PAGE>

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company committed to issue 84,486,
128,136 and 212,622 shares of common stock, respectively, valued at $156,299,
$57,661 and $213,960, respectively, to investors as a penalty for the delayed
registration of common stock. In May 2003 the Company issued 128,136 shares of
common stock that had been committed to the investors as a penalty, as of April
30, 2003. The penalty expense was recognized in the Consolidated Statement of
Operations.

During the year ended April 30, 2003, the Company committed to issue 44,705
shares of common stock valued at $7,164 following the exercise of stock options
in the Company's subsidiary Microdevices. In August 2003 the Company issued the
44,705 shares of common stock that had been committed.

During the year ended April 30, 2004 the Company committed to issue 10,500
shares of common stock valued at $13,440, to Mr. Richard Eckhouse in exchange
for a mutual release of claims. (See: "Note 16 - Commitments and Contingencies,
Litigation".)

                        COMMON STOCK ISSUED AS DIVIDENDS

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 68,150 and 68,150
shares of common stock, respectively, valued at $78,360 as a dividend that was
accrued, at a rate of 8%, on the Series A.

                 COMMON STOCK ISSUED ON THE EXERCISE OF WARRANTS

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 69,776, 0 and 69,776
shares of common stock, respectively, for the exercise of warrants for cash
proceeds of $54,004, $0 and $54,004, respectively.

            COMMON STOCK ISSUED ON THE CASHLESS EXERCISE OF WARRANTS

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 497,116, 33,909, and
531,025 shares, respectively, of common stock following the cashless exercise of
warrants. (See: "Note 16 - Commitments and Contingencies, Cashless Exercise of
Warrants".)

                      COMMON STOCK ISSUED AS PENALTY SHARES

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 719,079, 0, and 719,079
shares of common stock, respectively, valued at $1,068,685, $0 and $1,068,685,
respectively. The shares of common stock were issued as a penalty for the late
registration of common stock ("Penalty Shares"). (See: "Note 16 - Commitments
and Contingencies, Penalties Associated with the Late Registration of Common
Stock".)

     CONVERTIBLE NOTES PAYABLE - RELATED PARTIES CONVERTED INTO COMMON STOCK

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 300,000, 22,898, and
322,898 shares of common stock, respectively, for the outstanding principal on a
convertible note payable of $100,000, $20,000 and $120,000, respectively, and
accrued interest of $0, $2,896, and $2,896, respectively.

           NOTES PAYABLE - RELATED PARTIES CONVERTED INTO COMMON STOCK

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued 0, 15,000, and 15,000
shares of common stock, respectively, for the outstanding principal on a note
payable of $0, $15,000 and $15,000, respectively.

NOTE 19 - STOCK OPTIONS AND WARRANTS

                   STOCK OPTIONS ISSUED FOR SERVICES RENDERED

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004 the Company issued stock options to purchase
649,000, 1,400,000 and 2,049,000 shares of common stock.


                                      -97-
<PAGE>

In July 2002, the Company issued options to purchase 1,000,000 shares of common
stock for business development services rendered. As of April 30, 2003, options
to purchase 500,000 shares of common stock were vested. The options have an
exercise price of $1 per share and expire in July 2008. The fair value of the
vested portion of the stock options were determined to be $761,007 and the
Company recorded compensation expense totaling $211,390 and prepaid consulting
totaling $549,617 as of April 30, 2003. The compensation expense is being
expensed over the three year life of the agreement with the consultant. The fair
value of the stock options were determined using the Black-Scholes model. The
assumptions used to determine the valuation are as follows:

         Value of stock options per share                     $1.52
         Stock price on grant date                            $2.13
         Exercise price                                       $1.00
         Expected life                                        2.0 years
         Risk-free rate of return                             3.02%
         Expected annual volatility                           105%
         Annual rate of dividends                             0%

In August 2002, the Company issued options to purchase 400,000 shares of common
stock for investor and public relations services rendered. The options vest
immediately, have an exercise price of $2 per share, and expire in August 2004.
The fair value of the stock options was determined to be $187,163 and the
Company recorded compensation expense totaling $140,372 and prepaid consulting
totaling $46,791 as of April 30, 2003. The compensation expense is being spread
over the one-year life of the agreement. The fair value of the stock options
were determined using the Black-Scholes model. The assumptions used to determine
the valuation are as follows:

         Value of stock options per share                     $0.47
         Stock price on grant date                            $1.76
         Exercise price                                       $2.00
         Expected life                                        1.0 years
         Risk-free rate of return                             1.75%
         Expected annual volatility                           78%
         Annual rate of dividends                             0%

During the year ended April 30, 2004, the Company issued options to purchase
620,000 shares of common stock to various non-employee consultants for services
rendered. The fair value of the all the stock option grants was determined to be
$392,000 and the Company recorded compensation expense during the fiscal year
for that amount. The fair value of the stock options grants were determined
using the Black-Scholes model. The assumptions used to determine the valuations
are as follows:

<TABLE>
<CAPTION>
<S>                   <C>           <C>           <C>          <C>            <C>             <C>
No. of Options        30,000        200,000       40,000       210,000        100,000         40,000
                  --------------  ------------ ------------ -------------- --------------  ------------
Grant date           May 2003      July 2003    August         November       November      December
                                                  2003          2003           2003           2003
Term                 6 Years        6 Years      6 Years       6 Years        6 Years        6 Years
Compensation
expense              $ 5,458       $ 52,742     $ 31,514      $ 188,142      $ 90,000       $ 24,104
Value of options
per share            $ 0.18         $ 0.26       $ 0.79        $ 0.90         $ 0.90         $ 0.61
Stock price on
grant date           $ 0.45         $ 0.50       $ 1.02        $ 1.25         $ 1.25         $ 0.90
Exercise price       $ 0.75         $ 0.50       $ 1.02        $ 1.25         $ 0.35         $ 0.90
Expected life       2.0 years      2.0 years    2.5 years     2.0 years      2.0 years      2.0 years
Risk-free rate of
return                1.44%          1.45%        1.98%         1.95%          2.04%          1.88%
Expected annual
volatility            100%           100%         140%          150%           150%           140%
Annual rate of
dividends              0%             0%           0%            0%             0%             0%
Services provided   Business       Business    Scientific     Business       Business       Financial
                   development    development   advisors     development    development        and
                                                                                            business
</TABLE>


                  STOCK OPTIONS ISSUED AS COMPENSATION EXPENSE

In September 2002, the Company issued options to purchase 3,005,038 shares of
common stock to the President/Chief Executive Officer/Treasurer/Director in
accordance with an employment agreement (see Note 16).

In February 2003, the Company issued options to purchase 416,717 shares of
common stock and was committed to issue options to purchase 40,000 shares of
common stock to the Chief Scientist/Chairman of the Board in accordance with an


                                      -98-
<PAGE>

employment agreement (see Note 16). In relation to this transaction, the Company
recorded compensation expense totaling $59,373 or $0.13 per share as of April
30, 2003 because the exercise price of the stock option of $2.81 was less than
the market price of the stock ($2.94) on the date of the grant.

              STOCK OPTIONS ISSUED IN EXCHANGE FOR ACCOUNTS PAYABLE

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company converted accounts payable due
to consultants of $0, $65,000, and $65,000, respectively, into options to
purchase, 0, 72,726, and 72,726 shares, respectively, of common stock. Of these
options, 45,454 are exercisable at $1 per share, vest over a one-year period,
and expire in September 2012. The remaining options are exercisable at $2.24 per
share, vest over a one-year period, and expire in December 2012. The fair value
of the stock options was determined to be the amount of the accounts payable
converted into stock options.

                             STOCK OPTIONS - GENERAL

The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to outside
parties.

For purposes of computing the pro forma disclosures required by SFAS No. 123,
the fair value of each option granted to employees and directors is estimated
using the Black-Scholes option-pricing model

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which do not have vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

The following summarizes the stock option and warrant transactions:

<TABLE>
<CAPTION>
                                                    Stock
                                     Weighted      Options       Weighted                     Weighted
                                     Average         and         Average        Total         Average
                         Stock        Grant        Warrants       Grant        Options         Grant
                        Options       Price          Non-         Price          and           Price
                       Employee     per Share      Employee     per Share      Warrants      per Share
                     --------------------------- ------------- ---------------------------- -------------
<S>                     <C>           <C>             <C>         <C>         <C>              <C>
 Outstanding,
August 21, 1995
 (inception) to
April 30, 2001          2,482,011     $0.13           1,051       $0.28       2,483,062        $0.13

 Granted                  287,653     $0.20         346,373       $0.28         634,026        $0.24
                     --------------------------- ------------- ---------------------------- -------------
 Outstanding,
April 30, 2002          2,769,664     $0.14         347,424       $0.28       3,117,088        $0.16
                     --------------------------- ------------- ---------------------------- -------------

 Granted                3,461,755     $1.24       2,002,726       $2.02       5,464,481        $1.43

 Canceled              (2,264,208)    $1.33          (1,051)      $0.28      (2,265,259)       $1.33

 Outstanding,
April 30, 2003          3,967,211     $0.42       2,349,099       $1.76       6,316,310        $0.84
                     --------------------------- ------------- ---------------------------- -------------

Granted                 1,738,221     $1.03       1,029,000       $1.11       2,767,221        $1.01

Canceled               (1,058,483)    $1.42        (119,705)      $0.36      (1,178,188)       $1.31

Outstanding
April 30, 2004           4,646,949    $0.42       3,258,394       $1.61       7,905,343        $0.83
                     --------------------------- ------------- ---------------------------- -------------
Exercisable
April 30, 2004           3,499,449    $0.60       2,221,213       $1.32       5,720,662        $0.88
                     --------------------------- ------------- ---------------------------- -------------
</TABLE>


                                      -99-
<PAGE>

The weighted-average remaining contractual life of the options and warrants
outstanding at April 30, 2004 was 4.48 years. The exercise prices of the options
and warrants outstanding at April 30, 2004 ranged from $0.13 to $2.95, and
information relating to these options and warrants is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted-       Weighted-
                                                       Weighted-         Average         Average
                                                        Average         Exercise        Exercise
                          Stock          Stock         Remaining        Price of        Price of
        Range of        Options &      Options &      Contractual       Options &       Options &
        Exercise        Warrants        Warrants          Life          Warrants        Warrants
         Prices        Outstanding    Exercisable       (years)        Outstanding     Exercisable
     --------------- --------------- -------------- ---------------- --------------- ---------------
<S>                     <C>            <C>               <C>              <C>             <C>
      $0.01 -$0.99      4,341,900      3,701,900         4.48             $0.35           $0.28
      $1.00 -$1.99      2,029,454        655,227         4.48             $1.12           $1.06
      $2.00 -$2.99      1,533,989      1,363,535         4.48             $2.37           $2.41
                     -------------   ------------
                        7,905,343      5,720,662
                     =============   ============
</TABLE>


                      WARRANTS ISSUED FOR SERVICES RENDERED

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued warrants to purchase
380,000, 530,000 and 910,000 shares of common stock., respectively, for services
rendered valued at $270,000, $694,000 and 964,000, respectively, which is the
fair value as determined by the Black-Scholes option pricing model.


Details of the services performed during the year ended April 30, 2004 are as
follows:

<TABLE>
<CAPTION>
<S>                              <C>              <C>             <C>               <C>              <C>
No. of Warrants                  150,000          30,000          50,000            50,000           50,000
                              ------------    --------------   -------------   ---------------   --------------
Grant date                      May 2003       January 2004     April 2004        April 2004       April 2004
Term                            Two years       Three Years     Three Years       Three Years      Three Years
Compensation expense            $ 35,598          $17,775         $78,297          $ 54,675         $ 75,461
Value of options per share       $ 0.24           $ 0.59          $ 1.57            $ 1.09           $ 1.51
Stock price on grant date        $ 0.45           $ 0.89          $ 2.95            $ 2.06           $ 2.85
Exercise price                   $ 0.45           $ 1.25          $ 2.95            $ 2.06           $ 2.85
Expected life                  2.0 years        2.0 years       2.0 years         2.0 years        2.0 years
Risk-free rate of return         1.38%            1.84%           1.87%             2.34%            2.03%
Expected annual volatility        100%             150%            100%              100%             100%
Annual rate of dividends           0%               0%              0%                0%               0%
Services provided              Placement        SEC filing       Business          Business        SEC filing
                                services         services      development       development        services
</TABLE>


                                     -100-
<PAGE>

Details of the services performed during the year ended April 30, 2003 are as
follows:

<TABLE>
<CAPTION>
<S>                                        <C>                <C>                <C>               <C>
         No. of Warrants                   150,000            250,000            80,000            50,000
                                      ------------------ ------------------ ----------------  -----------------
         Grant date                     December 2002      December 2002     February 2003       April 2003
         Term                             Five years         Five years       Three Years        Three Years
         Compensation expense             $ 390,409           $162,792          $130,712          $ 18,284
         Value of options per share        $ 2.60             $ 0.65            $ 1.63             $ 0.37
         Stock price on grant date         $ 2.77             $ 2.09            $ 1.76             $ 0.41
         Exercise price                    $ 2.48             $ 2.09            $ 1.50             $ 0.50
         Expected life                    2.0 years          1.0 years         2.0 years         3.0 years
         Risk-free rate of return           1.88%              2.33%             1.66%             1.57%
         Expected annual volatility         100%                78%              100%               100%
         Annual rate of dividends            0%                 0%                0%                 0%
         Services provided                Terminate          Investor          Executive         Financial
                                          Agreement          Relations          Search           Consulting
                                                             services          services           services
</TABLE>

                      WARRANTS ISSUED AS FINANCING EXPENSE

In December 2002, the Company issued warrants to purchase 150,000 shares of
common stock to a shareholder/former officer/director as compensation for a
default on a note payable. The Company recorded $223,710 in the year ended April
30, 2003 as financing expense. The fair value of the warrants were determined
using the Black-Scholes model. The assumptions used to determine the valuation
are as follows:

         Value of warrant per share                           $1.49
         Stock price on grant date                            $2.09
         Exercise price                                       $1.00
         Expected life                                        2.0 years
         Risk-free rate of return                             3.72%
         Expected annual volatility                           105%
         Annual rate of dividends                             0%

