<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                              ====================
                                   FORM 10-KSB
                              ====================

(Mark One)

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

         FOR THE FISCAL YEAR ENDED JUNE 30, 2004

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

         FOR THE TRANSITION PERIOD FROM _____________ TO _____________

                         COMMISSION FILE NUMBER 1-16253
                              ====================

                       COMPUTERIZED THERMAL IMAGING, INC.
                       ----------------------------------
             (Exact name of registrant as specified in its charter)
                              ====================

             NEVADA                                               87-0458721
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
       incorporation or                                      Identification No.)
         organization)

1719 West 2800 South, Ogden, UT                                     84401
-------------------------------                                     -----
(Address of principal executive                                   (Zip Code)
            offices)

        Registrant's telephone number including area code: (801) 776-4700

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

              Securities registered under Section 12(g) of the Act:
                                  Common Stock
                                  ------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. |_|

Revenues of the registrant for its most recent fiscal year were $356,710.

The aggregate market value of Common Stock held by non-affiliates of the
registrant at September 1, 2004 was approximately $17 million. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates.

As of October 12, 2004, there were 114,561,698 shares of Common Stock
outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE None



<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.

                                   FORM 10-KSB

                                  ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  Description of Business                                               2

ITEM 2.  Description of Property                                              20

ITEM 3.  Legal Proceedings                                                    20

ITEM 4.  Submission of Matters to a Vote of Security Holders                 21

                                     PART II

ITEM 5.  Market for Common Equity, Related Stockholder Matters and
         Small Business Issuer Purchases of Equity Securities                 22

ITEM 6.  Management's Discussion and Analysis or Plan of Operation.           23

ITEM 7.  Financial Statements                                                F-1

ITEM 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure                                                 37

ITEM 8A  Controls and Procedures                                              37

                                    PART III

ITEM 9.  Directors and Executive Officers of the Registrant                   37

ITEM 10. Executive Compensation                                               39

ITEM 11. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters                           40

ITEM 12. Certain Relationships and Related Transactions                       41

                                     PART IV

ITEM 13. Exhibits List and Reports on Form 8-K                                42

ITEM 14. Principal Accountant Fees and Services                               43



<PAGE>

PART I
------

         THIS DOCUMENT, AND THE DOCUMENTS INCORPORATED BY REFERENCE, INCLUDING,
BUT NOT LIMITED TO, CERTAIN STATEMENTS CONTAINED IN ITEM 1, "DESCRIPTION OF
BUSINESS" AND ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS," CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED. WHEN
USED IN THIS DOCUMENT THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS,"
"MAY," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT,
EXCEPT AS OTHERWISE REQUIRED UNDER APPLICABLE LAWS AND REGULATIONS.

         THIS DOCUMENT SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED FINANCIAL
STATEMENTS INCLUDED IN PART II BELOW AND "RISK FACTORS" NOTED BELOW.

                                                     1



<PAGE>

ITEM 1.     BUSINESS

INTRODUCTION

         Computerized Thermal Imaging, Inc. ("we," "us," "CTI," or the
"Company") designs, manufactures and markets thermal imaging and infrared
devices and services used for clinical diagnosis, pain management and
non-destructive testing of industrial products and materials. We are presently
developing, manufacturing and/or marketing the following principal products:

         o    BREAST IMAGING: We are seeking pre-market approval from the U.S.
              Food and Drug Administration (the "FDA") of our breast imaging
              system, called the BCS 2100(TM), which, if approved and marketed,
              we believe will assist radiologists in their efforts to
              distinguish between benign and malignant breast masses. On January
              23, 2003, the FDA declined to grant pre-market approval for the
              BCS 2100 and recommended additional data analysis, clinical trials
              and other steps that we might take to obtain FDA approval. As
              explained in greater detail in "Government Regulation--Pre-market
              Approval of the BCS 2100" beginning on page [15] below, we do not
              believe we currently have the resources necessary to conduct the
              additional clinical studies requested by the FDA, but we are
              seeking to persuade the FDA to grant pre-market approval based on
              our existing data. Unless and until we receive final or
              conditional approval of the BCS 2100, we cannot sell, market or
              distribute the BCS 2100 in the United States, and lack of FDA
              approval significantly hinders marketing of this product in
              international markets. However, in April 2004 we received a
              Medical Device License from Health Canada to market the BCS 2100
              in Canada. In late August 2004, we shipped the first BCS 2100 to
              Ville Marie in Montreal, Canada for a one-to-three month
              evaluation that may result in a lease of the device at the end of
              evaluation. We are also pursuing other potential customers in
              Canada.

         o    PAIN MANAGEMENT--PHOTONIC STIMULATOR: We are manufacturing and
              marketing our Photonic Stimulator, which emits infrared light that
              penetrates the skin in an effort to promote increased blood flow
              and circulation in order to provide temporary relief of minor
              aches and pains where heat is indicated.

         o    PAIN MANAGEMENT--THERMAL IMAGE PROCESSORS: We are manufacturing
              and marketing our Thermal Image Processor (or "TIP,") which uses
              the same infrared camera as the BCS 2100 to measure body heat
              naturally radiated by the patient as he/she stands (or sits)
              before the camera. The heat-measuring capabilities of the TIP are
              generally used to develop a physiological profile of a patient to
              assist in the diagnosis and treatment of a wide range of
              physiological and circulatory abnormalities, principally
              soft-tissue related injuries and pain. The TIP may also have
              application as a pre-screening device to identify persons with
              increased skin temperature at international parts of entry and
              other public facilities.

         o    TURBINE BLADE INSPECTION SYSTEM: Our Turbine Blade Inspection
              System (the "TBIS") is a quality assurance tool which, using
              techniques similar to our BCS 2100, meets industrial requirements
              for non-destructive testing and examination of turbine blades used
              in aircraft and power generation, and other industrial components,
              composite materials and metals.

         We manufacture our products internally at our Ogden, Utah facility. Our
Ogden facilities are certified to ISO 9000 quality standards.

         Our common stock is quoted on the Over-the-Counter Bulletin Board or
"OTCBB" under the symbol "CIOB." As of September 1, 2004, we had approximately
114 million shares of common stock outstanding held by approximately 20,000
shareholders. In addition to the outstanding shares of our common stock, there
are outstanding exercisable warrants and options to acquire approximately 10
million shares of our common stock at exercise prices ranging from $0.22 to
$5.00. Of the approximately 114 million fully-diluted shares of our common stock
outstanding, 12.6 million shares are beneficially owned by insiders and
affiliates. Other than our wholly-owned subsidiary, Bales Scientific, Inc., we
have no interest in any other entity.

                                        2

<PAGE>

         We were a development stage company and, to date, we have funded our
business activities with funds raised through the private placement of common
stock, debt and warrants, and the exercise of warrants and options. We are
facing substantial financial challenges in that without sales we cannot support
operations and without the cash from sales we cannot support a sales staff,
therefore we are seeking cash from either a private placement of equity or debt.

INDUSTRY OVERVIEW & TRENDS

         The American Cancer Society estimated in 2003 that 211,300 new cases of
invasive breast cancer would be diagnosed among women and an estimated 39,800
women in the United States would die from the disease during 2003. Except for
skin cancer, breast cancer is the most commonly diagnosed cancer among American
women, accounting for nearly one of every three new cancers diagnosed, and is
the second leading cause of cancer death (after lung cancer). According to
information compiled by Atairgin, a biotechnology company dedicated to improving
the quality of care in women's health, each year more than 20 million women in
the United States have a mammogram to screen for breast cancer. Approximately
two million of those mammograms require additional follow-up due to a suspicious
finding, and approximately 1.3 million abnormal mammograms require a breast
biopsy to characterize the suspicious tissue as benign or malignant. The
statistics compiled by Atairgin also indicate that approximately 20% of the
suspicious tissues that are subjected to biopsies will turn out to be cancerous.
In other words, more than 80% of these breast biopsies performed during 2002
were expected to yield benign results.

         According to Atairgin's statistics, of the 1.3 million breast biopsies
performed in the United States each year, approximately 800,000 are open
surgical procedures where the patient is anesthetized or heavily sedated and a
surgeon extracts the mass through an incision. The remaining approximately
500,000 biopsies are less invasive "core" biopsies, where a needle is guided to
the region of interest and a sample is obtained without having to perform open
surgery. We believe the trend is toward less invasive biopsy methods in an
effort to reduce scaring, cost and emotional trauma.

         If we receive pre-market approval from the FDA for our BCS 2100, we
believe that, under prescribed circumstances, radiologists and surgeons will be
able to use the physiological profile of the suspicious tissue produced by our
BCS 2100 to determine whether breast masses are benign, without performing a
biopsy. The target users of the BCS 2100 are the more than 10,000 certified
mammography centers in the United States and more than 10,000 mammography
centers throughout the rest of the world.

         The primary target markets for our pain management products consist of
over 50,000 chiropractors, pain management practitioners, occupational
therapists, physical therapists and major sports teams in the United States
looking for ways to diagnose and treat injuries and pain conditions effectively
and quickly. Various reports estimate the number of Americans suffering from
chronic pain at between 50 million and 80 million, and estimate that an
additional 25 million Americans suffer acute injury-related pain, costing the
United States economy between $50 billion and $100 billion annually in missed
work days, emergency room visits, medications and other costs.

         The primary target market for our industrial products is manufacturers
of complex castings, particularly in the aerospace and power generation markets.

OUR PRODUCTS AND SERVICES

         We have developed six significant proprietary technologies, four of
which relate to the BCS 2100: 1) a climate-controlled examination unit to
provide patient comfort and facilitate reproducible tests for the BCS 2100; 2)
an imaging protocol designed to produce consistent results for the BCS 2100; 3)
a statistical model that detects physiological irregularities for the BCS 2100;
4) infrared imaging and analysis hardware, including our proprietary
heat-sensing camera, which is used in the BCS 2100 as well as our pain
management and industrial systems (collectively, we refer to items 2-4 as our
"Thermal Imaging Process"); 5) a system to treat pain and other symptoms of
diseases that restrict blood flow, which is used in the Photonic Stimulator; and
6) the TBIS.

                                        3

<PAGE>

Medical Products - BCS 2100
---------------------------

         Our BCS 2100 provides a non-invasive, painless method to collect
information that could supplement the information provided by mammograms for the
evaluation of suspicious breast lesions. To receive a breast scan on the BCS
2100, a patient would lie face down on our device and expose one breast at a
time to the flow of cold air. The breast is then observed by our infrared imager
as it cools. Because malignant tissue is more vascular and less likely to
constrict upon contact with cool air than benign tissue, malignancies are
measurably warmer than benign tissue. The BCS 2100 captures 103 dynamic images
of each breast and analyzes over 8.3 million temperature values per breast to
measure minute changes in physiological and metabolic activity. From these
measurements, the BCS 2100 is able to compute a mathematical probability and
indicate the likelihood that a suspicious breast lesion is benign or malignant.
We believe that this data, when combined with diagnostic information from
mammograms, will provide radiologists with additional information that can be
useful in determining more precisely when a surgical biopsy is needed.

         Mammography and related imaging methods capture a snapshot of
anatomical structure at a moment in time, but do not provide information about
the behavior of the structures exposed. While mammography may detect the
presence of an abnormality in the breast, a biopsy is required to determine
whether the abnormality is benign or malignant. We believe our technology
produces images that expose the physiology and function of breast tissue. If we
receive FDA approval for the BCS 2100, we believe this physiological information
can provide health professionals with a tool for more accurately discriminating
between those cases that require invasive biopsy and those that do not;
furthermore, we believe our BCS 2100 will be able to provide physiological data
that can lead to fewer biopsies, 80% of which have benign findings.

         We believe the BCS 2100 provides a tool that could detect cancer in
almost all types of abnormal breast lesions: masses, micro-calcifications and
architectural distortions. In our clinical trials, where BCS 2100 findings were
confirmed by biopsy, we detected malignancy 96.4% of the time when cancer was
present, and we believe we can improve this overall sensitivity with additional
clinical research studies and statistical software development.

         Our best sensitivity is with lesions classified as masses. According to
our clinical trials, where BCS 2100 results were confirmed by biopsies, our BCS
2100 detected cancer in lesions described as masses 99.3% of the time when
cancer was present. This means the BCS 2100 has a false negative rate of less
than 1%. Our pre-market approval application addresses efficacy for all breast
lesions, but later amendments and panel presentations focused on lesions
described as "masses," which represent about half of all anomalies noted on
mammograms referred for biopsy, and where the BCS 2100 had the best clinical
sensitivity. If utilized as a decision tool, excluding all other factors,
procedures and tests, we believe the BCS 2100 would have resulted in the
deferral or avoidance of 19.2% of biopsies in women who had masses detected on
their mammograms. The efficacy data presented shows a false positive rate (cases
where results from the BCS 2100 indicated the possible presence of cancer when
none existed) approximately 80% of the time when cancer was not present. We
believe that ongoing clinical research and future developments in the software
algorithms (statistical models), as part of the product maturation process and
under FDA-approved procedures, will enable the BCS 2100 to safely achieve
significantly lower false positive rates, thereby leading to higher biopsy
avoidance rates.

         We view biopsy as the direct competition for the BCS 2100. According to
the American College of Radiology, the average breast biopsy costs between
$1,000 and $3,000 per patient. We believe that a breast scan on the BCS 2100
would cost a fraction of the cost of a biopsy and avoid the pain, risk of
infection and other complications arising from an invasive surgical procedure.

         We have not received FDA pre-market approval for the BCS2100 and,
accordingly, are not presently permitted to market and sell the BCS 2100 in the
United States. Medical device marketing and distribution efforts rely upon
building relationships with other manufacturers (strategic alliances), equipment
dealers, physicians and clinical investigators. Local distributors tend to have
the essential relationships with hospitals that are difficult to duplicate with
a captive sales force. In anticipation of possible FDA approval, we have
initiated relationships with distributors who have established relationships in
the radiology and medical imaging communities. Such persons have not, however,
initiated efforts to market or sell the BCS 2100. We presently anticipate that
unless and until we obtain FDA pre-market approval of the BCS2100, our marketing
activities in the United States will be limited to our attendance at industry
trade shows and professional conferences where we can present product
information in an educational format to radiologists.

                                       4



<PAGE>

         Curtailed operations and activities greatly hamper our ability to
continue to sell at a level that will sustain operations.

Medical Products - Pain Management
----------------------------------

         We market two pain management devices used for diagnostic imaging and
therapeutic treatment, the TIP and the Photonic Stimulator.

         The TIP falls into a class of devices that the FDA permits to be
marketed within the limitations of the following identification:

         A telethermographic system for adjunctive diagnostic screening for
         detection of breast cancer or other uses in an electrically powered
         device with a detector that is intended to measure, without touching
         the patient's skin, the self-emanating infrared radiation that reveals
         the temperature variations of the surface of the body. This generic
         type of device may include signal analysis and display equipment,
         patient and equipment supports, component parts, and accessories.

         The TIP uses the same infrared camera as the BCS 2100 to measure body
heat naturally radiated by the patient as he/she stands (or sits) before the
camera. The heat-measuring capabilities of the TIP are generally used by our
customers to develop a physiological profile of a patient to assist in the
diagnosis and treatment of a wide range of physiological and circulatory
abnormalities, principally soft-tissue related injuries and pain. We have not
conducted clinical studies confirming the effectiveness of the TIP for any
specific uses.

         The TIP system competes indirectly with x-ray, computed tomography,
ultrasound and magnetic resonance imaging ("MRI"). Medical practitioners
typically view imaging technologies as elements of a toolkit, each uniquely
suited for the diagnosis of a specific problem or problems. The TIP also
competes against infrared cameras available in the aftermarket and marketed by
several small direct competitors.

         The outbreak of Sudden Acute Respiratory Syndrome ("SARS") in recent
years provided a new opportunity for employing the TIP as a pre-screening device
at international ports of entry and other public facilities; e.g., train
stations and airports. The TIP is not designed or calibrated to screen for SARS;
however, the TIP is designed to provide an accurate reading of surface skin
temperature. One of the outward symptoms of SARS (along with the common cold,
flu and numerous other ailments) is elevated skin temperatures. The TIP can be
used to identify persons with increased skin temperature, who would then be
identified for further, more accurate and invasive testing procedures that could
determine if the person is infected with SARS.

         We have not marketed or sold any TIPs in the United States to entities
that have expressed their intent to use the TIP as a pre-screening device for
SARS. Because we have not sought or received pre-marketing approval of the TIP
as a SARS screening device, we are not permitted to make claims that the TIP is
effective as a SARS screening device. We may, however, make claims that the TIP
is effective in reading surface skin temperatures. As described above, certain
government authorities may find the ability of the TIP to detect elevated skin
temperature useful in identifying symptoms that are consistent with (but not
definitively indicative of) SARS or other diseases.

         We have sold TIPs for pre-screening use into the People's Republic of
China, and we are participating in a Canadian program to evaluate the use of
infrared imaging for airport passenger screening. While these activities appear
positive, we are uncertain whether SARS screening procedures using the TIP, or a
competing thermal imaging device, will be adopted on a widespread basis. If
adopted, we are uncertain that the TIP would be selected over alternative
devices, which may be more suitable for such purpose.

         The current suggested retail price for the TIP is $55,000. Our average
selling price for new equipment during fiscal 2004 was $31,250 and during fiscal
2003 was $43,800. Our average selling price for reconditioned TIP is $28,000.
Although we believe our TIP system competes favorably with aftermarket and other
direct offerings in terms of capability and price, we expect TIP system prices
to decline over time as a result of increased competition.

         A complementary infrared light therapy device, our Photonic Stimulator,
is a hand-held device that emits infrared energy which penetrates the skin to
stimulate blood flow and promote circulation. The Photonic Stimulator falls into
a class of devices that the FDA permits to be marketed within the limitations of
the following identification:

                                       5



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         An infrared lamp is a device intended for medical purposes that emits
         energy at infrared frequencies (approximately 700 nanometers to 50,000
         nanometers) to provide topical heating.

In addition to its general classification, an approval statement of
specifications attached to the authorization received from the FDA states: "The
Photonic Stimulator emits infrared light that penetrates the skin to promote
increased blood flow and circulation, thereby providing safe, temporary relief
of minor aches and pains where heat is indicated."

         The infrared light-focusing capabilities of the Photonic Stimulator are
generally used by our customers to treat general aches and pains. Published
reports written by practitioners who use the Photonic Stimulator indicate that
infrared light therapy is also used in an attempt to promote circulation and
speed healing. We have not conducted clinical studies confirming the
effectiveness of the Photonic Stimulator for any specific uses.

         The Photonic Stimulator competes with therapeutic ultrasound,
electrical stimulation and newly-approved laser light therapy devices. The
current suggested retail price of our Photonic Stimulator is $4,500. Our average
selling price during 2004 was $2,600, and during 2003 was $2,130. We expect
Photonic Stimulator resale prices to remain at current levels for the
foreseeable future as we continue our efforts to expand unit volume and compete
with other light therapy devices as light therapy becomes more accepted.

         In order for us to expand our pain management segment, there must be
increased market adoption of both the TIP and the Photonic Stimulator based on
customer referrals, testimonials, and published third-party research in order to
build credibility of products and earn expanded indications for use of the
devices from the FDA. The adoption of new products may be adversely affected by
general economic conditions, changes in insurance coverage offered by private
insurers in response to the general economy and new competitive offerings. We
cannot guarantee that customers will accept our products, or that we will be
able to profitably manufacture and sell these products.

         To date, pain management product marketing has relied upon trade
advertising, word-of-mouth recommendations, public relations and media outreach,
trade show attendance, direct and channel sales, and educational seminars, where
products are demonstrated to groups of potential customers. We hold user group
meetings and work with our current customer base to place articles and provide
testimonials about how our pain management devices have impacted their practices
and improved the condition of their patients.

         We have a direct field sales team and a small inside sales team. To
build credibility and to obtain additional market exposure, we have developed
relationships with pain management dealers in California, Texas, Florida, New
England and Asia who have established relationships and reputations in these
markets.

Industrial - Non-Destructive Testing Products
---------------------------------------------

         Bales Scientific, Inc. ("Bales Scientific"), our wholly-owned
subsidiary, provided industrial test services and has, for many years, designed
and sold industrial test systems to customers who desire to perform their own
testing. Our industrial non-destructive testing product focus has been the
analysis of turbine blade defects. Turbine blades are very complex cast parts
used in aircraft, power generation, pumps and compressors. Using techniques
similar to those employed by our BCS 2100 and the infrared camera used in the
BCS 2100 and TIP products, our TBIS creates thermal stress by rapidly heating a
component, collecting a series of images as the component returns to ambient
temperature, and then analyzing these images to determine the presence or
absence of characteristics determined to correlate with certain manufacturing
and usage-induced defects. The analysis identifies defects, abnormalities and
flaws in the test material. This system can identify blockages in cooling holes
as small as the diameter of a human hair. We believe that this technology is
uniquely capable of testing blades automatically, quickly, inexpensively and
without destroying or compromising the blade part. During the third quarter of
fiscal 2003, to reduce cash outlays, we relocated this activity to our Ogden,
Utah facility and closed the operations formerly conducted by Bales Scientific
Walnut Creek, California.

         The turbine blades tested using our TBIS include aircraft turbines
employed in military aircraft, and electrical power turbines. TBIS sales have
long lead times and require significant integration into the customer's
production systems. TBIS sales have been infrequent, are dependent upon the
health of the aerospace industry and general economic conditions, and there may
be relatively few customers for this device.

                                       6



<PAGE>

         TBIS base systems are generally priced in a range between $350,000 and
$450,000 and compete with industrial x-ray, ultrasound and other technological
approaches. This system provides a safe, effective and hygienic approach to
locating product defects, and requires no disposable supplies; i.e., x-ray film.
We also market smaller, less expensive systems utilizing our TIP and an
alternative thermal stimulus device with a suggested retail price of
approximately $130,000. We market these products directly to engine and power
system manufacturers and other industrial customers. These products typically
have long sales cycles, and demand is directly impacted by general economic
conditions.

PATENTS

         As of June 30, 2004, we had the following patents or patent
applications pending before the United States Patent and Trademark Office:

         o    Patent No. 5,999,842, dated December 7, 1999, acquired by
              assignment from TRW on a Functional Thermal Imaging Apparatus (our
              BCS 2100 Patient Positioning Table).
         o    Patent No. 6,157,854, dated December 5, 2000, covering techniques
              designed to reduce or eliminate pain by the application of
              infrared therapy while monitoring the process as it is being
              conducted. The techniques involve the use of our Photonic
              Stimulator to apply infrared energy to a patient while using the
              TIP to monitor the patient's response to the therapy.
         o    Patent No. 6,366,802, dated April 2, 2002, covering techniques
              designed to reduce or eliminate pain by the application of
              infrared therapy while monitoring the process as it is being
              conducted. The techniques involve the use of our Photonic
              Stimulator to apply infrared energy to a patient while using the
              TIP to monitor the patient's response to the therapy.
         o    Patent No. 6,570,175, dated May 27, 2003, covering an infrared
              imaging arrangement for the turbine component inspection system
              covering the overall fixture and infrared imager arrangement
         o    Patent No. 6,711,506, dated March 23, 2004, covering software
              providing operator assistance during the use of an automated
              infrared inspection system of turbine components.
         o    Patent No. 6,750,454, dated June 15, 2004, covering software
              performing automated analysis of the thermal response of a turbine
              component to application of thermal stimuli by an infrared
              inspection system.
         o    Patent No. 6,757,412, dated June 29, 2004, covering an algorithm
              used to analyze imaging data collected through our BCS 2100 Patent
              application (Serial No. 10/062,862, dated January 31, 2002) for a
              heat exchanger for turbine component inspection system covering an
              improved convective heat exchanger design for use in the turbine
              component inspection system.
         o    Patent application (Serial No. 10/677,100, dated September 30,
              2003) for design and evaluation of actively cooled turbine
              components.
         o    Patent application (Serial No. 60/378,764, dated May 7, 2002) for
              the cold stimulus turbine component inspection system.

         Subject to the availability of capital, we hope to pursue the
registration of additional copyrights, patents and trademarks in the United
States; however, we presently lack the resources to pursue any additional
intellectual property protection. We believe that our patents and patent
applications are valid and enforceable and provide some competitive protection
for our products; however, any of our patents or other intellectual property
rights may be challenged, invalidated or circumvented, or the rights granted
thereunder may not provide any competitive advantage. We could also incur
substantial costs in asserting our intellectual property or proprietary rights
against others, including any such rights obtained from third parties, and/or
defending any infringement suits brought against us. We do not currently possess
the resources necessary to assert or defend our intellectual property rights.
Although we generally enter into confidentiality and invention assignment
agreements with our employees and consultants, there can be no assurance that we
have done so with all relevant employees and consultants, that such agreements
will be honored or that we will be able to effectively protect our rights to
unpatented trade secrets and know-how. Moreover, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how. We may be required to obtain licenses to certain intellectual property
or other proprietary rights from third parties. Such licenses or proprietary
rights may not be made available under acceptable terms, if at all. If we do not
obtain required licenses or proprietary rights, we could encounter delays in
product development or find that the development or sale of products requiring
such licenses is foreclosed.

                                       7



<PAGE>

SOURCE OF SUPPLY

         Manufacture and assembly of our pain management and thermal imaging
devices require standard electronic components, formed or machined metal and
plastic parts, wiring harnesses, printed circuit boards and metal cases which
are available from any number of suppliers with relatively short lead times. We
single-source certain proprietary optical components and cooling equipment;
these typically require 12 to 16-week lead times. To date, we have experienced
no supply disruptions with these vendors. While there are alternative sources
for these products, the loss of one of our current suppliers would require that
we invest time developing and certifying a new supplier. Until the new vendor is
located and certified, we could experience a disruption in ability to supply TIP
systems, which are a component of the BCS 2100 and our industrial products.

