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, 2006
                                       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)

<TABLE>
<CAPTION>
<S>                                                    <C>                                  <C>
        DELAWARE                                       3826                                 91-2022980

(State or other jurisdiction of            (Primary Standard Industrial Code)    (I.R.S. Employer Identification Number)
incorporation or organization
</TABLE>

                    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 31, 2006, representing the last business day of the registrant's most
recently completed fiscal quarter, the registrant had 67,693,936 shares of
Common Stock outstanding and 211.64 shares of Series B Convertible Preferred
Stock outstanding, and the aggregate market value of the voting common stock
held by non-affiliates of the registrant was approximately $18.8 million (based
on the closing price of $0.31 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 15, 2006, there were 68,658,751 shares of the registrant's common
stock outstanding and 219.64 shares of Series B Convertible Preferred 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, 2006

<TABLE>
<CAPTION>
<S>                <C>                                                                                                  <C>
                                                                                                                        PAGE
PART I

Item 1              Description of Business                                                                             2
Item 2              Description of Property                                                                             34
Item 3              Legal Proceedings                                                                                   34
Item 4              Submission of Matters to a Vote of Security Holders                                                 37

PART II

Item 5              Market for Common Equity and Related Stockholder Matters                                            52
Item 6              Management's Discussion and Analysis and Plan of Operation                                          57
Item 7              Financial Statements                                                                                70
Item 8              Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                111
Item 8a             Controls and Procedures                                                                             111

PART III

Item 9              Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of      112
                    the Exchange Act
Item 10             Executive Compensation                                                                              119
Item 11             Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      123
Item 12             Certain Relationships and Related Transactions                                                      126
Item 13             Exhibits and Reports of Form 8-K                                                                    128
Item 14             Principal Accountant Fees and Services                                                              137

                    SIGNATURES                                                                                          138
</TABLE>

                                       ii
<PAGE>

PART I

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

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
are 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 customer spending
patterns; changes in customer 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 slowdowns by unions affecting
businesses which have an impact our ability to conduct our own business
operations.


Forward-looking statements that we make, or that are made by others on our
behalf with our knowledge and express permission, are based on 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.


                                      -1-
<PAGE>

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 located
at the end of Item 1 of this Report.

OVERVIEW

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company and creator of the world's
first "stoichiometric" diagnostic devices that can effectively decipher chemical
compositions of unknown substances, without human intervention. Traditionally,
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.

Our AtometerTM detectors incorporate a proprietary interrogation process that
activates a selected target with high energy neutrons, causing the contents to
emit gamma rays of varying energies, which are then decoded, with the use of
proprietary algorithms, to determine with a high level of confidence, the
chemical composition of the targeted substance. To our knowledge, our AtometerTM
detectors are the only commercially available devices with this "stoichiometric"
capability and therefore we believe are uniquely positioned in the marketplace.

Since inception, we have primarily focused on the research, development and
commercialization of AtometerTM explosives detectors for the homeland security
and defense markets. Our AtometerTM explosives detectors can non-invasively and
remotely detect and confirm, through metal or other barriers, the presence of
explosives in an object, with a probability of detection of greater than 97% and
"false positive" and "false negative" rates of 3%. Further, they have
demonstrated the capability to detect hidden explosives, irrespective of shape
or form, solid or liquid. In numerous studies, we have also been able to detect
other select combustibles, biological agents, and illicit substances, such as
narcotics.

Currently, we are focused on the commercialization and sale of the following
AtometerTM detectors:

o        SIEGMATM 3E3 and 3M3 - portable, suitcase-borne systems for the remote
         detection and confirmation of home-made bombs, also known as Improvised
         Explosive Devices or "IEDs" and uniquely addressing the significant
         problems posed by unattended or suspicious packages.

o        CarBomb FinderTM 3C4 - vehicle-borne system for the detection and
         confirmation of car bombs, in which the sensors are deployed from the
         vehicle at the end of a mechanical arm and placed in proximity to the
         target.

o        CarBomb FinderTM 3C5 - in-ground vehicle screening system for the
         detection and identification of car bombs at checkpoints and
         chokepoints, developed in response to the high demand for critical
         infrastructure protection and improved perimeter defense.

o        STARRAYTM - all-terrain robot-borne detector for the stand-off
         detection of unexploded ordnance, landmines and IEDs, which can also be
         configured and integrated in various robotic and remote-vehicle
         platforms.

We have been marketing our initial AtometerTM detectors globally to governmental
and private entities, including the military. We are also negotiating licenses
for the distribution of our devices with various industry partners. To date,
however, we have yet to generate meaningful revenues from the sale of our
products or licensing of our technologies and 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.
Although a portion of this research and development has been developed through
funding from the Government, most of our research related work is funded
internally in order to capture full intellectual property rights from any
inventions or processes that may arise.

We expect to continue the research and development of applications of our
technologies and their further exploitation, both internally and through
collaboration with third parties. In order to capitalize on the commercial
opportunities that have been identified for our AtometerTM detectors, we will
need to continue to pursue intensive research and development initiatives and
advance our AtometerTM detector system designs to provide more rapid and precise
detection and analytical capabilities and improve their reliability in the
field. Historically, we have developed prototypes in programs with the U.S.
Department of Defense and the Department of Homeland Security for other related
uses of our core technology, including a cooperative development agreement with
the U.S. Transportation Security Administration to produce a proof of concept
incorporating our SuperSenzorTM technology into a next-generation baggage
screening system. While we expect to continue to pursue and receive additional
research and development funds through these agencies, we also have
independently funded our research, such as the use of our AtometerTM detectors
for medical diagnostics and other industrial applications.

                                      -2-
<PAGE>

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 to
be considered part of this Annual Report on Form 10-KSB.


BACKGROUND

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. SLW's operations and
business which had focused on the sale of nutritional supplements ceased 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.
("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 its founder Dr. Bogdan C. Maglich,
obtained the right to receive up to 64% of SLW Enterprises, Inc. The reverse
takeover was accounted for as a re-capitalization of Microdevices for accounting
purposes, and Microdevices became our majority-owned subsidiary.

Microdevices was originally formed in Delaware in 1995, and was the vehicle
through which our "stoichiometric" technology, or AtometryTM, was initially
developed by Dr. Maglich. Following the reverse-takeover, Microdevices and Dr.
Maglich assigned all rights, titles and interests in and to our two then
existing patents to us, which assignment was recorded at the USPTO on November
24, 2003. Effective April 26, 2002, the existing members of the Microdevices'
board of directors became members of our Board of Directors, and the executive
officers of SLW were replaced by executive officers of 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.

On January 25, 2005, we completed a short form merger to acquire the remaining
outstanding stock of Microdevices and issued 452,029 shares of common stock to
Microdevices stockholders on the basis of 22.3524 HiEnergy shares for 1 share of
Microdevices (the same ratio that was used in the original voluntary share
exchange). With the completion of the short-form merger, we assumed all of
Microdevices' assets and liabilities and Microdevices ceased to exist as a
separate entity as of that date. Additionally, we may be required to issue up to
704,190 shares of our common stock to former holders of options and warrants of
Microdevices who hold rights to purchase HiEnergy shares at $0.156 per share.
These rights survived the merger and may be exercised any time before April 25,
2007, subject to the payment of promissory notes representing the purchase
price.

At present, we have five wholly-owned subsidiaries, HiEnergy Defense, Inc.,
HiEnergy Mfg Company, HiEnergy International Co., HiEnergy Europe, Ltd., and
HiEnergy Leasing Co. HiEnergy Defense, Inc. was incorporated under the laws of
the State of Delaware in July 2003 to focus on marketing military and defense
applications of our technology within the Washington D.C. area from its office
in Alexandria, Virginia. HiEnergy Europe Ltd. was incorporated under the laws of
the State of Delaware in March 2004 and is presently not operating, but will
focus on marketing our technology throughout the European Union. HiEnergy Mfg
Company was incorporated under the laws of the State of Delaware in March 2005
and formed for the purpose of creating a separate entity for the manufacturing
and assembly of our devices. HiEnergy International Co. was incorporated under
the laws of the State of Delaware in July 2005 and was formed for the purpose of
creating a separate entity for the sales and servicing of our devices overseas,
excluding Europe, and primarily the Middle East and Africa. HiEnergy Leasing Co.
was incorporated under the laws of the State of Delaware in August 2005 and
formed for the purpose of creating a business entity to establish and
administrate an equipment lease finance and equipment rental operations.

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, 2006, our shares were traded on the OTCBB under the symbol "HIET".
Upon receipt by the NASD of notification that HiEnergy Technologies has complied
with its reporting requirements, the "E" is expected to be removed and our
trading symbol reverted to "HIET".


                                      -3-
<PAGE>

RECENT EVENTS

RESTRUCTURING AND CHANGES IN MANAGEMENT

Since February 2006, we have implemented a restructuring plan and have made
significant changes to our management and operations with the objective of
transforming our organization in order to make it scalable for anticipated
growth.

On February 17, 2006, as reported on a Form 8-K filed by the Company on February
24, 2006, our Board of Directors took the following actions: (i) the removal or
suspension of Dr. Maglich from his duties as Chief Executive Officer, Chairman,
Chief Scientific Officer and Treasurer; (ii) the election of our then President
and Chief Operating Officer, Roger Spillmann, as our new Chief Executive
Officer; (iii) the appointment of Directors William A. Nitze and Peter Le Beau
as Interim Chairman and Vice Chairman of the Board of Directors, respectively;
and (iv) the appointment of Mr. Spillmann and William J. Lacey, Jr., President
of HiEnergy Defense, as Directors to fill vacancies on our Board.

Subsequently, on April 18, 2006, Dr. Maglich was terminated from his positions
as our Chairman and Chief Scientific Officer for cause under his employment
agreement. Dr. Maglich currently continues to serve as a Director. Further, on
June 21, 2006, as reported on a Form 8-K dated June 27, 2006, Harb Al-Zuhair,
who had served as a member of our Board since inception, tendered his
resignation as a Director. At the time of his resignation, Mr. Al-Zuhair also
was serving as a member of the Board's Compensation and Finance Committees and
consequently resigned these posts. Following these changes and additions to the
Board of Directors, we currently have six members on the Board: David R. Baker,
Peter J. Le Beau, William J. Lacey, Jr., Bogdan C. Maglich, William A. Nitze and
Roger W.A. Spillmann.

In April 2006, we appointed a new Chief Scientist, Dr. Alex Vaucher, who at the
direction of management, has restructured the scientific department with a view
to correcting deficiencies and is putting into place new policies and procedures
to better direct and incorporate all of our scientific assets. These include:
(i) implementation of standardized hardware and software development processes;
(ii) establishment of safeguards for the incorporation and protection of our
intellectual property, including documentation and custody of all scientific
assets; (iii) pursuit and prosecution of current patent applications and the
filing of additional patents with greater relevancy to current and prospective
products; (iv) creation of parallel redundancies in key programs and research to
eliminate over reliance on key staff and allow for better transitioning of
research programs; (v) employment of advanced project management, incident
tracking and reporting between field technicians and research and engineering
personnel for more effective product development and support; and (vii) creation
and expansion of a better framework for future research and development,
including return-on-investment modeling and technology road-mapping.

Following the changes in our management in February 2006, we have taken
immediate and deliberate steps to enhance our operations, improve cost
efficiencies and advance our transition from a research and development company
to a commercial manufacturing and sales organization. We have instituted new
fiscal planning, budgeting and auditing structures, and have significantly
reduced expenses, including personnel and other operating costs. Further, we
have reorganized our internal governance and improved internal controls by
distributing budgetary responsibility across four departments consisting of (i)
Administration, which includes accounting, human resources and legal, (ii) Sales
and Marketing, (iii) Research and Development, and (iv) Integrated Product
Engineering and Manufacturing.

We have also instituted new capital prioritization strategies to improve capital
utilization and distribution across the entire organization. We have eliminated
expenditures on non-core activities in order to maximize our ability to exploit
those core industries and geographic markets which offer the most compelling
market and revenue growth opportunities, and for which we believe we have
differentiated technologies and expertise. We are currently focusing a majority
of our assets and resources on the development, sales and marketing, and support
of our devices with priority to the domestic market. Accordingly, we have
limited our overseas activities and initiatives, except for marketing through
select resellers, until such time as we can leverage our financial and
developmental capabilities through strategic partnerships with foreign sponsors,
or can generate sufficient sales revenues to fund foreign operations.

Lastly, we are implementing a new results-driven business plan that aims to
build and maintain a customer base and develop multiple sources of revenue
including (i) equipment sales; (ii) extended multi-year service contracts and
warranties; (iii) radiation safety training, licensing and consulting; (iv)
technology licensing fees and joint venture investment income; (vi) research
contracts, co-development funding and grants; (vii) integration services and
reseller fees from non-proprietary products licensed from third parties, and
(viii) lease financing and equipment rental income.

To further this initiative, we have created an organized and centralized lead
tracking system which provides accurate and credible sales management and
forecasting to allow our management to properly align expenses with revenue
growth, allocate resources, and rapidly identify shifts in customer demand,
market trends and other industry developments.

                                      -4-
<PAGE>

During the remainder of fiscal year 2007 and going forward, our new corporate
strategy focuses on the following principal objectives:

o        Optimize product design and engineering and allow for the easiest
         production, fastest assembly, best quality, highest reliability, and
         the shortest time to market of our systems;

o        Secure strategic partners in our industry who have established product
         lines and distribution channels, allowing for more efficient access to
         our targeted markets and leveraged sales efforts;

o        Maintain a leadership position in nuclear-based diagnostics and further
         development of competitive products incorporating our core technologies
         and other leading-edge technologies, which provide vale-added solutions
         for large and sustainable markets;

o        Aggressively pursue revenue generation and fund working capital from
         pre-sales, sales, additional development grants, government contracts,
         as well as the formation of joint ventures;

o        Achieve efficiencies throughout the commercialization process from
         prototype development to commercial production and better position our
         technology for strategic partnerships and cooperative developments for
         other industry applications; and

o        Continue to improve operational efficiency, maintain expense controls
         and implement the business practices, management philosophies and
         technology tools necessary to position ourselves best for revenue
         growth and organizational expansion.


                                      -5-
<PAGE>

OUR DEVICES

SIEGMATM 3E3 AND 3M3

The SIEGMATM 3E3 and 3M3 are suitcase-borne AtometerTM detectors designed
primarily for the remote detection and identification of terrorist homemade
bombs, or Improvised Explosive Devices (IEDs), and uniquely address the
significant problems posed by unattended or suspicious packages or bags.
Notably, IEDs are unconventional in delivery, often inaccessible by
vehicle-borne systems, and contain non-standard mixtures that generally require
accurate chemical identification not obtainable with other detectors currently
in the marketplace.

The SIEGMATM 3E3 system, including self-contained and rechargeable power supply,
weighs about 100 lbs and is housed completely within a single aluminum case with
wheels. The mobility of the SIEGMATM 3E3 offers advantages for the detection of
suspicious objects that are inaccessible by vehicle-borne systems. The system is
operated remotely via a fiber optic connection to a portable or handheld
computer and employs our proprietary InterrogatorTM software and analytics which
has an intuitive graphical user interface (GUI) designed to be user-friendly and
allow for operation without extensive training.

The SIEGMATM 3M3 system features a two-piece, modular design which provides for
more efficient weight distribution as well as a lower weight per unit for
greater portability and ease of handling for the operator. SIEGMATM 3M3 also
features a parallel system architecture designed for improved system stability
and lower routine maintenance time and servicing requirements. Like the 3E3, the
SIEGMATM 3M3 is also operated remotely via a fiber optic connection to a
portable or handheld computer and employs our proprietary InterrogatorTM
software and analytics and intuitive GUI.

We are currently marketing the SIEGMATM systems in the United States to federal,
state, and local governmental agencies and private entities and through select
resellers overseas in Europe, Asia and the Middle East.

The SIEGMATM systems are ideally suited for:

<TABLE>
<CAPTION>
<S>      <C>                                                                 <C>      <C>
o        Private & public transportation systems                              o        Bomb squads
o        Airports and customs                                                 o        Military applications
o        Private event security (sports venues and other events)              o        Gov't and high security facility protection
</TABLE>


In May 2005, we entered into an Equipment Sales Agreement with Southeastern
Pennsylvania Transportation Authority (SEPTA) in connection with the purchase of
two SIEGMATM 3E3 systems for an aggregate sum of $603,104. Accordingly, on June
10, 2005, we received a purchase order from the Commonwealth of Pennsylvania in
the amount of $603,104, and in September 2005, we received a down payment in the
amount of $375,581, and payment of the balance in January 2006.

Both SIEGMATM systems ordered by SEPTA completed factory acceptance testing and
were delivered for six-month field testing under a cooperative sales program,
which was structured to allow us to work with SEPTA in making general
improvements to the hardware and software necessary so that the detectors
complement SEPTA's existing operational and technical capabilities. Further, the
cooperative sales program with SEPTA was intended to accelerate our in-field
assessment of our explosive detection systems for user operability, reliability
and stability and has provided us with critical feedback and suggested design
improvements based on specific operational needs which may advance the
development of future AtometerTM devices. Pursuant to the terms of the Equipment
Sales Agreement, as of the date of this Report, SEPTA upgraded one SIEGMATM 3E3
system to our new SIEGMATM 3M3, which completed factory acceptance testing and
was shipped to SEPTA for field testing.

To date, we have provided SEPTA's designated personnel with comprehensive
radiation safety training and certification. Deployment of the devices by SEPTA
has been limited due to delays in licensing. We have been working closely with
SEPTA to secure its operator's license, which approval is anticipated by year
end.

All payments received from the Commonwealth of Pennsylvania against the SEPTA
purchase order have been recorded as deposits until the later of completion of
field testing or the date SEPTA is issued the appropriate operator's license by
the U.S. Nuclear Regulatory Commission (NRC) and/or the appropriate regulatory
State body, which is expected to occur in the current quarter.

CARBOMB FINDERTM 3C4 and 3C5

Early prototype development from 2002 to 2004 included the creation of an
AtometerTM device to detect bombs in vehicles, the CarBomb FinderTM. The device
was developed specifically to identify vehicles packed with nitrogen-based and
chlorine-potassium-based concealed explosives with the intent of using the
vehicle itself as a bomb. With many advancements made to this prototype as well
as our core technologies, we are now on the fourth generation of this device and
are advancing the commercialization of the CarBomb FinderTM 3C4, and CarBomb
FinderTM 3C5.

                                      -6-
<PAGE>

The CarBomb FinderTM 3C4 is a vehicle-borne AtometerTM detector designed for the
detection and identification of car bombs. The CarBomb FinderTM 3C4 is operated
from a console in the command and control van which allows remote operation and
system diagnostics. The system's sensors are deployed from the vehicle at the
end of a mechanical arm and placed in proximity to the target.

In July 15, 2005, we executed a Time and Material Subcontract with Integrated
Concepts & Research Corporation (ICRC) of Alexandria, VA. The subcontract was
awarded as part of ICRC's Prime Contract with the United States Army Tank -
Automotive and Armaments Command, Warren Michigan (TACOM), under which we will
deliver one CarBomb FinderTM 3C4 head unit and provide the engineering and
technical support necessary for its integration with the SmarTruck II
Multi-Mission Vehicle. In early 2006, ICRC requested an extension under the
subcontract and at present the finished prototype is expected to be completed
and field tested by the U.S. Army and D.C. Capitol Hill Police by year end,
subject to additional funding. Original funding of the program was provided
through a supplemental authorization of the Defense Appropriations Act for
Fiscal Year 2005.

The CarBomb FinderTM 3C5 is our most recent AtometerTM detector incorporating
the same core technologies as the CarBomb FinderTM 3C4. The CarBomb FinderTM 3C5
is an in-ground system that inspects the compartments of a car and other
vehicles from a stationary position below the level of the vehicles. The design
of the CarBomb FinderTM 3C5 provides for greater range as to the type of
vehicles it can scan and a higher throughput than the CarBomb FinderTM 3C4. It
is designed for static operation at checkpoints and chokepoints to provide
infrastructure protection and perimeter security at government installations,
military bases, power plants, refineries, critical infrastructure, such as
bridges and tunnels, and high traffic public areas, including airports,
buildings, and parking structures.

We are currently marketing the CarBomb FinderTM systems in the United States to
federal, state, and local governmental agencies and private entities, including
the U.S. military, and through select resellers overseas in Europe, Asia and the
Middle East. We believe that the CarBomb FinderTM devices will prove to be of
particular interest in regions that experience a higher than normal incidence of
car bombings. These regions 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.

STARRAYTM

The STARRAYTM shares the same core technology platform as the suitcase-borne
SIEGMATM 3M3. Bolstered by successful prototype testing, including two weeks of
extensive open-air live blind tests conducted with the U.S. Army in October
2005, and strong interest from the homeland security marketplace, in April 2006
we approved STARRAYTM to become a new product line.

The STARRAYTM is our robot-borne AtometerTM detector which has been designed to
quickly cover rough terrain, climb stairs, clear obstacles and cross ditches in
variable weather and temperature conditions. It provides stand-off and remote
detection of unexploded ordnance, landmines and home-made bombs, or Improvised
Explosive Devices (IEDs), and can be configured for and integrated in various
robotic and remote-vehicle platforms. The current configuration is integrated
with the Andros Mark V robotic remote vehicle, which is manufactured by Remotec
(Northrop Grumman) and currently in use by many bomb squads and military
personnel in the U.S. and overseas.

We intend to market the STARRAYTM to the U.S. Department of Defense, which has
allocated more than $3.3 billion in the fight against IEDs, which has been the
biggest killer of U.S. troops in Iraq, and to our nation's first responder
community, which includes state and local police departments / bomb squads and
other law enforcement entities within the United States.

In October 2005, the U.S. Army selected our white paper on the STARRAYTM
robot-borne detector of IEDs and landmines for submission of a full proposal,
and in December 2005, $1 million was appropriated for "stoichiometric" explosive
detection systems with the U.S. Army under Program Element 0602712A. Although we
expect these funds to be released for delivery of our robot-borne detector, and
have confirmed the availability of these funds as of the date of this report, we
can provide no assurance that these funds will be released, and if so, when.

In March 2006, the U.S. Army informed us by letter that a distinct proposal for
our STARRAYTM robot-borne detector submitted under BAA W909MY-04-R-0024 had been
determined "selectable" for funding. Currently, no formal award has been made
and funding of the proposal per the U.S. Army is pending the availability of
funds. As of the date of this report, we can provide no assurance that an award
will be made, and if so, when.

EQUIPMENT TACTICAL ASSISTANCE PROGRAM (ETAP)

In December 2005, we launched a new comprehensive program, the Equipment
Technical Assistance Program (ETAP) which was launched as part of our long-term
commitment to provide uncompromising aftermarket servicing for our systems. ETAP
is an integrated suite of services available in one-year increments to buyers of
our AtometerTM detectors and includes hands-on equipment and operator training,
local equipment support, including calibration, maintenance and servicing, and
radiation safety certification and licensing. ETAP, which does not include
extended warranties or upgrades, is expected to be our principal source of
aftermarket revenues which would be generated through multi-year contracts.

                                      -7-
<PAGE>

Under ETAP, aftermarket equipment servicing, including the installation, repair
and preventative maintenance for all current and future products to be sold and
deployed by us in the United States, is provided by Siemens Maintenance
Services, LLC., a subsidiary of Siemens A.G., as an exclusive service provider.
Radiation licensing, certification, training and auditing services are provided
through a strategic partnership with Radiation Safety Academy of Gaithersburg,
Maryland, a leading radiation safety and license management consultancy.

On May 30, 2006, we received a purchase order in the amount of $200,000 from
Southeastern Pennsylvania Transportation Authority (SEPTA) for a four-year
extension of equipment maintenance, service and support, and radiation safety
certification, certification and licensing for two SIEGMATM systems delivered to
SEPTA under our ETAP program. In August 2006, we received full payment from the
Commonwealth of Pennsylvania against the purchase order in the amount of
$200,000, which as deferred revenue will be earned and recorded as revenue on a
straight-line basis over the period of the contracts.


                                      -8-
<PAGE>

OUR MARKETS

We believe that AtometryTM and the other stoichiometric technologies we are
developing have broad industrial applications. However, due to our limited size
and availability of resources, to date we have limited our prototype development
and product commercialization efforts to address the needs of two potential
principal markets: (i) the security and counter-terrorism market, and (ii) the
chemical and petrochemical industry control market.

Within the security and counter-terrorism market, we have focused our product
development efforts primarily in the field of explosive detection with solutions
for critical security applications including explosives ordnance disposal, car
bomb detection, airport and transit screening, customs and border protection,
facility protection and military defense. Our largest geographical market for
our products is within the continental U.S., which if segmented by user,
comprises more than 450 state and local police departments / bomb squads, 440
major airports and 580 mass-transit agencies, as well as U.S Customs inspection
sites at more than 300 ports of entry.

Explosive detection is generally governmental in nature and the majority of
these potential customers for our products in the U.S. are dependent on local,
state and federal government funds as well as grants awarded by the U.S.
Department of Homeland Security (DHS), the U.S. Department of Transportation
(DOT), and the U.S. Department of Defense (DoD). Since 9/11, over $170.5 billion
has been provided in funds by the federal Government solely to DHS to fund
security initiatives and administration. DHS funds and grants to purchase
explosives detection equipment are distributed through the Transportation
Security Administration, the Office of State & Local Government Coordination and
Preparedness, the Office for Domestic Preparedness, and the U.S. Customs and
Border Protection.

Over the same period, the DoD has spent over $69 billion on research,
development, testing and evaluation to modernize and reshape the face of
national security, and has allocated $3.3 Billion to the Joint IED Task Force
whose sole mission is to combat the risk posed by improvised explosive devices
including roadside bombs. As to the DOT, the fiscal year 2006 budget includes
nearly $14 billion to build more secure infrastructure and deploy technology
that increases safety of the U.S. airports through the Federal Aviation
Administration.

Funding for homeland security is expected to continue to increase in the
forthcoming fiscal year as new legislative measures have been recently proposed
and/or enacted which provide direct appropriations in addition to departmental
budgets. In May 2006, the U.S. House of Representatives passed a Port Security
Bill to provide an additional $7.4 billion in funds for port security
inspections, nuclear weapons screening and the development of automated cargo
screening, with more than $400 million annually in grant money dedicated to port
security technology development. Furthermore, in May 2006, two broad
authorization bills, the Public Transportation Terrorism Prevention Act of 2006
and the Rail Security Act of 2006, were introduced to provide an additional $3.5
billion for capital security improvements to protect the public transportation
and transit systems used by 14 million people in the U.S. each work day, which
include subways, metros, light rail, commuter rail, buses and ferries.

The commercial courier, private transportation, and private security services
sectors also have a demonstrated need for our technology. Private security
contracting (security personnel) is approximately a $13 billion industry in the
U.S. with 11,000 to 15,000 companies employing some 1.2 million contract
security officers (guards). Private security companies are responsible for
protecting 85% of the majority of the critical infrastructure within the United
States. These include local, state and federal government facilities, office
buildings, commercial centers, stadiums, recreational sites, and resorts, as
well as high risk sites such as the more than 100 nuclear power plants and 200
petroleum refineries and liquefied natural gas facilities in the United States.

Applications in the chemical and petrochemical industry control market 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 marketing activities and anticipated
sales to the chemical and petrochemical market will be in these sectors.


SALES AND MARKETING

In order to build market penetration and share, and achieve product branding and
acceptance, we have formulated and are now executing a strategic sales and
marketing plan. This plan includes the direct sale of our products through our
own sales and marketing team, as well as indirect sales through independent
sales representatives or through licensing arrangements and joint ventures, as
well as the building of a multi-channel sales organization.

To date, we have established numerous outside sales and marketing alliances,
with outside sales representatives, industry partners, and potential system
integrators. We are also actively seeking strategic partners in our industry
that have established product lines and distribution channels, allowing for more
efficient access to our targeted markets and leveraged sales efforts. We believe
that establishing and maintaining an external sales organization comprised of
select value-added dealers and distributors, channel partners, system
integrators, and operators will enable us to exploit target markets customers in
a competitive manner and overcome certain restrictions imposed by our limited
manpower and resources.

                                      -9-
<PAGE>

In November 2005, we entered into an agreement with GTSI Corp., a leading
government technology solutions provider and integrator, to market and resell
our SIEGMATM systems to federal, state, and local government customers in the
U.S. and worldwide. GTSI maintains a comprehensive collection of government
purchasing contracts with sales exceeding $1 billion in 2004 and is the
exclusive IT solutions provider under the U.S. Communities Program. The
agreement is expected to allow us to participate in existing contract vehicles
held by GTSI Corp., which is expected to make it easier for participating public
safety agencies to purchase our products and services and provide more flexible
financing options.

In January 2006, we entered into a teaming agreement and reseller agreement with
Williams-Sterling, Inc. (WSI), a leading service disabled veteran owned small
business (SDVOSB), under which we will jointly introduce and implement our
AtometerTM explosive detectors, including the SIEGMATM, CarBomb FinderTM and
STARRAYTM systems and other future homeland security solutions to select federal
agencies. WSI provides systems integration, engineering consulting, and
financial services to governmental customers and industry. We expect to
capitalize on WSI's special designation and draw business from the 3% set-aside
for small business concerns owned and controlled by service-disabled veterans as
mandated by Executive Order 13360 issued by President Bush on December 12, 2004.

In February 2006, the Board of Directors approved the formation of a Business
Advisory Board to help management through the exchange of ideas related to
business opportunities, current industry challenges, and best practices. We are
currently assembling a team of global experts from within the homeland security
industry as well as other business and legal leaders, who will help us to define
new applications for our security products, advance the sale of our products,
and provide valuable guidance as to domestic and international activities.
Current members include Mr. Isaac Yeffet, the former Director of Global Security
at El Al Israel Airlines and a leading expert in aviation and homeland security,
and Mr. Freddie Bay, a veteran Asia-Pacific business consultant and senior
technology executive with AT&T GIS, Andersen Consulting and Singapore
Technologies.

In July 2006, the Company and Ingersoll Rand Security Technologies agreed to
list our products on its Series 84 Integrated Security Schedule with the GSA, a
centralized federal procurement and property management agency created by the
U.S. Congress to improve government efficiency and help federal agencies better
serve the public. Ingersoll Rand and the Company intend to jointly market and
sell our SIEGMATM systems to governmental agencies, the military and other
customers in complement to Ingersoll Rand's own security offerings. Through
Ingersoll Rand we expect to make our products available on a pre-approved basis
to all federal agencies, including DoD customers. Ingersoll Rand has established
sales channels and customer relations with nearly every DoD installation and
federal agency, as well as 98 of the nation's 103 nuclear power facilities and
over 75 airports worldwide. In addition to numerous manufacturing and assembly
locations, Ingersoll Rand's security unit maintains 25 service and supply
centers and 45 integration centers across the country to provide customer and
account support.

While the above agreements evidence the willingness and desire of the respective
parties to work collaboratively on the sale and marketing of our products, and
implementation generally, readers are cautioned there can be no assurance that
our entry into the agreements will result in any business, revenues or other
tangible benefits for us at any time.

We are also focused on supplementing direct sales through established industry
associations. Through these affiliations and active participation in key policy
committees, we aim to promote the understanding and use of our systems and
technologies across a broad range of industries. To date, we have joined the
following professional associations whose membership and audience comprise the
core clientele to whom we are marketing:

      o     NDIA - National Defense Industrial Association
      o     ASIS - American Society of Industrial Security
      o     IABTI - International Association of Bomb Technicians &
            Investigators
      o     IACSP - International Association for Counterterrorism & Security
            Professionals
      o     APTA - American Public Transportation Association
      o     FLEOA - Federal Law Enforcement Officers Association
      o     LEAA - Law Enforcement Alliance of America

We have further incorporated various sales subsidiaries, HiEnergy Defense, Inc.,
HiEnergy Europe, Ltd., and HiEnergy International, Inc., some of which are
currently active in regional and industry specific sales programs, such as
HiEnergy Defense, Inc., which is charged with the sales and marketing of our
products and technologies to the U.S. Department of Defense, the U.S military
and affiliated agencies, as well as securing of defense related appropriations
and funding initiatives. Through HiEnergy Defense, we also maintain ongoing
relationships with well-known and qualified Washington, D.C. based government
relations firms and agents. In August 2006, we entered into an agreement with
Ball, Janik LLP to manage our interface with our Government customers and
Congressional funding counterparts, as well as work with us to identify federal
opportunities.

                                      -10-
<PAGE>

To further the above initiatives and manage our multi-channel marketing and
sales operation in the most effective manner, as of April 2006 we have put into
operation a centralized electronic sales management and lead tracking system.
The system allows management to properly organize and deploy sales personnel and
collateral, allocate resources, align expenses with revenue growth, provide
accurate and credible forecasting, and rapidly identify shifts in customer
demand, market trends and other industry developments.

MARKETING ACTIVITIES

Although there are a broad range of potential applications and markets for our
AtometerTM detectors and stoichiometric technologies, we are currently focusing
the majority of our sales and marketing efforts on the promotion of our SIEGMA
TM systems, designed primarily for the detection of terrorist homemade bombs, or
Improvised Explosive Devices (IEDs).

To date, we have received strong interest for the SIEGMATM from the
transportation industry, specifically mass-transit authorities and airport
operators, due to its mobility and ability to quickly and safely interrogate
unattended packages, while eliminating or substantially reducing false alarms
that otherwise paralyze subway systems, train stations, airports and buildings.
Because of the ability of our systems to accurately determine explosive from
non-explosive packages, and significantly reduce or eliminate unnecessary
interruptions to operations which can cause significant economic losses, we
believe our products offer a compelling return on investment to transit and
airport operators.

We are also marketing our CarBomb FinderTM systems for car bomb detection. With
the advent of the increasing requirement for perimeter defense for military and
high security installations, buildings and high traffic public areas, and other
critical infrastructure, such as bridges, tunnels and major chokepoints, we are
accelerating commercialization of our newest prototype, the CarBomb FinderTM
3C5, an in-ground system that inspects at a high throughput the compartments of
a car and other vehicles from a stationary position below the level of the
vehicles. If we are successful in launching these as commercial products, then
our next areas of prototype and product development will most likely be in the
area of baggage and cargo screening, illicit drug and biological agent
detection, as well as medical diagnostics.

In May 2004, we hired a full time sales and marketing director to work with
management to develop and implement a sales strategy to target and exploit the
most lucrative markets, build and administer a multi-level sales organization,
and advance and extend our overall position within the commercial security and
defense marketplace as an industry innovator. Since 2004, we have been actively
demonstrating our various prototypes and system configurations domestically and
abroad, in order to effectively gain a clear understanding of the trends and
needs of the law enforcement, security, and counter-terrorism industries, and
acquiring valuable feedback to the technology applications which we are
commercializing and bringing to market.

In February 2005, we commenced a marketing campaign with the assistance of
outside sales representatives for the domestic marketing of our SIEGMATM 3E3,
which has been showcased for a variety of government, military and state & local
law enforcement personnel at our test facility located at our corporate offices
in Irvine, California, and at numerous industry/trade security and defense
exhibitions sponsored and held at various locations around the United States.

Since February 2005, we have held numerous exhibitions and demonstrations in
line with our domestic sales and marketing plan including:

      o     Exclusive showcase for more than 32 federal, state, and local
            homeland security professionals on March 30, 2005 at the U.S. Marine
            Corps Base at Quantico, Virginia, hosted by the FBI and the
            Washington, D.C. Metropolitan Police Bomb Squad (live blind tests);

      o     Force Protection Equipment Demonstration V (FPED V), held from April
            26-28, 2005 at the Quantico Marine Corp Base, Virginia;

      o     Exclusive showcase for more than 25 counter-terrorism professionals
            on May 17, 2005 at the Tactical Training Facilities of the New York
            Police Department Bomb Squad in Rodman's Neck, New York (live blind
            tests);

      o     Exclusive showcase for more than 30 counter-terrorism and homeland
            security professionals from Southern California on June 8, 2005 at
            the Orange County Sheriffs Office, in Santa Ana, California (live
            blind tests);

      o     Exclusive showcase for more than 30 counter-terrorism and homeland
            security professionals from the greater San Francisco Bay Area on
            June 13, 2005 at the Alameda County Sheriffs Office - Office of
            Emergency Services in Dublin, California (live blind tests);

      o     33rd Annual International Association of Bomb Technicians and
            Investigators (IABTI), International In-Service Training Conference,
            "Countering Terrorism: Civilian & Military Members in Unison," from
            June 19-23, 2005 in Palm Desert, California (live tests);

                                      -11-
<PAGE>

      o     Exclusive showcase for more than 15 counter-terrorism and homeland
            security professionals from the San Diego, California area on July
            13, 2005 at the San Diego County Regional Airport (live blind
            tests);

      o     Exclusive showcase for more than 25 counter-terrorism and homeland
            security professionals from the greater Houston, Texas Area at the
            Houston Metro Transit Police Headquarters on August 16, 2005 (live
            blind tests);

      o     Exclusive showcase for more than 20 counter-terrorism professionals
            from the Greater Phoenix Area at Phoenix Sky Harbor International
            Airport on August 23, 2005 (live blind tests);

      o     Exclusive showcase for more than 35 representatives from 15 leading
            homeland security and counter-terrorism agencies from the Greater
            Washington D.C. - Capitol area at the Arlington (Virginia) County
            Bomb Squad on January 9, 2006; and

      o     Exclusive showcase for Amtrak officials from the Corporate Security,
            Assessment and Planning Division of Amtrak in Philadelphia, PA on
            March 2, 2006.

Our ability to participate at other similar demonstrations in the future depends
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 4 technical and business persons to the test location.

In June 2005, in order to be able to complete the commercialization cycle, we
determined it necessary to field test the first class of our products and
developed a strategic customization and integration program. The cooperative
initiative is intended to accelerate our in-field assessment of an initial
limited introduction of 5 to 10 units of the SIEGMATM 3E3 system and our
InterrogatorTM software architecture for user operability and stability, as well
as provide us with critical feedback and suggested design improvements based on
each program participant's specific operational needs. During the remainder of
fiscal 2007, we will continue to offer this program to early adopters within the
first responder community, including emergency response teams, bomb squads and
explosive ordnance disposal units from a wide array of federal state, municipal
and local agencies, as well as airports and transit authorities around the
United States. The program is expected to stimulate sales by allowing us to
bring our first commercial product to market more effectively and efficiently,
while providing us an opportunity to further test our aftermarket service
capabilities.

In April 2006, we launched a strategic marketing initiative focused on the sale
of our SIEGMATM systems to the private security services market, in which we
intend to with leading regional and national private security services providers
to lease and deploy our detectors and offer private security customers superior
incident and threat management. Due to its ability to quickly and definitively
determine the presence of explosives in unattended or suspicious packages, our
products can eliminate or substantially reduce costly false alarms. In the case
of high profile events managed by private security companies, such as the
approximate 5,200 major league sporting events held each year, for example, this
can result in fewer interruptions and evacuations, which translates into a
compelling return on investment to venue operators and promoters alike. We
believe by approaching the growing private security market in parallel with the
homeland security market, we can achieve a positive balance between government
and private sector business and improve our prospects for growth by reducing our
dependence on the governmental customers, which are affected by long-sales
cycles.

Due in part to the relative shortage of federal funding for security
improvements in the public transportation sector, as well as to make the
SIEGMA(TM) system widely available and affordable to our customers, we also
created new and affordable commercial and municipal lease options. Under our
leasing programs, customers and/or users can lease purchase a SIEGMA(TM) system
for under $6,000 per month and benefit from special provisions including early
prepayment and purchase with no penalties, cancellation for non-appropriation of
funds, and a technology upgrade feature which allows the cost of future upgrades
or services to be added and re-factored into a new payment under the lease.

INTERNATIONAL MARKETING

In light of the growing global need for advanced explosive detection systems, we
expect international sales to play an important role in the growth and expansion
of our business. We have received significant interest in our products from
overseas users as well as resellers and distributors and have given priority to
those regions with a high incidence of terrorism, including Europe, the Middle
East and the Asia-Pacific region.

To date, we have established several international partnerships, reseller and
distributor relationships and joint ventures on a regional basis and have
assembled approximately three units in order to meet overseas demonstration or
similar requirements, including in Spain and the Middle East; however, we have
not been able to consummate any international product sales. This has been in
great part due to our limited resources, which prevents us from making
investments needed to serve these markets, including the building of
infrastructure necessary to launch and support products in overseas markets.

                                      -12-
<PAGE>

As part of our announced restructuring and capital prioritization, since
February 2006 we have focused the majority of our resources to the sales and
marketing of our products with priority given to our domestic markets.
Accordingly, we have postponed certain foreign demonstrations, potential joint
ventures, and other business activities, until we can either (i) leverage our
financial and developmental capabilities through strategic partnerships which
provide financial support; (ii) secure significant financing, governmental
grants, cooperative funding or purchase contracts; or (iii) generate sufficient
sales revenues to fund foreign operations. In spite of the reduction of our
overseas activities, however, we have been successful in arranging for travel to
the U.S. of representatives of various foreign governments and have hosted
demonstrations for various foreign military, customs and other security
officials at our facility in Irvine, CA.

Since 2003, our products and prototypes have been showcased for a variety of
overseas government, military and local law enforcement personnel at both our
test facility located at our corporate offices in Irvine, California as well as
at numerous industry/trade security and defense exhibitions sponsored and held
at various locations around the globe, including:

      o     On-site demonstrations in Irvine, California for the Security
            Manager and Director of Equipment and Installations of the
            Directorate of Spanish Airports and Navigation (AENA), the national
            airport authority of Spain, in Irvine, California in September 2003;

      o     Live tests at NATO Summit in Istanbul, Turkey for the Criminal
            Division of the Turkish Ministry of the Interior from June 28-29,
            2004;

      o     Live demonstrations at "NATO International Symposium on Countering
            Improvised Explosive Detection (IED)", held in Madrid, Spain and
            attended by approximately 300 military and civilian law and security
            enforcement officers from 23 NATO members and candidate states from
            October 18-19, 2004;

      o     Live demonstration at the 7th International Defense Exhibition &
            Conference (IDEX) held February 12-17, 2005 in Abu Dhabi, United
            Arab Emirates (live blind tests);

      o     Live demonstration in Riyadh, Saudi Arabia for Saudi Ministry of
            Interior and representatives of the Saudi military forces in June
            2005;

      o     Live demonstration in Tenerife, Spain for representatives of AENA,
            the national airport authority of Spain, and the Spanish Civil Guard
            and local bomb squads In September 2005, we shipped a prototype of
            our SIEGMA TM robot-borne system to Tenerife, Spain for a
            demonstration lead by our former Chief Scientist for representatives
            of AENA and the Spanish Civil Guard; and

      o     Live demonstration at the International Conference "The Balkans as
            Terrorism's Western Passage and Novel Counter-Terror Technologies"
            held in Belgrade, Serbia & Montenegro November 25-27, 2005.

Our ability to participate 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 4 technical and business persons to the test location.

On July 24, 2006, our distribution agreement with Electronic Equipment Marketing
Company ("EEMCO"), terminated on the expiration of the current term on July 24,
2006, following our providing EEMCO with notice that we would not be allowing
for automatic renewal of the agreement for an additional year period, as
provided in the agreement. This distribution agreement had given EEMCO rights to
sell our CarBomb Finder TM in several Middle Eastern and Northern African
countries to certain enumerated military forces and governmental agencies. As
previously disclosed, EEMCO is owned by one of our former directors, Harb
Al-Zuhair.

Following the expiration of the EEMCO agreement, we received a request for
return of the deposit in the amount of $25,000 from EEMCO in an apparent
cancellation of its order in August 2006. Because the sale of the unit was to be
made at or below cost of manufacture, preventing us from generating any true
economic benefit from the sale, we do not consider the cancellation of the order
to have a material impact our business. Further, since no purchase of our
products was ever consummated for resale by EEMCO for the assigned territories
during the term of the distribution agreement, we do not expect the termination
of the EEMCO relationship to have a material impact on our business or our
ability to sell and market our products in the region without EEMCO's support.

As of the date of this Report, we are in active discussions with numerous
resellers and distributors with interests in selling our products in the Middle
East region, including another leading Saudi engineering and integration
services company, and expect to announce new relationships that better meet our
requirements under the defined global strategy.

                                      -13-
<PAGE>

In January 2005, we entered into a non-binding memorandum of understanding to
form a joint venture company to be located in Tenerife, Canary Islands, Spain,
which is intended to serve as a complementary platform for sales and
distribution into the European and other markets. We also received an order in
the amount of $298,000 for one SIEGMATM 3E3 unit, along with a down payment in
the amount of $75,000, and a guarantee of the balance upon delivery, from
Compania de Aprovisionamiento Especifico S.L., located in Tenerife, Canary
Islands, Spain. Payment of the remaining balance in the amount of $223,000 is
due upon delivery and testing of the unit.

In September 2005, we shipped a demonstration unit of our SIEGMATM system to
Tenerife, Spain for a demonstration lead by our former Chief Scientist for
representatives of AENA, the national airport authority of Spain, and the
Spanish Civil Guard and local bomb squads. Based on those tests, it was
determined that certain modifications are required for our systems to meet the
requirements of the buyers and expect to finish these modifications at our
laboratory in our Irvine, CA facility. We had expected to hold another
demonstration for potential Spanish customers and deliver the final unit by
March 2006; however, it was determined in January 2006 that we could not commit
a date for another test until we completed the ongoing field-testing in the U.S.
As of the date of this Report, all parties to the MOU have agreed to continue
negotiations as to the joint-venture and resume sales and marketing of our
products in Europe as soon as we can meet certain financial requirements.

In January 2006, we entered into a non-binding memorandum of understanding and a
joint marketing agreement with Laseroptronix AB, ("Laseroptronix") a leading
Swedish innovator of security products and technologies. Under the memorandum of
understanding, we agreed to pursue the manufacture and sale of a product
offering consisting of a combination of their respective products and
technologies for sales to prospective customers globally. Under the joint
marketing agreement, Laseroptronix granted us an exclusive license for the
resale of Laseroptronix products in the United States, and HiEnergy Technologies
granted Laseroptronix an exclusive license for the resale of our explosive
detection systems to established governmental and military markets in Sweden.

In February 2006, Laseroptronix alleged a breach of our agreements following the
suspension of our former Chief Scientist, Dr. Bogdan Maglich, and unilaterally
requested termination of our negotiations and all joint activities under the
agreements without providing us with the period of cure as required under the
agreements. Since that time, Dr. Maglich, who still serves as a Director on our
Board, has actively pursued business opportunities and product design with
Laseroptronix, executing our obligations under the agreements; however, at this
time, we are unable to determine if any of the activities between Laseroptronix
and Dr. Maglich are being pursued on our behalf or for the benefit of
shareholders. Although we are uncertain as to the whether or not we will resume
discussions or pursue business with Laseroptronix in the manner prescribed by
the agreements, in the event of full cancellation of the rights to both parties
under the agreements and termination of all activities between Laseroptronix and
its affiliates, we would not expect any material impact to our business.
Regardless, we reserve the right to enforce our rights under the agreements and
prosecute any third-party that interferes with our ability to conduct business
with our customers and potential partners.

In April 2006, we entered into an agreement with Byron Commerce Pte Ltd, a
leading technology solutions sales and distribution company, to market and
resell our AtometerTM explosive detectors, including the SIEGMATM, CarBomb
FinderTM and STARRAYTM systems, to governmental customers in the Asia-Pacific
markets. Byron Commerce is a business partner of CETC Information Technology
Systems Co. Ltd (CITS), a directly held company of China Electronics Technology
Group (CETC). CETC, formerly China's Ministry of Electronics Industry, is a
Chinese central government organization. Under the terms of the Agreement, Byron
Commerce will also act as an authorized reseller for our products in Singapore
and China and act as our sales agent to the Beijing 2008 Summer Olympic Games.

While the above agreements evidence the willingness and desire of the respective
parties to work collaboratively on the sale and marketing of our products, and
implementation generally, readers are cautioned there can be no assurance that
our entry into the agreements will result in any business, revenues or other
tangible benefits for us at any time.


MAINTENANCE AND AFTERMARKET SERVICES

In December 2005, we launched a new comprehensive program, the Equipment
Technical Assistance Program (ETAP) which was launched as part of our long-term
commitment to provide uncompromising aftermarket servicing for our products.
ETAP is an integrated suite of services available in one-year increments to
buyers of our AtometerTM detectors and includes hands-on equipment and operator
training, local equipment support, including calibration, maintenance and
servicing, and radiation safety certification and licensing. ETAP, which does
not include extended warranties or upgrades, is expected to be our principal
source of aftermarket revenues which would be generated through multi-year
contracts.

                                      -14-
<PAGE>

Aftermarket equipment servicing, including the installation, repair and
preventative maintenance for all current and future products to be sold and
deployed by us in the United States, is provided to our customers through
Siemens Maintenance Services, LLC., a subsidiary of Siemens A.G. 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. Further, on April 15, 2005, we executed a subcontract with SMS, making
it our Exclusive Service Provider for aftermarket servicing, including the
installation, repair and preventative maintenance for all current and future
products to be sold and deployed by us in the United States. Pursuant to the
subcontract, we will pay SMS in the fulfillment of its services on an hourly
basis for labor, plus travel and expenses, and are obligated to supply all
necessary parts and technical support to allow SMS to perform its duties.

We are also exploring the contracting of added-value services from SMS,
including procurement services, supply chain and logistics, and customer service
solutions, such as call center and helpdesk functions, including incident
control, business process support and performance measurement systems.
Ultimately, it is our objective to develop a maintenance and service platform
with SMS which has a full range of information management capabilities which can
be integrated with our accounting, purchasing, engineering, manufacturing, and
quality control systems.

SMS was established in October 2002 as the business unit of Siemens A.G. focused
on the TSA's airport security program. Currently, SMS 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. SMS is also the
only company to have received the designation and certification of its equipment
maintenance and services as an "Approved Product List for Homeland Security"
under the Support Anti-terrorism by Fostering Effective Technologies Act of
2002, or "SAFETY Act." This Designation and Certification expires on February
14, 2010. Notably, our relationship with SMS is expected to allow us to better
satisfy certain certification criteria required by local, state and federal
agencies, such as the DHS and the TSA, as it relates to aftermarket maintenance
and support (i.e. equipment calibration, quality control, etc.) and product
liability.

While the Teaming Agreement and partnerships 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.

Radiation licensing, certification, training and auditing services are provided
for our customers through a strategic partnership formed in January 2006 with
Radiation Safety Academy of Gaithersburg, Maryland, a specialized service and
consultancy organization to provide ongoing radiation licensing, certification,
training and auditing services. Since 1984, Radiation Safety Academy has
performed over 80,000 radiation safety inspections and has provided radiation
training, licensing and safety certification to a large variety of clients
including the National Institutes of Health (NIH), the National Aeronautics and
Space Administration (NASA), the Department of Energy (DOE), Duke Energy,
Westinghouse, the University of Pennsylvania, the University of Texas, and the
State University of New York.

We intend to negotiate and enter into additional outsourcing relationships with
the overall objective of providing a uniform and comprehensive package of
product and customer support.


OUR TECHNOLOGY

Our "stoichiometric" technology, also termed "Atometry", identifies and confirms
the chemical formula or composition of objects by irradiating them with fast
neutrons, which stimulate the nuclei of the object and cause it to emit gamma
rays of varying energies which can then be analyzed by our sensors. The gamma
rays emitted by each substance have a unique `signature' from which we are able
to decipher the quantitative empirical chemical composition or formula of the
substance utilizing sophisticated and proprietary algorithms. For instance, in
the area of explosive identification, our stoichiometric AtometerTM detectors
can identify and distinguish not only a variety of nitrogen-based explosives
known to be used by terrorists, such as TNT, Semtex, RDX and those made with
nitrates (fertilizers), but chlorine and potassium-based explosives as well,
irrespective of shape or form, solid or liquid. We can also identify and
differentiate other combustibles, such as carbon-based fuels including gasoline
and diesel fuel.

Our stoichiometric technology has also successfully been used to identify, and
decipher the chemical formula and composition of illicit narcotics (cocaine) and
biological agents (such as an anthrax simulant made from dead spores). A
significant portion of our research is currently dedicated to identifying the
signatures of additional substances, including more "exotic" explosives, such as
triacetonetriperoxide (TATP), a highly volatile, highly explosive compound made
from widely available chemicals, including acetone, hydrogen peroxide and a
mineral acid, as well as liquid explosives and special nuclear materials.
Because our technology performs material identification and is not "chemically
blind" like other technologies (which are unable determine the composition of
the targeted object), we are also exploring the detection of binary explosives
components, which are transported as separate harmless chemicals, later to be
mixed into deadly explosives.

                                      -15-
<PAGE>

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
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 former 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 SuperSenzor, which is the name given by Dr. Maglich to the detector based on
this API technology, is a more sophisticated, advanced version of AtometryTM, by
employing more sophisticated directional and spatial accuracy features allowing
the interrogation device to image the location and shape of the substances being
analyzed in three dimensions. Prospective benefits of the SuperSenzor include
the ability to focus upon extremely small, three-dimensional objects and
locations, substantially increased inspection penetration depths, and the
ability to conduct inspections at a greater distance from an object. The
SuperSenzor is the basis of the core sensor system used in our prototypes and
designs for aviation security applications, specifically for the detection and
confirmatory screening of checked baggage and cargo screening.

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 named this invention
"MiniSenzor", in order to distinguish it from the "SuperSenzor". Although the
MiniSenzor has a shorter range and no imaging ability, it costs significantly
less to manufacture and is more portable (smaller and lighter), and
consequently, would have greater use for first responders, such as the detection
of car bombs, unexploded ammunition, landmines, roadside bombs and other IEDs.
The Minisenzor is the original basis of the core system used in all of our
commercial AtometerTM devices and has been significantly advanced from inception
to produce the current generation commercial products available for sale today.


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
            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 live blind 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.

                                      -16-
<PAGE>

      o     During the period 1998-2002, in live blind 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 live blind 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 live blind tests with our stoichiometric
            technology, and successfully detected both nitrogen-based and
            potassium chlorine-based explosives.

      o     On October 9, 2003, a technical inspector from the Transportation
            Security Agency conducted live tests at our laboratory facility in
            Irvine, California, and concluded that our stoichiometric technology
            easily differentiated explosives from benign items, such as peanut
            butter which confuses x-rays and other outdated techniques.

      o     In March 2004, we conducted a series of in-field tests of its
            Anti-Tank Landmine Detector for the United States Army's Night
            Vision and Electronic Sensors Directorate in Fort Belvoir, Virginia,
            our stoichiometric technology was able to decipher chemical formulas
            of explosives within buried landmines.

      o     In October 19, 2004, we successfully conducted live blind tests of
            our SIEGMATM 3E3 at the NATO International Symposium on Countering
            Improvised Explosive Detection (IED), on the grounds of Army
            Engineer Academy at Hoyo de Manzanares, near Madrid, Spain. During
            the demonstration, which occurred in front of approximately 300
            military and civilian law and security enforcement officers from 23
            NATO members and candidate states, the SIEGMATM 3E3 was able to
            determine whether or not the contents of various closed containers
            were explosives or inert substances.

      o     On February 15, 2005, we successfully conducted live blind tests of
            our SIEGMATM 3E3 at the 7th International Defense Exhibition &
            Conference (IDEX) held in Abu Dhabi, United Arab Emirates in front
            of approximately 350 of the conference participants, which include
            more than 800 government officials and military representatives from
            over 45 countries, including the US, Canada, China, and Great
            Britain, and more than 920 journalists. In the blind tests, the
            SIEGMA(TM) 3E3 system was able to correctly discriminate explosive
            from non-explosive compounds, remotely and through steel, in a
            matter of 1 to 5 minutes, depending on the mass of explosive.

      o     On March 30, 2005, we successfully conducted live blind tests of our
            SIEGMATM 3E3 at the U.S. Marine Corps Base at Quantico, Virginia,
            hosted by the FBI and the Washington, D.C. Metropolitan Police Bomb
            Squad for an audience of 32 federal, state, and local homeland
            security professionals from police departments, port authorities,
            bomb squads and special operations divisions from across the
            country, as well as representatives from Turkey and the U.S. Army
            and Marine Corps. In the live blind-tests, we were able to correctly
            discriminate in each of the tests explosives from non-explosives in
            a matter of 35 seconds to 5 minutes, depending on the mass of
            explosive.

      o     On May 17, 2005, we successfully conducted live blind tests of our
            SIEGMATM 3E3 at the Tactical Training Facilities of the New York
            Police Department Bomb Squad in Rodman's Neck, New York for an
            audience of more than 25 counter-terrorism professionals. In each
            case, we were able to correctly discriminate and confirm explosives
            from non-explosives in a matter of 25 seconds to 5 minutes,
            depending on the mass of explosive."

      o     On June 13, 2005, we successfully conducted live blind tests of our
            SIEGMATM 3E3 at the Alameda County Sheriffs Office - Office of
            Emergency Services in Dublin, California to an audience of more than
            30 counter-terrorism and homeland security professionals from the
            greater San Francisco Bay Area. During the tests, we were able to
            correctly discriminate and confirm explosives from non-explosives in
            a matter of 25 seconds to 5 minutes, depending on the mass of
            explosive.

      o     On July 13, 2005, we successfully conducted live blind tests of our
            SIEGMATM 3E3 at the San Diego County Regional Airport to an audience
            of more than 15 counter-terrorism and homeland security
            professionals from the greater San Diego Area. In each case, we were
            able to correctly discriminate and confirm explosives from
            non-explosives in a matter of 25 seconds to 5 minutes, depending on
            the mass of explosive.