     WARRANTS ISSUED TO INVESTORS IN PRIVATE PLACEMENTS AND PLACEMENT AGENTS

During the year ended April 30, 2003 the Company issued warrants to purchase
1,015,686 shares of common stock to investors in private placements and
placement agents. Details of the transactions are as follows:

     o    In October 2002, the Company issued warrants to purchase 255,536
          shares of common stock to the investors in the Series A private
          placement. The warrants vest immediately, have an exercise price of
          $1.50 per share, and expire in October 2004. The Company allocated
          $221,427 to the warrants issued in the private placement as a cost of
          raising capital. The fair value of the warrants were determined using
          the Black-Scholes model. The assumptions used to determine the
          valuation are as follows:

                  Value of warrant per share                           $0.87
                  Stock price on grant date                            $2.05
                  Exercise price                                       $1.50
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.59%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%

     o    In October 2002, the Company issued warrants to purchase 269,990
          shares of common stock to the investors in a private placement of
          common stock. The warrants vest immediately, have an exercise price of
          $2.50 per share, and expire in October 2005. The Company allocated
          $157,346 to the warrants issued in the private placement as a cost of
          raising capital. The fair value of the warrants were determined using
          the Black-Scholes model. The assumptions used to determine the
          valuation are as follows:

                  Value of warrant per share                           $0.58
                  Stock price on grant date                            $2.20
                  Exercise price                                       $2.50
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.46%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%

     o    In August 2002, the Company entered into an exclusive one-year
          agreement with a placement agent to arrange for the sale of debt or
          equity securities. Major terms of the agreement issued warrants to


                                     -101-
<PAGE>

          purchase 100,000 shares of common stock to the Company's placement
          agent as a retainer. The warrants vest immediately, have an exercise
          price of $0.01, and expire in August 2007. In December 2002, warrants
          to purchase 16,000 shares of common stock were exercised via a
          cashless exercise. The Company allocated $145,017 to the warrants
          issued in the private placements as a cost of raising capital. The
          fair value of the warrants were determined using the Black-Scholes
          model. The assumptions used to determine the valuation are as follows:

                  Value of warrant per share                           $1.45
                  Stock price on grant date                            $1.46
                  Exercise price                                       $0.01
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.75%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%

     o    In October 2002, the Company issued warrants to purchase 117,546
          shares of common stock as offering costs to the Company's placement
          agent who brought in the investors in the Series A offering. The
          warrants vest immediately, have an exercise price of $1.15 per share,
          and expire in October 2007. In December 2002, warrants to purchase
          15,000 shares of common stock were exercised via a cashless exercise.
          The Company allocated $125,206 to the warrants issued in the private
          placements as a cost of raising capital. The fair value of the
          warrants were determined using the Black-Scholes model. The
          assumptions used to determine the valuation are as follows:

                  Value of warrant per share                           $1.07
                  Stock price on grant date                            $2.05
                  Exercise price                                       $1.15
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.59%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%

     o    In October 2002, the Company issued warrants to purchase 161,994
          shares of common stock as offering costs to the Company's placement
          agent who brought in the investors in the common stock private
          placement. The warrants vest immediately, have an exercise price of
          $1.35 per share, and expire in October 2007. In December 2002,
          warrants to purchase 16,000 shares of common stock were exercised via
          a cashless exercise. The Company allocated $125,206 to the warrants
          issued in the private placements as a cost of raising capital. The
          fair value of the warrants were determined using the Black-Scholes
          model. The assumptions used to determine the valuation are as follows:

                  Value of warrant per share                           $1.07
                  Stock price on grant date                            $2.20
                  Exercise price                                       $1.35
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.46%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%

     o    In December 2002, the Company issued warrants to purchase 110,620
          shares of common stock as offering costs to the Company's placement
          agent who brought in investors to the Company. The warrants vest
          immediately, have an exercise price of $1.50 per share, and expire in
          December 2004. The Company allocated $294,950 to the warrants issued
          in the private placements as a cost of raising capital. The fair value
          of the warrants were determined using the Black-Scholes model. The
          assumptions used to determine the valuation are as follows:

                  Value of warrant per share                           $2.67
                  Stock price on grant date                            $2.77
                  Exercise price                                       $1.50
                  Expected life                                        1.0 years
                  Risk-free rate of return                             1.88%
                  Expected annual volatility                           78%
                  Annual rate of dividends                             0%


                                     -102-
<PAGE>

                WARRANTS ISSUED AS PENALTY FOR LATE REGISTRATION

During the years ended April 30, 2004 and 2003, and the period from August 21,
1995 (inception) to April 30, 2004, the Company issued or committed to issue
191,341 and 0, respectively, warrants to purchase common stock as penalty
warrants with a fair value of $191,020 and $191,020 and 0 respectively, related
to the delayed registration of the Company's common stock. The fair value of the
stock options grants were determined using the Black-Scholes model. The
assumptions used to determine the valuations are as follows:

                                                From          To
                                            ------------- ------------
         Grant dates                         Oct. 2003     Apr. 2004
         Term                                3.5 years     3.5 years
         Value of options per share              $0.31         $1.99
         Stock prices on grant date              $0.88         $2.55
         Exercise prices                         $0.60         $1.25
         Expected life                       1.0 years     1.0 years
         Risk-free rate of return                1.18%         1.81%
         Expected annual volatility               100%          100%
         Annual rate of dividends                   0%            0%


                    MICRODEVICES OPTIONS AND WARRANTS HOLDERS

In September 2001, Microdevices issued options to purchase 268,229 shares of the
Company's common stock (restated).

As of April 30, 2004, Microdevices has stock options and warrants outstanding to
non-employees to purchase 14,496 shares of common stock, and no stock options
outstanding to employees. If the stock option and warrant holders exercise their
stock options and warrants, the Company may agree, to allow these stock options
and warrant holders, to voluntarily exchange their shares in Microdevices for
shares in HiEnergy at an exchange rate of 22.3524 per share, or a range of $0.22
to $0.28 per share, resulting in the issuance of 324,020 additional shares of
common stock. The table below summarizes the warrant and stock option activity
for Microdevices:

<TABLE>
<CAPTION>
                                            Non-Employees                            Employees
                                   ------------------------------- ----------------------------------------------
                                                                    Exercise              Exercise
                                                Stock                 Price      Stock      Price
                                   Warrants   Options     Total      Range      Options     Range         Total
                                   ---------  --------   -------   --------    ---------  --------   ------------
<S>                                   <C>        <C>       <C>       <C>        <C>        <C>           <C>
Outstanding as of August 21,
1995 (inception) to April 30,
1998                                       -          -         -                      -                       -
                          Granted          -          -         -                111,040      $3.00      111,040
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

Outstanding as of April 30, 1999           -          -         -                111,040      $3.00      111,040
                          Granted     17,247          -    17,247       $6.25          -                  17,247
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

Outstanding as of  April 30,
2000                                  17,247          -    17,247       $6.25    111,040      $3.00      128,287

                          Granted          -          -         -                      -                       -
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

Outstanding as of  April 30,
2001                                  17,247          -    17,247       $6.25    111,040      $3.00      128,287
                                                                     $3.50 to              $3.48 to
                          Granted     15,000      3,496    18,496       $7.10     12,869      $5.00       31,365
Exchanged for HiEnergy Stock
Option                                     -          -         -              (111,040)      $3.00    (111,040)
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

                                                                     $3.50 to              $3.48 to
Outstanding as of April 30, 2002      32,247      3,496    35,743       $7.10     12,869      $5.00       48,612

Exchanged for HiEnergy Stock
Option                                     -          -         -                (4,000)      $3.48      (4,000)
                Expired/Forfeited   (17,200)          -  (17,200)       $6.25    (8,869)      $5.00     (26,069)
                                                                     $3.50 to
                        Exercised    (2,047)          -   (2,047)       $6.25          -                 (2,047)
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

Outstanding as of  April 30,                                         $3.50 to
2003                                  13,000      3,496    16,496       $7.10          -                  16,496
                Expired/Forfeited          -    (2,000)   (2,000)       $7.10          -                 (2,000)
                                   ---------- ---------- --------- ----------- ---------- ---------- ------------

                                                                    $5.00 to
Outstanding as of April 30, 2004      13,000      1,496    14,496       $6.25          -                  14,496
---------------------------------- ---------- ---------- --------- ----------- ---------- ---------- ------------
If options and warrants are
exercised and voluntarily                                            $0.22 to
exchanged for shares in HiEnergy     290,581     33,439   324,020       $0.28          -                 324,020
================================== ========== ========== ========= =========== ========== ========== ============
</TABLE>


                                     -103-
<PAGE>

                          CASHLESS EXERCISE OF WARRANTS

During the years ended April 30, 2004 and 2003, the Company issued warrants to
purchase common stock to certain holders whereby the holders would be entitled
to exercise the warrants via a cashless exercise when the exercise price was
less than the market price of the Company's common stock ("in-the-money"). As of
April 30, 2004, holders of the warrants to purchase 298,770 shares of common
stock are subject to this provision, all of which were in-the-money as of April
30, 2004 and therefore could be converted into 53,989 shares of common stock
using the Company's stock price of $2.35 at the election of the holders. During
the years ended April 30, 2004 and 2003, the Company issued 497,116 and 0 shares
of common stock, respectively, following the cashless exercise of warrants.



NOTE 20- INCOME TAXES

The components of the deferred income tax assets (liabilities) at April 30, 2004
were as follows:

         Deferred tax assets
          Compensation                             $  1,338,000
          Accrued interest                               35,000
          Payroll tax expense                            93,000
          Net operating loss carry forwards           3,526,000
                                                   ------------
           Total deferred tax assets                  4,992,000

         Deferred tax liability
          Depreciation                                  (87,000)
                                                   ------------

                                                      4,905,000
         Less valuation allowance                    (4,905,000)

           NET DEFERRED TAX ASSET                  $         --
                                                   ============

The following table presents the current and deferred income tax provision for
federal and state income taxes for the years ended April 30, 2004 and 2003:

                                               2004                2003
                                           -------------      -------------
         Current
              Federal                      $          --      $          --
              State                                  800              1,600
                                           -------------      -------------

                                                     800              1,600
                                           -------------      -------------
         Deferred
              Federal                                 --                 --
              State                                   --                 --
                                           -------------      -------------

                                                      --                 --
                                           -------------      -------------

              PROVISION FOR INCOME TAX     $         800      $       1,600
                                           =============      =============


                                     -104-
<PAGE>

The provision for (benefit from) income taxes differs from the amount that would
result from applying the federal statutory rate for the years ended April 30,
2004 and 2003 as follows:

<TABLE>
<CAPTION>
                                                           2004                2003
                                                      --------------      -------------
<S>                                                         <C>                <C>
       Statutory regular federal income benefit rate        34.00%             34.00%
       State taxes                                           8.84               8.84
       Change in valuation allowance                       (42.85)            (42.86)
                                                      -------------       -------------
            TOTAL                                           (0.01)%            (0.02)%
                                                      =============       =============
</TABLE>

As of April 30, 2004, the Company had net operating loss carry forwards for
federal and state income tax purposes of approximately $10,295,000, which starts
expiring in 2010 through 2023. The utilization of net operating loss carry
forwards may be limited due to the ownership change under the provisions of
Internal Revenue Code Section 382 and similar state provisions.


NOTE 21 - RELATED PARTY TRANSACTIONS

During the years ended April 30, 2004 and 2003 and the period from August 21,
1995 (inception) to April 30, 2004, the Company purchased $4,767, $0, and
$4,767, respectively, of property and equipment from a Board member.

See: "Notes 10, 11, 16 and 19" for additional related party transactions.


NOTE 22 - SUBSEQUENT EVENTS

                    RECENT SALES AND ISSUANCES OF SECURITIES

In May 2004, 351,452 shares of common stock were issued to an investor who in
April 2004 converted his convertible note payable for $150,000 plus accrued
interest of $8,153. In addition, the same investor received in May 2004, 944,444
shares of common stock following the exercise of the investor's right in April
2004 to purchase an additional $425,000 convertible note payable which was
immediately converted. In May, the investor also received 3,891,111 warrants to
purchase common stock at exercise prices from $0.45 to $1.25.

In May 2004, the Company committed to issue 95,000 shares of common stock to a
business consultant for services rendered that had a fair value of $208,050.

In May 2004, the Company issued 3,500 shares of common stock to a strategic
planning consultancy as compensation for services.

In May 2004, the Company issued 29,801 shares of common stock and warrants to
purchase 9,934 shares of common stock with an exercise price of $2.75 to an
investor in exchange for $45,000 in cash.

In May 2004, the Company committed to issue warrants to purchase 199 shares of
common stock with an exercise price of $2.75 to a consultant as a finder's fee.

In May through August 2004, the Company issued notes payable totaling $211,000
to the Chairman and CEO of the Company for short-term loans he made to the
Company. Also during the same period, the company paid $42,933 to the Chairman
and CEO for prior loans made to the Company.


                                     -105-
<PAGE>

In June 2004, the Company amended a previously issued convertible note payable
in the amount of $50,000, which was convertible into shares of common stock at
$0.45 per share, and warrants to purchase 312,222 shares of common stock at
various exercise prices between $0.45 and $1.50. Under the amended offering, the
Company issued separate convertible notes payable of $40,000 and $10,000, in
lieu of the prior note, to two investors based on an allowable assignment, and
certain warrants were repriced such that the Company issued additional warrants
to purchase 77,778 at various exercise prices between $0.45 and $1.25.

 In June 2004, the Company issued a convertible note payable for $240,000, which
is convertible into shares of common stock at $0.45 per share, and warrants to
purchase 1,578,666 shares of common stock at various exercise prices between
$0.45 and $1.25, to an investor.

In June 2004, the Company issued a convertible note payable for $60,000, which
is convertible into shares of common stock at $0.45 per share, and warrants to
purchase 394,666 shares of common stock at various exercise prices between $0.45
and $1.25, to an investor.