BUSINESS STRATEGY AND PRODUCT DEVELOPMENT

         We believe our products and technologies provide a unique collection of
cost-effective diagnostic, pain management and product testing solutions for
medical and industrial customers. Our target customers are hospital radiology
departments, cancer research facilities and imaging centers, chiropractors and
physical therapists, and manufacturers of products with complex cast components
or processes.

         Critical to our business strategy is to obtain the required approval
from the FDA with respect to our BCS 2100 and our pain management products. As
described in greater detail below under "Government Regulation," we have
obtained Section 510(k) approval for our Photonic Stimulator and TIP. Section
510(k) approval which permits us to market and sell such products for the uses
described in the approval letter and the applicable section of the Code of
Federal Regulations. As described in greater detail below, we have applied for,
but have not received, pre-market approval with respect to our BCS 2100. We
believe that securing pre-market approval for the BCS 2100 is essential to our
efforts to develop and market the BCS 2100 because, without such approval, we
will not be able to market the BCS 2100 as a breast cancer screening device in
the United States, obtain insurance payment codes or develop physician
acceptance of our system.

         Our marketing efforts rely upon building relationships with
manufacturers, local medical equipment dealers, physicians and clinical
investigators. We established a medical advisory board to assist us in preparing
for the FDA panel meeting and to help us devise programs and projects to
facilitate acceptance in the market place. We have also attended trade shows and
conferences and make direct sales calls to industrial customers and sponsor
clinics, where we introduce and demonstrate our breast imaging, pain management
and non-destructive testing products. We believe marketing our medical products
directly and through a dealer channel, augmented with trade shows, conference
presentations, direct mail and inside sales, provides a cost-effective approach
to diagnostic imaging and pain management practitioners. As of August 31, 2004
our medical advisory board was dormant, we had discontinued trade show
participation and had limited our marketing activities to user group meetings
with current and potential customers and direct selling; however, if we are
successful in securing additional capital, we plan to continue investing
resources in these programs.

         As with all medical devices, it is important that our BCS 2100
customers receive adequate reimbursements from third-party payers: insurance
companies, Medicare and Medicaid reimbursement agencies. We applied for a
reimbursement code from the American Medical Association during December 2001
for our BCS 2100. Our application will not be acted upon unless and until we
receive FDA pre-market approval for the BCS 2100.

         Our pain management products qualify for insurance reimbursement in
most states at rates that vary on a state-by-state basis. Generally insurance
providers offer coverage if the state's workers compensation scheme recommends
coverage. Currently only New York, Montana and Minnesota do not recommend
coverage for treatments that include infrared imaging or infrared therapy.
Average reimbursement for an infrared imaging procedure with our TIP camera, in
states offering reimbursement, is $198, with a high of $375 and a low of $96.
Average reimbursement for an infrared treatment with the Photonic Stimulator is
$12, with a high of $38 and a low of $4 per treatment.

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<PAGE>

         In order to conserve cash as we seek FDA approval for the BCS 2100, we
have scaled back operations and staffing levels by, among other things, reducing
our research and development group from 16 full-time employees in the fall of
2002 to one part-time employee in August 2004 and reducing our manufacturing
group from 20 full-time employees in the fall of 2002 to 2 full-time employees
in August 2004. In addition, we were in the process of developing temperature
screening software for the TIP to include a fever detection algorithm, color-map
settings for fever threshold, reporting, and networking, but suspended
development of the software in June 2003 due to lack of resources. Nevertheless,
we continue to expend financial and technical resources improving and developing
certain applications for our medical products. Specifically, we have upgraded
certain software developments for the camera used in the BCS 2100 and the TIP,
have commenced but not completed a project to reduce the size and weight and
improve operator efficiency and clinical effectiveness of the BCS 2100, have
added circuitry to the camera detectors in order to reduce noise and improve
imaging, and have upgraded the TIP application software (including new release
targeted to healthcare professionals).

COMPETITION

MEDICAL IMAGING. The principal methods used to visualize internal human anatomy
are x-ray, computed tomography, ultrasound and MRI. Physicians view these
technologies as elements of a toolkit, each uniquely suited to the diagnosis of
a specific problem or problems.

         Our BCS 2100 provides physiological information that supplements the
anatomical information obtained from mammography and does not compete directly
with x-ray, computed tomography, ultrasound or MRI. Our system is painless,
requires no radioactive materials and involves no invasive technology.

         Our pain management products compete with ultra-sound, electrical
stimulation, newly approved laser light therapy devices and infrared cameras
purchased from competitors or in the aftermarket for infrared cameras.

         Our industrial applications compete with industrial x-ray, and high
pressure water and air techniques; which require skilled labor, are time
consuming and may utilize dangerous radiation that requires special facilities.
Our TBIS provides additional defect analysis more quickly by using less skilled
labor and no special environment, and may replace high pressure water and air or
x-ray for certain applications.

         The companies that supply diagnostic and industrial imaging equipment
range from large manufacturers to smaller specialized companies. Large
diversified manufacturers, for which imaging systems define only a portion of
their total business, include General Electric, Siemens, Toshiba, Hitachi and
Philips.

NEW TECHNOLOGIES. Digital x-ray captures images electronically and may provide
several important benefits relative to existing technologies: 1) reduced
radiation dosage; 2) faster access to images, which is critical for emergency
room use; 3) the ability to distribute and access an image through a computer,
enabling remote consultation; and 4) reductions in labor and radiographic film
costs. Our BCS 2100 does not compete with digital x-ray equipment. In fact, as
mammography technology improves, we believe more women will be referred for
biopsies. We believe this will create a greater demand for technologies, like
our BCS 2100, that may be able to determine whether a patient's mass is benign
without the use of an invasive surgical procedure.

         Positron Emission Tomography ("PET"), a nuclear medicine-based
diagnostic imaging technique for measuring the metabolic activity of human
cells, may benefit patients suffering from certain types of cancer or certain
conditions affecting the brain and heart. Many insurance carriers approve PET,
but the technology is expensive and difficult to administer.

         Optical imaging of the breast is based on laser transillumination. This
technology is under investigation as a possible approach for medical imaging,
and at least one potential competitor is attempting to secure FDA approval for
its version of this technology. Laser transillumination has been investigated
for over 20 years and recent implementations of this technology used computed
tomography to improve the results. We believe our BCS 2100 competes favorably
with this technology.

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<PAGE>

PROCEDURES. We view biopsies, either needle aspiration or open surgery, as
direct competition for the BCS 2100. We believe that the BCS 2100, if approved
by the FDA with the indications for use we have requested, will be adjunctive to
mammography, and that every patient with an abnormal mammogram indicating a
mass, who might be referred to biopsy under current protocols, will be a
potential candidate for a BCS 2100 procedure. We believe that, through the
product maturation process involving additional product development, we will be
able to obtain expanded indications for use and effectively screen all patients
referred for biopsy. To successfully market our product, which can occur in the
United States only if we receive FDA approval, we will have to educate
physicians about the BCS 2100 so that they will be able to recommend a BCS 2100
procedure to their patients, persuade hospitals and imaging centers to purchase
the equipment and convince insurance carriers to provide reimbursement for the
BCS 2100 procedure.

OUR SALES AND MARKETING STRATEGY

OVERVIEW. We plan to market our products with a multi-channel strategy
incorporating independent distributors, direct marketing, telemarketing, the
internet and corporate marketing. We plan to address the industrial market with
a direct sales force augmented by distributors and dealer representatives as
appropriate.

DISTRIBUTORS. We have retained and intend to continue to seek the services of
distributors. Our distributors usually focus their efforts on a specific channel
in a specific region; e.g. chiropractors and physical therapists in Northern
California. We believe that distributors provide intimate local market knowledge
and contacts critical to accessing hospital imaging facilities, radiologists,
chiropractors and physical therapists, and local service capability. Our
agreements with these distributors allow the distributor to purchase products at
a discount from list price, usually 30%, and provide extended terms for an
initial order of demonstration equipment, which we do not recognize as a sale
until the distributor actually pays for the equipment. We retain the right to
develop and service national accounts in the distributor's territory, but
provide a period of limited exclusivity with regard to the distributor's own
customers, which can be extended only if the distributor meets certain sales
goals. To date, no distributor has met these goals. We also require the
distributor to participate with us in certain marketing programs, such as user
group meetings.

TELEMARKETING / TELESALES. We believe telemarketing/telesales provides important
direct marketing, lead follow-up and customer service capability, particularly
in the pain management segment. Telemarketing creates revenue through direct
sales and generates leads for distributors. However, due to limited resources,
our use of telemarketing and telesales has been limited.

INTERNET. We use the internet to provide information to current and potential
customers. Our web address is www.cti-net.com.

USER GROUPS AND SEMINARS. We believe meeting with our customers and potential
customers at informal user conferences and training sessions provides valuable
market intelligence, product use information, and assists us in selling our
products. We have conducted user group meetings at various sites across the
United States and by conference call.

TRADE SHOWS AND ASSOCIATIONS. From time to time, we have attended medical and
industrial trade shows and presented papers at professional conferences. We
believe attendance at trade shows and conferences allows us to build product
awareness, demonstrate our products, educate customers and generate leads for
future sales.

CORPORATE MARKETING. To the extent our working capital permits, we intend to
develop product and corporate collateral materials, advertise in select trade
journals, demonstrate our products and present papers, and research results at
conferences and trade shows. We believe these activities will build product and
corporate awareness and support our sales efforts in selected vertical markets.

INDUSTRIAL PRODUCTS. We have a small internal team pursuing industrial
opportunities. This team manages relationships with existing and potential
customers in the turbine power market and is exploring potential relationships
with industrial customers requiring non-destructive testing capabilities.

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<PAGE>

SERVICE PROVIDERS AND CONTRACTOR RELATIONSHIPS

CONTRACTOR RELATIONSHIPS. Our business model relies upon contractors and
suppliers to reduce our development risk and to provide necessary clinical
resources. During the course of preparing our FDA pre-market approval
application and conducting regular clinical studies, we engaged the services of
certain contractors, including Battelle Memorial Institute, which assisted us in
the preparation of regulatory submissions and provided technical consulting
services, on a time and materials basis, in connection with algorithm
development and statistical consultation for interaction with the FDA. We have
terminated our relationship with Battelle because of a shortage of working
capital. If we were to require such consulting services in the future in
connection with a supplement to our pre-market approval application or
otherwise, replacing Battelle would be costly and difficult (because any
competing entity would be unfamiliar with our data). We hope Battelle would
continue to work with us if needed in the future (if we provide a sufficient
retainer), but we have no contractual commitments to that effect.

         We have also used the services of Quintiles, Inc., an independent
consulting firm authorized by the FDA, to verify clinical examination results,
to provide clinical trial monitoring and FDA preparation support. We have
terminated our relationship with Quintiles because we no longer need their
services. If we were to require such consulting services in the future in
connection with a supplement to our pre-market approval application or
otherwise, we believe Quintiles would continue to work with us if we provided a
sufficient retainer, but we have no contractual commitments to that effect. If
we were unable to engage Quintiles again, we believe we could find alternative
providers of similar services at similar rates.

CLINICAL TRIALS. Previously, we contracted with six hospitals to conduct the
clinical trials necessary for FDA approval of the BCS 2100. The six hospitals
are:

-        USC/Norris Comprehensive Cancer Center, Los Angeles;
-        Los Angeles County Hospital, Los Angeles;
-        Mt. Sinai Hospital, Miami;
-        St. Agnes Hospital, Baltimore;
-        Lahey Clinic, Boston; and
-        Providence Hospital, Washington, D.C.

         We do not have any ongoing contractual relationships with any of these
institutions, and no clinical trials are ongoing. We continue to have periodic
contacts with officials at the USC/Norris Comprehensive Cancer Center and the
Lahey Clinic, and believe that such persons would be available for consulting
and other services if requested, but we have no written commitments to such
effect.

CLINICAL STUDIES. Clinical studies are clinical research conducted for purposes
of developing expanded indications for use, testing product enhancements,
identifying potential product issues and obtaining product trials by
practitioners and patients. Clinical trials are experiments where patient
results are withheld from us pursuant to experimental controls designed to
ensure scientific accuracy and are conducted in connection with obtaining FDA
pre-market approval.

         If we obtain pre-market approval from the FDA for our BCS 2100, of
which we can provide no assurance, we plan to expand our clinical studies
utilizing the BCS 2100 with institutions and practitioners to obtain user
feedback, test product enhancements and secure technical papers, and for
training and educational marketing purposes. During 2002, we entered into a
research relationship with McKay-Dee Hospital in Ogden, Utah for a study of up
to 70 patients referred for biopsy of a single mass after undergoing
conventional diagnostic procedures. We conducted this study to acquire
information about the effectiveness of the BCS 2100 for women age 60 and over
presenting with a lesion described as a mass. We ended this study during the
third quarter of fiscal 2003, without conclusion, when it became apparent that
the institution did not treat sufficient patients to complete the study in a
timely fashion. A separate study at McKay-Dee Hospital involved 125 women to
obtain baseline information regarding the characteristic thermal profile
associated with normal breast tissue in women 21 and older. We concluded this
study during March 2002 and are holding the data for further analysis if we
receive FDA approval. We also initiated a study at Massachusetts General
Hospital, Harvard Medical School's largest teaching hospital, for a clinical

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<PAGE>

study involving up to 250 patients referred for biopsy of a single mass after
undergoing conventional diagnostic procedures. This study was intended to
acquire information to study the effectiveness of the BCS 2100 in women age 60
and under who present with a lesion described as a mass. This study is on hold,
pending the FDA's final decision regarding our application for pre-market
approval of the BCS 2100. These studies could provide us with an opportunity to
evaluate the form and function of the BCS 2100 and develop product enhancements
for next generation products. We are currently conducting a study with the
Photonic Stimulator, evaluating its effect on neck and shoulder pain. We are not
currently conducting clinical studies or trials for our TIP or Photonic
Stimulator.

         In addition, we have utilized the services of Regulatory Insight, Inc.,
an independent clinical research organization, to conduct a study with our
Photonic Stimulator to evaluate its effect on neck and shoulder pain after a
limited course of treatment. Under our agreement with Regulatory Insight, they
agreed to develop a protocol for the study, submit the protocol to the FDA for
review, and conduct a study in accordance with the protocol in exchange for our
payment of a fee, reimbursement of expenses and provision of training and
materials. Regulatory Insight has completed their analysis of data collected,
and the study is completed. We cannot guarantee customer acceptance, published
results, expanded indications for use or the effectiveness of any product
enhancement or protocol tested in connection with these efforts. We believe,
however, these efforts are important and intend to continue this activity if we
obtain sufficient capital to continue our operations.

GOVERNMENT REGULATION

OVERVIEW. Our BCS 2100, Photonic Stimulator and TIP qualify as medical devices
under U.S. federal law because they are intended for use in the diagnosis, cure,
mitigation, treatment or prevention of disease but do not interact chemically
with the body. Medical devices are divided into three classes under FDA
regulations. Low risk devices that are substantially similar to approved
products already on the market are classified as Class I or Class II devices and
may be marketed if approved by the FDA following submission of a fairly simple
Section 510(k) filing. Sophisticated instruments that entail significant risk,
or utilize unique or new technology, are classified as Class III devices and, as
further described below, may not be marketed absent a comprehensive FDA review
and pre-market authorization.

         All Class I, II and III devices are subject to certain requirements
after the marketing of the product is approved by the FDA, including rules
requiring the following:

         o    that the manufacturer register with the FDA and list its devices
              with the FDA;
         o    that the manufacturer label the devices for their approved use and
              otherwise in accordance with governing rules;
         o    that the manufacturer maintain manufacturing processes in
              accordance with the FDA's regulations and prescribed procedures
              regarding manufacturing processes, including a quality assurance
              system, document control and manufacturing and design control
              requirements promulgated by the FDA;
         o    that the manufacturer report adverse events with respect to such
              devices and maintain a corrective and preventative action program;
              and
         o    that the manufacturer comply with certain export and import
              limitations.

In the event a manufacturer (including CTI) is found to be out-of-compliance
with any of these regulations, the FDA may require the manufacturer to cease
production and marketing until corrective measures have been implemented. The
FDA also could require a product recall and could enforce civil and criminal
penalties against the manufacturer, its officers and others.

         Certain rules promulgated by the FDA, which relate to Class III
products, do not generally relate to Class I or II products. Such rules include
those mandating the following:

         o    that an investigational device exemption be obtained in connection
              with clinical studies,
         o    that the manufacturer adhere to specified clinical and
              investigational practices and procedures (called Good Clinical
              Practices) in connection with its studies,
         o    that the manufacturer obtain specified approvals from an
              institutional review board at each study site,

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<PAGE>

         o    that the manufacturer monitor, and permit the monitoring of,
              clinical sites and data to assure adherence to protocol,
         o    that the manufacturer report any adverse patient reactions that
              might occur in connection with its studies, and
         o    the manufacturer submit, as requested, to an FDA audit of clinical
              trials in connection with approving pre-market approval. During
              September 2002, the FDA conducted such an audit of our clinical
              trials at our Ogden, Utah, facility and concluded that our
              clinical trials were conducted in compliance with FDA regulations.

Most significantly, the FDA rules related to Class III medical devices prohibit
making claims of efficacy in connection with the marketing and sale of the
device unless and until pre-market approval has been obtained following a
determination by the FDA that the pre-marketing application contains sufficient
valid scientific evidence to assure that the device is safe and effective for
its intended use.

THE TIP AND PHOTONIC STIMULATOR. Our pain management products, the TIP and
Photonic Stimulator, are Class II devices. The Photonic Stimulator received
Section 510(k) approval under a generic category as "an infrared lamp ...
intended for medical purposes that emits energy at infrared frequencies to
provide topical heating" on April 15, 1998. Our TIP received Section 510(k)
approval on April 26, 1990 under a generic category as a "telethermographic
system for adjunctive diagnostic screening for detection of breast cancer or
other uses in an electrically powered device with a detector that is intended to
measure, without touching the patient's skin, the self-emanating infrared
radiation that reveals the temperature variations of the surface of the body."
As required by governing rules, each of the TIP and the Photonic Stimulator is
listed with the FDA and labeled, manufactured and designed according to
governing rules. We have not experienced any adverse events with respect to the
Photonic Stimulator or the TIP, have not had to recall either such product and
have not had any penalty or legal remedies exercised against us by the FDA with
respect to such products. In connection with our export of the Photonic
Stimulator and TIP to foreign countries, we have obtained (in accordance with
import regulations of the destination countries) certification of United States
clearance and complied with specific labeling and quality management
requirements. As explained above, because the TIP and Photonic Stimulator are
not Class III devices, rules related to investigational device exemptions,
clinical investigator monitoring, institutional review board approval and
pre-market approval do not apply to such devices.

THE BCS 2100. The BCS 2100 is a Class III medical device. As a result, we
obtained an investigational device exemption in connection with the commencement
of clinical studies on the BCS 2100. In addition, our clinical studies with
respect to the BCS 2100 were subject to monitoring and conducted in accordance
with Good Clinical Practices. Our clinical studies were reviewed and monitored
by institutional review boards at USC/Norris Comprehensive Cancer Center in Los
Angeles, Mt. Sinai Hospital in Miami, St. Agnes Hospital in Baltimore, Lahey
Clinic in Boston and Providence Hospital in Washington, D.C. As described in
greater detail below, we have requested from the FDA pre-market approval for our
BCS 2100 but have not obtained it. Until we obtain pre-market approval for the
BCS2100, we are not permitted to market or sell the device in the United States
or list it with the FDA. Because pre-market approval has not been obtained, FDA
rules related to listing, labeling, and manufacturing (other than design
controls) do not yet apply. In addition, because we are not yet marketing the
BCS 2100, we have not had any adverse events, recalls or penalties from the FDA
with respect thereto. We have sold a single BCS 2100 to a purchaser in the
Peoples Republic of China, and we obtained the requisite export permit with
respect to such single sale.

PRE-MARKET APPROVAL OF THE BCS 2100. As noted above, we are not permitted to
market the BCS 2100 or make claims of efficacy with respect thereto unless and
until our application for pre-market approval is approved by the FDA. An
application for pre-market approval typically contains significant clinical
testing, manufacturing and other data, all of which are scrutinized by the FDA
to demonstrate the product's safety, reliability and effectiveness, and that
proposed indications and conditions for use are appropriate. Typically, less
than 40 devices a year are granted pre-market approval. Only companies that are
registered with the FDA can submit a 510(k) or pre-market approval application.
As a registered company, we obtained the clearance necessary to conduct clinical
tests and submit the request for pre-market approval of the BCS 2100 by the FDA.

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<PAGE>

         For the past five years, we have pursued pre-market approval for our
BCS 2100 as an adjunct diagnostic tool to mammography in patients with
suspicious breast lesions that include mass being considered for biopsy. We
believe pre-market approval is essential because pre-market approval 1) permits
us to reference medical efficacy claims in our marketing; 2) leads to improved
physician acceptance of our system; and 3) is a key step in the process of
obtaining insurance reimbursement codes.

         We submitted our application for pre-market approval in five modules.
         Module 1 provided:

         o    An introduction of the use of infrared imaging, its safety and
              effectiveness;
         o    Summary of indications for use of infrared imaging as an adjunct
              to mammography and clinical examination in the detection of breast
              cancer;
         o    Summary of incidence, diagnosis and prognosis of breast cancer;
         o    Description of current modalities for detecting breast cancer;
         o    Description of our BCS 2100, including major components and the
              population for which our device has clinical utility;
         o    Description of our clinical trial and the population of the trial;
              and
         o    Statement of marketing of our device for its intended use.

         Module 2 provided:

         o    A detailed description of our BCS 2100 and its component parts;
         o    Detailed discussion of the clinical evaluation system required to
              analyze and interpret the clinical data obtained through the
              clinical trial; and
         o    Documentation of all software used in our BCS 2100, including
              software used in the development of our system and the acquisition
              of data in our clinical trial.

         Module 3 provided:

         o    Manufacturing information concerning our BCS 2100, including a
              detailed discussion of the facilities, personnel, equipment and
              controls used to manufacture our system;
         o    Information concerning the distribution and installation of our
              system; and
         o    A description of the procedures and record keeping associated with
              the manufacture, testing and installation of our device.

         Module 4 reiterated certain information and provided additional
information regarding:

         o    The safety of our BCS 2100, including all non-clinical testing of
              the structural and functional components of our device; and
         o    The safety of materials used in manufacturing our system.

         Finally, Module 5 was an evaluation of our clinical trials, including
the accumulation and analysis of all the clinical trials, efficacy data and an
update to our indicated use as follows: "The CTI BCS 2100 is a dynamic,
computerized infrared-based image acquisition device intended for use as an
adjunct to mammography in patients with suspicious breast lesions that include
masses being considered for biopsy. The CTI BCS 2100 provides additional
information to guide a breast biopsy recommendation."

         On December 10, 2002, the FDA's Radiological Devices Panel, which is
composed of independent experts, was convened by the FDA and held a public
hearing to evaluate our application in order to make a recommendation to the FDA
whether to approve or disapprove the BCS 2100 for its intended uses. The panel,
by a vote of 4-3, recommended that the FDA not approve the BCS 2100. On January
23, 2003, the FDA concurred with that recommendation. In a letter dated January
23, 2003, the FDA identified the following reasons for its denial of the
application:

         o    The proposed indications for use (IFU) were revised (i.e.,
              restricted to women with masses visible on mammography) on the
              basis of a retrospective analysis of the results of CTI's clinical
              study in the original approval dated June 15, 2001, which the FDA
              believed had the effect of limiting further use of the approval
              result for the purpose of supporting the proposed new IFU.

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<PAGE>

         o    The FDA concluded that the added clinical data from 69 of 275
              subjects in the "post-approval" (the "PPMA") results were
              insufficient by themselves (i.e. too few subjects) to constitute
              an adequate study. The FDA concluded that combining the PPMA data
              with the original approval data, employing the Bonferroni
              correction, would be statistically inappropriate in the absence of
              multiple formal hypotheses.

         o    The FDA determined that the basis for enrollment was not
              consistent with the final proposed IFU. That is, the FDA believes
              enrollment was not limited to mammographically visible masses.

         o    The FDA concluded that the number of exclusions of enrolled
              subjects was excessive - over 50%.

         In the same letter, the FDA explained that, in order to place our
application for approval in approvable form, we should do the following:

         o    Perform a new, focused pre-market clinical study which clearly
              defines the target population for the device, and strictly adhere
              to this definition for the enrollment of subjects.

         o    Before beginning the new study, revise the IFU (in particular, the
              target population) based on exhaustive data mining of the
              approval/PPMA database.

         o    Perform a reproducibility study that takes into account the
              variations that may be encountered in clinical practice. This
              should include such things as patient positioning, room
              temperature, different technologists, different radiologists (ROI
              selection variances), menstrual cycle, etc.

         o    Provide a validated quality assurance procedure that the user can
              perform on a daily basis to ensure that the device is performing
              properly. Include instructions for corrective action if it is not.

         In light of our shortage of working capital, we do not currently have
the resources necessary to conduct the additional clinical study requested by
the FDA. We disagree with the FDA's conclusions, including the FDA's
interpretation of data forming the basis for such conclusions In an attempt to
secure approval without conducting the request clinical study and other tasks,
we have corresponded and met face to face with the FDA's ombudsman, Deputy
Commissioner, Chief Counsel and other staff on various occasions in an attempt
to persuade them that the conclusions of the FDA's Radiological Devices Panel
and the decision of the FDA were incorrect. We have also described our situation
to government officials outside of the FDA, including the staffs of various
congressmen, and asked such persons to encourage the FDA to reconsider its
decision.

         On March 19, 2004, we received from the FDA's Center for Devices and
Radiological Health a memorandum addressing the potential bases for pre-market
approval of the BCS 2100. The FDA's memorandum did not grant us pre-market
approval of the BCS 2100; however, it did identify two additional approaches for
obtaining pre-market approval, and indicated that, although a new clinical study
would be required under either alternative approach, the number of subjects
required to complete either study would be considerably less than the number of
subjects that would be required to complete our pending studies.