While each of these tests has validated our stoichiometric technology as an
accurate means for detecting explosives and contraband, we cannot provide any
assurance that the agencies or organizations involved will purchase any products
from us in the future other than those orders discussed previously in this
Report.


                                      -17-
<PAGE>

EXPLOSIVE DETECTION SYSTEMS: COMPETING TECHNOLOGIES

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 one 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 AtometerTM detectors can quantitatively decipher the chemical
composition of substances, they are characterized as secondary or "confirmation"
detectors.

Most explosive detection products on the market today have underlying
technologies that can only "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. Many of these existing
technologies are not only prone to high "false positive" readings which can
result in false alarms that trigger inappropriate and/or wasteful mobilizations
of resources, but also high "false negative" readings which are more dangerous
because they create a false sense of security and can lead to disastrous
consequences. In the area of bomb detection, "false negatives" signify that true
bombs are missed and mislabeled as non-explosives. Also known as the "missing
fraction", it is the most dangerous imperfection of an explosive screening or
detection device, for it leads to handling true explosives as though they were
innocuous objects which, in many cases, can lead to destruction of property and
loss of life.

To provide definitive results most technologies require the employment of
secondary "confirmation" sensors and/or secondary examinations to determine
chemical composition. Since our technology is more aptly used to decode and
identify the actual chemical omposition of a target, once it has been 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 confirmatory examinations, including manual inspection by humans
and canine units, in order to provide more reliable confirmation and
substantially eliminate the occurrence of false alarms.

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 CarBomb
FinderTM 3C4 is distinguishable from the V-EDS product, in that our device can
stoichiometrically 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 CarBomb FinderTM 3C4, we
believe that its penetration range should be significantly less than that of our
device.

                                      -18-
<PAGE>

IED DETECTORS

To our knowledge, there are no other viable secondary or "confirmation"
Improvised Explosive Device (IED) detection technology available as this time.
One system in development, the neu-Vision by Applied Signal Technology (formerly
Dynamics Technology Inc.), incorporates neutron activation and 3-D imaging
closely resembling certain of our proprietary techniques. No data is publicly
available as to the commercial viability or status of production of the
neu-Vision system. According to materials published by Applied Signal
Technology, it appears that the neu-Vision system cannot determine the
quantitative amount of detected substances. Further, based on our experience, it
appears that the neu-Vision system would demand long interrogation times which
questions its utility.

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
example, nitrogen, oxygen, hydrogen and carbon) in differing quantities and
ratios which can be analyzed to distinguish one from the other, and from other
non-harmful items. These technologies radiate neutrons upon the elements present
in the object being analyzed and the resulting gamma radiation provides a unique
"fingerprint" for identification of the elements contained in that object. These
detection systems, of which our AtometryTM-enabled systems are examples, all
detect the presence of chemical compounds, however, we believe our
AtometryTM-enabled systems to be superior to the others in that it uses higher
resolution gamma spectroscopy which allows a more accurate determination of the
chemical composition of the substance under examination, and the relative ratios
of each chemical element to the others. Technologies which compete with our
AtometryTM include thermal neutron analysis ("TNA"), pulsed fast neutron
analysis ("PFNA"), and Pulsed Elemental Analysis with Neutrons ("PELAN").

TNA systems, such as the SP-EDS system marketed by Ancore Corporation
(previously acquired by OSI Systems, Inc.), which uses the same technology as
the V-EDS detector, 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. As a consequence, further secondary or "confirmatory" investigation
may be necessary. (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.

The PFNA detector is used to inspect very large objects such as full-size
shipping containers, air-cargo and other cargo in containers, and
tractor-trailers, with the results displayed in three-dimensional format. Based
upon available information, we believe that the PFNA detector is element
specific only and not stoichiometric. As a consequence, further secondary or
"confirmatory" investigation may be necessary. Since the PFNA detector uses
neutrons that are approximately one-half as energetic as our MiniSenzor
technology, its penetration range should be significantly less than that of our
devices. The PFNA detector is extremely expensive (approximately $10 million)
and massive in size (twenty tons in weight with a footprint of over 300 sq.
ft.).

The PELAN detector is generally targeted at identifying explosives, although no
product literature or information relating to commercial applications is
currently available. Based upon available information, we believe that the PELAN
system is element specific only and not stoichiometric. As a consequence,
further secondary or "confirmatory" investigation may be necessary.

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 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.

                                      -19-
<PAGE>

INDIRECT COMPETITION--PRIMARY OR "ANOMALY" DETECTION PRODUCTS

Primary or "anomaly" detection products on the market include x-ray anomaly
detection systems marketed by GE/InVision Technologies; computed tomography
explosive detectors marketed by L-3 Communications and Reveal Imaging
Technologies, Inc.; x-ray security cargo screening devices marketed by OSI
Systems, Inc.; backscatter x-ray systems marketed by American Science and
Engineering; gamma ray-based radiographic imaging systems marketed by Science
Applications International Corporation; millimeter and terahertz wave imaging by
Brijot Imaging Systems, Inc. and TeraView. 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, and at most
infer, the chemical composition of that object. As a consequence, further
secondary or "confirmatory" investigation is necessary. Although our
AtometryTM-enabled systems 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
AtometryTM-enabled systems, to handle the inspection of suspicious items flagged
by anomaly detection products.


RESEARCH AND DEVELOPMENT ACTIVITIES

During the fiscal year ended April 30, 2006, research and development costs for
our existing products and prototypes, and other emerging applications increased
to $2,044,323 from $785,260 in fiscal 2005. This increase was due to increased
research and development activity, including additional equipment and consultant
expense, focused on the advancement of our CarBomb FinderTM, SIEGMATM and
STARRAYTM explosive detection systems, including upgrades to hardware and
software. We also expect to continue to direct research and development toward
the improvement of our core technologies, such as AtometryTM as well as
expanding the number of explosive substances that can be identified. Our
scientific team also continues to work on expanding the number of explosive
substances that can be decoded and identified by our AtometerTM systems, so as
to provide first responders with the most effective, reliable and adaptable tool
possible.

In May 2005, our scientific team was successful in making improvements to our
proprietary analytical software and algorithms, increasing the probability of
detection of our technology from 95% to greater than 97.75% and effectively
doubling the safety factor of the SIEGMA(TM) systems. Notably, this improvement
in the system's performance was achieved with no material increase to the
interrogation time.

In June 2005, we shipped a prototype of our STARRAYTM robot-borne system for a
demonstration lead by our former Chief Scientist for the Saudi Ministry of
Interior and representatives of the Saudi military forces. Based on those tests,
it was determined that certain modifications would be required for our systems
to operate in the extreme heat of the Middle East (+120F). To date, our
scientific and engineering teams have performed numerous tests in the Mojave
Desert and have identified system improvements, including system refrigeration.
Currently, due to our limited resources and priority given to field-testing of
our products ongoing in the U.S., we are unable to estimate a date of completion
of these system modifications or our next demonstration in the Middle East.

In April 2006, our scientific and engineering staff completed development work
and prototype testing required to proceed with the launch of a new line of
robot-borne AtometerTM explosive detection devices, called STARRAYTM. The novel
system evolved from our research and development efforts in landmine detection
with the U.S. Army and its recent advancements in stand-off detection of
improvised explosive devices, or IEDs. The first STARRAYTM system is configured
for the Andros Mark V robotic remote vehicle, which is manufactured by Remotec,
a subsidiary of Northrop Grumman, and can cover rough terrain, climb stairs,
clear obstacles and cross ditches in diverse weather and heat conditions. The
system is capable of non-invasively and remotely determining, in a few minutes,
the presence of landmines, concealed explosives or unexploded ordnance in a
specific area, and the type of munitions or explosives discovered.

In June 2006, our scientists and engineers also developed a new and improved
core system, featuring improved analytical software, a parallel system
architecture for better system stability, lower routine maintenance time and
servicing requirements, as well as a common engineering platform for more
flexible deployment options which can be configured or integrated with the
operational needs of the customer in mind. This new and improved core system is
expected to be integrated into current and future products, including our
STARRAYTM robot-borne detector.

In July 2006, we completed prototype development of our novel SIEGMA TM 3M3
system which incorporates significant design and operational enhancements in
both the hardware and software of its predecessor, SIEGMA TM 3E3, derived from
more than six months of research and field testing. The SIEGMA TM 3M3 features a
new modular design which provides for enhanced detection and target
interrogation capabilities, and more efficient weight distribution as well as
lower weight per unit, resulting in greater portability and ease of handling for
the operator. The SIEGMA TM 3M3 system also incorporates a new and improved core
system, improved analytical software, and our advanced Graphical User's
Interface (GUI).


Our second priority is to develop additional products based upon our proprietary
technologies. Our "stoichiometric" technology, or "AtometryTM, has been
incorporated into additional prototype applications and prototype concepts
which, if we are able to raise the funds necessary to commercialize them, or
secure financial support through government grants or contracts or
co-development partners, will be the next products we attempt to introduce:

                                      -20-
<PAGE>

      o     AtometerTM SNM, an advanced core detector system which can be
            integrated in current and future systems for the detection of
            special nuclear materials and radiation dispersal devices, in
            addition to explosives and other illicit substances;

      o     "Refractorymeter", a device for the petrochemical industry that can
            detect fissures or erosions in the ceramic lining of oil cracking
            tanks' and for industrial contamination identification and control;

      o     Baggage Screening STOXOR, a device advanced through the Manhattan II
            program in 2004 for the detection and confirmation of explosives and
            other illicit substances in luggage and carry-on packages, which may
            be integrated in-line with current baggage screening infrastructure;

      o     Palletized Cargo Screening EXOSENSOR, a portal screening system for
            the detection and confirmation of explosives and other illicit
            substances in palletized air or "break-bulk" cargo, which may be
            integrated in-line with current palletized cargo screening
            infrastructure;

      o     Freight Container Screening System, a larger "car wash" style
            screening system for the detection and confirmation of explosives
            and other illicit substances in sea and rail container cargo
            screening, which may be integrated in-line with current freight
            container screening infrastructure.

      o     Anti-Tank Landmine Detector 7AT7, a device for the detection and
            confirmation of landmines;

      o     Unexploded Ordnance Sensor 3UXO3, a device for the detection of
            unexploded ordnance which can be utilized in weapons and arms
            inspection and remediation;

The development of new products require time as well as financial resources much
greater than what we currently have or anticipate obtaining in the foreseeable
future, and despite significant investments in research and development, may not
yield commercially successful products. The development of our products for the
detection of explosives, binary explosives, special nuclear materials, illicit
drugs, biological agents and other contraband is highly complex. 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 technologies to meet the
unique specifications of those customers. Because our targeted customers are
primarily governmental agencies, we cannot predict if, or 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.


MANUFACTURING

We currently manufacture our stoichiometric devices on a one-by-one 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 enough, 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.

We currently only have the capacity to manufacture our CarBomb FinderTM,
SIEGMATM and STARRAYTM, systems on a limited basis. Until we can afford to ramp
up to commercial production, we intend to manufacture the first 10 units at our
Irvine facilities. This initial production may require the outsourcing of some
of the final assembly functions. We currently have only 18 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.

                                      -21-
<PAGE>


Manufacturing on a limited basis at our Irvine facilities 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 on a
standardized basis 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 implement the most efficient manufacturing methodologies given the size and
nature of the laboratory environment in which we will manufacture the initial
units. It is possible that we may not be able to sell our products at a price
exceeding our cost to manufacture them, and therefore we may not generate 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 launch our
CarBomb FinderTM, SIEGMATM and STARRAYTM systems, or bring any other prototype
device 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.

In order to address these manufacturing challenges, in August 2004, we engaged
Lockwood-Greene Engineering and Construction, to provide, among other things,
design and construction management services to us in connection with a proposed
construction of a manufacturing plant capable of producing commercial quantities
of our products at a volume capacity of 1,000 units per year. Although
Lockwood-Greene provided a detailed conceptual plan for a manufacturing facility
and made recommendations as to optimal flow processes and other manufacturing
efficiencies, we did not proceed with implementation of the plan. Instead, we
opted to pursue a smaller pilot plant with a production capacity of 100 units
per year in order to evaluate the manufacturability of our products and validate
systems that would ensure a more quick and efficient transition toward
manufacturing, as well as a lower total program/life cycle,

In March 2005, we formed a wholly-owned subsidiary, HiEnergy Mfg Company in
order to create a semi-autonomous division to develop and manage the
infrastructure, policies and controls for the manufacture and assembly of our
devices. In June 2005, we hired a consultant for three months experienced in
strategic planning and financial and operational management to help us establish
and refine a production system which includes supplier relations, material
handling, manufacturing processes, labor force capabilities, and distribution
systems. Further, in September 2005, we engaged an engineering and production
consultant with substantial experience to build the internal mechanisms
necessary to engineer, package and deliver our core technologies in the most
cost effective manner, as well as develop a product test plan and quality
control procedures.

Currently, we are focused on incorporating the business practices, management
philosophies and technology tools necessary to optimize product design and
engineering and allow for the easiest production, fastest assembly, best
quality, highest reliability, and the shortest time to market of our systems.
With the implementation of proven Design for Manufacturability and Integrated
Product Development principles, we believe that we will be able to develop,
build, and deliver products at half the total cost by reducing parts and labor
cost and systematically reducing all overhead and distribution costs. Currently,
it is too early for us to define whether we are to pursue standardization or
mass customization in our manufacturing process. Although standardization would
increase our purchasing leverage, simplify supply chain management, and reduce
part and overhead cost, we anticipate the need to build products on-demand that
are efficiently customized for niche markets, various countries, or individual
customers.

Further, we have developed a core system comprising our AtometryTM and other
proprietary technologies within a common engineering platform, on which future
products can be based. The core system can be utilized for whichever product or
application is specified and then configured with the needs of the customer in
mind. Additionally, this advancement allows for efficiencies throughout the
commercialization process from prototype development to commercial production,
as well as better positioning of our technology for strategic partnerships and
joint development in other industry applications.

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. During the last fiscal year we have been transforming our technology
into commercial production, creating finished vendible units from prototypes.
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. We intend to
conduct this work both internally and with the assistance of outside strategic
partners, consultants, or through collaborative associations.

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, price of
component materials, terms with third-party manufacturers, changes in the labor
market, and our ability to finance our own in-house manufacturing capability.

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.


                                      -22-
<PAGE>

PRODUCTION STATUS

As to the status of the initial phases of production, we have produced
commercial units of our SIEGMATM 3E3 and SIEGMATM 3M3 and production prototypes
of our CarBomb FinderTM 3C4 and STARRAYTM, and we have already acquired, or have
on order, the primary components, which include neutron generators and gamma
detectors, necessary to complete up to two CarBomb FinderTM, two SIEGMATM
systems and two STARRAYTM systems. Notably, these primary components are
interchangeable in all of our Atometer TM detectors.

At present, we have completed our InterrogatorTM software suite, including the
software architecture (device drivers and system diagnostics), decoding programs
and operating interface for field testing and our early adopter program.
Software development is an ongoing development effort for us, and any system
fielded will be able to receive upgrades as they are developed.

During the fiscal year, we returned four neutron generators which had been
acquired under a lease agreement dated April 29, 2004. Pursuant to the agreement
we were to receive a total of 10 generators for production on a fixed schedule,
however, due to significant delays in delivery by the manufacturer as well as
other support issues we cancelled the lease. In January 2005, to compensate for
delays, we issued a supplemental purchase order with another vendor for four
neutron generators compatible with our systems and have received these
generators, two of which have been used the assembly of systems for sale. Based
on assurances from the manufacture that production lead times would be
manageable based on our delivery cycle of 30 to 60 days, we do not anticipate
purchasing any additional generators until we receive orders sufficient to
justify adding to inventory.

In May 2004, we ordered gamma radiation detectors, electronic cooling systems
and other components for a total cost of $1,368,000. As of April 30, 2006, we
had 25 gamma detectors and 9 electronic cooling units in inventory. We began
receiving these components in May 2004 and continued to receive units at varying
intervals. Due to our decision to better balance inventory, we halted delivery
for the remaining gamma radiation detectors and components until such time we
receive orders sufficient to justify adding detectors. In February 2006, we
returned to the vendor 13 electronic cooling units for which the warranty
expired. The return was made to reduce our outstanding payable, while reducing
inventory of items that otherwise could be deemed impaired.

In November 2004, we issued a purchase order for two advanced neutron generators
at a total cost of approximately $335,000 for use in research and development
related to our SuperSenzorTM program and our past cooperative research agreement
with the TSA. As of January 31, 2006, we have paid for and received one of the
generators, with the balance due upon acceptance following delivery.

In February 2005 and in March 2005, we issued purchase orders in the amount of
$304,000 of $611,000, respectively, for seven Andros Robotic Vehicles from
Remotec (Northrop-Grumman) which are to be used to facilitate remote deployment
of our explosive detection devices. The orders were issued based on indications
from potential buyers in the U.S. Military, and in the Middle East, that they
would require a remote robotic deployment capability if they were to purchase
our devices. As of July 31, 2005, the Company received all of the robotic
vehicles ordered. In October and November 2005, due to our inability to carry
the cost of inventory, we returned five of the units for a complete cancellation
of the amount owed for those units.

In June 2005, we received an order for two SIEGMATM 3E3 systems from the
Southeastern Pennsylvania Transportation Authority (SEPTA), which were built
with components from our inventory. The SIEGMATM systems ordered by SEPTA
completed factory acceptance testing and were delivered for six-month field
testing under a cooperative sales program in December 2006. Based on site and
needs analysis, SEPTA decided to take advantage of the upgrade option in their
equipment sales agreement and elected to exchange one of the SIEGMATM 3E3
systems for the newly developed SIEGMATM 3M3. To date, SEPTA has returned one
unit to our Irvine, CA facility for upgrade and in August 2006 the first
replacement SIEGMATM 3M3 completed factory testing and was shipped to SEPTA.

Initial production is handled from our research and assembly facility in Irvine,
CA. Production at this facility is limited and we require outsourcing for some
final assembly functions. We are currently seeking a location to serve as our
manufacturing 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.


                                      -23-
<PAGE>

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.

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 numerous 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; a $117,000 grant from the U.S. Defense Advanced Research Projects
Agency/Special Operations Command in 2001; a $779,944 grant from the U.S. Army,
Night Vision and Electronic Sensor Directorate from 2002 to 2005; and a $367,141
cooperative agreement with the U.S. Transportation Security Administration from
2004 to 2005.

On July 15, 2005, we executed a Time and Material Subcontract in the amount of
$333,688 with Integrated Concepts & Research Corporation (ICRC), a subsidiary of
Koniag, Inc., an Alaskan Native Corporation, located in Alexandria, VA. The
Subcontract was awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062
with the United States Army Tank - Automotive and Armaments Command, Warren
Michigan (TACOM). Under the Subcontract, we will deliver one CarBomb FinderTM
head unit and provide the engineering and technical support necessary for its
integration with the SmarTruck II Multi-Mission Vehicle. In early 2006, ICRC
requested an extension under the subcontract and at present the finished
prototype is expected to be completed and field tested by the U.S. Army and D.C.
Capitol Hill Police by year end. Funding of the program was provided through a
supplemental authorization of the Defense Appropriations Act for Fiscal Year
2005.

In October 2005, the U.S. Army selected our white paper on the STARRAYTM
robot-borne detector of IEDs and landmines for submission of a full proposal,
and in December 2005, $1 million was appropriated for "stoichiometric" explosive
detection systems with the U.S. Army under Program Element 0602712A. Although we
expect these funds to be released for delivery of our robot-borne detector, we
can provide no assurance that these funds will be released.

In March 2006, the U.S. Army informed us by letter that a distinct proposal for
our STARRAYTM robot-borne detector submitted under BAA W909MY-04-R-0024 had been
determined "selectable" for funding. Currently, no formal award has been made
and funding of the proposal is on hold per the U.S. Army pending the
availability of funds. As of the date of this report, we can provide no
assurance that an award will be made.

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
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".)

                                      -24-
<PAGE>

Any of the technology developments or inventions we create using some or all of
the funding through the Cooperative Agreement is 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).


INTELLECTUAL PROPERTY


We rely primarily on a combination of patent applications, trade secrets,
confidentiality procedures and contractual provisions to protect our technology.
Despite our efforts to protect our rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our technology and products is
difficult.

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 can give no
assurance 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 any rights granted under any
patents issued 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 therefore we could experience
various obstacles and significant costs in protecting our intellectual property
rights in foreign countries. If we are unable to obtain or maintain these
protections, we may be unable to prevent third parties from using our
intellectual property. See Risk Factors: Intellectual Property Risks.


PATENT APPLICATIONS

To date, the following eight patent applications and one provisional patent
application have been filed and are pending with the U.S. Patent and Trademark
Office (USPTO). Certain of the patent applications have also been filed under
the Patent Cooperation Treaty and/or with the World Intellectual Property
Organization, and certain foreign jurisdictions, as indicated.

      o     On February 17, 1999, we filed a patent applications captioned
            "Method and Apparatus for Detecting, Locating and Analyzing Chemical
            Compounds Using Subatomic Particle Activation" under the Patent
            Cooperation Treaty (PCT). The patent was published in September 1999
            and entered the national phase in Japan, Canada and the European
            Union. Accordingly, we filed patent applications 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 USPTO. The patent was
            published in September 2003. The U.S. Patent and Trademark Office
            has since split this application into four distinct inventions and
            requested that we write four separate patent applications, following
            the most recent meetings with experts and the patent examiner at the
            USPTO in February 2005. On April 6, 2005, we resubmitted the
            application with petition that the USPTO accord it "special" status.
            The process of examination had been halted during 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 applications. We consider that, with
            exception to these delays, the patent approval process is proceeding
            as should be expected. This patent received a non-final rejection
            which has been appealed. As of the date of this report we are
            awaiting response to our appeal brief from USPTO.

      o     On June 18, 2001, we filed a patent application captioned "Method
            and Apparatus for Neutron Microscopy with Stoichiometric Imaging"
            with the USPTO. The patent was published in September 2003.
            Following the most recent meetings with experts and the patent
            examiner at the USPTO in February 2005, we resubmitted the
            application on April 6, 2005 with petition that the USPTO accord it
            "special" status. This patent received a non-final rejection which
            has been appealed. As of the date of this report we are awaiting
            response to our appeal brief from USPTO.

                                      -25-
<PAGE>

      o     On June 18, 2002, we filed an application captioned "Method and
            Apparatus for Neutron Microscopy with Stoichiometric Imaging" under
            the Patent Cooperation Treaty (PCT). The patent was published in
            March 2004 and entered the national phase in Canada and the European
            Union. Accordingly, we filed patent applications with patent
            agencies in Canada and the European Union on September 9, 2003,
            respectively.

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

      o     On March 11, 2004, we filed a U.S. Provisional Patent application
            captioned "Method and Apparatus for Measuring Wall Thickness in a
            Conduit" with the USPTO. On March 11, 2005, we filed a patent
            application with the USPTO with petition that the USPTO accord it
            "special" status.

      o     On March 11, 2005, we filed a patent application captioned Method
            and Apparatus for Measuring Wall Thickness in a Conduit" under the
            Patent Cooperation Treaty (PCT).

      o     On March 21, 2005, we filed an application captioned "Binocular
            Method and Apparatus for Stoichiometric Analysis and Imaging Using
            Subatomic Particle Activation" with the USPTO with petition that the
            USPTO accord it "special" status.

      o     On March 23, 2005, we filed an application captioned "Method and
            Apparatus for Analyzing Chemical Compounds Using Subatomic Particle
            Activation" with the USPTO with petition that the USPTO accord it
            "special" status.

Patent applications filed under the Patent Cooperation Treaty (PCT), by
designating any or all of the 128 Contracting States (as listed at the PCT
website [http://www.uspto.gov/web/offices/pac/dapp/pctstate.pdf]), allow for
simultaneous patent protection. The World Intellectual Property Organization
(WIPO) is a specialized agency of the United Nations which administers 23
international treaties dealing with different aspects of intellectual property
protection and includes the participation of 182 nations, as listed at the WIPO
website [http://www.wipo.int/directory/en/].

The original inventor on all of our patent applications, except for the one
filed in March 2005, was Dr. Bogdan Maglich, our former Chief Scientist and a
current member of our Board of Directors. The patent submitted on March 2005
names Dr. Kevin McKinny, a former research employee, as the original inventor.
In accordance with company policy, both individuals have fully assigned their
rights in and to the technology, including any corresponding patents awarded
through the USPTO, to HiEnergy Technologies. All of our scientific personnel
have executed non-disclosure agreements that reserve ownership of intellectual
property solely with us. In addition, pursuant to assignment agreements entered
into by him, Dr. Maglich is obligated to do everything possible to aid the
company to obtain and enforce patent protection for the inventions described in
the patent applications.

With reliance made on the declarations of the inventor, we have not used any
third-party intellectual property or other rights 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.

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 better 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.

NON-PATENTED PROPRIETARY TECHNOLOGY

Over the last seven years, we have developed proprietary software, comprised of
an advanced analytical engine, complex decoding algorithms and a special purpose
operator interface. We believe this software provides us with a significant
competitive advantage in the marketplace and we have taken significant steps to
protect it through copyright and trade secret laws, hardware encryption and
firmware, as well as through contractual restrictions on disclosure, copying and
distribution. As part of our confidentiality procedures, we require each of our
employees and consultants to enter into standard agreements pursuant to which
the employee and consultant agrees to keep confidential all of our proprietary
information and to assign to us all rights in any proprietary information or
technology made or contributed by the employee or consultant during his or her
employment, or made thereafter as a result of any inventions conceived or work
done during such employment.

                                      -26-
<PAGE>

We cannot offer assurances that the steps we have taken will prevent
misappropriation of our software or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken,
unauthorized third parties may be able to copy or reverse engineer our software,
or obtain and use processing techniques that we regard as proprietary. In
addition, our competitors could independently develop technologies substantially
equivalent or superior to our technologies. Any misappropriation could have a
material adverse effect on our business. In the future, we may need to go to
court to either enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others, which litigation might result in substantial costs and diversion of
resources and management attention.

To prevent our proprietary software and associated algorithms from potentially
falling into the hands of terrorists or other unauthorized users, we converted
our proprietary software and algorithms into firmware. This consists of a
Field-Programmable Gate Array (FPGA) chip and board, containing the software and
associated algorithms, which is automatically scrambled or erased if invaded.
Additionally, the FPGA hardware solution, aside from providing for security
protections, augments processor performance, reduces power consumption and
maximizes algorithm performance. With the aid of Celoxica Ltd., a leading C-base
design and synthesis tools consultant, we have completed the firmware
development and successfully integrated the customized FPGA hardware in our
product designs. The implementation of the FPGA hardware further eliminates the
need to host our proprietary software and associated algorithms for an external
host computer device, and renders it possible to have the entire complex program
handled by a palm computer or tablet PC. We are currently working on making this
item a serially-produced component for volume production and estimate
significant cost savings as we achieve certain economies of scale.


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 AtometerTM detectors have several advantages from the perspective of
radiation safety, which are:

      o     Our devices do not require a customized neutron source or emission
            methodology to work with our application and use 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.

      o     Our devices are typically turned on for a period of only 100
            seconds, with a maximum of 10 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 20 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.

      o     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.

As the manufacturer of a device involving a fast neutron generator, as stated
above, we must comply with State and 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. 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 a radiation 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.

                                      -27-
<PAGE>

On June 30, 2006, we were granted a Materials License from U.S. Nuclear
Regulatory Commission (NRC) which allows us to operate our explosive detection
devices in connection with our research and development activities for a period
of ten years anywhere the NRC maintains jurisdiction within the 50 States,
including areas of exclusive federal jurisdiction and all federal facilities.
Prior to obtaining the Materials License, we have operated under a temporary
license with a limited duration of 180 days per calendar year applicable to all
federal jurisdictions combined. This Materials License will allow us greater
freedom within NRC jurisdictions to test, demonstrate and co-develop under
cooperative agreements our explosive detection systems. This license does not
apply to those states which have reciprocity agreements with the State of
California ("Reciprocity States"). As to Reciprocity States, HiEnergy will
continue to contact the host state directly and subject to approval operate
under its California License.

On August 3, 2006, we were issued by the Radiologic Health Branch of the State
of California, Department of Health Services (CA-DHS), a "Certificate of
Radiation Machine Registration". With the issuance of the certificate, CA-DHS
has concluded that our devices are acceptable for radioactive materials
licensing. Notably, regulatory authorities at both the national and state levels
can rely on this registration certificate in their evaluation of requests made
by purchasers and operators to amend their radioactive materials licenses to
permit use of our products.

In early March 2006, we applied for a California Sealed Source and Device
Registration for our SIEGMATM 3E3 and 3M3 explosives detectors, which upon
approval will pave the way for the listing of our devices on the Sealed Source
and Device Registry (SSDR) of the U.S. Nuclear Regulatory Commission (NRC). The
NRC maintains a registry of radiation safety information on sealed sources and
devices that contain radioactive material, such as our SIEGMA(TM) systems. This
registry contains the results of radiological safety evaluations performed by
the NRC and state agencies responsible for radiation safety in states in which
the NRC has ceded this evaluation authority to those agencies.

Lastly, we have also submitted an application to amend our current Research and
Development Radioactive Material License Number 7127-30 to allow for
Manufacturing and Distribution. We believe that since our detectors use standard
solid-sealed neutron tubes supplied by a leading manufacturer without any
modifications, the design for which has been evaluated and approved by the
state, we expect to receive approval by September 2006.

We believe 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, 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. For example, measurements we have taken with
radiation survey instruments show that a three-minute, direct, unshielded
exposure to our AtometerTM detectors 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, we believe 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. 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

We have determined that our 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.

We believe that the sale of its AtometerTM detectors, and any future explosive
detection equipment (incorporating a neutron generator) developed by us to be
used by civil authorities to fight criminal and terrorist 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.

                                      -28-
<PAGE>

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.

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 company, 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 and private sector
            purchasers.

                                      -29-
<PAGE>

As part of our risk management and litigation management strategies, we are
seeking designation and/or certification from the DHS for our AtometerTM
explosive detection devices. If the DHS approves our products 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 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.

AUTHORIZED EQUIPMENT LIST (AEL)

In March 2006, our AtometerTM explosive detection system was included in the
U.S. Department of Homeland Security's Authorized Equipment List (AEL). All
equipment acquisitions under the various grant programs administrated by the DHS
Office of State and Local Government Coordination and Preparedness (SLGCP) and
the Office for Domestic Preparedness (ODP), including the State Homeland
Security Program, the Urban Areas Security Initiative and the Law Enforcement
Terrorism Prevention Program, require that all equipment meet certain guidelines
in order to be AEL qualified as acceptable expenditure items. The AEL provides
for equipment standardization and interoperability for state and local emergency
prevention, preparedness, and response personnel and is often updated for new
grant solicitations and streamlines the acquisition process for listed
equipment.


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 five wholly-owned subsidiaries, HiEnergy Defense, Inc., HiEnergy Mfg
Company, HiEnergy International Co., HiEnergy Europe, Ltd., and HiEnergy Leasing
Co. HiEnergy Defense, Inc. was incorporated under the laws of the State of
Delaware in July 2003 to focus on marketing military and defense applications of
our technology within the Washington D.C. area from its office in Alexandria,
Virginia. HiEnergy Europe Ltd. was incorporated under the laws of the State of
Delaware in March 2004 and is presently not operating, but will focus on
marketing our technology throughout the European Union. HiEnergy Mfg Company was
incorporated under the laws of the State of Delaware in March 2005 and formed
for the purpose of creating a separate entity for the manufacturing and assembly
of our products. HiEnergy International Co. was incorporated under the laws of
the State of Delaware in July 2005 and was formed for the purpose of creating a
separate entity for the sales and servicing of our products overseas, excluding
Europe, and primarily the Middle East and Africa. HiEnergy Leasing Co. was
incorporated under the laws of the State of Delaware in August 2005 and formed
for the purpose of creating a business entity to establish and administrate an
equipment lease finance and equipment rental operations.


EMPLOYEES

We have seventeen full-time employees as of the date of this Report, including
four senior scientists. We believe that our employee relations are favorable.
None of our employees is 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, 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.


                                      -30-
<PAGE>

We believe that our employee relations are generally favorable with the
exception of one pending issue. In approximately July and August of 2005, our
former CEO and Chairman, without prior Board approval and without conferring
with legal counsel, notified certain employees that subject to pricing and final
terms decided by the Board, they would receive shares of our common stock to be
registered for resale of Form S-8 and vesting in four equal quarterly
installments on November 1, 2005, February 1, 2006, April 1, 2006 and August 1,
2006. On September 19, 2005, our Board executed a unanimous written consent
authorizing the issuance of 482,143 restricted shares of Company common stock to
these employees, and authorized the issuance of an additional 364,286 restricted
shares of common stock as merit bonuses. To this date, the Company has not been
able to make any such registration of these or any other shares and any new
issuances would be subject to the restrictions of Rule 144, including a one year
holding period, among other restrictions. Because of the shares' illiquidity and
possible adverse tax consequences related to the receipt of such restricted
securities, the employees declined to accept the stock and therefore no such
issuances have been made.

Although we believe that following the refusal by these employees to accept the
shares, we are no longer legally obligated to make such share issuances, our
inability to provide shares to the employees registered for resale on Form S-8
has caused dissatisfaction among our employees. To the extent that this
dissatisfaction results in reduced performance or causes personnel to leave the
Company or reduce, our operations may be adversely impacted. We will attempt to
assuage this dissatisfaction by providing additional compensation to these
employees at such time and in the manner as is feasible in view of our limited
resources. Such additional compensation may include, in the determination of our
Board and current management, the issuance of shares from a registered stock
grant plan or otherwise registered for resale. At the present time, we cannot
determine the dollar amount of compensation or the number of shares that may be
granted and can offer no assurances that we will ever assuage this
dissatisfaction by providing additional compensation to these employees.


                                      -31-
<PAGE>

GLOSSARY OF SCIENTIFIC TERMS

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

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.

                                      -32-
<PAGE>

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 our 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).


                                      -33-
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

Our facilities are located at 1601-B Alton Parkway, Irvine, California 92606 and
consist of approximately 13,262 square feet of office space, inventory storage
and space set aside for some product assembly, plus 2,400 feet of outdoor
testing space. We rent these facilities from Del Mar Avionics, a company owned
by one of our former directors under a lease agreement which provides for
monthly rent payments of $17,591 and expires in October 2006. We are currently
negotiating an extension to our lease.

Within this 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, in accordance with the
standards mandated by the State of California, which we are observing in our
laboratory shielding designs are considered the strictest in the United States.
Our test sites have been designed in compliance with these requirements and both
the design and site were approved by the Radiation Safety Officer on July 16,
2003.

In the event we are required to relocate our offices, it is most likely that we
will incur significant relocation expenses and potentially experience an
interruption to certain elements of our operations, such as research and
development activities involving the use of radioactive sources. Accordingly,
management is committed to take any and all actions necessary to mitigate the
risks of relocation, including coordinating compliance with the appropriate
regulatory agencies and securing transitional space through a sublease with
local research institutions, if necessary. At this time, we cannot estimate the
cost or time requirements associated with relocation, the build-out of any new
office space, or an approval from the Radiologic Health Branch of the State of
California, Department of Health Services of any new testing facilities.


ITEM 3. LEGAL PROCEEDINGS

FILED COMPLAINTS

In January 2005, we were served with a Summons and Class Action Complaint for
Violations of Federal Securities Laws, which was filed on October 18, 2004, in
the Federal District Court for the Southern District of California under case
number SACV04-1226 GLT. The Complaint filed named HiEnergy and its former
Chairman, Dr. Bogdan C. Maglich, among other named defendants, on behalf of a
class of persons who acquired our stock during the period from February 22, 2002
through July 8, 2004. In February 2005, plaintiff's counsel filed a First
Amended Complaint entitled and styled, "In re: HiEnergy Technologies, Inc.
Securities Litigation," Master File No. 8:04-CV-01226-DOC (JTLx), alleging
various violations of the federal securities laws, generally asserting the same
claims involving Philip Gurian, Barry Alter, and our purported failure to
disclose their various securities violations including, without limitation,
allegations of fraud. The First Amended Complaint seeks, among other things,
monetary damages, attorney's fees, costs, and declaratory relief. We engaged two
legal firms to vigorously defend us in this matter and assess the impact of the
pending lawsuit. On Friday, March 25, 2005, we timely filed responsive pleadings
as well as Motions to Dismiss the Plaintiffs' First Amended Complaint arguing
that the Complaint failed to state a claim upon which relief can be granted. On
June 17, 2005, the Court issued an Order Granting the Motions to Dismiss (the
"Order"), finding that the Plaintiffs failed in the First Amended Complaint to
allege causation of loss resulting from any alleged omissions and/or
misrepresentations of HiEnergy or Dr. Maglich, to sustain a cause of action for
securities fraud under ss.10(b) of the Exchange Act and Rule 10b-5 of the SEC,
that the Plaintiffs had failed to plead actual reliance on any allegedly false
or misleading filings of HiEnergy to sustain a claim under ss.18 of the Exchange
Act, and that the Plaintiffs had failed to allege a primary violation of any
securities laws to sustain a claim for a violation of ss.20(a) of the Exchange
Act. On July 5, 2005, the Plaintiffs filed a Second Amended Complaint in
compliance with the Court's Order. On October 24, 2005, the Court issued a
Minute Order granting in part and denying in part our Motions to Dismiss,
finding that the Plaintiffs failed in the Second Amended Complaint to sustain a
cause of action for securities fraud under ss.10(b) of the Exchange Act and Rule
10b-5 of the SEC against Dr. Maglich and for claims that we filed false and
misleading financial statements and executed suspicious stock sales. On November
14, 2005, the Court held a scheduling conference at which the Plaintiff informed
us that it would not file a Third Amended Complaint. In accordance with the
Scheduling Order from the Court, class representative motions are to be filed
within 90 to 120 days and pre-trial conference has been scheduled for September
11, 2007. Our counsel will respond to any motions with appropriate challenges to
its legal sufficiency to state a claim upon which relief may be granted. As of
date, the costs to defend the class action have been substantial and it is
unable to predict an exact amount, or even a meaningful estimate, of the
aggregate costs that may be incurred, at this time.

In October 2005, a claim was filed against us with the Supreme Court of the
County of New York, New York by HWH Enterprises ("HWH") (Civil Action No. (Index
No. 603438/05). HWH is seeking collection of $101,621.18 allegedly owed to it
for public relations services purported to have been provided to us during the
prior fiscal year. We have engaged local counsel and intend to defend ourselves
and our counsel will respond with appropriate challenges. Depositions have been
scheduled in September 2006. As of this date, the Company and its legal counsel
have made no other determination as to the merits of, or possible defenses to,
the claim, and are unable to predict a meaningful estimate of the costs of
defending against the claim at this time.


                                      -34-
<PAGE>

On July 27, 2006, we filed a complaint for breach of contract against our former
CEO, Dr. Bogdan C. Maglich with the Orange County Superior Court, Santa Ana,
California, Case No. 06CC08456. The complaint alleged, among other things, that
Dr. Maglich had violated his employee confidentiality agreement and sought
injunctive relief, unspecified damages according to proof, interest, and
attorneys' fees. On August 1, 2006, the Court granted an ex parte Temporary
Restraining Order and Order to Show Cause Why Preliminary Injunction Should Not
Be Issued ("TRO"). The TRO provided that, pending hearing on the Order to Show
Cause, which the court set for August 22, 2006, Dr. Maglich, his agents,
assigns, and all those acting in concert with him were restrained and enjoined
from: (i) "violating the Confidentiality and Assignment of Inventions Agreement
dated October 7, 2003;" and (ii) "violating the promise contained in your letter
agreement with plaintiff dated April 12, 2006 that you `hereby agree to be bound
by the Cure Statements' of your then attorney, . . .attached thereto, that `Dr.
Maglich agrees to refrain from disseminating any information that the Board [of
Directors of Plaintiff HiEnergy Technologies, Inc.] believes may be confidential
inside information without the Board's approval, and agrees to refrain from
disseminating any statements about the Company without the Board's approval."
The order continued: "Notwithstanding anything to the contrary herein, defendant
is not restrained from making private, bona fide complaints to regulators,
police, or prosecutors about the company." As of the date of this report, due to
limitations on the removal of directors by the Board under applicable corporate
law, Dr. Maglich currently continues to serve as a director.

On August 22, 2006, after oral argument of counsel, the court invited our
counsel to submit a proposed preliminary injunction to enjoin disclosure of
specific categories of our trade secrets/confidential information. The court
declined to issue a preliminary injunction on terms as broad as set forth in the
TRO or based upon Dr. Maglich's letter dated April 12, 2006. The Court stated it
would hold the proposed injunction for ten days after submission pending receipt
of objections by Dr. Maglich's counsel.

On August 21, 2006, Dr. Maglich sent to one or more of our investors a copy of a
purported complaint by Dr. Maglich against the us and our CEO, Roger Spillmann.
The purported complaint claims, among other things, that the Orange County,
California Superior Court had been asked by us to override federal rules,
regulations, or statutes. The complaint appears to be largely a repetition of
prior allegations by Dr. Maglich, excluding the new allegation, as stated above,
that the state court had been asked to disregard federal law. We deny the
allegations and contend that (i) the state court has been acting lawfully in
restraining Dr. Maglich's improper conduct; (ii) Dr. Maglich's communications
with investors were in violation of the TRO; (iii) the allegations are frivolous
and are brought by a former disgruntled employee in bad faith; and (iv) Dr.
Maglich is involved in a vendetta against us for his own purposes. We are
committed to full compliance with all SEC and other state and federal rules,
regulations, and statutes.

On January 24, 2006, personal legal counsel for our fomer Chairman, Dr. Bogdan
Maglich, submitted a memorandum to our Board of Directors alleging that, despite
our payment to Dr. Maglich of salary, bonuses, expenses and other benefits, some
of the provisions of his employment agreement had not been implemented,
resulting in an adverse financial impact to Dr. Maglich personally. Dr.
Maglich's legal counsel proposed to settle this claim for (i) cash or a demand
note in the amount of $66,569, (ii) $188,271 worth of common stock registered
for sale, and (iii) $232,785 of restricted common stock. On January 25, 2006,
Dr. Maglich's personal legal counsel met with our Board during which meeting it
was agreed that Dr. Maglich and the Company would attempt to settle the claims.
However, in his cross-complaint, Dr. Maglich now claims that the memorandum
concluded that the Company owed him $487,000 in unpaid benefits and that the
Company "orally agreed" that it owed him this amount. On February 9, 2006, Dr.
Maglich's personal legal counsel sent a letter to the Board stating that the
failure to accede to these demands and provide Dr. Maglich with certain other
requested benefits, could be viewed as a constructive termination and entitle
Dr. Maglich to two years severance pay pursuant to his employment agreement and
"result in other significant effects on the Company." On February 17, 2006, the
Company's Board of Directors removed Dr. Bogdan Maglich from his position as our
Chief Executive Officer and suspended him from his duties as Chairman of the
Board, Treasurer and Chief Scientific Officer.

Effective April 18, 2006, we terminated Dr. Maglich as its Chairman and Chief
Scientist in accordance with Section 10(a) of his Employment Agreement, which
stated that the Company could terminate his employment at any time upon gross
negligence or willful malfeasance by Dr. Maglich in the material performance of
his duties and responsibilities to the Company under the agreement. Dr. Maglich
claims that his suspension and subsequent termination as an employee of the
Company was the result of age discrimination and national origin discrimination.
Dr. Maglich also claims that he is entitled to $416,000 plus interest in
severance payments under his Employment Agreement. However, the signed original
version of the Employment Agreement in our files state that Dr. Maglich is only
entitled to severance pay in the event of a termination "without cause."

On August 18, 2006, we were also served with a cross-complaint by Dr. Maglich
filed on July 27, 2006 Superior Court of California, County of Orange, under
case number 06CC084586. The cross-complaint alleges breach by the Company of
oral and written contracts, age discrimination and national origin
discrimination, retaliation for age and national origin discrimination,
violations the Ralph and Bane Civil Rights Act, withholding corporate records
from Dr. Maglich and withholding Dr. Maglich's personal property. Dr. Maglich
seeks damages in the amount of $903,000 plus interest for alleged breach of
contracts, a $25,000 civil penalty for alleged civil rights violations, punitive
damages, legal costs, and unspecified cash damages for lost wages and benefits
and for damages resulting form emotional distress, mental anguish and pain and
suffering. We believe Dr. Maglich's claims are without merit and intend to
assert a vigorous defense. The costs of defending against the charges could be
substantial; however we are unable to predict an exact amount, or even a
meaningful estimate, at this time.

                                      -35-
<PAGE>

In August 2006, we were served with a Summons and Complaint by Mary Ann Mashita,
filed on July 3, 2006 in the Superior Court of California, County of Orange,
under case number 06CC0770. The Complaint named HiEnergy Technologies, our
former Chairman, Dr. Bogdan C. Maglich, who is currently a member of our Board
of Directors, and Maglich Family Holdings, Inc., a company affiliated with Dr.
Maglich and a shareholder of the Company, In the Claim, Ms. Mashita alleges that
she worked for Maglich Family Holdings as Dr. Bogdan Maglich's assistant for
both personal and business matters and in December 2005, subject to written
employment agreements only between Maglich Family Holdings and Ms. Mashita. Ms.
Mashita alleges that she left her employment because of health and medical
problems, and that on July 25, 2005, the California Employment Development
Department ("EDD") mailed Maglich Family Holdings a request for information
concerning Ms. Mashita's condition in regard to her claim for benefits. Ms.
Mashita alleges a written response from Dr. Maglich was made to the EDD making
false and defamatory remarks about her. As a result of these statements, Ms.
Mashita claims that she became depressed and began suffering from obsessive
paranoia and is entitled to compensatory damages, emotional distress damages and
punitive damages. Ms. Mashita is seeking recovery against Dr. Bogdan Maglich,
Maglich Family Holdings, and HiEnergy Technologies, Inc. We have engaged counsel
and intend to vigorously defend these allegations in any further pleading with
appropriate challenges to their legal sufficiency to state a claim upon which
relief may be granted. We believe the Company's involvement in this legal
proceeding is primarily because Dr. Maglich incorrectly signed the written
response to the EDD as an officer of the Company, rather then in his capacity as
an officer of Maglich Family Holdings, Inc. The costs of defending against the
Complaint could be substantial; however we are unable to predict an exact
amount, or even a meaningful estimate, at this time.

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.

DISMISSED OR SETTLED MATTERS

On May 27, 2003, Mr. Barry Alter, a former Director, 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.

In July 2002, we entered into a consulting agreement with Yeffet Security
Consultants, Inc. and its beneficial owner, Isaac Yeffet ("YSCI"). 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
YSCI that we were terminating its contract on the grounds of inadequate
performance. YSCI alleged that we breached the consulting agreement and sought
to recover $449,540.91. Although we deny these allegations, on June 9, 2006, we
entered into a Confidential Settlement Agreement and Mutual Release with YSCI
which provides for a mutual reconciliation of disputes. As part of the
Settlement Agreement, YSCI released us from all claims to recover the
$449,540.91 and forfeited its options to purchase up to 1,000,000 shares of our
common stock. Pursuant to the Settlement Agreement, we are required to make cash
payments to YSCI as follows: (i) $27,000, which is payable within 15 business
days following the execution of the Settlement Agreement, (ii) $36,541
representing accrued and unpaid services and expenses incurred in 2003, and
(iii) $153,000. Excluding the amount of the above-mentioned cash payment of
$27,000, all amounts are due 150 days following the execution of the Settlement
Agreement together with simple interest of 8% per annum on any unpaid balance
accruing from the execution of the Settlement Agreement until full payment,
provided that we have an additional thirty-day cure period to pay this debt if
needed. We are also obligated to issue 775,000 shares (the "Settlement Shares")
of our common stock to Isaac Yeffet within 60 days of the execution of the
Settlement Agreement. In the event we breach our obligations of the Settlement
Agreement relating to the payment of money or the issuance of shares, YSCI,
after providing us with written notice and five business days to cure any such
breach, may have the arbitrator enter a judgment for the unpaid balance of the
cash payments plus the cash value of any undelivered stock.

In April 2005, a claim was filed against us with the 101st Judicial District
Court, Dallas County, Texas by Data Discovery Inc. ("DDI") (Civil Action No.
3-05-CV-0949-M). DDI, representing one party of a dissolved partnership, is
seeking the collection on behalf of the partnership of $107,300 allegedly owed
for services purported to have been fully-provided to us. We engaged local
counsel and filed on May 10, 2005, a Notice of Removal to move the case to
federal court, and a Motion for Dismissal. In July 2005, the District Court
delivered a Memorandum Opinion and Order granting our Motion for Dismissal and
ordered that within twenty days DDI amend its suit to the satisfaction of the
District Court, or the order will become a dismissal with prejudice, which would
bar DDI from filing any other suit against us related to the matters within its
claim. In August 2005, DDI filed a new lawsuit on behalf of the partnership
which is expected to go before the Court following an appropriate period for
discovery. In August 2006, we entered into settlement discussions with DDI and
in September 2006 DDI caused the lawsuit to be dismissed without prejudice.
There can be no assurance that the claims DDI asserted against us will not be
resuscitated at some time in the future.

                                      -36-
<PAGE>

In November 2005, a claim was filed against us with the District Court of Orange
County, California by SBI-USA ("SBI"). SBI sought collection of a fee in the
amount $50,000 allegedly owed to it for financial advisory services purported to
have been provided to us during the fiscal year ended 2003. In July 2006, we
agreed to mediation and entered into settlement discussions to avoid further
litigation costs. On September 6, 2006, we entered into a Confidential
Settlement Agreement and Mutual Release (the "Settlement Agreement") with SBI.
As part of the Settlement Agreement, SBI agreed to cause the lawsuit to be
dismissed and both parties agreed to release each other from any and all other
claims each party might have against the other. Pursuant to the terms of the
Settlement Agreement, we will pay SBI an aggregate of $35,000. As of date, we
made a payment of $8,750 and are required to pay SBI monthly payments of $2,000
each month with a lump sum payment due by December 29, 2006 in the amount of
$20,250. In the event we fail to make an installment payment by the required
date, the Company has a ten-day period to cure. Should we not make the payment
within the cure period, SBI would be entitled to an entry of judgment in its
favor and against us in the amount of $60,000.

In December 2005, we were served with regard to a Complaint filed against us by
a former consultant with the California Labor Commissioner regarding purported
unpaid wages in the amount of $20,000. A hearing before the California Labor
Commissioner was held in May 2006, during which the consultant agreed to
withdraw the Complaint and release us from any and all other claims for a cash
settlement payment in the amount of $15,000.

In December 2005, a claim was filed against the Company with the County Court of
Dallas County by Lockwood Greene Engineers Inc. ("LGE") (Cause No.
cc-05-12059-b), in which LGE sought collection of a fee in the amount of
$44,707.50 allegedly owed to it for engineering and construction services
purported to have been provided to us during the fiscal year ended 2005. On July
20, 2006, we entered into a Confidential Settlement Agreement (the "Settlement
Agreement") with CH2M Hill Lockwood Greene as the successor to LGE. As part of
the Settlement Agreement, LGE agreed to immediately cause the lawsuit to be
dismissed, which confirmation notice from the Court has been received, and both
parties released each other from any and all other claims each party might have
against the other. Pursuant to the terms of the Settlement Agreement, we are
required to pay LGE an aggregate of $40,000 in four installments of $10,000, due
respectively on July 21, 2006, October 20, 2006, January 19, 2007 and April 20,
2007. In the event we fail to make an installment payment by the required date,
the Company has a ten-day period to cure. Should we not make the payment within
the cure period, LGE would be entitled to refile the lawsuit seeking payment for
the unpaid amounts due under the Settlement Agreement plus accrued legal fees
and interest as allowed by law from the date the unpaid installment was due.

On August 18, 2006, we received notice of charge from the Equal Employment
Opportunity Commission ("EEOC") (Charge 488-2006-00735), in which Dr. Maglich
has challenged that the termination of his employment by us was due to age and
national origin discrimination. On September 1, 2006, we received copy of a
dismissal from the EEOC of the charges in connection with the filing of Dr.
Maglich's cross-complaint in the California Superior Court.


POTENTIAL LEGAL ACTIONS

In December 2005, we received a letter from EADS North America, Inc. ("EADS")
alleging that we breached a lease agreement between us and EADS, dated April 29,
2004 (the "Lease"). Pursuant to the terms of the Lease, EADS was to deliver ten
neutron generators on a fixed schedule agreed upon by both parties. We received
four of the ten neutron generators with significant delays due to production and
support issues and ceased payments pending resolution. Prior to the end of the
Lease, we returned the four generators that we had received due to
non-performance by EADS and sought termination of the contract. The letter from
EADS alleges that we failed to meet our payment obligations, and demands early
termination payments, cancellation of discounts and other charges unrecognized
by us, and threatens litigation in the event we fail to cure immediately. We
have recorded $239,017 for lease payments in accordance with terms of the lease
while we attempt to resolve the matter. In June 2006, we received a supplemental
letter from EADS detailing additional charges disputed by us for premature
cancellation and return of equipment in an amount equal to $280,415. As of this
date, no legal action has been filed by either party and we intend to defend
ourselves against any legal proceeding that may be brought by EADS on the basis
indicated in this letter. We are unable to predict a meaningful estimate of the
costs of defending ourselves against any possible legal action, should one be
filed in the future. We have other sources of neutron generators and our ability
to manufacture our products has not been materially impacted by this dispute.

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, 2006.


                                      -37-
<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 shareholders' deficit of
$40,432,588 as of April 30, 2006, and we may never achieve profitability.

We have not generated any revenue from operations, and we have incurred net
losses available to common shareholders every year since our inception,
including $8,632,428 for the year ended April 30, 2006, as compared to
$9,984,565 for the prior year period, and $39,003,554 for the period from August
21, 1995 (inception) through April 30, 2006. Although we reduced operating
expenses during the last quarter of the fiscal year, our operating expenses
remain high due in part to investments we are making in connection with the
commercialization, manufacture and marketing of our initial Atometer(TM)
detectors. 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.

During the period from May 1, 2005 through April 30, 2006, excluding sources or
uses from working capital, we have experienced average monthly negative cash
flows from operations of approximately $280,000 with no revenues. As such, we
must continually raise capital from the sale of equity or the placement of 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 our Atometer(TM) detectors are poorly 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.

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 prototypes and are introducing our first commercial
products, except for the purchase by Southeastern Pennsylvania Transportation
Authority (SEPTA) and orders placed by our resellers in Spain, we have had no
significant sales. Because of the few orders and the fact that the markets for
our Atometer(TM) detectors 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.

                                      -38-
<PAGE>

The commercial viability of our Atometer(TM) detectors is unproven, and may
never be realized.

As of the date of this Report, we have not had independent testing of the
Atometer(TM) detectors to rate or certify their functionality in explosive
detection, nor have we commissioned an independent market or research study to
determine their market potential. Consequently, the commercial viability of our
Atometer(TM) detectors is unproven at this time. We also have had limited field
testing experience and are unable at this time to qualify the amount and
frequency of maintenance to be required by our Atometer(TM) detectors, and we
have limited experience in causing, or simulating, extensive usage. We have
identified reliability issues which require us to create more "hardened" or
"ruggedized" equipment and will continue to seek improvements in design and
function. Our inability to resolve these issues or 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, current
or 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 our Atometer(TM)
detectors 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, prospective customers may be reluctant to spend the funds necessary
to purchase our Atometer(TM) detectors, or any of our other prototype
developments, and the sales cycle may be much longer than anticipated or may not
materialize at all, either of which events would have a materially adverse
effect on our business, operations and financial condition.

From time to time we may demonstrate our products to potential customers and/or
sources of funding, and any failures in these demonstrations could have a
materially adverse impact upon our ability to sell our products, and on our
business and financial condition generally.