In June 2004, the Company entered into an amended agreement with the previous
two investors of the convertible notes payable. The Company agreed to issue
additional warrants and to reduce the exercise prices of some of the warrants
previously issued in exchange for the investors exercising their option to
purchase an additional $300,000 of CNP. The CNP have a two year term and bear
interest at 5% and are convertible into common stock at $0.45 per share. The
additional CNP also contain warrants to purchase common stock with a three and
one-half year term as follows; 1,333,332 at $0.45 per share; 400,000 at $0.75
per share and 240,000 at $1.25 per share. A summary of the amended warrants and
exercise prices follows:

                  Original Agreement                 Amended Agreement
             ----------------------------     ----------------------------
                Exercise       No. of            Exercise         No. of
                 Price        Warrants             Price         Warrants
             ----------------------------     ----------------------------
                  $  0.75         66,667          $  0.45         111,111
                  $  1.25         40,000          $  0.75          66,667
                  $  1.50         33,333          $  1.25          40,000
                  $  0.45        222,222          $  0.45         222,222
                             ------------                    -------------
                                 362,222                          440,000
                             ============                    =============


In June 2004, the Company committed to issue 9,000 shares of common stock to the
members of the Board of Directors of HiEnergy as compensation for meeting
attendance.

In June 2004, the Company issued 99,010 shares of common stock and warrants to
purchase 32,673 shares of common stock with an exercise price of $2.50 to an
investor in exchange for $100,000 in cash.

In June 2004, the Company issued 19,868 shares of common stock and warrants to
purchase 6,623 shares of common stock with an exercise price of $2.75 to an
investor in exchange for $30,000 in cash.

In June 2004, the Company issued 66,225 shares of common stock and warrants to
purchase 22,075 shares of common stock with an exercise price of $2.75 to an
investor in exchange for $100,000 in cash.

In June 2004, the Company issued 19,868 shares of common stock and warrants to
purchase 6,623 shares of common stock with an exercise price of $2.75 to another
investor in exchange for $30,000 in cash.

In June 2004, the Company issued 33,113 shares of common stock and warrants to
purchase 11,038 shares of common stock with an exercise price of $2.75 to an
investor in exchange for $50,000 in cash.

In June 2004, the Company issued 66,225 shares of common stock and warrants to
purchase 22,075 shares of common stock with an exercise price of $2.75 to an
investor. in exchange for $100,000 in cash. .

In June 2004, the Company issued 13,245 shares of common stock and warrants to
purchase 4,415 shares of common stock with an exercise price of $2.75 to an
investor in exchange for $20,000 in cash.

In July 2004, the Company issued 182,955 shares of common stock to a law firm
for legal services provided. The common stock had a fair value of $177,466.


                                     -106-
<PAGE>

In July 2004, the Company issued 100,000 warrants to purchase common stock with
an exercise price of $0.97 and a five year term to an accounting and finance
consultant for services provided. The warrants had a fair value of $38,555 and
were determined using the Black-Scholes model.

In July 2004, the Company committed to issue 9,000 shares of common stock to the
board members of the Company as compensation for meeting attendance

In August 2004, the Company committed to issue 21,000 shares of common stock to
the board members of the Company as compensation for meeting attendance.

In August 2004, the Company committed to issue warrants to purchase 6,933 shares
of common stock with an exercise price of $1.51 to a consultant as a finder's
fee.

In September 2004, the Company issued a convertible note payable for $100,000,
which is convertible into shares of common stock at $0.52 per share to an
investor.

                               PENALTY SECURITIES

In May through August 2004, the Company issued $15,000 in convertible notes as
penalties to certain note holders with registration rights as a result of the
Company's inability to file a registration statement within specified deadlines.

In May 2004, the Company issued 168,976 shares of common stock and warrants to
purchase 156,277 shares of common stock with exercise prices ranging from $0.45
to $1.65 to various holders of securities with registration rights as penalties,
due to the inability of the Company to file and maintain effective a
registration statement within certain specified deadlines.

In June 2004, the Company issued 219,251 shares of common stock and warrants to
purchase 163,491 shares of common stock at various exercise prices to various
holders of securities with registration rights as penalties, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines

In July 2004, the Company issued 241,440 shares of common stock and warrants to
purchase 176,975 shares of common stock at various exercise prices to various
holders of securities with registration rights as penalties, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In August 2004, the Company committed to issue 262,359 shares of common stock
and warrants to purchase 177,775 shares of common stock at various exercise
prices, to various holders of securities with registration rights as penalties,
due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines.

                      CONSULTANCY AGREEMENTS AND CONTRACTS

In May 2004, the Company entered into a non-exclusive 180 day strategic
consulting and financial advisory agreement with a consulting firm. The
consulting firm would assist the Company with strategic planning issues. The
agreement was terminated by the Company in June 2004 and the Company paid the
consulting firm $27,000 in cash and 3,500 shares of common stock valued at
$6,895 for services performed.

In July 2004, the Company entered into an exclusive agreement with a placement
agent to arrange for the sale of debt or equity securities. Major terms of the
agreement are as follows:

     o    The term of the agreement will be until the proposed financing is
          completed or at such time either the Company or the placement agent
          gives 10 days' written notice of termination.

     o    The Company will pay a success fee equal to 8% of any of the gross
          proceeds received by the Company derived from the efforts of the
          placement agent, plus $5,000 in anticipated legal expenses at closing,
          to be paid from the proceeds of such closing.

     o    The Company will issue warrants to purchase 10% of the amounts of
          securities placed to investors through the efforts of the placement
          agent. The exercise price of the warrants will be equal to the price
          at which the security was placed. The warrants vest immediately,
          expire four years from the date of grant, and include "piggyback"
          registration rights.


                                     -107-
<PAGE>

In August 2004, the Company entered into an agreement with an engineering and
construction firm, which has agreed to provide design and construction
management services to the Company in connection with a proposed manufacturing
plant capable of producing commercial quantities of the CarBomb Finder. Under
the terms of the proposal, the engineering and management firm is responsible
for designing and implementing a facility which is suitable for its intended
purposes, including creating a flow process recommendation, designing the
optimum configuration for the facility, providing construction management,
assisting with supplier relationships, and reviewing transportation, laboratory
testing and other logistical issues. Under the agreement, the Company is
obligated to pay the firm in consideration for its services the amount of
$82,875, plus actual expenses anticipated not to exceed $4,000.

In August 2004, the Company entered into a Teaming Agreement with a global
maintenance services firm which would allow for the Company to sub-contract
maintenance services and under which both parties would jointly bid on business.

                              EMPLOYMENT AGREEMENT

In July 2004, the Company issued warrants to purchase 100,000 shares of common
stock with an exercise price of $0.99 for accounting and consulting services,
pursuant to an employment agreement.

                               PURCHASE AGREEMENTS

 In April and May 2004, the Company issued a purchase order for ten neutron
generators at a total cost of approximately (euro)867,000, or an estimated
$1,049,070. The generators are scheduled to be delivered approximately two per
month , which started in August 2004. The Company has the option to lease these
units from the vendor for up to 12 months for approximately (euro)9,600, or an
estimated $11,616 per unit every 2 months following an initiation fee of
approximately (euro)10,200, or an estimated $12,342 per unit. At the end of the
lease the Company has the option to purchase each unit for (euro)30,420, or an
estimated $36,808 (U.S. Dollar figures are based on an periodic exchange rate of
1.21 euros for 1 U.S. Dollar).

In May 2004, the Company ordered 60 neutron detectors for a total cost of
$1,368,000. The Company began receiving the detectors in May and will continue
to receive these units at varying intervals. Payment terms for the detectors are
50% due upon order and the balance due 30 days following receipt and acceptance
by the Company.

                                   LITIGATION

In June 2004, the Company reached a settlement in the legal matter with Mr.
Richard Eckhouse described in Note 16 - Commitments and
Contingencies-Litigation. The Company agreed to pay Mr. Eckhouse $10,000 and
10,500 shares of common stock valued at $13,440 in exchange for a mutual release
of all claims against the other party.

In June 2004, the SEC sent to the Company a subpoena in which it required the
Company to provide copies of all documents concerning the restatement of the
Company's financial statements of the years ended April 30, 2002 and 2003. The
subpoena requested documentary evidence to the restatement, including, without
limitation, all of the Company's electronic and written correspondence, notes,
journal entries, records, working papers and other documents that pertain to the
restatement, and specifically all communications between the Company and its
auditors.


                                     -108-
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.

ITEM 8a. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this Form 10-KSB, Dr.
Bogdan C. Maglich, serving in his capacity as our chief executive officer and
treasurer, carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14(c) and 5d-14(c). Based upon his review, Dr. Maglich concluded that
our disclosure controls and procedures during our fiscal year ended April 30,
2004 had not been effective in timely alerting us to material information
relating to the company required to be included in our reports required to be
filed under the Securities Exchange Act. The deficiencies which we experienced
during that period resulted from three primary problems: (1) a general lack of
corporate governance due to our extreme lack of resources and manpower, and an
inability to create an effective segregation of duties, due to the requirement
of Dr. Maglich to perform too many corporate and business functions
simultaneously; (2) a lack of general oversight through a systematic and formal
approach to the conduct of our corporate, financial and business affairs,
resulting in a lack of effective communication between management and our Board
of Directors; and (3) the lack of a full-time and experienced chief financial
officer.

Since April 30, 2004, we have worked diligently, including with our legal and
other professional advisors and our auditors, to address these deficiencies,
which we have taken very seriously. In August 2004, our Board of Directors was
joined by three new members, William A. Nitze, Col. William J. Lacey, Jr., and
Peter J. Le Beau, who collectively bring good experience to us in a variety of
areas including corporate governance and financial accounting and controls. Mr.
Le Beau has been designated as the "financial expert" on our Audit Committee. We
have also obtained new professional assistance, both independent and in-house,
designed to help us improve our corporate governance, public company reporting
and other activities generally. Finally, our Board has determined, subject to
our receipt of adequate financing to support its efforts, to undertake an
executive search to recruit a full-time Chief Financial Officer with public
company experience.

With these changes, Dr. Maglich has concluded as of the time of the filing of
this Report that our company does have in place an effective system for timely
meeting our Securities Exchange Act requirements, although further refinements
are contemplated as indicated above. Of course, the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and there can be no assurance that any design will succeed in
adhering to its stated goals under all potential future conditions. These
include an assumption that we will be able to raise through equity investment,
grants or otherwise the funding necessary to implement and maintain our full
system. There can be no assurance that we will be able to implement or maintain
an effective system of internal controls, and if we are not able to do so, we
risk being in violation of our obligations as a public company in the future.
See: Risk Factors: Corporate Risks.


                                     -109-
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

The directors and executive officers of HiEnergy Technologies, and their ages,
positions, business experience and education as of April 30, 2004 are as
follows:

<TABLE>
<CAPTION>
              NAME                   AGE                         POSITION
--------------------------------- ----------- --------------------------------------------------
<S>                                   <C>      <C>
 Dr. Bogdan C. Maglich                75       Chairman of the Board, Chief Executive Officer,
                                               President, Treasurer and Chief Scientific Officer
 Colonel William J. Lacey, Jr.        65       Director
 David R. Baker                       72       Director
 William A. Nitze                     61       Director
 Harb S. Al-Zuhair                    66       Director
 Peter J. LeBeau                      57       Director
</TABLE>


Dr. Maglich was appointed Chairman and Chief Scientific Officer of HiEnergy
Technologies on April 25, 2002. He was appointed Chief Executive Officer,
President and Treasurer of HiEnergy Technologies effective as of March 2003. Mr.
Tom Pascoe resigned as Chief Executive Officer and President of our company on
February 25, 2003. Mr. Barry Alter resigned as Chief Executive Officer,
President and Treasurer of our company on September 17, 2002 and resigned from
our board of directors on March 7, 2003.

Dr. Bogdan Maglich and Mr. Harb Al-Zuhair were appointed to the board of
directors on April 25, 2002. In February 2003, Mr. David R. Baker was appointed
to the board of directors. Mr. Lacey, Mr. Nitze and Mr. LeBeau were appointed to
the Board of Directors in August 2004.

All directors hold office for one year or until their respective successors are
elected, or until their earlier death, resignation or removal. Each of our
officers serves at the discretion of the board of directors. There are no family
relationships between or among any of our directors or executive officers.

BIOGRAPHIES

Each director and executive officer has furnished us the following information
with respect to his or her principal occupation or employment, other
affiliations and business experience during the last five years.

DR. BOGDAN C. MAGLICH

As HiEnergy Technologies' Chairman, Chief Executive Officer, President and
Treasurer since March 2003, Dr. Maglich has primary responsibility for our
business strategy and development. Dr. Maglich served from 1974 to 1977 as
Chairman and CEO of Fusion Energy Corporation, an American subsidiary of Swiss
Aluminum Ltd., ALUSUISSE, a large multi-national corporation based in Zurich,
Switzerland. He also served as a Director of Delta Holding A.G., Zurich,
ALUSUISSE's arm for operating the American high-tech subsidiaries of ALUSUISSE.
Dr. Maglich worked in Zurich with Mr. Nelli Celio, Minister of Finance of the
Swiss Confederation and was close to Mr. Roger Bonvin, President of Switzerland
and Minister of Energy, who declared Dr. Maglich an honorary citizen of
Switzerland in 1975. From 1980 to 1983, Dr. Maglich served as Chairman and CEO
of Science Transfer Associates, Inc., a New York company based in the
Rockefeller Center, and lead member of a British-Swedish-American consortium
that designed the multi-billion dollar King Abdul Aziz's Energy Development
Center in Jeddah, Saudi Arabia. Members of the consortium were: UK Atomic Energy
Research Establishment, Harwell; Skanditronics, a large Swedish technology


                                     -110-
<PAGE>

corporation; General Atomic Corporation, USA; and Booz Allen & Hamilton, a U.S.
management consulting company. In the period 1985 to 1987, Dr. Maglich was CEO
of Aneutronic Energy Labs, Inc., which in partnership with Bechtel Engineering,
carried on a U.S. Air Force contract to design a space power plant for the U.S.
Space Defense Initiative. From 1988 to 1993, Dr. Maglich served as CEO of
Advanced Physics Corporation, which has, among other accomplishments, designed a
miniature nuclear fission reactor for electricity production in collaboration
with the Department of Nuclear Engineering at MIT, Kurchatov Atomic Energy
Institute, Moscow and the Russian Ministry of Atomic Energy. Dr. Maglich founded
HiEnergy Microdevices and has served as its Chief Executive Officer from 1995
until its reverse takeover of HiEnergy Technologies in April 2002.