         Our management have reviewed the FDA's March 19, 2004 memorandum in an
effort to determine the most efficient path to obtaining pre-market approval of
the BCS 2100. We have also reviewed the FDA's alternative approaches to assess
the anticipated impact of the two approaches on our ability to develop market
and sell the BCS 2100, as well as the use of the BCS 2100 by our customers. We
are pursuing the methods we believe to be fiscally responsible given our
difficult financial situation to obtain FDA approval. Unless and until we
receive approval or conditional approval), we cannot sell, market or distribute
the BCS 2100 for commercial use in the United States. The BCS 2100 has been
licensed for sale for commercial use in Canada and is in the approval process in
China through our contracted affiliate NanDa.

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<PAGE>

         On June 30, 2004 we filed a "Citizen Petition" with the FDA contending
that consideration of our application for pre-market approval was severely and
improperly prejudiced because of pervasive bias against CTI by the Food and Drug
Administration staff reviewers who improperly undermined the Advisory Panel's
review of our application and ultimately caused the FDA to reject that
application. We seek internal documents within the FDA to help us understand
what prejudiced the FDA staff. The full text of the full Citizen Petition and 23
exhibits thereto are available at
http://www.fda.gov/ohrms/dockets/dailys/04/july04/070104/04p-0276-cp00001-
toc.htm.

CURRENT EMPLOYEES

         As of September 1, 2004, we had six full-time employees: three general
and administrative, one sales and marketing, one research, software and
engineering, and one manufacturing and service. Though generally categorized as
mentioned, the reduced number of employees requires each employee to "cross
task" in each area of operation. Consultants are used in each area then needed.
None of our employees are represented by a union and we consider our employee
relations to be good.

                                  RISK FACTORS

INVESTMENT IN SHARES OF OUR COMMON STOCK IS SUBJECT TO A NUMBER OF RISK FACTORS
THAT, IF REALIZED OR COME TO FRUITION, MAY ADVERSELY AFFECT OUR PROFITABILITY
AND THE VALUE OF THESE SHARES WHILE HELD BY OUR SHAREHOLDERS.

OUR AUDITORS HAVE QUESTIONED OUR ABILITY TO CONTINUE OUR OPERATIONS.

         For the years ended June 30, 2004, 2003 and 2002, our auditors issued
their audit report with a going concern qualification. This means that, based on
our expected cash flow from operations and our existing current assets, our
auditors did not believe that we would be able to continue our operations in
their current form through the end of our 2005 fiscal year. At present, we are
not generating sufficient operating revenues to offset our operating expenses.
We have experienced a loss from operations in every fiscal year since our
inception. As a result of these losses, we had working capital deficits
throughout our 2004 fiscal year. Working capital is a measure of the amount of
liquid assets an enterprise has available to build its business. Our working
capital deficit is an indication that we currently lack the liquid funds
required to operate our business. We can provide no assurance that we will ever
generate sufficient revenues to restore our working capital or to continue our
operations.

WE DO NOT CURRENTLY HAVE SUFFICIENT CAPITAL TO MEET OUR OBLIGATIONS.

         As of June 30, 2004, we had $169 thousand in cash and a working capital
deficit of $1.5 million. Accordingly, we did not have sufficient capital to
conduct our operations or pay all of our debts when due. The only way we will be
able to continue our business operations will be if we are able to obtain
outside financing to fund our business operations and satisfy our liabilities.
We hope to use a combination of equity and debt securities and instruments in
order to secure additional funding; however, we do not presently have any
funding or financing commitments from prospective investors or lenders, and can
provide no assurance that we will be able to secure additional funding from any
source or, if available, upon acceptable terms and conditions. We have actively
sought to obtain funding from external sources and, except for limited
circumstances, we have not been successful in obtaining capital necessary to
continue operations throughout the next fiscal year. We may not be able to
obtain the amount of additional capital we need or may be forced to pay an
extremely high price for capital. Factors which may affect the availability and
price of capital include the following:

         o    Market conditions affecting the availability and cost of capital
              generally;

         o    our financial results, particularly the absence of significant
              revenue;

         o    our success, or lack thereof, in obtaining FDA pre-market approval
              of BCS 2100;

         o    the amount of our capital needs;

         o    the market's perception of biotechnology stocks;

                                       16



<PAGE>

         o    the market's perception of our ability to generate revenues
              through the sale of our products and services; and

         o    the price, volatility and trading volume of our common stock.

         If our losses continue and we are unable to obtain additional
third-party financing or proceeds from the sale of certain of our assets, we
will likely be unable to continue our business operations, may be forced to
liquidate our assets and may elect to seek protection under federal bankruptcy
laws, which could adversely affect us and our shareholders.

OUR FAILURE TO OBTAIN FDA APPROVAL OF OUR BCS 2100 HAS SIGNIFICANTLY LIMITED OUR
BUSINESS OPERATIONS AND COULD RESULT IN THE COMPLETE TERMINATION OF OUR
OPERATIONS.

         On January 23, 2003, the FDA concurred with the recommendation of its
Radiological Devices Advisory Panel to decline approval of our BCS 2100. The
FDA's decision, if not modified, precludes us from marketing the BCS 2100 in the
United States. Since the FDA's decision, we have advocated a reversal or
modification of the decision through multiple channels, but have been
unsuccessful in our efforts. We may formally appeal the FDA's non-approval
decision; however, an appeal would be expensive and time-consuming, and we do
not presently have the financial resources to sustain our operations or pursue
an appeal. We do not know whether our negotiations or any appeal we might file
will be successful. There is no assurance that we will receive FDA approval. Our
efforts to obtain FDA pre-market approval of the BCS 2100 have substantially
depleted our financial and other resources, which has led to significant
reductions in our operations and threatens our ability to fund our operations.
Failure to secure FDA approval would materially reduce or eliminate the market
for our BCS 2100 and could result in the complete termination of our operations.

ONGOING INVESTIGATIONS BY THE SEC AND U.S. ATTORNEY ARE CAUSING US TO INCUR
SIGNIFICANT LEGAL EXPENSES, WHICH HAVE NEGATIVELY AFFECTED OUR WORKING CAPITAL,
OPERATIONS AND BUSINESS PROSPECTS.

         Both the Securities and Exchange Commission (the "SEC") and the U.S.
Attorney's Office for the Southern District of New York are conducting
investigations involving possible violations of proscriptions on insider trading
by our Chairman and Chief Executive Officer. Although we believe CTI is not
currently a target of the investigations, we are incurring substantial legal
expenses in responding to requests for information and documents from the SEC
and the U.S. Attorney, preparing for and attending depositions by our officers,
conducting investigations of our own affairs, and advancing legal fees on behalf
of officers who are or may be entitled to indemnification in connection with
these investigations. As of June 30, 2004, we had incurred expenses of
approximately $825 thousand associated with these investigations. The expenses
we have incurred to date have substantially and adversely affected our limited
working capital and have negatively impacted our operations and limited our
efforts to raise badly-needed capital. The investigations (although slowed in
fiscal year 2004) are ongoing; and we anticipate that the expenses we will incur
in the future will continue to adversely affect our working capital, distract
management from day-to-day operations and limit our capital-raising activities,
any of which may result in us having to materially reduce or terminate our
operations.

WE HAVE LIMITED REVENUES FROM OPERATIONS AND MAY NEVER HAVE SUBSTANTIAL REVENUE
FROM OPERATIONS.

         With limited exceptions, our products have not been used in commercial
applications and there is no assurance that the market will accept our products
in sufficient volume to assure profitability. From inception on June 10, 1987 to
June 30, 2004, we recorded $3.8 million in revenue. We have also recorded $96.5
million in operating expenses, resulting in aggregate accumulated operating
losses as of June 30, 2004 of $96.7 million. We recorded revenues of
approximately $356 thousand and $1.5 million for the fiscal years ended June 30,
2004 and 2003, respectively. We can provide no assurance that we will ever
generate sufficient revenues to exceed our operating expenses. If our expenses
continue to exceed our revenues, our business will fail.

                                       17



<PAGE>

FAILURE TO OBTAIN INSURANCE REIMBURSEMENT CODES FOR OUR BCS 2100 MAY MAKE THE
BCS 2100 UNMARKETABLE, THEREBY ADVERSELY AFFECTING SHAREHOLDER VALUE.

         Most healthcare providers, insurance companies and other third-party
payers will not use or pay for the use of a medical device or a procedure unless
it is has an accompanying insurance reimbursement code. In December 2001, we
applied to the American Medical Association for an Emerging Technology Code,
which is the first step in obtaining Medicare, Medicaid and private insurance
reimbursement for procedures performed using our BCS 2100. Our application will
not be acted upon unless and until we receive FDA approval for the BCS 2100.
There can be no assurance that we will receive these codes, that Medicare,
Medicaid or private insurers will provide reimbursement under these codes, or
that our customers will find the reimbursements sufficient to warrant the use of
our BCS 2100. If our customers cannot obtain adequate insurance reimbursement
for their services, the market for our BCS 2100 would be reduced and this would
have a material adverse effect on us and our shareholders.

WE EXPECT TO CONTINUE TO INCUR LOSSES, DEFICITS, AND DEFICIENCIES IN LIQUIDITY
THAT WILL IMPAIR OUR OPERATIONS.

         We must develop clinical applications, obtain regulatory approvals,
market our BCS 2100 and develop further applications and markets for our other
products in order to become profitable. There is no assurance that we will be
able to accomplish these objectives. We have incurred substantial losses in the
past and expect to continue to incur losses, deficits and deficiencies in
liquidity due to the significant costs associated with the continuing
development and commercialization of our products. From June 10, 1987 until June
30, 2004, we incurred accumulated losses of approximately $96.7 million. We
recorded accumulated losses of $2.5 million and $11.7 million for the fiscal
years ended June 30, 2004 and 2003, respectively. Such losses and deficiencies
have had, and will likely continue to have, a material adverse impact on our
operations and financial condition. Our losses have limited our operations,
including our efforts to obtain critical regulatory approvals, and our product
development efforts. If we continue to incur losses, our operations will be
impaired and we may be unable to remain in business.

WE HAVE LIMITED MANAGEMENT AND OTHER KEY PERSONNEL, WHICH LIMITS OUR ABILITY TO
EFFECTIVELY ADDRESS THE DEMANDS OF OUR BUSINESS.

         During the 2004 fiscal year, our former President, former Controller,
as well as other key management personnel resigned. In addition, during 2004 we
were forced to reduce our total workforce from 24 full and part-time employees
as of June 30, 2003 to 6 full and part-time employees as of June 30, 2004. We
have not yet engaged a new President, nor have we replaced many of the other key
personnel who resigned or were subject to our reductions in force. As a result
of these departures, the demands on our management team and key personnel are
extreme; frequently, they lack the time and resources to effectively address the
demands of our business. At present we lack the financial resources to expand
our management team, and do not anticipate that we will be able to attract or
engage additional management or qualified key personnel in the immediate future.

WE MAY SELL ASSETS OR REDUCE ACTIVITIES TO FUND OPERATIONS, WHICH COULD
ADVERSELY AFFECT SHAREHOLDER VALUE.

         If we are unable to secure adequate capital through the sales of
securities, or as part of a funding arrangement, we may continue to seek raising
capital by selling all or part of our intellectual property and know-how, enter
into license agreements for all or part of our intellectual property rights
(which might include manufacturing licenses) to third parties for certain
territories or business segments, terminate operations in any of our business
segments to reduce expenditures, or reduce our operations in any or all of our
business segments to preserve our business until funding is available. There can
be no guarantee that we will be successful in these efforts. If we are not
successful, we may have to severely reduce or terminate all or some of our
operations, either of which could severely reduce or completely eliminate any
shareholder value.

                                       18



<PAGE>

WE HAVE TERMINATED INSURANCES LEAVING THE COMPANY AND COMPANY OFFICERS AND
DIRECTORS VULNERABLE.

         Due to our lack of resources, we have terminated many insurance
policies including directors and officers insurance, clinical trials insurance,
some employee life insurance. We continue to carry minimal general liability,
product liability, employee health, workman's compensation and limited employee
life insurance. The reduction in insurance policies leaves the Company, as well
as our officers and directors vulnerable to clams against CTI and company
directors and officers. The lack of directors and officers insurance will limit
the company's ability to attract quality executives for future growth unless
adequate funds are obtained to re-instate directors and officers insurance.

THE RECENT VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK COULD CONTINUE TO
ADVERSELY AFFECT SHAREHOLDER VALUE.

         The market price of our common stock may continue to experience wide
fluctuations, as it has in the recent past, which could be unrelated to our
financial and operating results. Such volatility could result in a material loss
in the value of an investment in our shares. Our stock price fluctuated between
$4.97 and $1.44 during the year ended June 30, 2001, fluctuated between $4.05
and $.56 during the year ended June 30, 2002, fluctuated between $1.29 and $0.09
during the year ended June 30, 2003 and fluctuated between $.68 and $.06 during
the year ended June 30, 2004. The price at which our common stock trades has
been and will likely continue to be highly volatile and fluctuate substantially
due to factors such as the following:

         o    General market conditions;
         o    Changes in or failure to meet investors' expectations; Speculation
              regarding the likelihood of success, or lack thereof, of our FDA
              application relating to the BCS 2100;
         o    Concerns related to our solvency, liquidity or cash balances;
         o    Actual or anticipated fluctuations in our operating results;
         o    Ability to meet announced or anticipated profitability goals;
         o    Developments with respect to intellectual property rights; and
         o    Announcements of technological innovations or the introduction of
              new products or services by us or our competitors;

THE LISTING OF OUR COMMON STOCK ON THE AMERICAN STOCK EXCHANGE WAS TERMINATED,
WHICH CREATES SUBSTANTIAL UNCERTAINTY ABOUT THE ADEQUACY AND EFFICIENCY OF THE
MARKET FOR OUR COMMON STOCK.

         On March 29, 2004, our common stock ceased to be traded on the American
Stock Exchange ("AMEX"), due to our failure to comply with the requirements for
continued listing on AMEX. Within a few months following the delistment, our
common stock became quoted on the Over-the-Counter Bulletin Board Market
("OTCBB"), with the changed symbol of COIB.

         The termination of our AMEX listing has created substantial uncertainty
about the adequacy and efficiency of the market for our common stock. An
inadequate or inefficient trading market for our common stock will likely
compound the market volatility risks described in the preceding paragraphs.
However, we are hopeful that our stock's following as well as the increased ease
of access to all stock exchanges will assist in the ability of our current
shareholder to actively trade CTI shares of stock. We understand that the AMEX
is more widely respected and controlled than the OTCBB; however, there are many
very strong companies that trade on OTCBB and emerge to a more respected stock
exchange. It is our intentions that when (or if) the company can gain sustained
profitability then we would seek to be listed on a more reputable stock
exchange.

WE COULD ISSUE PREFERRED STOCK AND THIS COULD HARM YOUR INTERESTS.

         We have authorized 3 million shares of preferred stock, par value $5.00
per share, none of which are outstanding. The preferred stock, if issued, could
have preferential voting, dividend and liquidation rights which could adversely
affect the rights of our shareholders. Our authority to issue preferred stock
without shareholder approval could discourage potential takeover attempts and
could delay or prevent a change in control through merger, tender offer, proxy
contest or otherwise by making such attempts more difficult and costly. The
inability of a third party to enter into such a transaction may reduce the value
of our shares. In connection with our efforts to raise capital, we could sell
preferred stock to an investor. While we cannot quantify the impact at this time
from any such issuance, this stock could offer conversion, dividend or other
rights that could significantly dilute current shareholders of our common stock.

                                       19



<PAGE>

WE RELY ON THIRD PARTIES IN THE DEVELOPMENT AND MANUFACTURE OF KEY COMPONENTS
FOR OUR PRODUCTS. IF OUR PRODUCTS FAIL TO PERFORM, FDA APPROVALS, PRODUCT
DEVELOPMENT, AND/OR PRODUCTION COULD BE SUBSTANTIALLY DELAYED.

         We depend upon third parties to assist us with clinical studies,
product development and to supply product components. Our products are highly
specialized and have component parts developed and manufactured according to
unique specifications. Although there may be more than one developer or
manufacturer for these components, failure to develop or manufacture in a timely
manner could result in a loss of business and further result in substantial
delays in FDA approvals and/or commercialization of our products. Such delays
could adversely affect our operations and shareholder value.

IF WE ARE UNSUCCESSFUL IN PREVENTING OTHERS FROM USING OUR INTELLECTUAL
PROPERTY, WE COULD LOSE A COMPETITIVE ADVANTAGE.

         Our business activities depend, in part, on our ability to use and
prevent others from using our patents, trademarks and other intellectual
property. We currently hold eight patents and have submitted three patent
applications. There can be no assurance that the steps we have taken to protect
our property will protect our rights. Defense of our intellectual property
rights could be expensive and time-consuming, and parties that misappropriate
our intellectual property could have significantly more financial resources than
us, making it financially impossible to protect our rights.

ITEM 2.  PROPERTIES

         We lease facilities under various operating leases requiring fixed
monthly payments, adjusted periodically over their term as follows:

LAKE OSWEGO, OREGON LEASE AGREEMENT. Until March 1, 2003, we leased
approximately 7,388 square feet of executive office space in Lake Owego, Oregon.
By its terms, the lease continued through August 14, 2006 with respect to 2,088
square feet and August 15, 2005 with respect to the remaining 5,300 square feet.
Pursuant to the lease, monthly lease payments were $15,700, plus operating
expenses and property taxes. This space was used as our headquarters and housed
our administrative, financial, executive, and marketing employees. On March 1,
2003, as part of our general reduction in our operating expenses, we vacated
these premises and moved into approximately 1,800 square feet of executive
office space. The lease for that space ran through June 2003 and thereafter
continued on a month-to-month basis at $2,100 per month. In June of 2003, we
vacated the executive office space and consolidated our operations in the Ogden,
Utah facility identified below. The landlord for the space we vacated filed a
lawsuit against us for the remaining rent owed under that lease. See Item 3.
"Legal Proceedings." The litigation with our former landlord, St. Paul
Properties, stems from our decision to consolidate our offices in Ogden, Utah.
Our former landlord alleged that we breached our lease obligation and sought
damages of approximately $667,000 plus interest and attorneys and other fees. In
April 2004, we settled this litigation with our former landlord in Portland. The
settlement involved an initial payment of $50,000 with monthly payment of
$12,000 for the next five months totaling $110,000. We paid the final payment of
$12,000 in August 2004, settling all legal obligations to the Portland landlord.

OGDEN, UTAH LEASE AGREEMENT. We lease approximately 7,660 square feet of
manufacturing space in Ogden, Utah, on a month to month basis. Monthly payments
under the lease are $5,783. All of our operations are consolidated in the Ogden
facility. Although two employees work outside the Ogden office, both conduct
business from their personal residence(s) in order to reduce our overhead.

We believe that our existing offices and other physical facilities are adequate
for our present needs.

ITEM 3.  LEGAL PROCEEDINGS

SETTLEMENT OF SHAREHOLDER SECURITIES LITIGATION

         In July of 2004, the United States Court of Appeals for the Ninth
Circuit has ruled in our favor in the appeal of the United States District Court
decision to dismiss the plaintiffs' claims in the proceeding entitled IN RE:
COMPUTERIZED THERMAL IMAGING, INC., SECURITIES LITIGATION. The Ninth Circuit
decision upheld the determination of the District Court to dismiss the
plaintiff's complaint because it failed to adequately plead a case. The suit,
which was consolidated into a single suit during September 2002, alleged in
substance that CTI violated Section 10(b) of the Securities Exchange Act of
1934, as amended, and accompanying regulations and relevant case law by

                                       20



<PAGE>

misleading shareholders regarding such things as the progress of FDA approval
and other matters, which the plaintiffs alleged caused significant damage to the
holders of our common stock at the time of these alleged misrepresentations and
omissions. The plaintiffs had not specified their damages. On April 17, 2003,
the consolidated litigation was dismissed without prejudice by the United States
District Court. In a written opinion, the U.S. District Judge concluded that the
alleged misstatements were either not material, not misleading, or not plead by
plaintiffs with sufficient particularity to constitute a claim. Upon dismissal
of their complaint, the plaintiffs did not replead, so the District Judge
dismissed the case with prejudice on May 13, 2003.

SETTLEMENT OF SALAH AL-HASAWI ADVISORY SERVICES CLAIM

         On March 29, 2000, Salah Al-Hasawi, a citizen and resident of Kuwait,
filed an action in the United States District Court for the Southern District of
New York, against us and our former Chief Executive Officer, alleging violations
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, for commissions allegedly due to the plaintiff in
connection with the private placement of our securities. Shortly thereafter, the
lawsuit was dismissed without prejudice, and on April 12, 2000 the plaintiff
filed a similar complaint in the United States District Court for the District
of Utah. The plaintiff's complaint sought specified damages of $15.5 million,
attorneys' fees and unspecified damages pursuant to five separate causes of
action, including breach of contract, fraud and unjust enrichment.

         In December 2003, we reached a settlement with the plaintiff, pursuant
to which we agreed to pay the aggregate amount of $100,000 in three installments
($50,000 paid on December 17, 2003, $25,000 paid in January 2004 and $25,000
paid in February 2004), and the plaintiff agreed to dismiss the litigation with
prejudice. The settlement is set forth in a Settlement Agreement and Mutual
Releases Agreement, which was filed with the Court in February 2004.

SEC AND DEPARTMENT OF JUSTICE INVESTIGATIONS

         Both the Securities and Exchange Commission (the "SEC") and the U.S.
Attorney's Office for the Southern District of New York are conducting
investigations involving possible violations of proscriptions on insider trading
by our Chairman and Chief Executive Officer. Although CTI is not currently a
target of the investigations, we are incurring substantial legal expenses in
responding to requests for information and documents from the SEC and the U.S.
Attorney, preparing for and attending depositions by our officers, conducting
investigations of our own affairs, and advancing legal fees on behalf of
officers who are or may be entitled to indemnification in connection with these
investigations. As of June 30, 2004, we had incurred expenses of approximately
$825 thousand associated with these investigations. The expenses we have
incurred to date have substantially and adversely affected our limited working
capital and have negatively impacted our operations and limited our efforts to
raise badly-needed capital. The investigations (although slowed in fiscal year
2004) are ongoing; and we anticipate that the expenses we will incur in the
future will continue to adversely affect our working capital, distract
management from day-to-day operations and limit our capital-raising activities,
any of which may result in us having to materially reduce or terminate our
operations.

         In December 2002, we were requested to provide certain documents to the
SEC and the U.S. Attorney for the Southern District of New York in connection
with their investigation of possible violations by our Chairman of the Board and
Chief Executive Officer of the insider trading prohibitions found in the federal
securities laws. During the year ended June 30, 2003 we incurred approximately
$658 thousand in legal costs in complying with these requests. During the fiscal
year ended June 30, 2004, we incurred approximately $168 thousand in additional
legal costs associated with these investigations. We also may be required to
indemnify our officers and directors for fees incurred for these investigations.
For the year ended June 30, 2003, such indemnification obligations totaled
approximately $36 thousand, and during the year ended June 30, 2003 we incurred
approximately $12 thousand in additional indemnification obligations which are
included in the previous figures.

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

         No matters were submitted to a vote of the security holders during the
fiscal year ended June 30, 2004.

                                       21

<PAGE>

PART II
-------

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

         On March 29, 2004, our common stock ceased to be traded on the American
Stock Exchange ("AMEX"), due to our failure to comply with the requirements for
continued listing on AMEX. Within a few months following the delisting of our
common stock on AMEX, the Over-the-Counter Bulletin Board ("OTCBB") began
quotation of transactions in our common stock with the changed symbol of COIB.

PRICE RANGE OF OUR COMMON STOCK

The following table summarizes the quarterly low and high bid prices per share
for our common stock on AMEX and the OTCBB, as applicable, during the periods
indicated. The bid prices reflect inter-dealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.

Year Ended June 30, 2003                         Low Bid         High Bid
----------------------------------              --------         ---------

First Quarter                                   $   0.54         $  0.95
Second Quarter                                  $   0.18         $  1.29
Third Quarter                                   $   0.09         $  0.21
Fourth Quarter                                  $   0.10         $  0.76

Year Ended June 30, 2004
----------------------------------

First Quarter                                   $   0.35         $  0.68
Second Quarter                                  $   0.21         $  0.38
Third Quarter                                   $   0.17         $  0.52
Fourth Quarter                                  $   0.06         $  0.25

         On June 30, 2004, the closing bid for our common stock as reported on
the OTCBB was $0.12 per share. On June 30, 2004, we had approximately 20,000
beneficial shareholders of our common stock and approximately 114 million shares
of our common stock outstanding.

         We have not paid dividends with respect to our common stock, and do not
presently possess the resources to pay dividends in the future.

RECENT SALES OF UNREGISTERED SECURITIES

         PRIVATE OFFERING - THERFIELD HOLDINGS LTD

On July 10, 2003 we closed a private placement under Regulation S of the
Securities Act, as amended, and sold 3,344,482 shares of our common stock to
Therfield Holdings LTD ("Therfield"), for $1 million. We entered into

negotiations with Therfield in early June 2003 and offered a 15% discount off
the then prevailing market price. The transaction process took over 30 days to
conclude and involved document exchanges for the Common Stock Purchase and
Registration Rights Agreements, including time to coordinate the funds transfer.
The Company received the funds from the private placement on July 10, 2003. The
securities issued to Therfield Holdings LTD were restricted securities which our
management believes were acquired for investment. Certificates for the
securities issued bore a restrictive legend and stop-transfer instructions were
noted respecting such certificates on our transfer records. Each purchaser of
such securities provided to us a purchase agreement containing representations
and warranties upon which our management based its belief that an exemption from
registration under the Securities Act was available, including representations
and warranties that the investor is an "accredited investor," as defined in Rule
501 promulgated under the Securities Act, that the investor was acquiring the
securities for investment purposes only, that the investor was the sole party in
interest, and that the securities are "restricted," and may not be transferred
unless registered or an exemption is available under applicable securities laws.
Each of the foregoing transactions was affected in reliance on the exemption
from registration provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D adopted thereunder as transactions not involving any public
offering.

