<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, 2005

|_|      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 $235,972.

The aggregate market value of Common Stock held by non-affiliates of the
registrant at October 1, 2005 was approximately $14 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, 2005, there were 114,561,698 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None




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                       COMPUTERIZED THERMAL IMAGING, INC.

                                   FORM 10-KSB

                                  ANNUAL REPORT

                                TABLE OF CONTENTS


PART I

ITEM 1.   Description of Business                                              3

ITEM 2.   Description of Property                                             19

ITEM 3.   Legal Proceedings                                                   20

ITEM 4.   Submission of Matters to a Vote of Security Holders                 20


PART II

ITEM 5.   Market for Common Equity and Related Stockholder Matters            20

ITEM 6.   Management's Discussion and Analysis or Plan of Operation           21

ITEM 7.   Financial Statements                                                29

ITEM 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure                                            45

ITEM 8A.  Controls and Procedures                                             45


PART III

ITEM 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act                   46

ITEM 10.  Executive Compensation                                              46

ITEM 11.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters                                     48

ITEM 12.  Certain Relationships and Related Transactions                      49


PART IV

ITEM 13.  Exhibits List and Reports on Form 8-K                               49

ITEM 14.  Principal Accountant Fees and Services                              50





<PAGE>

PART I
------

         THIS DOCUMENT, 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," CONTAINS 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 OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS 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 US 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.


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 have
historically developed, manufactured and marketed 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 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. 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 a BCS
          2100 to Ville Marie in Montreal, Canada for a short term evaluation.
          The BCS did not fit into Ville Marie's procedures and protocol. The
          BCS has been returned to the our plant. We are also pursuing other
          potential customers in Canada.

     o    PAIN MANAGEMENT--PHOTONIC STIMULATOR: Our Photonic Stimulator 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.




<PAGE>

     o    PAIN MANAGEMENT--THERMAL IMAGE PROCESSORS: Our Thermal Image Processor
          (or "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 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 ports 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 October 1, 2005, we had approximately 114 million shares of common
stock outstanding held by approximately 1,562 shareholders of record. In
addition to the outstanding shares of our common stock, there are outstanding
exercisable warrants and options to acquire approximately 4.5 million shares of
our common stock at exercise prices ranging from $0.10 to $2.27. Of the
approximately 119 million fully-diluted shares of our common stock outstanding,
14 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.

         We are 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, the exercise of warrants and options and limited
revenues from product sales and licenses. We currently face substantial
financial challenges. For each of the past four years, our auditors have issued
their report with a going concern qualification, reflecting their assessment
that we do not possess the resources necessary to continue as a going concern
through the end of the applicable fiscal year. We have substantially reduced our
operations, and will not be able to continue our limited operations without a
substantial capital infusion. 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.




<PAGE>

         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.

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.




<PAGE>

         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 BCS 2100 and,
accordingly, are not presently permitted to market, sell or distribute 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 the hope of possibly obtaining 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. The lack
of FDA approval, and our resulting inability to market, sell or distribute the
BCS 2100, among other factors, have limited our ability to generate revenues at
a level that would sustain our business operations. Due to our financial
difficulties, we have substantially curtained our operations, including
substantially all of our manufacturing, research and development, sales and
marketing and regulatory compliance activities..

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.




<PAGE>

         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 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. This past fiscal year
we did not sell any new or used TIP systems, much due to the reduced sales force
and our financial status.

         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:

         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."




<PAGE>

         We believe 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 $4,995. Our average
selling price during 2005 was $3,593, during 2004 the average was $2,600, and
during 2003 it 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.

         Until recently, 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. Due to the company's
financial condition this past year, we have relied on word-of-mouth
recommendations and our website for marketing. We have held user group meetings
and worked 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.

         In an effort to develop credibility in the marketplace, 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 turbine 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
in 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.




<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. The TBIS 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, 2005, 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). 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
     o    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. 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
     o    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

     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.




<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
have historically purchased certain proprietary optical components and cooling
equipment from a single source, and have typically experienced; 12 to 16-week
lead times. Historically, we have experienced no supply disruptions with
vendors. While there are alternative sources for these products, the loss of an
established vendor supplier would require that we invest time developing and
certifying a new vendor. 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. Furthermore, due to our lack of
financial resources, we have suspended our manufacturing and product sourcing
activities. As a result, our vendor relationships are presently uncertain.

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 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.




<PAGE>

         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.

         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 none in October 2005 and reducing our manufacturing group from 20
full-time employees in the fall of 2002 to one full-time employee in October
2005. 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.


COMPETITION

MEDICAL IMAGING. The principal methods used to visualize internal human anatomy
are x-ray, computed tomography, ultrasound and MRI. We believe many 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.




<PAGE>

         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.

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. If we are able to generate sufficient capital to resume our
operations, of which there can be no assurance, 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. Prior to substantially reducing the scope of our operations, we
retained the services of distributors to market our products. If we are able to
resume our operations, we currently intend to see to re-establish distributor
relationships for the purpose of marketing our products. Our distributors have
historically focused 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 15%, 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. In our
experience, which is somewhat limited, no distributor has met these goals. We
have also generally required 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 very 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. Due to our limited financial resources, we
are not currently conducting any user groups or seminars.




<PAGE>

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. Due to our limited financial resources, we are not currently
participating in trade shows or association events.

CORPORATE MARKETING. To the extent our financial resources permit, 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 have the potential to
build product and corporate awareness and support our sales efforts in selected
vertical markets.

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 are able to generate
sufficient capital to retain Battelle), 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 are able
to generate sufficient capita to retain Quintiles), 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 reflected in our application for FDA pre-market 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.