As HiEnergy Technologies' Chief Scientific Officer since April 2002, Dr. Maglich
has primary responsibility for technology strategy, technology development and
technical proposal development. Dr. Maglich is a respected scientist in his
field. He received the White House Citation from President John F. Kennedy and
was named an honorary citizen in Switzerland by the President of the Swiss
Confederation for his discovery of the omega meson. In addition to his research
discoveries and inventions in particle physics, instrumentation, and detection
devices, Dr. Maglich has played a role in reducing weapons in areas such as
Yugoslavia and Russia, and worked on safety measures for Soviet reactors in
Europe. Following the Chernobyl incident, Dr. Maglich as CEO of Advanced Physics
Corporation, initiated and chaired a joint technical conference of the American
and Soviet nuclear reactor designers aimed at adding the American nuclear safety
features to the Soviet-built power reactors in Hungary, Bulgaria,
Czechoslovakia, East Germany, and Finland. The conference was held in Belgrade,
Yugoslavia on October 2-6, 1990. In the period 1992-1993 the late Glenn T.
Seaborg, Nobel Laureate and nuclear energy pioneer, as Chairman, and Dr.
Maglich, as President, of Advanced Physics Corporation, organized a project in
Irvine, California under the U.S. Dept. of State Initiatives, to assist in the
transition of Soviet nuclear physicists from nuclear weapons research to
peaceful nuclear research. The group worked on the design of a miniature joint
peaceful nuclear power reactor named MARR (Mini American Russian Reactor).
Twelve nuclear engineers from the Russian nuclear weapon center "Chelyabinsk
70," and from the Kurchatov Atomic Energy Institute, Moscow, gathered for a
period of 3 months in Irvine in the period between 1992-1993, and were hosted by
Advanced Physics Corporation. Currently, Dr. Maglich is involved in the
development and testing of three detectors based on his stoichiometric
technology. Dr. Maglich has served as a professor of physics at the University
of Pennsylvania and has also worked at Rutgers and at the Joint Faculty,
Princeton-Penn Accelerator Laboratory. Dr. Maglich also worked in various
leadership capacities on a variety of projects, including the CERN European
Center for High Energy Physics in Geneva, Switzerland; and the U.S. National
Laboratories, the Air Force Phillips Laboratory. Dr. Maglich received a Ph.D. in
high-energy physics and nuclear engineering from the Massachusetts Institute of
Technology, a Master of Science from Britain's University of Liverpool, and a
Bachelor of Science from the University of Belgrade.

COLONEL WILLIAM J. LACEY, JR. (USA, RET.)

Colonel William J. Lacey, Jr. (USA, Ret.) currently serves as the President and
Chief Executive Officer for our wholly-owned subsidiary, HiEnergy Defense, Inc.,
and was recently appointed as a member of our Board of Directors.

Col. Lacey has more than thirty years of diversified responsibility within
Department of Defense (DoD) management, including senior executive level
positions in congressional relations; program development, management and
administration; test design and analysis; research, development, test, and
evaluation of major weapons systems. His areas of expertise include counter
terrorism, mine detection, border control, military medicine, and weapons of
mass destruction.

Col. Lacey has worked in executive and management positions with several
corporations, including, most recently, Technology Team, Inc., in the role of
Program Manager/Regional Specialist and Senior Policy Analyst, supporting the
DoD Office of Partnership for Peace Information Management System (January


                                     -111-
<PAGE>

2001-August 2003). Prior to Technology Team, Inc., he held executive positions
with Integrated Concepts & Research Corporation; Militec, Inc.; EWA, Inc; and
LCC, Inc.

He served in combat as an Army Special Forces Officer. During the Vietnam
conflict, he was awarded two Silver Stars for valor, four Bronze Stars for valor
and service, and two Purple Hearts for wounds sustained. He was also awarded the
Legion of Merit.

Col. Lacey is a graduate of the University of Rhode Island (1963) and the
Defense Systems Management College Test and Evaluation Course (1975), and is an
MS Candidate, Business Administration, at the University of Southern Illinois.

DAVID R. BAKER

Mr. Baker has been an attorney for over 49 years and has been Of Counsel to the
firm Haskell Slaughter Young & Rediker, LLC, of Birmingham and Montgomery,
Alabama and New York City, since March 2003. Since October 1993, Mr. Baker has
been a Retired Partner of the law firm of Jones Day in its New York City office.
Prior to joining Haskell Slaughter Young & Rediker, LLC, Mr. Baker was a partner
in Baker, Johnston & Wilson LLP, Birmingham and New York City, from October 1998
to February 2003. Mr. Baker received his Juris Doctorate from Harvard Law
School. He received dual Bachelor's Degrees in Philosophy from the University of
Chicago and in Arts from Birmingham-Southern College. He is a member of the
Alabama and New York State Bar Associations and the American and Alabama Law
Institutes, serves on the Liaison Committee of the American Bar Association to
the Financial Accounting Standards Board and is the International Bar
Association's principal representative in New York to the United Nations. In
addition, he serves as Chairman of the New York Legislative Service and is a
Life Trustee of Birmingham-Southern College.

WILLIAM A. NITZE

Mr. William Nitze is currently President of Gemstar Group, Inc. (Global
Environmental Market Solutions through Technology And Reform), which was founded
in May 2001 to work with partners around the world in implementing market-based
approaches to global environmental problems. Mr. Nitze is a graduate of Harvard
College and Oxford University (UK) and received a J. D. degree from Harvard Law
School. After a brief practice at the law offices of Sullivan and Cromwell in
New York, he spent 14 years with Mobil Oil as a legal counsel, 4 years of which
were spent in Japan.

He served as an Assistant Administrator of the Environmental Protection Agency
(EPA) for International Activities during the Clinton Administration (1994-2001)
and Deputy Assistant Secretary of State for the Environment in the Reagan and
Bush Administrations (1987-90). Mr. Nitze has written and spoken widely on
environmental issues. In 1993-94 and 2002, he taught a new course on forming an
international regime to address climate change at the Paul H. Nitze School of
Advanced International Studies at The Johns Hopkins University. As President of
the Alliance to Save Energy, Mr. Nitze led a broad coalition of business,
government, labor and consumer interests in supporting and implementing policies
and programs to promote energy efficiency.

Mr. Nitze is also founder of the Alliance's Business Council for Sustainable
Energy. As an Assistant Administrator for International Activities at the EPA
from 1994 to the end of the Clinton Administration, Mr. Nitze strengthened the
EPA's international role by making it a key player in implementing NAFTA,
managing its associated institutions and by making it the lead agency on
environmental issues in several bi-national commissions co-chaired by Vice
President Al Gore. He made environmental security a focus of the EPA's


                                     -112-
<PAGE>

international work, instituting for the first time a formal working relationship
among the Department of Defense, the Department of Energy and EPA on
environmental security issues.

HARB S. AL-ZUHAIR

Born on July 4, 1938, Mr. Al-Zuhair received his primary education in Beirut and
obtained a degree in civil engineering from the Portsmouth College of
Technology, U.K. in 1961. In 1971, he established Electronics Equipment
Marketing Co. (EEMCO) as a division of SADCO, a company run by his family. Mr.
Al-Zuhair currently serves as President and Chief Executive Officer of Tetrad
Development Co. Ltd., a company established to manage his various investments
and business interests in Saudi Arabia. Mr. Al-Zuhair wholly-owns or has
investments in a variety of other businesses, among them: construction,
industrial, banking, mining, aviation and trading companies. Mr. Al-Zuhair is
also serving as chairman, member of the board of directors and founding member
of various companies in the Saudi Kingdom and abroad.

PETER J. LE BEAU

Mr. Peter Le Beau has extensive experience in commercial finance and investment
banking (including structured finance, private/public asset-based financing,
operating and leveraged leasing, debt and equity placements, mergers and
acquisitions, and research and analysis), with a strong emphasis on the aviation
and aerospace industries. Since 1996 and to the present, he has served as an
Executive Director and Treasurer for the Soldiers', Sailors', Marines and
Airmen's Club in New York City. From 2002 to 2003, he served as Director of
Capital Markets for Residual Based Finance Corporation, a finance company
involved in the acquisition of commercial aircraft and engines, where he was
involved in the structuring and placement of a $400 million private equity fund
focused on the acquisition of commercial aircraft and engines. From 2001 to
2002, he served as Senior Vice President of Finance with ComJet Aviation Leasing
Corp. and from 1998 to 2001, he was Director of Commercial Aviation Finance with
Summit Bank.

Currently, Mr. Le Beau is a member of Vietnam Veterans of America, the American
Legion, Veterans of Foreign Wars, Soldiers', Sailors', Marines and Airmen's
Club, Face the Challenge Foundation, the 82nd Airborne Division Association and
the Squadron A Association. Mr. Le Beau received a Bachelor's degree in the
field of management from St. John's University in 1967.

AUDIT AND FINANCE COMMITTEE

Peter Le Beau serves as the Chairman of the Audit Committee and David Baker is
also a member. Both Mr. Le Beau and Mr. Baker are independent audit committee
members according to the definition used by the NASD for audit committee
independence, and Mr. LeBeau is an audit committee qualified financial expert.

The Audit Committee selects our independent auditors, reviews the results and
scope of the audit and other services provided by our independent auditors,
reviews our financial statements for each quarterly period and reviews and
evaluates our internal control functions.

SCIENTIFIC ADVISORY BOARD

Our Scientific Advisory Board consists of the following distinguished
scientists:

DR. MELVIN SCHWARTZ; PROFESSOR OF PHYSICS EMERITUS AT COLUMBIA UNIVERSITY

Dr. Schwartz taught physics at Columbia University from 1958 to 1966 and then
moved to Stanford, where he was a professor of physics from 1966 to 1983. For a
number of years prior to his return to academia in 1991, Dr. Schwartz founded
and ran a Silicon Valley company, Digital Pathways, Inc., devoted to data
communications security.


                                     -113-
<PAGE>

In 1988, Dr. Schwartz received the Nobel Prize for Physics, along with two
colleagues, for research concerning neutrinos, which are subatomic particles
that have no electric charge and virtually no mass. It is exceptionally rare for
neutrinos to interact with matter and, as a result, it has been extremely
difficult to detect them in laboratory research (e.g., estimates say that only
one in ten billion neutrinos traveling through the earth would interact with a
particle of matter during the passage). Acting on Schwartz's suggestion, the
group of three scientists devised a way to increase the statistical probability
of neutrino interactions. They did this by producing a beam consisting of
hundreds of billions of neutrinos and then sending the beam through a detector
of solid matter. The researchers achieved success by using a particle
accelerator to generate a stream of high energy protons, which were then fired
at a target made of the metal beryllium. A stream of different particles,
including pi mesons, were produced by this bombardment. As they traveled, the
particles decayed into mu mesons and neutrinos. The stream of particles exiting
from the beryllium target then passed through a 44 feet thick steel barrier that
filtered out all particles except neutrinos. This resulted in a pure neutrino
beam, which subsequently entered a large aluminum detector in which a few
neutrinos interacted with the aluminum atoms. The scientists analyzed these
interactions and discovered a new type of neutrino, which came to be known as
the muon neutrino.

Dr. Schwartz spent his undergraduate and graduate years at Columbia University
in New York and received his Ph. D. in 1958.

DR. GIOVANNI G. FAZIO; SENIOR PHYSICIST AT THE HARVARD SMITHSONIAN CENTER FOR
ASTROPHYSICS

Dr. Fazio is presently Senior Physicist, Harvard-Smithsonian Center for
Astrophysics; Associate, Harvard College Observatory; and a Member of the
Faculty, International Space University, Strasbourg, France.

Dr. Giovanni Fazio received his Ph.D in Physics in 1959 from the Massachusetts
Institute of Technology, Cambridge, MA. His graduate work was in the field of
Elementary Particle Physics. Dr. Fazio spent his undergraduate years at St.
Mary's University, TX and received his Bachelors of Science in Physics and his
Bachelor of Arts in Chemistry.

In 1959 Dr. Fazio joined the University of Rochester, where he pioneered the
development of balloon-borne gamma-ray telescopes and was the Principal
Investigator for the gamma-ray detector experiment on the first Orbiting Solar
Observatory. In 1962 Dr. Fazio joined the Smithsonian Astrophysical Observatory
and the Harvard College Observatory, where he initiated a program in gamma-ray
astronomy using balloon-borne and ground-based detectors. He also initiated the
construction of the 10-meter optical reflector at the F. L. Whipple Observatory,
Arizona, to search for ultrahigh-energy cosmic gamma-rays.

In the early 1970's Dr. Fazio pioneered the development of large balloon-borne
telescopes for far-infrared astronomical observations above the atmosphere, and
in the 1980's flew the first infrared astronomical telescope on the Space
Shuttle. He has been a member of numerous NASA advisory committees and principal
investigator on the following NASA infrared programs: the 1-Meter Balloon-Borne
Far-Infrared Telescope Experiment, the Infrared Telescope Experiment which flew
on the Spacelab 2 flight of the Space Shuttle, and the Infrared Array Camera
experiment on the Spitzer Space Telescope, one of NASA's Great Observatories,
and co-investigator on the Submillimeter Wave Astronomical Satellite (SWAS). His
current research interests also include the development of infrared
instrumentation and the use of infrared array cameras on ground-based telescopes
to observe the early Universe, ultraluminous galaxies, young stellar objects,
planetary nebulae, and star formation regions.

Dr. Fazio is also past President of the International Astronomical Union's
Division XI and Commission 44 (Space and High Energy Astrophysics); past
Chairman, Universities Space Research Association (USRA) Science Council for
Astronomy and Space Physics; and past Vice-Chairman of the COSPAR Commission on


                                     -114-
<PAGE>

Research in Astrophysics from Space. Dr. Fazio is a Fellow of the American
Physical Society and past chairman of its Astrophysics Division, a Fellow of the
American Association for the Advancement of Science (AAAS), a member of the
American Astronomical Society and past chairman of its High Energy Astrophysics
Division. He is also a member of the International Astronomical Union, the
International Academy of Astronautics, the Optical Society of America, and a
Fellow of the Royal Astronomical Society. He has published more than 240
scientific papers.

DR. ROBERT J. MACEK; GUEST SCIENTIST, LOS ALAMOS NEUTRON SCIENCE CENTER AND
SENIOR SCIENTIST, TECHSOURCE INC., SANTA FE, NM.