As a defense products company, we are sometimes requested or required to
demonstrate, pilot or field test our technologies and our products at varying
product stages, which may be in front of potential purchasers of the products,
and/or sources of grant or private equity funding. To the extent that any
product or technology may not work in the manner in which it is intended, such
prospective purchasers and/or funding sources may lose confidence in our
products and technology, and may determine not to purchase any products or fund
any developments. If a demonstration should not work successfully at any time
when large numbers of people are present, the news could spread within the
homeland defense industry we are working in, especially among the relatively
small universe of large potential governmental agencies and other organizations
who are likely purchasers of our products. If that were to happen, it could have
a materially adverse effect upon our ability to make sales of our products, as
well as on our overall business operations and financial condition.

We have limited resources to devote to product development and
commercialization. If the commercialization of our Atometer(TM) detectors 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
market. Our current and primary objective is to commercialize our proprietary
Atometer(TM) detectors. 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 devices, the CarBomb Finder(TM), SIEGMA(TM) and
            STARRAY(TM) systems;

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

      o     our ability to manufacture our Atometer(TM) detectors 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 our Atometer(TM) detectors 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 our Atometer(TM)
            detectors;

      o     the timing of completion of acceptance testing for our Atometer(TM)
            detectors; and

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

                                      -39-
<PAGE>

We have introduced our CarBomb Finder(TM), SIEGMA(TM) and STARRAY(TM) systems
only recently, and all other applications of our technology are prototypes or at
earlier development stages. For the year ended April 30, 2006, we incurred
expenses of $2,044,323 or 32% of total operating expenses on research and
development, and we incurred expenses of $4,341,372 or 68% 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 and marketing of Atometer(TM) detectors. We
anticipate research and development costs to stay approximately at the same
level, to the extent that independent testing of our Atometer(TM) detectors 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 our CarBomb Finder(TM), SIEGMA(TM) and STARRAY(TM)
systems, 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 the
commercialization and marketing of our devices that proves unsuccessful may
delay or jeopardize the development of other products. The development of new
products require time and financial resources much greater than what we
currently have or 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, special nuclear materials,
illicit drugs, biological agents and other contraband is highly complex.

Due to our losses and accumulated deficit, we have 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 year ended April 30,
2006, and all subsequent periods, to include an explanatory paragraph related to
our ability to continue as a going concern, stating that "the Company had
negative cash flows from operations of $14,591,664 for the period from August
21, 1995 (inception) to April 30, 2006,. In addition, the Company had an
accumulated deficit of $40,432,588 and was in the development stage as of April
30, 2006. These factors raise substantial doubt about the Company's 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 expressing 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 have more
manufacturing, marketing, sales and distribution experience than we have, may
develop a technology which competes effectively with our stoichiometric
technology, and we may be unable to capture or maintain market share.

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 Atometer(TM) detectors, 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 introduce new technologies before we do,
allowing them to offer similar or more effective products at more competitive
prices. Any number of future technological developments could:

      o     adversely impact our competitive position;

                                      -40-
<PAGE>

      o     require write-downs of obsolete technology;
      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. The loss of services by one or more members of our management
and scientific teams could negatively affect our business and development
strategies. Members of our executive and scientific team, may be harmed. 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 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 sufficient capital due to economic conditions, we may
be unable 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     foreign currency controls;
      o     longer payment cycles and inadequate collection system;
      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.
6:31 AM 9/14/2006nce and our ability to successfully execute
a manufacturing plan is untested.

                                      -41-
<PAGE>

In order to be successful, we must be able to manufacture, or contract for the
manufacture of, our Atometer(TM) detectors 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
manufactured a limited number of systems for commercial sale, and have little
experience in contracting third parties to manufacture the product for us. In
order to move toward commercial production, in August 2004, we retained
engineering and construction consultants to develop a detailed conceptual plan
for a manufacturing facility, and in March 2005, we formed HiEnergy Mfg Company
in order to create a semi-autonomous division to develop and manage the
infrastructure, policies and controls for the manufacture and assembly of our
Atometer(TM) detectors. We anticipate that we will need to make a substantial
capital investment and recruit qualified personnel in order to build, equip
and/or operate any 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 Atometer(TM)
detectors at our facilities in Irvine and to continue this effort during fiscal
year 2007, or until either 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 to cover the costs of
            constructing and equipping a facility and for the manufacturing of
            our Atometer(TM) systems in quantities necessary to meet anticipated
            demand should approval by regulatory authorities be obtained;
      o     the ability to manufacture products that have minimal and acceptable
            defects;
      o     the ability to obtain product liability insurance;
      o     the ability to obtain approvals from any applicable state or federal
            regulatory agencies;
      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, or the failure to execute them, could delay the
manufacturing of our Atometer(TM) detectors, lead to higher costs, irreparably
damage our reputation with future customers due to factors such as quality
control or delays in order fulfillment, and result in our being unable to
effectively sell our Atometer(TM) detectors and substantially harm our business.

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 Atometer(TM) detectors 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 convert 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 Atometer(TM) detectors (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 our Atometer(TM)
detectors, including neutron generators with custom modifications and certain
sub-assemblies. For example, we obtain the standard sealed tube neutron
generators we use from the supplier, 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 our
Atometer(TM) detectors 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 shipments, which would also impair our ability to manufacture and sell our
Atometer(TM) detectors. 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 Atometer(TM) detectors and cause substantial
harm to our business.

                                      -42-
<PAGE>

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
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 protected by
patent protections 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 patent protection or where 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, which
constitute 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 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
products; 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. 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 as a
result 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. 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.

Governmental agencies have special contracting requirements, which create
additional risks.

                                      -43-
<PAGE>

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 may 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. Nonetheless, 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 such 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
Congress makes appropriations 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. We are therefore attempting to reduce 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 year ended April 30,
2006, we reported net losses available to common shareholders of $8,632,428 as
compared to a net loss available to common shareholders of approximately
$9,984,565 for the year ended April 30, 2005. Our accumulated deficit through
April 30, 2006 is $40,432,588. We expect that our losses will continue into
fiscal year 2007. We estimate that our aggregate financial requirements will be
between $4,000,000 and $6,000,000 for the fiscal year, until we can generate
sufficient revenues from sales to cover our operating costs. One of the factors
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.

Our success will depend in part on establishing and maintaining relationships
with industry partners. Our ability to produce and market the CarBomb Finder(TM)
and SIEGMA(TM) devices is dependent upon our ability to establish and maintain
satisfactory relationships with other companies and individuals. We may not be
able to enter into relationships with these companies on commercially reasonable
terms or at all. Even if we establish such relationships, not all may result in
benefits for our company.

We may grant third parties substantial marketing rights to our Atometer(TM)
detectors in an important market or industry. If the third parties are
unsuccessful in marketing our detectors, our marketing plan for the relevant
territory or industry could be jeopardized or interrupted.

From time to time, we may enter into distribution agreements with third parties
which provide substantial rights or exclusivity with regard to the marketing and
sale of our products to a particular region or industry These agreements would
make us greatly dependent on the ability of these third-parties in penetrating
and making sales within certain markets or industries. We generally attempt to
control this dependency by providing minimum performance requirements as to
sales activity and tangible results and providing acceptable cancellation or
termination provisions. Although we may have the right to cancel or terminate
these agreements, there may still be significant costs associated with
extricating ourselves from certain 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 are 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.

                                      -44-
<PAGE>

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 can give no assurance 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 therefore we could
experience various obstacles and significant costs in protecting our
intellectual property rights in foreign countries. If we are unable to obtain or
maintain these protections, we may be unable to prevent third parties from using
our intellectual property.

In the operation of our business, it is inevitable that certain employees,
consultants, vendors, current or prospective customers, distributors, government
officials, investors and other persons having a business relationship with us
will come in contact from time to time with certain of our trade secrets and
other proprietary information. Although we use reasonable efforts to ensure that
such persons sign confidentiality agreements with us, or otherwise respect the
proprietary and confidential nature of this information, our ability to protect
our rights depends upon us being aware that proprietary information has been or
may be misused and, even if we are aware of such fact, our ability further
depends upon having the resources necessary to compel such person not to misuse
such information, which may require costly legal proceedings which we may not be
able to afford at the time. If that were to be the case, our inability to
protect our proprietary and confidential trade secrets and information could
impair or destroy our ability to continue to claim proprietary rights in such
information, and/or could allow our competitors to access such information to
their competitive advantage and at our expense, either of which results could
have a materially adverse effect upon our business, operations and financial
condition, as well as the value of some or all of our intellectual property
rights in general.

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
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 developed 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 were developed prior to the SBIR contracts. Also,
the U.S. federal government might 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 limit the marketability of our
products. Furthermore, if we were to participate in 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 could otherwise be eligible for patent protection 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 upon to enforce our protections against intellectual property
and 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 this
date, we have not conducted an independent review of patents issued to third
parties. Because of the market opportunity we perceive, companies possessing
technology rights, which 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.

                                      -45-
<PAGE>

Regulatory and Legal Risks

The CarBomb Finder(TM), SIEGMA(TM), STARRAY(TM) systems and any future products
in development utilizing our Atometry(TM) 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
these and future products.

Our CarBomb Finder(TM), SIEGMA(TM), STARRAY(TM) systems 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 state, local and federal governmental laws and
regulations and licensing requirements, which may include those promulgated by
the State of California, U.S. Nuclear Regulatory Commission ("NRC") and 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 equipment. 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 expense, 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 Atometer(TM) detectors 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 to manufacture, but may be subject to additional state and local
regulations. 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. Currently, 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. 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 are 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 our Atometer(TM) detectors 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 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.

If our products, such as the CarBomb Finder(TM), SIEGMA(TM) and STARRAY(TM) 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 as soon as it is
necessary. 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 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
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.

                                      -46-
<PAGE>

If investors rely on projections or estimates we may make, they could assert in
a legal proceeding that we issued false or misleading statements about our
company. If they were able to prevail successfully in any such proceeding, it
could have a materially adverse impact on our business, operations, and
financial condition, as well as the market for our public securities. The
Company may from time to time make projections as to the sale of its units or
the growth of its business. These are considered forward looking statements and
the Company advises investors to not rely on these projections in making any
determination whether or not to invest in, or maintain an investment in our
stock. However, to the extent that any investor has so relied, and if the
investor can prove that any misstatements we have made were intentional or
reckless, that such investor's reliance on these misstatements was reasonable,
and that the investor has suffered actual damages as a result of such reliance,
than such investor may have a cause of action against us. If any investor were
to prevail in making such assertions in any legal proceeding, it could have a
materially adverse impact on our business, operations, and financial condition,
as well as the market for our public securities.

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, 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 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. 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.

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 a former director, Mr. Gregory F. Gilbert, and a separate
investigation by the SEC involving persons suspected of stock manipulation 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. 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.

A former director's outside legal proceedings were not promptly disclosed to the
public.

Mr. Gregory F. Gilbert, a former director of the Company, 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 have been disclosed in prior filings made by us. 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.

                                      -47-
<PAGE>

Corporate Risks

We have identified weaknesses in our internal controls which may affect our
ability to comply with our public company reporting obligations, and any lack of
compliance with these reporting obligations 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,

Although our management has concluded that while our system of disclosure
controls and procedures were effective in meeting our disclosure obligations
under the federal securities laws, two weaknesses exist: (i) a lack of
segregation of duties and (ii) a lack of a more systemic and formal approach to
the conduct of our corporate, financial and business affairs. These weaknesses
result primarily from a lack of capital and human resources. Although we plan to
hire additional personnel, we can offer no assurances that we will be
successful. If we are unsuccessful in strengthening our system of disclosure
controls and procedures, 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.

We may have insufficient amounts of, or may be otherwise unable to draw from,
directors' and officers' liability insurance.

Although we have obtained, and paid premiums for, levels of directors' and
officers' liability insurance to cover legal challenges where we may have
indemnification obligations to persons serving in such capacities on behalf of
our company, our insurance carrier may not pay all claims which we tender to it
under our policy. Even if they do honor claims which we may make at the maximum
levels required under our policy, the amounts of insurance which we can afford
to maintain at any given time may be insufficient to cover the amount of any
claims for indemnification made against us by our current or former officers or
directors. Furthermore, the policies of insurance which we currently or may in
future maintain normally do not fund amounts which we may pay out in defense
costs or indemnification directly, but rather will reimburse us for amounts
which we must pay up front, and normally only after significant deductible
amounts are paid for which we would not be reimbursed. Accordingly, if we were
to be required to fund expensive litigation involving our present or former
officers or directors, and/or to pay them amounts as indemnification which we
may owe to them, and to the extent that such amounts exceed the amount of
reimbursement we are able successfully to obtain from our relevant carriers, it
could have a materially adverse effect upon our business, operations and
financial condition.

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 or unenforceable as a matter of law or when the
securities can be sold pursuant to Rule 144.

                                      -48-
<PAGE>

The amount of the penalties paid or accrued as a result of the defaults
described above for the year ended April 30, 2006 is 746,338 shares of common
stock, $12,000 in aggregate face amount of additional convertible notes, and
warrants to purchase an additional 3,695,245 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 raise additional equity capital
in the future.

Our common stock price is subject to significant volatility, which could result
in substantial losses for investors and 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 $0.16, 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 suits 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.

There is a risk of dilution resulting from continued issuances of securities to
management, employees, consultants, and related parties which may reduce the
market price of our common stock, and may also lead to difficulty in obtaining
additional equity capital.

We issued options to purchase 421,980 shares of our common stock to our former
Chairman in fiscal year 2005 and options to purchase 529,510 shares in fiscal
year 2006 for services rendered as our Chief Executive Officer and Chief
Scientific Officer, pursuant to his employment contract. Also, pursuant to the
terms of various other agreements entered into by the Company, we also issued or
committed to issue options to purchase 2,535,000 shares and 1,464,510 shares in
fiscal years 2005 and 2006, respectively, to other employees and directors. In
fiscal year 2005 we issued a warrant to purchase 100,000 shares to our former
controller. As to consultants, in fiscal year 2006 we issued or committed to
issue options or warrants to purchase 177,179 shares. 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.

                                      -49-
<PAGE>

There were 64,202,668 shares of our common stock outstanding as of April 30,
2006, which does not include 3,964,635 new shares we have committed to be
issued. We also may be required to issue up to 704,190 shares of our common
stock to former holders of options and warrants of HiEnergy Microdevices who
hold rights to purchase our shares of common stock at $0.156 per share. These
rights survived the short-form merger completed in January 2005, and may be
exercised any time before April 25, 2007, subject to the payment of promissory
notes representing the purchase price. We also had outstanding as of April 30,
2006, warrants to purchase 13,986,358 and options to purchase 10,337,344 shares
of our common stock. If we issue all of the shares underlying for those warrants
and options in-the money, based on the April 30, 2006 closing price of our
common shares of $0.34, and then outstanding convertible notes, this would
result in approximately 6% dilution, of the ownership interest of holders of our
common stock, and result in proceeds of approximately $335,739 in cash and
approximately $900,000 in forgiveness of indebtedness. 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 percentage 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 that would require funding
include investments in capital equipment, technology 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 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. Further, we
have sold through private placements, warrants that have cashless exercise
provisions, in which the holder shall receive a net number of shares based upon
the share price on the trading day preceding the exercise date of the warrant if
the underlying shares of warrants with cashless exercise provisions are not
registered under an effective registration statement by a certain date. As of
April 30, 2006, we had outstanding warrants to purchase a total of 4,801,291
shares which may be exercised by means of a cashless exercise. Accordingly, in
the event there is a large spread between the exercise price and the share price
on the trading day of our common stock, a cashless exercise of warrants could
result in a significant amount of additional shares.

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 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
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 an amount 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.

Should 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.

                                      -50-
<PAGE>

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
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. From January 2005, our shares have appeared
frequently on the "Threshold Security List" published in connection with
Regulation SHO, which may indicate questionable shorting activity involving our
securities. We have also learned that our listing on the Berlin-Bremen Stock
Exchange ("BBSE") by a third-party poses a risk to our stock and provides an
avenue for such short trading activity by providing a loophole in the short
sales regulations adopted by the National Association of Securities Dealers. The
loophole is applicable to those shares traded in the U.S. stock market and
listed for trading on a foreign stock market, such as the BBSE, and purportedly
held in foreign brokerage accounts. While we have taken steps to effectuate the
delisting of our stock from the BBSE, under the rules of that exchange an issuer
does not necessarily have the right to compel such delisting and, accordingly,
there can be no assurance if or when our stock might be delisted from the BBSE.
If our stock were not promptly delisted from the BBSE, it could have a
materially adverse effect upon the price of our shares in the market and
increase price volatility, which could in turn affect our ability to raise
needed capital, which could have a materially adverse effect upon our business,
operations and financial condition.

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, including 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.


                                      -51-
<PAGE>

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 the National Quotation Bureau that compiles
quote information reported on the National Association of Securities Dealers'
composite feed or other qualified inter-dealer quotations' media and from other
public sources. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. 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, 2006, our shares were traded on the OTCBB under the symbol "HIET". Upon
receipt by the NASD of notification that HiEnergy Technologies has complied with
its reporting requirements, the "E" is expected to be removed and our trading
symbol reverted to "HIET".

<TABLE>
<CAPTION>
                                                                                    -------------      -------------
                                                                                         High                Low
                                                                                    -------------      -------------
<S>                                                                                         <C>                <C>

    Fiscal Year 2005-2006

    Fourth Quarter (February 1, 2006 to April 30, 2006) (interim)                           $0.52              $0.31

    Third Quarter (November 1, 2005 to January 31, 2006)                                    $0.69              $0.33

    Second Quarter (August 1, 2005 to October 31, 2005)                                     $0.88              $0.55

    First Quarter (May 1, 2005 to July 31, 2005)                                            $0.85              $0.61


    Fiscal Year 2004-2005

    Fourth Quarter (February 1, 2005 to April 30, 2006) (interim)                           $0.99              $0.70

    Third Quarter (November 1, 2004 to January 31, 2005)                                    $1.15              $0.67

    Second Quarter (August 1, 2004 to October 31, 2004)                                     $1.85              $0.61

    First Quarter (May 1, 2004 to July 31, 2004)                                            $2.34              $0.80
</TABLE>


As of July 31, 2006, representing the last business day of our most recently
completed fiscal quarter, we had 67,693,936 shares of common stock issued and
outstanding, held by approximately 320 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 a multitude of additional 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.


EQUITY COMPENSATION PLANS.

The following table sets forth information as of April 30, 2006 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.


                                      -52-
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------- --------------------------- ------------------------ ---------------------------
                                                  (a)                        (b)                     (c)

PLAN CATEGORY                           NUMBER OF SECURITIES TO       WEIGHTED-AVERAGE         NUMBER OF SECURITIES
                                        BE ISSUED UPON EXERCISE       EXERCISE PRICE OF      REMAINING AVAILABLE FOR
                                        OF OUTSTANDING OPTIONS,     OUTSTANDING OPTIONS,      FUTURE ISSUANCE UNDER
                                          WARRANTS AND RIGHTS        WARRANTS AND RIGHTS       EQUITY COMPENSATION
                                                                                                 PLANS (EXCLUDING
                                                                                             SECURITIES REFLECTED IN
                                                                                                   COLUMN (a))
-------------------------------------- --------------------------- ------------------------ ---------------------------
<S>                                    <C>                         <C>                      <C>
Equity compensation plans approved     6,203,439                   $0.71                    0
by security holders (1), (2), (3),
(4), (5)
-------------------------------------- --------------------------- ------------------------ ---------------------------
Equity compensation plans not          2,216,726                   $0.59                    1,000,000(10)
approved by security holders (6),
(7), (8), (9)
-------------------------------------- --------------------------- ------------------------ ---------------------------
Total (11)                             8,420,165                   $0.68                    0
-------------------------------------- --------------------------- ------------------------ ---------------------------
</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,
which was terminated on April 8, 2006, provided for the issuance of stock
options to Dr. Maglich annually through December 31, 2006 or the date of
termination, options to purchase one percent per year of the amount of our
common stock issued and outstanding at the end of each year with an exercise
price equal to the average trading price for the preceding thirty days and with
terms of five years.

(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 options to purchase 313,221 shares
of common stock with an exercise price of $0.87 and on December 31, 2004, we
granted him options to purchase 421,980 shares with an exercise price of $0.98
for calendar years 2003 and 2004, respectively, pursuant to the terms of his
employment agreement. In addition, on December 31. 2005, we granted Dr. Maglich
options to purchase 529,510 shares with an exercise price of $0.49 for calendar
year 2005.

(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. Options granted to employees who are not
officers, directors or Service Providers shall vest and become exercisable in
installments at a minimum rate of 20% per year over a period of five (5) years
from the date the Option is granted. No Option may be exercisable more than ten
(10) years after the date it is granted. An Incentive Option granted to a person
who is a 10% Shareholder on the date of grant shall not be exercisable more than
five (5) years after the date it is granted. No Incentive Option or Nonqualified
Option shall be assignable or transferable except by will or the laws of descent
and distribution, and during the life of the Optionee shall be exercisable only
by such Optionee.

(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
purchase 400,000 shares of our common stock with an exercise price of $0.75 and
a term that ends on May 16, 2009 to our employees and consultants. On June 26,
2003 our Board of Directors approved the issuance and grant of incentive stock
options 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 to our employees. On July 16, 2003
our Board of Directors approved the issuance and grant of non-qualified stock
options 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 to our consultants. On August 27,
2003 our Board of Directors approved the issuance and grant of incentive stock
options to purchase 65,000 shares of our common stock to our employees, and
nonqualified options to purchase 40,000 shares of our common stock with an
exercise price of $1.02 and a term that ends August 27, 2009 to our consultants.
On November 7, 2003, our Board of Directors approved the issuance and grant of
non-qualified options to purchase 100,000 shares of our common stock, with an
exercise price of $0.35 and a term that ends November 7, 2009, to one of our
directors. On November 7, 2003, our Board of Directors approved the issuance and
grant of nonqualified options to purchase 740,000 shares of our common stock,
with an exercise price of $1.25 and a term that ends November 7, 2009, to our
directors and consultants. On November 7, 2003, our Board of Directors approved
the issuance and grant of nonqualified options to purchase 100,000 shares of our
common stock, with an exercise price of $0.35 and a term that ends November 7,
2009 to one of our directors, and on December 4, 2003, we granted stock options
to purchase 350,000 shares of our common stock, with an exercise price of $0.90
and a term that ends December 4, 2009, to our employees and consultants. On
April 29, 2004, we granted stock options to purchase 100,000 shares of our
common stock, with an exercise price of $2.06 and a term that ends April 29,
2010, to our employees. Of the options granted, 85,000 were subsequently
forfeited pursuant to the terms of the Plan.

                                      -53-
<PAGE>

(6) On March 10, 2004, our Board of Directors approved the issuance and grant of
non-qualified stock options to purchase 29,000 shares of our common stock with
an exercise price of $1.42 and a term that ends on March 10, 2010 to board
members of HiEnergy Defense. On June 28, 2004, our Board of Directors approved
the issuance and grant of incentive stock options to purchase 25,000 shares of
our common stock with an exercise price of $1.78 and a term that ends on June
28, 2010 to one of our employees. On July 19, 2004, our Board of Directors
approved the issuance and grant of incentive stock options to purchase 30,000
shares of our common stock with an exercise price of $1.09 and a term that ends
on July 19, 2010 to one of our employees. On July 21, 2004 our Board of
Directors approved the issuance and grant of non-qualified stock options to
purchase 100,000 shares of our common stock with an exercise price of $0.94 and
a term that ends on July 21, 2010 to one of our board members upon his
appointment. On August 5, 2004, our Board of Directors approved the issuance and
grant of non-qualified stock options to purchase 200,000 shares of our common
stock with an exercise price of $1.25 and a term that ends on August 5, 2010 to
two of our board members upon their appointment. On August 18, 2004, our Board
of Directors approved the issuance and grant of incentive stock options to
purchase 25,000 shares of our common stock with an exercise price of $0.96 and a
term that ends August 18, 2010 to one of our employees. On August 27, 2004, our
Board of Directors approved the issuance and grant incentive options to purchase
25,000 shares of our common stock, with an exercise price of $0.85 and a term
that ends August 27, 2010, to one of our employees. On November 5, 2004, our
Board of Directors approved the issuance and grant of nonqualified options to
purchase 330,000 shares of our common stock, with an exercise price of $1.04 and
a term that ends November 5, 2010, to our directors and consultants. Of the
options granted, 100,000 were subsequently forfeited pursuant to the terms of
the grant.

(7) On January 19, 2005, our Board of Directors approved the issuance and grant
of incentive options to purchase 390,000 shares of our common stock, with an
exercise price of $0.72 and a term that ends January 19, 2011 to our employees.
On January 19, 2005, our Board of Directors approved the issuance and grant of
incentive options to purchase 500,000 shares of our common stock, with an
exercise price of $0.72 and a term that ends January 19, 2011 to our Vice
President/Corporate Secretary. On February 1, 2005, our Board of Directors
approved the issuance and grant of incentive options to purchase 35,000 shares
of our common stock, with an exercise price of $0.86 and a term that ends
February 1, 2011, to one of our employees. On March 1, 2005, our Board of
Directors approved the issuance and grant of incentive options to purchase
500,000 shares of our common stock, with an exercise price of $0.72 and a term
that ends March 1, 2011 to our Controller. On April 1, 2005, our Board of
Directors approved the issuance and grant of nonqualified options to purchase
315,000 shares of our common stock, with an exercise price of $0.01 and a term
that ends April 1, 2011, to one of our directors. On April 29, 2005, our Board
of Directors approved the issuance and grant of incentive options to purchase
50,000 shares of our common stock, with an exercise price of $0.73 and a term
that ends April 29, 2011, to one of our employees. Of the options granted,
80,000 were subsequently forfeited pursuant to the terms of the grant.

(8) On June 25, 2005, our Board of Directors approved the issuance and grant of
an incentive stock option to purchase up to 25,000 shares of our common stock
with an exercise price of $0.70 per share and a term that ends June 25, 2011, to
one of our consultants. On July 19, 2005, our Board of Directors approved the
issuance and grant of an incentive stock option to purchase up to 30,000 shares
of our common stock with an exercise price of $0.68 per share and a term that
ends July 19, 2011, to one of our employees. On August 5, 2005, our Board of
Directors approved the issuance and grant of a non-qualified stock option to
purchase up to 200,000 shares of our common stock with an exercise price of
$0.68 per share and a term that ends August 5, 2011, to two of our board
members. On August 18, 2005, our Board of Directors approved the issuance and
grant of an incentive stock option to purchase up to 25,000 shares of our common
stock with an exercise price of $0.68 and a term that ends August 18, 2011, to
one of our employees. On August 27, 2005, our Board of Directors approved the
issuance and grant of an incentive stock option to purchase up to 25,000 shares
of our common stock with an exercise price of $0.68 and a term that ends August
27, 2011, to one of our employees. On November 7, 2005, our Board of Directors
approved the issuance and grant of a non-qualified stock option to purchase up
to 330,000 shares of our common stock with an exercise price of $0.65 and a term
that ends November 7, 2011, to four of our directors. On December 30, 2005, our
Board of Directors approved the issuance and grant of an incentive stock option
to purchase up to 20,000 shares of our common stock with an exercise price of
$0.38 and a term that ends December 30, 2011, to one of our consultants. On
February 1, 2006, our Board of Directors approved the issuance and grant of an
incentive stock option to purchase up to 35,000 shares of our common stock with
an exercise price of $0.39 and a term that ends February 1, 2012, to one of our
employees. On April 29, 2006, our Board of Directors approved the issuance and
grant of an incentive stock option to purchase up to 50,000 shares of our common
stock with an exercise price of $0.34 and a term that ends April 29, 2012, to
one of our employees.

                                      -54-
<PAGE>

(9) On July 12 2002, we issued and granted a non-qualified stock option to
purchase up to 1,000,000 shares of our common stock with an exercise price of
$1.00 per share to Isaac Yeffet. The stock option was issued in connection with
a consulting agreement between Yeffet Security Consultant, Inc and HiEnergy
Technologies. In June 2006, all of the above options were voluntarily forfeited
by Yeffet pursuant to the terms of a Settlement Agreement. On September 25,
2002, we issued stock options to purchase an aggregate of 45,454 shares of
common stock at $1.00 per share and on December 19 2002 we issued additional
stock options to purchase an aggregate of 27,272 shares of common stock at $2.24
per share to Shea Wilson and Derek Woolston.

(10) On September 19, 2005, our Board of Directors approved a 2006 Consultant
Stock Plan reserving 1,000,000 shares for issuance to consultants in
compensation of services provided to the Company. Our management never
implemented the 2006 Consultant Stock Plan and no shares have ever been issued
under it. We anticipate that this plan will be cancelled at our next Board
meeting.

(11) The preceding footnotes all affect this total.


RECENT SALES OF UNREGISTERED SECURITIES

Set forth below is information regarding securities during the year ended April
30, 2006 that were not registered under the Securities Act of 1933, as amended:

      o     In April 2006, we committed to issue 25,000 Shares to the members of
            our Board of Directors, as compensation for meeting attendance, each
            board member receiving 5,000 Shares. We believe the issuances of
            these securities were exempt under Section 4(2) of the Securities
            Act.

      o     In April 2006, we committed to issue 12,132 Shares and warrants to
            purchase 180,414 Shares at various exercise prices between $0.45 and
            $1.75, to various holders of securities with registration rights as
            a penalty, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. These
            holders were accredited investors when they acquired the right to
            receive these shares and warrants and we believe the issuances of
            these securities are exempt under Section 4(2) of the Securities Act
            and Regulation D.

      o     In April 2006, we issued 1,886,600 Shares to The Yocca Law Firm, LLP
            in settlement of convertible promissory notes issued in connection
            with legal services rendered in the aggregate amount of $448,722.06,
            plus $117,257.94 of accrued interest. These holders were accredited
            investors when they acquired the notes and we believe the issuances
            of these securities are exempt under Section 4(2) of the Securities
            Act and Regulation D.

      o     In April 2006, we issued to David Baker, a member of our Board of
            Directors, a convertible promissory note for $25,000, bearing
            interest at 10% per annum and convertible into Shares at $0.30 per
            Share, with warrants to purchase 10,000 Shares at a price of $0.60
            per Share, for a cash investment of $25,000. The note provides for
            automatic exchange into the next qualified financing, as defined
            therein, at 110% of the then outstanding balance, including accrued
            interest. This investment was on the same terms as concurrently made
            by unaffiliated investors. The note was subsequently exchanged into
            an offering of our Series B Convertible Preferred Stock in June
            2006. Mr. Baker is an accredited investor and we believe the
            issuance of these securities is exempt under Section 4(2) of the
            Securities Act and Regulation D.

      o     In March 2006, we issued to Dr. Robert Neborsky a convertible
            promissory note for $300,000, bearing interest at 10% per annum and
            convertible into Shares at $0.30 per Share, with warrants to
            purchase 120,000 Shares at a price of $0.60 per Share, for a cash
            investment of $300,000. The note provides for automatic exchange
            into the next qualified financing, as defined therein, at 110% of
            the then outstanding balance, including accrued interest. The note
            was subsequently exchanged into an offering of our Series B
            Convertible Preferred Stock in June 2006. Dr. Neborsky is an
            accredited investor and we believe the issuance of these securities
            is exempt under Section 4(2) of the Securities Act and Regulation D.

      o     In March 2006, we issued to William A. Nitze, a member of our Board
            of Directors, a convertible promissory note for $31,500, bearing
            interest at 10% per annum and convertible into Shares at $0.30 per
            Share, with warrants to purchase 12,600 Shares at a price of $0.60
            per Share, for a cash investment of $31,500. The note provides for
            automatic exchange into the next qualified financing, as defined
            therein, at 110% of the then outstanding balance, including accrued
            interest. This investment was on the same terms as concurrently made
            by unaffiliated investors. The note was subsequently exchanged into
            an offering of our Series B Convertible Preferred Stock in June
            2006. Mr. Nitze is an accredited investor and we believe the
            issuance of these securities is exempt under Section 4(2) of the
            Securities Act and Regulation D.

                                      -55-
<PAGE>

      o     In March 2006, we committed to issue 10,000 Shares to the members of
            our Board of Directors, as compensation for meeting attendance. We
            believe the issuances of these securities were exempt under Section
            4(2) of the Securities Act.

      o     In March 2006, we committed to issue 12,132 Shares and warrants to
            purchase 177,602 Shares at various exercise prices between $0.45 and
            $1.75, to various holders of securities with registration rights as
            a penalty, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. These
            holders were accredited investors when they acquired the right to
            receive these shares and warrants and we believe the issuances of
            these securities are exempt under Section 4(2) of the Securities Act
            and Regulation D.

      o     In February 2006, we committed to issue 236,842 Shares to Vladimir
            Stanich as payment for accrued engineering consulting services of
            $90,000 rendered from August 15, 2005 through February 15, 2006. Mr.
            Stanich is an accredited investor and we believe the issuance of
            these securities is exempt under Section 4(2) of the Securities Act
            and Regulation D.

      o     In February 2006, we committed to issue 10,000 Shares to the members
            of our Board of Directors, as compensation for meeting attendance.
            We believe the issuances of these securities were exempt under
            Section 4(2) of the Securities Act.

      o     In February 2006, we committed to issue 12,132 Shares and warrants
            to purchase 174,790 Shares at various exercise prices between $0.45
            and $1.75, to various holders of securities with registration rights
            as a penalty, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. These
            holders were accredited investors when they acquired the right to
            receive these shares and warrants and we believe the issuances of
            these securities are exempt under Section 4(2) of the Securities Act
            and Regulation D.

      o     In April 2006, we committed to issue 1,001,151 Shares to Richard
            Melnick to satisfy outstanding convertible promissory notes in the
            aggregate amount of $300,345. Mr. Melnick is an accredited investor
            and we believe the issuances of these securities are exempt under
            Section 4(2) of the Securities Act and Regulation D.

      o     In February 2006, we issued or committed to issue 611,892 Shares to
            Jackson Asset Management and Richard Melnick in exchange for
            $122,378 upon the exercise of warrants by accredited investors. We
            believe the issuances of these securities are exempt from
            registration pursuant to Sections 4(2) and 3(a)(9) of the Securities
            Act of 1933 and Regulation D.

All Shares issued as described above in this section were issued bearing a
restrictive legend stating that the Shares were restricted securities.


                                      -56-
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND 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.

Any reference to "we," "us" and "our" herein shall mean HiEnergy Technologies,
Inc., together with its consolidated subsidiaries, HiEnergy Defense, Inc.,
HiEnergy Mfg Company, HiEnergy International, Inc., and HiEnergy Europe, Ltd,
and its former majority-owned subsidiary, HiEnergy Microdevices, Inc.

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company and creator of the world's
first "stoichiometric" diagnostic devices that can effectively decipher chemical
compositions of unknown substances, without human intervention. Traditionally,
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.

Our AtometerTM detectors incorporate a proprietary interrogation process that
activates a selected target with high energy neutrons, causing the contents to
emit gamma rays of varying energies, which are then decoded, with the use of
proprietary algorithms, to determine with a high level of confidence, the
chemical composition of the targeted substance. To our knowledge, our AtometerTM
detectors are the only commercially available devices with this "stoichiometric"
capability and therefore we believe are uniquely positioned in the marketplace.

Since inception, we have primarily focused on the research, development and
commercialization of AtometerTM explosives detectors for the homeland security
and defense markets. Our AtometerTM explosives detectors can non-invasively and
remotely detect and confirm, through metal or other barriers, the presence of
explosives in an object, with a probability of detection of greater than 97% and
"false positive" and "false negative" rates of 3%. Further, they have
demonstrated the capability to detect hidden explosives, irrespective of shape
or form, solid or liquid. In numerous studies, we have also been able to detect
other select combustibles, biological agents, and illicit substances, such as
narcotics.

Currently, we are focused on the commercialization and sale of the following
AtometerTM detectors:

      o     SIEGMATM 3E3 and 3M3 - portable, suitcase-borne systems for the
            remote detection and confirmation of home-made bombs, also known as
            Improvised Explosive Devices or "IEDs" and uniquely addressing the
            significant problems posed by unattended or suspicious packages.

      o     CarBomb FinderTM 3C4 - vehicle-borne system for the detection and
            confirmation of car bombs, in which the sensors are deployed from
            the vehicle at the end of a mechanical arm and placed in proximity
            to the target.

      o     CarBomb FinderTM 3C5 - in-ground vehicle screening system for the
            detection and identification of car bombs at checkpoints and
            chokepoints, developed in response to the high demand for critical
            infrastructure protection and improved perimeter defense.

      o     STARRAYTM - all-terrain robot-borne detector for the stand-off
            detection of unexploded ordnance, landmines and IEDs, which can also
            be configured and integrated in various robotic and remote-vehicle
            platforms.

We have been marketing our initial AtometerTM detectors globally to governmental
and private entities, including the military. We are also negotiating licenses
for the distribution of our devices with various industry partners. To date,
however, we have yet to generate meaningful revenues from the sale of our
products or licensing of our technologies and 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.
Although a portion of this research and development has been developed through
funding from the Government, most of our research related work is funded
internally in order to capture full intellectual property rights from any
inventions or processes that may arise.

                                      -57-
<PAGE>

We expect to continue the research and development of applications of our
technologies and their further exploitation, both internally and through
collaboration with third parties. In order to capitalize on the commercial
opportunities that have been identified for our AtometerTM detectors, we will
need to continue to pursue intensive research and development initiatives and
advance our AtometerTM detector system designs to provide more rapid and precise
detection and analytical capabilities and improve their reliability in the
field. Historically, we have developed prototypes in programs with the U.S.
Department of Defense and the Department of Homeland Security for other related
uses of our core technology, including a cooperative development agreement with
the U.S. Transportation Security Administration to produce a proof of concept
incorporating our SuperSenzorTM technology into a next-generation baggage
screening system. While we expect to continue to pursue and receive additional
research and development funds through these agencies, we also have
independently funded our research, such as the use of our AtometerTM detectors
for medical diagnostics and other industrial applications.

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 to
be considered part of this Annual Report on Form 10-KSB.


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
former Chairman, Dr. Bogdan Maglich, obtained the right to receive up to 64%
percent of the outstanding shares of SLW. 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, and was later
merged with the Company in January 2005 in a short-form merger through which the
Company committed to issue 452,029 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of Microdevices (the same ratio that was used in the original
voluntary share exchange). Additionally, we may be required to issue up to
704,190 shares of the Company's common stock to former holders of options and
warrants of Microdevices who hold rights to purchase HiEnergy shares at $0.156
per share. These rights survived the merger and may be exercised any time before
April 25, 2007, subject to the payment of promissory notes representing the
purchase price.


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
no material 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 in Risk Factors: Risks Related to Our
Business earlier in this Report, 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 and accompanying Notes and
the other financial information appearing elsewhere in this Report, 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.

                                      -58-
<PAGE>

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.

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 market price 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 market price
of our common stock was the quoted market price of the common stock at closing
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 and EITF 9-18 in determining the fair value of
the equity instruments granted requires judgment, including as to 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, 2006 COMPARED TO YEAR ENDED APRIL 30, 2005


For the year ended April 30, 2006, we incurred a net loss of $8,632,428, as
compared to a net loss of $9,984,565 for the year ended April 30, 2005. Included
in the losses are equity based expenses of $2,568,494 and $5,381,000,
respectively.

Operating Expenses

GENERAL AND ADMINISTRATION

General and administration expenses were 4,341,000 for the year ended April 30,
2006, a decrease of 606,000 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, legal and other professional services,
and directorship. Some warrants and options have been issued and expensed, but
then subsequently forfeited causing no dilution to us. The major components of
general and administration expenses, both cash and equity, are as follows:

<TABLE>
<CAPTION>
                          Year Ended April 30, 2006                   Year Ended April 30, 2005
                  -----------------------------------------------------------------------------------------
                     Cash &       Equity                       Cash &          Equity
                    Accrued        Based                      Accrued          Based                           Increase/
                    Expenses   Compensation      Total        Expenses      Compensation       Total           (Decrease)
                  ----------------------------------------------------------------------------------------- ----------------
<S>                <C>            <C>           <C>              <C>            <C>              <C>              <C>
   Salaries and    $ 1,274,000    $   32,000    $ 1,306,000      $767,000       $   87,000       $ 854,000        $ 452,000
   related

   Consulting           74,000       104,000        178,000       340,000          566,000         906,000        (728,000)

   Legal fees          750,000        60,000        810,000       752,000          390,000       1,142,000        (332,000)
   Accounting
   fees                282,000             -        282,000       464,000                -         464,000        (182,000)
   Investor  &
    public
   relations           182,000             -        182,000       244,000                -         244,000         (62,000)

   Insurance           191,000             -        191,000       169,000                -         169,000           22,000

   Travel              359,000             -        359,000       391,000                -         391,000         (32,000)

   Other               932,000       101,000      1,033,000       536,000          241,000         777,000         256,000
                  ----------------------------------------------------------------------------------------------------------
           Total   $ 4,044,000     $ 297,000    $ 4,341,000  $  3,663,000       $1,284,000     $ 4,947,000      $ (606,000)
                  ----------------------------------------------------------------------------------------------------------
</TABLE>


For the year ended April 30, 2006, as compared to the prior year, salary and
related expense increased $452,000. This increase was primarily due the hiring
of additional administrative personnel, expanded benefits including the
establishment of investment retirement accounts, as well as supplemental salary
increases and non-recurring incentives. The increase over the prior year also
reflects full year employment of two key personnel, including our current
President and CEO, Roger W.A. Spillmann, hired in January 2005, and our
Controller hired in March 2005. Both served as consultants for the greater part
of the prior year period, and only were employees for only a few months at the
end of the prior year. Accordingly, a significant portion of the increase in
employee wages and benefits expense for fiscal year 2006 attributed to both new
hires and corresponds to a decrease in consultancy expense for the same period,
as related below. Due to personnel reductions accomplished in the fourth quarter
ended April 30, 2006, as part of cost-saving measures under our restructuring
plan, as well as the resignation of our Controller, salary and benefits expense
is expected to decrease significantly into fiscal year 2007. An estimated
$440,000 in annual salary and benefits expense has been eliminated with these
personnel reductions. However, we expect salaries and benefits expense to
increase moderately in the second half of fiscal 2007 with the hiring of
additional administrative personnel to provide greater support toward our public
reporting requirements, internal controls, sales and marketing activities, and
other legal and financial matters related to our commercialization objectives.

Consulting expenses for the year ended April 30, 2006, decreased $728,000 from
the prior year. This decrease was attributable to a decrease of $462,000 in
equity-based compensation from $566,000 to $104,000 for the year ended April 30,
2006. Excluding equity-based compensation, consulting expenses decreased
$266,000 from the prior year and was primarily attributable to the conversion of
consultants to employees, as discussed above. The higher amount of equity-based
compensation expense for the prior year period reflects issuances of common
shares for business development and consulting services and to directors for
meeting attendance, as well as an option issued to a director which resulted in
a charge of $233,000, while the current year period only includes shares issued
to directors for board attendance. We expect cash consulting fees to increase
moderately into fiscal 2007 with the use of accounting and legal consultants to
meet our short-term reporting requirements, and total consulting expense,
including equity compensation, to increase thereafter as we accelerate our
efforts to bring our product to market. Generally, we have reduced our reliance
on paying for services with restricted equity instruments because of the
significant discounting required to compensate for their illiquidity; however,
we do anticipate having to offer equity based compensation opportunistically in
an effort to conserve cash.

Legal fees decreased $332,000 for the year ended April 30, 2006 as compared to
the prior year. The decrease was primarily due to our reduced reliance on the
issuance of equity-based compensation, which was $390,000 for the prior year
period as compared to $60,000 for the current year period. The $60,000 of
equity-based compensation expense incurred for the ended April 30, 2006
represents the excess cost of having settled certain outstanding accounts
payable to a related party for legal services. Excluding equity-based
compensation, legal fees increased slightly by $2,000. Although we have been
able to accomplish savings by internalizing many corporate and regulatory
functions and reducing our reliance on outside corporate legal services, these
savings have been outpaced by an increase in litigation expense related to our
defense of a class action law suit and other pending legal matters disclosed in
this Report. Although we have settled three claims during the last six months
and aim to settle most of the remaining pending litigation matters, we expect
litigation expense to remain high during fiscal year 2007. Corporate legal
expenses are also expected to remain high as we pursue the filing of
registration statements for stock issued to employees, consultants and
investors, and proxy materials associated with our next shareholders' meeting,
and then decrease during fiscal year 2007. We also anticipate having to offer
equity based compensation to settle legal expenses opportunistically in an
effort to conserve cash. Lastly, we are involved with various appeals and
defenses related to patent applications made by us, which shall require an
increase of activity by IP counsel, creating patent filing expense.

Accounting fees decreased $182,000 for the year ended April 30, 2006 as compared
to the prior year. This decrease was due to a reduction in accounting activity.
Accounting fees began decreasing significantly in the second half of fiscal year
2005 compared to prior year periods, and continued the savings trend throughout
fiscal year 2006. The savings is the result of normalized accounting activity
and improvements to, and efficiencies achieved, in our internal reviews. We have
increased accounting staff in order to further reduce external accounting costs
and improve and generate efficiencies in our financial controls. For the first
half of fiscal 2007, we expect accounting fees to increase slightly and remain
higher than the norm as we pursue the filing of registration statements for
stock issued to employees, consultants and investors.

                                      -59-
<PAGE>

Investor and public relations expense decreased $62,000 for the year ended April
30, 2006 as compared to the prior year. During fiscal year 2006, we sought
cost-effective solutions to our investor relations and public relations
activities, so we could continue to direct majority of our resources toward more
immediate concerns, such as product development, the funding of internal
operations, and expenditures related to legal and regulatory matters. In June
2005, we entered into a cost-effective contract with a consultant to provide
public media relations on a success fee basis and in August 2005 engaged an
outside consultant to provide investor relations services at $2,000 per month.
We anticipate investor and public relations expense to remain steady in the
first half of fiscal year 2007 and increase moderately thereafter as we seek to
develop increased awareness among the investor community.

Insurance expense increased by $22,000 for the year ended April 30, 2006 over
the prior year. This increase was primarily attributable to an overall increase
for health insurance premiums as well as an increase for new hires, and
increased workers compensation premiums. In June 2006, we renewed our Directors
and Officers liability policy for an additional year at a lower cost than that
of the prior year period, which together with the elimination of certain health
insurance costs resulting from a reduction of personnel, should result in a
decrease in insurance expense for the first half of fiscal year 2007. We expect
insurance expense thereafter to increase moderately with an anticipated
expansion of operations as well as the need for comprehensive product liability
coverage.

Travel expenses decreased by $32,000 for the year ended April 30, 2006 over the
prior year. In spite of expanding operations and increased outside sales
activity, we only experienced a slight increase primarily due to our better
administration of costs for offsite demonstrations. During the prior year
period, we incurred significant costs with regards to a demonstration of our
CarBomb FinderTM prototype in Istanbul, Turkey, which was attended by a team of
scientific personnel and required expedited shipments of heavy equipment and
materials utilized in the demonstration. We have since improved our
administration of costs for offsite demonstrations and have reduced the
personnel requirement for demonstrations to one or two scientific staff and one
or two sales representatives. Further, we are conducting all demonstrations with
our suitcase-borne system which is more cost effective to ship than our vehicle
system, and have placed significant emphasis on the domestic market and have
limited demonstrations overseas as part of our new capital prioritization
policy. We expect that travel expenses for the remainder of fiscal year 2007
will remain steady as our sales and marketing personnel continue to attend
numerous key industry conferences and trade shows, management continues to meet
with investors, consultants and potential strategic partners, and general
business activity increases in connection with our commercialization objectives.

Other expenses for the year ended April 30, 2006 increased $256,000 to
$1,033,000 as compared to the prior year amount of $777,000. Included in other
expenses is $462,000 of expenses recognized in connection with certain
settlement agreements entered into by us with regard to litigation filed against
us. While equity-based compensation expense for Edgar filing fees decreased
$156,000 from $241,000 to $85,000 for fiscal year 2006 versus the prior year
period, business development expense increased by $73,000 and marketing and
conference and exhibition fee expense increased by $31,000. During the period
other expenses included certain high expenses, such as taxes of $19,000, and
payments to outside sales representatives of $80,000 in connection with the
receipt of $603,000 toward the purchase of two of our SIEGMA units. Other
expenses also include a loss on the disposal of equipment of $165,000 and an
adjustment of $345,000 in connection with the reduction of accrued payroll tax
liability. Building lease and facility expenses increased $7,000 over the prior
year period, due to a change in the terms of our lease which requires us to pay
electricity costs. Savings were achieved in other areas such as,
sponsor/participant fees and contributions to industry symposiums and related
events, stock transfer agent services, telecommunications, office equipment and
supplies, and licenses and permits. While we do not anticipate other expenses to
increase for the first half of fiscal 2007, we do expect an increase in the
second half of fiscal year 2007 as our general business activity accelerates in
connection with our commercialization objectives and heightened need for
marketing and business development.

RESEARCH AND DEVELOPMENT

Net research and development expenses for the year ended April 30, 2006 were
$2,044,000, increasing $1,259,000 over the prior year. During the year ended
April 30, 2006, we have issued or contracted to issue, equity-based compensation
to consultants contracted to provide engineering and research services in lieu
of cash. The major components of research and development expenses are as
follows:

<TABLE>
<CAPTION>
                             Year Ended April 30, 2006                   Year Ended April 30, 2005
                    --------------------------------------------- -----------------------------------------
                        Cash &         Equity                         Cash &        Equity
                       Accrued         Based                         Accrued        Based                      Increase/
                       Expenses     Compensation      Total          Expenses   Compensation     Total        (Decrease)
                    --------------------------------------------- ----------------------------------------- ---------------
<S>                   <C>            <C>           <C>            <C>            <C>       <C>            <C>
 Salaries & related   $   820,000    $        --   $   820,000    $   727,000    $    --   $   727,000    $    93,000


 Consultants              344,000        159,000       503,000        169,000         --       169,000        334,000

 Supplies                 143,000             --       143,000         86,000         --        86,000         57,000

 Travel                     2,000             --         2,000         17,000         --        17,000        (15,000)

 Depreciation             283,000             --       283,000        187,000         --       187,000         96,000

 Other                    614,000             --       614,000        209,000         --       209,000        405,000

Grant Income             (321,000)            --      (321,000)      (610,000)        --      (610,000)       289,000
                      ----------------------------------------    ------------------------------------    -----------

           Total      $ 1,885,000    $   159,000   $ 2,044,000    $   785,000    $    --   $   785,000    $ 1,259,000
                      ----------------------------------------    ------------------------------------    -----------
</TABLE>


                                      -60-
<PAGE>

Salaries and related for research and development activities increased $93,000
for the year ended April 30, 2006 as compared to the prior year. This increase
was due to normal increases as well as the hiring of one research scientist in
January 2006, previously serving as a consultant, and three new hires to our
research and development team, including one-full time software programmer, one
junior scientist, and a CAD manager. We also expanded benefits including the
establishment of investment retirement accounts, as well as supplemental salary
increases and non-recurring incentives, including cash bonuses. For the first
half of fiscal year 2007, we expect a moderate decrease in research and
development salaries with the departure of two research scientists, but an
increase in equity based compensation with anticipated payments of common stock
to certain members of our scientific staff as incentives.

Consulting expenses for research and development activities for the year ended
April 30, 2006 increased $334,000 over the prior period from $169,000 to
$503,000. This increase is due to increased research and development activity as
well as product engineering and manufacturing planning, in order to bring our
products to market. During fiscal 2006, we paid a total of $344,000 in
consulting fees, representing an increase of $175,000 over the prior year
period, in connection with service contracts with a software developer, a senior
engineer, a senior research physicist, and a manufacturing consultant. Of the
$334,000 increase in consulting expense, $159,000 was equity based compensation
expense related to the issuance and commitment to issue common stock and
warrants for consultants providing engineering and manufacturing planning
services. Going forward, we expect a decrease in consulting fees for the first
fiscal 2007, resulting from the conversion of one of the consultants to an
employee and the cancellation of two service contracts. However, we do expect to
continue to issue consultants our common stock in lieu of cash in an effort to
conserve cash, and expect equity based compensation to remain high.

Supply expense increased $57,000 for the year ended April 30, 2006 as compared
to the prior year due to increased activity to commercialize our prototype. In
light of an acceleration of our commercialization efforts and an increase in our
grant application and cooperative development activity, related supply expense
should increase significantly into fiscal year 2007. However, we intend to
continue to focus on the completion and advancement of our product
commercialization and will direct most resources toward this objective.

Travel expenses decreased $15,000 for the year ended April 30, 2006 as compared
to the prior year as our scientists were more involved in onsite research and
development during the current year period than the prior year period. We expect
travel expenses to remain low during the first half of fiscal year 2007 and
increase significantly thereafter with anticipated grants and awards,
co-development programs and offsite testing.

For the year ended April 30, 2006, depreciation expense increased by $96,000 as
we have continued to purchase equipment for research and development activities.
Cumulatively, these additions have increased depreciation expense. Also included
in the current year period is $17,000 of depreciation expense from the transfer
of $143,000 of equipment during the period that was originally recorded as
inventory. In light of our expected increase in research and development
activities as we advance and/or develop prototypes and make technology
improvements, we expect further research and development equipment purchases.
Accordingly, depreciation expense should increase going forward as we continue
to expense current equipment and increase our capital expenditures year over
year.

Other research and development expenses for the year ended April 30, 2006
increased $405,000 compared to the prior year. The increase was primarily
comprised of additional equipment lease expense of $266,000 incurred with the
acquisition of key research and development equipment under operating leases,
and an increase in insurance premiums in the amount of $28,000, primarily health
insurance costs for three new hires and one scientific consultant who became an
employee. Also included in other expenses are building lease and facility
expenses, which increased $34,000 over the prior year period, due to a change in
the terms of our lease which provides an increase in monthly payments with a
corresponding increase in both square footage and cost per square foot, and a
requirement to pay electricity costs. Other extraordinary expenses incurred
during fiscal year 2006, include an assessment of personal property taxes of
$15,000 and inventory impairment charges in the amount of $50,000. Taking into
consideration a decrease in expense with the cancellation of the equipment
operating lease and the anticipated reduction in insurance expense resulting
from the departure of three members of our research and technical staff between
May2006 and September 2006, we expect other research and development expenses to
decrease during the first half of fiscal year 2007 and remain steady throughout
the remainder of fiscal 2007.

We have completed the second year of 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 ("NVESD"). Under the terms of the
contract, we are to develop and test its Anti-Tank Landmine Detector 7AT7TM over
a two-year period, which was extended for one additional year at the option of
the U.S. Army. As of January 31, 2006, we have earned $779,944 against the
contract. 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 and/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 these research and development
costs beyond Phase II or any subsequent extension, or to purchase any of our
products, including the Anti-Tank Landmine Detector 7AT7TM, once we have
completed the development activities. Under the terms of the contract, the U.S.
Army pays a portion of our research and development costs on a periodic basis
during the term of the contract, for which we are required to submit monthly
written reports detailing its progress. We recognize the proceeds from the
contract as an offset against research and development expenses following the
submission of the monthly written reports. When the written report is accepted
by the U.S. Army, we usually receive payment in about 30 to 45 days. As of
January 31, 2006, we collected all receivables due us in completion of Phase II.

                                      -61-
<PAGE>

In September 2004, we entered into a Cooperative Agreement with the U.S.
Transportation Security Administration (TSA). Under the agreement, we are to
provide proof-of-concept for the Company's "NextGen Checked Baggage Program
(STOXOR)" over a nine month period, which may be extended at the option of the
TSA. The agreement provides funding in the amount of $367,141 for Stage 1, and
an additional $145,381 for Stage 2, if, at the conclusion of Stage 1, the TSA
elects to continue with us. As of January 31, 2006, we have earned $367,141 in
cooperative financing from the TSA to complete Stage 1. There is no obligation
for the TSA to fund our development efforts under this agreement beyond the
Stage 1 funded amount or to purchase any of our products once we have completed
the development activities. The TSA will pay our research and development costs
on a periodic basis during the term of the contract, for which we are required
to submit monthly written reports detailing our progress under the contract.
When the written report is accepted by the TSA, we receive payment in about 30
to 45 days. Payments commenced in November 2004 and we recognize the Stage 1
funding amount as an offset against research and development expenses upon
submission of the monthly written reports. As of January 31, 2006, we collected
all receivables due it in completion of Stage 1.