                                       22



<PAGE>

         PRIVATE OFFERING - CHARLES DAI

         On January 30, 2004 we closed a private placement under Regulation S of
the Securities Act, as amended, and sold 1,000,000 shares of our common stock to
Charles Dai, for $220 thousand, $.22 per share. We entered into negotiations
with Mr. Dai in early December 2003 and offered a 10% discount off the then
prevailing market price at that time. Negotiations and the transaction process
took over 60 days to conclude and involved document exchanges for the Common
Stock Purchase and Registration Rights agreements, including time to coordinate
the funds transfer. The Company received the funds from the private placement on
February 4, 2003. The securities issued to Chares Dai were restricted securities
which our management believes were acquired for investment. Certificates for the
securities issued bore a restrictive legend and stop-transfer instructions were
noted respecting such certificates on our transfer records. Each purchaser of
such securities provided to us a purchase agreement containing representations
and warranties upon which our management based its belief that an exemption from
registration under the Securities Act was available, including representations
and warranties that the investor is an "accredited investor," as defined in Rule
501 promulgated under the Securities Act, that the investor was acquiring the
securities for investment purposes only, that the investor was the sole party in
interest, and that the securities are "restricted," and may not be transferred
unless registered or an exemption is available under applicable securities laws.
Each of the foregoing transactions was affected in reliance on the exemption
from registration provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D adopted thereunder as transactions not involving any public
offering.

         PRIVATE OFFERING - NABEEL AL MULLA

         On May 14, 2004 we closed a private placement under Regulation S of the
Securities Act, as amended, and sold 666,667 shares of our common stock to
Nabeel Al Mulla, for $100 thousand, $.15 per share. We entered into
negotiations with Mr. Al Mulla in early in 2004 and offered a discount off the
then prevailing market price, however, at the time of the final agreement the
our common stock had been removed from the American Stock Exchange and we were
waiting to be listed on the Over-The-Counter Bulletin Board and were trading on
"pink sheets" only. The Board of Directors and company management felt in view
of the company's situation that $.15 per share would be a reasonable offering.
The Company received the funds from the private placement on May 17, 2004. The
securities issued to Nabeel Al Mulla were restricted securities which our
management believes were acquired for investment. Certificates for the
securities issued bore a restrictive legend and stop-transfer instructions were
noted respecting such certificates on our transfer records. Each purchaser of
such securities provided to us a purchase agreement containing representations
and warranties upon which our management based its belief that an exemption from
registration under the Securities Act was available, including representations
and warranties that the investor is an "accredited investor," as defined in Rule
501 promulgated under the Securities Act, that the investor was acquiring the
securities for investment purposes only, that the investor was the sole party in
interest, and that the securities are "restricted," and may not be transferred
unless registered or an exemption is available under applicable securities laws.
Each of the foregoing transactions was affected in reliance on the exemption
from registration provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D adopted thereunder as transactions not involving any public
offering.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         FORWARD-LOOKING STATEMENTS CONCERNING OUR BUSINESS

         The following discussion should be read in conjunction with the
Consolidated Financial Statements, the notes thereto and the other information
included in this Report. Certain statements in this "Management's Discussion and
Analysis or Plan of Operation" are forward-looking statements. When used in this
document, the words "expects," "anticipates," "intends," "plans," "may,"
"believes," "seeks," "estimates," and similar expressions generally identify
forward-looking statements. The forward-looking statements contained herein are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. For a more detailed discussion of these and other
business risks, see "Risk Factors."

                                       23



<PAGE>

         OVERVIEW

         Our mission is to improve the quality of life by raising the
performance standards of infrared thermal imaging technology for both the
medical device and industrial markets. We design, manufacture and market thermal
imaging devices and services used for clinical diagnosis, pain management and
industrial non-destructive testing. We provide inspection services and design
and build non-destructive test systems for industrial customers.

         Our current products are the BCS 2100, Photonic Stimulator, TIP, and
our TBIS. We have historically marketed our products with an internal sales
force and through independent distributors. At present, however, due to our
troubled financial condition, we are not actively marketing our products. To
date, our revenues have been generated principally from the sale of our Photonic
Stimulator, TIP, TBIS and services provided in connection with our TBIS.

         Given our inability to market our principal product unless we secure
FDA pre-market approval, our need to raise capital to fund our operations, our
history of losses ($96 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 24, 2004
contains a "going concern qualification," meaning that our independent auditors
have indicated that there is substantial doubt as to our ability to continue as
a going concern. Our efforts to raise additional funds to date have been only
marginally successful. Since the FDA's rejection of our application for
pre-market approval of the BCS 2100 in December 2002, we have raised $500
thousand in advances under an equity line of credit with Beach Boulevard, $1.32
million through a private issuance of restricted stock, $660 thousand from the
NanDa License Agreement and $220 thousand from short-term notes. We have pursued
additional financing transactions, but, as of the date of this report, we have
been unsuccessful in our efforts to raise additional capital. Regardless of the
FDA's ultimate decision regarding our application for pre-market approval of the
BCS2100, we will require additional capital to execute our operating plan, which
may include more clinical trials, research and development, marketing into
Canada and marketing and manufacturing expenses.

         CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements requires us to estimate the
effect of various matters that are inherently uncertain as of the date of the
financial statements. Each of these required estimates varies in regard to the
level of judgment involved and its potential impact on our reported financial
results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to
occur from period to period, and would materially impact our financial
condition, changes in financial condition or results of operations. Our
significant accounting policies are discussed in Note 1 of the Notes to
Consolidated Financial Statements; critical estimates inherent in these
accounting policies are discussed in the following paragraphs. Our management
has discussed the development and selection of these critical accounting
policies with the Audit Committee of our Board of Directors.

         REVENUE RECOGNITION--We believe revenue recognition is a significant
business process that requires management to make estimates and assumptions. We
recognize revenue from product sales after shipment when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
obligations remain, the price or fee is fixed or determinable, and
collectibility is probable. If these conditions are not met, revenue is deferred
until such obligations and conditions are fulfilled.

         Our standard domestic terms for our medical products to end-user
customers are net 30 days and our standard international terms for our medical
products are cash or a letter of credit before shipment. On occasion, we offer
extended payment terms beyond our normal business practices, usually in
connection with providing an initial order of demonstration equipment to a new
domestic distributor. We consider fees on these extended terms agreements to not
be fixed and collectibility to be less than probable. Accordingly, we defer the
revenue until receipt of payment. We sell separate extended warranty contracts
for our TIP and Photonic Stimulator and recognize revenue from those
arrangements ratably over the contract life. We do not offer rights or return
privileges in sales agreements.

         Industrial sales are made pursuant to individually negotiated
commercial contracts which specify payment terms that have ranged from 60 to 90
days from shipment or service completion. With industrial products, even if
delivery and payment have occurred, we may retain a significant ongoing
obligation under a sales arrangement for the delivery of components or
customized software and customer testing, and we defer recognizing revenue until
all the multiple elements of the sale are completed.

                                       24



<PAGE>

         INVENTORY VALUATION--We value inventory at lower of cost or market.
Inventory values are determined using standard purchase quantities and prices
agreed with our vendors. If purchase costs decrease, any difference is recorded
to cost of revenues and the carrying value of inventory is reduced. We have not
experienced significant material cost increases for any production part.

         INVENTORY RESERVES--We reserve for excess and obsolete inventory by
comparing inventory on hand to estimated consumption during the next 12 months.
Consumption is estimated by annualizing trailing three or six-month trailing
sales volumes, adjusting those volumes for known activities and trends, and
comparing forecast consumption to quantity on hand. Any difference between
inventory on hand greater and estimated consumption is recorded to cost of
revenues and an excess and obsolete reserve which is included as an element of
net inventory reported on our balance sheet. Amounts charged into the inventory
reserves are not reversed to income until the reserved inventory is sold or
otherwise disposed.

         IMPAIRMENT OF LONG-LIVED ASSETS--We follow the provisions of the
Financial Accounting Standards Board ("FASB") SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires that if the sum of the future undiscounted cash flows expected to
result from the assets is less than the carrying value of the assets, then the
asset is not recoverable and the company must recognize an impairment. The
amount of impairment to be recognized is the excess of the carrying value of the
assets over the fair value of those assets and is recorded as a component of
impairment loss on our consolidated statement of operations. In estimating
impairments, management makes assumptions about future cash flows, the
likelihood of those cash flows occurring and fair values of the related assets
based on estimates that may differ from actual results.

         STOCK-BASED COMPENSATION--We measure compensation expense for our
employee stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF ACCOUNTING
PRINCIPLES BOARD (APB) OPINION NO. 25 ("FIN 44").

         Pursuant to the prescribed guidelines, we have recorded adjustments
associated with the exercise price of employee stock options, extension of the
exercise period of employee stock options, issuing stock options at a strike
price lower than the then prevailing price for our common stock and issuing
stock to directors or stock to an employee.

         During 2001, we modified the exercise price of certain stock options
granted to certain executives and managers in connection with concluding
severance agreements or to align the interests of executives, managers and
shareholders. As a result, these options became subject to variable accounting.
Variable accounting requires us to adjust compensation expense for the increases
or decreases in the intrinsic value of the modified awards in subsequent periods
until the award is exercised, is forfeited, or expires unexercised.

         We follow SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for
non-employee stock options and warrants granted. Values have been estimated at
the date of grant and beginning of the period respectively, using a
Black-Scholes security pricing model. In determining values under the
Black-Scholes pricing model, we make estimates and assumptions regarding our
volatility, risk-free lending rate and the expected life of the security, which
materially impact the security's value.

         Our Board of Directors authorizes all stock option and warrant grants,
and approves any changes to option or warrant terms.

                                       25



<PAGE>

RESULTS OF OPERATION

FISCAL YEARS ENDED JUNE 30, 2004 AND 2003

         REVENUES

       Total revenues for the fiscal year ended June 30, 2004 were $357
thousand, compared to $1.539 million for the fiscal year ended June 30, 2003, a
decrease of $1.182 million, or 77%. The decrease in revenues for 2004 partly
reflected the deferral of $342 thousand in revenues for our NanDa and Pratt &
Whitney contracts. The Company recognizes revenue from its product sales to end
customers upon shipment of products when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant Company obligations
remain, the fee is fixed or determinable, and collectibility is probable. If
these conditions are not met, revenue is deferred until such obligations and
conditions are fulfilled. If the Company retains an ongoing obligation under a
sales arrangement, revenue is deferred until all of the Company's obligations
are fulfilled. During 2003, we reduced the price of our Photonic Stimulators in
efforts to reduce inventory, which resulted in increased sales of over $100
thousand for the Photonic Stimulator and we sold TIP cameras and Photonic
Stimulators in a separate contract to NanDa for over $500 thousand. We attribute
the remainder of the decrease to reductions in sales personnel and other staff,
as well as shifting our limited resources to efforts to obtain FDA pre-market
approval and open other markets such as Canada.

       Our medical segment revenues were $269 thousand and $1.0 million for the
fiscal years ended June 30, 2004 and 2003, respectively. The decrease of $731
thousand, or 73%, resulted primarily from decreased shipments of TIP units and
Photonic Stimulators mentioned above.

       The remaining $88 thousand and $539 thousand of revenues reported in 2004
and 2003, respectively, were attributable to our industrial segment. The primary
factor in the decrease in industrial segment revenues was the recognition of a
TBIS sale to Alstom Power, a major power turbine manufacturer, in 2003.
Industrial contracts tend to be large contracts over several months. We did not
have a contract to equal the Alstom Power contract in 2004. Our balance sheet
dated June 30, 2004 does, however, reflect over $400 thousand in deferred
revenue waiting to be recognized for another industrial contract with Pratt &
Whitney once final adjustment and certifications are completed. We anticipate
that these procedures will be completed during the fiscal year ending June 30,
2005. The $88 thousand in industrial revenue that we recognized during fiscal
2004 was primarily repair work on existing customer's cameras.

       As of June 30, 2004, we did not have a backlog of industrial orders for
our TBIS and industrial products, nor did we did we have backlog as of June 30,
2003. We generally have no backlog for pain management products, which are
shipped promptly upon receipt of an order. Reported backlog represents the
actual value of purchase orders issued to us for delivery of goods in the
future. As of June 30, 2004, we had not recognized revenue for the sale of a
TBIS to Pratt & Whitney because, even though the TBIS was delivered during the
quarter ended March 31, 2003, we have not yet satisfied our post-delivery
obligations related to customer acceptance tests, installation and training, and
customization of software for the needs of Pratt & Whitney. We have not included
the TBIS sold to Pratt & Whitney in backlog because an invoice with respect to
such TBIS had been sent and was payable as of June 30, 2003. Revenue will be
recognized as a gain on sale of fixed assets when all of our sales commitments
and obligations have been fulfilled.

         EXPENSES

         GROSS MARGINS AND COST OF REVENUES. Total gross margins for the fiscal
year ended June 30, 2004 were $190 thousand, compared to $215 thousand for the
fiscal year ended June 30, 2002, a decrease of approximately 12%. This decrease
is principally attributable to the 77% decrease in revenues. However, gross
margins increased as a percentage of sales from 14% to 54%. This increase in
gross margin as a percentage of revenue was due primarily to the decrease in
costs allocated to cost of goods sold, such as salaries of the reduced employee
staff. Total cost of goods sold for fiscal 2004 was $166 thousand, compared to
$1.324 million in fiscal 2003, a 87% decrease in dollar value. As a percentage
of revenue, cost of goods sold dropped from 86% in 2003 to 46% in 2004. The drop
in percentage of revenue to cost of goods sold was primarily due to the reduced
sales prices used to reduce inventory in 2003.

         We have not tracked segment information beyond certain revenue levels
due primarily to the similarity of inventoried products used in each segment.
The absence of segmented information as also due to the fact that industrial
revenues were principally repair-oriented for the fiscal year 2004.

                                       26



<PAGE>

         Gross margins and cost of revenues as a percentage of sales for the
fiscal years ended June 30, 2004 and 2003 were:

<TABLE>
<CAPTION>
                                TOTAL     PERCENTAGE                 PERCENTAGE
                                SALES         OF       TOTAL SALES       OF        INCREASE    PERCENTAGE
                                2004         SALES        2003         SALES      (DECREASE)    CHANGE
                             -----------  -----------  ------------  ----------  ------------  ----------
<S>                          <C>             <C>       <C>              <C>      <C>               <C>
Revenues                     $  356,710      100%      $ 1,539,476      100%     $ 1,182,766       77%
Cost of revenues               (165,741)      46%       (1,324,267)      86%      (1,158,526)      87%
                             -----------  -----------  ------------  ----------  ------------  ----------
Gross margins                $  190,969       54%      $   215,209       14%     $  (215,209)     (11%)
                             ===========  ===========  ============  ==========  ============  ==========
</TABLE>

       OPERATING, GENERAL AND ADMINISTRATIVE. Operating, general and
administrative expenses for the year ended June 30, 2004 were $1.235 million,
compared to $2.919 million for the year ended June 30, 2003. Operating, general
and administrative expenses decreased by $1.684 million, or 58%, from fiscal
2003 to fiscal 2004. If we obtain FDA pre-market approval or funding to
facilitate the steps suggested by the FDA, neither of which appears imminent at
this point in time, or, if the market in Canada and China begin to purchase our
BCS 2100, then our expense level would increase in connection with hiring the
people needed to build the administrative infrastructure required to manufacture
and market our BCS 2100.

         Operating, general and administrative expenses decreased from fiscal
2003 to fiscal 2004 primarily due to: 1) a $542 thousand decrease in wages and
related expenses; 2) a $668 thousand decrease in legal and other professional
services expense; 3) a $196 thousand decrease in office expenses; 4) a $122
thousand decrease in shareholder services; 5) a $92 thousand decrease in
insurance expense; and 6) a $66 thousand decrease in other expenses including
travel, equipment, supplies, bad debt recoveries, and miscellaneous accrued
expenses.

         The decrease in wages was due primarily to a material decrease in the
number of employees, as well as salary reductions. Legal and other professional
services expenses we have incurred, primarily during fiscal 2003, were primarily
attributable to a request by the SEC and the U.S. Attorney for the Southern
District of New York to provide certain documents in connection with their
investigation of possible violations by our Chairman of the Board and Chief
Executive Officer of the insider trading prohibitions found in federal
securities laws. During the year ended June 30, 2003, we incurred approximately
$658 thousand in legal costs, principally in response to the requests submitted
to us by the SEC and the U.S. Attorney. Comparatively, for the year ended June
30, 2004 we incurred approximately $168 thousand in additional legal costs for
the same investigations. We may also be required to indemnify our officers and
directors in connection for fees incurred in connection with these
investigations. Also attributing to the decrease was the settlement of the three
legal matters, as discussed in Item 3. Legal Proceedings, above.

         Decreases in office expense was attributable to the office
consolidation to one location in Utah and to continued efforts to reduce all
expenses.

         Operating, general and administrative expenses are allocated to
segments using budgeted levels of various activities, e.g., headcount, square
feet occupied and fixed assets. Comparative expenses allocated to these segments
were affected by the factors discussed above. We have maintained this allocation
method throughout the year for consistency; however, we intend to re-evaluate
the methodology due to office consolidations and reductions in staff.

         LITIGATION SETTLEMENTS. Litigation settlements were $110 thousand for
the year ended June 30, 2004 and $0 for the year ended June 30, 2003 a increase
of $110 thousand. Two separate legal issues which were settled in the year
ending June 30 2004 were expensed in the same year. 1) Salah Al-Hasawi Advisory
Services Claim for $100 thousand (discussed in Item 3, Legal Proceedings, above)
and 2) our former landlord, St. Paul Properties, in Portland, Oregon for $10
thousand, $100 thousand was previously expensed in prior years as lease expense.

         RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended June 30, 2004 were $997 thousand compared to $3.765 million for
fiscal 2003 a decrease of $2.769 million, or 74%, from fiscal 2003 to fiscal
2004.

                                       27



<PAGE>

         The decrease in research and development expense was primarily a result
of: 1) a $1.498 million decrease in wages, temporaries and related employee
expenses; 2) a $311 thousand decrease in consulting services associated with the
development of our BCS 2100 and FDA approval application; 3) a $177 thousand
decrease in regulatory expenses; 4) a $142 thousand decrease in engineering
costs associated with product design, development and enhancement; 5) a $141
thousand decrease in insurance expense; 6) a $500 decrease in overhead,
primarily rent, travel and general office expense.

         The decrease of research and development expenses overall primarily
relates to our efforts to decrease costs and reduce our negative cash flow. We
have significantly reduced our medical and industrial research and development
personnel and have scaled back capital intensive projects. Our remaining
research and development personnel now devote a substantial portion of their
time and attention to replying to technical questions from the FDA regarding our
application for pre-market approval and refining existing products and to
current clients for enhancements in the products they use.

         Research and development spending is highly dependant upon our ability
to secure FDA approval, attract investors and generate revenue from sales. The
FDA has asked for more clinical trials to be preformed which may require us to
increase efforts in research and development. After reviewing the circumstances
associated with our application for pre-market approval, we have filed with the
FDA a "Citizen's Petition" alleging that our application was severely and
improperly prejudiced because of bias against CTI by FDA staff reviewers who
improperly undermined the Advisory Panel's review of our application and
ultimately caused the FDA to reject that application. Our Citizen's Petition
requests that the FDA Commissioner review and reconsider our application for
pre-market approval of the BCS 2100.

         If our Citizen's Petition is unsuccessful, we may be required to
conduct more clinical trials. We do not presently have the financial resources
or personnel on staff to complete additional clinical trials. If additional
trials are required, we will need to obtain additional capital in the form of
debt or equity. Given our current financial condition, we do not believe we will
be able to raise debt capital. We have previously evaluated, and will continue
to evaluate, opportunities to raise equity capital through the private offerings
of our common stock; however, we can not provide any assurance that we will be
able to raise equity capital if necessary to fund additional clinical trials.

         For the fiscal year ended June 30, 2004 and all prior periods, we
expensed all costs associated with process and systems development, including
software code development, computer hardware and software purchases, and
expenses related to the development of our BCS 2100.

         MARKETING. Marketing expenses for the year ended June 30, 2004 were
$242 thousand, compared to $1.492 million for the year ended June 30, 2003.
Marketing expenses decreased by $1.250 million, or 84%, from fiscal 2003 to
fiscal 2004.

         Marketing expense decreases were primarily a result of: 1) a $636
thousand decrease in wages and related expenses resulting from a material
reduction in the number of sales and marketing employees; 2) a $174 thousand
decrease in marketing and tradeshow expenses, reflecting our reduced marketing
efforts; 3) a $120 thousand decrease in travel expenses, and 4) $320 thousand
decrease in office expenses including allocated rent, insurance, and office
supplies.

         Marketing expenses decreased primarily due to our decision to
significantly reduce our marketing activities, including tradeshows and travel
expenses, and sales and marketing personnel. Subsequent to June 30, 2003, we
consolidated our Portland, Oregon office to our Ogden, Utah facility. As a
result of these significant reductions in workforce and curtailed marketing
efforts since June 30, 2003 sales have dropped significantly.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the fiscal year ended June 30, 2004 were $142 thousand, compared to $440
thousand for the year ended June 30, 2003 a decrease of $298 thousand, or 73%,
This drop was primarily related to goodwill impairments recorded June 30, 2002,
and to fixed asset impairments recorded during the year ended June 30, 2003. The
year ended June 30, 2004 was the first full fiscal year reflecting the full
effect of the impairments. There were no additional impairments for the year
ended June 30, 2004

         IMPAIRMENT LOSSES. Impairment losses consisted of asset impairments of
approximately $711 thousand for the fiscal year ended June 30, 2003. There was
no impairment of assets in fiscal 2004. We evaluate our property, plant and
equipment for impairment whenever indicators of impairment exist.

                                       28



<PAGE>

         Accounting standards require that if the sum of the future cash flows
expected to result from the assets, undiscounted and without interest charges,
is less than a company's reported value of the assets, then the asset is not
recoverable and the company must recognize an impairment. The amount of
impairment to be recognized is the excess of the reported value of the assets
over the fair value of those assets and is recorded as an impairment expense on
our statement of operations. In estimating impairments, management makes
assumptions about future cash flows and fair value that are inherently
uncertain, can significantly affect the results, and may differ from actual
future results.

         For the year ended June 2003, we reviewed our fixed assets for
impairment and recorded adjustments to their estimated fair value primarily
because of our limited cash balances, history of sustained losses and the FDA's
denial of our application for pre-market approval of the BCS 2100. The primary
impairment adjustments recorded on our financial statements consisted of
goodwill attributable to our operations formerly conducted in our Bales
California facility ($171 thousand), office furniture ($118 thousand), leasehold
improvements in our former Oswego, Oregon office ($117 thousand) and software
licenses ($89 thousand). The balance of the impairment adjustment ($216
thousand) related to computers, the Bales manufacturing system, office
equipment, research and demonstration equipment, web design assets and
networking assets.

         OPERATING INCOME/LOSS

         We recorded an operating loss of $2.535 million for the fiscal year
ended June 30, 2004, compared to an operating loss of $9.112 million for the
fiscal year ended June 30, 2003 an improvement of $6.577 million or 72%.

         Medical and Industrial segment information was not maintained beyond
the gross margin level due to the dramatic changes in the scope of our
operations. Segment allocations were previously calculated on a budgetary
allocation. As we dramatically reduced our expenses during fiscal 2004 and
significantly changed the structure of our operations, segment allocations
became misleading and therefore, we have abandoned such allocations.

         NET INTEREST INCOME/EXPENSE

         Interest income for the fiscal year ended June 30, 2004 was $5
thousand, compared to $165 thousand for the year ended June 30, 2003. The $160
thousand, or 97%, decrease was primarily a result of decreased investments
available for sale and lower interest rates. Interest income will continue to
decease as we use investments available for sale to fund operations.

         Interest expense for the fiscal year ended June 30, 2004 was $10
thousand, compared to $2.792 million for the year ended June 30, 2003. Interest
expense for fiscal year 2004 was comprised of interest accrued but not paid for
three loans 1) $5 thousand attributable to a $100 thousand debt to Thermal
Imaging Inc assumed at the time of settlement of the departure of our former
president; 2) $526 attributable to a $200 thousand loan received June 14, 2004;
and 3) $164 attributable to a $20 thousand loan received May 11, 2004. The
remaining interest expense for fiscal 2004 was attributable to finance charges
from vendors for late payments. In comparison, interest expense for fiscal 2003
consisted of 1) $1.777 million related to reducing the conversion price of our
convertible debenture and attached warrants; 2) $367 thousand related to the
amortization of deferred finance costs; 3) $286 thousand related to penalties
paid to Beach Boulevard LLC in connection with our convertible debenture
financing; 4) $243 thousand related to the amortization of beneficial conversion
features associated with our Beach Boulevard financing transaction; and 5) $119
thousand of accrued interest at 7% per annum on our convertible debenture.

         OTHER INCOME/EXPENSE

         Other income/expense for the fiscal year ended June 30, 2004 was $69
thousand, compared to $0 for the year ended June 30, 2003. Other income for the
year ended June 30, 2004 consisted primarily of a single stock transaction to
satisfy the remaining Beach Boulevard debenture in July of 2003, as discussed
below. The outstanding debenture, which was valued at $157 thousand, was
fulfilled with 196,451 shares of common stock (approximately $0.80 per share).
Our common stock was trading for $0.45 per share at the time of issuance of
stock certificates, resulting in the recognition of $0.35 per share or a total
recognition of approximately $69 thousand gain on sale of stock to satisfy the
outstanding debenture.

                                       29



<PAGE>

         NET LOSS

         We incurred a loss of $2.472 million, or $(.02) per share, for the
fiscal year ended June 30, 2004, compared to a loss of $11.752 million, or
$(0.10) per share, for the fiscal year ended June 30, 2003.