Dr. Robert J. Macek retired in July 2003 from the Los Alamos National Laboratory
where he had been a technical staff member for over 30 years. He has held
various management positions at Los Alamos including deputy group leader, group
leader, associate division leader, program manager, accelerator (Proton Storage
Ring, PSR), facility manager and, most recently, project leader for two PSR
upgrade projects. During this time he has been engaged in particle and nuclear
physics research, accelerator R&D as well as accelerator operations and
development.

Dr. Macek's work over the past decade has focused on accelerator physics R&D and
performance improvements for the Los Alamos PSR. His work on beam losses, space
charge effects and electron cloud instabilities for this high intensity machine
has attracted considerable interest and resulted in collaboration with other
laboratories to resolve the electron cloud instability in high intensity proton
rings. Laboratories in the collaboration include Argonne National Lab, Lawrence
Berkeley, FermiLab, Brookhaven National Lab, Princeton Plasma Physics Laboratory
and the SNS project at OakRidge National Laboratory.

Dr. Macek received his Ph.D. in High Energy Physics from the California
Institute of Technology in Pasadena.

DR. ANDREW J. LANKFORD; PROFESSOR OF PHYSICS AND CHAIR OF THE DEPARTMENT OF
PHYSICS AND ASTRONOMY, UNIVERSITY OF CALIFORNIA, IRVINE

Dr. Andrew J. Lankford is a Professor of Physics and Chair of the Department of
Physics and Astronomy at the University of California, Irvine. Prior to joining
the University of California, Dr. Lankford served as a physicist in the Research
Division at the Stanford Linear Accelerator Center and as a scientist and
research physicist in the Physics Research Division at the Lawrence Berkeley
Laboratory. He has also held teaching positions in the Departments of Physics at
Stanford University and Yale University. Dr. Lankford is actively involved in
research in elementary particle physics. He has considerable expertise in
particle and radiation detectors and in signal processing and data acquisition
electronics.

He is currently working on research projects with CERN, the European
Organization for Nuclear Research, which is the world's largest particle physics
laboratory, and with the Stanford Linear Accelerator Center (SLAC). In recent
years, he has played major roles in the management of the principal experiments
at these laboratories, the BABAR Experiment at SLAC and the ATLAS Experiment at
CERN. He serves on advisory panels for the Fermi National Accelerator
Laboratory, Brookhaven National Laboratory, and the Institute of High Energy
Physics, Beijing.

Dr. Lankford received his Ph.D. in Physics and M. Phil in Physics from Yale
University. He also holds a B.S. in Mathematics and Physics, Magna Cum Laude
with Departmental Honors, from Yale. He was the recipient of an Alfred P. Sloan
Fellowship, and he is a Fellow of the American Physical Society. He is the
author of more than 350 publications.

There are no material agreements between us and any of the members of the
Scientific Advisory Board. On August 27, 2003, our Board of Directors approved
the issuance and grant of non-qualified stock options to each of the four


                                     -115-
<PAGE>

members of the Scientific Advisory Board to purchase 10,000 shares of our common
stock, with an exercise price of $1.02 and a term that ends August 27, 2009.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires all
executive officers, directors and persons who are the beneficial owners of more
than 10% of the common stock of HiEnergy Technologies to file reports of
ownership with the SEC indicating their ownership of our equity securities and
to report any changes in that ownership. Specific due dates for these reports
have been established, and we are required to report in this Annual Report on
Form 10-K any failure to comply therewith during the fiscal year ended April 30,
2004. As of the date of this Report, one of our directors, Harb Al-Zuhair, has
yet to file on Form 5 any changes in beneficial ownership. One of our directors,
David R. Baker, has filed, but has not updated an annual statement of ownership
filed on Form 5 in November 2003. Our directors, Col. William J. Lacey, Peter J.
Le Beau and William A. Nitze, recently joined our Board in July and August 2004,
and have yet to file a statement of beneficial ownership. With the exception of
the foregoing, the Company believes that all of these filing requirements were
satisfied by its executive officers and by the beneficial owners of more than
10% of our common stock. In making this statement, the Company has relied on
copies of the reporting forms received by it or on the written representations
from certain reporting persons that no Form 5 (Annual Statement of Changes in
Beneficial Ownership) were required to be filed under applicable rules of the
SEC.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation that we have paid to our named
executive officers for the three fiscal years ended April 30, 2004, 2003 and
2002. With the exception of Dr. Maglich, no executive officers received more
than $100,000 in annual salary and bonus during the fiscal year ended April 30,
2004. Dr. Maglich served as Chairman, Chief Executive Officer, President,
Treasurer and Chief Scientific Officer of HiEnergy Microdevices during the
fiscal years 2004 and 2003. He was appointed Chairman and Chief Scientific
Officer of HiEnergy Technologies on April 25, 2002. Dr. Maglich was appointed
Chief Executive Officer, President and Treasurer of HiEnergy Technologies
effective as of March 10, 2003. No other compensation was granted for the
periods covered.

<TABLE>
<CAPTION>
                                                                                       LONG TERM COMPENSATION
                                                                                -----------------------------------
                                                   ANNUAL COMPENSATION                   AWARDS             PAYOUTS
                                             --------------------------------   -----------------------     -------
                                 FISCAL                               OTHER     RESTRICTED   SECURITIES               ALL OTHER
                                 YEAR                                ANNUAL       STOCK      UNDERLYING      LTIP      COMPEN-
                                 ENDED       SALARY       BONUS      COMPEN-      AWARDS      OPTIONS/      PAYOUTS     SATION
NAME AND PRINCIPAL POSITION     APRIL 30       ($)         ($)       SATION         ($)       SARs (#)        ($)        ($)
---------------------------     --------     --------    -------    ---------   ----------   ----------     -------   ---------
<S>                               <C>         <C>        <C>          <C>        <C>          <C>              <C>       <C>
Bogdan Maglich                    2004       $220,046        -0-                                               -0-       -0-
Chairman, Chief Executive         2003       $157,713    $50,000      $47,401         -0-       456,717        -0-       -0-
Officer, President,               2002        $80,734    $50,000      $24,952    $196,148     2,482,011        -0-       -0-
Treasurer, and Chief
Scientific Officer
</TABLE>


The Other Annual Compensation amounts paid to Dr. Maglich consisted of the
following personal expense reimbursements:


                                     -116-
<PAGE>

<TABLE>
<CAPTION>
         EXPENSE CATEGORY         FISCAL YEAR    FISCAL YEAR ENDED    FISCAL YEAR ENDED    FISCAL YEAR ENDED
                                   ENDED 2004           2003                2002                  2001
      -------------------------   -----------    -----------------    -----------------    -----------------
<S>                                <C>                 <C>                 <C>                   <C>
      Auto Lease                       -0-             $17,500              $6,705               $15,745
      Auto Insurance                  $212              $1,144              $1,438                $2,017
      Auto Expenses (other)         $1,046                 -0-                $500                  $471
      Home Rent                        -0-                 -0-             $13,750                $6,500
      Medical & Dental
        Reimbursements             $24,088             $28,757              $2,559                $1,933
      TOTAL                        $25,345             $47,401             $24,952               $26,666
</TABLE>

Dr. Maglich also received compensation in the form of shares of restricted
common stock of HiEnergy for fiscal year 2004 as follows:


OPTION GRANTS

The following table sets forth information with respect to stock options granted
to each named executive officer during our most recent fiscal year ended April
30, 2004. We have never granted any stock appreciation rights.

<TABLE>
<CAPTION>
                                                                            PERCENT OF TOTAL
                                            NUMBER OF SECURITIES        OPTIONS/SARs GRANTED TO    EXERCISE OF BASE
                NAME                   UNDERLYING OPTIONS/SARs GRANTED  EMPLOYEES IN FISCAL YEAR    PRICE ($/SHARE)
----------------------------------     -------------------------------  ------------------------   ----------------
<S>                                              <C>                              <C>                    <C>
Bogdan Maglich                                   456,717(1)                       31%                    $2.81
Chairman, Chief Executive Officer,
President, Treasurer, and Chief
Scientific Officer
</TABLE>

------------
(1)  Option was granted on February 11, 2003 and was fully vested and
     exercisable on the date of grant pursuant to his employment agreement.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information with respect to fiscal year-ended
April 30, 2004 option values. No stock options were exercised by the named
executive officers during the fiscal year ended April 30, 2004.


                                     -117-
<PAGE>

<TABLE>
<CAPTION>
                                                              NUMBER OF UNEXERCISED          VALUE OF UNEXERCISED
                                SHARES                      OPTIONS/SARs AT THE FISCAL    IN-THE-MONEY OPTIONS/SARs
                              ACQUIRED ON                            YEAR END                 AT FISCAL YEAR-END
                               EXERCISE         VALUE                  (#)                           (#)
           NAME                   (#)         REALIZED      EXERCISABLE/UNEXERCISABLE     EXERCISABLE/UNEXERCISABLE
-------------------------     -----------     --------      --------------------------    -------------------------
<S>                              <C>             <C>            <C>                           <C>
Bogdan Maglich                    --             --             2,898,728 / 0                 $481,188 (1)
Chairman, Chief Executive
Officer, President,
Treasurer, and Chief
Scientific Officer
</TABLE>

----------
(1)  The value of Dr. Maglich's options has been calculated based on the
     difference between the closing price of our stock on the OTC Bulletin
     Board(R) on April 30, 2004 $0.30 per share and the exercise prices of his
     stock options at $0.134 per share. No effect is given to the shares
     exercisable at $2.81 per share.

COMPENSATION OF DIRECTORS

The Board previously approved a plan to grant each director 2,000 shares of
common stock or stock options for each meeting attended, and the directors were
each granted stock options in varying amounts for their services. On November 7,
2003, the Board approved an increase to the number of shares or stock options
due each director for each meeting attended to 3,000 restricted shares of common
stock or stock options, immediately effective on said date. Additionally, all
directors are reimbursed for any reasonable expenses incurred in the course of
fulfilling their duties as a director of the Company.

HiEnergy Microdevices compensated its directors with shares of its common stock
for their service as directors prior to the reverse takeover by HiEnergy
Technologies. During the fiscal year ended April 30, 2002, the following
HiEnergy Microdevices directors received shares of HiEnergy Microdevices common
stock for their service as directors: Mr. Richard Alden received 3,500 shares
with an estimated value of $3,500; Mr. Gregory Gilbert received 1,000 shares
with an estimated value of $1,000; and Mr. Edward Finch received 1,000 shares
with an estimated value of $1,000. These shares were subsequently converted by
each of the directors into shares of our common stock through participation in
the voluntary share exchange transaction with us.

EMPLOYMENT CONTRACTS

In March 2002, Microdevices entered into an employment agreement with its Chief
Scientist/Chairman of the Board. In May 2002, we assumed the employment
agreement, which was subsequently amended in December 2002 and July 2003. Major
commitments included in the agreement, as amended, are as follows:

     o    We must pay an annual bonus, which must not be less than 20% of the
          total amount of bonuses paid to our officers. If the pretax profit in
          any fiscal year exceeds $0.20 per share, then his bonus in that year
          must not be less than $50,000.

     o    We will grant our Chief Scientist/Chairman of the Board annually,
          during the term of the employment agreement, stock options to exercise
          a number of shares of common stock equal to the greater of (i) 1% per
          annum of the our common stock issued and outstanding or (ii) 10% of
          the total number of options granted by us for services in that year.
          In either case, the exercise price on the stock options is equal to
          the average price of our traded shares for the preceding 30 days prior
          to the date of the grant.

     o    We will provide our Chief Scientist/Chairman of the Board with a car,
          family health insurance, life and disability insurance, and
          reimbursements for reasonable out-of-pocket expenses, not to exceed
          $39,200 in any one year, and any personal tax liabilities arising up
          to $75,000.


                                     -118-
<PAGE>

     o    We must pay our Chief Scientist/ Chairman of the Board a base salary
          in cash as follows:

                 January 1, 2004 to December 31, 2004      $175,000 per year
                 January 1, 2005 to December 31, 2005      $175,000 per year
                 January 1, 2006 to December 31, 2006      $283,013 per year

     o    We must pay our Chief Scientist/ Chairman of the Board a supplemental
          salary of $2,800 per month for the duration he serves as our Chief
          Executive Officer, pursuant to an authorization from the Board of
          Directors in July 2003.

     o    If the employment agreement is terminated by us without cause, we must
          pay our Chief Scientist / Chairman of the Board, on the termination
          date, an amount equal to two years of the minimum annual base salary.

     o    The employment agreement between our Chief Scientist/Chairman of the
          Board and us is effective until December 31, 2006.

In April 2004, we entered into an employment agreement with our Director of
Sales and Marketing, Mr. Sean Moore. Major terms of the agreement are as
follows:

     o    We will pay him an annual salary of $80,000 per year.

     o    We will grant him 50,000 stock options per year under its Qualified
          Incentive Stock Option Plan.

     o    Mr. Moore will be able to participate in our health and dental plan.

     o    Mr. Moore will be eligible for additional incentive bonuses based on
          his performance and once a specific product and a sales plan has been
          finalized.

In July 2004, we entered into an employment agreement with Jim Hertzog to serve
as our Controller. Major terms of the agreement are as follows:

     o    We will pay him $60 per hour for work performed beginning July 26,
          2004.

     o    We will grant him 100,000 warrants with a five year term at the
          closing price as of July 26, 2004. The warrants vested immediately and
          will be included in our next registration statement to be filed with
          the SEC.

     o    We will reimburse him, on a monthly basis, for the medical and dental
          insurance plan he currently participates.

     o    We will pay for any legal costs that Mr. Hertzog may incur in
          connection with any work that he is undertaking on our behalf and
          indemnify Mr. Hertzog against any judgments not covered under our
          current Directors and Officers insurance policy.

     o    We will keep our Directors and Officers insurance coverage in effect
          at all times with the present policy limits and for a period of three
          years following the termination of Mr. Hertzog's employment with us on
          a commercially reasonable effort.

     o    We will reimburse Mr. Hertzog for reasonable out-of-pocket expenses
          for his home office.

     o    Mr. Hertzog may continue to do that majority of his work on our behalf
          from his home but will come to Irvine on an as-needed basis.


                                     -119-
<PAGE>

     o    Mr. Hertzog will continue with the same role with our company as he
          has had in the past and will take direction from Dr. Maglich.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

The Compensation Committee currently consists of Mr. Harb Al-Zuhair and Mr.
William A. Nitze.