On July 18, 2005, we executed a Time and Material Subcontract in the amount of
$333,688 with Integrated Concepts & Research Corporation (ICRC), which was
awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the United
States Army Tank - Automotive and Armaments Command, Warren Michigan (TACOM).
Under the Subcontract, we will deliver one CarBomb FinderTM head unit and
provide the engineering and technical support necessary for its integration in
the SmarTruck Multi-Mission Vehicle platform. The finished prototype is expected
to be field tested by the U.S. Army early 2006. As of date, we have received
payment in the amount of $260,114 for performance to date. ICRC will pay the
Company's time and material 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 subcontract. The Company recognizes the
proceeds from the subcontract as an offset against research and development
expenses following the submission of the monthly written reports. Pursuant to
the subcontract, when the written report is accepted by ICRC, we receive the
remaining payments in about 30 to 45 days, or no later than 5 days after payment
by the U.S. Army Contracting Officer to ICRC.

In September 2005, we entered into a subcontract with a defense technology
organization to provide testing services and received a performance payment of
$33,600.

DEPRECIATION

Total depreciation expense for the year ended April 30, 2006 and 2005 was
$314,000 and $213,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period. Also included in the current year period is $17,000 of
depreciation expense from the transfer of $143,000 of equipment during the
period that was originally recorded as inventory.

Interest Expense and Income

Of the $1,042,000 in total interest expense incurred during the year ended April
30, 2006, included interest on $673,000 of CNP issued to our former legal
counsel for services performed in prior years, $856,500 of CNP issued in the
current year and $278,000 of CNP issued to an investor in the prior fiscal year,
bearing interest rates per annum of 10%, 10% and 5%, respectively. Total
interest expense also includes charges of $733,000 incurred with the inducement
for conversion of $673,000 of CNP issued to our former legal counsel for
services and $278,000 of CNP issued to investors in prior periods. Further,
total interest expense includes $181,000 of debt discounts of the beneficial
conversion feature of $856,500 of CNP issued during the period, and the
detachable warrants issued during the period, and $25,000 of debt discount fully
expensed when $100,000 of CNP was redeemed shortly following its issuance. Under
Generally Accepted Accounting Principles, the debt discounts associated with
CNP, and detachable warrants issued in connection with the CNP, are amortized
over the term of the note. The debt discount was proportionately allocated based
on the intrinsic value of the convertible note and the fair value of the
detachable warrants capped by the proceeds received. The intrinsic value of the
beneficial conversion feature was determined by taking the spread 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 fair value of
the warrants was determined using the Black-Scholes pricing model.

Interest income for the year ended April 30, 2006 and 2005 was minimal.

                                      -62-
<PAGE>

Other Expenses

During the year ended April 30, 2006, we received $21,000 on the sale of
property and equipment and recorded a charge of $10,000 due to foreign currency
exchange loss.

Penalties on Debt and Equity Issuances

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, 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 December 2005, our Board of Directors approved a special warrant re-pricing
offer for investors whereby participants were allowed to exercise their existing
warrants at greatly reduced prices under the condition, among others, that they
forfeit any claim to the right for future penalties on all securities, resulting
from our inability to file and maintain an effective registration statement or
otherwise. With the participation of a significant number of warrant holders
under the special warrant offer, we have significantly reduced future penalties
on all securities issued to investors.

During the year ended April 30, 2006, we issued or committed to issue 746,338
shares of common stock as penalty expenses in the amount of $462,793. Although
greatly reduced, certain holders of unregistered common stock who did not
participate in the special warrant offer still may receive or accrue each month,
as applicable, additional shares calculated as a percentage of the original
number of shares purchased.

For the year ended April 30, 2006, we recorded $737,299 as penalty expense for
the issuance or committed issuance of warrants to purchase 3,695,245 common
shares. The fair value of these warrants was determined using the Black-Scholes
pricing model. Although greatly reduced, certain holders of warrants who did not
participate in the special warrant offer still may accrue each month, as
applicable, increases in the number of shares underlying their warrants,
calculated as a percentage of the original number of the underlying shares.

For the year ended April 30, 2006, we recorded $12,000 as a penalty expense upon
issuance of CNP with a face value of $12,000 as penalties for our delayed
registration statement. Since all holders of CNP participated in the special
warrant offer, we no longer will accrue these penalties to holders of CNP.


LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2006, we had cash and cash equivalents of $51,000 and accounts
receivable of $37,000.

Other current assets, as of April 30, 2006 decreased to $23,000 from $382,000
for the prior year end. At April 30, 2006, other current assets consisted of a
deposit of $13,000 for prepaid insurance and a security deposit of $8,000
related to our facility lease.

During the fiscal year ended April 30, 2006, our sources of cash were as
follows:

<TABLE>
<CAPTION>
                                                                                  Amount
                                                                             -----------------
<S>                                                                                <C>
         Sales or commitments of common stock                                      $1,620,000
         Sales of convertible notes payable, net                                      900,000
         Proceeds from convertible notes payable- related parties                      56,500
         Exercise of warrants                                                       1,609,500
         Offering costs                                                             (122,400)
         Customer deposits                                                            603,000
         Grant proceeds                                                               321,200
                                                                             -----------------
                                                                                  $ 4,987,800
                                                                             -----------------
</TABLE>

As of April 30, 2006, accounts payable were $ 2,090,181, which represents an
increase of $802,638 from April 30, 2005. This increase was primarily due to the
purchase and leasing of R&D equipment, as well as an increase in accrued and
unpaid services from consultants and lawyers. We intend to settle a portion of
the payables due service providers, where possible, through stock issuances.
Also included in this total balance of accounts payable are significantly aged
amounts that are being evaluated for legitimacy.

                                      -63-
<PAGE>

Because we continue to operate under a tightened cash position, which has
resulted in delays to our making payments to some service providers and vendors,
we have changed our policies related to equipment purchasing and put into place
stricter cash conservation measures as well as a restructured our entire
organization so as to generally reduce operating expenditures. For the remainder
of fiscal year 2007, we foresee accounts payable remaining high until we raise
sufficient capital or generate cash flow to significantly pay down these
balances.

Accrued expenses as of April 30, 2006 were $629,000, which represents an
increase of $555,000 from April 30, 2005 and comprised primarily of $462,000 of
expenses recognized in connection with certain settlement agreements entered
into by us with regard to litigation filed against us, accrued property taxes in
the amount of $14,000 and accrued fees payable to an investment bank and to
consultants in the amount of $103,000. We intend to settle a portion of the
accrued expenses due consultants, where possible, through the stock issuances.

As of April 30, 2006, we continue to carry an estimated payroll tax liability of
$55,000, related to equity based compensation provided by Microdevices for
services rendered from June 1997 through February 2002 by officers, employees,
directors, legal advisors and consultants. We have been making payments against
this amount under a payment plan with the IRS, which also reduced a significant
amount of the payroll tax liability and penalties accrued in the prior period.
See "Note 9 - Accrued Payroll and Payroll Taxes" to our audited Consolidated
Financial Statements. Excluding the payroll tax liability mentioned above, as of
April 30, 2006, we have accrued payroll and payroll tax of $203,000, which
includes $77,000 in accrued payroll tax, $60,000 of deferred salaries for its
President/CEO and former Controller, as well as $61,000 for earned vacation of
employees.

During the year ended April 30, 2006, we reclassified the remaining 312,012
shares deemed subject to rescission rights, reported at fiscal year ended April
30, 2005, to common stock and additional paid in capital, eliminating the
recorded current liability for shares deemed subject to rescission rights of
$199,560.

In April 2004, we ordered neutron generators at a cost of approximately
$814,000. We leased four units under this order, which have since been returned
and we terminated the lease due to delays and performance. In January 2005, to
compensate for delays, we issued a supplemental purchase order with another
vendor in the amount of for four neutron generators compatible with our systems
and have received these generators, two of which have been used the assembly of
systems for sale.

In May 2004, we ordered gamma radiation detectors, electronic coolers and other
components for a total cost of $1,368,000. We began receiving these components
in May 2004 and continued to receive units at varying intervals. Due to our
decision to better balance inventory, we halted delivery for the remaining gamma
radiation detectors and components until such time we receive orders sufficient
to justify adding detectors. In February 2006, we returned to the vendor 13
electronic cooler units for which the warranty expired for a restocking fee of
$14,000.

In February 2005 and in March 2005, we issued purchase orders in the amount of
$304,000 and $611,000, respectively, for the purchase of remotely controlled
robotic vehicles to be used to facilitate the transportation of our explosive
detecting technology to suspicious targets. The orders were issued based on
indications from potential buyers in the U.S. Military and Middle East that they
would require a remote robotic deployment capability if they were to purchase
our devices. As of April 30, 2006, we received all of the robotic vehicles
ordered and returned five of the units for a complete cancellation of the amount
owed for those units.

Convertible Notes

Between September and November, 2005, we sold $600,000 of convertible notes
payable (CNP) to various investors, of which $100,000 was subsequently repaid,
with the investor using the money to purchase common shares upon exercise of
warrants under the special warrant offer. The remaining CNP bear interest at 10%
per annum (except in an event of default in which case they bear interest at the
default rate of 12% per annum from the default date until the date that such
default is cured or waived) and are due in October and November 2006. The
remaining $500,000 of CNP were issued with detachable warrants to purchase
400,000 shares of common stock with a three year term at an exercise price of
$0.80 per share. During our special warrant offer, 360,000 shares of common
stock were purchased upon exercise of these detachable warrants at a reduced
exercise price of $0.20 per share, with the remaining warrants forfeited. The
CNP holders have the option to convert the principal and accrued interest into
shares of our common stock at a conversion price of $0.60 per share at any time
until the later of the prepayment date or the maturity date. The Notes are
senior to all of our existing indebtedness, other than any current or future
accounts receivable financing up to an aggregate face amount of $1,000,000.
Further, the outstanding balance of the remaining CNP, plus any unpaid interest,
will be automatically exchanged into the next financing secured by us in the
amount of $2,500,000 or above, at a 10% discount. See "Note 14 - Convertible
Notes Payable" to our audited Consolidated Financial Statements. As of the date
of this Report, investors have subscribed approximately $2,200,000 of Series B
Convertible Preferred Stock in our most recent financing and we will need to
raise approximately an additional $300,000 in order to affect the exchange of
the remaining CNP, or risk default which will result in an increase to the
interest rate to 12%, among other remedies.

                                      -64-
<PAGE>

We also sold an additional $300,000 of CNP to an accredited investor, Dr. Robert
J. Neborsky. The CNP provided the option to convert the principal and accrued
interest into shares of our common stock at a conversion price of $0.30 per
share at any time until the later of the prepayment date or the maturity date.
The CNP bore interest at 10% per annum (except if an event of default in which
case they bear interest at the default rate of 12% per annum from the default
date until such default is cured or waived) and were due in September and
October 2006. The CNP were issued with detachable warrants to purchase 120,000
shares of common stock with a three year term at an exercise price of $0.60 per
share, which remain outstanding. In June 2006, these CNP were automatically
exchanged into our offering of Series B Convertible Preferred Stock at a 10%
discount and the holder received the aggregate of 33.82 Series B Convertible
Preferred Shares. See "Note 14 - Convertible Notes Payable" to our audited
Consolidated Financial Statements.

As of April 30, 2006, we had outstanding $56,500 of convertible promissory notes
related parties issued to two members of our board of directors. The notes
provided the option to convert the principal and accrued interest into shares of
our common stock at a conversion price of $0.30 per share at any time until the
later of the prepayment date or the maturity date. In June 2006, these
outstanding convertible notes related parties issued to our directors, plus
unpaid interest, were automatically exchanged into our offering of Series B
Convertible Preferred Stock at a 10% discount and the holders received the
aggregate of 6.37 Series B Convertible Preferred Shares.

During the fiscal year ended April 30, 2006, all of the $673,000 of convertible
notes payable related parties issued to Yocca, Patch & Yocca LLP, our former
legal counsel, and reported outstanding as of the end of the prior year period,
plus $164,000 of accrued interest, was converted into a total of 2,338,628
shares of our common stock. See "Note 13 - Convertible Notes Payable - Related
Parties" to our audited Consolidated Financial Statements. The legal fees were
expensed as a general and administration expense for the periods incurred.

In June 2005, Nicholas J. Yocca, our former counsel, elected to convert $185,000
of CNP originally purchased in January 2004, plus $11,932 of accrued interest,
into 437,627 shares of our common stock. The detachable warrants have since
expired. Pursuant to the terms of a note purchase agreement as described in
"Note 13 - Convertible Notes Payable - Related Parties" to our audited
Consolidated Financial Statements, Mr. Yocca had the option to purchase an
additional $400,000 worth of CNP prior to the filing of a registration statement
with detachable warrants to purchase a number of shares of common stock. This
right to a second closing was forfeited by Mr. Yocca in April 2006.

In June 2004, we sold $300,000 of CNP subject to rescission to Richard Melnick
and Sherbrooke Partners LLC in connection with the exercise of an option to a
second closing obtained in January 2004. During the fiscal year ended April 30,
2006, all of the $300,000 CNP issued to Richard Melnick and Sherbrooke Partners
LLC and reported as outstanding as of the end of the prior year period, were
converted into shares of our common stock. See "Note 15 - Convertible Notes
Payable - Subject to Rescission Rights" to our audited Consolidated Financial
Statements. Based upon legal advice we have received as to the appropriate state
and federal limitations periods pertaining to the rescission obligations
assumed, the shares issued upon conversion were deemed no longer subject to
rescission. The CNP also contained warrants to purchase common stock with a six
and one-half year term as follows: 1,066,666 at $0.45 per share; 320,000 at
$0.75 per share; and 192,000 shares at $1.25 per share. As of April 30, 2006,
none of the warrants remain outstanding, having been exercised either by
cashless exercise or at reduced prices pursuant to our special warrant offer,
with the remaining warrants forfeited as provided under the special warrant
offer.

As of April 30, 2006, we were delinquent on notes payable totaling $85,000 with
a shareholder and related party. The notes payable have been due on demand since
November 1997; however, to date, no demand has been received.


Additional Liquidity Considerations

As of April 30, 2006, we had total current liabilities of approximately $4.5
million as compared to $3.7 million at the end of the prior year period. These
liabilities greatly exceed our cash on hand. While we have received to date
payments for the purchase of our products and services in the amounts of
$603,000 and $200,000, respectively, we currently do not have firm order
commitments or receivables of significance. Unless and until income generated
from orders reaches a sufficient level to cover operating expenses and our
liabilities, we are required to continue to sell equity or debt instruments in
order to pay present liabilities and fund on-going operations. If we cannot
attract investment or generate revenues, our ability to grow may be severely
hindered and we may not be able to continue as a going concern.

In February 2006, in light of cost cutting measures instituted by us under our
restructuring plan, we have revised our estimated annual financial requirements
for calendar 2006 from a range of $5 to $10 million to a range of $4 to $6
million. This estimated amount takes into consideration the need to reconcile
outstanding payables. Our budgeted operating expense for fiscal year 2007 is
currently estimated at $4.2 million, which assumes $3.2 million of general
operating expense and $1 million of increased R&D and manufacturing expense. In
order to meet our standards of performance and offer more competitive product,
we anticipate additional R&D costs of approximately $500,000. We also estimate
expenses related to the build-out of a manufacturing site to be about $500,000 .
Although, operating expense is projected to decrease from $6.1 million to $3.2
million, if we greatly expand our marketing and sales activities, general
operating expense could increase significantly and the projected operating
expense may be underestimated.

                                      -65-
<PAGE>

Although historically we have been able to raise capital through self-managed
private placements of our equity, we currently do not have an institutional
commitment for the additional capital necessary as of the date of this Report.
In September 2005, we engaged a placement agent to provide certain advisory and
placement services in connection with securing financing. From October 2005 to
August 2006, we received through private placements to accredited and
institutional investors a total of approximately $3.7 million in proceeds from
financing activities, including $856,500 from the sale of convertible notes
payable, $1.6 million from the exercise of warrants under our special warrant
offer, as well as net proceeds of $1.3 million from the sale of Series B
Convertible Preferred stock as part of a private placement of up to $5 million
of our Series B Convertible Preferred Shares to accredited and institutional
investors approved by the Board in June 2006.

We plan to continue to apply for several government contracts for future
development projects; 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. Contracts may be denied for
reasons that include funding of the program, our financial position and
abilities, or for other reasons. For the fiscal year ended April 2006, we have
earned $321,000 from grants and other governmental funding, including $260,000
for performance under a subcontract with ICRC, which provides for an additional
$73,000 in grant proceeds upon the delivery of one CarBomb FinderTM head unit to
the U.S. Army. In September 2005, we received entered into a subcontract with a
defense technology organization to provide testing services and received a
performance payment of $33,600. In December 2005, $1 million was appropriated
for "stoichiometric" explosive detection systems with the U.S. Army under
Program Element 0602712A. Although we expect these funds to be released for the
delivery of our robot-borne detector to the U.S. Army, and we have confirmed the
availability of these funds as of the date of this report, we can provide no
assurance when these funds will be released.

As to our commercial activities, from September 2005 to January 2006, we
received payment in the amount of $603,000 against an order of two SIEGMATM
systems from Southeastern Pennsylvania Transportation Authority (SEPTA). In
August 2006, we received full payment from the Commonwealth of Pennsylvania
against a purchase of a four-year maintenance and support services program in
the amount of $200,000, which as deferred revenue will be earned and recorded as
revenue on a straight-line basis over the period of the contracts. We also
currently maintain a deposit against an order by Compania de Aprovisionamiento
Especifico S.L. of Tenerife, Spain for one SIEGMATM system and expect to collect
the balance of $227,000 upon delivery.

In January 2005, we entered into a non-binding memorandum of understanding to
form a joint venture company to be located in Tenerife, Canary Islands, Spain,
which is intended to serve as a complementary platform for sales and
distribution into the European and other markets. As of the date of this Report,
all parties to the MOU have agreed to resume sales and marketing of our products
in Europe and negotiations as to the joint-venture as soon as we can meet
certain financial requirements. While we have prioritized our attention to
domestic markets and have limited our overseas activities, we intend to explore
and pursue other joint ventures, which provide for the contribution of capital
and resources from a strategic partner to develop an assigned territory and
accomplish the certification, importing, licensing, permitting, maintenance and
service of our products overseas, in exchange for a regional license from us for
the assembly, sale, and marketing of our products in certain markets. Such
arrangements can also reduce the capital requirements necessary for us to build
and maintain the infrastructure necessary to manufacture and support our
products outside North America.

Until such time as we can (i) generate sufficient sales revenues to fund
operations and research and development costs; and/or (ii) leverage our
financial and developmental capabilities through strategic partnerships which
provide financial support; and/or (iii) receive significant governmental grants,
cooperative funding or purchase contracts, we will be required to raise an
additional $3 to 4 million through the sale of securities to cover estimated
expenditures for the remainder of fiscal 2007, subject to the successful
implementation of our restructuring plan and the reduction of operating
expenses.


                                      -66-
<PAGE>

                                PLAN OF OPERATION

Since February 2006, we have implemented a restructuring plan and have made
significant changes to our management and operations with the objective of
transforming our organization in order to make it scalable for anticipated
growth. We have taken immediate and deliberate steps to enhance our operations,
improve cost efficiencies and advance our transition from a research and
development company to a commercial manufacturing and sales organization. We
have instituted new fiscal planning, budgeting and auditing structures, and have
significantly reduced expenses, including personnel and other operating costs.

We have also instituted new capital prioritization strategies to improve capital
utilization and distribution across the entire organization. We have eliminated
expenditures on non-core activities in order to maximize our ability to exploit
those core industries and geographic markets which offer the most compelling
market and revenue growth opportunities, and for which we believe we have
differentiated technologies and expertise.

Lastly, we have been implementing a new results-driven business plan that aims
to expand our customer base and develop multiple sources of revenue including
(i) equipment sales; (ii) extended multi-year service contracts and warranties;
(iii) radiation safety training, licensing and consulting; (iv) technology
licensing fees and joint venture investment income; (vi) research contracts,
co-development funding and grants; (vii) integration services and reseller fees
from non-proprietary products licensed from third parties, and (viii) lease
financing and equipment rental income.

During the remainder of fiscal year 2007 and going forward, our focus will
remain on the commercialization, marketing and sale of our CarBomb FinderTM,
SIEGMATM and STARRAY(TM) systems, as well as the development of newer prototypes
incorporating our proprietary "stoichiometric" technologies, and incorporate the
following principal objectives:

      o     Aggressively pursue revenue generation and fund working capital from
            pre-sales, sales, additional development grants, government
            contracts, as well as the formation of joint ventures;
      o     Secure strategic partners in our industry who have established
            product lines and distribution channels, allowing for more efficient
            access to our targeted markets and leveraged sales efforts;
      o     Maintain a leadership position in nuclear-based diagnostics and
            further development of competitive products incorporating our core
            technologies and other leading-edge technologies, which provide
            vale-added solutions for large and sustainable markets;
      o     Optimize product design and engineering and allow for the easiest
            production, fastest assembly, best quality, highest reliability, and
            the shortest time to market of our systems;
      o     Achieve efficiencies throughout the commercialization process from
            prototype development to commercial production and better position
            our technology for strategic partnerships and cooperative
            developments for other industry applications; and
      o     Continue to improve operational efficiency, maintain expense
            controls and implement the business practices, management
            philosophies and technology tools necessary to position ourselves
            best for revenue growth and organizational expansion.

Our largest geographical market for our products is within the continental U.S.,
which if segmented by user, comprises state and local police departments / bomb
squads, major airports and mass-transit agencies, as well as border and port
security agencies. Explosive detection is generally governmental in nature and
the majority of these potential customers for our products in the U.S. are
dependent on local, state and federal government funds as well as grants awarded
by the U.S. Department of Homeland Security (DHS), the U.S. Department of
Transportation (DOT), and the U.S. Department of Defense (DoD). Funding for
homeland security is expected to continue to increase in the forthcoming fiscal
year as new legislative measures have been recently proposed and/or enacted
which provide direct appropriations in addition to departmental budgets.

The commercial courier, private transportation, and private security services
sectors also have a demonstrated need for our technology. Private security
companies are responsible for protecting 85% of the majority of the critical
infrastructure within the United States. This infrastructure includes local,
state and federal government facilities, office buildings, commercial centers,
stadiums, recreational sites, and resorts, as well as high risk sites such as
nuclear power plants, petroleum refineries and liquefied natural gas facilities
in the United States.

We continue to see potential demand for our explosives identification and
detection products and have correspondingly increased, and directed greater
resources toward, the direct and indirect sales and marketing of our products.
We have also created an organized and centralized sales management and lead
tracking system which provides accurate and credible forecasting to allow our
management to properly align expenses with revenue growth, allocate resources,
and rapidly identify shifts in customer demand, market trends and other industry
developments.

As of the date of this Report, we have developed a strategic sales and marketing
plan and have expanded our relationship with distributors and resellers
specializing in the security and anti-terrorism industry, defense industry
consultants, as well as potential strategic partners in developing some key
geographic markets and verticals. In July 2006, Ingersoll Rand Security
Technologies agreed to list our products on its Series 84 Integrated Security
Schedule with the GSA, a centralized federal procurement and property management
agency created by the U.S. Congress to improve government efficiency and help
federal agencies better serve the public. We intend to jointly market and sell
our SIEGMATM systems to governmental agencies, the military and other customers
in complement to Ingersoll Rand's own security offerings.

                                      -67-
<PAGE>

In connection with the restructuring, we are currently focusing our sales and
marketing assets products on the domestic market. Accordingly, we have limited
our overseas activities until such time as we can leverage our financial and
developmental capabilities through strategic partnerships or joint ventures with
foreign sponsors, or can generate sufficient sales revenues to fund foreign
operations. Strategic partnerships and joint ventures are intended to reduce the
capital requirements necessary for us to build and maintain the infrastructure
necessary to manufacture and support our products outside North America and
serve as a complementary platform for sales and distribution into Europe, Asia
and other markets. In April 2006, we entered into an agreement with Byron
Commerce Pte Ltd, a leading technology solutions sales and distribution company,
to market and resell our AtometerTM explosive detectors, including the SIEGMATM,
CarBomb FinderTM and STARRAYTM systems, to governmental customers in the
Asia-Pacific markets. We are also in active discussions with numerous potential
distributors and licensees with interests in reselling our products in the
Middle East region.

For the remainder of fiscal year 2007, we also intend to continue to accelerate
and enhance our pre-market and aftermarket efforts, which address the warranty,
service, maintenance, certification, licensing, export policy, product liability
and customer service elements of our commercialization strategy. We have teaming
agreements in place with a global maintenance company, have engaged outside
specialists involved in certification, inspection, and risk management, and are
seeking coverage of our products under the Safety Act to address product
liability issues.

In December 2005, we launched a new program, the Equipment Technical Assistance
Program (ETAP), an integrated suite of services available to buyers which
includes hands-on equipment and operator training, local equipment support,
including calibration, maintenance and servicing, and radiation safety
certification and licensing. For this purpose, we also formed a strategic
relationship with a specialized service and consultancy organization to provide
ongoing radiation licensing, certification, training and auditing services. We
intend to negotiate and enter into additional outsourcing relationships with the
overall objective of providing a uniform and uncompromising package of product
and customer support.

In order to be able to improve the marketability of our products, we have
determined it necessary to field test our products through cooperative sales
initiatives which are intended to accelerate our in-field assessment of our
explosive detection systems and software architecture for user operability and
stability, as well as provide us with critical feedback and suggested design
improvements based on each program participant's specific operational needs. The
programs are expected to stimulate sales by allowing us to bring our commercial
products to market more effectively and efficiently, enhance our products to
better satisfy the needs of the public transit industry, and test our
aftermarket service capabilities. During the remainder of 2007, we will continue
to offer similar programs to other early adopters in the first responder
community, including emergency response teams, bomb squads and explosive
ordnance disposal units from a wide array of federal, state, municipal and local
agencies around the U.S. In certain circumstances, as determined by the
purchasing policies of prospective customers, we may be required to enter into
pilot programs prior to receiving purchase commitments.

During the remainder of fiscal year 2007, we will continue to direct the greater
portion of our production budget to our SIEGMATM system, which management has
prioritized in response to interest received from airport and transit system
operators. In January 2005, we received our first order for one SIEGMATM 3E3,
followed by the order of two systems from SEPTA in June 2005. As for our
vehicle-borne CarBomb FinderTM 3C4, we have upgraded the delivery platform
design and are making enhancements to the vehicle assembly with the assistance
of integration partners. In October 2005, we announced the order of one CarBomb
FinderTM by the U.S. Army under a subcontract providing for the integration of
our system in the Army's SmarTruck Multi-Mission Vehicle platform, which is now
expected to be delivered by year end.

Initial assembly of orders is performed at our research and development facility
located in Irvine, CA. Assembly at this facility will be limited, and we may be
required to outsource certain functions and/or hire additional technicians as
needed. Based on preliminary marketing data suggesting a strong demand for
commercial versions of our explosion detection devices, we anticipate the need
to scale production to meet that demand. Previously, we have studied locations
to serve as our principal assembly facility in various states and continue to
meet with both local and state officials as part of this assessment. We have
estimated that the construction and/or build-out costs related to a dedicated
manufacturing facility fall between $1 million and $2.5 million, which costs are
expected to be supplemented by local municipalities and state agencies in the
form of monetary incentives offered to locate a facility to their respective
areas. As of the date of this report, we have not selected a site to locate a
facility and are unsure whether or not we will be able to meet the criteria
necessary to attract local municipalities and state suitors.

In June 2005, we hired a consultant for three months experienced in strategic
planning and financial and operational management to help us establish and
refine a production system which includes supplier relations, material handling,
manufacturing processes, labor force capabilities, and distribution systems.
Further, in September 2005, we engaged an engineering and production consultant
with substantial experience to build the internal mechanisms necessary to
engineer, package and deliver our core technologies in the most cost effective
manner, as well as develop a product test plan and quality control procedures.
During the remainder of fiscal year 2007 and forward, we will continue to
incorporate the business practices, management philosophies and technology tools
necessary to optimize product design and engineering to allow for the easiest
production, fastest assembly, best quality/reliability, and shortest time to
market of our systems.

                                      -68-
<PAGE>

During fiscal year 2007, we may be required to increase inventory of those core
components and parts that have greater delivery lead-times from vendors to
prevent potentially harmful delays in our product delivery cycle. Although we
remain adverse to building inventories, in light of the lead-times and
anticipated sales of our products, we have estimated that in order to meet, and
properly manage the sales cycle of, anticipated orders, we will require at any
one time sufficient components to deliver at least 5 to 10 units of our
explosive detection systems to buyers. In order to control inventory risk, we
will continue to identify and seek to engage additional sources of components in
order to reduce, limit or eliminate our exposure to single-source suppliers and
protracted delivery schedules. We have entered discussions with various vendors
and are in the process of securing commitments for volume discounting and to
shorten production times in anticipation of an increase in sales volume.

Materials and production costs for our explosive identification units will be
significant for the remainder of fiscal year 2007. Working capital requirements
and inventories are also expected to grow in remainder of fiscal year 2007, as
necessary components are purchased. Initial sales are projected to be at or near
cost with margins expected to improve significantly with the elimination of
non-recurring engineering costs, the realization of economies of scale attendant
to the opening of our production facility or the outlay of the assembly function
to a manufacturing partner, and the increased demand anticipated with the
introduction of our products into the marketplace. As we proceed with our
commercialization phase of our products and expand our operating structures,
enhancements to corporate management will also be necessary and we anticipate
increases in personnel requirements throughout our organization. An off-site
production facility, when operational, will require the hiring or contracting of
approximately 20 new personnel. We also anticipate the need to hire individuals
to manage the product engineering, manufacturing and distribution functions, and
to fill and upgrade key executive positions in fiscal year 2007, including,
among others, a new controller and possibly a chief financial officer. Other
areas that may require additional personnel include sales and marketing,
customer service and human resources. As funds are available, we also anticipate
hiring additional skilled personnel, such as advanced engineering professionals,
as part of a product development team that can operate and manage projects 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 initial assembly and distribution.

We plan to continue to focus 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 build upon our investments in the base units and core technologies upon which
our explosives identification and detection prototypes are based, as well as
introduce more sophisticated applications and configurations. We intend to
continue to work on expanding the number of explosive substances that can be
detected and identified by our systems, so as to provide the customer with the
most effective, reliable and adaptable tools possible. In order to capitalize on
additional commercial opportunities that have been identified for our AtometerTM
detectors, we will need to continue to pursue intensive research and development
initiatives and advance our AtometerTM detector system designs to provide more
rapid and precise detection and analytical capabilities. In light of an increase
in our grant application activity and current and anticipated cooperative and
research development agreements, we expect to use the proceeds of government
grants and/or research and development contracts, together with other available
funds, to accomplish these objectives.

While we are seeking to reduce our dependency on the sale of our securities by
funding working capital through proceeds from other sources, such as pre-sales,
sales, additional development grants, government contracts, as well as the
formation of joint ventures, we are still dependent on financing operations
through the sale of our securities. The uncertainties of securing financing has
limited our capacity to make greater investments in research and development,
inventory and component procurement, and human resources, as well as the
commercialization of our products. In light of the cost-cutting measures
accomplished with the restructuring, we have adjusted our budgeted general
operating expense for fiscal year 2007 to $3.2 million. Taking into
consideration outstanding payables and the estimated total costs to further
advance our current product line we estimate that our total financial
requirements for calendar year 2007 (excluding contributions received through
research and development grants) will be between $4 million and $6 million. We
have recently raised $1.2 million through a private placement and are currently
seeking an additional capital infusion of $3-4 million, which is our financial
requirement for the remainder of fiscal year 2007 for administrative and
operational costs, including personnel and consultant expenses, property and
materials, and accounting/reporting and legal expenses. While there can be no
assurance, we are hopeful that the restructuring affected during this period
combined with anticipated revenue growth will improve our condition as a going
concern.


                                      -69-
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

             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 (collectively, the "Company") as of April
30, 2006 and 2005, 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, 2006. 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. and subsidiaries as of April 30, 2006 and 2005 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, 2006, in conformity
with accounting principles generally accepted in the United States of America.

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 exceed its total assets. 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 19 to the financial statements, the Company is involved in
various litigation matters.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Santa Ana, California
September 14, 2006


                                      -70-
<PAGE>
                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                                      CONSOLIDATED BALANCE SHEET
                           FOR THE YEARS ENDED APRIL 30, 2006 AND APRIL 30, 2005

<TABLE>
<CAPTION>
                                                                            April 30,       April 30,
                                                                              2006            2005
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
CURRENT ASSETS
   Cash                                                                   $     51,281    $     18,452
   Accounts receivable                                                          37,398         275,957
   Inventory                                                                   875,218         808,650
   Other current assets                                                         22,992         381,829
                                                                          ------------    ------------

      Total current assets                                                     986,889       1,484,888
                                                                          ------------    ------------

PROPERTY AND EQUIPMENT, net                                                    788,722         542,080
                                                                          ------------    ------------

TOTAL ASSETS                                                              $  1,775,611    $  2,026,968
                                                                          ============    ============

CURRENT LIABILITIES
   Cash advances                                                          $     22,453    $         --
   Accounts payable                                                          2,090,182       1,287,543
   Accrued expenses                                                            629,383          74,205
   Accrued payroll and payroll taxes                                           258,262         436,865
   Accrued interest                                                             78,487         166,591
   Capital lease obligations                                                     8,455           2,039
   Notes payable                                                                 7,125          37,125
   Notes payable - related parties                                              85,000          99,000
   Convertible notes payable                                                   583,019              --
   Convertible notes payable - related parties                                  40,853         673,083
   Convertible notes payable subject to rescission rights                           --         532,800
   Common stock subject to rescission rights,  0 and 312,012 shares                 --         199,560
   Other current liabilities                                                   703,105         200,000
                                                                          ------------    ------------

      Total current liabilities                                              4,506,323       3,708,811

   Long-term capital lease obligations                                           8,106           3,556
                                                                          ------------    ------------

      Total liabilities                                                      4,514,429       3,712,367
                                                                          ------------    ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT
   Preferred stock,  $0.001 par value  20,000,000 shares
    authorized no shares outstanding                                      $         --    $         --
   Common stock.  $0.001 par value  100,000,000 shares
     authorized 64,202,668 and 45,817,315 shares issued and outstanding         64,203          45,817
   Additional paid-in capital                                               35,802,969      29,521,570
   Committed common stock, 3,964,635 and 1,378,604 shares, respectively      1,826,598         547,375
   Deficit accumulated during the development stage                        (40,432,588)    (31,800,161)
                                                                          ------------    ------------

      Total shareholders' deficit                                           (2,738,818)     (1,685,399)
                                                                          ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                               $  1,775,611    $  2,026,968
                                                                          ============    ============
</TABLE>

                                      F-1
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED APRIL 30, 2006 AND 2005 AND
--------------------------------------------------------------------------------
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  For the
                                                                                Period from
                                                    For the Years Ended       August 21, 1995
                                                 April 30,       April 30,    (Inception) to
                                                   2006            2005       April 30, 2006
                                               ------------    ------------   ---------------
<S>                                            <C>             <C>            <C>
OPERATING EXPENSES
   General and administrative                  $  4,341,372    $  4,947,315   $    24,936,262
   Research and development                       2,044,323         785,260         5,241,692
                                               ------------    ------------   ---------------

TOTAL OPERATING EXPENSES                          6,385,695       5,732,575        30,177,954

LOSS FROM OPERATIONS                             (6,385,695)     (5,732,575)      (30,177,954)
                                               ------------    ------------   ---------------

OTHER INCOME (EXPENSE)
  Interest income                                       560             666            10,123
  Other income                                       17,291             720            19,434
  Interest expense                                 (308,130)       (896,706)       (1,783,809)
  Induced Conversion Expense                       (733,460)             --          (733,460)
  Financing expense                                      --              --          (223,710)
  Loss on foreign currency translation              (10,102)             --           (10,102)
  Penalty expense on issuance of
   convertible promissory notes
   as a penalty for late registration               (12,000)        (44,000)          (63,000)
  Penalty expense on issuance of
   common stock and warrants
   as a penalty for late registration            (1,200,092)     (3,311,870)       (6,026,093)
                                               ------------    ------------   ---------------

Total other expense, net                         (2,245,933)     (4,251,190)       (8,810,618)
                                               ------------    ------------   ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES           (8,631,528)     (9,983,765)      (38,988,571)

PROVISION FOR INCOME TAXES                              800             800            14,183
                                               ------------    ------------   ---------------

NET LOSS                                       $ (8,632,428)   $ (9,984,565)  $   (39,003,554)

BENEFICIAL CONVERSION FEATURE GRANTED
  ON PREFERRED STOCK                                     --              --          (767,431)

PREFERRED STOCK DIVIDEND                                 --              --          (661,603)
                                               ------------    ------------   ---------------

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS      $ (8,632,428)   $ (9,984,565)  $   (40,432,588)
                                               ============    ============   ===============


Net loss per share                             $      (0.15)   $      (0.28)
                                               ============    ============


PREFERRED STOCK DIVIDENDS PER SHARE            $         --    $         --
                                               ============    ============

BASIC AND DILUTED LOSS AVAILABLE TO
  COMMON SHAREHOLDERS PER SHARE                $      (0.15)   $      (0.28)
                                               ============    ============

BASIC AND DILUTED WEIGHTED AVERAGE
  COMMON SHARES OUTSTANDING                      56,559,453      36,101,484
                                               ============    ============
</TABLE>


                                      F-2
<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, 2006
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Balance, August 21, 1995 (inception)                                                   --   $   --          --      --         --
Recapitalization upon reverse merger                                                                 6,470,000   6,470     (6,456)
Issuance of common stock for services rendered           08/31/95   $      0.01                        715,277     715      7,297
Issuance of common stock for services rendered           09/05/95   $      0.01                         11,623      12        118
Issuance of common stock for services rendered           02/13/96   $      0.01                          7,871       8         80
Net loss

Balance, April 30, 1996  (Restated)                                                    --       --   7,204,771   7,205      1,039

Issuance of common stock for services rendered           12/02/96   $      0.01                          1,162       1         11
Issuance of common stock for services rendered           12/16/96   $      0.01                          1,788       2         19
Issuance of common stock for services rendered           12/20/96   $      0.01                            269     --           3
Net loss

Balance, April 30, 1997   (Restated)                                                   --       --   7,207,990   7,208      1,072

Issuance of common stock for services rendered           05/20/97   $      0.28                         13,411      13      3,737
Issuance of common stock for services rendered           06/02/97   $      0.28                        135,903     136     37,861
Issuance of common stock for services rendered           06/03/97   $      0.28                        588,762     589    164,023
Issuance of common stock for services rendered           06/08/97   $      0.28                          5,901       6      1,644
Issuance of common stock for cash                        06/14/97   $      0.28                         35,766      36      9,964
Issuance of common stock for services rendered           06/16/97   $      0.28                        290,331     290     80,884
Issuance of common stock for services rendered           06/18/97   $      0.28                          4,918       5      1,370
Issuance of common stock for services rendered           06/23/97   $      0.28                        206,167     206     57,436
Issuance of common stock for services rendered           07/28/97   $      0.28                          8,941       9      2,491
Issuance of common stock for cash                        08/11/97   $      0.14                         40,237      40      5,585
Issuance of common stock for cash                        08/19/97   $      0.14                         17,883      18      2,482
Issuance of common stock for cash                        09/04/97   $      0.28                          8,942       9      2,491
Issuance of common stock for cash                        09/04/97   $      0.35                          8,942       9      3,116
Issuance of common stock for cash                        09/12/97   $      0.28                          8,942       9      2,491
Issuance of common stock for cash                        10/14/97   $      0.22                         89,417      89     19,911
Issuance of common stock for cash                        12/17/97   $      0.14                         53,650      54      7,446
Issuance of common stock for cash                        12/17/97   $      0.28                         42,920      43     11,957
Issuance of common stock for cash                        12/17/97   $      0.49                         42,920      43     20,957
Issuance of common stock for services rendered           12/31/97   $      0.29                         49,175      49     14,229
Issuance of common stock for services rendered           01/29/98   $      0.28                         53,646      54     14,945
Issuance of common stock for cash                        01/30/98   $      0.28                         44,708      45     12,455
Issuance of common stock for cash                        03/23/98   $      0.05                         45,603      46      2,204
Issuance of common stock for cash                        03/23/98   $      0.28                         62,771      63     17,489
Issuance of common stock for cash                        03/25/98   $      0.11                          4,471       4        496
Issuance of common stock for services rendered           03/25/98   $      0.22                          1,788       2        398
Issuance of common stock for cash                        03/25/98   $      0.28                         89,417      89     24,911
Issuance of common stock for services rendered           04/04/98   $      0.22                         89,410      89     19,936
Issuance of common stock for services rendered           04/14/98   $      0.22                          2,682       3        598
Issuance of common stock for services rendered           04/28/98   $      0.22                            893       1        197
Net loss

Balance, April 30, 1998   (Restated)                                                   --       --   9,256,507   9,257    544,776

Issuance of common stock for services rendered           05/05/98   $      1.64                          4,470       4      7,307
</TABLE>


                                      F-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, 2006
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                              Deficit
                                                                                            Accumulated
                                                  Committed                                   during the
                                                   Common     Subscription     Deferred      Development
                                                   Stock      Receivable     Compensation       Stage        Total
                                                  --------      ------       -----------     -----------     -----
<S>                                                   <C>          <C>                <C>       <C>       <C>
Balance, August 21, 1995 (inception)                   --           --                --              --        --
Recapitalization upon reverse merger                                                                            14
Issuance of common stock for services rendered                                                               8,012
Issuance of common stock for services rendered                                                                 130
Issuance of common stock for services rendered                                                                  88
Net loss                                                                                         (39,387)  (39,387)

Balance, April 30, 1996  (Restated)                    --           --                --         (39,387)  (31,143)

Issuance of common stock for services rendered                                                                  12
Issuance of common stock for services rendered                                                                  21
Issuance of common stock for services rendered                                                                   3
Net loss                                                                                        (110,004) (110,004)

Balance, April 30, 1997   (Restated)                   --           --                --        (149,391) (141,111)

Issuance of common stock for services rendered                                                               3,750
Issuance of common stock for services rendered                                                              37,997
Issuance of common stock for services rendered                                                             164,612
Issuance of common stock for services rendered                                                               1,650
Issuance of common stock for cash                                                                          10,000
Issuance of common stock for services rendered                                                              81,174
Issuance of common stock for services rendered                                                               1,375
Issuance of common stock for services rendered                                                              57,642
Issuance of common stock for services rendered                                                               2,500
Issuance of common stock for cash                                                                            5,625
Issuance of common stock for cash                                                                            2,500
Issuance of common stock for cash                                                                            2,500
Issuance of common stock for cash                                                                            3,125
Issuance of common stock for cash                                                                            2,500
Issuance of common stock for cash                                                                           20,000
Issuance of common stock for cash                                                                            7,500
Issuance of common stock for cash                                                                           12,000
Issuance of common stock for cash                                                                           21,000
Issuance of common stock for services rendered                                                              14,278
Issuance of common stock for services rendered                                                              14,999
Issuance of common stock for cash                                                                           12,500
Issuance of common stock for cash                                                                            2,250
Issuance of common stock for cash                                                                           17,552
Issuance of common stock for cash                                                                              500
Issuance of common stock for services rendered                                                                 400
Issuance of common stock for cash                                                                           25,000
Issuance of common stock for services rendered                                                              20,025
Issuance of common stock for services rendered                                                                 601
Issuance of common stock for services rendered                                                                 198
Net loss                                                                                        (655,432) (655,432)

Balance, April 30, 1998   (Restated)                   --           --                --        (804,823) (250,790)

Issuance of common stock for services rendered                                                               7,311
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock for cash                        05/05/98   $      1.64                         17,883      18     29,232
Issuance of common stock for services rendered           06/01/98   $      0.28                         28,879      29      8,045
Issuance of common stock for cash                        06/01/98   $      0.28                         53,649      54     14,946
Issuance of common stock for cash                        08/03/98   $      0.28                          8,942       9      2,491
Issuance of common stock for cash                        08/10/98   $      0.28                          8,942       9      2,491
Issuance of common stock for services rendered           09/16/98   $      0.28                         74,501      75     20,755
Issuance of common stock for services rendered           10/01/98   $      0.46                         29,818      30     13,686
Issuance of common stock for cash                        10/01/98   $      0.36                         13,815      14      4,986
Issuance of common stock for cash                        10/01/98   $      0.56                          8,942       9      4,991
Issuance of common stock for cash                        10/30/98   $      0.56                          4,471       4      2,496
Issuance of common stock for services rendered           11/02/98   $      0.40                          4,470       4      1,794
Issuance of common stock for cash                        11/02/98   $      0.28                         44,708      45     12,435
Issuance of common stock for services rendered           11/12/98   $      0.40                          8,941       9      3,588
Issuance of common stock for services rendered           11/14/98   $      0.40                         89,410      89     35,876
Issuance of common stock for services rendered           11/18/98   $      0.40                         15,647      16      6,278
Issuance of common stock for services rendered           11/19/98   $      0.40                         75,998      76     30,494
Issuance of common stock for cash                        11/24/98   $      0.89                         11,177      11      9,989
Issuance of common stock for services rendered           11/28/98   $      0.40                        447,048     447    179,379
Stock options issued for services rendered               11/30/98   $      0.27                                           659,684
Issuance of common stock for services rendered           12/02/98   $      0.91                          4,470       4      4,080
Issuance of common stock for cash                        12/02/98   $      0.75                          3,353       3      2,497
Issuance of common stock for cash                        12/02/98   $      0.78                          8,942       9      6,991
Issuance of common stock for cash                        12/02/98   $      0.93                          2,683       3      2,497
Issuance of common stock for cash                        12/02/98   $      2.80                            894      1       2,499
Issuance of common stock for services rendered           12/17/98   $      0.91                          5,208       5      4,753
Issuance of common stock for services rendered           12/31/98   $      0.91                          2,012       2      1,836
Issuance of common stock for cash                        01/08/99   $      0.72                         44,708      45     32,355
Issuance of common stock for cash                        01/15/99   $      0.38                          9,389       9      3,591
Issuance of common stock for cash                        01/15/99   $      1.41                          4,471       4      6,296
Issuance of common stock for services rendered           03/01/99   $      0.57                        223,524     224    127,266
Issuance of common stock for services rendered           03/16/99   $      0.57                         22,352      22     12,727
Issuance of common stock for services rendered           03/17/99   $      0.57                      1,034,979   1,035    589,278
Issuance of common stock for cash                        03/17/99   $      0.57                         17,883      18     10,182
Issuance of common stock for services rendered           04/28/99   $      0.57                         84,716      85     48,203
Issuance of common stock for services rendered           04/30/99   $      0.57                         11,177      11      6,360
Net loss

Balance, April 30, 1999   (Restated)                                                   --       --  11,688,979  11,689  2,457,130

Issuance of common stock for cash                        05/03/99   $      0.10                         35,767      36      3,629
Issuance of common stock for services rendered           05/05/99   $      0.10                        117,216     117     11,894
Issuance of common stock for cash                        06/05/99   $      0.56                         17,883      18      9,982
Issuance of common stock for services rendered           06/09/99   $      0.45                         89,410      90     40,307
Issuance of common stock for services rendered           06/28/99   $      0.45                        277,170     277    124,953
Issuance of common stock for cash                        06/28/99   $      0.02                          4,471       4         96
Issuance of common stock for cash                        07/12/99   $      0.52                          2,861       3      1,497
Issuance of common stock for cash                        07/14/99   $      0.28                         44,708      45     12,455
Issuance of common stock for cash                        07/14/99   $      0.56                         17,883      18      9,982
Issuance of common stock for services rendered           07/22/99   $      0.37                        247,218     247     90,402
Issuance of common stock for services rendered           11/30/99   $      0.42                         52,305      52     21,675
Issuance of common stock for cash                        11/30/99   $      0.39                         53,650      54     20,946
Issuance of common stock for cash                        11/30/99   $      0.56                          8,942       9      4,991
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                Deficit
                                                                                              Accumulated
                                                    Committed                                   during the
                                                     Common     Subscription     Deferred      Development
                                                     Stock      Receivable     Compensation       Stage          Total
                                                    --------      ------       -----------     -----------       -----
<S>                                                   <C>          <C>                <C>       <C>             <C>
Issuance of common stock for cash                                                                               29,250
Issuance of common stock for services rendered                                                                   8,074
Issuance of common stock for cash                                                                               15,000
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for services rendered                                                                  20,830
Issuance of common stock for services rendered                                                                  13,716
Issuance of common stock for cash                                                                                5,000
Issuance of common stock for cash                                                                                5,000
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for services rendered                                                                   1,798
Issuance of common stock for cash                                                                               12,480
Issuance of common stock for services rendered                                                                   3,597
Issuance of common stock for services rendered                                                                  35,965
Issuance of common stock for services rendered                                                                   6,294
Issuance of common stock for services rendered                                                                  30,570
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for services rendered                                                                 179,826
Stock options issued for services rendered                                                                     659,684
Issuance of common stock for services rendered                                                                   4,084
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for cash                                                                                7,000
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for cash                                                                                2,500
Issuance of common stock for services rendered                                                                   4,758
Issuance of common stock for services rendered                                                                   1,838
Issuance of common stock for cash                                                                               32,400
Issuance of common stock for cash                                                                                3,600
Issuance of common stock for cash                                                                                6,300
Issuance of common stock for services rendered                                                                 127,490
Issuance of common stock for services rendered                                                                  12,749
Issuance of common stock for services rendered                                                                 590,313
Issuance of common stock for cash                                                                               10,200
Issuance of common stock for services rendered                                                                  48,288
Issuance of common stock for services rendered                                                                   6,371
Net loss                                                                                        (1,956,565) (1,956,565)

Balance, April 30, 1999   (Restated)                     --           --                --      (2,761,388)   (292,569)

Issuance of common stock for cash                                                                                3,665
Issuance of common stock for services rendered                                                                  12,011
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for services rendered                                                                  40,397
Issuance of common stock for services rendered                                                                 125,230
Issuance of common stock for cash                                                                                  100
Issuance of common stock for cash                                                                                1,500
Issuance of common stock for cash                                                                               12,500
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for services rendered                                                                  90,649
Issuance of common stock for services rendered                                                                  21,727
Issuance of common stock for cash                                                                               21,000
Issuance of common stock for cash                                                                                5,000
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>

Issuance of common stock for cash                        12/29/99   $      0.56                         80,475      81     44,919
Issuance of common stock for services rendered           03/20/00   $      0.59                          2,235       2      1,309
Issuance of common stock for cash                        04/03/00   $      0.56                        107,301     107     59,893
Issuance of common stock for services rendered           04/03/00   $      0.59                      1,307,700   1,308    765,802
Issuance of common stock for cash                        04/03/00   $      0.72                          2,794       3      1,997
Issuance of common stock for cash                        04/03/00   $      0.89                          8,383       8      7,492
Issuance of common stock for services rendered           04/10/00   $      0.59                         50,159      50     29,374
Issuance of common stock for services rendered           04/24/00   $      0.59                         22,352      22     13,090
Issuance of common stock for services rendered           04/26/00   $      0.59                          2,235       2      1,309
Net loss

Balance, April 30, 2000   (Restated)                                                   --       --  14,242,097   4,242  3,735,124

Issuance of common stock for services rendered           07/28/00   $      0.59                         11,177      11      6,546
Issuance of common stock for services rendered           08/10/00   $      0.59                        223,542     224    130,908
Issuance of common stock for services rendered           08/22/00   $      0.59                         22,354      22     13,091
Issuance of common stock for services rendered           09/28/00   $      0.24                         11,177      11      2,623
Issuance of common stock for cash                        09/28/00   $      0.24                         21,214      21      4,979
Issuance of common stock for services rendered           10/09/00   $      0.24                         35,767      36      8,394
Issuance of common stock for services rendered           11/30/00   $      0.24                            448      1         105
Issuance of common stock for services rendered           12/31/00   $      0.24                        510,793     511    119,878
Net loss

Balance, April 30, 2001   (Restated)                                                   --       --  15,078,569   5,079  4,021,648

Issuance of common stock for services rendered           05/10/01   $      0.24                        116,903     117     27,940
Issuance of common stock for services rendered           06/18/01   $      0.45                         67,057      67     29,930
Issuance of common stock for cash                        06/18/01   $      0.45                         22,354      22      9,978
Issuance of common stock for cash                        07/31/01   $      0.45                         22,354      22      9,978
Issuance of common stock for services rendered           07/31/01   $      0.64                        350,933     351    223,917
Issuance of common stock for cash                        07/31/01   $      1.12                          8,942       9      9,991
Issuance of common stock for cash                        09/07/01   $      0.22                        223,542     224     49,776
Issuance of common stock for services rendered           09/23/01   $      0.22                        525,281     525    116,965
Issuance of common stock for cash                        09/23/01   $      0.22                         67,062      67     14,933
Warrants issued for services rendered                    09/23/01   $      0.09                                            24,924
Issuance of common stock for services rendered           10/31/01   $      0.22                         13,411      14      2,986
Issuance of common stock for services rendered           11/02/01   $      0.22                         67,057      67     14,932
Issuance of common stock for services rendered           12/07/01   $      0.22                         11,176      11      2,489
Issuance of common stock for services rendered           12/10/01   $      0.22                        217,176     217     48,359
Issuance of common stock for services rendered           12/13/01   $      0.22                         87,235      87     19,425
Issuance of common stock for cash                        12/13/01   $      0.22                        223,542     224     49,776
Issuance of common stock for cash                        12/20/01   $      0.22                          3,577       4        796
Issuance of common stock for services rendered           12/20/01   $      0.22                      1,230,276   1,230    273,948
Issuance of common stock for services rendered           12/21/01   $      0.22                         22,352      22      4,978
Issuance of common stock for services rendered           12/30/01   $      0.22                        212,348     212     47,284
Stock options issued for services rendered               01/08/02   $      0.11                                             1,402
Issuance of common stock for services rendered           01/14/02   $      0.22                         33,529      34      7,465
Stock options issued for services rendered               01/31/02   $      0.11                                             2,142
Stock options issued for services rendered               02/08/02   $      0.09                                             3,809
Issuance of common stock for services rendered           02/14/02   $      0.22                      2,235,241   2,235    497,725
Issuance of common stock for cash                        03/13/02   $      0.24                         10,283      10      2,410
Issuance of common stock in private
   placement for cash                                    04/30/02   $      1.00                      1,225,000   1,225  1,223,775
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                Deficit
                                                                                              Accumulated
                                                    Committed                                   during the
                                                     Common     Subscription     Deferred      Development
                                                     Stock      Receivable     Compensation       Stage          Total
                                                    --------      ------       -----------     -----------       -----
<S>                                                   <C>          <C>                <C>       <C>       <C>
Issuance of common stock for cash                                                                               45,000
Issuance of common stock for services rendered                                                                   1,311
Issuance of common stock for cash                                                                               60,000
Issuance of common stock for services rendered                                                                 767,110
Issuance of common stock for cash                                                                                2,000
Issuance of common stock for cash                                                                                7,500
Issuance of common stock for services rendered                                                                  29,424
Issuance of common stock for services rendered                                                                  13,112
Issuance of common stock for services rendered                                                                   1,311
Net loss                                                                                        (1,247,576) (1,247,576)

Balance, April 30, 2000   (Restated)                     --           --                --      (4,008,964)   (259,598)

Issuance of common stock for services rendered                                                                   6,557
Issuance of common stock for services rendered                                                                 131,132
Issuance of common stock for services rendered                                                                  13,113
Issuance of common stock for services rendered                                                                   2,634
Issuance of common stock for cash                                                                                5,000
Issuance of common stock for services rendered                                                                   8,430
Issuance of common stock for services rendered                                                                     106
Issuance of common stock for services rendered                                                                 120,389
Net loss                                                                                          (452,754)   (452,754)

Balance, April 30, 2001   (Restated)                     --           --                --      (4,461,718)   (424,991)

Issuance of common stock for services rendered                                                                  28,057
Issuance of common stock for services rendered                                                                  29,997
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for services rendered                                                                 224,268
Issuance of common stock for cash                                                                               10,000
Issuance of common stock for cash                                                                               50,000
Issuance of common stock for services rendered                                                                 117,490
Issuance of common stock for cash                                                                               15,000
Warrants issued for services rendered                                                                           24,924
Issuance of common stock for services rendered                                                                   3,000
Issuance of common stock for services rendered                                                                  14,999
Issuance of common stock for services rendered                                                                   2,500
Issuance of common stock for services rendered                                                                  48,576
Issuance of common stock for services rendered                                                                  19,512
Issuance of common stock for cash                                                                               50,000
Issuance of common stock for cash                                                                                  800
Issuance of common stock for services rendered                                                                 275,178
Issuance of common stock for services rendered                                                                   5,000
Issuance of common stock for services rendered                                                                  47,496
Stock options issued for services rendered                                                                       1,402
Issuance of common stock for services rendered                                                                   7,499
Stock options issued for services rendered                                                                       2,142
Stock options issued for services rendered                                                                       3,809
Issuance of common stock for services rendered                                                                 499,960
Issuance of common stock for cash                                                                                2,420
Issuance of common stock in private
   placement for cash                                                                                        1,225,000
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Net loss