UNAUDITED QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------

         The following table summarizes our results of operations for each of
the four quarters in the fiscal years ended June 30, 2004 and 2003. This
information was derived from unaudited interim consolidated financial statements
that, in the opinion of our management, have been prepared on a basis consistent
with the audited consolidated financial statements contained elsewhere in this
Report and includes all adjustments necessary for fair statement of such
information when read in conjunction with the audited consolidated financial
statements and notes thereto.

         Period-to-period comparisons of our historical operating results are
not necessarily indicative of future performance.
<TABLE>
<CAPTION>
                                   QUARTER ENDED (UNAUDITED)
                                   (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------
                                   6/30/04 3/30/04  12/31/03  9/30/03   6/30/03  3/31/03  12/31/02  9/30/02
                                   ------- -------- -------- --------- --------- -------- --------- --------
<S>                                  <C>      <C>     <C>       <C>       <C>      <C>       <C>      <C>
Revenues                             $ 93     $107    $  94     $  63     $ 290    $ 390     $ 595    $ 264

Cost of goods sold                    (90)    (13)      (21)      (42)     (152)    (220)     (748)    (204)
                                   ------- -------- -------- --------- --------- -------- --------- --------
Gross margin
                                        3       94       73        21       138      170     (153)       60
Operating general &
administrative                         58      252      380       545       736      703       646      833

Litigation Settlement                   -       10      100         -         -        -         -        -

Research & development                 69      264      297       367       512      851     1,154    1,248

Marketing                            (54)       45       97       154       190      307       387      609

Depreciation & amortization            10       36       41        55        52       48       176      164

Impairment Loss                                                               -        -       711        -
                                   ------- -------- -------- --------- --------- -------- --------- --------
Total costs and expenses
                                       83      607      915     1,121     1,490    1,909     3,074    2,854

Interest income/(expense)              (5)       1        2        (4)      (10)  (1,830)     (159)    (628)

Misc. Income                           69        -                            -        -         -        -
                                   ------- -------- -------- --------- --------- -------- --------- --------
Total other income                     64        1        2        (4)      (10)  (1,830)     (159)    (628)
                                   ------- -------- -------- --------- --------- -------- --------- --------
Net loss                            $(16)   $(512)   $(840)   $(1,104)  $(1,362) $(3,569)  $(3,386) $(3,422)
                                   ------- -------- -------- --------- --------- -------- --------- --------
</TABLE>

         Revenue fluctuates quarter to quarter primarily due to large industrial
sales and contracts.

         In the quarter ended December 31, 2002 cost of goods sold increase due
to inventory adjustments related to impairment evaluations.

          Operating expenses steadily declined as we attempt to conserve cash.
In the quarter ended December 31, 2002 expenses increased due to impairment
losses.

         Interest expense increased in the quarter ended March 31, 2003 due to
the retirement and conversion of the Beach Boulevard coverable debenture.

                                       30



<PAGE>

SOURCES OF LIQUIDITY

         Given our inability to market our principal product unless we secure
FDA pre-market approval, our need to raise capital to fund our operations, our
history of losses ($96 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 24, 2004
contains a "going concern qualification," meaning that our independent auditors
have indicated that there is substantial doubt as to our ability to continue as
a going concern. Our efforts to raise additional funds to date have been only
marginally successful. Since the FDA's rejection of our application for
pre-market approval of the BCS 2100 in December 2002, we have raised $500
thousand in advances under an equity line of credit with Beach Boulevard, $1.32
million through a private issuance of restricted stock, $660 thousand from the
NanDa License Agreement and $220 thousand from short-term notes. We have pursued
additional financing transactions, but, as of the date of this Report, we have
been unsuccessful in our efforts to raise additional capital. Regardless of the
FDA's ultimate decision regarding our application for pre-market approval of the
BCS2100, we will require additional capital to execute our operating plan, which
may include more clinical trials, research and development, marketing into
Canada and marketing and manufacturing expenses.

         Our cash requirements include general corporate expenses including
salaries and benefits, lease payments for office space, technology acquisition,
software license and maintenance contract payments, legal and accounting fees,
clinical trial and technical support, FDA consulting, marketing, and expenses
associated with the private placement of our equity securities. Capital
resources needed to meet our past and planned expenditures have been financed
and are likely to continue to be primarily from the sale of equity securities.

         Our operations used $1.8 million of cash during the fiscal year ended
June 30, 2004, compared to $9.2 million in the fiscal year ended June 30, 2003.
The reduction of cash usage was due primarily to a significant decrease in our
operating costs.

         Investing activities provided no cash in fiscal year 2004. Equity
activities provided $1.3 million in cash from three private placements of our
common stock. On July 10, 2003, we closed a private placement under Regulation S
of the Securities Act, as amended, and sold 3,344,482 shares of our common stock
to Therfield Holdings LTD ("Therfield"), for $1 million. We entered into
negotiations with Therfield in early June 2003 and offered a 15% discount off
the then prevailing market price. The transaction process took over 30 days to
conclude and involved document exchanges for the Common Stock Purchase and
Registration Rights Agreements, including time to coordinate the funds transfer.
The Company received the funds from the private placement on July 10, 2003. On
February 4, 2004, we received a payment of $220,000, representing the initial
payment from Charles Dai pursuant to a Stock Purchase Agreement we executed in
February 2004. In exchange for the amounts paid we issued 1,000,000 shares of
common stock. On May 14, 2004, we received $100,000 in exchange for our sale of
666,667 shares of common stock pursuant to a Stock Purchase Agreement we entered
into with Nabeel Amulla on May 14, 2004.

         During the fiscal year ended June 30, 2004 we also received funds from
two separate individuals in the form of short-term loans, subject to future
determination by the lenders. We received $220 thousand in the form of a
short-term note to assist in continuing operations: $20 thousand in loan
proceeds we received from General Harry Aderholt, one of our directors, and $200
thousand in loan proceeds from a large investor, Mr. Nabeel Al Mulla on June 14,
2004. The details of the notes are yet to be determined. We are, however,
accruing on our financial statements the obligation to repay the loans, together
with interest at an imputed interest rate for accounting purposes.

         As of June 30, 2004, we believed that we had sufficient liquidity to
sustain current operations for three to four months. No significant cash has
been received since June 30, 2004 although we continue to engage in discussions
with prospective sources of equity capital. To restore operations to former
levels, we must secure additional funding. As of June 30, 2004, our current
monthly cash outlay rate was approximately $60 thousand; our cash monthly outlay
at our former full operation rate was approximately $1.1 million. We cannot
continue to reduce our monthly cash outlay and be able to service our current
customers. As of June 30, 2004, we hold three notes totaling $320 thousand. No
payment schedule has been determined for repayment.

         As of June 30, 2004 we had no contractual obligations, other than
payment plans for existing vendors whose invoices are reflected on our balance
sheet as accounts payable.

                                       31



<PAGE>

AGREEMENT WITH BEACH BOULEVARD, LLC.

         On December 31, 2001, we reached a financing agreement (the
"Agreement") with Beach Boulevard, LLC (the "Investor"), pursuant to which the
we issued a 7% convertible debenture (the "Convertible Debenture") in the amount
of $2.5 million (the "Debenture Offering") and secured an equity line of credit
(the "Equity Line") for $20 million that allowed us to sell up to $20 million of
our common stock to the Investor at 94% of the market price, as defined by the
Agreement. The Convertible Debenture was originally due on December 31, 2004.
The terms of the Agreement permitted the Investor to convert the Convertible
Debenture into 2,100,694 shares of our common stock at a conversion price of
$1.44 per share at any time during the term of the Agreement. Interest on the
Convertible Debenture was due on the conversion date and was payable, at our
option, in cash or common stock.

         In connection with the Debenture Offering, we entered into a
registration rights agreement and subsequently filed a registration statement
with the SEC, which was declared effective on March 18, 2002 (Registration No.
333-82016). Prior to completing this financing agreement, we terminated our 1999
agreement with Beach Boulevard to purchase up to $7 million of our common stock.
The Investor possessed the right to require us to redeem all or a portion of the
Convertible Debenture if the average closing bid price of the our common stock
for the 90 consecutive trading days after the effective date of the registration
statement was less than $1.44 (a "Trigger Event"). The amount redeemable was
equal to 111% of the principal balance of the Convertible Debenture and accrued
interest (the "Redeemable Balance"). Upon the occurrence of a Trigger Event, the
Investor is required to provide notice to us of its election to force redemption
and to specify the date (the "Redemption Due Date") on which the Redeemable
Balance is to be paid. If we do not pay the Redeemable Balance in full by the
Redemption Due Date, we are required to issue registered unrestricted shares of
common stock pursuant to a series of put notices consistent with the terms of
the Equity Line. If the registration statement is not currently effective, the
conversion price of 94% would be reduced to 75% of the three lowest bid prices
from the 10 trading days after a put is issued. The maximum put we can issue is
equal to the lesser of $500 thousand or 125% percent of the weighted average
volume of our common stock for the 20 trading days immediately preceding the put
date. Because of this volume restriction, we cannot redeem the entire
Convertible Debenture at one time, but have to redeem the Convertible Debenture
in numerous puts. If the Redeemable Balance is not satisfied through the
mandatory puts within six months of the Investor's notice to force redemption,
the unpaid portion of the Redeemable Balance is required to be paid immediately
in cash. If we do not comply with the cash payment, the Company will be in
default of its Convertible Debenture obligation.

         In connection with the Agreement, we issued to the Investor warrants
for the purchase of 260,417 shares of our common stock at $2.03 a share and
641,026 shares of common stock at $1.95 a share. The proceeds from the Debenture
Offering were allocated between the Convertible Debenture, the beneficial
conversion feature and the warrants issued to the Investor. We also issued
separate warrants to an investment banking firm for the purchase of 100,000
shares of common stock at $1.87 per share. The fair market value of these
warrants and other related financing costs were recorded as deferred financing
costs and were originally being amortized over the three-year term of the
Agreement. However, because of the occurrence of the Trigger Event discussed
below, the deferred financing costs and beneficial conversion feature were
amortized over the six-month period ending January 25, 2003.

         On July 25, 2002, the Investor notified us that a Trigger Event had
occurred. On the date of the Trigger Event, the Redeemable Balance was
approximately $2.9 million, which included principal of $2.5 million, $111
thousand of accrued interest and $287 thousand of penalty. We elected to satisfy
the Redeemable Balance through a series of put notices based on the terms of the
Equity Line. The terms of the Equity Line provided for one mandatory put per
month and a maximum put amount equal to the lesser of $500 thousand or 125% of
the weighted average volume for the 20 days immediately preceding the date of
the put notice. During the period from July 1, 2002 through January 29, 2003, we
issued 5,009,083 shares of common stock pursuant to a series of mandatory put
notices. The proceeds were applied to redeem approximately $685,000 of the
Convertible Debenture and to pay accrued interest and penalties totaling
$176,000 and $95,000, respectively.

         On January 29, 2003, we received a Holder Redemption Notice (the
"Notice") from the Investor. The Notice, referencing the Agreement, stated that
the Investor demanded payment of the Redeemable Balance. Pursuant to the
Agreement, we had five days to pay the balance in cash. Because we did not pay
the Redeemable Balance as requested by the Investor, we were considered to be in
default based on the terms of the Agreement.

                                       32



<PAGE>

         On February 5, 2003, we received approximately $210,000 from the
issuance of 2,234,043 shares of common stock pursuant to the terms of the Equity
Line. The proceeds were used to redeem approximately $183,000 of the Convertible
Debenture and to pay accrued interest and penalties totaling $6,000 and $21,000,
respectively.

         On or about February 21, 2003, we entered into an agreement with the
Investor which was formalized on March 19, 2003, (the "Amendment") whereby we
agreed to reduce the conversion price in the Convertible Debenture from $1.44
per share to an amount equal to the lower of (a) $1.44 (the "Fixed Conversion
Price") or (b) ninety-four percent (94%) of the average of the lowest closing
bid prices (not necessarily consecutive) for any three trading days during the
ten trading days period immediately preceding the conversion date. We also
agreed to reduce the exercise price of the warrants that were issued to the
Investor in connection with the Agreement to $0.087733 per share, which was the
average of the lowest closing bid prices for any of the three trading days
during the ten trading days period immediately preceding the Amendment. Pursuant
to the Amendment, the Investor exercised warrants to purchase 260,417 shares of
common stock at an agreed-upon exercise price of $0.087733 per share and (2)
converted approximately $86,000 in principal of the Convertible Debenture into
977,244 shares common stock at the agreed-upon conversion price of $0.087733 per
share. The proceeds from the exercise of the warrants totaling approximately
$23,000 were applied to redeem approximately $20,000 of the Convertible
Debenture and to pay accrued interest of approximately $2,000. In connection
with the modification of the conversion terms of the Convertible Debenture,
which was considered to be an inducement to convert the Convertible Debenture,
and the reduction of the exercise price of the Investor's warrants, we recorded
an interest expense totaling approximately $1,770,000 during the quarter ended
March 31, 2003.

         We issued 1,212,956 shares of common stock to the Investor pursuant to
a mandatory put notice on February 21, 2003. The proceeds were applied to redeem
approximately $91,000 of the Convertible Debenture and to pay accrued interest
and penalties totaling $5,000 and $11,000, respectively. On March 19, 2003, we
entered into an agreement with the Investor (the "Amendment Agreement") that
formalized the terms reached in the February 21, 2003 Amendment. In connection
with the Amendment Agreement, the Investor also agreed to defer its demand for
immediate payment of the full amount due under the Notice for at least 90 days
and agreed to not file suit against CTI, its officers, employees, partners or
agents for a period of 90 days. Upon execution of the Amendment Agreement, the
Investor converted $272,000 in principal of the Convertible Debenture, including
$7,000 of interest, into 3,224,146 shares of common stock.

         During the period March 20, 2003 through May 19, 2003, the Investor
converted approximately $1,181,000 of the remaining Redeemable Balance,
including interest of $11,000, into 9,805,161 shares of common stock. As of June
30, 2003, the Company owed the Investor approximately $157,000 of the Redeemable
Balance, which consisted of the unpaid portion of the penalty. In July 2003, we
issued 196,451 shares of common stock to redeem the remaining Redeemable
Balance. The July 2003 transaction represented the final issuance of shares of
common stock under the Equity Line, and we do not anticipate issuing additional
shares of common stock thereunder.

CAPITAL REQUIREMENTS/PLAN OF OPERATION

         Our capital requirements may vary from our estimates and depend upon
numerous factors including 1) time and costs involved in obtaining regulatory
approvals for the BCS 2100, 2) results of pre-clinical and clinical testing, 3)
costs of technology, 4) progress in our research and development programs, 5)
costs of filing, defending and enforcing any patent claims and other
intellectual property rights, 6) the economic impact of developments in
competing technology and our markets, 7) competing technological and market
developments, 8) the terms of any new collaborative, licensing and other
arrangements that we may establish, 9) litigation costs, and 10) market
acceptance of our products and the cost of obtaining acceptance.

         As of June 30, 2004, we estimate that we will require approximately $3
million in net cash to meet our financial obligations based on our projected
operating level for the year ending June 30, 2005. Our current operating level
consists of significantly reduced staffing, minimal services, halted production
and consolidated facilities. Since December 2002, we have significantly cut back
on our expenses to maintain solvency and continue efforts to obtain FDA
pre-market approval of the BCS 2100. Since June 30, 2002, we have reduced our
monthly cash outlays from $1.1 million to approximately $60 thousand by: a)
reducing staff from 72 to 6 and eliminating certain benefit programs; b)
eliminating regional trade shows and related marketing expenses; c)

                                       33



<PAGE>

consolidating our Bales Scientific facility into our Ogden, Utah facility; d)
decreasing research and development activities; and e) decreasing manufacturing
and production expenditures.

         Under our bylaws and contractual agreements, we are required to
indemnify our current and former officers and directors who are a party to
certain litigation proceedings by providing legal defense through our attorneys
(or reimbursing them for their own attorneys) and covering all damages they may
suffer if the plaintiffs are successful. For the year ended June 30, 2004, such
indemnification obligations totaled approximately $46 thousand.

         Given our inability to market our principal product unless we secure
FDA pre-market approval, our need to raise capital to fund our operations, our
history of losses ($96 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 24, 2004
contains a "going concern qualification," meaning that our independent auditors
have indicated that there is substantial doubt as to our ability to continue as
a going concern. Our efforts to raise additional funds to date have been only
marginally successful. Since the FDA's rejection of our application for
pre-market approval of the BCS 2100 in December 2002, we have raised $500
thousand in advances under an equity line of credit with Beach Boulevard, $1,320
million through a private issuance of restricted stock, $660 thousand from the
NanDa License Agreement and $220 thousand from short-term notes. We have pursued
additional financing transactions, but, as of the date of this Report, we have
been unsuccessful in our efforts to raise additional capital. Regardless of the
FDA's ultimate decision regarding our application for pre-market approval of the
BCS2100, we will require additional capital to execute our operating plan, which
may include more clinical trials, research and development, marketing into
Canada and marketing and manufacturing expenses.

         There can be no guarantee that will be successful in obtaining FDA
pre-marketing approval or that we will be able to raise additional capital
required to continue our operations. We are pursing opportunities
internationally including Canada where we have placed a BCS 2100 for evaluation
in Montreal at Ville Marie Women's Health Center. Our discussions with potential
investors are in an early stage and we cannot guarantee that we will be able to
successfully conclude any transaction.

RECENT ACCOUNTING PRONOUNCEMENTS

         During the year ended December 31, 2003, the Company adopted the
following accounting pronouncements:

         SFAS NO. 143 -- In August 2001, the FASB issued SFAS No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which established a uniform
methodology for accounting for estimated reclamation and abandonment costs. The
statement was effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 did not have a material effect on the financial
statements of the Company.

         SFAS NO. 145 -- On April 30, 2002, the FASB issued FASB Statement No.
145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB
Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of
Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64),
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through
this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS
64) that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. However, an entity is not prohibited from classifying such gains and
losses as extraordinary items, so long as it meets the criteria in paragraph 20
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting
for Leases", to eliminate an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The amendment requires
that a lease modification (1) results in recognition of the gain or loss in the
9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for
Sales of Real Estate," if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of
FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145
is effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 did not have a material effect on the financial statements of the Company.

                                       34



<PAGE>

         SFAS NO. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting
for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. The provisions of EITF
No. 94-3 shall continue to apply for an exit activity initiated under an exit
plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.
The effect on adoption of SFAS 146 will change on a prospective basis the timing
of when the restructuring charges are recorded from a commitment date approach
to when the liability is incurred. The adoption of SFAS 146 did not have a
material effect on the financial statements of the Company.

         SFAS NO. 147 -- In October 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147,
"Acquisitions of Certain Financial Institutions" which is effective for
acquisitions on or after October 1, 2002. This statement provides interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope of
both SFAS 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets". The adoption of SFAS No. 147 did
not have a material effect on the financial statements of the Company.

         SFAS NO. 148 -- In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123" which is effective for financial statements issued
for fiscal years ending after December 15, 2002. This Statement amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The adoption of SFAS No. 148 did not have a material effect on the financial
statements of the Company.

         SFAS NO. 149 -- In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" which is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging activities under
SFAS 133. The adoption of SFAS No. 149 did not have a material effect on the
financial statements of the Company.

         SFAS NO. 150 -- In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity" which is effective for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. This Statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. The adoption of SFAS No. 150 did not have a material effect on the
financial statements of the Company.

         FASB INTERPRETATION NO. 45 -- "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an Interpretation of FASB Statements No. 5, 57 and 107". The initial
recognition and initial measurement provisions of this Interpretation are to be
applied prospectively to guarantees issued or modified after December 31, 2002.
The disclosure requirements in the Interpretation were effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FASB Interpretation No. 45 did not have a material effect on the
financial statements of the Company.

                                       35



<PAGE>

         FASB INTERPRETATION NO. 46 -- In January 2003, the FASB issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46
provides guidance on the identification of entities for which control is
achieved through means other than through voting rights, variable interest
entities, and how to determine when and which business enterprises should
consolidate variable interest entities. This interpretation applies immediately
to variable interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 did not have a material
impact on the Company's financial statements.

         During the year ended December 31, 2003, the Company adopted the
following Emerging Issues Task Force Consensuses: EITF Issue No. 00-21 "Revenue
Arrangements with Multiple Deliverables", EITF Issue No. 01 -8 " Determining
Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain
Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of
Customer Relationship Intangible Assets Acquired in a Business Combination",
EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after
Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning
of Other Than Temporary and its Application to Certain Instruments", EITF Issue
No. 03-5, "Applicability of AICPA Statement of Position 9702, `Software Revenue
Recognition' to Non-Software Deliverables in an Arrangement Containing More Than
Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the
Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires
the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to
Consumers by Manufacturers.

                                       36



<PAGE>

ITEM 7. FINANCIAL STATEMENTS

Report of Independent Registered Accounting Firm                             F-2

Consolidated Balance Sheets as of June 30, 2004 and 2003                     F-3

Consolidated Statements of Operations for the years ended
  June 30, 2004 and 2003.                                                    F-4

Consolidated Statements of Stockholders' Equity for the years
  ended June 30, 2004 and 2003                                               F-5

Consolidated Statements of Cash Flows for the years ended
  June 30, 2004 and 2003                                                     F-6

Notes to Consolidated Financial Statements                                  F-14

                                      F-1



<PAGE>

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

Board of Directors and Shareholders of
Computerized Thermal Imaging, Inc. and Subsidiaries
Ogden, Utah

We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. and subsidiaries as of June 30, 2004, and the related
consolidated statements of operations and other comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the years ended June 30, 2004
and 2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the auditing 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 Computerized Thermal
Imaging, Inc. and Subsidiaries as of June 30, 2004, and the consolidated results
of their operations and their cash flows for the years ended June 30, 2004 and
2003 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses and
has a working capital deficit at June 30, 2003 of $1.522 million. Together these
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

HJ & Associates, LLC
Salt Lake City, Utah
September 24, 2004

                                      F-2



<PAGE>
<TABLE>

                               COMPUTERIZED THERMAL IMAGING, INC.
                                  CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                    June 30,         June 30,
ASSETS                                                                2004            2003
                                                                  -------------   -------------
<S>                                                               <C>             <C>
CURRENT ASSETS:
  Cash and cash equivalents                                       $    168,955    $    454,387
  Accounts receivable-trade, less allowance for doubtful
     accounts of $3,199 for June 2004 and 2003                          53,328         420,395
  Accounts receivable-other, net                                         1,391              --
  Inventories                                                          260,331         305,864
  Prepaid expenses                                                      91,474         310,248
                                                                  -------------   -------------
        Total current assets                                           575,479       1,490,894
                                                                  -------------   -------------

PROPERTY AND EQUIPMENT, Net                                            169,358         312,719
                                                                  -------------   -------------

INTANGIBLE ASSETS:
  Intellectual property rights, less accumulated amortization
of $17,437 and $14,782 respectively                                     15,410          18,065
                                                                  -------------   -------------

TOTAL ASSETS                                                      $    760,247    $  1,821,678
                                                                  =============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                $    512,542    $    655,075
  Accrued liabilities                                                  172,036         306,032
  Short-term Note Payable                                              220,690              --
  Accrued settlement reserve                                                --         100,000
  Convertible Debenture                                                     --         157,276
  Deferred revenues                                                  1,083,100         786,650
                                                                  -------------   -------------
        Total current liabilities                                    1,988,368       2,005,033
                                                                  -------------   -------------

LONG-TERM NOTE PAYABLE                                                 109,178         100,000
                                                                  -------------   -------------
TOTAL LIABILITIES                                                    2,097,546       2,105,033
                                                                  -------------   -------------

STOCKHOLDERS' EQUITY:
  Convertible preferred stock, $5.00 par value, 3,000,000
    shares authorized ; issued-none                                         --              --
  Common stock, $.001 par value, 200,000,000 shares authorized,
    114,561,698 and 109,329,098 issued and outstanding on
   June 30, 2004 and June 30, 2003, respectively                       114,562         109,329
  Additional paid-in capital                                        95,454,274      94,041,104
  Deficit accumulated                                              (96,906,135)    (94,433,788)
                                                                  -------------   -------------
        Total stockholders' equity (deficit)                        (1,337,299)       (283,355)
                                                                  -------------   -------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                       $    760,247    $  1,821,678
                                                                  =============   =============

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

                                               F-3
</TABLE>



<PAGE>
<TABLE>

                             COMPUTERIZED THERMAL IMAGING, INC.
         CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
<CAPTION>

                                                                  YEARS ENDED JUNE 30,
                                                                  2004             2003
                                                             --------------   --------------
<S>                                                          <C>              <C>
INCOME:
   Product revenues                                          $     239,210    $   1,442,976
   Service revenues                                                117,500           96,500
                                                             --------------   --------------
Total revenues                                                     356,710        1,539,476
                                                             --------------   --------------

   Cost of product revenues                                       (111,146)      (1,314,313)
   Cost of service revenues                                        (54,595)          (9,954)
                                                             --------------   --------------
Total cost of revenues                                            (165,741)      (1,324,267)
                                                             --------------   --------------

GROSS MARGIN                                                       190,969          215,209
                                                             --------------   --------------

OPERATING EXPENSES:
  Operating, general and administrative                          1,235,482        2,918,949
  Litigation Settlements                                           110,000               --
  Research and development                                         996,567        3,765,279
  Marketing                                                        242,373        1,491,796
  Depreciation and amortization                                    142,002          439,780
  Impairment loss                                                       --          711,194
                                                             --------------   --------------

Total operating expenses                                         2,726,424        9,326,998
                                                             --------------   --------------

OPERATING LOSS                                                  (2,535,455)      (9,111,789)
                                                             --------------   --------------

OTHER INCOME (EXPENSE):
  Interest income                                                    4,512          165,066
  Interest expense                                                 (10,478)      (2,791,505)
  Other                                                             69,074               --
                                                             --------------   --------------