None of our executive officer of our serves as a director or member of the
compensation committee of any other entity whose executive officers serve as one
of our directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS


SECURITY OWNERSHIP LISTED BELOW AS OF AUGUST 31, 2004

                                                      NUMBER OF       PERCENT OF
NAME OF BENEFICIAL OWNER                                SHARES       OUTSTANDING
-------------------------------------------------    --------------  -----------
Dr. Bogdan C. Maglich,                                9,450,917 (1)     24.09%
Chairman of the Board, Chief Executive Officer,
President, Treasurer and Chief Scientific Officer

Colonel William J. Lacey, Jr.,                          166,429 (2)      0.46%
Director

Harb S. Al-Zuhair,                                    1,056,422 (3)      2.92%
Director

William B. Nitze,                                       187,762 (4)      0.52%
Director

David R. Baker,                                         600,493 (5)      1.66%
Director

Peter J. Le Beau,                                        56,500 (6)      0.16%
Director

All Executive Officers & Directors As A Group        11,518,523 (7)     29.81%
(6 Persons)

---------

(1)  Includes 1,519,108 shares owned directly by Dr. Maglich, 1,181,735 shares
     owned by Advanced Projects Group, Inc., a Delaware corporation, of which
     Dr. Maglich is a director, officer and greater than ten percent
     stockholder, 2,120,125 shares owned by Maglich Family Holdings, Inc., a
     Delaware corporation, of which Dr. Maglich is a director, officer and
     greater than ten percent stockholder, and 1,380,000 shares owned by Maglich
     Innovations Fund Inc., a Delaware corporation, of which Dr. Maglich is sole
     director, officer and direct or indirect stockholder. Dr. Maglich disclaims
     beneficial ownership of the stock held by Maglich Family Holdings, Inc. and
     Advanced Projects Group, Inc. beyond his pecuniary interest. Also includes
     3,249,949 shares of common stock issuable upon the exercise of currently
     exercisable stock options.


                                     -120-
<PAGE>

(2)  Includes 22,353 shares of common stock owned directly by Col. Lacey and
     144,706 shares of common stock issuable upon the exercise of fully-vested
     stock options.

(3)  Includes 823,540 shares of common stock owned directly by Mr. al-Zuhair.
     Also includes 17,882 shares of common stock issuable upon the exchange of
     800 shares of HiEnergy Microdevices common stock held by Mr. al-Zuhair. The
     800 shares of HiEnergy Microdevices common stock are subject to payment of
     a promissory note in the amount of $3.50 per share, or a total of $2,800.
     Includes 100,000 shares of common stock issuable upon the exercise of
     currently exercisable stock options which were exercisable as of May 16,
     2004 and 115,000 shares of common stock underlying stock options, half of
     which became exercisable on May 7, 2004, and half of which become
     exercisable as of November 7, 2004. Also includes 57,500 shares of common
     stock underlying stock options which are exercisable as of May 7, 2004.

(4)  Includes 111,762 shares of common stock owned directly by Mr. Nitze. Also
     includes 76,000 shares of common stock issuable upon the exercise of fully
     vested stock options.

(5)  Includes 263,012 shares of common stock owned directly by Mr. Baker. Also
     includes 20,236 shares of common stock issuable upon the exchange of 60,710
     shares of common stock registered in the name of BJW Investments, LLC, an
     Alabama limited liability company, of which Mr. Baker was a member, but the
     beneficial interests in which have been distributed to the members, so that
     Mr. Baker has no interest in, dispositive power over, or right to vote, the
     remaining 40,474 shares, and 152,245 of the shares owned by Advanced
     Projects Group, a Delaware corporation, attributable to Mr. Baker as a
     stockholder. Mr. Baker disclaims beneficial ownership of the stock held by
     Advanced Projects Group beyond his pecuniary interest. Also includes 50,000
     shares of common stock underlying stock options which were exercisable as
     of May 16, 2004 and 115,000 shares of common stock underlying stock
     options, half of which became exercisable on May 7, 2004, and half of which
     become exercisable as of November 7, 2004.

(6)  Includes 5,000 shares of common stock owned directly by Mr. Le Beau. Also
     includes 1,500 shares of common stock issuable upon the exchange of 67
     shares of HiEnergy Microdevices common stock held by Mr. Le Beau. Also
     includes 100,000 shares of common stock underlying stock options 50% of
     which are exercisable as of January 16, 2004 and the other 50% of which are
     exercisable as of January 16, 2005.

(7)  The number of shares beneficially owned takes into account the details set
     forth in the preceding footnotes.

The number of shares of common stock outstanding used in calculating the
percentages was 35,987,779, the number of shares of common stock outstanding as
of the date of thisReport. The beneficial ownership for each listed person
includes those shares of common stock underlying options held by such persons on
the date of this Report that are exercisable within 60 days. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.

The amounts reflected above are based upon information provided to us and in
filings with the Securities and Exchange Commission. To our knowledge, the table
sets forth information about beneficial ownership information for (i) each
person known by us to beneficially own more than 5% of our outstanding shares of
common stock; (ii) each of our executive officers; (iii) each of our directors;
and (iv) all of our executive officers and directors as a group.

The address for those listed above is: c/o HiEnergy Technologies, Inc., 1601-B
Alton Parkway, Irvine, California 92606. Except as indicated by footnote, and
subject to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.


                                     -121-
<PAGE>

CHANGE IN CONTROL

There are no arrangements known to us the operation of which may result in a
change of control of HiEnergy Technologies.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of April 30, 2004 with respect to
compensation plans under which we are authorized to issue shares of our common
stock, aggregated as follows:

     o    all compensation plans previously approved by security holders; and


     o    all compensation plans not previously approved by security holders.

<TABLE>
<CAPTION>
                                       (a)                    (b)                         (c)
                                                                                 NUMBER OF SECURITIES
                               NUMBER OF SECURITIES                             REMAINING AVAILABLE FOR
                                TO BE ISSUED UPON       WEIGHTED-AVERAGE     FUTURE ISSUANCE UNDER EQUITY
                                   EXERCISE OF         EXERCISE PRICE OF    COMPENSATION PLANS (EXCLUDING
                               OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,     SECURITIES REFLECTED IN
      PLAN CATEGORY            WARRANTS AND RIGHTS    WARRANTS AND RIGHTS            COLUMN (a))
---------------------------   ---------------------   --------------------  -----------------------------
<S>                                 <C>                      <C>                       <C>
Equity compensation
plans approved by
security holders (1),
(2), (3), (4), (5)                  6,166,949                $0.79                      55,000

Equity compensation
plans not approved by
security holders (6)                  572,726                $1.64                     500,000

Total (7)                           6,739,975                $0.84                     555,000
</TABLE>

---------
(1)  On April 24, 2002, our Board of Directors approved the issuance and grant
     of a non-qualified stock option to Dr. Maglich to purchase 2,482,011 shares
     of our common stock with an exercise price of $0.134 and a term that ends
     on November 30, 2008. The stock option was granted pursuant to the reverse
     takeover of HiEnergy Microdevices by SLW and Dr. Maglich's agreement to
     cancel a HiEnergy Microdevices' stock option to purchase 111,040 shares of
     HiEnergy Microdevices common stock with an exercise price of $3.00 and a
     term that would have ended on November 30, 2008. The number of shares and
     exercise price for the HiEnergy Technologies stock option was determined by
     using the same exchange rate as that used in the voluntary share exchange
     transaction, or 22.3524 shares of our common stock for each share of
     HiEnergy Microdevices. The stockholders of HiEnergy Technologies ratified
     and approved the grant of the stock option at the Annual Meeting of
     Stockholders that took place on October 10, 2002.

(2)  The employment agreement between Dr. Maglich and HiEnergy Technologies
     contemplates the issuance of the following stock options to Dr. Maglich
     annually through the term of the employment agreement, or until December
     31, 2006: options to purchase one percent per year of HiEnergy
     Technologies' common stock issued and outstanding at the end of each year
     with an exercise price equal to the average trading price for the preceding


                                     -122-
<PAGE>

     thirty days and with terms of five years. In no case, without permission of
     Dr. Maglich, may the number of options granted him in a given year be less
     than ten percent of the total number of options granted by HiEnergy
     Technologies for services in that year. That could result for instance in
     annual issuances of options to acquire about 350,000 shares of common
     stock, at today's capitalization, or more if we grant options to purchase
     more than 3,500,000 shares of common stock in one year. That number of
     shares may increase dramatically year to year or over the course of six
     years. Our stockholders approved Dr. Maglich's Employment Agreement in
     October 2002.

(3)  Pursuant to the foregoing (see footnote (2)), on February 11, 2003 our
     Board of Directors approved the issuance and grant of a non-qualified stock
     option to Dr. Maglich to purchase 416,717 shares of our common stock with
     an exercise price of $2.81 and a term that ends on February 11, 2008,
     pursuant to his employment agreement with us. On June 26, 2003 our Board of
     Directors approved (due to an error in the calculation of the grant
     approved by the Board on February 11, 2003) the issuance and grant of an
     incidental non-qualified stock option to Dr. Maglich to purchase an
     additional 40,000 shares of our common stock with an exercise price of
     $2.81 and a term that ends on February 11, 2008. On December 31, 2003, we
     granted Dr. Maglich 313,221 stock options with an exercise price of $0.87
     required under the terms of his employment agreement for calendar year
     2003.

(4)  On May 5, 2003, our Board of Directors approved the HiEnergy Technologies
     2003 Stock Incentive Plan (the "Plan") to provide equity incentives to our
     employees, officers, directors and service providers. The Board decided to
     reserve 700,000 shares of our authorized and unissued common stock for
     future issuance under the Plan. On May 28, 2003 our Board of Directors
     approved an increase in the amount of the reserve of shares to be issued
     under the Plan to 2,000,000 shares of authorized and unissued Common Stock.
     Our stockholders approved the Plan on November 7, 2003.

(5)  On May 16, 2003, our Board of Directors approved the issuance and grant of
     incentive stock options and non-qualified stock options under the Plan to
     our employees and consultants to purchase 400,000 shares of our common
     stock with an exercise price of $0.75 and a term that ends on May 16, 2009.
     On June 26, 2003 our Board of Directors approved the issuance and grant of
     incentive stock options to our employees to purchase 90,000 shares of our
     common stock with an exercise price of $0.75 and a term that ends on June
     26, 2009. On July 16, 2003 our Board of Directors approved the issuance and
     grant of non-qualified stock options to our consultants of to purchase
     200,000 shares of our common stock with an exercise price of $0.50 and a
     term that ends on July 16, 2009. On August 27, 2003 our Board of Directors
     approved the issuance and grant of incentive stock options to our employees
     of to purchase 65,000 shares of our common stock, and nonqualified options
     to our consultants of to purchase 40,000 shares of our common stock, with
     an exercise price of $1.02 and a term that ends August 27, 2009. On
     November 7, 2003, our Board of Directors approved the issuance and grant of
     nonqualified options to one of our directors to purchase 100,000 shares of
     our common stock, with an exercise price of $0.35 and a term that ends
     November 7, 2009. On November 7, 2003, our Board of Directors approved the
     issuance and grant of nonqualified options to our directors and consultants
     to purchase 740,000 shares of our common stock, with an exercise price of
     $1.25 and a term that ends November 7, 2009. On November 7, 2003, our Board
     of Directors approved the issuance and grant of nonqualified options to one
     of our directors to purchase 100,000 shares of our common stock, with an
     exercise price of $0.35 and a term that ends November 7, 2009, and on
     December 4, 2003, we granted stock options to our employees and consultants
     to purchase 350,000 shares of our common stock, with an exercise price of
     $0.90 and a term that ends December 4, 2009. On April 29, 2004, we granted
     stock options to our employees to purchase 100,000 shares of our common
     stock, with an exercise price of $2.06 and a term that ends April 29, 2010.

(6)  On July 12 2002, we issued and granted a non-qualified stock option to
     Isaac Yeffet to purchase up to 1,000,000 shares of our common stock with an
     exercise price of $1.00 per share. The stock option was issued in
     connection with a consulting agreement between Yeffet Security Consultant,


                                     -123-
<PAGE>

     Inc., of which Mr. Yeffet is the sole principal, and HiEnergy Technologies.
     One half of the shares were exercisable immediately and the other half were
     to become exercisable beginning one year after our MiniSenzor product is
     operational and ready to be shown for approval to appropriate authorities.
     The stock option agreement was amended and restated in September 2002 to
     add a cashless exercise provision. We terminated our consulting agreement
     with Mr. Yeffet in October 2003, at which time the second 500,000 options
     had not become exercisable. On August 1 2002, we issued a stock option to
     Primoris Group Inc. to purchase 400,000 shares of common stock at $2.00 per
     share with a term of 5 years in connection with a consulting agreement.
     Primoris Group Inc. provided us investor relations services. On September
     25, 2002, as an accommodation to adjust amounts owing to QED Law Group,
     P.L.L.C., we issued stock options to Shea Wilson and Derek Woolston to
     purchase an aggregate of 45,454 shares of common stock at $1.00 per share.
     On December 19 2002, as an accommodation to adjust amount owing to QED Law
     Group, P.L.L.C., we issued additional stock option to Shea Wilson and Derek
     Woolston to purchase an aggregate of 27,272 shares of common stock at $2.24
     per share. On November 7, 2003, our Board of Directors approved a Grant
     Share Program, which reserves up to 500,000 shares of our authorized and
     unissued common stock, for the future issuance of stock options with an
     exercise price of $1.25 per share and an exercise term of 6 years.

(7)  The preceding footnotes all affect this total.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates be entered into only if they are approved by a
majority of the disinterested directors, are on terms no less favorable to us
than could be obtained from unaffiliated parties and are reasonably expected to
benefit us.

On July 28, 2003, we entered into an exclusive International Distribution
Agreement for our 3C34CarBomb Finder device with Electronic Equipment Marketing
Company (EEMCO). EEMCO is majority-owned by Harb Al-Zuhair, one of our
directors. This agreement is described in more detail in the section entitled
Marketing and Distribution Strategy, in Part I of this Report.