Balance, April 30, 2002   (Restated)                                                   --       --  22,075,200  22,075  6,743,681

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     12,010
Financing expense in connection with
   issuance of warrants                                  05/31/02   $      1.49                                           223,710
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock        06/04/02   $      1.00                          5,780       6      5,774
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock        06/20/02   $      1.00                          5,438       5      5,435
Issuance of common stock in private placement for
   cash                                                  06/25/02   $      1.00                        500,000     500    499,500
Stock options issued for services rendered               07/12/02   $      1.52                                           761,007
Conversion of notes payable -- related
   parties into common stock                             07/16/02   $      1.00                         15,000      15     14,985
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock        07/22/02   $      1.00                         11,680      12     11,664
Stock options issued for services rendered               08/01/02   $      0.47                                           187,163
Issuance of common stock for services rendered           08/24/02   $      1.67                          5,589       6      9,328
Stock options issued for services rendered               09/25/02   $      1.10                                         3,305,542
Stock options issued in exchange for settlement
   of accounts payable                                   09/25/02   $      1.10                                            50,000
Issuance of Series A convertible preferred stock
   in private placement for cash                         10/07/02   $ 10,000.00     97.93        1                        979,300
Offering costs on issuance of Series A convertible
   preferred stock in private placement for cash         10/07/02                                                        (178,902)
Dividends on Series A preferred stock                    10/07/02                                       68,150      68     78,292
Beneficial conversion feature on issuance of
   Series A preferred stock                              10/07/02                                                         767,431
Issuance of common stock in private placement for
   cash                                                  10/29/02   $      1.35                      1,349,934   1,350  1,821,056
Offering costs on issuance of common stock in
   private placement for cash                            10/29/02                                                        (196,793)
Common stock committed for services rendered             11/24/02   $      2.35
Warrants issued for services rendered                    12/09/02   $      2.60                                           390,409
Warrants issued for services rendered                    12/09/02   $      0.65                                           162,792
Stock options issued in exchange for settlement
   of accounts payable                                   12/19/02   $      0.55                                            15,000
Stock options issued for services rendered               12/31/02   $      0.13                                            59,373
Issuance of common stock on cashless exercise of
   warrants                                              01/02/03                                       33,909      34        (34)
Issuance of common stock on cashless conversion
   of the Series A convertible preferred stock           01/24/03                   (1.05)               9,162       9         (9)
Issuance of common stock on cashless conversion
   of the Series A convertible preferred stock           01/27/03                   (1.06)               9,174       9         (9)
Amortization of deferred compensation                    01/31/03
Warrants issued for services rendered                    02/17/03   $      1.63                                           130,712
Common stock committed for services rendered             02/24/03   $      0.79
Reversal of deferred compensation                        02/25/03                                                      (2,272,561)
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                Deficit
                                                                                              Accumulated
                                                    Committed                                   during the
                                                     Common     Subscription     Deferred      Development
                                                     Stock      Receivable     Compensation       Stage          Total
                                                    --------      ------       -----------     -----------       -----
<S>                                                   <C>          <C>                <C>       <C>       <C>
Net loss                                                                                        (2,399,061) (2,399,061)

Balance, April 30, 2002   (Restated)                      --          --                --      (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                                                                  12,016
Financing expense in connection with
   issuance of warrants                                                                                        223,710
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock                                                                5,780
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock                                                                5,440
Issuance of common stock in private placement for
   cash                                                                                                        500,000
Stock options issued for services rendered                                                                     761,007
Conversion of notes payable -- related
   parties into common stock                                                                                    15,000
Conversion of convertible notes payable -- related
   parties and accrued interest into common stock                                                               11,676
Stock options issued for services rendered                                                                     187,163
Issuance of common stock for services rendered                                                                   9,334
Stock options issued for services rendered                                      (3,305,542)                         --
Stock options issued in exchange for settlement
   of accounts payable                                                                                          50,000
Issuance of Series A convertible preferred stock
   in private placement for cash                                                                               979,301
Offering costs on issuance of Series A convertible
   preferred stock in private placement for cash                                                              (178,902)
Dividends on Series A preferred stock                                                              (78,360)         --
Beneficial conversion feature on issuance of
   Series A preferred stock                                                                       (767,431)         --
Issuance of common stock in private placement for
   cash                                                                                                      1,822,406
Offering costs on issuance of common stock in
   private placement for cash                                                                                 (196,793)
Common stock committed for services rendered          13,134                                                    13,134
Warrants issued for services rendered                                                                          390,409
Warrants issued for services rendered                                                                          162,792
Stock options issued in exchange for settlement
   of accounts payable                                                                                          15,000
Stock options issued for services rendered                                                                      59,373
Issuance of common stock on cashless exercise of
   warrants                                                                                                         --
Issuance of common stock on cashless conversion
   of the Series A convertible preferred stock                                                                      --
Issuance of common stock on cashless conversion
   of the Series A convertible preferred stock                                                                      --
Amortization of deferred compensation                                            1,032,981                   1,032,981
Warrants issued for services rendered                                                                          130,712
Common stock committed for services rendered           4,415                                                     4,415
Reversal of deferred compensation                                                2,272,561                          --
</TABLE>

                                      F-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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock for services rendered           04/21/03   $      0.48                         21,277      21     10,288
Common stock committed for services rendered             04/21/03   $      0.48
Warrants issued for services rendered                    04/28/03   $      0.37                                            18,284
Offering costs on issuance of common stock subject
   to buyback for cash                                   04/23/03                                                         (20,000)
Offering costs on issuance of common stock subject
   to buyback for cash                                   04/28/03                                                         (24,500)
Issuance of common stock for subscription receivable     04/30/03   $      0.40                         10,000      10      3,972
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 13,573,900

Warrants issued for services rendered                    05/01/03   $      0.16                                             8,079
Issuance of common stock for services rendered           05/13/03   $      0.48                         45,000      45     21,555
Warrants issued for services rendered                    05/16/03   $      0.24                                            35,598
Stock options issued for services rendered               05/16/03   $      0.18                                             5,458
Issuance of common stock on cashless conversion
   of Series A preferred stock                           05/16/03                  (95.82)     (1)   2,129,316   2,129     (2,128)
Dividend on induced conversion of Series A
   preferred stock                                       05/16/03                                                         583,243
Issuance of committed common stock                       05/16/03                                      128,136     128     57,533
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      05/16/03   $      0.45                         25,952      26     11,653
Issuance of committed common stock                       05/21/03                                       20,000      20      9,671
Issuance of common stock on exercise of
   warrants                                              05/27/03   $      0.01                         34,000      34        306
Issuance of committed common stock                       06/19/03                                       11,178      11     17,538
Issuance of common stock on conversion of
   convertible notes payable -- related parties          06/24/03   $      0.33                        300,000     300     99,700
Stock options issued for services rendered               07/16/03   $      0.26                                            52,742
Issuance of common stock for services rendered           07/16/03   $      0.50                          6,000       6      2,994
Issuance of committed common stock                       08/14/03                                       44,705      45      7,119
Issuance of common stock for cash                        08/15/03   $      0.45                        222,222     222     99,778
Issuance of common stock for cash                        08/20/03   $      0.52                        400,000     400    207,600
Issuance of common stock for cash                        08/25/03   $      0.69                        272,464     272    187,728
Issuance of common stock for services rendered           08/27/03   $      1.06                          6,000       6      6,354
Stock options issued for services rendered               08/27/03   $      0.79                                            31,514
Beneficial conversion feature on convertible
   notes payable -- related parties                      08/28/03                                                             341
Issuance of common stock for cash                        08/28/03   $      0.69                         86,957      87     59,913
Issuance of common stock for cash                        08/29/03   $      0.69                        144,928     145     99,855
Issuance of common stock for cash                        08/29/03   $      0.75                        666,666     667    499,333
Offering costs on issuance of common stock
   for cash                                              08/29/03                                                         (40,000)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      10/15/03   $      1.29                        148,260     148    191,107
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          10/15/03   $      0.73                                             6,009
Issuance of common stock for cash                        10/27/03   $      0.95                         63,000      63     59,938
Stock options issued for services rendered               11/07/03   $      0.90                                           278,142
</TABLE>

                                      F-11
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                       Committed                                   during the
                                                        Common     Subscription     Deferred      Development
                                                        Stock      Receivable     Compensation       Stage          Total
                                                       --------      ------       -----------     -----------       -----
<S>                                                   <C>          <C>                <C>          <C>          <C>
Issuance of common stock for services rendered                                                                     10,309
Common stock committed for services rendered              9,691                                                     9,691
Warrants issued for services rendered                                                                              18,284
Offering costs on issuance of common stock subject
   to buyback for cash                                                                                            (20,000)
Offering costs on issuance of common stock subject
   to buyback for cash                                                                                            (24,500)
Issuance of common stock for subscription receivable                                                                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)                     92,065          --                --     (13,632,250)     57,842

Warrants issued for services rendered                                                                               8,079
Issuance of common stock for services rendered                                                                     21,600
Warrants issued for services rendered                                                                              35,598
Stock options issued for services rendered                                                                          5,458
Issuance of common stock on cashless conversion
   of Series A preferred stock                                                                                         --
Dividend on induced conversion of Series A
   preferred stock                                                                                   (583,243)         --
Issuance of committed common stock                      (57,661)                                                       --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                11,679
Issuance of committed common stock                       (9,691)                                                       --
Issuance of common stock on exercise of                                                                                --
   warrants                                                                                                           340
Issuance of committed common stock                      (17,549)                                                       --
Issuance of common stock on conversion of
   convertible notes payable -- related parties                                                                   100,000
Stock options issued for services rendered                                                                         52,742
Issuance of common stock for services rendered                                                                      3,000
Issuance of committed common stock                       (7,164)                                                       --
Issuance of common stock for cash                                                                                 100,000
Issuance of common stock for cash                                                                                 208,000
Issuance of common stock for cash                                                                                 188,000
Issuance of common stock for services rendered                                                                      6,360
Stock options issued for services rendered                                                                         31,514
Beneficial conversion feature on convertible                                                                           --
   notes payable -- related parties                                                                                   341
Issuance of common stock for cash                                                                                  60,000
Issuance of common stock for cash                                                                                 100,000
Issuance of common stock for cash                                                                                 500,000
Offering costs on issuance of common stock
   for cash                                                                                                       (40,000)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               191,255
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                     6,009
Issuance of common stock for cash                                                                                  60,001
Stock options issued for services rendered                                                                        278,142
</TABLE>

                                      F-12
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock for services rendered           11/07/03   $      1.25                         12,000      12     14,988
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      11/15/03   $      1.04                         44,187      44     45,910
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          11/15/03   $      0.52                                             7,143
Offering costs on issuance of common stock subject
   to rescission rights for cash                         11/21/03                                                          (5,250)
Issuance of common stock for services rendered           11/21/03   $      0.75                          2,000       2      1,498
Stock options issued for services rendered               12/05/03   $      0.60                                            24,104
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      12/15/03   $      0.90                         61,242      61     55,057
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          12/15/03   $      0.41                                             7,937
Issuance of common stock for cash                        12/22/03   $      0.71                         42,254      42     29,958
Issuance of common stock for services rendered           01/06/04   $      0.89                         27,500      28     24,447
Warrants issued for services rendered                    01/06/04   $      0.59                                            17,775
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      01/15/04   $      0.88                         75,739      76     66,574
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          01/15/04   $      0.39                                             9,837
Issuance of common stock on cashless
   exercise of warrants                                  01/15/04                                       54,053      54        (54)
Issuance of common stock for services rendered           01/15/04   $      0.88                         12,000      12     10,548
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      01/16/04   $      0.89                          2,520       3      2,240
Beneficial conversion feature on convertible
   notes payable -- related parties                      01/16/04                                                          58,245
Issuance of warrants in conjunction with
   convertible notes payable -- related parties          01/16/04   $      0.18                                            91,755
Issuance of common stock for services rendered           01/23/04   $      1.18                         55,000      55     64,845
Beneficial conversion feature on convertible
   notes payable -- related parties                      01/26/04                                                           4,026
Beneficial conversion feature on convertible
   notes payable -- related parties                      01/28/04                                                          41,196
Issuance of warrants in conjunction with
   convertible notes payable -- related parties          01/28/04   $      0.15                                           143,804
Issuance of common stock on cashless
   exercise of warrants                                  01/30/04                                       48,000      48        (48)
Beneficial conversion feature on convertible
   notes payable -- related parties                      01/31/04                                                           6,046
Issuance of warrants in conjunction with
   convertible notes payable -- related parties          01/31/04   $      0.12                                            43,954
Beneficial conversion feature on convertible
   notes payable -- related parties                      01/31/04                                                           9,558
Issuance of common stock on cashless
   exercise of warrants                                  02/04/04                                       25,049      25        (25)
Offering costs on issuance of common stock subject
   to rescission rights for cash                         02/06/04                                                          (5,250)
Issuance of common stock for services rendered           02/06/04   $      1.23                          3,333       3      4,097
</TABLE>

                                      F-13
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                       Committed                                   during the
                                                        Common     Subscription     Deferred      Development
                                                        Stock      Receivable     Compensation       Stage          Total
                                                       --------      ------       -----------     -----------       -----
<S>                                                    <C>          <C>                <C>        <C>              <C>
Issuance of common stock for services rendered                                                                     15,000
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                45,954
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                     7,143
Offering costs on issuance of common stock subject
   to rescission rights for cash                                                                                   (5,250)
Issuance of common stock for services rendered                                                                      1,500
Stock options issued for services rendered                                                                         24,104
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                55,118
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                     7,937
Issuance of common stock for cash                                                                                  30,000
Issuance of common stock for services rendered                                                                     24,475
Warrants issued for services rendered                                                                              17,775
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                66,650
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                     9,837
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of common stock for services rendered                                                                     10,560
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 2,243
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                58,245
Issuance of warrants in conjunction with
   convertible notes payable -- related parties                                                                    91,755
Issuance of common stock for services rendered                                                                     64,900
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                 4,026
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                41,196
Issuance of warrants in conjunction with
   convertible notes payable -- related parties                                                                   143,804
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                 6,046
Issuance of warrants in conjunction with
   convertible notes payable -- related parties                                                                    43,954
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                 9,558
Issuance of common stock on cashless
   exercise of warrants                                                                                               --
Offering costs on issuance of common stock subject
   to rescission rights for cash                                                                                   (5,250)
Issuance of common stock for services rendered                                                                      4,100
</TABLE>

                                      F-14
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      02/15/04   $      1.25                         99,332      99    124,066
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          02/15/04   $      0.69                                            19,415
Issuance of common stock for services rendered           02/25/04   $      1.26                          2,667       3      3,357
Offering costs on issuance of common stock subject
   to rescission rights for cash                         02/25/04                                                          (7,000)
Common stock committed for services rendered             03/10/04   $      1.42
Stock options issued for services rendered               03/10/04   $      0.55                                            15,917
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      03/15/04   $      1.75                        120,464     121    210,691
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          03/15/04   $      1.13                                            38,323
Issuance of common stock on cashless
   exercise of warrants                                  03/15/04                                        2,958       3         (3)
Beneficial conversion feature on convertible
   notes payable -- related parties                       03/16/04                                                         15,831
Issuance of common stock for cash                        03/19/04   $      0.75                         40,000      40     29,960
Issuance of common stock on cashless
   exercise of warrants                                  03/23/04                                       17,334      17        (17)
Issuance of common stock for cash                        03/25/04   $      0.75                         40,000      40     29,960
Issuance of common stock for services rendered and
   to be rendered                                        03/25/04   $        --                        200,000     200    323,800
Issuance of common stock for cash                        03/26/04   $      0.75                         40,000      40     29,960
Issuance of common stock on cashless
   exercise of warrants                                  04/01/04                                        7,879       8         (8)
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          04/01/04   $      1.03                                            10,735
Warrants issued for services rendered                    04/07/04   $      1.57                                            78,297
Issuance of common stock for services rendered           04/07/04   $      2.95                         12,000      12     35,388
Issuance of common stock on cashless
   exercise of warrants                                  04/12/04                                      302,638     303       (303)
Issuance of common stock for services rendered           04/12/04   $      2.78                        100,000     100    277,900
Issuance of common stock on cashless
   exercise of warrants                                  04/14/04                                       12,701      13        (13)
Issuance of common stock on cashless
   exercise of warrants                                  04/15/04                                       18,235      18        (18)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      04/15/04   $      2.55                        141,383     141    360,386
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          04/15/04   $      1.88                                            74,639
Issuance of common stock on exercise of warrants         04/16/04   $      1.50                         35,776      36     53,628
Warrants issued for services rendered
   and to be rendered                                    04/16/04   $        --                                            75,461
Issuance of common stock for services rendered
   and to be rendered                                    04/16/04   $        --                         75,000      75    213,675
Beneficial conversion feature on convertible
   notes payable -- related parties                      04/19/04                                                          78,024
</TABLE>

                                      F-15
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                       Committed                                   during the
                                                        Common     Subscription     Deferred      Development
                                                        Stock      Receivable     Compensation       Stage          Total
                                                       --------      ------       -----------     -----------       -----
<S>                                                    <C>          <C>                <C>        <C>             <C>
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               124,165
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                    19,415
Issuance of common stock for services rendered                                                                      3,360
Offering costs on issuance of common stock subject
   to rescission rights for cash                                                                                   (7,000)
Common stock committed for services rendered              9,940                                                     9,940
Stock options issued for services rendered                                                                         15,917
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               210,812
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                    38,323
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                15,831
Issuance of common stock for cash                                                                                  30,000
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of common stock for cash                                                                                  30,000
Issuance of common stock for services rendered and
   to be rendered                                                                    (324,000)                         --
Issuance of common stock for cash                                                                                  30,000
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                    10,735
Warrants issued for services rendered                                                                              78,297
Issuance of common stock for services rendered                                                                     35,400
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of common stock for services rendered                                                                    278,000
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of common stock on cashless
   exercise of warrants                                                                                                --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               360,527
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                    74,639
Issuance of common stock on exercise of warrants                                                                   53,664
Warrants issued for services rendered
   and to be rendered                                                                 (75,461)                         --
Issuance of common stock for services rendered
   and to be rendered                                                                (213,750)                         --
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                78,024

</TABLE>

                                      F-16
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock for cash                        04/20/04   $      0.99                         30,303      30     29,970
Issuance of common stock on cashless
   exercise of warrants                                  04/23/04                                        6,269       6         (6)
Issuance of common stock on cashless
   exercise of warrants                                  04/28/04                                        2,000       2         (2)
Warrants issued for services rendered                    04/29/04   $      1.09                                            54,675
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                                            11,738
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                          04/30/04   $      1.71                                            17,790
Common stock committed to investors as a penalty
   for delayed registration of common stock              04/30/04   $      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                                            27,717
Amortization of deferred compensation
Net Loss
Balance, April 30, 2004                                       --   $         --                     30,652,482         19,181,421

Beneficial conversion feature on convertible
   notes payable                                         05/01/04                                                          25,262
 Issuance of warrants in conjunction with
   convertible notes payable                             05/01/04   $      0.10                                           399,738
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      05/01/04   $      2.35                          6,667       7     15,661
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   05/01/04   $      1.69                                           186,733
Issuance of common stock for services rendered           05/05/04   $      2.19                         95,000      95    207,955
Issuance of common stock for services rendered           05/07/04   $      1.97                          3,500       4      6,891
Offering costs on issuance of common stock               05/10/04                                                         (13,000)
Common stock issued for services rendered                05/12/04                                        5,000       5      9,345
Common stock committed for services rendered             05/12/04   $      0.53
Issuance of committed common stock to investors as
   a penalty for delayed registration of common stock    05/15/04   $      1.85                         84,486      84    156,215
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      05/15/04   $      1.85                         77,823      78    143,894
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   05/15/04   $      1.22                                            27,732
Issuance of common stock for cash                        05/21/04   $      1.51                         29,801      30     44,970
Offering costs on issuance of common stock               05/25/04                                                          (5,000)
Offering costs on issuance of common stock               05/26/04                                                          (2,250)
Amortization of deferred compensation                    05/31/04
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      06/01/04   $      1.90                         32,223      32     61,192
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   06/01/04   $      1.27                                           140,443
Issuance of common stock for cash                        06/01/04   $      1.51                         13,245      13     19,987
Issuance of common stock for cash                        06/01/04   $      1.51                         19,868      20     29,980
Issuance of common stock for cash                        06/04/04   $      1.51                         66,225      66     99,934
</TABLE>

                                      F-17
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                    Deficit
                                                                                                  Accumulated
                                                        Committed                                   during the
                                                         Common     Subscription     Deferred      Development
                                                         Stock      Receivable     Compensation       Stage          Total
                                                        --------      ------       -----------     -----------       -----
<S>                                                      <C>          <C>           <C>            <C>            <C>
Issuance of common stock for cash                                                                                   30,000
Issuance of common stock on cashless
   exercise of warrants                                                                                                 --
Issuance of common stock on cashless
   exercise of warrants                                                                                                 --
Warrants issued for services rendered                                                                               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
Issuance of warrants to investors as a
   penalty for delayed registration of the underlying
   common stock                                                                                                     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
Amortization of deferred compensation                                                 153,903                      153,903
Net Loss                                                                                            (7,600,103) (7,600,103)
Balance, April 30, 2004                                 179,679           --         (459,308)     (21,815,596) (2,883,152)

Beneficial conversion feature on convertible
   notes payable                                                                                                    25,262
 Issuance of warrants in conjunction with
   convertible notes payable                                                                                       399,738
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 15,668
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                             186,733
Issuance of common stock for services rendered                                                                     208,050
Issuance of common stock for services rendered                                                                       6,895
Offering costs on issuance of common stock                                                                         (13,000)
Common stock issued for services rendered                                                                            9,350
Common stock committed for services rendered              3,740                                                      3,740
Issuance of committed common stock to investors as
   a penalty for delayed registration of common stock  (156,299)                                                        --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                143,972
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                              27,732
Issuance of common stock for cash                                                                                   45,000
Offering costs on issuance of common stock                                                                          (5,000)
Offering costs on issuance of common stock                                                                          (2,250)
Amortization of deferred compensation                                                  92,202                       92,202
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 61,224
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                             140,443
Issuance of common stock for cash                                                                                   20,000
Issuance of common stock for cash                                                                                   30,000
Issuance of common stock for cash                                                                                  100,000
</TABLE>

                                      F-18
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock for cash                        06/07/04   $      1.51                         33,113      33     49,967
Issuance of common stock for cash                        06/07/04   $      1.51                         19,868      20     29,980
Issuance of common stock for cash                        06/07/04   $      1.51                         66,225      66     99,934
Offering costs on issuance of common stock               06/10/04                                                         (11,500)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      06/15/04   $      1.26                        187,028     187    235,468
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   06/15/04   $      0.69                                            36,412
Common stock issued for services rendered                06/16/04                                        3,000       3      3,327
Common stock committed for services rendered             06/16/04   $      0.74
Beneficial conversion feature on convertible
   notes payable -- related parties                       06/16/04                                                          1,305
Beneficial conversion feature on convertible
   notes payable -- related parties                       06/17/04                                                          3,859
Issuance of common stock for cash                        06/18/04   $      1.01                         99,010      99     99,901
Beneficial conversion feature on convertible
   notes payable                                         06/23/04                                                          30,044
Issuance of warrants in conjunction with
   convertible notes payable                             06/23/04   $      0.15                                           209,956
Beneficial conversion feature on convertible
   notes payable                                         06/23/04                                                           7,511
Issuance of warrants in conjunction with
   convertible notes payable                             06/23/04   $      0.15                                            52,489
Issuance of committed common stock for legal settlement  06/24/04   $      1.28                         10,500      11     13,429
Amortization of deferred compensation                    06/30/04
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      07/01/04   $      1.86                         32,223      32     59,903
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   07/01/04   $      1.23                                           136,473
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      07/15/04   $      1.20                        209,217     209    250,851
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock   07/15/04   $      0.64                                            37,715
Common stock issued for services rendered                07/21/04                                        6,000       6      5,634
Common stock committed for services rendered             07/21/04   $      0.31
Warrants issued for services rendered                    07/26/04   $      0.39                                            38,573
Issuance of common stock for services rendered           07/28/04   $      0.97                        182,955     183    177,283
Common stock issued to investors as a
   penalty for delayed registration of common stock      07/31/04   $      1.00                        116,004     116    115,888
Warrants committed to investors as a penalty
   for delayed registration of common stock              07/31/04   $      0.47                                            15,500
Amortization of deferred compensation                    07/31/04
Common stock issued for services rendered                08/05/04   $      1.14                          9,000       9     10,251
Common stock issued for services rendered                08/11/04   $      1.02                         12,000      12     12,228
Common stock issued to investors as a
   penalty for delayed registration of common stock      08/15/04   $      1.00                        116,004     116    115,888
Warrants committed to investors as a penalty
   for delayed registration of common stock              08/15/04   $      0.47                                            15,500
Common stock issued to investors as a
   penalty for delayed registration of common stock      08/31/04   $      0.85                         32,223      32     27,357
Warrants committed to investors as a penalty
   for delayed registration of common stock              08/31/04   $      0.37                                            41,405
</TABLE>

                                      F-19
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                    Deficit
                                                                                                  Accumulated
                                                        Committed                                   during the
                                                         Common     Subscription     Deferred      Development
                                                         Stock      Receivable     Compensation       Stage          Total
                                                        --------      -------      ------------    -----------       -----
<S>                                                     <C>          <C>                <C>         <C>            <C>
Issuance of common stock for cash                                                                                   50,000
Issuance of common stock for cash                                                                                   30,000
Issuance of common stock for cash                                                                                  100,000
Offering costs on issuance of common stock                                                                         (11,500)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                235,655
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                              36,412
Common stock issued for services rendered                                                                            3,330
Common stock committed for services rendered              6,660                                                      6,660
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                  1,305
Beneficial conversion feature on convertible
   notes payable -- related parties                                                                                  3,859
Issuance of common stock for cash                                                                                  100,000
Beneficial conversion feature on convertible
   notes payable                                                                                                    30,044
Issuance of warrants in conjunction with
   convertible notes payable                                                                                       209,956
Beneficial conversion feature on convertible
   notes payable                                                                                                     7,511
Issuance of warrants in conjunction with
   convertible notes payable                                                                                        52,489
Issuance of committed common stock for legal settlement (13,440)                                                        --
Amortization of deferred compensation                                                  114,150                     114,150
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 59,935
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                             136,473
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                251,060
Issuance of warrants to investors as a penalty for
   delayed registration of the underlying common stock                                                              37,715
Common stock issued for services rendered                                                                            5,640
Common stock committed for services rendered              2,820                                                      2,820
Warrants issued for services rendered                                                                               38,573
Issuance of common stock for services rendered                                                                     177,466
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                116,004
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         15,500
Amortization of deferred compensation                                                   72,199                      72,199
Common stock issued for services rendered                                                                           10,260
Common stock issued for services rendered                                                                           12,240
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                116,004
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         15,500
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                 27,389
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         41,405
</TABLE>

                                      F-20
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Amortization of deferred compensation                    08/31/04
Beneficial conversion feature on convertible
   notes payable                                         09/01/04                                                          55,769
Issuance of common stock upon receipt of cash            09/07/04   $      0.46                         71,739      72     32,928
Common stock issued to investors as a
   penalty for delayed registration of common stock      09/15/04   $      0.82                        254,350     254    208,313
Warrants committed to investors as a penalty
   for delayed registration of common stock              09/15/04   $      0.34                                            24,260
Issuance of common stock upon conversion of
   Convertible Note payable                              09/20/04                                      192,308     192     99,808
Common stock issued for services rendered                09/21/04   $      0.78                         15,000      15     11,685
Common stock issued to investors as a
   penalty for delayed registration of common stock      09/30/04   $      0.82                         32,223      32     26,391
Warrants committed to investors as a penalty
   for delayed registration of common stock              09/30/04   $      0.44                                            49,026
Expensing of deferred compensation                       09/30/04
Common stock issued to investors as a
   penalty for delayed registration of common stock      10/15/04   $      1.28                        235,662     236    207,147
Warrants committed to investors as a penalty
   for delayed registration of common stock              10/15/04   $      0.51                                            39,793
Common stock issued for cash                             10/18/04   $        --                        525,992     526    241,430
Common stock issued for cash                             10/19/04   $        --                        805,435     805    369,695
Common stock issued for cash                             10/21/04   $        --                         55,000      55     25,245
Common stock issued for cash                             10/22/04   $        --                         71,277      71     32,929
Common stock issued for services rendered                10/25/04   $      0.97                         15,000      15     14,535
Common stock issued to investors as a
   penalty for delayed registration of common stock      10/31/04   $      0.99                         90,923      91     89,923
Warrants committed to investors as a penalty
   for delayed registration of common stock              10/31/04   $      0.61                                            90,390
Amortization of deferred compensation                    10/31/04   $        --
Common stock issued cash                                 11/01/04   $      0.46                         45,000      45     20,655
Common stock issued for services rendered                11/05/04   $      1.04                         15,000      15     15,585
Common stock issued to investors as a
   penalty for delayed registration of common stock      11/15/04   $      1.02                         87,870      88     89,540
Warrants committed to investors as a penalty
   for delayed registration of common stock              11/15/04   $      0.49                                            20,645
Issuance of common stock in settlement of
   promissory notes payable -- related parties           11/19/04   $      0.46                      1,010,870   1,011    463,989
Issuance of committed common stock from
   the cashless exercise of warrants                     11/24/04   $        --                      1,046,687   1,047     (1,047)
Issuance of common stock for cash                        11/30/04   $      0.46                      1,707,395   1,707    783,693
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      11/30/04   $      1.05                         32,223      32     33,802
Warrants committed to investors as a penalty
   for delayed registration of common stock              11/30/04   $      0.68                                            84,276
Amortization of deferred compensation                    11/30/04   $        --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      12/15/04   $      0.92                         79,627      80     73,177
Warrants committed to investors as a penalty
   for delayed registration of common stock              12/15/04   $      0.41                                            37,352
Issuance of common stock for cash                        12/23/04   $      0.46                        108,696     109     49,891
</TABLE>

                                      F-21
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                    Accumulated
                                                          Committed                                   during the
                                                           Common     Subscription     Deferred      Development
                                                           Stock      Receivable     Compensation       Stage          Total
                                                          --------    ----------     ------------    -----------       -----
<S>                                                      <C>          <C>                <C>         <C>            <C>
Amortization of deferred compensation                                                     20,084                      20,084
Beneficial conversion feature on convertible
   notes payable                                                                                                      55,769
Issuance of common stock upon receipt of cash                                                                         33,000
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                  208,567
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           24,260
Issuance of common stock upon conversion of
   Convertible Note payable                                                                                          100,000
Common stock issued for services rendered                                                                             11,700
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                   26,423
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           49,026
Expensing of deferred compensation                                                        20,084                      20,084
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                  207,383
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           39,793
Common stock issued for cash                                                                                         241,956
Common stock issued for cash                                                                                         370,500
Common stock issued for cash                                                                                          25,300
Common stock issued for cash                                                                                          33,000
Common stock issued for services rendered                                                                             14,550
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                   90,014
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           90,390
Amortization of deferred compensation                                                     20,084                      20,084
Common stock issued cash                                                                                              20,700
Common stock issued for services rendered                                                                             15,600
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                                   89,628
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           20,645
Issuance of common stock in settlement of
   promissory notes payable -- related parties                                                                       465,000
Issuance of committed common stock from
   the cashless exercise of warrants                                                                                      --
Issuance of common stock for cash                                                                                    785,400
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                   33,834
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           84,276
Amortization of deferred compensation                                                     20,084                      20,084
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                   73,257
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           37,352
Issuance of common stock for cash                                                                                     50,000
</TABLE>

                                      F-22
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock to investors as a
   penalty for delayed registration of common stock      12/31/04   $      0.80                         32,223      32     25,746
Warrants committed to investors as a penalty
   for delayed registration of common stock              12/31/04   $      0.50                                            60,990
Amortization of deferred compensation                    12/31/04   $        --
Issuance of common stock for cash                        01/07/05   $      0.46                        489,783     490    224,810
Issuance of common stock in settlement of
   promissory notes payable                              01/07/05   $      0.46                        128,260     128     58,872
Common stock issued for services rendered                01/12/05   $      0.70                         15,000      15     10,485
Common stock issued to investors as a
   penalty for delayed registration of common stock       01/15/05  $      0.75                         38,485      39     28,825
Warrants committed to investors as a penalty
   for delayed registration of common stock               01/15/05  $      0.29                                            28,014
Issuance of common stock for cash                         01/18/05  $      0.46                        200,000     200     91,800
Common stock committed to former shareholders
   of Microdevices                                        01/25/05  $      0.04                                     --         --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       01/31/05  $      0.85                         39,947      40     33,915
Warrants committed to investors as a penalty
   for delayed registration of common stock               01/31/05  $      0.49                                            86,030
Amortization of deferred compensation                     01/31/05  $        --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       02/15/05  $      0.87                          7,724       8      6,712
Warrants committed to investors as a penalty
   for delayed registration of common stock               02/15/05  $      0.19                                             7,805
Issuance of common stock upon cashless
   exercise of warrants                                   02/17/05  $        --                        182,787     183       (183)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       02/28/05  $      0.85                         28,811      29     24,461
Common stock committed to investors as a
   penalty for delayed registration of common stock       02/28/05  $      0.85
Warrants committed to investors as a penalty
   for delayed registration of common stock               02/28/05  $      0.18                                            24,338
Amortization of deferred compensation                     02/28/05  $        --
Issuance of common stock upon cashless
   exercise of warrants                                   03/04/05  $        --                        112,332     112       (112)
Common stock committed to investors as a
   penalty for delayed registration of common stock       03/15/05  $      0.84
Warrants committed to investors as a penalty
   for delayed registration of common stock               03/15/05  $      0.18                                            17,407
Common stock committed upon receipt of cash               03/22/05  $      0.50
Common stock committed to investors as a
   penalty for delayed registration of common stock       03/31/05  $      0.73
Warrants committed to investors as a penalty
   for delayed registration of common stock               03/31/05  $      0.14                                            19,241
Amortization of deferred compensation                     03/31/05  $        --
Common stock committed for services rendered              04/01/05  $      0.75
Stock option issued for services rendered                 04/01/05  $      0.74                                           233,100
Common stock committed upon receipt of cash               04/04/05  $      0.50
Stock option issued for services rendered                 04/06/05  $      0.16                                            48,000
Common stock committed to investors as a
   penalty for delayed registration of common stock       04/15/05  $      0.73
Warrants committed to investors as a penalty
   for delayed registration of common stock               04/15/05  $      0.14                                            14,361
</TABLE>

                                      F-23
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                 Deficit
                                                                                               Accumulated
                                                     Committed                                   during the
                                                      Common     Subscription     Deferred      Development
                                                      Stock      Receivable     Compensation       Stage          Total
                                                     --------    ----------     ------------    -----------       -----

<S>                                                   <C>          <C>               <C>         <C>            <C>
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                              25,778
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      60,990
Amortization of deferred compensation                                                20,084                      20,084
Issuance of common stock for cash                                                                               225,300
Issuance of common stock in settlement of
   promissory notes payable                                                                                      59,000
Common stock issued for services rendered                                                                        10,500
Common stock issued to investors as a
   penalty for delayed registration of common stock                                                              28,864
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      28,014
Issuance of common stock for cash                                                                                92,000
Common stock committed to former shareholders
   of Microdevices                                     18,923                                                    18,923
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                              33,955
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      86,030
Amortization of deferred compensation                                                20,085                      20,085
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               6,720
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       7,805
Issuance of common stock upon cashless
   exercise of warrants                                                                                              --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                              24,490
Common stock committed to investors as a
   penalty for delayed registration of common stock    27,104                                                    27,104
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      24,338
Amortization of deferred compensation                                                20,084                      20,084
Issuance of common stock upon cashless
   exercise of warrants                                                                                              --
Common stock committed to investors as a
   penalty for delayed registration of common stock     7,448                                                     7,448
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      17,407
Common stock committed upon receipt of cash           200,000                                                   200,000
Common stock committed to investors as a
   penalty for delayed registration of common stock    41,936                                                    41,936
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      19,241
Amortization of deferred compensation                                                20,084                      20,084
Common stock committed for services rendered           11,250                                                    11,250
Stock option issued for services rendered                                                                       233,100
Common stock committed upon receipt of cash           150,000                                                   150,000
Stock option issued for services rendered                                                                        48,000
Common stock committed to investors as a
   penalty for delayed registration of common stock     1,327                                                     1,327
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                      14,361
</TABLE>


                                      F-24
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock committed in prior year
   period for services rendered                           04/29/05  $        --                          3,000       3       4,257
Reclassify from common stock subject to Buy--Back         04/30/05  $      0.35                      2,000,000   2,000     692,000
Common stock committed to investors as a
   penalty for delayed registration of common stock       04/30/05  $      0.73
Warrants committed to investors as a penalty
   for delayed registration of common stock               04/30/05  $      0.15
Reclassify from common stock subject to rescission        04/30/05                                   3,819,996               3,820
Amortization of deferred compensation                     04/30/05  $        --
Net loss                                                                              --       --           --      --          --

Balance at April 30, 2005                                                             --       --   45,817,315  45,817  29,521,570

Common stock issued for services rendered
   and for future services                                05/02/05  $      0.71                        104,000     104      73,736
Issuance of common stock committed for services           05/09/05  $      0.70                          2,000       2       2,838
Issuance of common stock for cash                         05/12/05  $      0.45                      1,144,446   1,144     513,856
Warrants committed to investors as a penalty
   for delayed registration of common stock               05/15/05  $      0.25                                             13,818
Issuance of common stock committed to former
   Microdevices shareholders                              05/19/05  $      0.04                        452,029     452      18,471
Issuance of common stock committed for cash               05/24/05  $     (0.50)                       400,000     400     199,600
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       05/31/05  $      0.71                         78,982      79      55,998
Warrants committed to investors as a penalty
   for delayed registration of common stock               05/31/05  $      0.30                                             71,804
Issaunce of common stock committed for cash               06/02/05  $      0.50                        300,000     300     149,700
Issuance of common stock to settle convertible note       06/02/05  $      0.45                        437,627     438     196,495
Issuance of common stock to settle promissory note        06/02/05  $      0.45                         32,820      33      14,736
Issuance of common stock for cash                         06/06/05  $      0.45                        511,111     511     229,489
Offering costs on issuance of common stock                06/08/05                                                         (12,000)
Warrants committed to investors as a penalty
   for delayed registration of common stock               06/15/05  $      0.29                                             32,928
Issuance of common stock for cash                         06/17/05  $      0.45                        166,667     167      74,833
Issuance of common stock as offering cost                 06/17/05  $      0.45                         62,222      62         (62)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       06/30/05  $      0.70                         78,982      79      55,208
Warrants committed to investors as a penalty
   for delayed registration of common stock               06/30/05  $      0.30                                             70,152
Warrants issued for services rendered
   and for future services                                07/01/05  $      0.23                                             11,369
Expensing of employee stock option upon vesting           07/06/05  $      0.16                                             32,000
Issuance of common stock for services rendered            07/15/05  $      0.70                         55,000      55      38,445
Issuance of common stock to settle accounts payable       07/15/05  $      0.70                        154,359     154     107,897
Issuance of warrants to settle accounts payable           07/15/05  $      0.29                                             22,531
Issuance of common stock as offering cost                 07/15/05  $      0.45                         17,778      18         (18)
Warrants committed to investors as a penalty
   for delayed registration of common stock               07/15/05  $      0.26                                             31,287
Issuance of common stock committed for services           07/19/05  $      0.75                         15,000      15      11,235
Issuance of common stock for cash                         07/29/05  $      0.45                      1,200,001   1,200     538,800
Issuance of common stock as offering cost                 07/29/05  $      0.45                         26,667      27         (27)
</TABLE>

                                      F-25
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                  Deficit
                                                                                                Accumulated
                                                      Committed                                   during the
                                                       Common     Subscription     Deferred      Development
                                                       Stock      Receivable     Compensation       Stage          Total
                                                      --------    ----------     ------------    -----------       -----
<S>                                                   <C>          <C>                <C>        <C>           <C>
Issuance of common stock committed in prior year
   period for services rendered                        (4,260)                                                        --
Reclassify from common stock subject to Buy--Back                                                                694,000
Common stock committed to investors as a
   penalty for delayed registration of common stock    70,487                                                     70,487
Warrants committed to investors as a penalty
   for delayed registration of common stock            45,904                                                     45,904
Reclassify from common stock subject to rescission  1,784,333                                                  1,788,153
Amortization of deferred compensation                                                 20,084                      20,084
Net loss                                                   --             --              --      (9,984,565) (9,984,565)

Balance at April 30, 2005                             547,375             --              --     (31,800,161) (1,685,399)

Common stock issued for services rendered
   and for future services                                                                                        73,840
Issuance of common stock committed for services        (2,840)                                                        --
Issuance of common stock for cash                                                                                515,000
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       13,818
Issuance of common stock committed to former
   Microdevices shareholders                          (18,923)                                                        --
Issuance of common stock committed for cash          (200,000)                                                        --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               56,077
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       71,804
Issaunce of common stock committed for cash          (150,000)                                                        --
Issuance of common stock to settle convertible note                                                              196,933
Issuance of common stock to settle promissory note                                                                14,769
Issuance of common stock for cash                                                                                230,000
Offering costs on issuance of common stock                                                                       (12,000)
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       32,928
Issuance of common stock for cash                                                                                 75,000
Issuance of common stock as offering cost                                                                             --
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                               55,287
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       70,152
Warrants issued for services rendered
   and for future services                                                                                        11,369
Expensing of employee stock option upon vesting                                                                   32,000
Issuance of common stock for services rendered                                                                    38,500
Issuance of common stock to settle accounts payable                                                              108,051
Issuance of warrants to settle accounts payable                                                                   22,531
Issuance of common stock as offering cost                                                                             --
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                       31,287
Issuance of common stock committed for services       (11,250)                                                        --
Issuance of common stock for cash                                                                                540,000
Issuance of common stock as offering cost                                                                             --
</TABLE>

                                      F-26
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Issuance of common stock upon cashless
   exercise of warrants                                   07/29/05                                      22,463      22        (22)
Issuance of common stock to settle convertible notes      07/29/05  $      0.45                        189,917     190     85,273
Reclassify from common stock subject to rescission        07/29/05  $      0.61                        243,466     243    149,317
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       07/29/05  $      0.70                         78,982      79     55,208
Warrants committed to investors as a penalty
   for delayed registration of common stock               07/29/05  $      0.28                                            85,467
Warrants committed to investors as a penalty
   for delayed registration of common stock               08/15/05  $      0.24                                            15,144
Issuance of common stock for cash                         08/23/05  $      0.45                        111,111     111     49,889
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       08/31/05  $        --                         78,982      79     51,259
Warrants committed to investors as a penalty
   for delayed registration of common stock               08/31/05  $      0.26                                            60,407
Issuance of common stock for cash                         09/08/05  $      0.50                        100,000     100     49,900
Issuance of common stock for cash                         09/14/05  $      0.50                         40,000      40     19,960
Issuance of common stock for cash                         09/15/05  $      0.50                         50,000      50     24,950
Warrants committed to investors as a penalty
   for delayed registration of common stock               09/15/05  $      0.24                                            31,604
Issuance of common stock for cash                         09/19/05  $      0.50                         50,000      50     24,950
Issuance of warrant for services rendered                 09/20/05  $      0.28                                             8,463
Issuance of common stock for cash                         09/23/05  $        --                         50,000      50     24,950
Issuance of common stock for cash                         09/26/05  $        --                        111,111     111     49,889
Beneficial conversion feature on convertible
   notes payable                                          09/26/05                                                         13,556
Issuance of warrants in conjunction with
   convertible notes payable                              09/26/05  $      0.19                                             7,723
Offering costs on convertible notes payable               09/26/05                                                         (5,000)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       09/30/05  $        --                        130,667     131     84,803
Warrants committed to investors as a penalty
   for delayed registration of common stock               09/30/05  $      0.26                                            95,635
Common stock committed for services rendered              10/13/05  $      0.65
Common stock committed for contribution                   10/13/05  $      0.65                                            16,250
Issuance of common stock for cash                         10/14/05  $        --                         30,000      30     14,970
Warrants committed to investors as a penalty
   for delayed registration of common stock               10/15/05  $      0.23                                            32,134
Beneficial conversion feature on convertible
   notes payable                                          10/17/05                                                         19,367
Issuance of warrants in conjunction with
   convertible notes payable                              10/17/05  $      0.16                                            19,367
Offering costs on convertible note payable                10/17/05                                                        (15,000)
Beneficial conversion feature on convertible
   notes payable                                          10/18/05                                                          6,455
Issuance of warrants in conjunction with
   convertible notes payable                              10/18/05  $      0.16                                             6,455
Offering costs on convertible note payable                10/18/05                                                         (5,000)
Beneficial conversion feature on convertible
   notes payable                                          10/19/05                                                          2,720
Issuance of warrants in conjunction with
   convertible notes payable                              10/19/05  $      0.16                                             3,136
Offering costs on convertible note payable                10/19/05                                                         (2,500)
</TABLE>

                                      F-27
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                       Committed                                   during the
                                                        Common     Subscription     Deferred      Development
                                                        Stock      Receivable     Compensation       Stage          Total
                                                       --------    ----------     ------------    -----------       -----

<S>                                                   <C>          <C>                <C>         <C>             <C>
Issuance of common stock upon cashless
   exercise of warrants                                                                                                 --
Issuance of common stock to settle convertible notes                                                                85,463
Reclassify from common stock subject to rescission                                                                 149,560
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 55,287
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         85,467
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         15,144
Issuance of common stock for cash                                                                                   50,000
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 51,338
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         60,407
Issuance of common stock for cash                                                                                   50,000
Issuance of common stock for cash                                                                                   20,000
Issuance of common stock for cash                                                                                   25,000
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         31,604
Issuance of common stock for cash                                                                                   25,000
Issuance of warrant for services rendered                                                                            8,463
Issuance of common stock for cash                                                                                   25,000
Issuance of common stock for cash                                                                                   50,000
Beneficial conversion feature on convertible
   notes payable                                                                                                    13,556
Issuance of warrants in conjunction with
   convertible notes payable                                                                                         7,723
Offering costs on convertible notes payable                                                                         (5,000)
Issuance of common stock to investors as a
   penalty for delayed registration of common stock                                                                 84,934
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         95,635
Common stock committed for services rendered            13,000                                                      13,000
Common stock committed for contribution                 16,250
Issuance of common stock for cash                                                                                   15,000
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         32,134
Beneficial conversion feature on convertible
   notes payable                                                                                                    19,367
Issuance of warrants in conjunction with
   convertible notes payable                                                                                        19,367
Offering costs on convertible note payable                                                                         (15,000)
Beneficial conversion feature on convertible
   notes payable                                                                                                     6,455
Issuance of warrants in conjunction with
   convertible notes payable                                                                                         6,455
Offering costs on convertible note payable                                                                          (5,000)
Beneficial conversion feature on convertible
   notes payable                                                                                                     2,720
Issuance of warrants in conjunction with
   convertible notes payable                                                                                         3,136
Offering costs on convertible note payable                                                                          (2,500)
</TABLE>

                                      F-28
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Beneficial conversion feature on convertible
   notes payable                                          10/24/05
Issuance of warrants in conjunction with
   convertible notes payable                              10/24/05  $      0.15
Offering costs on convertible note payable                10/24/05
Issuance of common stock to settle note payable           10/31/05                                     452,028     452
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       10/31/05  $        --                        116,303     116
Warrants committed to investors as a penalty
   for delayed registration of common stock               10/31/05  $      0.22
Beneficial conversion feature on convertible
   notes payable                                          11/07/05
Issuance of warrants in conjunction with
   convertible notes payable                              11/07/05
Offering costs on convertible note payable                11/07/05
Warrants committed to investors as a penalty
   for delayed registration of common stock               11/15/05
Beneficial conversion feature on convertible
   notes payable                                          11/18/05
Issuance of warrants in conjunction with
   convertible notes payable                              11/18/05
Issuance of common stock previously committed
   to investors
   delayed registration of common stock                   11/29/05                                      10,685      11
Issuance or committed  issuance of common
   stock to investors as a penalty for delayed
   registration of common stock                           11/30/05                                         100      --
Issuance or committed isuance of common
   stock to investors as a penalty for
   delayed registration of common stock                   11/30/05                                      98,680      99
Warrants committed to investors as a penalty
   for delayed registration of common stock               11/30/05
Issuance of common stock committed to investors as a
   penalty for delayed registration of common stock       12/12/05                                     150,741     151
Common stock committed for services rendered              12/13/05
Common stock issued upon exercise of warrants             12/13/05                                     794,442     794
Warrants committed to investors as a penalty
   for delayed registration of common stock               12/15/05
Common stock issued upon exercise of warrants             12/15/05                                   1,167,664   1,168
Beneficial conversion feature on convertible
   notes payable                                          12/16/05
Re--pricing of warrants issued in conjunction with
   convertible notes payable                              12/16/05
Common stock issued upon exercise of warrants             12/16/05                                   1,475,587   1,476
Common stock issued upon exercise of warrants             12/19/05                                     140,875     141
Beneficial conversion feature on convertible
   notes payable                                          12/20/05
Re--pricing of warrants issued in conjunction with
   convertible notes payable                              12/20/05
Common stock issued upon exercise of warrants             12/20/05                                   1,192,214   1,192
Common stock issued upon exercise of warrants             12/21/05                                     742,259     742
Common stock issued upon exercise of warrants             12/22/05                                      50,000      50
Common stock issued upon exercise of warrants             12/30/05                                     543,678     544
Common stock committed to investors as a penalty
   for delayed registration of common stock               12/31/05                                      36,132      36
</TABLE>

                                      F-29
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                    Deficit
                                                                                                  Accumulated
                                                        Committed                                   during the
                                                         Common     Subscription     Deferred      Development
                                                         Stock      Receivable     Compensation       Stage          Total
                                                        --------    ----------     ------------    -----------       -----
<S>                                                     <C>          <C>            <C>            <C>             <C>
Beneficial conversion feature on convertible
   notes payable                                           2,213                                                     2,213
Issuance of warrants in conjunction with
   convertible notes payable                               3,047                                                     3,047
Offering costs on convertible note payable                (2,500)                                                   (2,500)
Issuance of common stock to settle note payable          377,669                                                   378,121
Issuance of common stock to investors as a
   penalty for delayed registration of common stock       69,666                                                    69,782
Warrants committed to investors as a penalty
   for delayed registration of common stock               92,324                                                    92,324
Beneficial conversion feature on convertible
   notes payable                                          70,723                                                    70,723
Issuance of warrants in conjunction with
   convertible notes payable                              54,056                                                    54,056
Offering costs on convertible note payable               (20,000)                                                  (20,000)
Warrants committed to investors as a penalty
   for delayed registration of common stock               (2,848)                                                   (2,848)
Beneficial conversion feature on convertible
   notes payable                                          19,496                                                    19,496
Issuance of warrants in conjunction with
   convertible notes payable                               5,496                                                     5,496
Issuance of common stock previously committed
   to investors
   delayed registration of common stock                    8,765        (8,776)                                         --
Issuance or committed  issuance of common
   stock to investors as a penalty for delayed
   registration of common stock                               59           --                                           59
Issuance or committed isuance of common
   stock to investors as a penalty for
   delayed registration of common stock                   58,123                                                    58,221
Warrants committed to investors as a penalty
   for delayed registration of common stock               48,332                                                    48,332
Issuance of common stock committed to investors as a
   penalty for delayed registration of common stock       113,716     (113,867)                                         --
Common stock committed for services rendered                            12,500                                      12,500
Common stock issued upon exercise of warrants             134,539                                                  135,333
Warrants committed to investors as a penalty
   for delayed registration of common stock                 5,909                                                    5,909
Common stock issued upon exercise of warrants             132,433                                                  133,601
Beneficial conversion feature on convertible
   notes payable                                            3,224                                                    3,224
Re--pricing of warrants issued in conjunction with
   convertible notes payable                                3,224                                                    3,224
Common stock issued upon exercise of warrants             202,891                                                  204,367
Common stock issued upon exercise of warrants              26,034                                                   26,175
Beneficial conversion feature on convertible
   notes payable                                           28,319                                                   28,319
Re--pricing of warrants issued in conjunction with
   convertible notes payable                               28,319                                                   28,319
Common stock issued upon exercise of warrants             163,251                                                  164,443
Common stock issued upon exercise of warrants              81,931                                                   82,673
Common stock issued upon exercise of warrants               9,950                                                   10,000
Common stock issued upon exercise of warrants              59,748                                                   60,292
Common stock committed to investors as a penalty
   for delayed registration of common stock                13,694          --                                       13,730
</TABLE>

                                      F-30
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       Series A
                                                                                     Convertible,
                                                                     Price per        Preferred                          Additional
                                                                      Equity            Stock            Common Stock     Paid-in
                                                          Date         Unit        Shares   Amount      Shares  Amount    Capital
                                                          ----         ----        ------   ------      ------  ------    -------
<S>                                                      <C>        <C>            <C>      <C>      <C>        <C>       <C>
Warrants committed to investors as a penalty
   for delayed registration of common stock               12/31/05                                                          8,577
Common stock issued upon exercise of warrants             01/03/06                                     118,479     118     23,541
Common stock issued upon exercise of warrants             01/04/06                                     407,100     407     40,303
Common stock committed for services rendered              01/05/06
Common stock issued upon exercise of warrants             01/06/06                                   2,342,224   2,342    348,991
Common stock issued upon exercise of warrants             01/09/06                                     104,622     105     20,820
Common stock issued upon exercise of warrants             01/10/06                                     117,778     118     11,660
Common stock issued upon exercise of warrants             01/12/06                                     168,470     168     33,526
Warrants committed to investors as a penalty
   for delayed registration of common stock               01/15/06                                                          4,561
Common stock issued upon exercise of warrants             01/24/06                                      29,622      30      5,895
Common stock committed for services rendered              01/25/06
Common stock issued upon exercise of warrants             01/25/06                                     375,000     375     74,625
Common stock issued upon exercise of warrants             01/31/06                                   1,072,206   1,072    106,148
Offering cost on warrant exercises                        01/31/06                                                        (55,485)
Issuance of common stock committed in prior year period   01/31/06                                      35,000      35     25,515
Common stock committed to investors as a penalty
   for delayed registration of common stock               01/31/06                                      12,132      12      4,719
Warrants committed to investors as a penalty
   for delayed registration of common stock               01/31/06                                                         10,959
Reclassify from common stock subject to rescission        01/31/06                                      68,546      69     49,931
Common stock issued upon exercise of warrants             02/10/06
Offering cost on warrant exercises                        02/10/06                                                         (4,895)
Warrants committed to investors as a penalty
   for delayed registration of common stock               02/15/06                                                          2,266
Common stock committed for Director Fees                  02/17/06
 Issuance of common stock to settle note payable          02/28/06
Common stock committed to investors as a penalty
   for delayed registration of common stock               02/28/06                                      12,132      12      4,598
Warrants committed to investors as a penalty
   for delayed registration of common stock               02/28/06                                                          6,470
Common stock committed for Director Fees                  03/15/06
Warrants committed to investors as a penalty
   for delayed registration of common stock               03/15/06                                                          4,374
Beneficial conversion feature on convertible
   notes payable                                          03/17/06                                                         12,416
Issuance of warrants in conjunction with
   convertible notes payable                              03/17/06                                                            866
Beneficial conversion feature on convertible
   notes payable                                          03/27/06                                                         81,028
Issuance of warrants in conjunction with
   convertible notes payable                              03/27/06                                                          6,028
Common stock committed to investors as a penalty
   for delayed registration of common stock               03/31/06                                      12,132      12      4,598
Warrants committed to investors as a penalty
   for delayed registration of common stock               03/31/06                                                          6,478
Common stock committed for Director Fees                  04/06/06
Beneficial conversion feature on convertible
   notes payable                                          04/13/06                                                          3,747
Issuance of warrants in conjunction with
   convertible notes payable                              04/13/06                                                            413
</TABLE>