Total other income (expense)                                        63,108       (2,626,439)
                                                             --------------   --------------

LOSS BEFORE EXTRAORDINARY ITEM                                  (2,472,347)     (11,738,228)

EXTRAORDINARY GAIN ON
  EXTINGUISHMENT OF DEBT                                                --               --
                                                             --------------   --------------

NET LOSS                                                        (2,472,347)     (11,738,228)

OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized gain (loss) on investments available for sale                          (14,178)

TOTAL COMPREHENSIVE  (LOSS)                                  ($  2,472,347)   ($ 11,752,406)
                                                             ==============   ==============

WEIGHTED AVERAGE SHARES
  OUTSTANDING                                                  113,259,221       91,669,483
                                                             ==============   ==============

BASIC AND DILUTED LOSS PER COMMON SHARE                      $       (0.02)   $       (0.13)
                                                             ==============   ==============

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

                                           F-4
</TABLE>



<PAGE>

<TABLE>
COMPUTERIZED THERMAL IMAGING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003

                                                                                             LOSSES
                                                                                           ACCUMULATED
                                      COMMON STOCK          ADDITIONAL      ACCUMULATED    DURING THE
                              ---------------------------     PAID-IN      COMPREHENSIVE   DEVELOPMENT
                                 SHARES         AMOUNT        CAPITAL         INCOME         STAGE           TOTAL
                              ------------   ------------   ------------   -------------  -------------   -------------
<S>                           <C>            <C>            <C>            <C>            <C>             <C>
Balance at June 30, 2002      $ 83,004,313   $     83,004   $ 88,644,442   $     14,178   $(82,695,560)   $  6,046,064

Stock Issued for Cash
   $0.63 per share ......          143,609            144         81,926                                        82,070
   $0.64 per share ......          119,241            119         68,997                                        69,116
   $0.54 per share ......          199,122            199         98,791                                        98,990
   $0.48 per share ......          147,140            147         64,063                                        64,210
   $0.17 per share ......        2,955,083          2,955        464,515                                       467,470
Stock Issued to Redeem Debenture
   $0.58 per share ......          199,039            199        115,800                                       115,999
   $0.61 per share ......          142,494            142         86,922                                        87,064
   $0.57 per share ......          141,060            141         79,859                                        80,000
   $0.51 per share ......          225,739            226        115,774                                       116,000
   $0.27 per share ......          209,098            209         56,791                                        57,000
   $0.12 per share ......        4,091,653          4,092        495,908                                       500,000
   $0.09 per share ......        2,234,043          2,234        207,766                                       210,000
   $0.09 per share ......        2,450,617          2,450        212,550                                       215,000
   $0.09 per share ......        3,224,146          3,224        269,539                                       272,763
   $0.09 per share ......          936,867            937         87,129                                        88,066
   $0.09 per share ......        1,188,910          1,189         99,393                                       100,582
   $0.09 per share ......        2,979,584          2,980        379,797                                       382,777
   $0.09 per share ......        2,768,530          2,769        352,895                                       355,664
   $0.09 per share ......        1,931,720          1,932        252,282                                       254,214
Price modification of
  convertible debenture .                                      1,769,883                                     1,769,883
Price modification of warrants
  attached to the
  convertible debenture .                                          6,956                                         6,956
Stock issued to 401(k)
  retirement account ....           37,090             37         21,846                                        21,883
Compensation marked to
  market ................                                          7,280                                         7,280
Other comprehensive loss                                                        (14,178)                       (14,178)
Net loss                                                                                   (11,738,228)    (11,738,228)
                              ------------   ------------   ------------   -------------  -------------   -------------
Balance at June 30, 2003      $109,329,098   $    109,329   $ 94,041,104   $          0   $(94,433,788)   $   (283,355)
                              ============   ============   ============   =============  =============   =============

Conversion of remaining
  premium pntly 7.7.0 ...          196,451            196         88,206                                        88,403
Kuwait Restricted Stock
  Sale 7.10.04                   3,344,482          3,344        996,656                                     1,000,000
Garvey Schubert Issue
  for debt 1.22.04                  25,000             25          9,975                                        10,000
Xue Zheng Charlie DAI
  (CMS) 1.30.04                  1,000,000          1,000        219,000                                       220,000
Net loss                                                                                    (2,472,347)     (2,472,347)
                              ------------   ------------   ------------   -------------  -------------   -------------
Balance at June 30, 2004      $114,561,698   $    114,562   $ 95,454,274   $          0   $(96,906,135)   $ (1,337,299)
                              ============   ============   ============   =============  =============   =============

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

                                                         F-5
</TABLE>



<PAGE>
<TABLE>

                                     COMPUTERIZED THERMAL IMAGING, INC.
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                             YEAR ENDED
                                                                             30-JUN-04
                                                                       2004                2003
                                                                   -------------     -------------
<S>                                                                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                         ($ 2,472,347)     ($11,752,406)
  Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
  Depreciation and amortization                                         142,002           439,780
  Impairment loss and loss on disposition of assets                       4,013           685,798
  Bond Amortization                                                          --            69,107
  Amortization Bonds and deferred finance costs and discounts
    on notes payable                                                         --           609,760
  Conversion expense of convertible debenture                         1,776,839
  Stock-based compensation on options marked to market                       --             7,280
  Common stock issued to pay Debenture                                  (68,873)               --
  Common stock issued to 401(k) plan                                         --            21,883
  Bad debt expense                                                        1,061           (91,502)
  Interest expense on convertible debenture                                               404,906
  Changes in operating assets and liabilities:
    Accounts receivable - trade                                         366,006          (281,748)
    Accounts receivable - other                                          (1,392)          116,617
    Inventories                                                          45,533           772,573
    Prepaid expenses                                                    218,774           204,196
    Accounts payable                                                   (122,533)         (336,931)
    Accrued liabilities                                                (224,129)         (932,540)
    Accrued litigation settlement                                            --        (1,300,000)
    Deferred revenues                                                   296,450           366,744
                                                                   -------------     -------------
           Net cash used in operating activities                     (1,815,435)       (9,219,644)
                                                                   -------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of assets                                               --           127,006
  Capital expenditures                                                       --          (105,489)
  Proceeds from redemption of investments available for sale                 --         7,919,684
                                                                   -------------     -------------
           Net cash provided by (used in) investing activities               --         7,941,201
                                                                   -------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock and warrants,
    net of offering costs                                          $  1,310,003       $    781,855
  Proceeds from related party borrowing                                 220,000                 --
                                                                   -------------     -------------
           Net cash provided by financing activities                  1,530,003            781,855
                                                                   -------------     -------------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                 (285,433)          (482,409)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                     454,387            936,796
                                                                   -------------     -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                           $    168,955      $    454,387
                                                                   =============     =============

SUPPLEMENTAL CASH FLOW INFORMATION
  CASH PAID FOR:
     Interest                                                      $        899      $          0
                                                                   -------------     -------------

SUPPLEMENTAL SCHEDULE OF NON-CASH
  FINANCING AND INVESTING ACTIVITIES
  Common stock issued to reduce debenture,
   interest and penalty                                            $    157,277      $  2,835,212

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

                                                 F-6
</TABLE>



<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------

1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION--Computerized Thermal Imaging, Inc. (the "Company" or "CTI"), a
Nevada corporation, develops and markets thermal imaging systems for
applications in healthcare and industrial markets. The Company's system is based
upon computer interpretation of thermal photography using proprietary software
developed by the Company. The Company also applies elements of its core thermal
imaging technology to industrial non-destructive testing applications.

Since inception, the Company has devoted substantially all of its efforts to: 1)
the development and improvement of systems for commercial application of thermal
imaging technology in the medical industry; 2) the development of markets for
its technology; and 3) the search for sources of capital to fund its efforts. On
April 18, 2000, the Company acquired 100% of the outstanding common stock of
Bales Scientific, Inc. ("Bales"), a company that designs, manufactures, and
sells high-resolution, dynamic, digital infrared-imaging workstations and
related products for both medical and industrial applications.

BASIS OF PRESENTATION--The Company's consolidated financial statements have been
presented on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has been primarily involved in research and development activities. This
has resulted in significant operating losses and an accumulated deficit at June
30, 2004, of $96,906,135. As explained in the paragraphs below, the Company has
numerous conditions which may adversely affect its ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
if the Company is unable to continue as a going concern.

The following conditions may adversely affect the Company's ability to continue
as a going concern:

The Company has not received regulatory approval for the BCS 2100. On December
10, 2002, the Radiological Devices Advisory Panel (the "Panel") of the U.S. Food
and Drug Administration (the "FDA") voted four to three against recommending the
BCS 2100 for FDA pre-marketing approval. On January 24, 2003, the FDA advised
the Company that it concurred with the Panel's recommendation to not approve the
Company's pre-market approval application. Regulatory approval is contingent
upon, among other things, successful negotiation with the FDA to reverse its
decision or conduct additional data analysis, clinical trials and other steps
followed by an FDA audit of the Company's manufacturing and clinical trial
practices. The Company has filed a "Citizen's Petition" with the FDA to request
internal FDA documents help the Company to understand why FDA procedures were
not followed and the panel rejected the Company's request. There is no assurance
that the Company will receive the documents from the FDA or receive
pre-marketing approval for the BCS 2100.

If the BCS 2100 receives FDA pre-marketing approval, the Company's cash flow and
profitability will be dependant upon, among other things, successful marketing
and acceptance of the system by the medical community, obtaining reimbursements
from private and public insurance providers for procedures performed with the
BCS 2100, and that customers will find these reimbursements sufficient to
warrant its use. There is no assurance that the Company will be able to
successfully market the system or secure reimbursements, nor can the Company
assure that customers will believe reimbursements offered are sufficient.

The Company's current operating plan for fiscal 2005 assumes the expenditure of
approximately $4 million for general and administrative costs, research and
development, marketing, and continuing efforts to secure FDA pre-marketing
approval of the BCS 2100. The operating plan does not encompass: 1) additional
costs required to bring the BCS 2100 to market if FDA approval is obtained; or
2) start new clinical trials as described the FDA non-approval letter, which
describes additional steps the Company can take to obtain approval including
more clinical trials and further research. In order to fund operations, the
Company will be required to raise additional capital through debt or equity
financing. Uncertainties regarding FDA approval for the BCS 2100 and shareholder
litigation may make fundraising more difficult, if not impossible.

                                      F-7



<PAGE>

Management of the Company has taken certain actions in response to these risk
factors. Management believes that regulatory approval is contingent upon, among
other things, successful negotiations and resolution to FDA concerns and a
device panel review and an audit of the Company's manufacturing and clinical
trial practices. The Company cannot guarantee whether or when the FDA will
approve the BCS 2100, and has retained consultants to assist with preparation
for the Radiological Devices Panel meeting, manufacturing practices and clinical
trial audits. The FDA could affirm its prior decision, approve the Company's
application or approve the Company's application with conditions. Unless and
until the Company receives approval or conditional approval, which could include
having to conduct further clinical trials, clinical studies or analysis of
clinical trial data, the Company will conduct clinical studies of and analysis
of existing clinical trial data to develop product improvements, obtain patient
and clinician feedback and collect clinical data for product training purposes.
The Company cannot sell, market or distribute the BCS 2100 in the United States
for commercial use until it receives FDA approval. The BCS 2100 is currently
approved for use in Canada. The Company has begun marketing the BCS 2100 in
Canada by placing one BCS 2100 in Montreal at Ville Marie Women's Health Center
on a trial basis. Ville Marie began using the BCS 2100 in their breast cancer
diagnostic process as of September 1, 2004.

Further, management believes that success with regulatory activities and the
development of the Canadian market will facilitate funding and insurance
reimbursement efforts.

The Company hopes to secure additional cash from operations through continuing
efforts to market in the United States, Canada and other international markets
its pain management products (which have regulatory approval in the U..S and
Canada).

PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Computerized Thermal
Imaging Company ("CTICO"), formerly known as Thermal Medical Imaging, Inc, which
was dissolved during June 2001, and Bales Scientific, Inc. All intercompany
transactions and accounts have been eliminated.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS--The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash in checking
accounts and short-term highly liquid investments with an original maturity of
three months or less.

CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject
the Company to credit risk consist primarily of cash in bank. The Company
maintains its cash in bank deposit accounts insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The Company's accounts at times may
exceed federally insured limits.

INVESTMENTS AVAILABLE FOR SALE--The Company invests cash reserves in U.S.
government securities, corporate bonds and certificates of deposit. All
investments are classified as available for sale and are reported at fair market
value with net unrealized gains or losses (net of taxes) reported as a separate
component of stockholders' equity. The Company has no investments available for
sale mature during the year ending June 30, 2004. For computing the realized
gain or loss on sales of investments available for sale, the cost of a security
sold or the amount reclassified out of accumulated other comprehensive income
into earnings was determined by specific identification.

INVENTORIES--Inventories consist of finished goods, work-in-process, and raw
materials. Inventories are stated at the lower of cost or market, with cost
determined using the first-in first-out method.

PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and
depreciated using the straight-line method over their estimated useful lives:

       Leasehold improvements                                            3 years
       Office furniture and fixtures                                   5-7 years
       Machinery and equipment (including demonstration equipment)     2-7 years

                                      F-8



<PAGE>

INTANGIBLE ASSETS--Intangible assets are stated at cost and amortized using the
straight-line method over their estimated useful lives:

       Intellectual property rights                                     10 years

REVENUE RECOGNITION-- The Company generates revenues from sales of its products
and from services provided to its customers. The Company sells its products to
independent distributors and to end customers. With the exception of sales
transactions in which a customer may return defective product, the Company does
not provide its customers with other rights to return products.

The Company recognizes revenue from its product sales to end customers upon
shipment of products when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations remain, the fee
is fixed or determinable, and collectibility is probable. If these conditions
are not met, revenue is deferred until such obligations and conditions are
fulfilled. If the Company retains an ongoing obligation under a sales
arrangement, revenue is deferred until all of the Company's obligations are
fulfilled.

Beginning July 1, 2001, revenue on shipments to distributors is deferred until
cash payment from the distributor is received by the Company, which is generally
when the product is sold by the distributor to the end customer. Prior to that
date, revenue on shipments to distributors, which was not significant, was
recognized upon shipment to the distributor if all of the criteria for revenue
recognition were satisfied. The Company believes that deferral of revenue on
shipments to distributors until cash payment is received is a more meaningful
measurement of results of operations.

Certain of the Company's products contain software that is not considered
incidental to the product. Sales of those products are subject to the provisions
of AICPA Statement of Position No. 97-2, SOFTWARE REVENUE RECOGNITION, as
amended, which requires the deferral of revenue from certain multiple-element
arrangements. The Company defers revenue from multiple-element arrangements
until all elements have been delivered.

Deferred revenues at June 30, 2004 was approximately $1.08 million and consisted
of $22 thousand of deferred medical revenues, $660 thousand of deferred revenues
from the NanDa licensing and manufacturing agreement, $8 thousand of deferred
warranty revenues and $390 thousand of deferred industrial revenues and deposits
relating the Turbine Blade Inspection System ("Turbine Blade Inspection System")
the Company shipped to Pratt & Whitney (see Note 5). Deferred Revenues at June
30, 2003 was approximately $787 thousand and consisted of $10 thousand of
deferred medical revenues, $28 thousand of deferred warranty revenues, $449
thousand of deferred industrial revenues and deposits and $300 thousand from the
NanDa contract.

Service revenue is derived from the non-destructive testing of turbine blades,
repair of non warranty medical products, and other items. Service revenue is
recognized upon completion of the services. The Company offers extended
warranties on certain of its products. Warranty revenue, which is not
significant, is recognized ratably over the period of the agreement as services
are provided.

INCOME TAXES--Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry-forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

RESEARCH AND DEVELOPMENT EXPENSES--The Company expenses as incurred the direct,
indirect, and purchased research and development costs associated with its
products. Research and development expenses for the years ended June 30, 2004
and 2003 were approximately $996 thousand and $3.765 million respectively.

                                      F-9



<PAGE>

IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The Company impaired
no assets in fiscal 2004 and approximately $711 thousand of tangible and
intangible assets in fiscal 2003, based on its assessment that the entire
carrying value of the assets and goodwill was not recoverable. The statement of
cash flows for impairment loss and disposition of assets contains an impairment
loss of approximately $711 thousand of assets in fiscal the year ending June 30,
2003.

STOCK-BASED COMPENSATION--The Company has elected to follow the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES FOR STOCK-BASED COMPENSATION, for stock options
granted to employees and directors and to furnish the pro forma disclosure
required under Statement of Financial Accounting Standards ("SFAS") No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended. Transactions in which the
Company receives goods or services in exchange for equity instruments of the
Company are accounted for based on the fair value of the equity instrument
issued.

ACCRUED LIABILITIES AND NOTES PAYABLE-- During the year ended June 30, 2004, the
Company received $220 thousand in the form of a short-term loans to assist in
continuing operations. The Company borrowed $20 thousand from Harry Aderholt, a
director of the Company, on May 11, 2004 and $200 thousand from Mr. Nabeel al
Mulla, a shareholder of the Company, on June 14, 2004. The Company also carries
a long-term note due in 2010 acquired from the settlement with the former
Company president for $100 thousand. Interest has been accrued for each of these
outstanding notes although no formal documents exist. The details of these notes
are yet to be determined. The Company is now accruing an 6% interest rate for
accounting purposes. Due to the reduction in legal costs the accrued legal and
professional services has decreased and general expense accruals. Accrued
liabilities consisted of the following at June 30, 2004 and 2003:
<TABLE>
<CAPTION>
                                                                   2004              2003
                                                              --------------    -------------
<S>                                                           <C>               <C>
     Accrued bonuses                                          $           0     $           0
     Accrued vacation                                                26,088            23,881
     Other accrued employee costs                                     3,347            26,921
     Accrued legal and other professional services                   93,110           233,899
     Other accrued liabilities                                       49,491            21,331
                                                              --------------    -------------

     Total accrued liabilities                                $     172,036     $     306,032
                                                              ==============    =============

     Imputed interest payable                                           690                 0
     Short-term notes payable                                       220,000                 0
                                                              -------------     -------------

     Total short-term notes payable                           $     220,690     $           0
                                                              ==============    =============

     Imputed interest payable                                         9,178                 0
     Long-term note payable                                         100,000                 0
                                                              -------------     -------------

     Total long-term note payable                             $     109,178     $           0
                                                              ==============    =============
</TABLE>

COMPREHENSIVE INCOME--The Company classifies components of other comprehensive
income in the consolidated financial statements and displays the accumulated
balance of other comprehensive income as a separate component of stockholders'
equity in the consolidated balance sheets.

                                      F-10



<PAGE>

NET LOSS PER SHARE--Net loss per share is based on the net loss and the weighted
average number of common shares outstanding during each period. Common
equivalent shares from common stock options and warrants are excluded from the
computation of diluted earnings per share, as their effect would be antidilutive
to the loss per share for all periods presented. Options to purchase 3.6 million
and 4.4 million shares of common stock and warrants to purchase 6.5 million and
6.5 million shares were outstanding at June 30, 2004 and 2003, respectively, but
were not included in the computation of diluted earnings per share because the
effect would be antidilutive.

FINANCIAL INSTRUMENTS-- With the exception of the "Convertible Debenture"
described in Note 2 below, the Company believes the carrying values of its
financial instruments currently approximate their fair values. During the fiscal
years ended June 30, 2002 and 2003 the Company had a Convertible Debenture
outstanding. Due to the complexities of the Convertible Debenture, such as the
beneficial conversion feature, trigger events, and interrelationship with the
warrants and equity line, it was not practicable for the Company to estimate the
fair value of the Convertible Debenture. From January 1, 2002 to June 30, 2003,
the effective interest rate the Company paid on the Convertible Debenture
approximated 23% due to the amortization of the deferred finance costs and the
discount resulting from the beneficial conversion feature. During the year ended
June 30, 2004 the Convertible Debenture was satisfied and therefore stabilized
the debt and equity structure of the Company.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS-- During the year ended June 30,
2004, the Company adopted the following accounting pronouncements:

SFAS NO. 143 -- In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS, which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. The statement was
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
No. 143 did not have a material effect on the financial statements of the
Company.

SFAS NO. 145 -- On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS
145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB
Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of
Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64),
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through
this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS
64) that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. However, an entity is not prohibited from classifying such gains and
losses as extraordinary items, so long as it meets the criteria in paragraph 20
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting
for Leases", to eliminate an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The amendment requires
that a lease modification (1) results in recognition of the gain or loss in the
9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for
Sales of Real Estate," if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of
FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145
is effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 did not have a material effect on the financial statements of the Company.

SFAS NO. 146 -- In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit
or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. The provisions of EITF
No. 94-3 shall continue to apply for an exit activity initiated under an exit

                                      F-11



<PAGE>

plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.
The effect on adoption of SFAS 146 will change on a prospective basis the timing
of when the restructuring charges are recorded from a commitment date approach
to when the liability is incurred. The adoption of SFAS 146 did not have a
material effect on the financial statements of the Company.

SFAS NO. 147 -- In October 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions
of Certain Financial Institutions" which is effective for acquisitions on or
after October 1, 2002. This statement provides interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both SFAS 72
and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets". The adoption of SFAS No. 147 did not have a material
effect on the financial statements of the Company.

SFAS NO. 148 -- In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" which is effective for financial statements issued for fiscal
years ending after December 15, 2002. This Statement amends SFAS 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 did not have a material effect on the financial statements of
the Company.

SFAS NO. 149 -- In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" which is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging activities under
SFAS 133. The adoption of SFAS No. 149 did not have a material effect on the
financial statements of the Company.

SFAS NO. 150 -- In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" which is effective for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. This Statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. The adoption of SFAS No. 150 did not have a material effect on the
financial statements of the Company.

FASB INTERPRETATION NO. 45 -- "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an Interpretation of FASB Statements No. 5, 57 and 107". The initial
recognition and initial measurement provisions of this Interpretation are to be
applied prospectively to guarantees issued or modified after December 31, 2002.
The disclosure requirements in the Interpretation were effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FASB Interpretation No. 45 did not have a material effect on the
financial statements of the Company.

FASB INTERPRETATION NO. 46 -- In January 2003, the FASB issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46
provides guidance on the identification of entities for which control is
achieved through means other than through voting rights, variable interest
entities, and how to determine when and which business enterprises should
consolidate variable interest entities. This interpretation applies immediately
to variable interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 did not have a material
impact on the Company's financial statements.

                                      F-12



<PAGE>

During the year ended December 31, 2003, the Company adopted the following
Emerging Issues Task Force Consensuses: EITF Issue No. 00-21 "Revenue
Arrangements with Multiple Deliverables", EITF Issue No. 01 -8 " Determining
Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain
Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of
Customer Relationship Intangible Assets Acquired in a Business Combination",
EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after
Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning
of Other Than Temporary and its Application to Certain Instruments", EITF Issue
No. 03-5, "Applicability of AICPA Statement of Position 9702, `Software Revenue
Recognition' to Non-Software Deliverables in an Arrangement Containing More Than
Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the
Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires
the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to
Consumers by Manufacturers.

RECLASSIFICATION--Certain prior period amounts have been reclassified to conform
to the current year presentation.

2. CONVERTIBLE DEBENTURE

On December 31, 2001, the Company entered into a financing agreement (the
"Agreement") with Beach Boulevard, LLC (the "Investor"), pursuant to which the
Company issued a 7% convertible debenture in the amount of $2.5 million (the
"Convertible Debenture") and secured an equity line of credit (the "Equity
Line") that allowed the Company to sell up to $20 million in common stock to the
Investor at 94% of the market price, as defined by the Agreement. The
Convertible Debenture was due on December 31, 2004. The terms of the Agreement
permitted the Investor to convert the Convertible Debenture into 2,100,694
shares of common stock at a conversion price of $1.44 per share at any time
during the term of the Agreement. Interest on the Convertible Debenture was due
on the conversion date and was payable, at the option of the Company, in cash or
common stock.

In connection with the Agreement, the Company entered into a registration rights
agreement and subsequently filed a registration statement with the SEC. The
Investor had the option to require the Company to redeem all or a portion of the
Convertible Debenture if the average closing bid price of the Company's common
stock for the 90 consecutive trading days after the effective date of the
registration statement was less than $1.44 (a "Trigger Event"). The amount
redeemable was equal to 111% of the principal balance of the Convertible
Debenture and accrued interest (the "Redeemable Balance"). In the event of a
Trigger Event, the Investor was required to provide notice to the Company of its
election to force redemption and to specify the date (the "Redemption Due Date")
on which the Redeemable Balance was to be paid. If the Company did not pay the
Redeemable Balance in full by the Redemption Due Date, the Company was required
to issue registered unrestricted shares of common stock pursuant to a series of
mandatory put notices consistent with the terms of the Equity Line. If the
Redeemable Balance was not satisfied through the mandatory puts within six
months of the Investor's notice to force redemption, the unpaid portion of the
Redeemable Balance was required to be paid immediately.

In connection with the Agreement, the Company issued the Investor warrants for
the purchase of 260,417 shares of common stock at $2.03 a share and 641,026
shares of common stock at $1.95 a share, which, by their terms, would have
expired December 31, 2004 and December 31, 2007, respectively. The proceeds from
the Debenture Offering were allocated between the Convertible Debenture, the
beneficial conversion feature, and the warrants issued to the Investor. The
Company also issued separate warrants to an investment bank for the purchase of
100,000 shares of common stock at $1.87 per share. The fair market value of
these warrants and other related financing costs were recorded as deferred
financing costs. Because of the Trigger Event discussed in the preceding
paragraph, the deferred financing costs were amortized over the six-month period
ending January 25, 2003.

The fair value of the warrants issued in connection with the Agreement was
estimated using the Black-Scholes pricing model with the following assumptions:
(1) risk free rate of 2.17 percent, (2) expected life of one year, (3) expected
volatility of 44.6 percent, and (4) no expected dividends.