LOANS FROM EXECUTIVE OFFICERS AND DIRECTORS

During the fiscal year ended April 30, 2004, we incurred the following material
notes payable to current and former officers and directors that involved amounts
in excess of $60,000:

     o    In December 2003, we signed a promissory note with Dr. Maglich for
          expense reimbursements totaling $15,712.88. The note is non-interest
          bearing and is due on demand by Dr. Maglich. The full amount was paid
          in June 2004.

     o    In January 2004, we signed promissory notes with Dr. Maglich for a
          bonus that was due to him and a loan that was made to us totaling
          $40,380.77. The notes are non-interest bearing and are due on demand
          by Dr. Maglich. In June 2004, $4.380.77 was repaid to Dr. Maglich and
          $36,000 remains outstanding.

     o    In March 2004, we signed a promissory note with Dr. Maglich for
          expense reimbursements totaling $6,000. The note is non-interest
          bearing and is due on demand by Dr. Maglich. The full amount of the
          note remains outstanding.

     o    In April 2004, we signed promissory notes with Dr. Maglich for loans
          that were made to us totaling $187,840. The notes are non-interest


                                     -124-
<PAGE>

          bearing and are due on demand by Dr. Maglich. In May 2004, $22,840 was
          repaid to Dr. Maglich and $165,000 remains outstanding.

     o    In August 2004, we signed promissory notes with Dr. Maglich for loans
          that were made to us totaling $211,000. The notes are non-interest
          bearing and are due on demand by Dr. Maglich.

CERTAIN BUSINESS RELATIONSHIPS

Except with respect to our lease with Del Mar Aviation and the reverse take-over
transaction that occurred on April 25, 2002, no director or nominee for director
is or has been during the fiscal year ended April 30, 2004, an executive officer
or beneficial owner of more than 10% of any other entity that has engaged in a
transaction with us in excess of 5% of either companies' revenues or assets.

INDEBTEDNESS OF MANAGEMENT

There are no persons who are directors or executive officers of our company,
nominees for election as a director, immediate family members of the foregoing,
corporations or organizations in which the foregoing are executive officers or
partners, or 10% of the shares of which are directly or beneficially owned by
the foregoing, trusts or estates in which the foregoing have a substantial
beneficial interest or as to which the foregoing serve as a trustee or in a
similar capacity that are indebted to us in an amount in excess of $60,000.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

THE EXHIBIT INDEX IMMEDIATELY FOLLOWING THE SIGNATURE PAGE OF THIS REPORT IS
HEREBY INCORPORATED HEREIN BY REFERENCE.

REPORTS ON FORM 8-K

On August 25, 2004, we filed a report on Form8-K dated August 24, 2004. The
report disclosed under Item 5 that we were making all diligent efforts to cure
its failure to timely file its Annual Report on Form 10-KSB for the fiscal year
ended April 30, 2004, in response to our having received an extraordinary volume
of inquiries.

On August 20, 2004, we filed a report on Form 8-K dated August 19, 2004. The
report disclosed under Item 5 the changing of the designated trading symbol for
our common shares from "HIET" to "HIETE" as a result of our being delinquent in
our periodic reporting requirements under the Securities Exchange Act.

On August 9, 2004, we filed a report on Form 8-K dated August 9, 2004. The
report disclosed under Item 5 that we held a Special Meeting of the Board of
Directors to increase the number of members comprising the Board of Directors,
to appoint William A. Nitze and Peter J. Le Beau as members of the Board of
Directors and to appoint David R. Baker and Peter J. Le Beau to serve on our
Audit Committee, of which Mr. Le Beau will serve as Chairman.

On July 8, 2004, we filed a report on Form 8-K dated July 8, 2004. The report
disclosed under Item 5 that we received a "Wells Notice" and written requests
for information from the SEC.

On June 17, 2004 we filed a report on Form 8-K dated June 17, 2004. The report
disclosed under Item 5 that our technical team was scheduled to demonstrate and
test the operation of its CarBomb Finder(TM) in Spain on July 8, 2004. The
report further disclosed under Item 9 our response to news stories concerning
the Securities and Exchange Commission's filing of an application for order
requiring compliance with administrative subpoenas.

On June 9, 2004 we filed a report on Form 8-K dated June 9, 2004. The report
disclosed under Item 5 that the House of Representatives had approved $1,500,000
for Stoichemetric Explosives Detection Systems in FY 2005 National Defense


                                     -125-
<PAGE>

Authorization Act. The report further disclosed under Item 9 that we would be
restating its past financial statements.

On May 21, 2004, we filed a report on Form 8-K dated May 21, 2004. The report
disclosed under Item 5 that we are developing a new product called the
Refractorymeter and had submitted a patent application with the United States
Patent Office on March 11, 2004.

On May 17, 2004, we filed a report on Form 8-K dated May 17, 2004. The report
disclosed under Item 5 that we had placed orders for key components of 10
CarBomb Finders(TM); had executed a Preliminary Manufacturing Facility
Assessment Agreement with Lockwood-Greene, and had appointed a Director of Sales
and Marketing to its team.

On April 12, 2004, we filed a report on Form 8-K/A dated April 9, 2004. The
report disclosed under Item 7 that we were filing complete copies of some
agreements, to include certain information which was accidentally omitted when
the exhibits were originally filed.

On April 13, 2004, we filed a report on Form 8-K dated April 9, 2004. The report
disclosed under Item 9 that we were filing complete copies of some agreements,
to include certain information which was accidentally omitted when the exhibits
were originally filed.

On April 8, 2004, we filed a report on Form 8-K dated April 6, 2004. The report
disclosed under Item 9 that we had entered into a non-exclusive oral
understanding with a consortium which was assembled by the Dallas - Fort Worth
Homeland Security Alliance (the "Alliance"), for the consortium to evaluate and
potentially implement solutions for manufacturing, product development,
servicing, and marketing.

On February 25, 2004, we filed a report on Form 8-K dated January 15, 2004. The
report disclosed under Item 5 that we had been engaged in additional financing
pursuant to a small loan from its Chairman, a private placement of Convertible
Notes and Warrants, and a private placement of Common Stock and Warrants.

On November 12, 2003, we filed a report on Form 8-K dated November 7, 2003. The
report disclosed under Item 9 that we had held its Annual Meeting of
Stockholders on November 7, 2003, and detailed the disclosure presented at the
Annual Meeting of Stockholders.

On November 6, 2003, we filed a report on Form 8-K dated October 30, 2003. The
report disclosed under Item 9 that we had been featured on Fox News Channel's
national investigative report on new cutting-edge technologies currently in
development for airport security.

On October 8, 2003, we filed a report on Form 8-K dated October 7, 2003. The
report disclosed under Item 5 that we had executed a Memorandum of Understanding
with the Directorate of Spanish Airports and Navigation known as AENA
(Aeropuertos Espanoles y Navegacion Aerea), to form a collaborative effort with
HiEnergy to use HiEnergy's Stoichiometer technology to improve the security of
Spain's airports.

On September 16, 2003, we filed a report on Form 8-K dated September 15, 2003.
The report disclosed under Item 9 that we had been cleared by the U.S. Army to
present two scientific papers at the International Conference on Requirements
and Technologies for the Detection, Removal and Neutralization of Landmines and
UXO, which would be taking place in Brussels, Belgium, September 15-18, 2003.

On September 12, 2003, we filed a report on Form 8-K dated September 11, 2003.
The report disclosed under Item 9 that we wanted to respond to questions from
investors and to comment on whether we are owned or controlled by associates of
Philip Gurian, pursuant to publicized allegations from the SEC for the purpose
of enforcing subpoenas it issued to Philip Gurian, Jeannine Gurian, Rheal Cote
and Benil Finance Ltd.


                                     -126-
<PAGE>

On June 20, 2003, we filed a report on Form 8-K dated June 20, 2003. The report
disclosed under Item 9 that we had engaged a German-based business and financial
consultant, and furthermore, that we had engaged a German Investor Relations
Firm and would be listed on the Berlin Stock Exchange.

On June 11, 2003, we filed a report on Form 8-K dated June 10, 2003. The report
disclosed under Item 5 that our Contract with the Naval Surface Warfare Center
(NSWC), already approved and funded by DARPA, was not granted on financial
grounds. We also announced the results of open air in-field tests of our
MiniSenzor technology for the U.S. Navy on January 9, 2003 in Indian Head, MD.;
and also announced development of our new product, the CarBomb Finder.

On May 19, 2003, we filed a report on Form 8-K dated May 16, 2003. The report
disclosed under Item 5 the close and results of the "Exchange Offer" announced
by us in a Form 8-K dated May 12, 2003, to the holders of our Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). The Exchange Offer
concluded on May 16, 2003 at 5 pm., and one hundred percent (100%) of the
holders of our Series A Preferred Stock elected to exchange all of their shares
of Series A Preferred Stock for Common Stock pursuant to the terms and
conditions of the Exchange Offer.

On May 12, 2003, we filed a report on Form 8-K dated May 9, 2003. The report
disclosed under Item 5 an Exchange Offer made on May 9, 2003 from us to our
Series A investors to issue our Common Stock in exchange for the surrender of
outstanding shares of our Series A Preferred Stock, for the purpose of retiring
our Series A Preferred Stock.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

As of the date of this Report, we have incurred audit services of $279,774,
audit related services of $131,704, tax preparation services of $17,472 and
other services of $0. All of the services were provided by Singer Lewak
Greenbaum & Goldstein LLP. Singer Lewak Greenbaum & Goldstein LLP has not
performed any other services for us not expressly mentioned above.


                                     -127-
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         HIENERGY TECHNOLOGIES, INC.


                                         By:            /s/
                                             -----------------------------
                                         Bogdan C. Maglich,
                                         Chief Executive Officer, President,
                                         Treasurer and Chief Scientific Officer
                                         (Principal Executive Officer and
                                         Principal Financial Officer)


Date: September 13, 2004


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

                               Chairman of the Board, Chief Executive Officer,
                               President, Treasurer and Chief Scientific Officer
                               (Principal Executive Officer and
        /s/                    Principal Financial Officer)
-------------------------
Bogdan C. Maglich

        /s/                    Director
-------------------------
Harb Al-Zuhair

        /s/                    Director
-------------------------
David R. Baker

        /s/                    Director
-------------------------
William J. Lacey, Jr.

        /s/                    Director
-------------------------
Peter J. Le Beau

        /s/                    Director
-------------------------
William A. Nitze


                                     -128-
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NUMBER         DESCRIPTION
--------       -----------

2.1 (1)        Voluntary Share Exchange Agreement by and between HiEnergy
               Technologies, Inc. and HiEnergy Microdevices, Inc. dated March
               22, 2002

2.2 (5)        Agreement and Plan of Merger dated October 18, 2002 by and
               between the Registrant and its wholly owned subsidiary, HiEnergy
               Technologies, Inc., a Delaware corporation

3.1 (5)        Certificate of Incorporation of HiEnergy Technologies, Inc., a
               Delaware corporation, filed on October 17, 2002

3.2 (5)        Bylaws of HiEnergy Technologies, Inc., a Delaware corporation,
               adopted on October 18, 2002

3.3 (10)       Certificate of Elimination of Series A Convertible Preferred
               Stock

4.1.1 (5)      Specimen Common Stock Certificate

4.2 (1)        Form of Registration Rights Agreement between the Registrant and
               each April 2002 Private Placement Common Stock Investor. See also
               Exhibit 10.55 Form of Subscription Agreement between the
               Registrant and each April 2002 Private Placement Common Stock
               investor.

4.3 (1)        Form of Amendment No. 1 to Registration Rights Agreement between
               the Registrant and each April 2002 Private Placement Common Stock
               Investor

4.4 (3)        Warrant Certificate issued to Rheal Cote by HiEnergy
               Technologies, Inc. dated June 3, 2002 Form of Registration Rights
               Agreement between the Registrant and each June 2002 Private
               Placement Common Stock

4.4.1 (5)      investor. See also Exhibit 10.24 Form of Subscription Agreement
               between the Registrant and each June 2002 Private Placement
               Common Stock investor.

4.5 (5)        Registration Rights Agreement dated July 12, 2002 between the
               Registrant and Isaac Yeffet

4.6 (5)        Registration Rights Agreement dated August 19, 2002 between the
               Registrant and Primoris Group Inc.

4.7 (5)        Registration Rights Agreement dated October 7, 2002 between the
               Registrant and the Series A Convertible Preferred Stock Investors
               set forth below:

4.8 (5)        Form of Warrant Certificate dated October 7, 2002 issued by the
               Registrant to each Series A Convertible Preferred Stock investor

4.9 (5)        Form of Registration Rights Agreement between the Registrant and
               each October 2002 Private Placement Common Stock Investor

4.10 (5)       Form of Warrant Certificate issued by the Registrant to each
               October 2002 Private Placement Common Stock investor

10.1 (5)       Lease Agreement dated August 15, 2002 between the Registrant and
               Del Mar Avionics

10.1.1 (10)    Addendum to Original Lease Agreement dated August 15, 2002,
               between the Registrant and Del Mar Avionics dated July 1, 2003

10.1.2 (16)    Addendum No. 2 to Original Lease Agreement dated August 15, 2002,
               between the Registrant and Del Mar Avionics dated January 1,
               2004.

10.1.3 (16)    Addendum No. 3 to Original Lease Agreement dated August 15, 2002,
               between the Registrant and Del Mar Avionics dated January 20,
               2004.

10.3 (4)       Stock Option Agreement between Isaac Yeffet and HiEnergy
               Technologies, Inc. dated July 12, 2002

10.4 (4)       Letter Agreement between H.C. Wainwright & Co., Inc. and HiEnergy
               Technologies, Inc. dated August 8, 2002

10.4.1 (3)     Award Contract between HiEnergy Microdevices, Inc. and the U.S.
               Department of Defense dated February 12, 2002

10.5 (3)       Employment Agreement between HiEnergy Microdevices, Inc. and Dr.
               Bogdan C. Maglich dated March 6, 2002*


                                     -129-
<PAGE>

10.6 (3)       Assignment and Assumption of Employment Agreement between
               HiEnergy Technologies, Inc., HiEnergy Microdevices, Inc. and Dr.
               Bogdan C. Maglich dated July 16, 2002*

10.7 (3)       Stock Option Agreement between Dr. Bogdan C. Maglich and HiEnergy
               Technologies, Inc. effective April 24, 2002*

10.8 (3)       Consulting Agreement between Yeffet Security Consultant, Inc. and
               HiEnergy Technologies, Inc. dated July 12, 2002

10.9 (5)       Amended and Restated Nonqualified Stock Option dated July 12,
               2002 issued by the Registrant to Isaac Yeffet

10.11 (5)      Consulting Agreement dated August 1, 2002 between the Registrant
               and Primoris Group Inc.