                                      F-31
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                   Accumulated
                                                         Committed                                   during the
                                                          Common     Subscription     Deferred      Development
                                                          Stock      Receivable     Compensation       Stage          Total
                                                         --------    ----------     ------------    -----------       -----
<S>                                                       <C>          <C>           <C>            <C>            <C>
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           8,577
Common stock issued upon exercise of warrants                                                                        23,659
Common stock issued upon exercise of warrants                                                                        40,710
Common stock committed for services rendered               23,500                                                    23,500
Common stock issued upon exercise of warrants                                                                       351,333
Common stock issued upon exercise of warrants                                                                        20,925
Common stock issued upon exercise of warrants                                                                        11,778
Common stock issued upon exercise of warrants                                                                        33,694
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           4,561
Common stock issued upon exercise of warrants                                                                         5,925
Common stock committed for services rendered               21,000                                                    21,000
Common stock issued upon exercise of warrants                                                                        75,000
Common stock issued upon exercise of warrants                                                                       107,220
Offering cost on warrant exercises                                                                                  (55,485)
Issuance of common stock committed in prior year period   (25,550)                                                       --
Common stock committed to investors as a penalty
   for delayed registration of common stock                                                                           4,731
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                          10,959
Reclassify from common stock subject to rescission                                                                   50,000
Common stock issued upon exercise of warrants             122,378                                                   122,378
Offering cost on warrant exercises                                                                                   (4,895)
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           2,266
Common stock committed for Director Fees                   96,268                                                    96,268
 Issuance of common stock to settle note payable        1,492,882                                                 1,492,882
Common stock committed to investors as a penalty
   for delayed registration of common stock                    --                                                     4,610
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           6,470
Common stock committed for Director Fees                    3,900                                                     3,900
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           4,374
Beneficial conversion feature on convertible
   notes payable                                                                                                     12,416
Issuance of warrants in conjunction with
   convertible notes payable                                                                                            866
Beneficial conversion feature on convertible
   notes payable                                                                                                     81,028
Issuance of warrants in conjunction with
   convertible notes payable                                                                                          6,028
Common stock committed to investors as a penalty
   for delayed registration of common stock                                                                           4,610
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                           6,478
Common stock committed for Director Fees                    8,751                                                     8,751
Beneficial conversion feature on convertible
   notes payable                                                                                                      3,747
Issuance of warrants in conjunction with
   convertible notes payable                                                                                            413
</TABLE>

                                      F-32
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 Series A
                                                                               Convertible,
                                                               Price per        Preferred                                Additional
                                                                Equity            Stock            Common Stock           Paid-in
                                                    Date         Unit        Shares     Amount      Shares    Amount      Capital
                                                    ----         ----        ------     ------      ------    ------      -------
<S>                                                    <C>        <C>            <C>      <C>      <C>        <C>         <C>
Warrants committed to investors as a penalty
   for delayed registration of common stock         04/15/06                                                                 3,111
Beneficial conversion feature on convertible
   notes payable                                    04/21/06                                                                10,971
Issuance of warrants in conjunction with
   convertible notes payable                        04/21/06                                                                   971
Expensing of optoin issued for services rendered    04/30/06                                                                   806
Common stock committed to investors as a penalty
   for delayed registration of common stock         04/30/06                            12,132                     13        4,109
Warrants committed to investors as a penalty
   for delayed registration of common stock         04/30/06                                                                 6,407
Net Loss                                                              --        --          --         --          --           --

                                                               =========     =====  ========== ==========  ==========   ==========
Balance at April 30, 2006                                             --        --             64,202,668      64,203   35,802,969
</TABLE>



                                      F-33
<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, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                  Deficit
                                                                                                Accumulated
                                                      Committed                                   during the
                                                       Common     Subscription     Deferred      Development
                                                       Stock      Receivable     Compensation       Stage            Total
                                                      --------    ----------     ------------    -----------         -----
<S>                                                   <C>          <C>                <C>        <C>            <C>
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         3,111
Beneficial conversion feature on convertible
   notes payable                                                                                                   10,971
Issuance of warrants in conjunction with
   convertible notes payable                                                                                          971
Expensing of optoin issued for services rendered                                                                      806
Common stock committed to investors as a penalty
   for delayed registration of common stock                                                                         4,122
Warrants committed to investors as a penalty
   for delayed registration of common stock                                                                         6,407
Net Loss                                                      --          --              --     (8,632,428)   (8,632,428)

                                                       =========   =========     ===========    ============   ===========
Balance at April 30, 2006                                     --          --              --    (40,432,588)   (2,738,818)
</TABLE>

                                      F-34
<PAGE>
                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 FOR THE YEARS ENDED APRIL 30, 2006 AND 2005 AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                      For the
                                                                                                                    Period from
                                                                                                                     August 21,
                                                                                                                       1995
                                                                                        For the Years Ended        (Inception) to
                                                                                     April 30,       April 30,       April 30,
                                                                                        2006           2005            2006
                                                                                    ------------    ------------    ------------
<S>                                                                                 <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                         $ (8,632,428)   $ (9,984,565)   $(39,003,555)
   Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation                                                                       313,802         213,379         770,719
      Loss on inventory impairment                                                        63,898              --          63,898
      Loss on disposal of property and equipment                                         164,582              --         164,582
      Gain on payroll tax  settlement                                                   (344,947)             --        (344,947)
      Issuance or committed issuance of common stock for services rendered               399,310         504,715       5,662,634
      Issuance or committed issuance of common stock for contribution                     16,250              --          16,250
      Common stock issued for legal settlement                                                --              --          13,440
      Issuance of common stock as compensation expense
        for services rendered from minority shareholders                                      --              --          18,923
      Warrants issued or committed for services rendered                                  42,362          38,573       1,018,397
      Financing expense in connection with the
        issuance of warrants                                                             733,460              --         957,170
      Stock options issued for services rendered                                          32,806         281,100       2,380,446
      Additional compensation to officer in the form of
        convertible note payable - related party                                              --              --          42,171
      Amortization of deferred compensation                                                   --         459,308       1,646,192
      Amortization of debt discount on convertible
        notes payable                                                                    180,708         785,934       1,459,422
      Issuance of convertible notes payable as a penalty for the
       delayed registration of the underlying common stock                                12,000          44,000          63,000
      Issuance or committed issuance of common stock as a penalty for the delayed
        registration of shares of common stock                                           462,793       2,024,125       3,769,281
      Issuance or commitment to issue warrants as a penalty for the
        delayed registration of the underlying common stock                              737,299       1,287,746       2,256,327
      (Increase) decrease in
         Accounts receivable                                                             238,559        (245,547)        (37,400)
         Inventory                                                                      (273,834)       (808,650)     (1,082,484)
         Other current assets                                                            358,837        (196,972)        (52,952)
      Increase (decrease) in
         Accounts payable                                                                794,016         780,205       2,980,652
         Accrued expenses                                                                555,178         (14,086)        629,383
         Accrued payroll and payroll taxes                                               166,344           9,546       1,024,962
         Accrued interest                                                                114,720          94,778         288,720
         Other current liabilities                                                       503,105         200,000         703,105
                                                                                    ------------    ------------    ------------

Net cash used in operating activities                                               $ (3,361,180)   $ (4,526,411)   $(14,591,664)
                                                                                    ------------    ------------    ------------
</TABLE>


                                      F-35
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 FOR THE YEARS ENDED APRIL 30, 2006 AND 2005 AND
               FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO APRIL 30, 2006
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                      For the
                                                                                                                    Period from
                                                                                                                     August 21,
                                                                                                                       1995
                                                                                        For the Years Ended        (Inception) to
                                                                                     April 30,       April 30,       April 30,
                                                                                        2006           2005            2006
                                                                                    ------------    ------------    ------------
<S>                                                                                 <C>             <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                                               $   (554,105)   $   (138,526)   $ (1,542,160)
   Sales of property and equipment                                                        21,250              --          21,250
                                                                                    ------------    ------------    ------------

Net cash used in investing activities                                                   (532,855)       (138,526)     (1,520,910)
                                                                                    ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock in
     private placement                                                              $         --    $         --    $  3,547,406
   Offering costs on issuance of common stock in
     private placement                                                                        --              --        (196,793)
   Proceeds from issuance of common stock                                              1,620,000       2,702,156       6,315,424
   Offering costs on issuance of common stock                                           (122,380)        (31,750)       (262,148)
   Proceeds from the issuance of preferred stock                                              --              --         979,301
   Offering costs on issuance of preferred stock                                              --              --        (178,902)
   Proceeds from issuance of common stock subject
     to rescission rights                                                                     --         880,000       1,355,000
   Proceeds from issuance of common stock subject
     to buy-back for two year period                                                          --              --         250,518
   Proceeds from collection of subscription receivable for net
     sales of common stock subject to buy-back for two year period                            --              --         443,482
   Recapitalization of reverse merger                                                         --              --              14
   Proceeds from exercise of stock options in subsidiary                                      --              --           7,164
   Proceeds from issuance of common stock upon exercise
     of warrants                                                                       1,609,505              --       1,663,509
   Proceeds from notes payable                                                                --          59,000          59,000
   Payment on capital lease obligations                                                   (6,761)             --          (6,761)
   Payment on notes payable                                                              (30,000)         (8,940)        (39,447)
   Proceeds from issuance of notes payable - related parties                                  --         476,000         947,853
   Payments on notes payable - related parties                                                --        (260,934)       (807,265)
   Proceeds from convertible notes payable                                               900,000         100,000       1,000,000
   Payments on convertible notes payable                                                (100,000)             --        (100,000)
   Proceeds from convertible notes payable - related parties                              56,500              --         111,900
   Payments on convertible notes payable - related parties                                    --              --         (35,400)
   Proceeds from convertible notes payable
     subject to rescission rights                                                             --         300,000         685,000
   Proceeds from collection of subscription receivable for
     sale of convertible note payable sold subject to rescission rights                       --         425,000         425,000
                                                                                    ------------    ------------    ------------

Net cash provided by financing activities                                              3,926,864       4,640,532      16,163,855
                                                                                    ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                                      32,829         (24,405)         51,281

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            18,452          42,857              --
                                                                                    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $     51,281    $     18,452    $     51,281
                                                                                    ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

   Interest paid                                                                    $     10,380    $     15,076    $     28,344
                                                                                    ============    ============    ============

   Income taxes paid                                                                $         --    $        800    $     14,983
                                                                                    ============    ============    ============
</TABLE>


                                      F-36
<PAGE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
740,201, 402,455, and 14,499,183 shares of common stock, respectively, for
services rendered or to be rendered. The shares of common stock were valued at
$399,310, $504,715, and $5,662,634, respectively.

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
warrants to purchase 157,179, 100,000, and 1,435,408 shares of common stock,
respectively, for services rendered or to be rendered. The warrants were valued
at $42,362, $38,573, and $1,435,408, respectively.

Of the 740,201 common shares and warrants to purchase 157,179 common shares
either issued or committed during the years ended April 30, 2006, 101,172 common
shares related to prior period services off-setting accounts payable in the
amount of $70,820.

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued unsecured convertible
notes payable-related party, in exchange for accounts payable due to former
legal counsel of the Company of $0, $25,648, and $773,083, respectively.

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company expensed $462,793, $2,024,125,
and $3,769,280, respectively, for the issuance or committed issuance of 746,338,
1,966,056 and 3,644,094 shares of common stock, respectively, as a penalty for
the late registration of common stock.

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006 the Company issued convertible notes payable
of $12,000, $26,000, and $63,000, respectively, as a penalty for the late
registration of common stock to be issued upon conversion of convertible notes
payable.

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company expensed $737,299, $1,287,746,
and $2,256,327, respectively, for the issuance or committed issuance of warrants
to purchase 3,695,245, 2,454,334, and 6,351,323 shares of common stock,
respectively, as a penalty for the late registration of the common shares
underlying investor warrants.

During the year ended April 30, 2006, the Company issued 22,463 shares of common
stock upon the cashless exercise of warrants to purchase 64,583 shares of common
stock.

During the year ended April 30, 2006, the Company issued or committed to issue
3,967,323 shares of common stock to investors, upon the conversion of $2,986,111
of convertible notes payable plus accrued interest.

During the year ended April 30, 2006, the Company issued 32,820 shares of common
stock to an investor, upon the conversion of a promissory note payable plus
accrued interest in the amount of $14,769.

During the year ended April 30, 2006, the Company removed $199,560 of current
liabilities recorded from the sale of 312,012 common shares sold deemed subject
to rescission rights. The $199,560 of current liabilities was reclassified to
common stock and paid-in-capital.

During the year ended April 30, 2006, the Company reclassified $278,400 of
convertible notes payable deemed subject to rescission rights to convertible
notes payable.

During the year ended April 30, 2006, the Company issued 80,000 shares of common
stock as offering costs.

During the year ended April 30, 2006, the Company issued 452,029 shares of
common stock, committed in the prior year, to acquire the remaining outstanding
stock of Microdevices.

During the year ended April 30, 2006, the Company committed to issue 25,000
shares as a contribution to a non-profit organization.

During the year ended April 30, 2006, the Company recorded debt discounts
totaling $413,336 upon issuance of convertible notes payable in the face amount
of $856,500 with detachable warrants to purchase 592,600 common shares.

                                      -71-
<PAGE>

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


                                      -72-
<PAGE>

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

General

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company that can effectively decipher
chemical formulas or compositions of unknown substances, without human
intervention. Traditionally, the practical determination of the chemical formula
or composition of 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.

Since inception, the Company has primarily focused on the research, development
and commercialization of AtometerTM explosives detectors for the homeland
security and defense markets.

Currently, the Company is focused on the commercialization and sales of the
following AtometerTM detectors:

      o     SIEGMATM 3E3 and 3M3 - portable, suitcase-borne systems for the
            remote detection and confirmation of home-made bombs, also known as
            Improvised Explosive Devices or "IEDs" and uniquely addressing the
            significant problems posed by unattended or suspicious packages.

      o     CarBomb FinderTM 3C4 - vehicle-borne system for the detection and
            confirmation of car bombs, in which the sensors are deployed from
            the vehicle at the end of a mechanical arm and placed in proximity
            to the target.

      o     CarBomb FinderTM 3C5 - in-ground vehicle screening system for the
            detection and identification of car bombs at checkpoints and
            chokepoints, developed in response to the high demand for critical
            infrastructure protection and improved perimeter defense.

      o     STARRAYTM - all-terrain robot-borne detector for the stand-off
            detection of unexploded ordnance, landmines and IEDs, which can also
            be configured and integrated in various robotic and remote-vehicle
            platforms.

The Company is marketing its initial AtometerTM detectors globally to
governmental and private entities, including the military. They are also
negotiating licenses for the distribution of the devices with various industry
partners. To date, however, the Company has yet to generate meaningful revenues
from the sale of its products or the licensing of its technologies and 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. Although a portion of this research and development has
been developed through funding from the Government, most of the Company's
research related work is funded internally in order to capture full intellectual
property rights from any inventions or processes that may arise.

The Company expects to continue the research and development of applications of
its technologies and their further exploitation, both internally and through
collaboration with third parties. Historically, the Company has developed
prototypes in programs with the U.S. Department of Defense and the Department of
Homeland Security for other related uses of its core technology, including a
cooperative development agreement with the U.S. Transportation Security
Administration to produce a proof of concept incorporating its SuperSenzorTM
technology into a next-generation baggage screening system. While it expects to
continue to pursue and receive additional research and development funds through
these agencies, the Company also has independently funded its research for
programs, such as the use of our AtometerTM detectors for medical diagnostics
and other industrial applications.

Prior to January 2005, HiEnergy also had one majority-owned subsidiary, HiEnergy
Microdevices, Inc., which was incorporated in Delaware on August 21, 1995 and
was the vehicle through which "Atometry" or StoitechTM was initially developed
by the Company's former Chairman, Dr. Bogdan Maglich ("Microdevices"). As a
result of a short-form merger, which became effective on January 25, 2005, the
Company assumed all of Microdevices' assets and liabilities and Microdevices
ceased to exist as a separate entity as of that date.


                                      -73-
<PAGE>

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
former Chairman, Dr. Bogdan Maglich, obtained the right to receive up to 64%
percent of the outstanding shares of SLW. 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, and was later
merged with the Company in January 2005 in a short-form merger through which the
Company committed to issue 452,029 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of Microdevices (the same ratio that was used in the original
voluntary share exchange). Additionally, we may be required to issue up to
704,190 shares of the Company's common stock to former holders of options and
warrants of Microdevices who hold rights to purchase HiEnergy shares at $0.156
per share. These rights survived the merger and may be exercised any time before
April 25, 2007, subject to the payment of promissory notes representing the
purchase price.

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. Stock options granted to
            employees and directors were valued using the intrinsic value method
            as prescribed in APB No. 25, "Accounting for Stock Issued to
            Employees," and related interpretations while stock options and
            warrants issued to non-employees 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.


                                      -74-
<PAGE>

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>


                                      -75-
<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>


                                      -76-
<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 deemed subject to buy-back             --           494,000   13
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>

                                      -77-
<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>


                                      -78-
<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>

                                      -79-
<PAGE>

1) For the period from August 21, 1995 (inception) to April 30, 2002, the
Company issued common stock, options and warrants 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. Accordingly, the Company increased
compensation expense during the period by $3,792,564 as well as 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 valued 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, 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 $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) During the period from inception through fiscal-year ended April 30, 2002,
the Company erroneously recorded the issuance of common stock upon the receipt
of cash as both stock sold for cash and stock issued for services. Accordingly,
the Company reversed $255,460 of expense during the period from inception
through fiscal-year ended April 30, 2002 and additional paid in capital which
was also overstated by the same amount due to the double recording. As of April
30, 2002, both accumulated deficit and additional paid in capital were both
reduced by the amount of $255,460.

4) For the year ended April 30, 2002 the Company reclassified $148,166 of grant
income 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 as
prescribed by SFAS 2, which defines research as a planned search or critical
investigation of new knowledge and development as the translation of findings
into a plan or design for a new product. We had originally erroneously recorded
all expenses as general and administrative.

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 erroneously recorded the
issuance of common stock upon the receipt of cash as both stock sold for cash
and stock issued for services. Accordingly, the Company reversed $33,349 of
expense during the fiscal-year ended April 30, 2002 and additional paid in
capital which was also overstated by the same amount due to the double
recording. This amount is a component of the $255,460 total reversal of expense
for the period from inception through April 30, 2002 as described in item 3
above.

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, W-2s and Forms 1099. See "Note 9
Accrued Payroll and Payroll Taxes" for further information.

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, W-2s
and Forms 1099.


                                      -80-
<PAGE>


10) For the year ended April 30, 2002 the Company issued warrants and initially
undervalued the warrants 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 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.

13) For the year ended April 30, 2003, the Company reclassified $494,000 from
stockholders' deficit to current liabilities. For the nine months ended January
31, 2004, the Company reclassified $200,000 from stockholder's deficit to
current liabilities. In April and June 2003, the Company engaged in a public
offering of its shares to purchasers who bought 1,400,000 and 900,000 shares of
common stock in reliance upon a prospectus that did not, at the time the sales
were made, contain a fixed price for the 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. The Company has received waivers with
respect to 300,000 of the shares sold in the public offering. Based upon legal
advice we have received as to the appropriate state and federal limitations
periods pertaining to the buy-back obligations assumed, the Company reclassified
2,000,000 shares of common stock deemed subject to buy-back to common stock and
additional paid in capital for the fiscal year ended April 30, 2005, and
eliminated the related current liability.

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.
During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company incurred net losses available to
common shareholders of approximately $8,632,428, $9,984,565 and $40,432,588,
respectively, and it had negative cash flows from operations of approximately
$3,361,180, $4,526,411 and $14,591,664, respectively. In addition, the Company
had an accumulated deficit of $40,432,588 and was in the development stage as of
April 30, 2006. 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 nor 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, 2006 through private
placements, the Company is currently negotiating with certain investors to raise
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 unless and until the Company's sales volume reaches a sufficient level to
cover operating expenses as further discussed in "Note 22". 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.

Since February 2006, we have implemented a restructuring plan and have made
significant changes to our management and operations with the objective of
transforming our organization in order to make it scalable for anticipated
growth. We have taken immediate and deliberate steps to enhance our operations,
improve cost efficiencies and advance our transition from a research and
development company to a commercial manufacturing and sales organization. We
have instituted new fiscal planning, budgeting and auditing structures, and have
significantly reduced expenses, including personnel and other operating costs.

We have also instituted new capital prioritization strategies to improve capital
utilization and distribution across the entire organization. We have eliminated
expenditures on non-core activities in order to maximize our ability to exploit
those core industries and geographic markets which offer the most compelling
market and revenue growth opportunities, and for which we believe we have
differentiated technologies and expertise.

Lastly, we have been implementing a new results-driven business plan that aims
to expand our customer base and develop multiple sources of revenue including
(i) equipment sales; (ii) extended multi-year service contracts and warranties;
(iii) radiation safety training, licensing and consulting; (iv) technology
licensing fees and joint venture investment income; (vi) research contracts,
co-development funding and grants; (vii) integration services and reseller fees
from non-proprietary products licensed from third parties, and (viii) lease
financing and equipment rental income.

Historically we have been able to raise capital through self-managed private
placements of our equity. From October 2005 to August 2006, we received through
private placements to accredited and institutional investors a total of
approximately $3.7 million in proceeds from financing activities, including
$856,500 from the sale of convertible notes payable, $1.6 million from the
exercise of warrants under our special warrant offer, as well as net proceeds of
$1.3 million from the sale of Series B Convertible Preferred stock as part of a
private placement of up to $5 million of our Series B Convertible Preferred
Shares to accredited and institutional investors approved by the Board in June
2006, as further discussed in Note 22.

Until such time as we can (i) generate sufficient sales revenues to fund
operations and research and development costs; and/or (ii) leverage our
financial and developmental capabilities through strategic partnerships which
provide financial support; and/or (iii) receive significant governmental grants,
cooperative funding or purchase contracts, we will be required to raise an
additional $3 to 4 million through the sale of securities to cover estimated
expenditures for the remainder of fiscal 2007, subject to the successful
implementation of our restructuring plan and the reduction of operating
expenses. While management believes it will be able to obtain the additional
financing, there can be no assurance that such financing will be available on
acceptance terms and conditions or at all. Further there can be no assurance
that the Company will be successful in implementing its plans as described
above.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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." All losses accumulated since inception have been considered
as part of the Company's development stage activities.


                                      -81-
<PAGE>

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period, and actual results could
differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
HiEnergy and its wholly-owned subsidiaries, HiEnergy Defense Inc., HiEnergy
Europe Ltd., HiEnergy Mfg Company, HiEnergy International Co., HiEnergy Leasing
Co., and its former majority-owned subsidiary, HiEnergy Microdevices, Inc. All
significant inter-company accounts and transactions have been eliminated.

Reclassifications

For comparative purposes, prior periods' consolidated financial statements have
been reclassified to conform with report classifications of the current period.

Accounts Receivable

Accounts receivable consists of amounts due under governmental grants billed as
monthly reports and submitted detailing work performed under the contracts and
generally due in 30 to 60 days.

Inventories

The Company values its inventory at the lower of cost or market with cost being
determined using the first-in, first-out method. The Company evaluates the
carrying value of its inventory and reserves for potentially excess and obsolete
inventories based on estimated demand quantities on hand, physical condition and
technical functionality. Unfavorable changes in estimates of excess and obsolete
inventory would result in an increase in cost of revenue and a decrease in gross
profit. Inventory used for research and development is expensed, with
appropriate state use tax accrued in the period such inventory is used.
Inventory held at April 30, 2006 and 2005, is $875,217 and $808,650,
respectively, and consists entirely of components acquired in anticipation of
future assembly and sale, and is stated net of allowances for excess and
obsolete inventory.

Other Current Assets

Other current assets consist primarily of capitalized insurance premiums,
prepaid consulting and services, and deposits. Insurance premiums 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, including leasehold improvements, are capitalized at
cost and stated net of depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the useful life of
the property and equipment and over the lease term for leasehold improvements.
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 and offsetting gains or losses are recorded as
other income or loss.

Useful lives for property and equipment are as follows:

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


                                      -82-
<PAGE>

Long-Lived Assets

The Company evaluates the carrying value of long-lived assets for potential
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Measurement of the
impairment loss is determined when the fair value of the asset subsequent to the
impairing event or circumstance is less than the carrying value of that asset.
Fair value is generally determined using valuation techniques such as the
present value of expected future cash flows. Impairment losses are recognized in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". For the period ended April
30, 2006, the Company recognized impairment loss of $291,936.

Intangible Properties

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

Fair Value of Financial Instruments

The carrying value of cash 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 deemed 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
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 No.'s 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 provisions that require 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
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 becomes 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 15, 20
and 21, and the commitment to issue such penalty securities is described in
Notes 19 and 23 to this Report.

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.


                                      -83-
<PAGE>

Warrants

Noncash Exercise of Warrants - The Company will issue on occasion warrants to
purchase common stock where the holder is entitled to exercise the warrant,
utilizing a non-cash transaction, 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 non-cash exercise of warrants as a cost of capital.

Warrants Issued As Financing and Offering Costs - The Company issues common
stock with detachable warrants to investors. The company will also issue
warrants to shareholders who identify and arrange for successful third party
investors in the Company's common stock. These warrants are recorded as a cost
of capital.

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 year ended
April 30, 2006 was $0.29. Fair value was determined using the Black-Scholes
option-pricing model. For stock options granted during the fiscal-year ended
April 30, 2006, the weighted average assumptions for grants were a risk free
interest rate of 4.22% an expected life of 2 years, volatility of 96.64% and
dividend yield of 0%.

The following table compares net loss attributable to common stockholders and
loss per share for the years ended April 30, 2006 and 2005, as reported, 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>
                                                          Year ended         Year ended
                                                         April 30, 2006     April 30, 2005
                                                         --------------    --------------
<S>                                                      <C>               <C>
Net loss attributable to common stockholders             $   (8,632,428)   $   (9,984,565)
Stock-based employee compensation included in
   reported net income, net of related tax effects               32,000           319,673
Total stock-based employee compensation expense
  determined under fair value based methods for
  all awards, net of related tax effects                     (1,025,442)       (1,430,197)
                                                         --------------    --------------
Pro forma net loss attributable to common stockholders   $   (9,625,870)   $  (11,095,089)


Basic loss per share:
  As reported                                            $        (0.15)   $        (0.28)
  Pro forma                                              $        (0.17)   $        (0.31)
Diluted loss per share:
  As reported                                            $        (0.15)   $        (0.28)
  Pro forma                                              $        (0.17)   $        (0.31)
</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.


                                      -84-
<PAGE>

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. 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.

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 and development
agreements with the U.S. Department of Defense and U.S. Department of Homeland
Security have been offset against research and development costs, in accordance
with the provisions of that section.

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 deemed subject to
buy-back and the common stock deemed 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.

<TABLE>
<CAPTION>
                                                            As of April  As of April
                                                             30, 2006      30, 2005
                                                             -----------------------
<S>                                                          <C>           <C>
Stock Options                                                10,337,344    8,415,655
Warrants                                                     13,986,358   19,600,262
Convertible notes payable and accrued interest - related
   parties                                                      190,045      781,713
Convertible notes payable and accrued interest                1,492,512           --
Convertible notes payable and accrued interest - deemed
  subject to rescission rights                                       --    1,241,319
Shares of common stock deemed subject to rescission rights           --      312,012
Shares held by Company to be issued upon
   payment of outstanding promissory notes
                                                                     --      704,190
                                                             -----------------------
                                                             26,006,259   31,055,151
                                                             -----------------------
</TABLE>



                                      -85-
<PAGE>

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment ("SFAS
123R"). SFAS 123R requires companies to expense the value of employee stock
options and similar awards. SFAS 123R is effective for interim and annual
financial statements beginning after June 15, 2005 and will apply to all
outstanding and unvested share-based payments at the time of adoption. The
Company is required to implement the new standard in the first quarter of fiscal
2007, and will apply the modified prospective transition method. Under the
modified prospective method, the new accounting standard will be applied;
effective May 1, 2006, to the unvested portion of awards previously granted and
will be applied to all prospective awards. Prior financial statements will not
be restated under this method. The new accounting standard will result in the
recognition of expense for all stock-based compensation awards where the Company
previously used the intrinsic value method of accounting, at times resulting in
no recognition of expense for stock-based compensation

In November 2004, the FASB issued SFAS No. 151, Inventory Costs - An Amendment
of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted beginning on January 1, 2006. The Company has recently inventory
and has no sales or cost of goods and the adoption of SFAS 151 did not have a
material impact on the Company's consolidated results of operations and
financial condition.

In December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
Time-Sharing Transactions - An Amendment of FASB statements No. 66 and 67"
("SFAS 152"). SFAS 152 amends SFAS 66 and 67 to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. SFAS 152 is effective for financial statement
for fiscal years beginning after June 15, 2005. The Company is currently
evaluating the effect that the adoption of SFAS 152 will have on its
consolidated results of operations and financial condition but does not expect
it to have a material impact.

In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets
- An Amendment of APB opinion No. 29" ("SFAS 153"). SFAS 153 clarifies that
exchanges of non-monetary assets should be measured based on the fair value of
the assets exchanged, with a general exception for exchanges that have no
commercial substance. SFAS 153 is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company is
currently evaluating the effect that the adoption of SFAS 153 will have on its
consolidated results of operations and financial condition but does not expect
it to have a material impact.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application as the required
method for reporting a change in accounting principle and the reporting of a
correction of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years which begin after December 15, 2005
and is required to be adopted by the Company in the first quarter of fiscal
2007. The Company is currently evaluating the effect that the adoption of SFAS
154 will have on its consolidated results of operations and financial condition
but does not expect it to have a material impact.

In February 2006, the FASB issued SFAS No. 155 ("SFAS 155"), "Accounting for
Certain Hybrid Financial Instruments -- an amendment of FASB Statements No. 133
and 140." SFAS 155 permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. This statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is still evaluating the statement but does not
expect the adoption of SFAS 155 to have a material impact on the Company's
consolidated financial statements.


In March 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156").
SFAS 156 provides relief for entities that use derivatives to economically hedge
fluctuations in the fair value of their servicing rights and changes how gains
and losses are computed in certain transfers or securitizations. SFAS 156 is
effective as of the beginning of the first fiscal year that begins after
September 15, 2006. The Company is still evaluating the statement but does not
expect the adoption of SFAS 156 to have a material impact on the Company's
consolidated financial statements.


In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes," which is an interpretation of SFAS No. 109
("SFAS 109"), "Accounting for Income Taxes." FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the effect that the adoption of FIN 48 may have on its financial
position or results of operations.



                                      -86-
<PAGE>

NOTE 5 - OTHER ACCRUED LIABILITIES

Included in other current liabilities is $603,100 representing a deposit made
against the purchase of our devices with a customer. This amount shall remain a
deposit until applicable revenue recognition criteria are met.


                                      -87-
<PAGE>

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consisted of the following as of the year ended:

                                  April 30, 2006  April 30, 2005
                                 --------------   --------------
 Prepaid professional services   $           --   $       44,553
 Insurance premiums                      13,287           10,060
 Deposits                                    --          311,042
 Other                                    9,705           16,174
                                 --------------   --------------

Total                            $       22,992   $      381,829
                                 ==============   ==============


NOTE 7 - INVENTORY

During the year ended April 30, 2006, the Company continued to acquire
components in anticipation of future assembly and sale. Total net inventory as
of April 30, 2006 was $875,218 compared to $808,650 as of April 30, 2005. The
Company values its inventory at the lower of cost or market. The Company
performs quality control reviews of its components to ensure that each component
meets the quality and design standards required for final assembly of finished
goods. For components identified as possibly defective or of not meeting the
specific design requirements for finished goods, the company records an
inventory reserve for components of uncertain use in product assembly or records
an impairment charge for components which require additional work to bring them
to the quality and standard of product design or written off if determined that
the component is obsolete and virtually incompatible with the design and
standard of finished goods. At April 30, 2006, included in net inventory is a
$37,000 inventory reserve for components owned by the Company which were being
repaired at April 30, 2006. In addition, included in operating loss for the year
ended April 30, 2006 is $12,910 for inventory expensed to research and
development supplies used in the development of prototypes and $13,988 for
restocking fees on the return of inventory previously purchased by the Company.

SFAS 2, "Accounting for Research and Development Costs", allows an enterprise to
draw from its normal inventory and convert the inventory for research and
development purposes as a capital asset. During the year ended April 30, 2006,
the Company converted $143,369 of its inventory to research and development
equipment.

NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of the year ended:

                                April 30, 2006    April 30, 2005
                                --------------   --------------

Prototype equipment             $      874,283   $      327,747

Laboratory equipment                   322,503          535,110

Furniture and fixtures                  85,903           70,587
Leasehold improvements                  51,150           51,150

Web site development                        --           14,400
                                --------------   --------------
                                     1,333,839          998,994

Less accumulated depreciation          545,117          456,914
                                --------------   --------------

                   Total        $      788,722   $      542,080
                                ==============   ==============



                                      -88-
<PAGE>

Depreciation and amortization expense for the years ended April 30, 2006 and
2005 and the period from August 21, 1995 (inception) to April 30, 2006, was
$313,802, $213,379, and $770,719, respectively.

NOTE 9 - ACCRUED PAYROLL AND PAYROLL TAXES

At April 30, 2004, the Company's former subsidiary, Microdevices, recorded a
payroll tax liability of approximately $386,000 for potential payroll taxes due
for unknowlingly filing incomplete payroll tax returns or not filing payroll tax
returns with respect to the issuance of shares of Microdevices common stock to
officers, employees, directors, legal advisors and consultants for services
rendered prior to April 30, 2002. Prior to April 30, 2006, we amended previously
filed payroll tax returns and filed missing tax returns to ensure that the
Microdevices payroll tax returns were in compliance with payroll tax regulations
for the payroll tax period of 1998 through June 30, 2002 and allowed the taxing
authorities to determine and assess the payroll tax, penalties and interest due
for these periods. As result, the Company paid approximately $25,000 in payroll
taxes, penalties and interest during the 2006 fiscal year and entered into an
installment agreement with the Internal Revenue Service to make $2,000 monthly
payments on tax only principal due of $44,317. At April 30, 2006, the total
Microdevices liability assessed by the Internal Revenue Service for 1998 through
June 30, 2002 was $55,279 for the installment note and related penalties and
interest due. Based on this IRS assessment we reduced the $386,000 estimated
payroll tax accrual to the actual IRS assessment and recorded the approximate
$345,000 adjustment to operating expenses.

NOTE 10 - CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
Capital lease obligations consisted of the following as of the year ended:

                                                                           April 30, 2006  April 30, 2005
                                                                           --------------   --------------
<S>                                                                        <C>              <C>
                                                                           $        3,556   $        5,595
Capital lease for equipment, secured by the equipment with an effective
  interest rate of 17.205% per annum through October 2007, with monthly
  payments in the amount of $237

Capital lease for equipment, secured by the equipment, with an effective
  interest rate of 8.99% per annum through October 2007, with monthly
  payments in the amount of $817.64                                                13,005               --
                                                                           --------------   --------------
                                                                                   16,561            5,595

Less current portion                                                       $        8,455   $        2,039
                                                                           --------------   --------------
Long-term portion
                                                                           $        8,106   $        3,556
                                                                           ==============   ==============
</TABLE>


NOTE 11 - NOTES PAYABLE

Notes payable consisted of the following as of the year ended:

<TABLE>
<CAPTION>
                                                                           April 30, 2006   April 30, 2005
                                                                           --------------   --------------
<S>                                                                        <C>              <C>

Notes payable to former employees for deferred compensation,
 unsecured and bearing interest at 5% per annum                                     7,125           37,125
                                                                           --------------   --------------
                                                                                    7,125           37,125

Less current portion                                                       $        7,125   $       37,125
                                                                           --------------   --------------
Long-term portion
                                                                           $           --   $           --
                                                                           ==============   ==============
</TABLE>


NOTE 12 - NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties consisted of the following as of the year ended:

<TABLE>
<CAPTION>
                                                                           April 30, 2006   April 30, 2005
                                                                           --------------   --------------
<S>                                                                        <C>              <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 on demand                                          $       40,000   $       40,000

Note payable to a shareholder of the Company, unsecured,

  bearing interest at 10.5% per annum, and due on demand                           45,000           45,000

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

  The note was subsequently converted into equity in June 2005                         --           14,000
                                                                           --------------   --------------
                                                                                   85,000           99,000


Less current portion                                                               85,000           99,000
                                                                           --------------   --------------

   Long-term portion
                                                                           $           --   $           --
                                                                           ==============   ==============
</TABLE>



NOTE 13 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

Convertible notes payable - related parties consisted of the following as of the
year ended:

<TABLE>
<CAPTION>
                                                                                    April 30, 2006  April 30, 2005
                                                                                   --------------   --------------
<S>                                                                               <C>              <C>
  Convertible notes payable to former legal counsel of the Company, unsecured,
   bearing interest at 10% per annum and due on demand. 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. In October 2005, the
   Company induced conversion of $211,617 of the notes, plus accrued interest,
   by reducing the conversion price to $0.60 per share. In April 2006, the
   Company induced conversion of the balance of the notes, plus accrued
  interest, by reducing the conversion price to $0.30 per share                    $           --   $      634,851
                                                                                   --------------   --------------


  Convertible notes payable ("CNP") to two board members, unsecured, bearing
   interest of 10% per annum, and, coupled with the debt discount attributable
   to the beneficial conversion feature and detachable warrants, estimated
   effective annual interest rates in the range of 27% to 52%, due in March and
   April 2007. The CNP were issued with detachable warrants to purchase 22,600
   shares of common stock at $0.60 per share with a three year term. The face
   value of the CNP is $56,500, the recording of which reflects an unamortized
   debt discount of $15,647 for the relative values of the beneficial conversion
   feature and detachable warrants. The note holders have the option to convert
   the principal and accrued interest into shares of common stock at $0.60 per
   share at any time until the later of the prepayment date or the maturity
   date. Any outstanding balance of the CNP, plus any unpaid interest, will be
   automatically exchanged into the next financing secured by the Company in the
   amount of $2,000,000 or above, at a 10% discount. In June 2006, the CNP
   together with accrued interest were automatically exchanged
   into shares of the Company's Series B Convertible Preferred Stock.
   See "Note 22 Subsequent Events Convertible Notes," for more information.                40,853

  Convertible note payable to former legal counsel of the Company, unsecured,
   bearing interest at 10% per annum and due on demand. 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. In October 2005, the
   Company induced conversion of $12,744 of the notes, plus accrued interest, by
   reducing the Cconversion price to $0.60 per share                                           --           38,232
                                                                                   --------------   --------------





                                                                                           40,853          673,083

Less current portion                                                                       40,853          673,083
                                                                                   --------------   --------------

 Long-term portion                                                                 $           --   $           --
                                                                                   ==============   ==============
</TABLE>



                                      -89-
<PAGE>

NOTE 14 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following as of the year ended:

<TABLE>
<CAPTION>
                                                                                April 30, 2006    April 30, 2005
                                                                                --------------   --------------
<S>                                                                             <C>              <C>
Convertible notes payable ("CNP") to various investors, unsecured,
bearing interest of 10% per annum, and, coupled with the debt discount
attributable to the beneficial conversion feature and detachable warrants,
estimated effective annual interest rates in the range of 31% to 74%, due in
October and November 2006. The CNP were issued with detachable warrants to
purchase 400,000 shares of common stock at $0.80 per share with a three year
term. The face value of the CNP is $500,000, the recording of which reflects an
unamortized debt discount of $134,657 for the relative values of the beneficial
conversion feature and detachable warrants. The note holders have the option to
convert the principal and accrued interest into shares of common stock at $0.60
per share at any time until the later of the prepayment date or the maturity
date. Any outstanding balance of the CNP, plus any unpaid interest, will be
automatically exchanged into the next financing secured by the Company in the
amount of $2,500,000 or above, at a 10% discount. During the Company's special
warrant offer, 360,000 shares of common stock were purchased upon exercise of
the detachable warrants at a reduced exercise price of $0.20 per share,
with the remaining warrants forfeited. See "Note 22 Subsequent Events
Convertible Notes," for more information.                                              365,343               --

Convertible notes payable ("CNP") to an investor, unsecured,
bearing interest of 10% per annum, and, coupled with the debt discount
attributable to the beneficial conversion feature and detachable
warrants, estimated effective annual interest rates in the range of 58%
to 79%, due in September and October 2006. The CNP were issued with
detachable warrants to purchase 120,000 shares of common stock at $0.60
per share with a three year term.  The face value of the CNP is
$300,000, the recording of which reflects an unamortized debt discount
of $82,324 for the relative values of the beneficial conversion feature
and detachable warrants. The note holders have the option to convert the
principal and accrued interest into shares of common stock at $0.30 per
share at any time until the later of the prepayment date or the maturity
date.  Any outstanding balance of the CNP, plus any unpaid interest,
will be automatically exchanged into the next financing secured by the
Company in the amount of $2,000,000 or above, at a 10% discount.  In
June 2006, the CNP together with accrued interest were automatically
exchanged into shares of the Company's Series B Convertible Preferred
Stock. See "Note 22 Subsequent Events Convertible Notes," for more information.        217,676               --

                                                                                --------------   --------------
                                                                                       583,019               --

                                                                                --------------   --------------
Less current portion                                                            $      583,019   $           --
                                                                                --------------   --------------

 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 sale of the above convertible notes
payable with detachable warrants for the beneficial conversion features. 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.



                                      -90-
<PAGE>

NOTE 15 - CONVERTIBLE NOTES PAYABLE DEEMED SUBJECT TO RESCISSION RIGHTS

Convertible notes payable deemed subject to rescission rights consisted of the
following as of the year ended:

<TABLE>
<CAPTION>
                                                                                   April 30, 2006   April 30, 2005
                                                                                   --------------   --------------
<S>                                                                                <C>              <C>
Convertible notes payable ("CNP"), unsecured, bearing interest at 5% per annum
 and coupled with the proceeds allocated to the detachable
 warrants, an estimated effective annual interest rate of 49%, due in
 June 2006 (excluding $10,000 due in January 2006).  In June 2005, the
 holders converted $70,000 of the CNP into shares of common stock, with
 the balance converted in February 2006. The shares issued upon
 conversion were deemed no longer subject to rescission                            $           --   $      310,000

Convertible notes payable, unsecured, bearing interest at 5% per annum due in
 June 2006, issued as a penalty to holders as a result of the Company's
 inability to file a registration statement within certain specified deadlines
 As of April 30, 2006, the CNP were converted into shares of common stock. The
 shares issued upon conversion were deemed
 no longer subject to rescission                                                               --           37,800

Convertible note payable ("CNP"), unsecured, bearing interest at 5% per annum,
 and, coupled with the proceeds allocated to the detachable warrants, an
 estimated effective annual interest rate of 44%. The CNP was due January 2006,
 convertible at $0.45 per share at any time before maturity. The CNP included
 detachable warrants with a three and one-half year term to purchase shares of
 common stock 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
 Said detachable warrants issued in the first closing have since expired. In
 June 2005, the holder converted all principle and accrued interest into common
 shares. The shares issued upon conversion have been deemed no
 longer subject to rescission                                                                  --          185,000
                                                                                   --------------   --------------
                                                                                               --          532,800

                                                                                   --------------   --------------
Less current portion                                                               $           --   $      532,800
                                                                                   --------------   --------------

  Long-term portion                                                                $           --   $           --
                                                                                   ==============   ==============
</TABLE>


                                      -91-
<PAGE>

The above convertible notes payable had been previously deemed subject to
integration having been sold during a period when 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 concerning
the contemporaneous sale of securities by the Company at different terms, where
the effect of integration can be to destroy an exemption upon which a company
has relied in issuing its securities privately, which renders the transaction an
illegal unregistered public offering. If this is the case, the purchasers of
convertible notes payable may have had similar rescission rights available to
certain of the shareholders as described in Note 16 (See Note 16 for a full
description of the circumstances surrounding rescission rights of the
shareholders). Accordingly, the Company would have been required to pay each
rescinding holder of the amount it received as consideration, plus any interest
with respect to such amount at the applicable rate, and the securities would
have been cancelled.

The Company has completed an independent investigation as to whether or not the
rescission rights continue to exist and, based upon legal advice it has received
as to the appropriate state and federal limitations periods pertaining to the
rescission obligations assumed, the Company has reclassified all convertible
notes payable deemed subject to rescission rights to convertible notes payable
as of April 30, 2006.


NOTE 16 - SALES OF COMMON STOCK DEEMED SUBJECT TO RESCISSION RIGHTS

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. Of the shares to be registered, 5
million were shares to be newly issued for sale by the Company, and the
remainder was shares to be registered for resale 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 the benefit of the Company,
and re-filed a registration statement solely seeking to register the shares of
the selling stockholders. On April 16 2004, this registration statement was also
withdrawn.

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 certain 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 contemporaneous public offering on a continuous basis at
varying prices or a negotiable price, the only overlap occurred with respect to
shares to be registered for resale for the account of selling stockholders.
Although the Company, as an issuer, was not selling stock both publicly and
privately at the same time, the Company has been advised that 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 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 renders the transaction an illegal unregistered public
offering. In such event, the persons who purchased securities in such an
offering may be entitled to, in addition to any 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.

The Company has completed an independent investigation as to whether or not the
rescission rights continue to exist and, based upon legal advice we have
received as to the appropriate state and federal limitations periods pertaining
to the rescission obligations assumed, the Company has reclassified all of
4,132,008 shares of common stock sold deemed subject to rescission rights to
common stock and additional paid in capital, and eliminated the related current
liability. During the years period ended April 30, 2006, the Company
reclassified the 312,012 remaining shares deemed subject to rescission rights,
reported at fiscal year ended April 30, 2005, to common stock and additional
paid in capital, eliminating the recorded current liability for shares deemed
subject to rescission rights of $199,560, reported at fiscal year ended April
30, 2005.


NOTE 17 -RESEARCH AND DEVELOPMENT COSTS

To date, the Company has devoted the bulk of its efforts and resources to the
research, design, testing and development of sensor systems incorporating its
proprietary "stoichiometric" technologies for numerous governmental and
commercial applications and markets. The Company's technologies 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 substances,
such as explosives, illicit drugs or biological agents, by deciphering the
chemical composition of select substances. Aside from its current applications,
management believes that its technologies have numerous other applications.


                                      -92-
<PAGE>

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 and development
agreements with the U.S. Department of Defense ("DoD") and U.S. Department of
Homeland Security (DHS) have been offset against research and development costs,
in accordance with the provisions of that section, in all periods presented.


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

<TABLE>
<CAPTION>
                                                                                             Period from
                                                                                           August 21, 1995
                                                                                           (Inception) to
                                                      Year ended April 30,                    April 30,
                                           --------------------------------------------------------------------
                                                   2006                  2005                   2006
                                           --------------------------------------------------------------------
<S>                                                  <C>                  <C>                     <C>
        Research and development costs               $ 2,365,543          $  1,395,460            $  7,015,686
        Grant proceeds earned                           (321,220)             (610,200)             (1,773,994)
                                           --------------------------------------------------------------------
        Net research and development costs           $ 2,044,323            $  785,260            $  5,241,692
                                           --------------------------------------------------------------------
</TABLE>


NOTE 18 - RETIREMENT PLAN

In July 2005, the Company's Board of Directors approved a SIMPLE IRA Plan (the
"Plan"). Participation in the Plan is automatic for those employees who meet
eligibility requirements unless they decline participation. Under the Plan, the
Company provides matching contributions of up to 3% of each participating
employee's annual eligible compensation. The maximum employee contribution is
subject to regulatory limitations. The Company contributed $37,059 to the Plan
on behalf of its employees during the year ended April 30, 2006.


NOTE 19 - COMMITMENTS AND CONTINGENCIES

Consultancy Agreements and Contracts

In August 2004, the Company entered into a Retention Agreement with the
Company's current securities counsel, for legal services which include the
preparation and review of the Company's annual and quarterly reports, regulatory
filings and other assistance with corporate and contract needs as the Company
may request from time to time.

In April 2005, the Company entered into a subcontract with a global maintenance
and services company, in which the subcontractor as Exclusive Service Provider
will provide the Company with product support and aftermarket servicing,
including the installation, repair and preventative maintenance for all products
to be sold and deployed by the Company in the United States. Pursuant to the
subcontract, the Company will pay the contractor on an hourly basis for labor,
plus travel and expenses, and supply all necessary parts and technical support
to allow contractor to fulfill its obligations.

In June 2005, the Company entered into a contract with a consultant to provide
public media relations on a guaranteed placement basis. Under the contract, the
Company agrees to pay the consultant pursuant to a fixed fee schedule for
successful placements and media coverage incorporating the Company's products
and technologies.

In September 2005, the Company entered into a contract with a consultant to
provide investor relations. Under the contract, the Company agrees to pay the
consultant $2,000 per month and make timely reimbursements for any approved
expenses incurred.

In November 2005, the Company entered into an engagement letter with an attorney
to act as special counsel to the Company on discovery and litigation matters
related to the arbitration between HWH Enterprises and the Company. Pursuant to
the agreement, the Company will pay the attorney $200 per hour and agrees to
reimburse the attorney for any pre-approved expenses.

In November 2005, the Company engaged a research physicist as a scientific
advisor and consultant to the Company. Pursuant to the letter agreement, the
Company will pay the consultant an annual consultancy fee of approximately
(euro) $11,750 in cash and/or common stock of the Company payable in quarterly
installments. Either party may terminate the agreement at any time.


                                      -93-
<PAGE>

In November 2005, the Company entered into a letter agreement with a technology
management consultant to provide the Company with advisory services as to
business strategy, technology management and new product/innovation development.
The Company will pay the consultant a retainer of $25,000, payable in restricted
shares of common stock of the Company. The agreement may be terminated by any
party with 60 days' written notice to the other.

In January 2006, the Company entered into a new contract with a consultant to
provide engineering services and production planning for a six month-month
period. Major terms of the agreement are as follows:

      o     The Company will pay the consultant cash remuneration of $4,000 and
            issue him restricted shares in the amount of $15,000 for each month
            of services performed under the engagement.
      o     The Company will reimburse consultant for any pre-approved expenses
            during the engagement.
      o     In the event the Company files a registration statement on S-8, the
            Company will include restricted shares issued to the consultant for
            resale and the Company has the option to prepay the consultant's
            services with S-8 stock.

In January 2006, the Company entered into a reseller agreement with a
service-disabled veteran-owned small business (SDVO) related to the right to
market and resell the Company's products and services to federal agencies and
customers. The Company agreed to work with no other qualified SDVOSB in the
sales and marketing of its products and services. The reseller agreement and
related pricing expires in one year unless extended by mutual agreements.

In February 2006, the Company engaged a research physicist as a scientific
advisor and consultant to the Company to pursue funded cooperative research and
development with NATO, IAEA, EU and local governments and certain marketing
activities. Pursuant to the letter agreement, prior to commencing any work, the
Company will be required to pay the consultant a retainer of $40,000 in the form
of stock of the Company and reimburse any pre-approved expenses. Either party
may terminate the agreement at any time upon 60 days written notice to the
other.

In February 2006, the Company executed an engagement letter with an independent
contractor to provide radiation licensing, certification, training and auditing
services. Major terms of the agreement are as follows:

      o     The Company agrees to pay $150 for each hour invoiced by the
            consultant during the engagement in cash and/or stock of the
            Company.
      o     The Company has the option to prepay the consultant's services with
            stock with an obligation to file any shares issued for services on a
            registration statement.
      o     The Company will reimburse consultant for any pre-approved expenses.

In March 2006, the Company entered into a consultancy agreement with a senior
research scientist to provide software engineering, software documentation and
architecture for a six month-month period. Major terms of the agreement are as
follows:

      o     The Company will pay $60 for each hour invoiced by the consultant
            during the engagement in cash and/or stock of the Company.
      o     The Company has the option to prepay the consultant's services with
            stock with an obligation to file any shares issued for services on a
            registration statement.
      o     The Company will reimburse consultant for any pre-approved expenses
            during the engagement.

In April 2006, the Company entered into an agreement with a leading technology
solutions sales and distribution company related to non-exclusive rights to
market and resell the Company's products and services to governmental customers
in Singapore and China and exclusive rights to market and resell the Company's
products and services to the Beijing 2008 Summer Olympic Games.

Placement Agency Agreements

In September 2005, 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 for one year or in the event the
            placement agent has not completed financing of at least $2 million
            in the first 30 days, the Company may cancel at any time with 5
            days' written notice of cancellation.
      o     The Company will pay a retainer in the amount of $10,000 to be
            deducted from any fees due under the agreement.
      o     The Company will pay a success fee equal to 10% of any of the gross
            proceeds received by the Company derived from the efforts of the
            placement agent for any amounts up to $3 million and 7% for that
            amount in excess of $3 million, plus reimbursable expenses not to
            exceed $10,000 without written approval of the Company.
      o     In connection with advisory services related to strategic
            transactions, the Company shall pay the placement agent a cash fee
            of 3% of the aggregate value/consideration received.
      o     The Company will issue the placement agent warrants to purchase 8%
            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 securities were placed. The
            warrants vest immediately, expire four years from the date of grant,
            and include "piggyback" registration rights.


                                      -94-
<PAGE>

      o     As part of the agreement, the Company executed a separate letter
            indemnifying BHP and its related parties for services provided under
            the engagement letter.

Employment Agreements

In January 2005, the Company entered into an employment agreement for the
employment of Roger W.A. Spillmann as Secretary and Vice President. This
agreement is still in effect; however Mr. Spillmann now serves as the company's
President and CEO. Major commitments in the agreement are as follows:

      o     The Company must pay him an annual base salary of $200,000, of which
            $140,000 will be payable in cash, and the remainder in deferred
            compensation.
      o     The Company granted him a stock option to purchase 500,000 shares of
            common stock at $0.72 per share, and vesting on December 31, 2005.
      o     If terminated by the Company without cause, the Company must pay him
            on the termination date, severance pay in an amount equal to six (6)
            months of the minimum annual base salary.
      o     The Company will provide him with four (4) weeks paid vacation as
            well as comprehensive family medical and dental healthcare benefits.

Effective February 2005, the Company entered into an employment agreement with a
research scientist in which the Company committed to pay the research scientist
an annual base salary of $85,000 and employee stock options to purchase 35,000
shares of common stock on an annual basis, with equal vesting on a bi-annual
basis. Pursuant to the employment agreement, the Company committed to reimburse
the employee for relocation expenses up to $5,000 and provide standard medical
and dental healthcare benefits.

In December 2005, the Company entered into an employment agreement with a
project manager in which the Company committed to pay the employee an annual
base salary of $55,000 in cash and, after six months of continuous employment,
employee stock options to purchase 40,000 shares of common stock per year at the
market price on the issuance date, with equal vesting on a bi-annual basis.
Pursuant to the employment agreement, upon sixty days of employment the project
manager will receive standard medical and dental healthcare benefits and upon
ninety days qualify for enrollment in the Company's IRA plan.

In January 2006, the Company entered into an employment agreement with a senior
scientist in which the Company committed to pay the scientist an annual base
salary of $120,000 and, after six months of continuous employment, employee
stock options to purchase 35,000 shares of common stock per year at the market
price on the issuance date, with equal vesting on a bi-annual basis. Pursuant to
the employment agreement, upon sixty days of employment the scientist will
receive standard medical and dental healthcare benefits.

In December 2005, the Company entered into an employment agreement with a
software engineer in which the Company committed to pay the employee an annual
base salary of $75,000 and, after six months of continuous employment, employee
stock options to purchase 37,500 shares of common stock per year at the market
price on the issuance date, with equal vesting on a bi-annual basis. Pursuant to
the employment agreement, upon sixty days of employment the engineer will
receive standard medical and dental healthcare benefits and upon ninety days
qualify for enrollment in the Company's IRA plan.

In April 2006, the Company entered into an employment agreement with its Chief
Scientist. Major commitments included in the agreement are as follows:

      o     The Company must pay him an annual base salary of $120,000 per year
            effective May 1, 2006. of which $20,000 will be accrued as deferred
            compensation and payable in equal installments on a quarterly basis.
      o     The Company has the option to prepay him with common shares having a
            value equivalent to six (6) months of the above stated salary in the
            event the Company files a registration statement on S-8.
      o     The Company will grant him a stock option to purchase 80,000 shares
            of common stock at the market price on the issuance date with equal
            vesting on a bi-annual basis.
      o     On each anniversary of his original hire date of July 19, 2004, the
            Company will grant him a stock option to purchase 30,000 shares of
            common stock per year at the market price on the issuance date, with
            equal vesting on a bi-annual basis.
      o     The Company will provide him with three (3) weeks paid vacation as
            well as comprehensive family medical and dental healthcare benefits.

Purchase and Sales Agreements

In April and May 2004, the Company issued a purchase order for neutron
generators at a total cost of approximately (euros) 678,000, approximately
$813,600. The Company had the option to lease these units from the vendor for up
to 12 months but has returned all units prior to the 12 month period due to
performance issues under the lease.