                                      F-13



<PAGE>

On July 25, 2002, the Investor notified the Company that a Trigger Event had
occurred and the Redeemable Balance of the Convertible Debenture became due. On
the date of the Trigger Event, the Redeemable Balance was approximately
$2,898,000, which included principal of $2,500,000, $111,000 of accrued interest
and $287,000 of penalty. The Company elected to satisfy the Redeemable Balance
through a series of mandatory put notices based on the terms of the Equity Line.
The terms of the Equity Line provided for one mandatory put per month and a
maximum put amount per month equal to the lesser of $500,000 or 125% of the
weighted average trading volume of the Company's common stock for the 20 days
immediately preceding the date of the mandatory put notice.

In connection with the terms of the Agreement, the Company issued 5,009,083
shares of common stock pursuant to a series of mandatory put notices during the
period July 1, 2002 through January 29, 2003. The proceeds were applied to
redeem approximately $685,000 of the Convertible Debenture and to pay accrued
interest and penalties totaling $176,000 and $95,000, respectively.

On January 29, 2003, the Company received a Holder Redemption Notice (the
"Notice") from the Investor. The Notice, referencing the Agreement, stated that
the Investor demanded payment of the Redeemable Balance. Pursuant to the
Agreement, the Company had five days to pay the balance in cash. Because the
Company did not pay the Redeemable Balance as requested by the Investor, the
Company was considered to be in default based on the terms of the Agreement.

On February 5, 2003, the Company received approximately $210,000 from the
issuance of 2,234,043 of common stock pursuant to the terms of the Equity Line.
The proceeds were used to redeem approximately $183,000 of the Convertible
Debenture and to pay accrued interest and penalties totaling $6,000 and $21,000,
respectively.

On or about February 21, 2003, the Company and the Investor entered into an
agreement which was formalized on March 19, 2003, (the "Amendment Agreement")
whereby the Company agreed to reduce the conversion price in the Convertible
Debenture from $1.44 per share to an amount equal to the lower of (a) $1.44 (the
"Fixed Conversion Price") or (b) ninety-four percent (94%) of the average of the
lowest closing bid prices (not necessarily consecutive) for any three trading
days during the ten trading days period immediately preceding the conversion
date. The Company also agreed to reduce the exercise price of the warrants that
were issued to the Investor in connection with the Agreement to $0.087733 per
share, which was the average of the lowest closing bid prices for any of the
three trading days during the ten trading days period immediately preceding the
Amendment Agreement. Pursuant to the Amendment Agreement, the Investor exercised
warrants to purchase 260,417 shares of common stock at an agreed-upon exercise
price of $0.087733 per share and (2) converted approximately $86,000 in
principal of the Convertible Debenture into 977,244 shares common stock at the
agreed-upon conversion price of $0.087733 per share. The proceeds from the
exercise of the warrants totaling approximately $23,000 were applied to redeem
approximately $20,000 of the Convertible Debenture and to pay accrued interest
of approximately $2,000. In connection with the modification of the conversion
terms of the Convertible Debenture, which was considered to be an inducement to
convert the Convertible Debenture, and the reduction of the exercise price of
the Investor's warrants, the Company recorded an interest expense totaling
approximately $1,770,000 during the quarter ended March 31, 2003.

On February 21, 2003, the Company issued 1,212,956 shares of common stock
pursuant to a mandatory put notice. The proceeds were applied to redeem
approximately $91,000 of the Convertible Debenture and to pay accrued interest
and penalties totaling $5,000 and $11,000, respectively. On March 19, 2003, the
Company entered into an agreement with the Investor (the "Amendment Agreement")
that formalized the terms reached in the February 21, 2003 Agreement. In
connection with the Amendment Agreement, the Investor also agreed to defer its
demand for immediate payment of the full amount due under the Notice for at
least 90 days and agreed to not file suit against the Company, its officers,
employees, partners or agents for a period of 90 days. Upon execution of the
Amendment Agreement, the Investor converted $272,000 in principal of the
Convertible Debenture, including $7,000 of interest, into 3,224,146 shares of
common stock.

During June 2003, the Company executed a second amendment to the Convertible
Debenture, pursuant to which the Investor agreed to accept approximately 200
thousand shares of restricted stock in payment for the remaining $157 thousand
outstanding under the Convertible Debenture. In July 2003, the outstanding
Convertible Debenture, valued at approximately $157 thousand, was fulfilled with
196,451 shares of common stock (approximately $0.80 per share). The stock was
trading for $0.45 per share at time of issuance of stock certificates resulting
in the recognition of $0.35 per share or a total recognition of approximately
$69 thousand gain on sale of stock to satisfy the outstanding Convertible
Debenture.

                                      F-14



<PAGE>

3. INVENTORIES

Inventories consisted of the following at June 30, 2004 and 2003:

                                                        2004            2003
                                                     ------------   ------------

       Raw materials                                 $   616,508    $   674,502
       Work-in-process                                    18,629         19,286
       Finished goods                                    255,161        207,419
       Inventory Reserve                                (629,967)      (595,343)
                                                     ------------   ------------
       Total                                         $   260,331    $   305,864
                                                     ============   ============

Finished goods inventories include approximately $196 thousand in TIP cameras
and $59 thousand assemblies and Photonic Stimulators at June 30, 2004. At June
30, 2003 finished goods inventories included approximately $151 thousand of
industrial inventories and $56 thousand of medical inventories. Work in process
inventory was primarily one TIP camera in process for both fiscal year-end 2004
and 2003. Raw Materials inventory was approximately $617 thousand and $675
thousand for the years ending June 30, 2004 and 2003 respectively. The inventory
reserve represents the impairment and obsolescence adjustments to inventory.

Inventory and commitments are based upon future demand forecasts. During fiscal
2003, inventory levels exceeded the Company's forecast requirements and the
Company recorded an additional excess inventory charge of $395,000 in accordance
with its policies. During fiscal 2004, the Company considered selling existing
inventory at a reduced price and believes the finished goods could be sold in
times of disparity. Consequently the Company impaired the inventory no further.

The Company reserves for excess and obsolete inventory by comparing inventory on
hand to estimated consumption during the next twelve months. Consumption is
estimated by annualizing trailing three or six month sales volumes, adjusting
those volumes for known activities and trends and then comparing forecast
consumption to quantity on hand. Any difference between inventory on hand and
estimated consumption is recorded to cost of revenues and an excess and obsolete
reserve which is included as an element of net inventory reported on the
Company's balance sheet. Amounts charged into the inventory reserves are not
reversed to income until the reserved inventory is sold or otherwise disposed.

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 2004 and 2003:

                                                         2004           2003
                                                     ------------   ------------
         Leasehold improvements                      $         0    $    94,403
         Office furniture and fixtures                    38,421         38,403
         Machinery and equipment                         557,281        569,199
                                                     ------------   ------------
                                                         595,702        702,005
         Less accumulated depreciation                  (426,344)      (389,286)
                                                     ------------   ------------
         Property and equipment, net                 $   169,358    $   312,719
                                                     ============   ============

Depreciation expense for the years ended June 30, 2004 and 2003 was
approximately $142 thousand and $436 thousand, respectively.

As of June 30, 2004, machinery and equipment included approximately $240
thousand of demonstration equipment. As of June 30, 2003, machinery and
equipment included approximately $252. Demonstration equipment is used in
clinical studies, tradeshows, research and development, and customer
demonstrations is recorded at cost and amortized over two years.

For the year ended June 30, 2003, the FDA's decision to not approve the BCS
pre-market application raised substantial uncertainty in the Company's ability
to eventually market and sell the BCS. This factor, coupled with the other
conditions listed in Note 1, have raised substantial doubt about the Company's
ability to continue as a going concern. Accordingly, the Company evaluated the
carrying value of all operating assets and, based on the Company's estimated
undiscounted net cash flows, determined that its assets were impaired. The
Company recorded an impairment charge of approximately $694,000 relating to its
medical and industrial operating assets. These assets include computers,
equipment, furniture, leasehold improvements, software and other operating
assets for the year ended June 30, 2003. There was not additional impairment in
the year ended June 30, 2004.

                                      F-15



<PAGE>

5. INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2004 and 2003:

                                                        2004            2003
                                                     ------------   ------------

           Intellectual property rights              $    32,847    $    33,062
           Less accumulated amortization                 (17,437)       (14,997)
                                                     ------------   ------------

           Net Intangible assets                     $    15,410    $    18,065
                                                     ============   ============

For the year ended June 30, 2003, the FDA's decision to not approve the BCS
pre-market application raised substantial uncertainty in the Company's ability
to eventually market and sell the BCS. This factor, coupled with other
conditions listed in Note 1, have raised substantial doubt about the Company's
ability to continue as a going concern. Accordingly, the Company evaluated the
carrying value of its intangible asset based on estimated undiscounted net cash
flows and determined that its intangible asset was impaired and recorded an
impairment write-down of approximately $17,000 as of June 30, 2003. No
additional impairment was recognized for as of June 30, 2004.

Amortization expense for the years ended June 30, 2004 and 200 was approximately
$2 thousand and $4 thousand, respectively.

6. INCOME TAXES

Deferred taxes are provided on the liability method, whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry-forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. Due to the
Company filing an extension for income tax filings we lack the information for
deferred taxes. However, at June 30, 2004, for federal income tax and
alternative minimum tax reporting purposes, the Company had approximately
$61,838,000 of unused net operating losses available for carry forward to future
years. The benefit from carry forward of such net operating losses will expire
in various years between 2004 and 2023 and could be subject to severe
limitations if significant ownership changes occur in the Company.

Net deferred tax assets consist of the following components as of June 30, 2004
and 2003:

                                                       2004            2003
                                                  --------------  --------------
     Deferred tax assets:
          NOL Carryover                           $  29,412,300   $  28,327,179
          Research Credit                             2,193,864       2,193,864
          Accrued Compensation                          243,273         302,860
          Deferred Revenue                              267,327         838,767
          Other                                         576,487         576,487
          Depreciation                                   54,765

     Deferred tax liabilities:                               --              --

     Valuation allowance                          $ (32,748,016)  $ (32,239,157)
                                                  --------------  --------------

     Net deferred tax asset                       $           0   $           0
                                                  ==============  ==============

                                      F-16



<PAGE>

The income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rates of 39% to pretax income
from continuing operations for the years ended June 30, 2004 and 2003 due to the
following:

                                                       2004            2003
                                                  --------------  --------------
     Book income                                  $    (964,254)  $  (4,820,629)
     Other                                                4,443          15,809
     Research Credit                                                   (136,252)
     Accrued Compensation                                23,239
     Deferred Revenue                                   222,862
     NOL Expiration                                     222,955
     True up Prior Year                                 (18,104)         18,822

     Valuation allowance                                508,859       4,922,250
                                                  --------------  --------------
                                                  $           0   $           0
                                                  ==============  ==============

At June 30, 2004, the Company had net operating loss carry-forwards of
approximately $75,000,000 that may be offset against future taxable income from
the year 2004 through 2024. No tax benefit has been reported in the June 30,
2004 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carry forwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carry-forwards may be limited as to use in future years.

7. COMMITMENTS AND CONTINGENCIES

LITIGATION--Three separate law suits were settled during the year ended June 30,
2004.

         1)   On March 29, 2000, Salah Al-Hasawi, a citizen and resident of
              Kuwait, filed an action in the United States District Court for
              the Southern District of New York, against the Company and its
              former Chief Executive Officer, alleging violations under Section
              10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
              promulgated thereunder, for commissions allegedly due to the
              plaintiff in connection with the private placement of the
              Company's securities. Shortly thereafter, the lawsuit was
              dismissed without prejudice and on April 12, 2000 the plaintiff
              filed a similar complaint in the United States District Court for
              the District of Utah. The plaintiff's complaint sought specified
              damages of $15.5 million, attorney fees and unspecified damages
              pursuant to five separate causes of action including breach of
              contract, fraud and unjust enrichment. In December 2003, the
              Company reached a settlement with the plaintiff, pursuant to which
              the Company agreed to pay the aggregate amount of $100,000 in
              three installments ($50,000 paid in December, 2003, $25,000 paid
              in January 2004 and $25,000 paid in February 2004) and the
              plaintiff agreed to dismiss the litigation with prejudice. The
              settlement is set forth in a Settlement Agreement and Mutual
              Release, which provided for the filing with the court of dismissal
              pleadings when the Company paid the final installment in February
              2004.

         2)   On April 11, 2003, St. Paul Properties, Inc. (the "Landlord")
              filed suit against the Company in the Circuit Court for Clackamas
              County. The Landlord alleged that the Company breached its prior
              corporate office lease by failing to pay the rent specified under
              the lease. The Landlord sought damages of approximately $667,000,
              plus interest and attorneys and other fees. The Company filed an
              answer and affirmative defenses alleging that St. Paul Properties
              failed to use reasonable efforts to mitigate its damages. In April
              of 2004, the Company settled with St. Paul for the sum of $110,000
              and which included a $50,000 payment with 5 monthly payments of
              $12,000. The final payment of $12,000 was paid on August 15, 2004.

         3)   An appeal of COMPUTERIZED THERMAL IMAGING, INC., SECURITIES
              LITIGATION (see prior SEC filings) was heard on July 16, 2004 in
              the United States Court of Appeals for the Ninth Circuit. The
              Ninth Circuit decision upheld the determination of the District
              Court to dismiss the plaintiff's complaint because it failed to
              adequately plead a case.

                                      F-17



<PAGE>

OPERATING LEASES--The Company leases certain office and warehouse space. Total
expense recorded under operating lease agreements in the accompanying
consolidated statements of operations was approximately $88 thousand and $400
thousand for the years ended June 30, 2004 and 2003, respectively.

At June 30, 2004, there were no future minimum payments required under the
noncancelable operating leases. We have two leases for our 1) Ogden, Utah
location which houses all offices and manufacturing and 2) a storage unit also
in Ogden. These leases are month-to-month leases with 30 day notice for
termination. Monthly lease is $5,783 for the Ogden office and $70 for the
storage unit.

OTHER CONTINGENCIES--The Company has funded its operations in part by means of
various offerings which the Company's management believes were exempt from the
registration requirements of the Securities Act and applicable state securities
laws. In the event that any of the exemptions upon which the Company relied were
not, in fact, available, the Company could face claims from federal and state
regulators and from purchasers of their securities. Management and legal
counsel, although not aware of any alleged specific violations, cannot predict
the likelihood of claims or the range of potential liability that could arise
from this issue.

Prior to February 4, 1998, most of the Company's stockholders held preemptive
rights to acquire shares of the Company's common stock under certain
circumstances. In certain instances, the Company failed to properly offer
stockholders these preemptive rights. No shareholder has asserted any preemptive
rights to date. Should any stockholder do so, the Company plans to issue shares
of common stock at the price to which the stockholder was originally entitled.

8. STOCKHOLDERS' EQUITY

PREFERRED STOCK--The Company has authorized 3,000,000 shares of $5.00 par value
preferred stock that is convertible into shares of common stock. The Board of
Directors has the authority, without further stockholder action, to issue up to
3,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, and restrictions thereof.

The Company had no preferred stock outstanding as of June 30, 2004 and 2003.

9. STOCK WARRANTS AND OPTIONS

WARRANTS--A summary of warrant activity for the period from July 1, 2002,
through June 30, 2004, is as follows:
                                               # OF UNDERLING
                                                   SHARES       EXERCISE PRICE
                                               --------------   --------------
         Balance at June 30, 2002                  6,719,513     $1.56 - $5.00

           Granted                                         -
           Exercised                                (260,417)    $0.09
                                               --------------
         Balance at June 30, 2003                  6,459,096     $1.56 - $5.00

           Granted                                        -
           Exercised                                      -
         Balance at June 30, 2004                  6,459,096     $1.56 - $5.00
                                               ==============

During the year ended June 30, 2003, the Company reduced the exercise price of
the warrants that were issued to the Investor from $2.028 to $0.087733 per
share. These warrants were exercised to pay $21,000 of the debenture principal
and $2,000 of accrued interest. The fair value of the warrant modification was
estimated at the date of modification using the Black-Scholes option pricing
model.

OPTIONS--Periodically, the Company has issued incentive stock options to
employees and officers and non-qualified options to directors and outside
consultants to promote the success of the Company and enhance its ability to
attract and retain the services of qualified persons.

                                      F-18



<PAGE>

The Company has 3,592,023 options outstanding and issued under the 1997 Stock
Option and Restricted Stock Plans (the "Plan") since its adoption, and could
issue an additional aggregate of 6,357,977 options and shares. The Plan permits
restricted stock grants to employees, officers, directors and consultants at
prices that may be less than 100% of the fair market value of the Company's
common stock on the date of issuance. The Company also has outstanding 75,000
non-statutory stock options issued outside the Plan. Options issued under the
Plan will have variable terms based on the services provided and will generally
vest on the date of grant.

EMPLOYEE STOCK OPTIONS--The Company has granted the following fixed price stock
options during the period July 1, 2002, through June 30, 2004:
<TABLE>
<CAPTION>
                                                        2004                           2003
                                                ----------------------       ----------------------
                                                              WEIGHTED                     WEIGHTED
                                                               AVERAGE                      AVERAGE
                                                              EXERCISE                     EXERCISE
                                                  SHARES        PRICE          SHARES        PRICE
                                                  ------        -----          ------        -----
<S>                                               <C>            <C>           <C>            <C>
         Outstanding at beginning of year...      4,367,719      1.83          7,876,762      1.83
         Granted  ..........................        510,000       .29                 --        --
         Exercised..........................             --        --                 --        --
         Forfeited..........................     (1,360,695)     1.73         (3,509,043)     2.21
                                                ------------                 ------------     ----

         Outstanding at end of year.........      3,517,023      1.27          4,367,719      1.53
                                                ------------                 ------------     ----
         Options exercisable at year end....      3,367,023                    4,367,719
                                                ============                 ============

         Weighted average fair value of
           options granted during the year..           0.29                         0.00
                                                ============                 ============

                    OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE

                                   WEIGHTED
                                   AVERAGE       WEIGHTED                   WEIGHTED
RANGE OF                           REMAINING     AVERAGE                    AVERAGE
EXERCISE            NUMBER         CONTRACTUAL   EXERCISE     NUMBER        EXERCISE
PRICE               OUTSTANDING    LIFE          PRICE        EXERCISABLE   PRICE
--------------      --------------------------------------------------------------------
$.22 - .64          416,400        6.54          $.35         191,400       $.50
$1.25 - 1.25        2,000,000      0.95          1.25         2,000,000     1.25
$1.50 - $1.95       1,071,587      6.36          1.52         1,071,587     1.52
$2.27 - $2.44       24,036         6.71          2.34         24,036        2.34
$3.50 - 3.50        88,000         6.98          3.50         80,000        3.50
                    --------------------------------------------------------------------
$.22 - $3.50        3,592,023      3.39          $1.28        3,367,023     $1.36
                    ====================================================================
</TABLE>

Modifications to the terms of previously fixed stock options or awards granted
to employees are accounted for in accordance with APB Opinion No. 25 and
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AN INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD (APB) OPINION NO.
25 ("FIN 44"). During the year ended June 30, 2004 the Company did not re-price
any options. As a result of the Company's significant reduction in personnel
during the year ended June 30, 2004, nearly all those employees holding options
that had been re-priced in prior years are no longer employed by the Company and
their rights to exercise their options have lapsed.

                                      F-19



<PAGE>

If compensation cost for options or awards granted to employees had been
determined based on SFAS No. 123, the Company's net loss and basic and diluted
loss per common share would have changed to the pro forma amounts indicated
below:

                                                       2004            2003
                                                   -------------   -------------
       Net loss:
       As reported                                 $ (2,472,347)   $(11,752,406)
       Pro forma                                     (2,688,459)    (12,389,458)
       Basic and diluted loss per common share:
       As reported                                 $      (0.02)   $      (0.13)
       Pro forma                                          (0.02)          (0.14)

The fair value of the options and awards was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions for
2004 and 2003:

         1)   risk-free interest rate between 3.34 and 4.17 percent depending
              upon the term of the option;
         2)   no dividend yield;
         3)   no discount for lack of marketability;
         4)   expected life of from 1 to 10 years; and
         5)   a volatility factor of the expected market price of the Company's
              common stock from 259.14% to 263.29% for the years ended June 30,
              1997 through 2004

NON-EMPLOYEE STOCK OPTIONS--Changes in stock options issued to non-employees are
as follows for the years ended June 30, 2004, and 2003, respectively:
<TABLE>
<CAPTION>

                                                       2004                           2003
                                               ------------------------    --------------------------
                                                              WEIGHTED                     WEIGHTED
                                                               AVERAGE                      AVERAGE
                                                              EXERCISE                     EXERCISE
                                                  SHARES        PRICE          SHARES        PRICE
                                               ------------------------------------------------------
<S>                                                  <C>         <C>           <C>            <C>
         Outstanding at beginning of year...         75,000      1.81          2,449,849      1.11
         Granted............................             --        --
         Exercised..........................             --        --
         Forfeited..........................                                  (2,374,849)     1.08
                                               -------------               --------------------------
         Outstanding at end of year.........         75,000      1.81             75,000      1.81
                                               -------------     ----      --------------     ----
         Options exercisable at year end....         75,000                       75,000
                                               =============               ==============
         Weighted average fair value of
           options granted during the year..             --                           --
                                               =============               =============
</TABLE>

The following table summarizes information about stock options issued to
non-employees that were outstanding at June 30, 2004:
<TABLE>
<CAPTION>

                    OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                    --------------------------------------    -------------------------
                                   WEIGHTED
                                   AVERAGE       WEIGHTED                   WEIGHTED
RANGE OF                           REMAINING     AVERAGE                    AVERAGE
EXERCISE            NUMBER         CONTRACTUAL   EXERCISE     NUMBER        EXERCISE
PRICE               OUTSTANDING    LIFE          PRICE        EXERCISABLE   PRICE
--------------      -----------    -----------   --------     -----------   -----------
<C>     <C>         <C>            <C>           <C>          <C>           <C>
$1.00 - 1.81        35,000         4.18          1.64         35,000        1.64
$       1.95        40,000         1.39          1.95         40,000        1.95
--------------      -----------    -----------   --------     -----------   -----------
$1.00 - 1.95        75,000         2.70          $1.81        75,000        $1.81
==============      ===========    ===========   ========     ===========   ===========
</TABLE>

                                      F-20



<PAGE>

10. PROFIT SHARING PLAN

The Company sponsored a profit sharing plan (the "Profit Sharing Plan") under
Section 401(k) of the Internal Revenue Code; however to due the financial
condition of the Company has decided to temporarily terminate the Profit Sharing
Plan. The Profit Sharing Plan was designed to allow participating employees to
accumulate savings for retirement or other purposes. Under the Profit Sharing
Plan, all full-time employees were eligible to participate. The Profit Sharing
Plan allowed employees to make contributions to the Profit Sharing Plan from
salary reductions up to a maximum amount established by the Internal Revenue
Service. The Company, at the discretion of the board of directors, had the
option to match a percentage of employee contributions with its common stock or
cash. Matching contributions vest ratably over a two-year period. The Profit
Sharing Plan was terminated in June of 2003. During the years ended June 30,
2004 and 2003 the Company issued stock, valued on the date of issuance at $0 and
$21,883 respectively, as matched contributions to the Profit Sharing Plan.

11. RELATED PARTY TRANSACTIONS

The Company has been dependent upon certain individuals, officers, stockholders
and other related parties to provide capital, management services, assistance in
finding new sources for debt and equity financing, and guidance in the
development of the Company's business. The related parties have generally
provided services and incurred expenses on behalf of the Company in exchange for
shares of the Company's common stock.