10.12 (5)      Amendment No. 1 to the Consulting Agreement dated August 19, 2002
               between the Registrant and Primoris Group Inc.

10.13 (5)      Nonqualified Stock Option (Warrant) dated August 1, 2002 issued
               by the Registrant to Primoris Group Inc.

10.15 (5)      Letter Employment Agreement dated February 26, 2002 between
               HiEnergy Microdevices, Inc. and Michal Levy*

10.16 (5)      Assignment, Assumption and Amendment of Employment Agreement
               dated September 17, 2002 by and among the Registrant, HiEnergy
               Microdevices, Inc. and Michal Levy*

10.17 (5)      Nonqualified Stock Option dated September 17, 2002 issued by the
               Registrant to Michal Levy*

10.17.1 (6)    10.17.1(6) Form of Warrant Certificate dated August 11, 2002
               issued by the Registrant to H.C. Wainwright & Co., Inc. and
               Assigns

10.18 (5)      Nonqualified Stock Option dated September 25, 2002 issued by the
               Registrant to Chapin E. Wilson

10.18 (6)      Form of Warrant Certificate dated October 7, 2002 issued by the
               Registrant to H.C. Wainwright &Co., Inc.

10.19 (6)      Form of Warrant Certificate dated October 31, 2002 issued by the
               Registrant to H.C. Wainwright &Co., Inc.

10.19 (5)      Nonqualified Stock Option dated September 25, 2002 issued by the
               Registrant to Derek W. Woolston

10.20 (5)      Employment Agreement dated September 25, 2002 between the
               Registrant and Tom Pascoe*

10.21 (5)      Nonqualified Stock Option effective September 25, 2002 issued by
               the Registrant to Tom Pascoe*

10.22 (16)     Series A Convertible Preferred Stock Purchase Agreement dated
               October 7, 2002 between the Registrant and the Series A
               Convertible Preferred Stock investors.

10.23 (16)     Consulting Agreement dated September 25, 2002 between the
               Registrant and Barry Alter*

10.24 (5)      Form of Subscription Agreement between the Registrant and each
               June 2002 Private Placement Common Stock investor. See also
               Exhibit 4.4.1 Form of Registration Rights Agreement between the
               Registrant and each June 2002 Private Placement Common Stock
               investor.

10.25 (5)      Form of Subscription Agreement between the Registrant and each
               October 2002 Private Placement Common Stock investor.

10.26 (7)      Warrant Certificate dated December 9, 2002 issued by the
               Registrant to Wolfe Axelrod Weinberger Associates LLC.

10.29 (16)     Termination Agreement dated November 27, 2002 between HiEnergy
               Technologies, Inc. and H.C. Wainwright & Co., Inc.

10.30 (7)      Termination Agreement dated December 2, 2002 between HiEnergy
               Technologies, Inc. and Wolfe Axelrod Weinberger Associates LLC.

10.31 (7)      Form of Warrant Certificate dated December 9, 2002 issued by the
               Registrant to H.C. Wainwright & Co., Inc. and Assigns.

10.32 (16)     Placement Agent Agreement dated December 16, 2002 between
               HiEnergy Technologies, Inc. and Seabury Transportation Advisors
               LLC.


                                     -130-
<PAGE>

10.32.1 (10)   Letter dated July 2003 terminating agreement with Seabury
               Transportation Advisors, LLC.

10.33 (7)      Nonqualified Stock Option dated December 19, 2002 issued by
               HiEnergy Technologies, Inc. to Chapin E. Wilson.

10.34 (7)      Nonqualified Stock Option dated December 19, 2002 issued by
               HiEnergy Technologies, Inc. to Derek W. Woolston.

10.35 (7)      Settlement Agreement dated January 15, 2003 between HiEnergy
               Technologies, Inc. and Keith Cowan.

10.36 (7)      Settlement Agreement dated February 14, 2003 among HiEnergy
               Technologies, Inc., Columbus Group/cFour Partners, Robert W.
               Bellano and Shaun Corrales. See also Exhibit 10.37 Form of
               Warrant Certificate dated February 17, 2003 between HiEnergy
               Technologies, Inc. and the principals of Columbus Group/cFour
               Partners.

10.37 (7)      Form of Warrant Certificate dated February 17, 2003 between
               HiEnergy Technologies, Inc. and the principals of Columbus
               Group/cFour Partners. See also Exhibit 10.36 Settlement Agreement
               dated February 14, 2003 among HiEnergy Technologies, Inc.,
               Columbus Group/cFour Partners, Robert W. Bellano and Shaun
               Corrales.

10.38 (16)     Award Contract dated January 15, 2003 by the U.S. Department of
               Defense to HiEnergy Technologies, Inc.

10.39 (8)      Letter Agreement dated November 18, 2002 between HiEnergy
               Technologies, Inc. and HWH Enterprises, Inc.

10.40.1 (9)    Client Fee Agreement between HiEnergy Technologies and Yocca
               Patch & Yocca, LLP

10.40.2 (9)    Form of Promissory Note between HiEnergy Technologies, Inc. and
               Yocca Patch & Yocca, LLP

10.40.3 (12)   Amendment of the Promissory Note issued to Yocca, Patch & Yocca,
               LLP

10.41 (9)      Jenkins Capital Management LLC Private Placement Agreement dated
               April 22, 2003

10.42 (9)      Vertical Ventures Investments LLC Stock Purchase Agreement dated
               April 23, 2003. See also Exhibit 10.72 Form of Escrow Agreement.

10.43 (9)      Greenwich Growth Fund Limited Stock Purchase Agreement dated
               April 28, 2003. See also Exhibit 10.72 Form of Escrow Agreement.

10.44 (9)      Consulting Agreement dated April 15, 2003, between HiEnergy
               Technologies, Inc. and Charles Van Musscher

10.45 (9)      Letter Agreement between HiEnergy Technologies, Inc. and Roth
               Investor Relations

10.46 (9)      Stock Option Agreement between Bogdan C. Maglich and HiEnergy
               Technologies, Inc. dated February 11, 2003*

10.47 (10)     HiEnergy Technologies, Inc. 2003 Stock Option Plan*

10.48 (10)     HiEnergy  Technologies,  Inc. Form of Stock Option  Agreement*

10.49 (10)     Yocca, Patch & Yocca, LLP Stock Purchase Agreement dated June 16,
               2003

10.50 (10)     Richard Melnick Stock Purchase Agreement dated June 18, 2003. See
               also Exhibit 10.72 Form of Escrow Agreement.

10.51 (10)     Jeffrey Herman Stock Purchase Agreement dated June 23, 2003. See
               also Exhibit 10.72 Form of Escrow Agreement.

10.52 (10)     Form of Stock Purchase Agreement dated August 5-29, 2003 between
               HiEnergy Technologies, Inc. and the purchasers of common stock
               and warrants. See also Exhibit 10.72 Form of Escrow Agreement.

10.53 (10)     Form of Warrant Certificate dated August 8-29, 2003 between
               HiEnergy Technologies, Inc. and the purchasers of common stock
               and warrants

10.53.1 (13)   Form of Amendment of Warrant dated December 15, 2003 between
               HiEnergy Technologies, Inc. and the purchasers of common stock
               and warrants

10.54 (10)     International Distribution Agreement between the Registrant and
               Electronic Equipment Marketing Company (EEMCO) dated July 28,
               2003

10.55 (10)     Form of Subscription Agreement between the Registrant and each
               April 2002 Private Placement Common Stock investor. See also
               Exhibit 4.2 Form of Registration Rights Agreement between the
               Registrant and each April 2002 Private Placement Common Stock
               investor.


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<PAGE>

10.56 (16)     Form of Amendment No. 1 to Subscription Agreement between the
               Registrant and each April 2002 Private Placement Common Stock
               investor

10.57 (11)     Memorandum of Understanding between HiEnergy Technologies, Inc.
               and Aeropuertos Espanoles y Navegacion Aerea, Edificio La Piovera
               - Peonias dated October 6, 2003

10.58 (12)     Form of Stock Purchase Agreement dated October 15 - December 2,
               2003 between HiEnergy Technologies, Inc. and the purchasers of
               common stock and warrants. See also Exhibit 10.72 Form of Escrow
               Agreement.

10.59 (12)     Form of Warrant Agreement dated October 28 - December 2, 2003
               between HiEnergy Technologies, Inc. and the purchasers of common
               stock and warrants.

10.60 (16)     Letter Agreement between SBI - USA LLC and HiEnergy Technologies,
               Inc. dated August 1, 2003

10.61 (14)     Promissory Note issued to Bogdan Maglich by HiEnergy
               Technologies, Inc.

10.62 (14)     Note Purchase Agreement dated January 16, 2004 between HiEnergy
               Technologies, Inc. and Platinum Partners Value Fund LP, with
               attached Form of Convertible Note and Warrant

10.63 (14)     Note Purchase Agreement dated January 31, 2004 between HiEnergy
               Technologies, Inc. and Richard Melnick with attached Form of
               Convertible Note and Warrant

10.64 (14)     Stock Purchase Agreement dated February 9, 2004 between HiEnergy
               Technologies, Inc. and Bullbear Capital Partners, LLC with
               attached Form of Warrant

10.65 (14)     Letter Agreement between KCSA Public Relations Worldwide and
               HiEnergy Technologies, Inc. dated January 6, 2003

10.66 (14)     Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy
               Microdevices, Inc. dated March 26, 2002.

10.66.1 (14)   Assignment of Patent Rights from HiEnergy Microdevices, Inc. to
               HiEnergy Technologies, Inc. dated November 17, 2003.

10.67 (14)     Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy
               Technologies, Inc. dated November 17, 2003

10.68 (14)     Employment Agreement between HiEnergy Technologies, Inc. and
               Ioana C. Nicodin dated February 3, 2004

10.69 (14)     Note Purchase Agreement dated January 28, 2004 between HiEnergy
               Technologies, Inc. and Nicholas J. Yocca with attached Form of
               Convertible Note and Warrant

10.70 (15)     Form of Consent and Waiver from April 2003 purchasers of common
               stock.

10.71 (15)     Form of Release from June 2003 purchasers of common stock.

10.72 (16)     Form of Escrow Agreement utilized in connection with the Stock
               Purchase Agreements filed as Exhibits 10.50, 10.51, 10.52 and
               10.58.

14.1 (9)       Code of Ethics for Senior Financial Officers of HiEnergy
               Technologies, Inc.

16.1 (1)       Letter of Manning Elliott

21.1 (9)       List of Subsidiaries

23.1           Consent of Singer Lewak Greenbaum & Goldstein LLP, independent
               accountants

* Indicates a management compensatory plan or arrangement.

     (1)   Filed on May 10, 2002 as an exhibit to HiEnergy Technologies' report
           on Form 8-K dated April 25, 2002 and incorporated herein by
           reference.

     (2)   Filed on June 2, 2000 as an exhibit to HiEnergy Technologies'
           registration statement on Form SB-2 (File No. 333-38536) and
           incorporated herein by reference.

     (3)   Filed on July 29, 2002 as an exhibit to HiEnergy Technologies' annual
           report on Form 10-KSB for the fiscal year ended April 30, 2002, and
           incorporated herein by reference.


                                     -132-
<PAGE>

     (4)   Filed on September 20, 2002 as an exhibit to HiEnergy Technologies'
           quarterly report on Form 10-QSB for the fiscal quarter ended July 31,
           2002, and incorporated herein by reference.

     (5)   Filed on November 6, 2002 as an exhibit to HiEnergy Technologies'
           registration statement on Form SB-2 and incorporated herein by
           reference.

     (6)   Filed on December 16, 2002 as an exhibit to HiEnergy Technologies'
           quarterly report on Form 10-QSB for the fiscal quarter ended October
           31, 2002, and incorporated herein by reference.

     (7)   Filed on February 25, 2003 as an exhibit to HiEnergy Technologies'
           registration statement on Form SB-2/A (File No. 333-101055) and
           incorporated herein by reference.

     (8)   Filed on March 24, 2003 as an exhibit to HiEnergy Technologies'
           quarterly report on Form 10-QSB for the fiscal quarter ended January
           31, 2003, and incorporated herein by reference.

     (9)   Filed on August 8, 2003 as an exhibit to HiEnergy Technologies'
           annual report on Form 10-KSB for the fiscal year ended April 30,
           2003, and incorporated herein by reference.

     (10)  Filed on September 19, 2003 as an exhibit to HiEnergy Technologies'
           registration statement on Form SB-2 (File No. 333-108934) and
           incorporated herein by reference.

     (11)  Filed on October 8, 2003 as an exhibit to HiEnergy Technologies'
           report on Form 8-K dated October 7, 2003 and incorporated herein by
           reference.

     (12)  Filed on December 16, 2003 as an exhibit to HiEnergy Technologies'
           quarterly report on Form 10-QSB for the fiscal quarter ended October
           31, 2003, and incorporated herein by reference.

     (13)  Filed on December 24, 2003 as an exhibit to Pre-Effective Amendment
           No. 1 to HiEnergy Technologies' registration statement on Form SB-2
           (File No. 333-108934) and incorporated herein by reference.

     (14)  Filed on February 25, 2004 as a like numbered exhibit to HiEnergy
           Technologies' current report on Form 8-K dated February 24, 2004 and
           incorporated herein by reference.

     (15)  Filed on March 25, 2004 as an exhibit to HiEnergy Technologies'
           Pre-Effective Amendment No 2 registration statement on Form SB-2
           (File No. 333-108934) and incorporated herein by reference.

     (16)  Filed on April 12, 2004 as a like numbered exhibit to HiEnergy
           Technologies' current report on Form 8-K/A dated April 9, 2004 and
           incorporated herein by reference.

     (17)  Filed on May 17, 2004 as a like numbered exhibit to HiEnergy
           Technologies' current report on Form 8-K dated May 17, 2004 and
           incorporated herein by reference.

     (18)  Filed on May 21, 2004 as a like numbered exhibit to HiEnergy
           Technologies' current report on Form 8-K dated May 21, 2004 and
           incorporated herein by reference.




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