                                      -95-
<PAGE>

In May 2004, the Company ordered gamma radiation detectors, electronic cooling
systems and other components for a total cost of $1,368,000. The Company began
receiving the detectors and components in May 2004 and continued to receive
units at varying intervals. Due to its decision to better balance inventory, the
Company halted delivery and in February 2006 the Company returned 13 of the
electronic cooling units for a credit against payables due the vendor and
incurred a restocking fee of 20%. In the event the Company receives orders
sufficient to justify adding detectors, the vendor has agreed to extend the
Company a purchasing discount of 10% so as to recover a portion of the
restocking fee.

In November 2004, the Company issued a purchase order for two advanced neutron
generators at a total cost of approximately $335,000 for use in research and
development related to the Company's SuperSenszorTM program and the Company's
cooperative research agreement with the TSA. As of April 30, 2006, the Company
has paid for and received one of the generators and has made a non-refundable
deposit of $92,997 against the remaining unit with the balance due upon
acceptance following delivery.

In January 2005, the Company received an order for one SIEGMATM system, along
with a down payment in the amount of $75,000, and a guarantee of the balance
upon delivery, from a company located in Tenerife, Canary Islands, Spain.
Payment of the balance in the amount of $227,000 is due upon testing and
acceptance of the unit.

In February 2005 and in March 2005, the Company issued purchase orders in the
amount of $304,000 and $611,000, respectively, for robotic vehicles to be used
to facilitate remote deployment of its explosive detection devices. As of July
31, 2005, the Company received all of the robotic vehicles ordered. In October
and November 2005, the Company returned five of the units for a complete
cancellation of the amount owed for those units.

In May 2005, the Company entered into an Equipment Sales Agreement with a major
transit authority in connection with the purchase of two SIEGMATM systems for an
aggregate sum of $603,104. Accordingly, on June 10, 2005, the Company received
Purchase Order No. 4500233769 from the Commonwealth of Pennsylvania in the
amount of $603,104. In September 2005, the Company received a down payment in
the amount of $375,581 and in January 2006, the Company received the balance of
the purchase order. Pursuant to the agreement, the Company will provide one year
of maintenance and service, and radiation safety consulting, as well as software
and hardware upgrades for a period of six months.

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. In October 2005, the Company extended the lease for an additional
year adding 2,265 square feet of space within the same building, bringing the
total building space to 13,262. The new space is being used for additional
offices, inventory storage, with space set aside for some product assembly. The
Company also has an option for additional space if needed for expanded assembly
or manufacturing. The Company also leases 2,400 feet of outdoor testing space
which is included in the monthly rent under the terms of the addendum. The
addendum for one additional year provides for monthly rent of $17,591. The
addendum to the lease expires in October 2006 and as of April 30, 2006, the
aggregate future minimum payment under the lease agreement was $105,543.

Litigation

In May 2003, Barry 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.

In July 2002, the Company entered into a consulting agreement with Yeffet
Security Consultants, Inc. and its beneficial owner, Isaac Yeffet ("YSCI").
Under the terms of this agreement, YSCI was to provide consulting services to
the Company to further our marketing and business objectives. On October 29,
2003, the Company notified YSCI that it was terminating its contract on the
grounds of inadequate performance and YSCI alleged that the Company breached the
consulting agreement and sought to recover $449,540.91. On June 9, 2006, the
Company and YSCI entered into a Confidential Settlement Agreement and Mutual
Release which provides for a mutual reconciliation of disputes.


                                      -96-
<PAGE>

In January 2005, the Company was served with a Summons and Class Action
Complaint For Violations of Federal Securities Laws, which was filed on October
18, 2004, in the Federal District Court for the Southern District of California
under case number SACV04-1226 GLT. The Complaint filed named the Company and its
former Chairman, Bogdan C. Maglich, among other named defendants, on behalf of a
class of persons who acquired the stock of the Company during the period from
February 22, 2002 through July 8, 2004. In February 2005, plaintiff's counsel
filed a First Amended Complaint entitled and styled, "In re: HiEnergy
Technologies, Inc. Securities Litigation," Master File No. 8:04-CV-01226-DOC
(JTLx), alleging various violations of the Federal securities laws, generally
asserting the same claims involving Philip Gurian, Barry Alter, and the
Company's failure to disclose their various securities violations including,
without limitation, allegations of fraud. The First Amended Complaint seeks,
among other things, monetary damages, attorney's fees, costs, and declaratory
relief. The Company engaged two legal firms to vigorously defend itself in this
matter and assess the impact of the pending lawsuit. On Friday, March 25, 2005,
the Company timely filed responsive pleadings as well as Motions to Dismiss the
Plaintiffs' First Amended Complaint arguing that the Complaint failed to state a
claim upon which relief can be granted. On June 17, 2005, the Court issued an
Order Granting the Motions to Dismiss (the "Order"), finding that the Plaintiffs
failed in the First Amended Complaint to allege causation of loss resulting from
any alleged omissions and/or misrepresentations of the Company or Dr. Maglich,
to sustain a cause of action for securities fraud under ss.10(b) of the Exchange
Act and Rule 10b-5 of the SEC, that the Plaintiffs had failed to plead actual
reliance on any allegedly false or misleading filings of the Company to sustain
a claim under ss.18 of the Exchange Act, and that the Plaintiffs had failed to
allege a primary violation of any securities laws to sustain a claim for a
violation of ss.20(a) of the Exchange Act. On July 5, 2005, the Plaintiffs filed
a Second Amended Complaint in compliance with the Court's Order. On October 24,
2005, the Court issued a Minute Order granting in part and denying in part
Motions to Dismiss filed by the Company, finding that the Plaintiffs failed in
the Second Amended Complaint to sustain a cause of action for securities fraud
under ss.10(b) of the Exchange Act and Rule 10b-5 of the SEC against Dr. Maglich
and for claims that the Company filed false and misleading financial statements
and executed suspicious stock sales. On November 14, 2005, the Court held a
scheduling conference at which the Plaintiff informed the Company that it would
not file a Third Amended Complaint. In accordance with the Scheduling Order from
the Court, class representative motions are to be filed within 90 to 120 days
and pre-trial conference has been scheduled for September 11, 2007. Company
counsel will respond to any motions with appropriate challenges to its legal
sufficiency to state a claim upon which relief may be granted. As of date, the
costs to defend the class action have been substantial and it is unable to
predict an exact amount, or even a meaningful estimate, of the aggregate costs
that may be incurred, at this time.

In April 2005, a claim was filed against the Company with the 101st Judicial
District Court, Dallas County, Texas by Data Discovery Inc., ("DDI") (Civil
Action No. 3-05-CV-0949-M). DDI, representing one party of a dissolved
partnership, is seeking the collection on behalf of the partnership of $107,300
allegedly owed to it for services purported to have been fully-provided to the
Company. The Company engaged local counsel and filed, on May 10, 2005, a Notice
of Removal to move the case to federal court, and a Motion for Dismissal. In
July 2005, the District Court delivered a Memorandum Opinion and Order granting
the Company's Motion for Dismissal and ordered that within twenty days DDI amend
its suit to the satisfaction of the District Court, or the order will become a
dismissal with prejudice, which would bar DDI from filing any other suit against
the Company related to the subject matter of its current claim. In August 2005,
DDI filed a new lawsuit on behalf of the partnership which is expected to go
before the Court following an appropriate period for discovery. In August 2006,
the Company entered into settlement discussions with DDI and in September 2006,
DDI caused the lawsuit to be dismissed without prejudice. There can be no
assurance that the claims DDI asserted against the Company will not be
resuscitated at some time in the future.

In October 2005, a claim was filed against the Company with the Supreme Court of
the County of New York, New York by HWH Enterprises ("HWH") (Index No.
603438/05). HWH is seeking collection of $101,621.18 allegedly owed to it for
its public relations services purported to have been provided to the Company
during the prior fiscal year. The Company engaged local counsel and intends to
defend itself and counsel will respond with appropriate challenges. As of this
date, the Company and its legal counsel have made no other determination as to
the merits of, or possible defenses to, the claim, and are unable to predict a
meaningful estimate of the costs of defending against the claim at this time.

In November 2005, a claim was filed against the Company with the District Court
of Orange County, California by SBI-USA ("SBI"). SBI is seeking collection of a
fee in the amount $50,000 allegedly owed to it for financial advisory services
purported to have been provided to the Company during the fiscal year ended
2003. In July 2006, we agreed to mediation and entered into settlement
discussions to avoid further litigation costs and in September 2006, the Company
and SBI entered into a settlement agreement which provides for a mutual
reconciliation of disputes and a dismissal of the claim.

In December 2005, a claim was filed against the Company with the County Court of
Dallas County by Lockwood Greene Engineers Inc. ("LGE") (Cause No.
cc-05-12059-b). LGE is seeking collection of a fee in the amount of $35,039
allegedly owed to it for engineering and construction services purported to have
been provided to the Company during the fiscal year ended 2005. In July 2006,
the Company and LGE entered into a Confidential Settlement Agreement and Mutual
Release which provides for a mutual reconciliation of disputes.


                                      -97-
<PAGE>

Potential Legal Actions

In December 2005, the Company received a letter from EADS North America, Inc.
("EADS") alleging breaches by the Company of a lease agreement between the
Company and EADS, dated April 29, 2004 (the "Lease"). Pursuant to the terms of
the Lease, EADS was to deliver ten neutron generators on a fixed schedule agreed
upon by both parties. The Company received four of the ten neutron generators
with significant delays due to production and support issues and ceased payments
pending resolution. Prior to the end of the Lease, the Company returned the four
generators it had received due to non-performance by EADS and sought termination
of the contract. The letter from EADS alleges that the Company failed to meet
its payment obligations, demands early termination payments, cancellation of
discounts and other charges unrecognized by the Company, and threatens
litigation in the event the Company fails to cure immediately. The Company has
recorded $239,017 for lease payments in accordance with terms of the lease while
it attempts to resolve the matter. In June 2006, the Company received a
supplemental letter from EADS detailing additional charges disputed by the
Company for premature cancellation and return of equipment in an amount equal to
$280,415. As of this date, no legal action has been filed by either party and
the Company intends to defend itself against any legal proceeding that may be
brought by EADS on the basis indicated in this letter. The Company is unable to
predict a meaningful estimate of the costs of defending itself against any
possible legal action, should one be filed in the future. The Company currently
sources neutron generators from other trusted vendors and its ability to
manufacture its products has not been materially impacted by this dispute.

Minority Shareholders

On January 25, 2005, Microdevices was effectively merged into the Company
through a short form merger effected by the Company and certified by the
Secretary of the State of Delaware, whereupon the Company assumed all assets and
liabilities of Microdevices. Under the terms of the merger, the Company issued
452,029 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). Additionally, we may be required to issue up to 704,190 shares of the
Company's common stock to former holders of options and warrants of Microdevices
who hold rights to purchase HiEnergy shares at $0.156 per share. These rights
survived the merger and may be exercised any time before April 25, 2007, subject
to the payment of promissory notes representing the purchase price.

Convertible Notes Payable

As of April 30, 2006, the Company had outstanding $800,000 of convertible notes
payable ("CNP") issued to investors, which together with accrued interest of
$43,055 are convertible into 1,492,512 shares of common stock. The CNP have been
recorded net a remaining unamortized debt discount of $216,981 for the relative
values of the beneficial conversion feature and detachable warrants. In June
2006, $300,000 of the CNP together with accrued interest were automatically
exchanged into shares of the Company's Series B Convertible Preferred Stock.

Convertible Notes Payable - Related Parties

As of April 30, 2006, the Company has outstanding $56,500 of convertible notes
payable - related parties issued to two members of the Company's Board of
Directors, which together with accrued interest of $513.42 are convertible into
190,045 shares of common stock. The CNP have been recorded net a remaining
unamortized debt discount of $15,647 for the relative values of the beneficial
conversion feature and detachable warrants. In June 2006, all $56,500 of the
convertible notes payable - related parties together with accrued interest were
automatically exchanged into shares of the Company's Series B Convertible
Preferred Stock. This investment was on the same terms as concurrently made by
unaffiliated investors.

Penalty Securities

After August 2003, the Company entered into certain stock and convertible note
purchase agreements which contain 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.

In December 2005 the Company's Board approved a special warrant offer allowing
investors to exercise their existing warrants at greatly reduced exercise
prices. In conjunction with this offer each participating investor forfeited any
right to receive penalties after November 2005. However, for investors who did
not participate in the special warrant offer, the Company remains obligated to
honor these registration rights and to issue additional securities as a result
of the related penalties, and it will incur additional financial costs or
penalties until such time as all registerable shares under the agreements have
in fact been registered or when the penalties become impermissible as a matter
of law as prescribed in the instrument or can be sold without registration under
Rule 144. 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.


                                      -98-
<PAGE>

Government Contract Commitments

On July 18, 2005, the Company executed a Time and Material Subcontract in the
amount of $333,688 with Integrated Concepts & Research Corporation (ICRC), which
was awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the
United States Army Tank - Automotive and Armaments Command, Warren Michigan
(TACOM). Under the Subcontract, the Company will deliver one CarBomb FinderTM
head unit and provide the engineering and technical support necessary for its
integration in the SmarTruck II Multi-Mission Vehicle. In early 2006, ICRC
requested an extension under the subcontract and at present the finished
prototype is expected to be completed and field tested by the U.S. Army and D.C.
Capitol Hill Police by year end. Funding of the program was provided through a
supplemental authorization of the Defense Appropriations Act for Fiscal Year
2005. As of date of this Report, the Company has received payment in the amount
of $260,114 for its performance. Funding of the program was provided through a
supplemental authorization of the Defense Appropriations Act for Fiscal Year
2005. ICRC will pay the Company's time and material 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 subcontract. The
Company recognizes the proceeds from the subcontract as an offset against
research and development expenses following the submission of the monthly
written reports. Pursuant to the subcontract, when the written report is
accepted by ICRC, the Company receives payment in about 30 to 45 days, or no
later than 5 days after payment by the U.S. Army Contracting Officer to ICRC.

The Company's entitlement to the above-mentioned funding is conditioned upon its
compliance with the terms and conditions of the respective SBIR contract and
cooperative agreement, as well as applicable federal regulations, including
auditing of the expenditure of the resources for allowable purposes by grantor
agencies of the federal government or their designees. 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 20 - COMMON STOCK

Common Stock Issued or Committed for Cash

During the years ended April 30, 2006 and 2005, and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
3,564,447, 7,083,227 and 17,316,321 shares of common stock, respectively, in
exchange for cash of $1,620,000, $3,582,156 and $8,364,424, respectively.

Common Stock Issued or Committed to be Issued Upon Exercise of Warrants

During the year ended April 30, 2006 the Company issued or committed to issue
11,454,112 shares of common stock in exchange for cash of $1,609,505 upon the
exercise of warrants under a special warrant offer approved by the Company's
Board of directors in December 2005. Under the terms of the offer, investors who
has previously received warrants in conjunction with their investments were
allowed to exercise those warrants at greatly reduced exercise prices. The
average exercise price for the purchase of the 11,454,112 shares was $0.14. See
"Note 21 - Stock Options and Warrants".

Offering Costs on Issuance of Common Stock for Cash

During the years ended April 30, 2006 and 2005, and the period from August 21,
1995 (inception) to April 30, 2006, the Company incurred offering costs of
$122,380, $31,750 and $262,148, respectively. The current year period includes
$60,380 of offering costs related to the special warrant offer. Also during the
year ended April 30, 2006 the Company issued 80,000 shares of common stock as
offering costs.

Common Stock Issued or Committed for Services Rendered or to be Rendered

During the years ended April 30, 2006 and 2005, and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
740,201, 402,455 and 14,499,183 shares of common stock, respectively, in
exchange for services rendered or to be rendered, valued at the fair market of
the common stock issued of $399,309, $504,715 and $5,662,633, respectively.

Details of the services performed, in consideration for the common stock, during
the years ended April 30, 2006, are as follows:

      o     During the year ended April 30, 2006, 30,000 unregistered shares of
            common stock valued at $21,000 were issued to a design/manufacturing
            consultant as compensation for services.
      o     During the year ended April 30, 2006, 104,000 unregistered shares of
            common stock valued at $73,840 were issued for Edgar filing
            services.
      o     During the year ended April 30, 2006, 154,359 unregistered shares
            valued at $108,051 were issued or committed to settle accounts
            payable of $70,820 for prior legal services. The difference between
            the value of the shares and the accounts payable balance of $37,231
            was expensed in the current period.
      o     During the year ended April 30, 2006, the Company issued or
            committed to issue a total of 215,000 unregistered shares of common
            stock valued at $104,050 to members of its Board of Directors for
            their attendance at scheduled meetings. Each member of the Company's
            board had received 5,000 shares of un-registered common stock, then
            beginning in January 2006, 10,000 shares of unregistered common
            stock for each meeting attended.
      o     During the year ended April 30, 2006, the Company committed to issue
            236,842 unregistered shares valued at $92,368 to an engineering
            consultant as compensation for services provided during the year.


                                      -99-
<PAGE>

Common Stock Issued or Committed to Issue on the Conversion of Convertible Notes
Payable

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
3,967,323, 302,421 and 5,865,660 shares of common stock, respectively, for the
outstanding principal and accrued interest on convertible notes payable balances
of $2,153,398, $149,560 and $2,986,111, respectively. Shares reported for the
year end period April 30, 2006, and inception-to-date period include 1,315,116
shares issued and committed to be issued to induce the conversion of $565,980 of
convertible notes payable plus accrued interest, with extra shares resulting in
an aggregate inducement charge of $499,744. The inception-to-date shares also
include 944,444 shares committed at the end of fiscal-year 2004 for a
subscription receivable collected at the beginning of fiscal-year 2005 in the
amount of $425,000.

Common Stock Issued on the Conversion of Promissory Notes

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued 32,820, 1,139,130 and
1,171,950 shares of common stock for the settlement of outstanding promissory
notes and accrued interest in the aggregate amount of $14,769, $524,000 and
$538,769.

Common Stock Issued on the Cashless Exercise of Warrants

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued 22,463, 1,341,806 and
1,895,294 shares of common stock, respectively, on the cashless exercise of
warrants.

Common Stock Issued or Committed as a Penalty for Late Registration

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
746,338, 1,966,055, and 3,644,094 shares of common stock, respectively, as
penalty expenses in the amount of $462,793, $2,024,125 and $3,769,280,
respectively, for the late registration of the Company's common stock. See "Note
19 - Commitments and Contingencies, Penalty Securities".


NOTE 21 - STOCK OPTIONS AND WARRANTS

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 for employees
and other service providers:



                                     -100-
<PAGE>

<TABLE>
<CAPTION>
                                                 Stock
                                   Weighted      Options       Weighted                      Weighted
                                   Average       And           Average      Total            Average
                     Stock         Exercise      Warrants      Exercise     Options          Exercise
                     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,  2006          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
                     --------------------------- ------------- ----------------------------- -------------
                         2,956,980     $   0.76                     $  0.99       3,056,980      $   0.77
Granted                                               100,000


Canceled                 (910,000)     $   1.08     (876,668)      $   2.79     (1,786,668)      $   1.92
                     --------------------------- ------------- ----------------------------- -------------

Outstanding
April 30, 2005           6,693,929     $   0.70     2,481,726      $   1.17       9,175,655      $   0.82

                     --------------------------- ------------- ----------------------------- -------------
                                       $   0.55                    $   0.65                      $   0.56
Granted                  1,464,510                    177,179                     1,641,689

Canceled                  (480,000)    $   0.77             -       $     -        (480,000)     $   0.77

Outstanding
April 30, 2006           7,678,439     $   0.66     2,658,905      $   1.13      10,337,344      $   0.78

Exercisable
April 30, 2006           6,908,439     $   0.62     2,138,905      $   1.17       9,047,344      $   0.75
                     --------------------------- ------------- ----------------------------- -------------
</TABLE>


                                     -101-
<PAGE>

The weighted-average remaining contractual life of the options and warrants
outstanding at April 30, 2006 was 4.23 years. The exercise prices of the options
and warrants outstanding at April 30, 2006 ranged from $0.01 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                       7,248,901             6,428,901             4.62        $        0.46         $         0.44
  $1.00 - $1.99                       2,184,454             1,684,454             3.70        $        1.09         $         1.12
  $2.00 - $2.95                         933,989               933,989             2.48        $        2.54         $         2.54
                          ----------------------  --------------------
                                     10,367,344             9,047,344
                          ======================  ====================
</TABLE>


                                     -102-
<PAGE>

As noted in "--New Accounting Pronouncements--Statement of Financial Accounting
Standards No. 123(R)" above, the Company is required to use the fair value
accounting method for stock-based employee compensation beginning in the first
quarter of fiscal year 2007.

Option issued for service

During the April 30, 2006 fiscal year the Company entered into an agreement with
a consultant to issue an option to purchase 20,000 common shares in exchange for
services to be performed with a 12 month consecutive vesting period. The
consultant died prior to the 12 month performance and vesting period voiding the
terms of the option agreement. No expense was recognized during the 2006 fiscal
year related to this non-employee option agreement.


Warrants Issued or Committed to Investors and Placement Agents in Private
Placements

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
warrants to purchase 8,932,618, 11,032,189, and 28,975,914 shares of common
stock to investors and placement agents in private placements. In conjunction
with the Company's special warrant offer, these investors exercised warrants to
purchase 11,454,112 common shares and forfeited warrants to purchase an
additional 6,423,337 common shares as of April 30, 2006.

Warrants Forfeited with Special Warrant Offer

In December 2005 the Company's Board of Directors approved a special warrant
offer whereby investors were allowed to exercise their existing warrants at
greatly reduced prices. This offer resulted in the exercise of warrants to
purchase 11,454,112 common shares at an average price of $0.14 per shares, see
"Note 20 - Common Stock". The terms of the special warrant offer required
participants to forfeit unexercised warrants to purchase common stock equal to
the number of shares they purchased to the extent of their remaining warrant
balances. In conjunction with the special warrant offer, participants forfeited
warrants to purchase 6,423,337 common shares of which warrants to purchase
747,036 common shares had previously been issued as a penalty due to the
Company's inability to file an effective registration statement, see "Note 19 -
Commitment and Contingencies, Penalty Securities".

Warrants Issued or Committed for Services Rendered

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
warrants to purchase 157,179, 100,000 and 1,435,408 shares of common stock,
respectively, for services rendered. The warrants were valued at $42,362,
$38,573 and $1,018,397, respectively, which is the fair value as determined by
the Black-Scholes option pricing model. Warrants issued in the current period to
purchased 77,179 common shares were issued in conjunction with common stock to
settle accounts payable for prior legal services. As the valuation of the common
stock more than offset the accounts payable balance, the $22,531 value of the
warrants was expensed in the current period. A warrant was issued in the current
period to purchase 50,000 common shares valued $11,369 for Edgar filing services
and recorded as an expense in the year ended April 30, 2006.

Details of the warrants issued for services performed or to be performed during
the years ended April 30, 2006 are as follows:

<TABLE>
<CAPTION>
<S>                                                <C>                   <C>                      <C>
       No. of shares                               50,000                77,179                   30,000
       Grant                                     June 2005             June 2005                June 2005
       Term                                       3 Years               5 Years                  3 Years
       Compensation value                         $11,369               $22,531                   $8,463
       Stock price on commitment                   $0.65                 $0.70                    $0.70
       Exercise price                              $0.75                 $0.65                    $0.68
       Expected life                             1.0 years             1.0 years                1.0 years
       Risk-free rate of return                    3.51 %                3.61 %                   3.61 %
       Expected annual volatility                   100%                  100%                     100%
       Annual rate of dividends                      0%                    0%                       0%
       Services provided                     Edgar filing fees      Prior legal fees      Manufacturing planning
</TABLE>


Warrants Issued or Committed as Penalty for Late Registration

During the years ended April 30, 2006 and 2005 and the period from August 21,
1995 (inception) to April 30, 2006, the Company issued or committed to issue
warrants to purchase 3,695,245, 2,454,334, and 6,351,323 shares of common stock,
respectively, as a penalty with a fair value of $737,299, $1,287,746 and
$2,256,327, respectively, for the late registration of the Company's common
stock. The fair values of the warrants were determined using the Black-Scholes
model. See "Note 19 - Commitments and Contingencies, Penalty Securities".


                                     -103-
<PAGE>

Warrants with Cashless Rights as Penalty for Late Registration

Due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines, as of April 30, 2006, outstanding
warrants to purchase up to 4,801,291may be purchased by cashless exercise. If
the closing price for the Company's shares is greater than the exercise price,
then the holders may exercise the warrant and receive shares with no proceeds to
the Company. The number of shares to be received by the holders upon cashless
exercise is determined by the spread between the closing price of the Company's
common stock on the exercise date and the exercise price of the warrant, but
would not exceed the number of the underlying shares to the warrant so
exercised.

NOTE 22 - INCOME TAXES

The components of the deferred income tax assets (liabilities) at April 30, 2006
were as follows:

Deferred tax assets
 Equity compensation                 $   713,000
 Payroll tax expense                      93,000
 Net operating loss carry forwards     5,350,000
                                     -----------
   Total deferred tax assets           6,156,000

Deferred tax liabilities
 Depreciation                           (121,000)
                                     -----------
                                       6,035,000

Less valuation allowance              (6,035,000)
                                     -----------
   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, 2006 and 2005:

                                                  2006            2005
                                         -------------   -------------
Current
       Federal                           $          --   $          --
       State                                       800             800
                                         -------------   -------------
                                                   800             800
                                         -------------   -------------

Deferred
       Federal                               5,100,000       5,551,268
       State                                   935,000       1,017,732
                                         -------------   -------------
                                             6,035,000       6,569,000
                                         -------------   -------------


       Less: valuation allowance             6,035,800       6,569,800
                                            (6,035,000)     (6,569,000)

              Provision for income tax   $         800   $         800
                                         =============   =============

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,
2006 and 2005 as follows:

                                                         2006            2005
                                                -------------   -------------
Statutory regular federal income benefit rate         34.00 %           34.00%
State taxes                                              8.84            8.84
Change in valuation allowance                          (42.85)         (42.85)
                                                -------------   -------------

       Total                                         (0.01) %           (0.01)%
                                                =============   =============


                                     -104-
<PAGE>

As of April 30, 2006, the Company had net operating loss carry forwards for
federal and state income tax purposes of approximately $21,940,000 which starts
expiring in 2010 through 2025. 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 23 - SUBSEQUENT EVENTS

Series B Convertible Preferred Financing

In June and August 2006, the Company entered into Series B Convertible Preferred
Stock Purchase Agreements (the "Agreements") with select accredited investors
(the "Investors") for the sale of Series B Convertible Preferred Stock, par
value $0.001 per share (the "Series B Preferred Shares") and Series B-1 Warrants
and Series B-2 Warrants (collectively, the "Warrants"). As of the date of this
Report, Investors subscribed a total of $2,196,403 of the offering, and the
Company has issued 219.64 of Series B Preferred Shares, Series B-1 Warrants for
the purchase of up to 2,196,403 shares of common stock and Series B-2 Warrants
for the purchase of up to 1,464,269 shares of common stock. Less commission and
financing expenses, and including the automatic exchange of certain outstanding
convertible notes payable plus accrued interest in the amount of $552,653, the
Company received a total of $1,262,617 in net proceeds.

The Series B Preferred Shares are convertible into shares of common stock of the
Company at $0.30 per share (the "Conversion Price"). The Conversion Price is
subject to downward adjustments if the event the Company issues or sells more
common stock, however are not required to make any adjustment to the Conversion
Price upon (i) issuances of any additional shares of common stock and warrants
therefore in connection with a merger, acquisition or consolidation, (ii)
issuances of additional shares of common stock pursuant to a bona fide firm
underwritten public offering of securities, (iii) any issuances of warrants to
purchase shares of common stock issued pursuant to the Agreement, (iv) issuances
of securities pursuant to the conversion or exercise of convertible or
exercisable securities issued or outstanding on or prior to the date hereof or
issued pursuant to the Agreement, (v) issuances of warrants to the placement
agent for the transactions contemplated by the Agreement or in connection with
other financial services rendered to the Company, (vi) the payments of any
dividends on the Series B Preferred Stock, (vii) issuances of additional shares
of common stock in connection with license agreements, joint ventures and other
strategic partnering arrangements so long as such issuances are not for the
primary purpose of raising capital, and (viii) issuances of common stock or the
issuance or grants of options to purchase common stock pursuant to the Company's
stock option plans and employee stock purchase plans outstanding on the date
hereof.

The Series B Preferred Shares have a liquidation preference of $10,000 per
share. The Series B Holders are entitled to receive, out of any assets at the
time legally available thereof and as declared by the Board of Directors,
dividends at the rate of 8% per share per annum until January 1, 2007, at which
time this rate will increase to 10%. If the Company has an effective
registration statement for the sale of the common shares to be received in
conversion of the Series B Preferred Shares and the closing bid price of the
Company's traded shares exceeds $1.00 for a period of 20 consecutive trading
days, the Series B Preferred Shares will automatically convert into shares of
common stock of the Company.

The Series B-1 Warrants and Series B-2 Warrants are exercisable until June 30,
2011 and have exercise prices of $0.45 and $0.60, respectively the "Warrant
Prices"). The Warrants provide the Investors with ratchet rights, whereby the
exercise price of the Warrants will be reduced to equal the price of any new
shares (or common share equivalents) sold below the Warrant Prices. Further,
commencing one (1) year following the date of issuance, if (i) the traded market
price of the shares of common stock of the Company is greater than the Warrant
Price and (ii) a registration statement under the Securities Act provided for
the resale of the shares underlying the Warrants is not then in effect, the
Investors may exercise the Warrants by cashless exercise.

Until approximately December 31, 2007, the Investors have a right of first
refusal to participate in certain subsequent financings of the Company. This
right of first refusal is not triggered by issuances of shares of common stock
in connection with mergers, strategic partnering arrangements, or in bona fide
firm underwritten public offerings of our securities.

In connection with this Agreement, on June 30, 2006, the Company also entered
into a Registration Rights Agreement with the Investors. Under the Registration
Rights Agreement, the Company has committed to file, within 45 days following
the closing date, a "resale" registration statement covering all the shares of
common stock issuable upon conversion of the Series B Preferred Shares and any
dividends payable thereon and the shares of common stock issuable upon exercise
of Warrants and use its best efforts to have the registration statement declared
effective within 120 days following the closing date. If the Company fails to
register all shares issuable pursuant to this transaction within the required
time, the Company must pay the Investors 2.0% for the first calendar month and
1.0% per calendar month thereafter (and not exceed 10%) of the Investor's
initial investment in the Preferred Stock until cured.


                                     -105-
<PAGE>

Under the Agreement, the Company is initially required to reserve a number of
shares of its common stock sufficient to effect the conversion of all the Series
B Preferred Shares and exercise of the outstanding Warrants. However, the
Agreement requires the Company to obtain shareholder approval by October 31,
2006 for the filing of an amendment to its Certificate of Incorporation to
increase the number of the Company's authorized shares of common stock
sufficient for it to reserve a number of shares of common stock equal to 120% of
the number of shares necessary to effect the conversion of the Series B
Preferred Shares and the exercise of the Warrants. In the event the Company has
not obtained the approval of its stockholders at such annual meeting, the
Company must pay the Investors 2.0% for the first calendar month and 1.0% per
calendar month thereafter (and not exceed 10%) of the Investor's initial
investment in the Preferred Stock until cured.

Convertible Promissory Notes

In May and June 2006, the Company issued convertible notes payable ("CNP") to
various investors in exchange for cash of $180,000, which bear interest at 10%
per annum and are due one year from the date of issuance. The CNP were issued
with detachable warrants to purchase 180,000 shares of common stock with a three
year term at an exercise price of $0.45 per share. The holders have the option
to convert the principal and accrued interest into shares of common stock at a
conversion price of $0.30 per share at any time until the later of the
prepayment date or the maturity date. The CNP were secured against certain
receivables of the Company and is payable upon their receipt. In July 2006, the
Company repaid $80,000 of the CNP together with $657 of accrued interest and in
August 2006, the Company repaid $100,000 of the CNP together with $2,383 of
accrued interest

In May and June 2006, the Company issued CNP to investors in exchange for cash
of $135,000, which bear interest at 10% per annum and are due in May and June
2007. The CNP were issued with detachable warrants to purchase 60,000 shares of
common stock with a three year term at an exercise price of $0.45 per share. In
June 2006, the CNP were automatically exchanged into the Company's Series B
Convertible Preferred Offering at a 10% discount pursuant to the terms of the
CNP.

Promissory Notes

In June 2006, the Company issued a promissory note for $150,000 to an investor
in exchange for cash of $150,000, due June 2007. The note was issued with a
detachable warrant to purchase 150,000 shares of common stock with a three year
term at an exercise price of $0.45 per share. In June 2006, the promissory note
was exchanged into the Company's Series B Convertible Preferred Offering.

Stock for Services

In June 2006, the Company committed to issue 125,000 restricted shares of common
stock to an engineering consultant in settlement for $52,500 in consulting
services earned from February 15, 2006 to May 30, 2006.

In June 2006, the Company committed to issue 25,000 unregistered shares of
common stock to members of its Board of Directors for their attendance at
scheduled meetings.

Penalty Securities

In August 2006, the Company committed to issue 12,132 shares and warrants to
purchase 191,669 shares at various exercise prices between $0.45 and $1.75, to
various holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In July 2006, the Company committed to issue 12,132 shares and warrants to
purchase 188,853 shares at various exercise prices between $0.45 and $1.75, to
various holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In June 2006, the Company committed to issue 12,132 Shares and warrants to
purchase 186,038 Shares at various exercise prices between $0.45 and $1.75, to
various holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In May 2006, the Company committed to issue 12,132 Shares and warrants to
purchase 183,225 Shares, of which a portion of the warrant values was accrued in
April 2006, at various exercise prices between $0.45 and $1.75, to various
holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

Warrants Becoming Cashless as Penalty for Late Registration

Due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines, in May through June 2006,
outstanding warrants to purchase up to 869,315 became exercisable via cashless
exercise. If the closing price for the Company's shares is greater than the
exercise price, then the holders may exercise the warrant and receive shares
with no proceeds to the Company. The number of shares to be received by the
holders upon cashless exercise is determined by the spread between the closing
price of the Company's common stock on the exercise date and the exercise price
of the warrant, but would not exceed the number of the underlying shares to the
warrant so exercised.


                                     -106-
<PAGE>

Purchase and Sales Agreements

In May 2006, the Company entered into an Equipment Sales Agreement with a major
transit authority in connection with the purchase of a four-year maintenance and
support services program for an aggregate sum of $200,000. During the first
year, the Company will provide the buyer with any upgrades made to the hardware
and software delivered as part of its cooperative sales program. Accordingly,
the Company received Purchase Order No. 4500327526 from the Commonwealth of
Pennsylvania in the amount of $200,000 and then full payment in August 2006.

Employment Agreements

In June 2006, the Company entered into an employment agreement with its CAD
Manager. Major commitments included in the agreement are as follows:

      o     The Company must pay him an annual base salary of $50,000 per year
            effective July 1, 2006.
      o     The Company will grant him an employee stock option to purchase
            25,000 shares of common stock upon acceptance of the agreement, and
            on each anniversary thereafter, at the market price on each issuance
            date with equal vesting on a bi-annual basis
      o     The Company will provide him with two (2) weeks paid vacation as
            well as comprehensive family medical and dental healthcare benefits.

Consultancy Agreements and Contracts

In May 2006, the Company entered into a reseller agreement with a leading
governmental sales organization related to non-exclusive rights to market and
resell the Company's products and services to federal customers, including the
U.S. Department of Energy, which provides a reseller discount of up to 15%. The
reseller agreement expires in one year.

In June 2006, the Company entered into a contract with a consultant for Edgar
filing services in which it prepays one year of services with 180,000 restricted
shares of its common stock. Pursuant to the agreement, the Company issued the
service provider a three year warrant to purchase 50,000 shares of its common
stock with an exercise price of $0.60 per share, as the shares had not been
filed for registration on or before August 1, 2006.

In June 2006, the Company entered into a letter agreement with a sales
consultant to provide advisory services as to business strategy, new
product/innovation development, and sales and marketing. The Company will pay
the consultant a number of shares of common stock of the Company equal to $5,000
per month. With respect to any sales revenue received by the Company as a result
of the direct efforts of the consultant, the Company will pay the consultant a
sales commission of 15%, payable in the form of cash or shares of common stock
of the Company. The agreement may be terminated by any party with 30 days
written notice to the other.

In July 2006, the Company entered into a retention agreement with legal counsel,
in connection with the litigation of employment matters and other claims alleged
by the Company's former chief executive officer, including enforcement of
confidentiality agreements and other contract matters as the Company may request
from time to time. A deposit in the amount of $10,000 was made against future
services to be rendered.

In July 2006, the Company executed a professional services agreement with a
professional legal and financial staffing corporation. Two accounting
professionals and one legal professional are currently providing consulting
services to us from this corporation. Pursuant to the agreement we are to pay
the staffing corporation hourly payments for services in the amount of $70 to
$130 per hour, plus overtime, to be invoiced and paid on a weekly basis for the
duration of the assignment. Any balances due for services rendered and remaining
outstanding after thirty (30) days of the invoice date shall incur late charges
at the greater of (i) 1 1/2% per month or (ii) the highest rate allowable by
law.

In July 2006, the Company entered into a reseller agreement with a leading
reseller related to non-exclusive rights to market and resell the Company's
products and services to local, state and federal customers, as well as private
security companies, and provides for a sales commission of 10%. The reseller
agreement expires in one year.

In August 2006, the Company entered into an agreement with a Washington, D.C.
based government relations firm to manage our interface with our Government
customers and Congressional funding counterparts, as well as work with us to
identify federal opportunities. Pursuant to the agreement, the Company will pay
a flat monthly fee in the amount of $6,000 from September 1, 2006 through
December 31, 2006, increasing to $7,000 per month from January 1, 2007 through
April 30, 2007, and increasing to $8,000 per month through December 31, 2007,
plus other out-of-pocket expenses. Either party may cancel the agreement at the
end of each month.


                                     -107-
<PAGE>

Financing Agreements

In June 2006, in connection with the renewal of its Directors and Officers
insurance policy, the Company entered into a finance agreement for the payment
of $105,302 in insurance premiums over a 10 month period in equal installments
of 9,110. Total remaining payments under the finance agreement as of July 31,
2006 are $81,986.

In June 2006, in connection with the renewal of its commercial general liability
policy, the Company entered into a finance agreement for the payment of $14,062
in insurance premiums. As of July 31, 2006, total remaining payments under the
finance agreement are $9,324, payable over 8 months in equal installments of
$1,165.

In June 2006, in connection with the renewal of its workman's compensation
policy, the Company entered into a finance agreement for the payment of $32,128
in insurance premiums. As of July 31, 2006, total remaining payments under the
finance agreement are $22,500, payable over 9 months in equal installments of
over 8 month period in equal installments of $2,843.

Settlement Agreements

On June 9, 2006, the Company entered into a Confidential Settlement Agreement
and Mutual Release with a former consultant, Yeffet Security Consultants, Inc.
("YSCI"), which provides for a mutual reconciliation of disputes. As part of the
Settlement Agreement, YSCI released the Company from all claims to recover the
$449,540.91 and forfeited its options to purchase up to 1,000,000 shares of our
common stock. Pursuant to the Settlement Agreement, the Company made a cash
payment of $27,000 and is obligated to make additional cash payments in the
amount of $36,541 representing accrued and unpaid services and expenses incurred
in 2003, and $153,000. The remaining cash payments are due 150 days following
the execution of the Settlement Agreement together with simple interest of 8%
per annum on any unpaid balance accruing from the execution of the Settlement
Agreement until full payment, provided that the Company has an additional
thirty-day cure period to pay this debt if needed. The Company is also obligated
to issue 775,000 shares (the "Settlement Shares") of its common stock to YSCI
within 60 days of the execution of the Settlement Agreement. In the event, the
Company breaches its obligations of the Settlement Agreement relating to the
payment of money or the issuance of shares, YSCI, after providing written notice
and five business days to cure any such breach, may have the arbitrator enter a
judgment for the unpaid balance of the cash payments plus the cash value of any
undelivered stock. For the year ended April 30, 2006, in connection with this
settlement, we recognized an expense of $471,500 in our statement of operations.

In November 2005, a claim was filed against the Company with the District Court
of Orange County, California by SBI-USA ("SBI"). SBI is seeking collection of a
fee in the amount $50,000 allegedly owed to it for financial advisory services
purported to have been provided to the Company during the fiscal year ended
2003. The $50,000 fee was recorded as a contingent liability in 2004. In July
2006, the Company agreed to mediation and entered into settlement discussions to
avoid further litigation costs. On September 6, 2006, the Company entered into a
Settlement Agreement and Mutual Release with SBI. As part of the Settlement
Agreement, SBI agreed to cause the lawsuit to be dismissed and both parties
agreed to release each other from any and all other claims each party might have
against the other. Pursuant to the terms of the Settlement Agreement, the
Company is required to pay SBI payments in the aggregate of $35,000. As of date,
the Company has paid $8,750 and is required to pay SBI monthly payments of
$2,000 each month with a lump sum payment due by December 29, 2006 in the amount
of $20,250. In the event the Company fails to make an installment payment by the
required date, the Company has a ten-day period to cure. Should the Company not
make the payment within the cure period, SBI would be entitled to an entry of
judgment in its favor and against us in the amount of $60,000. For the year
ended April 30, 2006, to reflect the actual settlement amount, we adjusted the
accrual recorded in the prior year period to $35,000.

In December 2005, we were served with regard to a Complaint filed against us by
a former consultant with the California Labor Commissioner regarding purported
unpaid wages in the amount of $20,000. A hearing before the California Labor
Commissioner was held in May 2006, during which the consultant agreed to
withdraw the Complaint and release us from any and all other claims for a cash
settlement payment in the amount of $15,000.

In December 2005, a claim was filed against the Company with the County Court of
Dallas County by Lockwood Greene Engineers Inc. ("LGE") (Cause No.
cc-05-12059-b), in which LGE sought collection of a fee in the amount of
$44,707.50 allegedly owed to it for engineering and construction services
purported to have been provided to us during the fiscal year ended 2005. On July
20, 2006, the Company entered into a Confidential Settlement Agreement (the
"Settlement Agreement") with CH2M Hill Lockwood Greene as the successor to LGE.
As part of the Settlement Agreement, LGE agreed to immediately cause the lawsuit
to be dismissed and both parties released each other from any and all other
claims each party might have against the other. Pursuant to the terms of the
Settlement Agreement, the Company is required to pay LGE an aggregate of $40,000
in four installments of $10,000, due respectively on July 21, 2006, October 20,
2006, January 19, 2007 and April 20, 2007. In the event the Company fails to
make an installment payment by the required date, it has a ten-day period to
cure. In the event the Company does not make the payment within the cure period,
LGE would be entitled to refile the lawsuit seeking payment for the unpaid
amounts due under the Settlement Agreement, plus any accrued legal fees and
interest as allowed by law from the date the unpaid installment was due. For the
year ended April 30, 2006, in connection with this settlement, we recognized an
expense of $40,000 in our statement of operations.

In April 2005, a claim was filed against the Company with the 101st Judicial
District Court, Dallas County, Texas by Data Discovery Inc. ("DDI") (Civil
Action No. 3-05-CV-0949-M). DDI, representing one party of a dissolved
partnership, is seeking the collection on behalf of the partnership of $107,300
allegedly owed for services purported to have been fully-provided to the
Company. The Company has engaged local counsel and filed on May 10, 2005, a
Notice of Removal to move the case to federal court, and a Motion for Dismissal.
In July 2005, the District Court delivered a Memorandum Opinion and Order
granting our Motion for Dismissal and ordered that within twenty days DDI amend
its suit to the satisfaction of the District Court, or the order will become a
dismissal with prejudice, which would bar DDI from filing any other suit against
the Company related to the matters within its claim. In August 2005, DDI filed a
new lawsuit on behalf of the partnership which is expected to go before the
Court following an appropriate period for discovery . In August 2006, we entered
into settlement discussions with DDI and in September 2006 DDI caused the
lawsuit to be dismissed without prejudice. There can be no assurance that the
claims DDI asserted against us will not be resuscitated at some time in the
future.


                                     -108-
<PAGE>

Legal Actions

On July 27, 2006, the Company filed a complaint for breach of contract against
its former CEO, Dr. Bogdan C. Maglich with the Orange County Superior Court,
Santa Ana, California, Case No. 06CC08456. The complaint alleged, among other
things, that Dr. Maglich had violated his employee confidentiality agreement.
The Company's complaint sought injunctive relief, unspecified damages according
to proof, interest, and attorneys' fees. On August 1, 2006, the Court granted an
ex parte Temporary Restraining Order and Order to Show Cause Why Preliminary
Injunction Should Not Be Issued ("TRO"). The TRO provided that pending hearing
on the Order to Show Cause, which the court set for August 22, 2006, Dr.
Maglich, his agents, assigns, and all those acting in concert with him were
restrained and enjoined from: (1) "violating the Confidentiality and Assignment
of Inventions Agreement dated October 7, 2003;" and (2) "violating the promise
contained in your letter agreement with plaintiff dated April 12, 2006 that you
`hereby agree to be bound by the Cure Statements' of your then attorney, . .
..attached thereto, that `Dr. Maglich agrees to refrain from disseminating any
information that the Board [of Directors of Plaintiff HiEnergy Technologies,
Inc.] believes may be confidential inside information without the Board's
approval, and agrees to refrain from disseminating any statements about the
Company without the Board's approval." The order continued: "Notwithstanding
anything to the contrary herein, defendant is not restrained from making
private, bona fide complaints to regulators, police, or prosecutors about the
company." As of the date of this report, due to limitations on the removal of
directors by the Board under applicable corporate law, Dr. Maglich currently
continues to serve as a director.

On August 22, 2006, after oral argument of counsel, the court invited the
Company's counsel to submit a proposed preliminary injunction to enjoin
disclosure of specific categories of Company trade secrets/confidential
information. The court declined to issue a preliminary injunction on terms as
broad as set forth in the TRO or based upon Dr. Maglich's letter dated April 12,
2006. The Court stated it would hold the proposed injunction for ten days after
submission pending receipt of objections by Dr. Maglich's counsel.

On August 21, 2006, Dr. Maglich sent to one or more investors of the Company a
copy of a purported complaint, dated August 21, 2006, by Dr. Maglich against the
Company and its CEO, Roger Spillmann. The purported complaint claims, among
other things, that the Orange County, California Superior Court had been asked
by the Company to override federal rules, regulations, or statutes. The
complaint appears to be largely a rehash of Dr. Maglich's prior allegations plus
a new allegation, as stated above, that the state court had been asked to
disregard federal law. The Company denies the allegations and contends that (i)
the state court has been acting lawfully in restraining Dr. Maglich's improper
conduct.; (ii) Dr. Maglich's communications with investors were in violation of
the TRO; (iii) the allegations are frivolous and are brought by a former
disgruntled employee in bad faith; and (iv) Dr. Maglich is involved in a
vendetta against the Company for his own purposes. The Company maintains that is
committed to full compliance with all SEC and other state and federal rules,
regulations, and statutes.

On January 24, 2006, personal legal counsel for the Company's former Chairman,
Dr. Bogdan Maglich, submitted a memorandum to the Company's Board of Directors
alleging that, despite the payment by the Company to Dr. Maglich of salary,
bonuses, expenses and other benefits, some of the provisions of his employment
agreement had not been implemented, resulting in an adverse financial impact to
Dr. Maglich personally. Dr. Maglich's legal counsel proposed to settle this
claim for (i) cash or a demand note in the amount of $66,569, (ii) $188,271
worth of common stock registered for sale, and (iii) $232,785 of restricted
common stock. On January 25, 2006, Dr. Maglich's personal legal counsel met with
the Company's Board during which meeting it was agreed that Dr. Maglich and the
Company would attempt to settle the claims. However, in his cross-complaint, Dr.
Maglich now claims that the memorandum concluded that the Company owed him
$487,000 in unpaid benefits and that the Company "orally agreed" that it owed
him this amount. The Company denies such allegation.

On February 9, 2006, Dr. Maglich's personal legal counsel sent a letter to the
Board stating that the failure to accede to Dr. Maglich's demands and provide
him with certain other requested benefits, could be viewed as a constructive
termination and entitle Dr. Maglich to two years severance pay pursuant to his
employment agreement and "result in other significant effects on the Company."
On February 17, 2006, the Company's Board of Directors removed Dr. Bogdan
Maglich from his position as our Chief Executive Officer and suspended him from
his duties as Chairman of the Board, Treasurer and Chief Scientific Officer.

Effective April 18, 2006, the Company terminated Dr. Maglich as its Chairman and
Chief Scientist in accordance with Section 10(a) of his Employment Agreement,
which stated that the Company could terminate his employment at any time upon
gross negligence or willful malfeasance by Dr. Maglich in the material
performance of his duties and responsibilities to the Company under the
agreement. Dr. Maglich claims that his suspension and subsequent termination as
an employee of the Company was the result of age discrimination and national
origin discrimination. Dr. Maglich also claims that he is entitled to $416,000
plus interest in severance payments under his Employment Agreement. However, the
signed original version of the Employment Agreement in the Company's files
stated that Dr. Maglich was entitled to severance pay only in the event of a
termination by us "without cause."


                                     -109-
<PAGE>

On August 18, 2006, the Company was also served with a cross-complaint by Dr.
Maglich filed on July 27, 2006 with the Superior Court of California, County of
Orange, under case number 06CC084586. The cross-complaint alleges breach of oral
and written contracts, age discrimination and national origin discrimination,
retaliation for age and national origin discrimination, violations the Ralph and
Bane Civil Rights Act, withholding corporate records from Dr. Maglich and
withholding Dr. Maglich's personal property. Dr. Maglich seeks damages in the
amount of $903,000 plus interest for alleged breach of contracts, a $25,000
civil penalty for alleged civil rights violations, punitive damages, legal
costs, and unspecified cash damages for lost wages and benefits and for damages
resulting form emotional distress, mental anguish and pain and suffering. The
Company believes Dr. Maglich's claims are without merit and intends to assert a
vigorous defense. The costs of defending against the cross-complaint could be
substantial; however the Company is unable to predict an exact amount, or even a
meaningful estimate, at this time.

In August 2006, the Company was served with a Summons and Complaint by a former
employee providing services to an affiliate of the Company's former CEO, filed
on July 3, 2006 in the Superior Court of California, County of Orange. The
Complaint names Dr. Bogdan Maglich, his affiliate, Maglich Family Holdings,
Inc., and HiEnergy Technologies, as defendants, and plaintiff is seeking
compensatory damages, exemplary damages, and punitive damages due to alleged
intentional and negligent infliction of emotional distress for purported false
and defamatory remarks made by Dr. Maglich about the plaintiff in a response to
a request for information by the California Employment Development Department
with regard to a claim for benefits. The Company and its counsel intend to
respond to the allegations in any further pleading with appropriate challenges
to its legal sufficiency to state a claim upon which relief may be granted. The
costs of defending against the Complaint could be substantial; however the
Company is unable to predict an exact amount, or even a meaningful estimate, at
this time.



                                     -110-
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES


Disclosure controls and procedures are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure.


As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as of April 30, 2006, being the last day of our most recently
completed fiscal year. This evaluation was carried out by Roger W.A. Spillmann
in his capacity as our Chief Executive Officer and Treasurer. Based upon that
evaluation, Roger Spillmann concluded that our disclosure controls and
procedures were not effective in meeting our requirements as to the disclosure
of material information in our reports filed under the Exchange Act. However,
two areas of weakness were identified in the evaluation: (i) a lack of
segregation of duties due to understaffing and (ii) a lack of a more systematic
and formal approach to the conduct of our corporate, financial and business
affairs. These weaknesses, which we continue to experience, are primarily the
result of a general lack of capital and human resources dedicated to make the
improvements necessary for timelier reporting and disclosure with less reliance
on internal auditing. Currently, Roger Spillmann serves simultaneously as our
Chief Executive Officer, President, Treasurer and Secretary. In order to further
segregate the duties of our officer positions, we are attempting to recruit
additional officers as well as other employees experienced with the
implementation and evaluation of disclosure controls and procedures for timely
financial reporting, including a full-time controller. Currently, we employ the
use of accounting consultants to serve some of these roles. We can offer no
assurance that we will successfully recruit such employees, as our ability to do
so is limited by our available capital resources.


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with Roger Spillmann's evaluation of our disclosure controls and
procedures as of April 30, 2006, as described above, Mr. Spillmann also
determined that during our most recent fiscal quarter, there was no change in
our internal control over financial reporting (as defined in Rule 13a-15(f) or
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.


ITEM 8A OTHER EVENTS

On February 17, 2006 our Board of Directors amended our Bylaws, adding language
that allows the Board to suspend officers and appoint interim officers and
providing that officers of the Company shall have such functions as may be
normally appurtenant to the duties of such positions, subject to such other
functions and duties as may be determined by the Board.



                                     -111-
<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, 2006 are as
follows:

<TABLE>
<CAPTION>
  ---------------------------------------------------- --------- ----------------------------------------------------
                         NAME                            AGE                              POSITION


  ---------------------------------------------------- --------- ----------------------------------------------------
<S>                                                    <C>
  Roger W.A. Spillmann                                 35        Chief Executive Officer, President, Secretary and
                                                                 Treasurer; Director
  ---------------------------------------------------- --------- ----------------------------------------------------
  William A. Nitze                                     63        Chairman of the Board; Director
  ---------------------------------------------------- --------- ----------------------------------------------------
  Peter J. Le Beau                                     59        Vice Chairman of the Board; Director
  ---------------------------------------------------- --------- ----------------------------------------------------
  David R. Baker                                       74        Director
  ---------------------------------------------------- --------- ----------------------------------------------------
  Colonel William J. Lacey, Jr.                        67        Director
  ---------------------------------------------------- --------- ----------------------------------------------------
  Dr. Bogdan C. Maglich                                77        Director
  ---------------------------------------------------- --------- ----------------------------------------------------
</TABLE>

Mr. Spillmann was appointed Vice President and Corporate Secretary of HiEnergy
Technologies on January 11, 2005. He became our President and Chief Operating
Officer on January 5, 2006, our Chief Executive Officer and a member of our
Board of Directors on February 17, 2006, and our Treasurer on March 15, 2006. He
is a member of the Marketing and Business Development and the Finance
Committees. Our employment agreement with Mr. Spillmann remains in effect and
has not been modified.

Mr. Nitze was appointed as a director of HiEnergy Technologies on August 5,
2005, became Interim Chairman of the Board of Director on February 17, 2006, and
Chairman of the Board of Directors on June 5, 2006. He is a member of the Legal
Affairs and the Marketing and Business Development Committees.

Mr. Le Beau was appointed as a director of HiEnergy Technologies on August 5,
2005 and became Vice Chairman of the Board of Directors on February 17, 2006. He
is Chairman of the Audit and the Marketing and Business Development Committees
and a member of the Finance Committee.

Mr. Baker was appointed as a director of HiEnergy Technologies on February 27,
2003. He is Chairman of the Legal Affairs, Finance and Compensation Committees
and a member of the Audit Committee.

Mr. Lacey was appointed as a director of HiEnergy Technologies on July 21, 2004.
He resigned from the Board of Directors on October 13, 2005 and was re-appointed
to the Board of Directors on February 17, 2006. Mr. Lacey is a member of the
Compensation, Marketing and Business Development and Nominating Committees.

Dr. Maglich was appointed Chairman and Chief Scientific Officer of HiEnergy
Technologies and as a member of our Board of Directors on April 25, 2002. He was
appointed Chief Executive Officer, President and Treasurer of HiEnergy
Technologies effective as of March 2003. Dr. Maglich resigned as our President
on January 5, 2006. He was removed as our Chief Executive Officer and a member
of the Board of Directors' Finance Committee, and his duties as our Chairman of
the Board, Treasurer and Chief Scientific Officer were suspended on February 17,
2006. He was replaced as our Treasurer on March 15, 2006, and was removed as our
Chairman of the Board and Chief Scientific Officer on April 18, 2006. Dr.
Maglich's Employment Agreement with us was terminated effective April 28, 2006.

Mr. Harb Al-Zuhair was appointed to the Board of Directors on April 25, 2002. He
resigned from our Board of Directors including as a member of its Compensation
and Finance Committees, on June 21, 2006.

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.



                                     -112-
<PAGE>

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.