12. SEGMENTS

Beginning July 1, 2001, the Company changed the structure of its internal
organization such that management at that time started to evaluate the Company
based on two distinct operating segments: medical and industrial products and
services. Due to the dramatic changes and cost cuts beginning in January 2003
and continuing through fiscal 2004, the allocation models used to separate costs
into these segments became misleading. Each time a new model was developed
changes in the cost structure would render the model inaccurate. The Company
continues to accurately separate revenue but believes any attempt to assign
costs to the segments would be inconsistent from year to year. The revenue
segment information follows
<TABLE>
<CAPTION>

                                    2004                                  2003
                      ----------------------------------     ----------------------------------
                       MEDICAL    INDUSTRIAL    TOTAL         MEDICAL    INDUSTRIAL    TOTAL
                      ----------  ----------  ----------     ----------  ----------  ----------
<S>                   <C>         <C>         <C>            <C>               <C>   <C>
Product revenue       $     269   $       5   $     274      $     999         444   $   1,443
Service revenue               0          83          83              1          95          96
                      ----------  ----------  ----------     ----------  ----------  ----------
   Total revenue            269          88         357          1,000         539       1,539
                      ==========  ==========  ==========     ==========  ==========  ==========

                                      Percentage                              Dollars
                        -------------------------------------   -------------------------------------
    Fiscal Year             USA         Canada       China         USA         Canada        China         Total
    -----------         -----------  -----------  -----------   -----------  -----------  -----------   -----------
       2004                 70%           29%           1%      $   187,000  $    78,000  $     4,000   $   269,000
       2003                 44%            1%          55%      $   442,000  $     7,000  $   551,000   $ 1,000,000
                        -----------  -----------  -----------   -----------  -----------  -----------   -----------
       Total                50%            7%          43%      $   629,000  $    85,000  $   555,000   $ 1,269,000
                        ===========  ===========  ===========   ===========  ===========  ===========   ===========

Industrial sales are primarily attributable to customers in the following geographic regions:

                                      Percentage                              Dollars
                        -------------------------------------   -------------------------------------
    Fiscal Year            USA           UK         Germany         USA          UK        Germany         Total
    -----------         -----------  -----------  -----------   -----------  -----------  -----------   -----------
       2004                100%           0%           0%       $    88,000  $        --  $        --   $    88,000
       2003                 31%          69%           0%       $   165,000  $   374,000  $        --   $   539,000
                        -----------  -----------  -----------   -----------  -----------  -----------   -----------
       Total                40%          60%           0%       $   253,000  $   374,000  $        --   $   627,000
                        ===========  ===========  ===========   ===========  ===========  ===========   ===========
</TABLE>

                                      F-21



<PAGE>

13. SIGNIFICANT CUSTOMERS

Net sales for the years ended June 30, 2004 and 2003 included sales to following
customers that make up more the 10% of total net sales:

                                                         YEARS ENDED JUNE 30,
                                                       2004            2003
                                                   -------------   -------------
       Boothroyd Imaging                           $      74,000   $           0
       Spawar                                             49,000               0
       Alstom Power                                           --         374,000
       NanDa                                                  --         501,000
                                                   -------------   -------------
                                                   $     123,000   $     875,000
                                                   =============   =============

Accounts receivable as of June 30, 2004 and 2003 contained the following
balances from significant customers:
                                                         YEARS ENDED JUNE 30,
                                                       2004            2003
                                                   -------------   -------------
       Boothroyd Imaging                           $      26,000   $          --
       Pratt & Whitney                                   105,000              --
       Alstom Power                                           --              --
       NanDa                                                  --         300,000
                                                   -------------   -------------
                                                   $     131,000   $     300,000
                                                   =============   =============

Deferred revenues as of June 30, 2004 and 2003 contained the following balances
from significant customers:

                                                        YEARS ENDED JUNE 30,
                                                       2004            2003
                                                   -------------   -------------
       Pratt & Whitney                             $     106,000   $          --
       NanDa                                             925,000         300,000
                                                   -------------   -------------
                                                   $   1,031,000   $     300,000
                                                   =============   =============

14. SUBSEQUENT EVENTS

SHAREHOLDER LITIGATION: The United States Court of Appeals for the Ninth Circuit
ruled in the Company's favor in the appeal of the United States District Court
decision to dismiss the plaintiffs' claims in the proceeding entitled IN RE:
COMPUTERIZED THERMAL IMAGING, INC., SECURITIES LITIGATION. The Ninth Circuit
decision upheld the determination of the District Court to dismiss the
plaintiff's complaint because it failed to adequately plead a case. The suit,
which was consolidated into a single suit during September 2002, allege in
substance that CTI violated section 10(b) of the Securities Exchange Act of
1934, as amended, and accompanying regulations and relevant case law by
misleading shareholders regarding such things as the progress of FDA approval
and other matters, which the plaintiffs believed caused significant damage to
the holders of our common stock at the time of these alleged misrepresentations
and omissions. The plaintiffs had not specified their damages. On April 17,
2003, the consolidated litigation was dismissed without prejudice by the United
States District Court. In a written opinion, the U.S. District Judge concluded
that the alleged misstatements were either not material, not misleading, or not
plead by plaintiffs with sufficient particularity to constitute a claim. Upon
dismissal of their complaint, the plaintiffs did not replead, so the District
Judge dismissed the case with prejudice on May 13, 2003. On May 22, 2003, the
plaintiffs filed their brief in support of their appeal. On October 20, 2003 we
responded by filing our response brief in support of the District Court opinion.
The decision has now been upheld.

                                       F-22



<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None

ITEM 8A. CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of June
30, 2004. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to our company required to be included in our reports filed
or submitted under the Exchange Act. There have been no significant changes
(including corrective actions with regard to significant deficiencies or
material weaknesses) in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation
referenced above.

PART III
--------

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Name                       Age        Position                         Director
----                       ---        --------                         --------

Richard V. Secord          72         Chairman of the Board, Chief     1996
                                      Executive Officer

Brent M. Pratley, M.D.     68         Director                         1995

Milton R. Geilmann         71         Director                         1998

Harry C. Aderholt          83         Director                         1998

John M. Brenna             57         Former President, Chief          2001-2003
                                      Operating Officer, Director (1)

(1) Mr. Brenna resigned from all positions with the Company for personal reasons
on October 11, 2003.

RICHARD V. SECORD (Major General, United States Air Force, retired) has served
as our Chairman and Chief Executive Officer since September 22, 2000. General
Secord served as our Vice Chairman from July 1997 through September 2000, as our
Secretary from July 1997 to June 2000, as our President from February 1996 to
April 1997 and as our Chief Operating Officer from June 1995 to December 1999.
General Secord served in numerous positions while performing military service
from July 1951 until June 1984. General Secord received a Bachelor of Science
degree from the United States Military Academy. General Secord is also a
graduate of the United States Air Force Command and Staff College and the United
States Naval War College. General Secord holds a Masters degree in International
Affairs from George Washington University.

BRENT M. PRATLEY, M.D., has been a director since June 1995 and is a member of
our Audit Committee. Dr. Pratley served as our Secretary from June 1994 to
September 1997. Dr. Pratley is currently licensed to practice medicine in Utah
and California. Since 1978, Dr. Pratley has been in private practice in General
Orthopedics and Sports Medicine at Utah Valley Regional Medical Center located
in Provo, Utah, as well as in Los Angeles, California. Dr. Pratley holds a
Doctor of Medicine degree in Orthopedic Surgery from the College of Medicine at
University of California, Irvine and a Bachelors of Science degree from Brigham
Young University.

MILTON R. GEILMANN has been a director since January 1998 and serves as a member
of our Audit Committee. From 1965 until his retirement in 1992, Mr. Geilmann
worked at E. R. Squibb & Sons where he held many positions, including Nuclear
Consultant for Diagnostic Medicine. Mr. Geilmann holds an Associates degree in
dental science from State University of New York.

                                      37



<PAGE>

HARRY C. ADERHOLT (Brigadier General, United States Air Force, retired) has been
a director since January 1998 and serves as Chairman of our Audit Committee.
From 1942 until his retirement in 1976, General Aderholt served in the U.S. Air
Force. Since his retirement from military service, General Aderholt has engaged
in various private business ventures, including serving as Vice President of Air
Siam in Bangkok, Thailand. General Aderholt owns and operates Far East Designs,
a furniture importer and retailer in Florida, and is President of the McCroskie
Threshold Foundation, a humanitarian organization that donates medical supplies,
food and clothing to needy people in the U.S. and around the world.

JOHN M. BRENNA was a director, our President, our Chief Operating Officer and a
member of our Executive Committee from March 2001 until October 11, 2003, at
which time he resigned from all positions for personal reasons. From October
2000 until March 2001, Mr. Brenna served as our Executive Vice President. From
1986 until 1996, Mr. Brenna was employed by Phillips Medical Systems marketing
cardiovascular and general X-ray systems for Phillips' North America operations.
From 1996 until 1999, Mr. Brenna was Executive Vice President of Marketing for
Trex Medical, a Thermo-Electron company. During that time period, Mr. Brenna
also was President and Chief Operating Officer of the LORAD division of Trex
Medical, which specializes in advanced breast imaging and stereotactic biopsy
systems. Following Mr. Brenna's employment with Trex Medical and up to the time
that he joined us, Mr. Brenna was an independent consultant. Mr. Brenna holds a
Bachelor of Science degree from University of New Haven.

EXECUTIVE OFFICERS

NAME                  AGE      POSITION                            OFFICER SINCE
----                  ---      --------                            -------------

Bernard J. Brady      47       Former Chief Financial Officer,     June 2001
                               Secretary and Treasurer             (Employment
                                                           terminated June 2003)

BJ Mendenhall         45       Former Chief Financial Officer      October 2003
                                                 (resigned as CFO in March 2004)

BERNARD J. BRADY, age 46, was our Chief Financial Officer, Secretary, and
Treasurer from June 2001 until his employment contract expired on June 2003.
From January 1995 to June 1999 and from April 2000 to March 2001, Mr. Brady
served as vice president, chief financial officer, treasurer, and in various
other positions for Laser Power corporation and its predecessor company Exotic
Materials, Inc., a manufacturer of infrared and laser optics for military and
commercial applications. From July 1999 to April 2000, Mr. Brady was the chief
financial officer for DecisionPoint Applications, Inc., a provider of packaged
data warehousing applications. From February 1997 until June 1998, Mr. Brady
served as controller at Atlas Telecom, where he was recruited to assist in an
attempt to solve the company's acute financial problems. Despite Mr. Brady's
efforts, in June 1998, Atlas filed for reorganization under the bankruptcy code.
From 1989 through 1994, Mr. Brady served as controller at MLX Corp., a
nationwide wholesale distributor. Mr. Brady holds Bachelors and MBA degrees from
the University of Utah.

BJ Mendenhall, age 44, was our Chief Financial Officer from October 2003 until
his resignation in March 2004. Mr. Mendenhall served as a consultant to the
Company for the two months prior to his appointment. From October 2002 to August
2003, Mr. Mendenhall worked as a private business consultant and CPA. From
August 2000 to October 2002, Mr. Mendenhall served as the Chief Financial
Officer of Daw Technologies Inc,. a manufacturer and constructor of cleanrooms
for the semiconductor and medical devise industry. From February 1999 to July
2000 Mr. Mendenhall served as chief financial officer for Venturi Technologies
Inc. a rollup company in the carpet cleaning industry. Prior to February 1999,
Mr. Mendenhall was Vice President and Controller, among other positions for 15
years at GlobeCast, Keystone Communications and Bonneville Satellite corp. a
major satellite communication company merging with companies such as World
Communications, IDB satellite division and France Telecom. Mr. Mendenhall is a
CPA and holds Bachelors degree from Brigham Young University.

                                      38



<PAGE>

SECTION 16 COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers and directors, as well as persons who beneficially own more
than ten percent of our Common Stock, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission (the
"SEC"). Reporting persons are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to us and written representations from the
Company's executive officers and directors, the Company believes that for the
fiscal year ended June 30, 2004 all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
<TABLE>
                                                                                         LONG-TERM COMPENSATION
                                                                                   --------------------------------
                                                  ANNUAL COMPENSATION                     AWARDS             PAYOUT
                                       ------------------------------------------  ---------------------     ------
                                                                        OTHER      RESTRICTED                               ALL
                                                                        ANNUAL       STOCK    SECURITIES      LTIP         OTHER
                                       FISCAL   SALARY     BONUS     COMPENSATION   AWARD($)  UNDERLYING     PAYOUTS    COMPENSATION
NAME AND PRINCIPAL POSITION             YEAR      ($)       ($)         ($)(4)         ($)    OPTION (#)       ($)          ($)
----------------------------------     ------   --------   ------    ------------  ---------- ----------     -------    ------------
<S>                                     <C>      <C>                     <C>                      <C>
Richard V. Secord                       2004     90,050        --        32,400         --        25,000        --           --
Chairman, Chief Executive Officer (1)   2003    201,000        --        35,309         --            --        --           --
                                        2002    210,000        --        32,400         --            --        --           --
                                        2001    210,000        --        13,400         --       750,000        --      975,894

John M. Brenna (2)                      2004     72,000        --         6,000         --            --        --           --
Former President, Chief Operating       2003    210,000        --        20,347         --            --        --           --
Officer, Director                       2002    210,000   168,000         6,000         --        15,000        --           --
                                        2001    143,014    20,000         4,500         --       500,000        --      150,000

Bernard J. Brady (3)                    2004     21,241        --            --         --            --        --           --
Former Chief Financial Officer,         2003    175,000        --        20,093         --            --        --           --
Secretary & Treasurer                   2002    140,000    84,000            --         --       110,000        --           --
                                        2001     13,417        --            --         --        50,000        --           --

BJ Mendenhall (3)                       2004     82,699        --            --         --        25,000        --           --
Former Chief Financial Officer
</TABLE>

(1) Under his employment agreement with the Company, which expired in September
2003 but is being extended on a month to month basis, General Secord, our
chairman and Chief Executive Officer, is entitled to receive a base salary of
$210,000 per year. During June 2003, Mr. Secord voluntarily began to accept a
reduced salary of $105,000 per year and again on March 5, 2004 to $52,000 per
year until such time as he determines to demand the full $210,000 per year
salary authorized by the Board.

(2) Mr. Brenna resigned as our President, Chief Operating Officer and director
of the Company as of October 11, 2003. The positions of President and Chief
Operating Officer have not been filled as of the date of this Report.

(3) Mr. Brady resigned as our Chief Financial Officer, Secretary & Treasurer as
of June 15, 2003. A new Chief Financial Officer, BJ Mendenhall, was appointed on
October 17, 2003 and resigned as Chief Financial Officer on April 19, 2004. Mr.
Mendenhall remains with the company as Director of Finance.

(4) Other Annual Compensation includes car allowance. For our Chief Executive
Officer, Other Annual Compensation for 2004 and 2003 also includes the premiums
of $24,000 per year on a $500,000 personal life insurance policy.

                                      39



<PAGE>

DIRECTOR COMPENSATION

We currently pay each non-employee director no fee for attending quarterly board
meetings and special meetings of the board and its committees as needed. During
the fiscal year ended June 30, 2004, we issued 25,000 options at $0.22 per share
on April 19, 2004 with 6 month vesting to each of the four directors.

ANNUAL MEETINGS, BOARD MEETINGS AND COMMITTEES

We request that all of the members of our Board of Directors attend each annual
meeting of shareholders. We did not hold an annual meeting of shareholders for
the year ended June 30, 2003. During the year ended June 30, 2004, our Board of
Directors held board meetings and met informally on numerous occasions and
approved relevant matters by written consent. All incumbent directors attended
at least 75% of all board meetings and applicable committee meetings.

Our Board of Directors has a standing Audit Committee. The members of our Audit
Committee are Harry C. Aderholt (Chairman), Brent M. Pratley and Milton R.
Geilmann. All members of our Audit Committee are independent according to
Nasdaq's listing standards, however, our Board of Directors has not determined
that the Audit Committee has a member qualifying as an audit committee financial
expert, as defined in Item 401(h) of Regulation S-K. The Company is actively
seeking a possible member of the Board of Directors and audit committee as the
financial expert.

         Our Board of Directors adopted a written Audit Committee Charter in
2001. The Audit Committee oversees our accounting and financial reporting
processes and related audits. This involves, among other tasks, the selection of
our external auditors for ratification by our shareholders, pre-approving
engagements of our auditors with respect to audit and non-audit services,
reviewing our accounting practices and controls and administering our Code of
Ethics for Officers and Finance Department Employees and whistleblower policy.

CODE OF ETHICS

         We have adopted the FC-01 Business Ethics Policy Code of Ethics
included in each employee packet for Officers and Finance Department Employees,
which constitutes a code of ethics that applies to the principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as defined in Item 406 of
Regulation S-K under the Securities Exchange Act of 1934, as amended.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers and directors, as well as persons who beneficially own more
than ten percent of our Common Stock, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission (the
"SEC"). Reporting persons are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to us and written representations from the
Company's executive officers and directors, the Company believes that for the
fiscal year ended June 30, 2003 all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis.

                                      40



<PAGE>

The following table sets forth, as of June 30, 2004, the number of common share
beneficially owned by (i) the persons know to the Company to be owners of more
than 5% of the common stock, (ii) each director of the Company, (iii) each named
executive officers as a group. Shares not outstanding but deemed beneficially
owned by virtue of the right of any individual to acquire shares within 60 days
are treated as outstanding only when determining the amount of and percentage of
common stock owned by such individual.
<TABLE>
Title of          Name and Address of                  Amount & Nature of       Percentage of
Class             Beneficial owner                     Beneficial owner         Class
---------------------------------------------------------------------------------------------
<S>                                                    <C>                      <C>
Common            Richard V. Secord                    3,165,286                2.8%
                  Chairman of the Board and
                  Chief Executive Officer

Common            Brent M. Pratley                     30,600                   *
                  Director

Common            Milton R. Geilmann                   25,000                   *
                  Director

Common            Harry C. Aderholt                    172,500                  *
                  Director

5% SHAREHOLDERS OTHER THAN OFFICERS AND DIRECTORS

Common            Thermal Imaging, Inc.                9,229,855                8.1%
                  141 North State Street, Ste 150
                  Lake Oswego, Oregon  97034

All executive officers and directors as a group
(5 persons)                                            3,393,386                2.9%

</TABLE>

* Less than 1%

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We received $220 thousand in the form of a short-term note to assist in
continuing operations. $20 thousand from board member General Harry Aderholt was
deposited on May 11, 2004 and $200 thousand from a large investor, Mr. Nabeel al
Mulla on June 14, 2004. Due to the relationship with these two lenders the loans
were made in good faith and the details of these notes are yet to be determined.
We are now accruing an imputed interest rate for accounting purposes.

The Company indemnifies all board members and officers. During the fiscal year
2004 the Company incurred costs of $1,892 for our former president and board
member, John Brenna and $597 for our former CFO and secretary, Bernard Brady,
and $23,336 for our CEO and chairman of the board, Richard Secord.

                                      41



<PAGE>

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a)      EXHIBITS

NUMBER           DESCRIPTION
------           -----------
3.1.5**          Amendment to Articles of Incorporation filed February 17, 1998
                 (incorporated by reference to the Registrant's Registration
                 Statement SB-2 filed March 3, 1998, as subsequently amended).

3.1.6**          Amendment to Articles of Incorporation filed July 5, 2000
                 (incorporated by reference to the Registrant's Registration
                 Statement SB-2 filed March 3, 1998, as subsequently amended).

3.2**            Bylaws of Computerized Thermal Imaging, Inc., as amended
                 January 15, 1998 (incorporated by reference to the Registrant's
                 Registration Statement SB-2 filed March 3, 1998, as
                 subsequently amended). Debenture (incorporated by reference to
                 Form 8-K filed on January 14, 2002).

4.1**            Debenture (incorporated by reference to Form 8-K filed on
                 January 14, 2002)

4.2**            Form of Warrant (Debenture) (incorporated by reference to Form
                 8-K filed on January 14, 2002).

4.3**            Form of Warrant (Equity Line) (incorporated by reference to
                 Form 8-K filed on January 14, 2002).

4.4**            Registration Rights Agreement (Debenture) (incorporated by
                 reference to Form 8-K filed on January 14, 2002).

4.5**            Registration Rights Agreement (Equity Line) (incorporated by
                 reference to Form 8-K filed on January 14, 2002).

10.1**           Computerized Thermal Imaging, Inc. 401(k) Retirement Plan
                 Restatement 2001 (the "Plan") (incorporated by reference to
                 Form S-8 filed on July, 15, 2002).

10.2**           Computerized Thermal Imaging, Inc. 401(k) Retirement Plan
                 Restatement 2001 Amendment (incorporated by reference to Form
                 S-8 filed on July, 15, 2002).

10.3**           Computerized Thermal Imaging, Inc. 401(k) Retirement Plan
                 Restatement 2001 Second Amendment (incorporated by reference to
                 Form S-8 filed on July, 15, 2002).

10.4**           Employment Agreement dated October 12, 2000 between
                 Computerized Thermal Imaging, Inc. and John M. Brenna.
                 (incorporated by reference to Form 10-QA filed on May 17,
                 2001).

10.5**           Employment Agreement dated September 18, 2000 between
                 Computerized Thermal Imaging, Inc. and Richard V. Secord
                 (incorporated by reference to Form 10-K filed on September 30,
                 2002).

10.6**           Employment Agreement dated June 6, 2000 between Computerized
                 Thermal Imaging, Inc. and Bernard J. Brady (incorporated by
                 reference to Form 10-K filed on September 30, 2002).

10.7**           Securities Purchase Agreement dated as of December 21, 2001, by
                 and between Computerized Thermal Imaging, Inc. and Beach
                 Boulevard, LLC. (incorporated by reference to Form 8-K filed on
                 January 14, 2002).

10.8**           Private Equity Credit Agreement dated as of December 21, 2001,
                 by and between Computerized Thermal Imaging, Inc., a Nevada
                 corporation, and Beach Boulevard, LLC. (incorporated by
                 reference to Form 8-K filed on January 14, 2002).

10.9**           Registration Rights Agreement by and between Computerized
                 Thermal Imaging, Inc., and Beach Boulevard, LLC (incorporated
                 by reference to Form 8-K filed on January 14, 2002).

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<PAGE>

10.10**          Debenture by and between Computerized Thermal Imaging, Inc. and
                 Beach Boulevard, LLC. (incorporated by reference to Form 8-K
                 filed on January 14, 2002).

10.11**          Lease agreement dated June 13, 2001, between Computerized
                 Thermal Imaging, Inc. and Silver Creek Engineering
                 (incorporated by reference to Form 10-K/A filed on October, 2,
                 2001).

10.12**          Lease Agreement dated May 31, 2000, between Computerized
                 Thermal Imaging, Inc. and St. Paul Properties, Inc.
                 (incorporated by reference to Form 10-K filed on September 15,
                 2000).

10.13**          Contract between TRW Systems Integration Group and Computerized
                 Thermal Imaging, Inc. dated October 29, 1996. [Articles VI,
                 XXIV, XXXII, and Appendix A have been omitted pursuant to a
                 Request for Confidential Treatment Accordingly, the material
                 has been filed separately with the SEC.] (Incorporated by
                 reference to Form SB-2 filed March 9, 1998, as subsequently
                 amended).

10.14**          Contract between TRW Systems Integration Group and Thermal
                 Medical Imaging, Inc. dated June 19, 1997. [Articles VI, XXIV,
                 XXXII, and Appendix A have been omitted pursuant to a Request
                 for Confidential Treatment. (Incorporated by reference to Form
                 SB-2 filed March 9, 1998, as subsequently amended).

10.15**          Agreement with Battelle Memorial Institute dated March 19, 1999
                 and renewed on via letter agreement on August 30, 1999
                 [Portions of this Agreement have been omitted pursuant to a
                 Request for Confidential Treatment. Accordingly, the material
                 has been filed separately with the SEC.] (Incorporated by
                 reference to Form 10-KSB filed October 14, 1999).

10.16**          Manufacturing license agreement with NanDa Thermal Medical
                 Technology, Inc., (incorporated by reference to Form 8-K filed
                 on June 24, 2003).

10.17**          Products supply and purchase agreement with NanDa Thermal
                 Medical Technology, Inc., (incorporated by reference to Form
                 8-K filed on June 24, 2003).

10.18**          Sales agreement for Product "Kits" with NanDa Thermal Medical
                 Technology, Inc., (incorporated by reference to Form 8-K filed
                 on June 24, 2003).

10.19**          Amendment agreement with Beach Boulevard, L.L.C., (incorporated
                 by reference to Form 8-K filed on March 24, 2003).

10.20*           _____________ Agreement with Massachusetts General Hospital

21**             Subsidiaries of registrant (incorporated by reference to Form
                 10-K filed on September 30, 2002).

23.1*            Consent of HJ and Associates.

31.1*            Certification of Chief Executive Officer.

31.2*            Certification of Principal Accounting Officer

99.3*            Letter from the FDA citing Advisory Panel's recommendation to
                 not approve the BCS 2100.

(b)      REPORTS ON FORM 8-K

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

         The aggregate fees billed by HJ and Associates, our independent public
accountants, for professional services rendered for the audit of our financial
statements and the reviews of our interim financial statements included in our
Quarterly Reports on Forms 10-Q were approximately $32,732 for the fiscal year
ended June 30, 2004 and approximately $45,513 for the fiscal year ended June 30,
2003.

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<PAGE>

AUDIT-RELATED FEES

         The aggregate fees billed by HJ and Associates for assurance and
related services performed by HJ and Associates that were reasonably related to
the performance of the audit of our financial statements and are not reported in
the preceding paragraph were approximately $1,156 for the fiscal year ended June
30, 2004 and nothing for the fiscal year ended June 30, 2003. Audit-related fees
relate primarily to audits of employee benefit plans and miscellaneous
accounting and internal control related consultations.

TAX FEES

         The aggregate fees billed by Thompson, Wiest & Sickler, P.C. for tax
compliance, tax advice and tax planning were approximately $6,325 for the fiscal
year ended June 30, 2004 and approximately $5,140 for the fiscal year ended June
30, 2003.

ALL OTHER FEES

         There were no fees billed for other non-audit services during fiscal
years 2004 and 2003.

PRE-APPROVAL POLICIES AND PROCEDURES

         The Audit Committee of our Board of Directors ensures that we engage
our public accountants to provide only audit and non-audit services that are
compatible with maintaining the independence of our public accountants. Our
Audit Committee approves or pre-approves all services provided by our public
accountants. Permitted services include audit and audit-related services, tax
and other non-audit related services. Certain services are identified as
restricted. Restricted services are those services that may not be provided by
our external public accountants, whether identified in statute or determined in
the opinion of our Audit Committee to be incompatible with the role of an
independent auditor. All fees identified in the preceding four paragraphs were
approved by our Audit Committee. During the fiscal year ended June 30, 2004, our
Audit Committee reviewed all non-audit services provided by our external public
accountants, and concluded that the provision of such non-audit services was
compatible with maintaining the independence of the external public accountants.

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<PAGE>

                                   SIGNATURES

In accordance with Sections 13 or 15(d) of the Exchange Act, the registrant
caused this Annual Report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                           COMPUTERIZED THERMAL IMAGING, INC.

Date: October 11, 2004                     /s/ RICHARD V. SECORD
                                           ----------------------------------
                                           Richard V. Secord
                                           Director, Chairman of the Board and
                                           Chief Executive Officer

In accordance with the Exchange Act, this Annual Repot on Form 10-KSB has been
signed by the following persons on behalf of the issuer and in the capacities
and on the dates indicated.

/s/ Richard V. Secord                                           October 11, 2004
-------------------------------------
RICHARD V. SECORD
Director, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)

/s/ Richard V. Secord                                           October 11, 2004
-------------------------------------
RICHARD V. SECORD
Acting Chief Financial Officer
(Principal Financial Officer)

/s/ Brent M. Pratley, M.D.                                      October 11, 2004
-------------------------------------
BRENT M. PRATLEY, M.D.
Director

/s/ Milton R. Geilmann                                          October 11, 2004
-------------------------------------
MILTON R. GEILMANN
Director

/s/ Harry C. Aderholt                                           October 11, 2004
-------------------------------------
HARRY C. ADERHOLT
Director

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