ROGER W.A. SPILLMANN

Mr. Spillmann has served as HiEnergy Technologies' Vice President from January
2005 to January 2006, Corporate Secretary since January 2005, our President and
Chief Operating Officer since January 2006, our Chief Executive Officer and a
member of our Board of Directors since February 2006, and our Treasurer since
March 2006. In these capacities, he focuses on corporate compliance and
governance, contract administration, investor relations, and capital strategy.
Prior to joining HiEnergy, Roger Spillmann provided financial and legal
consulting as an employee of Resources Connection, Inc. from July 2004 until his
appointment in January 2005. Prior to Resources Connection, he served as a
business development and financial services specialist with Empire Capital
Leasing, Inc. ("ECL"), where he focused on asset based financing, including
project finance, receivable financing, equipment leasing and related
securitizations (2003-2004). Prior to ECL, Mr. Spillmann was a Managing Director
and Partner of Harris, Hoover & Lewis, Inc. (HHL), a New York based middle
market financial advisory and investment banking boutique, and a member of its
Executive Committee, where he was responsible for strategic planning, affiliate
marketing, product research and outside capital relationships (2001-2003). Prior
to HHL, Mr. Spillmann was First Vice President of Investments, Director -
Special Accounts Group (SAG) with Prudential Securities in New York City,
specializing in advising corporations, institutions and high net-worth clients
on asset allocation, money management, estate and tax planning, equity risk
management and general investment strategies, and a Sales Analyst with the
Private Client Services Group at Banc of America Securities LLC (Montgomery
Securities), where he focused on corporate finance, equity derivatives, asset
management and corporate and venture services directed toward leading and
emerging technology companies (1997-2001). From March 1994 to 1997, Mr.
Spillmann was with the Cross Border Finance Group at Clifford Chance, Rogers &
Wells LLP, where he served as a corporate paralegal and assisted senior partners
and associates with the development and structuring of public and private debt
and equity transactions, project finance and M&A for governments, financial
institutions and corporations. Upon graduation in 1992, Mr. Spillmann was
recruited by Liz Claiborne, Inc, a Fortune 500 textile and clothing
manufacturer, with positions in its sales, production and manufacturing
divisions, as well as serving as Production Coordinator for the Knitwear
Division.

Roger Spillmann received a Bachelor of Arts from Dartmouth College in Hanover,
NH. He also attended the Universidad Federal do Rio de Janeiro, in Brazil, and
is fluent in Spanish and Portuguese. During his career, Mr. Spillmann has served
on the advisory boards of several private technology companies.

WILLIAM A. NITZE

Mr. Nitze, Chairman of our Board of Directors since June 2006, Interim Chairman
February 2006 through June 2006, Director since August 2005, and Chairman of our
subsidiary HiEnergy Defense, Inc. (since August 2003), has been Chairman of
GridPoint, Inc. since November 2003, and Chairman of Oceana Energy Systems since
March 2006. He was President of Gemstar Group, Inc. (Global Environmental Market
Solutions through Technology And Reform), from 2001 to 2005, which was founded
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
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.


                                     -113-
<PAGE>

PETER J. LE BEAU

Mr. Le Beau, the Vice Chairman of our Board of Directors, 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.

DAVID R. BAKER

Mr. Baker has been an attorney for over 50 years and has been Of Counsel to the
firm Haskell Slaughter Young & Rediker, LLC, of Birmingham and Montgomery,
Alabama and New York City, since February 2003. Since October 1993, Mr. Baker
has been a Retired Partner of the law firm of Jones Day from 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 a Bachelor of Philosophy from the University of Chicago, a
Bachelor of Arts from Birmingham-Southern College, and a Juris Doctor from
Harvard Law School. 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 to the
United Nations in New York. In addition, he serves as Chairman of the New York
Legislative Service and is a Life Trustee of Birmingham-Southern College.

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 re-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
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.

DR. BOGDAN C. MAGLICH

Dr. Maglich served as HiEnergy Technologies' President from March 2003 to
January 2006, as its Treasurer from March 2003 to March 2006, and as its
Chairman and Chief Scientific Officer from March 2003 to April 2006. During
those periods, he had primary responsibility for our business strategy and
development. Dr. Maglich resigned as our President on January 5, 2006, was
suspended form the duties of Chairman of the Board of Directors, Treasurer and
Chief Scientific Officer on February 17, 2006, was replaced as our Treasurer on
March 15, 2006, and was removed as our Chairman of the Board and Chief
Scientific Officer on April 18, 2006. 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. Since the termination of his
employment agreement with us, he has been pursuing new ventures independently
and is President of Centurion Enterprises Corporation.


                                     -114-
<PAGE>

As HiEnergy Technologies' Chief Scientific Officer since April 2002, Dr. Maglich
had 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 and 1993, and were
hosted by Advanced Physics Corporation. Currently, 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.


SIGNIFICANT EMPLOYEES

DR. ALEXANDER R. VAUCHER - CHIEF SCIENTIST

Dr. Alexander Vaucher joined HiEnergy in July 2004 as a Senior Scientist and
non-executive Vice President for Research & Development and assumed the title of
Chief Scientist in 2006. Dr. Vaucher brings with him more than 20 years
experience in software and product development and engineering with a focus on
new product development, project management, cost administration and technical
supervision. From 1997 to July 2004, he served as a Software Engineer and
manager with Northrop Grumman where he was responsible for managing a satellite
telemetry-data acquisition system, including continuous troubleshooting,
hardware and software upgrades and installation and changing system architecture
as needed. From 1985 to 1997, he served as Software Engineer and a systems
analyst with Hughes Aircraft Co. where he developed analysis and algorithms for
near field calibration of aperture array radar antennas, as well as theoretical
models and simulations of ground clutter return in airborne radar systems,
digital filters to simulate antenna commanding for various radar modes and
coordinate transformations between aircraft and antenna platform for radar
simulations. Other positions include Systems Engineer with Vitro Laboratories,
where he developed a mathematical model for an electrostatic gyro used on the
Trident navigation system and other projects, including digital time series
analysis, and filtering, and an Engineer with the U.S. Bureau of Mines.

Dr. Vaucher received a Ph.D. in Theoretical High Energy Physics and a Masters in
Physics from University of California - Riverside. He completed undergraduate
studies at the University of Minnesota, Minneapolis.

SEAN MOORE - VICE PRESIDENT, SALES & MARKETING

Sean C. Moore joined HiEnergy Technologies in May 2004 as Director of Sales &
Marketing and was promoted in December 2005 to Vice President. Prior to joining
HiEnergy Technologies, from June 2000 to May 2004, Mr. Moore served as Director
of the North American Business Unit of Signalbau Huber GMBH of Germany, where he
created and executed the product launch of the SecuScan - Under Vehicle
Explosives Inspection System, with more than 100 units sold to state, local and
federal security customers in the U.S. and abroad. Prior to his successful sales
career, Mr. Moore served as a Special Agent from June 1991 to May 2000 with the
United States Customs Service where he held numerous positions within the Office
of Field Operations and the Office of Investigations and awarded the
Commissioner's Unit Citation of Merit. With more than 200 letters of
commendation for strategic investigations and interdictions which led to major
arms, narcotics and currency seizures, Sean Moore brings to HiEnergy
Technologies significant operational and enforcement expertise within air, sea,
land and border operations as well as in homeland security. Mr. Moore graduated
with High Honors with a Bachelors Degree in Criminal Justice and International
Business from Northeastern University in Boston.

AUDIT AND FINANCE COMMITTEE

Mr. Le Beau serves as the Chairman of the Audit Committee and Mr. 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. Le Beau is an audit committee qualified financial expert.


                                     -115-
<PAGE>

The Audit Committee selects our independent auditors, reviews the results and
scope of the audit and other services provided by our independent auditors and
our financial statements for each quarterly period, and evaluates our internal
control functions.


SCIENTIFIC ADVISORY BOARD

Our Scientific Advisory Board consists of the following distinguished
scientists:

DR. WALTER OELERT

Dr. Oelert is Professor of Experimental Physics at the University of Bochum and
Leading Scientist at the Institute for Nuclear Physics at the Research Center
Juelich / Germany. He was also Leader of the European research collaboration
that synthesized, for the first time in the history of science, atoms of
antimatter, specifically, anti-hydrogen atoms. This monumental work, which
includes investigations on spectroscopy and gravitational force on antimatter
atoms, is still in progress at the CERN European Laboratory for Nuclear Particle
Research in Geneva, Switzerland.

Dr. Oelert's broad experience covers nuclear particle detection, high precision
nuclear instrumentation, laser applications in particle experiments, very
accurate measurements in particle collisions and resonances.

Dr. Oelert studied Physics at the Universities of Heidelberg and Hamburg,
obtained his doctorate at the University of Hamburg, and pursued post-doctoral
studies at the University of Pittsburgh before obtaining a professorship at the
University of Bochum. He was Visiting Professor at the University of Pittsburgh
in 1979.

In 1996, Dr. Oelert was elected "Outstanding Person of the Year" by Popular
Science Magazine-USA. He was awarded the "Merentibus Medal of the Jagellonien
University Cracow" and accepted as a "Member of the Polish Academy of Arts and
Sciences".

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
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.


                                     -116-
<PAGE>

Dr. Robert J. Macek retired in July 2003 from the Los Alamos National Laboratory
(LANL) where he had been a technical staff member for over 30 years. He has held
various technical management positions at Los Alamos including deputy group
leader, group leader, associate division leader, program manager, accelerator
facility manager (Proton Storage Ring, PSR), and, more recently, project leader
for two PSR upgrade projects. During his career 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 20 years 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 international interest and resulted in
collaboration with other laboratories to resolve the electron cloud instability
in high intensity proton rings. Laboratories in the collaborative efforts
include Argonne National Lab, Lawrence Berkeley National Laboratory, FermiLab,
Brookhaven National Lab, Princeton Plasma Physics Laboratory, Stanford Linear
Accelerator, and the SNS project at the OakRidge National Laboratory.

Dr. Macek joined TechSource Inc. in 2003 as a senior scientist after retirement
from LANL. He is currently Principal Investigator on a DOE Phase II Small
Business Innovative Research Award (SBIR) to develop an electron cloud detector
for use in quadrupole magnets at PSR. In addition, he is a guest scientist at
the Los Alamos Neutron Science Center (LANSCE) and continues beam physics
research on the PSR.

Dr. Macek received his Ph.D. in High Energy Physics from the California
Institute of Technology in Pasadena.

On August 27, 2003, our Board of Directors approved the issuance and grant of
non-qualified stock options to each of the four 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. In November 2005, we
engaged Dr. Walter Oelert, a research physicist, as a scientific advisor and
consultant and committed to pay him an annual consultancy fee of approximately
(euro) $11,750 in cash and/or common stock. Either party may terminate the
agreement at any time.


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-KSB any failure to comply therewith during the fiscal year ended April
30, 2006. During the Company's fiscal year ended April 30, 2006, Messrs. Baker,
Nitze, Al-Zuhair, Le Beau, Lacey and Dr. Maglich did not timely file Forms 4
for common stock and options issued to them by HiEnergy Technologies during the
past fiscal year and did not file a timely Form 5 to report these; but
subsequently Messrs. Baker, Nitze, Le Beau, Lacey filed a Form 5 that included
all transactions they were required to report. Mr. Obolensky did not file an
initial statement of beneficial ownership Form 4 for common stock and options
issued to him by HiEnergy Technologies for services to the board. As of date,
Dr. Maglich and Messrs. Al-Zuhair and Obolensky have not filed a timely Form 5
to report transactions. None of the foregoing directors or officers, other than
Dr. Maglich, disposed of any shares or derivatives in the open market during the
reporting period. During the reporting period, Dr. Maglich disposed of shares of
our common stock pursuant to a 10b5-1 trading plan as follows: 76,700 shares of
common stock disposed of between May 19, 2005 and May 23, 2005, at $.69 or $.70
per share; and 46,200 shares of our common stock disposed of between May 31,
2005 and June 1, 2005, at $.69 or $.70 per share. With the above exceptions, we
believe that, as of the date of this Report, all of the filing requirements
under Section 16(c) of the Securities Exchange Act of 1934, as amended, have
been satisfied by its executive officers, directors and beneficial owners of
more than 10% of our common stock. In making this statement, we have relied on
copies of the reporting forms received by us or on the written representations
from certain reporting persons that no Form 5 (Annual Statement of Changes in
Beneficial Ownership) was required to be filed under applicable rules of the
SEC.


                                     -117-
<PAGE>

CODE OF ETHICS: On May 28, 2003, the Board of Directors approved the adoption of
a Code of Ethics applicable to our Chief Executive Officer, Chief Financial
Officer, Controller, Treasurer and other senior-level persons responsible for
financial, control and accounting functions. Our Code of Ethics was filed on
August 8, 2003 as Exhibit 14.1 to our Annual Report on Form 10-KSB for the
fiscal year ended April 30, 2003, and is intended to comply with the
requirements of Item 406 of Regulation S-B. A copy of our Code of Ethics has
been posted on our corporate website
[http://www.hienergyinc.com/company/pdf/HiEnergy_Code_Ethics.pdf].



                                     -118-
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation that we have paid to our named
executive officers for each of our last three completed fiscal years ended. Dr.
Maglich served as Chairman, Chief Executive Officer, President, Treasurer and
Chief Scientific Officer of HiEnergy Microdevices during the fiscal years 2006,
2005 and 2004.

Mr. Spillmann was appointed Vice President and Corporate Secretary of HiEnergy
Technologies on January 11, 2005. Mr. Spillmann became our President and Chief
Operating Officer on January 5, 2006, our Chief Executive Officer and a member
of our Board of Directors on February 17, 2006, and our Treasurer on March 15,
2006.

<TABLE>
<CAPTION>
----------------------- ---------- ----------- --------- ----------- ------------------------------------------- -------------
                                                                               LONG TERM COMPENSATION
----------------------- ---------- ----------- --------- ----------- ------------------------------------------- -------------
                                         ANNUAL COMPNESATION                     AWARDS               PAYOUTS
----------------------- ---------- --------------------------------- ------------------------------- ----------- -------------
  NAME AND PRINCIPAL    FISCAL       SALARY     BONUS    OTHER         RESTRICTED      SECURITIES    LTIP         ALL OTHER
       POSITION         YEAR                             ANNUAL       STOCK AWARDS     UNDERLYING    PAYOUTS     COMPENSATION
                        ENDED         ($)        ($)     COMPENSATION                   OPTIONS         ($)
                        APRIL 30                                           ($)                                       ($)
----------------------- ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
<S>                       <C>         <C>         <C>            <C>             <C>             <C>         <C>           <C>
  Roger W.A. Spillmann

       Chief Executive
        Officer, Chief    2006        200,000     2,292         -0-             -0-             -0-         -0-           -0-
    Operating Officer,  ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
 President, Secretary,    2005                                                              500,000
Treasurer and Director  ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
                          2004            N/A       N/A         N/A             N/A             N/A         N/A           N/A
---------------------------------- ----------- --------- ----------- --------------- --------------- ----------- -------------

----------------------- ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
 Dr. Bogdan C. Maglich    2006        219,038    24,381      $7,518             -0-         529,510         -0-           -0-

              Director  ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
                          2005        220,046     4,381     $13,640             -0-         421,980          -0-           -0-
          Former Chief
   Scientific Officer,
  President, Treasurer  ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
   and Chairman of the    2004        220,046       -0-     $25,345             -0-         313,221          -0-           -0-
    Board of Directors
                        ---------- ----------- --------- ----------- --------------- --------------- ----------- -------------
</TABLE>

Dr. Maglich was appointed Chairman and Chief Scientific Officer of HiEnergy
Technologies and as a member of our Board of Directors on April 25, 2002. He was
appointed Chief Executive Officer, President and Treasurer of HiEnergy
Technologies effective as of March 2003. Dr. Maglich resigned as our President
on January 5, 2006, was removed as our Chief Executive Officer and a member of
the Board of Directors' Finance Committee on February 17, 2006. Also on February
17, 2006, Dr. Maglich's duties as our Chairman of the Board, Treasurer and Chief
Scientific Officer were suspended, he was replaced as our Treasurer on March 15,
2006, and was removed as our Chairman of the Board and Chief Scientific Officer
on April 18, 2006. Dr. Maglich's Employment Agreement with us was terminated
effective April 28, 2006.



                                     -119-
<PAGE>

Other Annual Compensation amounts paid to Mr. Spillmann and Dr. Maglich
consisted of the following personal expense reimbursements during the last three
completed fiscal years:

<TABLE>
<CAPTION>
-------------------------------- ----------------------- ------------------------ ----------------------
       EXPENSE CATEGORY            FISCAL YEAR ENDED        FISCAL YEAR ENDED       FISCAL YEAR ENDED
-------------------------------- ----------------------- ------------------------ ----------------------
                                          2006                    2005                    2004
-------------------------------- ----------------------- ------------------------ ----------------------
<S>                                                  <C>                      <C>
Roger W.A. Spillmann                                -0-                      -0-                    N/A
-------------------------------- ----------------------- ------------------------ ----------------------
TOTAL                                               -0-                      -0-                    N/A
-------------------------------- ----------------------- ------------------------ ----------------------

-------------------------------- ----------------------- ------------------------ ----------------------
Dr. Bogdan C. Maglich
-------------------------------- ----------------------- ------------------------ ----------------------
Auto Lease                                          -0-                      -0-                    -0-
-------------------------------- ----------------------- ------------------------ ----------------------
Auto Insurance                                     $213                   $4,500                   $212
-------------------------------- ----------------------- ------------------------ ----------------------
Auto Expenses (other)                              $561                   $1,325                 $1,046
-------------------------------- ----------------------- ------------------------ ----------------------
Home Rent                                           -0-                      -0-                    -0-
-------------------------------- ----------------------- ------------------------ ----------------------
Medical & Dental Reimbursements                  $6,744                   $7,815                $24,088
-------------------------------- ----------------------- ------------------------ ----------------------
TOTAL                                            $7,518                  $13,640                $25,345
-------------------------------- ----------------------- ------------------------ ----------------------
</TABLE>



                                     -120-
<PAGE>

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, 2006. We have never granted any stock appreciation rights.

<TABLE>
<CAPTION>
  --------------------------------- --------------------------- ------------------------------ ------------------------
                                                                 PERCENT OF TOTAL OPT./WRTS.
                                       NUMBER OF SECURITIES                GRANTED             EXERCISE OF BASE PRICE
                NAME                    UNDERLYING OPTIONS       TO EMPLOYEES IN FISCAL YEAR          ($/SHARE)
  --------------------------------- --------------------------- ------------------------------ ------------------------
<S>                                                 <C>                                   <C>                    <C>
  Roger W.A. Spillmann                                     -0-                            N/A                      N/A
  --------------------------------- --------------------------- ------------------------------ ------------------------

  --------------------------------- --------------------------- ------------------------------ ------------------------
  Dr. Bogdan C. Maglich                             529,510(1)                            48%                    $0.49
  --------------------------------- --------------------------- ------------------------------ ------------------------
</TABLE>

(1) Option was granted on December 31, 2005, 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, 2006 option values. No stock options were exercised by the named
executive officers during the fiscal year ended April 30, 2006.

<TABLE>
<CAPTION>

------------------------- ------------------- ------------------ ------------------------------------- -----------------------------
                                                                        NUMBER OF UNEXERCISED      VALUE OF UNEXERCISED IN-THE-MONEY
                           SHARES ACQUIRED                       OPTIONS/SARs AT THE FISCAL YEAR END   OPTIONS/SARs AT FISCAL
                             ON EXERCISE                                         (#)                              YEAR-END (#)
          NAME                   (#)           VALUE REALIZED         EXERCISABLE/UNEXERCISABLE         EXERCISABLE/UNEXERCISABLE
------------------------- ------------------- ------------------ -------------------------------     ----------------------------
<S>                                    <C>                  <C>               <C>                                    <C>
Roger W.A. Spillmann                      --                 --               500,000 / 500,000                         $ -0- (1)
------------------------- ------------------- ------------------ -------------------------------     -----------------------------

------------------------- ------------------- ------------------ -------------------------------     -----------------------------
Dr. Bogdan C. Maglich                     --                 --           4,203,439 / 4,203,439                      $511,294 (2)
------------------------- ------------------- ------------------ -------------------------------     -----------------------------
</TABLE>

(1) The value of Mr. Spillmann's options has been calculated based on the
difference between the closing price of our stock on the OTC Bulletin Board(R)
on April 28, 2006 of $0.34 per share and the exercise price of Mr. Spillmann's
stock options at $0.72 per share. No effect is given to the shares with exercise
prices above $0.34 per share.

(2) As of the date of this Report, Dr. Maglich had options to purchase 2,482,011
which were in-the-money. 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 28, 2006 of $0.34 per share and the exercise prices
of Dr. Maglich's stock options at $0.134 per share. No effect is given to the
shares with exercise prices above $0.34 per share.

COMPENSATION OF DIRECTORS

The Board previously approved a plan to grant each non-executive director 3,000
shares of common stock or stock options to purchase 3,000 shares of common stock
for each meeting attended, and the non-executive directors have also received
annually stock options to purchase 100,000 shares of common stock for service as
a director and to purchase varying amounts of shares of common stock for their
services on committees of the Board. The transfer of all these securities is
restricted under applicable securities laws. On July 15, 2005, the Board
approved an increase to the number of shares or stock options due each
non-executive director for each meeting attended to 5,000, effective at that
meeting. On January 5, 2006, the Board approved an increase in the number of
shares or stock options due each non-executive director for each meeting
attended to 10,000. Grants of 10,000 shares or stock options were made to the
non-executive directors in attendance at that meeting and at the directors'
meeting on January 25, 2006. On February 17, 2006, the Board rescinded the
increase from 5,000 to 10,000, and for that meeting and the subsequent meeting
those directors who had received grants of 10,000 shares or stock options
received nothing, with the effect that each non-executive director received
5,000 shares or stock options for each meeting attended without any increase.
Additionally, all directors are reimbursed for any reasonable expenses incurred
in the course of fulfilling their duties as a director of our company.

EMPLOYMENT CONTRACTS

In March 2002, Microdevices entered into an employment agreement with Dr.
Maglich. In May 2002, we assumed the employment agreement, which as amended in
December 2002 and July 2003, provided that it was effective through December 31,
2006. On April 8, 2006, we gave Dr. Maglich notice of termination of the
employment agreement for cause, which termination became effective on April 18,
2006. Pursuant to the contract, our major commitments under the employment
agreement include our obligations to:


                                     -121-
<PAGE>

      o     Pay an annual bonus, which must not be less than 20% of the total
            amount of bonuses paid to our officers.

      o     Grant Dr. Maglich 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 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     Provide Dr. Maglich 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     Pay Dr. Maglich 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     Pay Dr. Maglich 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     Pay Dr. Maglich, on the termination date, an amount equal to two
            years of the minimum annual base salary which would have been
            required if his employment agreement had been terminated without
            cause, which we believe is not applicable in view of the termination
            of Dr. Maglich for cause.

In view of the termination of Dr. Maglich's employment agreement, we are
currently analyzing our obligations to Dr. Maglich under the employment
agreement to determine the extent to which we are required to honor them.

In January 2005, we entered into an employment agreement for the employment of
Roger Spillmann to serve as our Vice President and Corporate Secretary. Mr.
Spillmann became our President and Chief Operating Officer on January 5, 2006,
our Chief Executive Officer and a member of our Board of Directors on February
17, 2006, and our Treasurer on March 15, 2006. Our employment agreement remains
in effect and has not been modified. Major terms of the agreement are as
follows:

      o     We will pay him an annual base salary of $200,000, of which $140,000
            will be payable in cash, and the remainder in deferred compensation.

      o     We have the option to prepay services with S-8 stock with value
            equivalent to six (6) months of the above stated salary.

      o     We will pay the fee required under his contract with his then
            current employer for his conversion from consultant employee, which
            should not exceed $12,000.

      o     We will grant him a stock option to purchase 500,000 shares of
            common stock which shall be exercisable at a price no greater than
            the average trading price for the prior thirty (30) day period. The
            option is fully vested.

      o     If the employment agreement is terminated by HiEnergy without cause,
            we must pay him on the termination date, severance pay in an amount
            equal to six (6) months of the minimum annual base salary.

      o     We will provide him with comprehensive family medical and dental
            healthcare benefits.

      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. Spillmann's employment
            with us on a commercially reasonable effort.

      o     We will timely reimburse Mr. Spillmann for approved expenses.



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

The Compensation Committee currently consists of Mr. David Baker and Mr. William
Lacey.

None of our executive officers serves as a director or member of the
compensation committee of any other entity whose executive officers serve as one
of our directors.



                                     -122-
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following tables set forth information as of July 31, 2006, regarding the
beneficial ownership of our common stock and Series B Convertible Preferred
Stock by:

      o     each person who is known by us to beneficially own more than 5% of
            our shares of common stock; and
      o     each named executive officer, each director and all of our directors
            and executive officers as a group.

The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 67,693,936 shares of common stock outstanding as
of July 31, 2006 and 211.64 shares of Series B Convertible Preferred Stock
outstanding as of July 31, 2006. For the purposes of the information provided
below, shares that may be issued upon the exercise or conversion of options,
warrants and other rights to acquire shares of our common stock that are
exercisable or convertible within 60 days following July 31, 2006, are deemed to
be outstanding and beneficially owned by the holder for the purpose of computing
the number of shares and percentage ownership of that holder, but are not deemed
to be outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated in the footnotes to these tables, and as
affected by applicable community property laws, all persons listed have sole
voting and investment power for all shares shown as beneficially owned by them.

<TABLE>
<CAPTION>
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
            NAME OF BENEFICIAL OWNER         NUMBER OF SHARES       PERCENT        NUMBER OF SHARES        PERCENT
                                              OF COMMON STOCK     OUTSTANDING        OF SERIES B         OUTSTANDING
                                                                                     CONVERTIBLE
                                                                                   PERFERRED STOCK
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
<S>                                             <C>                       <C>                    <C>                <C>
      Roger W.A. Spillmann, Chief               500,000 (1)(7)             0.73%                 -0-                -0-
      Executive Officer, Chief Operating
      Officer, President, Secretary,
      Treasurer, Director
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      William A. Nitze, Director, Chairman         768,592 (2)             1.13%                3.56              1.68%
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      Peter J. Le Beau, Director, Vice             446,528 (3)             0.66%                 -0-                -0-
      Chairman
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      David R. Baker, Director                   1,238,732 (4)             1.81%                2.81              1.33%
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      William J. Lacey, Jr., Director              387,058 (5)             0.47%                 -0-                -0-
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      Dr. Bogdan C. Maglich, Director           10,661,373 (6)(8)         14.73%                -0-                -0-

      -------------------------------------- ------------------ ----------------- ------------------- ------------------
      All Executive Officers & Directors        14,002,283 (9)            19.53%                6.37             3.01%
      As A Group
      -------------------------------------- ------------------ ----------------- ------------------- ------------------
</TABLE>

(1) Represents 500,000 shares of common stock issuable upon the exercise of
currently exercisable stock options as of December 31, 2005.

(2) Includes:

         (a) 249,501 shares of common stock owned directly by Mr. Nitze;

         (b) 304,500 shares of common stock underlying stock options issued for
services as a member of the Board of Directors or a committee thereof, but not
including 7,500 shares of common stock underlying such stock options that will
vest on November 7, 2006 if Mr. Nitze is then a director, all issued for
services as a member of the Board of Directors or a committee thereof;

         (c) 23,913 shares of common stock underlying a warrant, immediately
exercisable, which was acquired in a private placement on September 7, 2004;

         (d) 12,600 shares of common stock underlying a warrant acquired as
partial consideration in a bridge financing on the same terms as the terms given
to non-affiliate participants; and

         (e) 118,666 shares of common stock issuable upon conversion of 3.56
shares of Series B Preferred Stock, plus 59,412 shares of common stock issuable
upon conversion of warrants, acquired in a private placement on the same terms
given to non-affiliate participants.


                                     -123-
<PAGE>

(3) Includes:

         (a) 71,528 shares of common stock owned directly by Mr. Le Beau; and

         (b) 375,000 shares of common stock underlying stock options issued for
services as a member of the Board of Directors or a committee thereof, or
services rendered as a consultant prior to becoming a member of the Board of
Directors, but not including 25,000 shares of common stock underlying such stock
options that will vest on November 7, 2006 if Mr. Le Beau is then a director,
all issued for services as a member of the Board of Directors or a committee
thereof.

(4) Includes:

         (a) 481,422 shares of common stock owned directly by Mr. Baker;

         (b) 152,245 shares owned by Advanced Projects Group, a Delaware
corporation, attributable to Mr. Baker as a stockholder, the number of shares
being previously furnished by Dr. Bodgan C. Maglich, a controlling person of
Advanced Projects Group, Inc. (see note (6) below), Mr. Baker having no personal
knowledge of the accuracy of the number of shares listed; Mr. Baker disclaims
beneficial ownership of the stock held by Advanced Projects Group beyond his
pecuniary interest;

         (c) 390,000 shares of common stock underlying stock options issued for
services as a member of the Board of Directors or a committee thereof, but not
including 75,000 shares of common stock underlying such stock options that will
vest on November 7, 2006 if Mr. Baker is then a director, all issued for
services as a member of the Board of Directors or a committee thereof;

         (d) 64,886 shares of common stock underlying a warrant exercisable at
$0.65 per share, which was acquired (together with 129,174 shares of common
stock included in (a) above) in connection with the satisfaction at $0.46 per
share of accounts payable in the amount of $59,420 for legal services rendered,
and expenses incurred, prior to his directorship;

         (e) 10,000 shares of common stock underlying a warrant acquired as
partial consideration in a bridge financing on the same terms as the terms given
to non-affiliate participants; and

         (f) 93,666 shares of common stock issuable upon conversion of 2.81
shares of Series B Preferred Stock, plus 46,813 shares of common stock issuable
upon conversion of warrants, acquired in a private placement on the same terms
given to non-affiliate participants.

(5) Includes:

         (a) 52,353 shares of common stock owned directly by Mr. Lacey;

         (b) 270,000 shares of common stock underlying stock options issued for
services as a member of the Board of Directors or a committee thereof, but not
including 50,000 shares of common stock underlying such stock options that will
vest on February 17, 2006 if Mr. Lacey is then a director, all issued for
services as a member of the Board of Directors or a committee thereof; and

         (c) 44,705 shares of common stock underlying HiEnergy Microdevices,
Inc. exchange rights exercisable at any time, subject to payment of a promissory
note in the amount of $7,000 and granted for consultant services rendered to
HiEnergy Microdevices, Inc. prior to merger with SLW Enterprises, Inc.

(6) Includes:

         (a) 869,769 shares owned directly by Dr. Maglich;

         (b) 1,131,735 shares owned by Advanced Projects Group, Inc., a Delaware
corporation, of which Dr. Maglich is a director, officer and greater than ten
percent stockholder; Dr. Maglich disclaims beneficial ownership of the stock
held by Advanced Projects Group beyond his pecuniary interest

         (c) 2,580,995 shares owned by Maglich Family Holdings, Inc., a Delaware
corporation, of which Dr. Maglich is a director, officer and greater than ten
percent stockholder; Dr. Maglich disclaims beneficial ownership of the stock
held by Maglich Family Holdings beyond his pecuniary interest;

         (d) 505,435 shares of common stock underlying a warrant owned by
Maglich Family Holdings, immediately exercisable, which was acquired in a
private placement on November 19, 2004;

         (d) 1,370,000 shares owned by Maglich Innovations Fund Inc., a Delaware
corporation, of which Dr. Maglich is sole director, officer and direct or
indirect stockholder; and


                                     -124-
<PAGE>

         (e) 4,203,439 shares of common stock issuable upon the exercise of
currently exercisable stock options issued pursuant to the terms of Dr.
Maglich's employment agreement.

(7) Mr. Spillmann became our President and Chief Operating Officer on January 5,
2005, our Chief Executive Officer and a member of our Board of Directors on
February 17, 2006, and our Treasurer on March 15, 2006.

(8) Dr. Maglich resigned as our President on January 5, 2006, was replaced as
our Treasurer on March 15, 2006, and was removed as our Chairman of the Board
and Chief Scientific Officer on April 18, 2006.

(9) The number of shares beneficially owned takes into account the details set
forth in the preceding footnotes.


The amounts reflected above are based upon information provided to us and in
filings on Form 5 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 Messrs. Spillmann, Nitze, Le Beau, Baker and Lacey is: c/o
HiEnergy Technologies, Inc., 1601-B Alton Parkway, Irvine, California 92606. The
address for Dr. Maglich is 2785 Vista Umbrosa, Newport Beach, CA 92660. 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.

CHANGE IN CONTROL

There are no arrangements known to us the operation of which may result in a
change of control of HiEnergy Technologies.

For information concerning our equity compensation plans, see discussion in
"Item 5. Market for Common Equity and Related Stockholder Matters - Equity
Compensation Plans", which is incorporated herein by reference.


                                     -125-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except for the transactions described below, during the last two years, none of
our directors, officers or principal stockholders, nor any associate or
affiliate of the foregoing have any interest, direct or indirect, in any
transaction, or in any proposed transactions, which has materially affected or
will materially affect us.

TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates are 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.

      o     In September 2004, we issued to William A. Nitze, Chairman of our
            Board of Directors, 71,739 Shares and warrants to purchase 23,913
            shares of common stock, par value $0.001 with an exercise price of
            $1.00 a Share in a private placement transaction for an investment
            by Mr. Nitze of $33,000.

      o     In July 2005, we issued to David R. Baker, a member of our Board of
            Directors, 129,174 Shares and warrants to purchase 64,586 Shares
            with an exercise price of $0.65 a Share, in connection with the
            satisfaction of accounts payable for legal services rendered, and
            expenses incurred, prior to his directorship..

      o     In March 2006, we issued to Mr. Nitze a convertible promissory note
            for $31,500, bearing interest at 10% per annum and convertible into
            Shares at $0.30 per Share, with warrants to purchase 12,600 Shares
            at a price of $0.60 per Share, for an investment by Mr. Nitze of
            $31,500. The note provided for its automatic exchange into the next
            qualified financing, as defined therein, at 110% of the then
            outstanding balance, including accrued interest. This investment was
            on the same terms as concurrently made by unaffiliated investors.

      o     In June 2006, we issued to Mr. Nitze 3.56 shares of Series B
            Convertible Preferred Stock (the "Series B Preferred Shares"),
            convertible into 118,666 Shares; Series B-1 Warrants to purchase
            35,647 Shares at an exercise price of $0.45 per Share, and Series
            B-2 Warrants to purchase 23,765 Shares at an exercise price of $0.60
            per Share, upon the automatic exchange referred to in the preceding
            paragraph.

      o     In April 2006, we issued to Mr. Baker a convertible promissory note
            for $25,000, bearing interest at 10% per annum and convertible into
            Shares at $0.30 per Share, with warrants to purchase 10,000 Shares
            at a price of $0.60 per Share, for an investment by Mr. Baker of
            $25,000. The note provided for its automatic exchange into the next
            qualified financing, as defined therein, at 110% of the then
            outstanding balance, including accrued interest. This investment was
            on the same terms as concurrently made by unaffiliated investors.

      o     In June 2006, we issued Mr. Baker 2.81 shares of Series B
            Convertible Preferred Stock (the "Series B Preferred Shares"),
            convertible into 93,666 Shares; Series B-1 Warrants to purchase
            28,088 Shares at an exercise price of $0.45 per Share, and Series
            B-2 Warrants to Mr. Baker purchase 18,725 Shares at an exercise
            price of $0.60 per Share, upon the automatic exchange referred to in
            the preceding paragraph.


TRANSACTIONS WITH OTHER RELATED PARTIES

During the fiscal year ended April 30, 2005, we had the following transactions
with related parties:

      o     In June 2004, we issued convertible promissory notes for $11,866 and
            $13,782, bearing interest at 10% per annum, which are convertible
            into Shares at $1.00 per share to Yocca, Patch & Yocca, LLP for
            legal services.

      o     In July 2004, we issued 182,955 Shares to Richardson & Patel, LLP
            for legal and consulting services.

      o     In August 2004, we signed promissory notes with Maglich Family
            Holdings, Inc., an investor related to Dr. Bogdan Maglich, a
            director and our former Chairman of the Board, President, Treasurer
            and Chief Scientific Officer, for loans that were made to us
            totaling $300,000. The notes are non-interest bearing and are due on
            demand. As of April 30, 2005, the notes have been converted into
            Shares.

      o     In September 2004, we signed promissory notes with Maglich Family
            Holdings, Inc., an investor related to Dr. Maglich, for loans that
            were made to us totaling $50,000. The notes were non-interest
            bearing and were due on demand. As of April 30, 2005, the notes have
            been converted into Shares.


                                     -126-
<PAGE>

      o     In October 2004, we signed promissory notes with Maglich Family
            Holdings, Inc., an investor related to Dr. Maglich, for loans that
            were made to us totaling $115,000. The notes were non-interest
            bearing and were due on demand. As of April 30, 2005, the notes have
            been converted into Shares.

      o     In November 2004, we issued 1,010,870 Shares to Maglich Family
            Holdings, Inc., an investor related to Dr. Maglich, in exchange for
            promissory notes evidencing loans made to us in the aggregate amount
            of $465,000. As additional consideration for the exchange, we issued
            to Maglich Family Holdings warrants to purchase an additional
            505,435 shares of common stock at an exercise price of $0.82 per
            share. The warrants are to expire three and one half years following
            the date of effectiveness of our next filed registration statement

During the fiscal year ended April 30, 2006, we had the following transactions
with related parties:

      o     In June 2005, we issued 437,627 Shares to Nicholas J. Yocca upon
            conversion of $185,000 of convertible notes, originally purchased in
            January 2004, plus $11,932 of accrued interest.

      o     In June 2005, we issued 32,820 Shares to Nicholas J. Yocca upon the
            conversion of a promissory note evidencing loans made to us in the
            aggregate amount of $14,000, plus $769 of accrued interest.

      o     In October 2005, we issued 452,028 Shares to Ryan Patch upon
            conversion of defaulted convertible promissory notes issued to our
            former legal counsel, Yocca, Patch and Yocca LP for legal services
            rendered to us in the aggregate amount of $224,361, plus $46,856 of
            accrued interest.

      o     In July 2006, we issued 1,886,600 Shares to The Yocca Law Firm, LLP,
            or its assignees, upon conversion of defaulted convertible
            promissory notes issued to our former legal counsel, Yocca, Patch
            and Yocca for legal services rendered to us in the aggregate amount
            of $448,722.06, plus $117,257.94 of accrued interest.


CERTAIN BUSINESS RELATIONSHIPS

No director or nominee for director is or has been during the fiscal years ended
April 30, 2005 or 2006, 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.


                                     -127-
<PAGE>

ITEM 13.  EXHIBITS
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  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
  3.4                 Amendment to Bylaws of HiEnergy Technologies, Inc., adopted on February 17, 2006
  4.1.1 (5)           Specimen Common Stock Certificate
  4.1 (40)            Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred
                      Stock of HiEnergy Technologies, Inc.
  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.
  4.2 (40)            Form of Series B-1 Warrant
  4.3 (1)             Form of Amendment No. 1 to Registration Rights Agreement between the Registrant and each April 2002
                      Private Placement Common Stock Investor
  4.3 (40)            Form of Series B-2 Warrant
  4.4 (3)             Warrant Certificate issued to Rheal Cote by HiEnergy Technologies, Inc. dated June 3, 2002
  4.4.1 (5)           Form of Registration Rights Agreement between the Registrant and each June 2002 Private Placement Common
                      Stock 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 Series A Convertible
                      Preferred Stock Investors.
  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
  4.11 (35)           HiEnergy Technologies, Inc. Special Warrant Offer dated December 13, 2005
  10.1 (5)            Lease Agreement dated August 15, 2002 between the Registrant and Del Mar Avionics
  10.1 (40)           Form of the Series B Convertible Preferred Stock Purchase Agreement
  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.
  10.2 (40)           Form of the Registration Rights Agreement
  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
</TABLE>


                                     -128-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  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 Michael Levy*
  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.
  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
</TABLE>


                                     -129-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  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 25, 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.
  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.
</TABLE>


                                     -130-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  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.
  10.73 (19)          Employment Letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.
  10.74 (19)          Proposal for Detailed Concept Design Services dated June 7, 2004 between Lockwood Greene Engineering &
                      Construction and HiEnergy Technologies, Inc.
  10.75 (19)          Employment letter dated July 26, 2004 between Jim Hertzog and HiEnergy Technologies, Inc.
  10.76 (19)          Engagement Agreement dated July 27, 2004 between Pacific Summit Securities and HiEnergy Technologies, Inc.
  10.77 (19)          Teaming Agreement dated August 4, 2004 between HiEnergy Technologies, Inc. and Siemens Maintenance Services,
                      LLC
  10.78 (20)          Consulting Agreement dated July 22, 2004 between Greg Henkel and HiEnergy Technologies, Inc.
  10.79 (21)          Form of Stock Purchase Agreement and Warrant dated October 18, 2004 - December 15, 2004 issued in connection
                      with the sale of restricted shares to various accredited investors and HiEnergy Technologies, Inc.
  10.80 (21)          Form of Debt Conversion Agreement and Warrant between Maglich Family Holdings and HiEnergy Technologies,
                      dated November 19, 2004
  10.81 (24)          Amendment to Share Purchase Agreement dated January 24, 2005 between HiEnergy Technologies, Inc. and Bull
                      Bear Capital Partners, LLC
  10.82 (23)          Employment letter dated November 22, 2004 between Roger Spillmann and HiEnergy Technologies, Inc.
  10.83 (22)          Consulting Agreement dated November 22, 2004 between Don Abbe and HiEnergy Technologies, Inc.
  10.84 (25)          Proposal for Preliminary Manufacturing Facility Assessment Consulting Services dated April 13, 2004 between
                      HiEnergy Technologies, Inc. and Lockwood Greene Engineering & Construction (filed in its entirety)
  10.85 (25)          Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.86 (25)          Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.87 (25)          Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.88 (25)          Promissory Note dated March 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.89 (25)          Promissory Note dated April 5, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.90 (25)          Promissory Note dated April 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.91 (25)          Promissory Note dated April 29, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.92 (25)          Promissory Note dated August 3, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.93 (25)          Promissory Note dated August 4, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.94 (25)          Promissory Note dated August 10, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.95 (25)          Promissory Note dated August 18, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.96 (25)          Promissory Note dated August 25, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
  10.97 (25)          Promissory Note dated August 30, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.
</TABLE>


                                     -131-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  10.98 (25)          Proposal for Detailed Concept Design Services between HiEnergy Technologies, Inc. and Lockwood Greene
                      Engineering & Construction dated June 7, 2004
  10.99 (25)          Consulting Agreement between HiEnergy Technologies, Inc. and Greg Henkel dated July 22, 2004
  10.100 (25)         Consulting Agreement between HiEnergy Technologies, Inc. and Jim Hertzog dated July 26, 2004
  10.101 (25)         Engagement letter between HiEnergy Technologies, Inc. and Pacific Summit Securities dated July 27, 2004
  10.102 (25)         Employment letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.
  10.103 (25)         Teaming Agreement between HiEnergy Technologies, Inc. and Siemens Maintenance Services, LLC dated August
                      4, 2004
  10.104 (25)         Retention Agreement between HiEnergy Technologies, Inc. and Pellettieri, Rabstein and Altman dated
                      November 11, 2004
  10.105 (25)         Retention Agreement between HiEnergy Technologies, Inc. and Feldhake Roquemore LLP dated January 12, 2005
  10.106 (26)         Form of Stock Purchase Agreement dated March 22, 2005 and issued in connection with the sale of restricted
                      shares to various accredited investors and HiEnergy Technologies, Inc.
  10.107 (26)         Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated March 22, 2005 and
                      issued in connection with the sale of restricted shares to various accredited investors
  10.108 (26)         Form of Stock Purchase Agreement dated April 2005 and issued in connection with the sale of restricted
                      shares to various accredited investors and HiEnergy Technologies, Inc.
  10.109 (26)         Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated April 2005 and issued
                      in connection with the sale of restricted shares to various accredited investors.
  10.110 (26)         Form of Stock Purchase Agreement for the period from May 16, 2005 through July 12, 2005 and issued in
                      connection with the sale of restricted shares to various accredited investors.
  10.111 (26)         Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. for the period from May
                      16, 2005 through July 12, 2005 and issued in connection with the sale of restricted shares to various
                      accredited investors.
  10.112 (26)         Form of Debt Conversion Agreement between Nicholas J. Yocca and HiEnergy Technologies, Inc., dated May 13,
                      2005.
  10.113 (26)         Debt Conversion Agreement between David R. Baker and HiEnergy Technologies, Inc., dated July 15, 2005, and
                      form of detachable warrant.
  10.114 (26)         Debt Conversion Agreement between Baker, Johnston & Wilson LLP and HiEnergy Technologies, Inc., dated July
                      15, 2005, and form of detachable warrant.
  10.115 (26)         Agreement between Mason, Griffin & Pierson and HiEnergy Technologies, Inc., dated April 29, 2005.
  10.116 (26)         Subcontract Agreement between Siemens Maintenance Services LLC and HiEnergy Technologies, Inc., dated
                      April 15, 2005
  10.117 (26)         Agreement between Vintage Filings, LLC and HiEnergy Technologies, Inc., dated May 1, 2005.
  10.118 (26)         Engagement Letter between Henry S. Sprintz and HiEnergy Technologies, dated June 20, 2005.
  10.119 (26)         Employment Agreement between Gregory C. Henkel, Controller, and HiEnergy Technologies, Inc., dated March 1,
                      2005.
  10.120 (26)         Equipment Sales Agreement between Southeastern Pennsylvania Transportation Authority and HiEnergy
                      Technologies, Inc., dated June 6, 2005.
  10.121 (26)         Time and Material Subcontract between Integrated Concepts & Research Corporation and HiEnergy Technologies,
                      dated July 18, 2005.
  10.122 (26)         International Distribution Agreement between Electronic Equipment Marketing Company (EEMCO) and HiEnergy
                      Technologies, dated July 25, 2003
  10.123 (27)         Form of Stock Purchase Agreement dated July 26, 2005 and issued in connection with the sale of restricted
                      shares to various accredited investors.
  10.124 (27)         Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated July 26, 2005 and
                      issued in connection with the sale of restricted shares to various accredited investors.
  10.125 (29)         Engagement Letter between Vladimir Stanich and HiEnergy Technologies, dated September 9, 2005.
  10.126 (29)         Independent Contractor Agreement between Metaskill, Inc. and HiEnergy Technologies, dated September 15, 2005.
  10.127 (32)         Form of Senior Convertible Bridge Note and Warrant issued in connection with the sale of restricted shares to
                      various accredited investors.
</TABLE>


                                     -132-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  10.128 (34)         Secured Convertible Promissory Note issued to First Regional Bank, CFBO Bruce Steinberg Roth IRA dated
                      November 18, 2005.
  10.129 (34)         Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated November 18, 2005 issued to
                      Bruce Steinberg Roth IRA.
  10.130 (34)         Assignment of Accounts Receivable issued by HiEnergy Technologies, Inc. to First Regional Bank, CFBO Bruce
                      Steinberg Roth IRA dated November 18, 2005.
  10.131 (34)         Memorandum of Understanding between Williams-Sterling, Inc. and HiEnergy Technologies dated November 16, 2005.
  10.132 (34)         Reseller Agreement between GTSI Corp. and HiEnergy Technologies, Inc. dated November 18, 2005.
  10.133 + (34)       Cooperative Agreement between Transportation Security Administration and HiEnergy Technologies, Inc. dated
                      September 27, 2004
  10.134 (34)         Addendum No. 4 to Original Lease Agreement dated August 15, 2002, between the Registrant and Del Mar Avionics
                      dated October 14, 2005
  10.135 (34)         Placement Agent Agreement between Burnham Hill Partners and HiEnergy Technologies, Inc. dated September 26,
                      2005.
  10.136 (36)         International Distribution Agreement between HiEnergy Technologies, Inc. and Electronic Equipment Marketing
                      Company (EEMCO) dated July 25, 2003, as amended on August 27, 2003.
  10.137 (36)         Award Contract between HiEnergy Microdevices, Inc. and the U.S. Department of Defense dated February 12, 2002
                      (filed in its entirety)
  10.138 (36)         Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Microdevices, Inc. dated March 26, 2002
                      (filed in its entirety).
  10.139 (36)         Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Technologies, Inc. dated November 17,
                      2003 (filed in its entirety)
  10.140 (36)         Form of Convertible Promissory Note issued to Yocca, Patch & Yocca, LLP and/or Nicholas J. Yocca
  10.141 (36)         Form of Promissory Note issued to Maglich Family Holdings, Inc.
  10.142 (36)         Debt Conversion Agreement with form of Warrant to purchase shares of common stock of HiEnergy Technologies,
                      Inc. dated October 27, 2004 between HiEnergy Technologies, Inc. and Maglich Family Holdings, Inc.
  10.143 (36)         Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Technologies, Inc. dated November 17,
                      2003 (filed in its entirety)
  10.144 (36)         Assignment of Patent Rights by Dr. Kevin Mckinny to HiEnergy Technologies, Inc. dated November 17, 2003
                      (filed in its entirety)
  10.145 (36)         Teaming Agreement between HiEnergy Technologies, Inc. and Williams-Sterling, Inc. dated effective January 30,
                      2006
  10.146 (36)         Reseller Agreement between HiEnergy Technologies, Inc. and Williams-Sterling, Inc. dated effective January
                      30, 2006
  10.147 (36)         Joint Marketing Agreement between HiEnergy Technologies, Inc. and Laseroptronix, AB dated January 15, 2006
  10.148 (36)         Engagement Letter between HiEnergy Technologies, Inc. and Dr. Vladivoj Valkovic dated February 16, 2006
  10.149 (36)         Independent Contractor Agreement between HiEnergy Technologies, Inc. and Radiation Safety Academy dated
                      February 8, 2006
  10.150 (37)         Employment Agreement between HiEnergy Microdevices, Inc and Dr. Bogdan C. Maglich dated March 6, 2002
                      (Corrected version of the agreement previously  filed as Exhibit 10.5 to the Company's Annual Report on Form
                      10-KSB for the fiscal year ended April 20, 2002 filed with the SEC on July 29, 2002.
  10.151 (38)         Equipment Sales Agreement (Contract No. 19107), as amended, between Southeastern Pennsylvania Transportation
                      Authority and HiEnergy Technologies, Inc., dated May 18, 2006.
  10.152 (38)         Purchase Order in the amount of $200,000 from the Commonwealth of Pennsylvania, Pennsylvania Emergency
                      Management Agency (PEMA) on behalf of Southeastern Pennsylvania Transportation Authority.
  10.153 (39)         Confidential Settlement Agreement and Mutual Release between HiEnergy Technologies, Inc. and Yeffet Security
                      Consultants, Inc., dated June 9, 2006.
  10.154 (41)         Confidential Settlement Agreement between CH2M Hill Lockwood Greene and the HiEnergy Technologies, Inc.,
                      dated July 20, 2006.
</TABLE>


                                     -133-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT NUMBER      DESCRIPTION
<S>                     <C>
  10.155(42)          Copy of U.S. Nuclear Regulatory Commission Materials License dated June 30, 2006 and expiring June 30, 2016.
  10.156(42)          Copy of State of California Certificate of Radiation Machine Registration expiring March 31, 2008.
  10.157 *            HiEnergy Technologies, Inc. 2006 Consultant Stock Plan
  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
  21.2 (26)           List of Subsidiaries
  31.1*               Certification of Chief Executive Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.
  32.1*               Certification of Chief Executive Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.
</TABLE>

+     Portions of this exhibit have been omitted pursuant to an Application for
      Confidential Treatment filed by the Company with the Securities and
      Exchange Commission pursuant to the Rules of the Exchange Act.

*     Filed herewith

(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.

(4)   Filed on September 20, 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.

(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 January 31,
      2004, 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.


                                     -134-
<PAGE>

(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.

(19)  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.

(20)  Filed on September 14, 2004 as a like numbered exhibit to HiEnergy
      Technologies' annual report on Form 10-KSB for the fiscal year ended April
      30, 2004 and incorporated herein by reference.

(21)  Filed on October 20, 2004 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2004,
      and incorporated herein by reference.

(22)  Filed on November 30, 2004 as exhibit 99.1 to HiEnergy Technologies'
      current report on Form 8-K dated November 30, 2004 and incorporated herein
      by reference.

(23)  Filed on December 17, 2004 as Exhibit 10.80 to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2004 and
      incorporated herein by reference.

(24)  Filed on January 11, 2005 as Exhibit 99.3 to HiEnergy Technologies'
      current report on Form 8-K dated January 7, 2005 and incorporated herein
      by reference.

(25)  Filed on February 2, 2005 as Exhibit 10.81 to HiEnergy Technologies'
      current report on Form 8-K dated January 27, 2005 and incorporated herein
      by reference.

(25)  Filed on March 17, 2005 as a like numbered exhibit to HiEnergy
      Technologies' quarterly report on Form 10-QSB for the quarter ended
      January 31, 2005 and incorporated herein by reference.

(26)  Filed on July 27, 2005 as a like numbered exhibit to HiEnergy
      Technologies' amendment to its annual report on Form 10-KSB for the fiscal
      year ended April 30, 2004 and incorporated herein by reference.

(27)  Filed on August 15, 2005 as a like numbered exhibit to HiEnergy
      Technologies' annual report on Form 10-KSB for the fiscal year ended April
      30, 2005 and incorporated herein by reference.

(28)  Filed on September 6, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated September 2, 2005 and incorporated herein by reference.

(29)  Filed on September 19, 2005 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended July 31, 2005 and
      incorporated herein by reference.

(30)  Filed on October 11, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated October 11, 2005 and incorporated herein by reference.

(31)  Filed on October 24, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated October 20, 2005 and incorporated herein by reference.

(32)  Filed on November 17, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated November 17, 2005 and incorporated herein by reference.

(33)  Filed on November 30, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated November 30, 2005 and incorporated herein by reference.

(34)  Filed on December 16, 2005 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2005 and
      incorporated herein by reference.


                                     -135-
<PAGE>

(35)  Filed on January 3, 2006 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated December 23, 2005 and incorporated herein by reference.

(36)  Filed on March 22, 2006 as an exhibit to HiEnergy Technologies' quarterly
      report on Form 10-QSB for the quarter ended January 31, 2006 and
      incorporated herein by reference.

(37)  Filed on April 24, 2006 as Exhibit 150 to HiEnergy Technologies' report on
      Form 8-K dated April 24, 2006 and incorporated herein by reference.

(38)  Filed on June 1, 2006 as Exhibit 150 to HiEnergy Technologies' report on
      Form 8-K dated June 1, 2006 and incorporated herein by reference.

(39)  Filed on June 15, 2006 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated June 15, 2006 and incorporated herein by reference.

(40)  Filed on July 10, 2006 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated July 7, 2006 and incorporated herein by reference.

(41)  Filed on July 27, 2006 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated July 27, 2006 and incorporated herein by reference.

(42)  Filed on August 4, 2006 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated August 4, 2006 and incorporated herein by reference.


                                     -136-
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

For the fiscal years ended April 30, 2006 and 2005, our principal accountant is
expected to bill approximately $248,000 and billed $110,518 respectively, for
the audit of our annual financial statements and review of financial statements
included in our Form 10-QSB filings.

AUDIT-RELATED FEES

There were no fees billed for services reasonably related to the performance of
the audit or review of our financial statements outside of those fees disclosed
above under "Audit Fees" for fiscal years 2006 and 2005.

TAX FEES

For the fiscal years ended April 30, 2006 and 2005, our principal accountant is
expected to bill approximately $0 and has billed $0, respectively, for tax
compliance, tax advice, and tax planning services.

ALL OTHER FEES

There were no fees billed for services by our principal accountant, other than
those disclosed above.

PRE-APPROVAL POLICIES AND PROCEDURES

Prior to engaging our accountants to perform a particular service, our Board of
Directors obtains an estimate for the service to be performed. The Board of
Directors in accordance with our procedures approved all of the services
described above.


                                     -137-
<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/ Roger W.A. Spillmann
                                            -----------------------------
                                            Roger W.A. Spillmann,
                                            Chief Executive Officer, Chief
                                            Operating Officer, President,
                                            Treasurer and Director
                                            (Principal Executive Officer and
                                            Principal Financial Officer)

                                            Date: September 15, 2006

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.

                                               Chief Executive Officer, Chief
                                               Operating Officer, President
                                               and Treasurer; Director
/s/ Roger W.A. Spillmann                       (Principal Executive Officer and
---------------------------------              Principal Financial Officer)
Roger W.A. Spillmann


/s/ William A. Nitze
---------------------------------              Director
William A. Nitze                               Chairman of the Board


/s/ Peter J. Le Beau
---------------------------------              Director
Peter J. Le Beau                               Vice Chairman of the Board


/s/ David R. Baker
---------------------------------              Director
David R. Baker


/s/ William J. Lacey, Jr.
---------------------------------              Director
William J. Lacey, Jr.



---------------------------------              Director
Bogdan C. Maglich



Date: September 15, 2006

                                     -138-