<PAGE>

         If we obtain pre-market approval from the FDA for our BCS 2100, of
which we can provide no assurance, and if we are able to generate sufficient
capital to continue our operations, 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 pre-market approval. We also initiated a study at Massachusetts
General Hospital, Harvard Medical School's largest teaching hospital, for a
clinical 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 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.




<PAGE>

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,
     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 classified for FDA purposes as 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.




<PAGE>

THE BCS 2100. The BCS 2100 is classified for FDA purposes as 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. 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.

         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.

     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.




<PAGE>

         In light of our shortage of 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 has 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.

         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.

CURRENT EMPLOYEES

         As of October 1, 2005, we have two full-time employees: one accounting
and administrative 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
when 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 past four years 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 the applicable fiscal year. At present, we are not generating



<PAGE>

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 2005
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, 2005, we had $52 thousand in cash and a working capital
deficit of $2.2 million. Accordingly, we did not have sufficient capital to
conduct our operations or pay 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;
     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.

WE HAVE SUBSTANTIALLY CURTAILED OUR OPERATIONS AND MAY NEVER RESUME EXPANDED
OPERATIONS

         Due to our extremely limited financial resources, we have suspended
substantially all of our operations. We are not currently able to pay for the
employees, supplies and other resources that would be necessary for us to
restore our business operations to their prior level. We currently employ only
two employees, who are responsible for general and administrative matters, but
have limited experience in manufacturing, marketing or distributing products
like ours. As a result of our significantly reduced level of operations, our
revenues have declined dramatically and we can provide no assurance that we will
ever generate revenues sufficient to restore our operations to their former
level. We currently lack the financial resources to expand our operations, and
have no current basis to believe we will be able to attract additional capital
in an amount to resume our prior level of operations.

         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.




<PAGE>

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 have led to significant
reductions in our operations and threaten 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 have incurred 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, 2005, 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 2005) 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, 2005, we recorded accumulated operating losses as of June 30, 2005 of
$97.6 million. We recorded revenues of approximately $236 thousand and $357
thousand for the fiscal years ended June 30, 2005 and 2004, 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.

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.




<PAGE>

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, develop further applications and markets for our other
products and raise operating capital 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, 2005, we incurred accumulated losses of approximately $97.6
million. We recorded accumulated losses of $702 thousand and $2.5 million for
the fiscal years ended June 30, 2005 and 2004, 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 2005 fiscal year, key management personnel were lost due to
necessary workforce reductions and resignations. During 2005 we were forced to
reduce our total workforce from 6 full and part-time employees to 2 full time
employees. We have not engaged a new President, nor have we replaced any of the
other key personnel who resigned or were subject to our reductions in workforce.
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.

WE HAVE TERMINATED INSURANCE POLICIES, LEAVING THE COMPANY, COMPANY OFFICERS AND
DIRECTORS VULNERABLE.

         Due to our lack of resources, we have terminated most of our insurance
policies including directors and officers insurance, clinical trials insurance,
and employee life insurance. We continue to carry minimal employee health and
workers compensation coverage. The reduction in insurance policies leaves the
Company, as well as our officers and directors vulnerable to claims against CTI
and our 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.




<PAGE>

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 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 has varied between $4.97
to $.06 in the past 5 years.

                               High           Low
               2001           $ 4.97         $ 1.44
               2002           $ 4.05         $ 0.56
               2003           $ 1.29         $ 0.09
               2004           $ 0.68         $ 0.06
               2005           $ 0.22         $ 0.06

         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;
     o    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 was 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.

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 currently 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.




<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 seven patents and have submitted two 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 two operating leases requiring fixed monthly
payments, adjusted periodically over their term as follows: OGDEN, UTAH LEASE
AGREEMENTS. 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. We also rent a storage space on a monthly basis for $80 per month. All
of our operations are consolidated in the Ogden facility. We believe that our
existing offices and other physical facilities are adequate for our present
needs.

ITEM 3. LEGAL PROCEEDINGS

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, 2005, 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
2005) 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.




<PAGE>

         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. For fiscal year ending June
30, 2005, legal costs held steady with little or no changes. We also may be
required to indemnify our officers and directors for fees incurred for these
investigations. For the year ended June 30, 2004, such indemnification
obligations totaled approximately $48 thousand, and during the year ended June
30, 2005 indemnification obligations were reduced to approximately $34 thousand.

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, 2005.


PART II
-------

ITEM 5. MARKET FOR 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.

     Year Ended June 30, 2004                Low Bid             High Bid
     ------------------------                -------             --------
     First Quarter                           $ 0.31              $ 0.76
     Second Quarter                          $ 0.19              $ 0.39
     Third Quarter                           $ 0.17              $ 0.58
     Fourth Quarter                          $ 0.06              $ 0.27

     Year Ended June 30, 2005
     ------------------------
     First Quarter                           $ 0.09              $ 0.17
     Second Quarter                          $ 0.10              $ 0.15
     Third Quarter                           $ 0.11              $ 0.22
     Fourth Quarter                          $ 0.08              $ 0.13



<PAGE>

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.

         On June 30, 2005, the closing bid for our common stock as reported on
the OTCBB was $0.11per share. On June 30, 2005, we had approximately 14 million
shares of our common stock held by beneficial shareholders and approximately 114
million shares of our common stock outstanding.




<PAGE>

     Year Ended June 30, 2004                Low Bid             High Bid
     ------------------------                -------             --------
     First Quarter                           $ 0.31              $ 0.76
     Second Quarter                          $ 0.19              $ 0.39
     Third Quarter                           $ 0.17              $ 0.58
     Fourth Quarter                          $ 0.06              $ 0.27

     Year Ended June 30, 2005
     ------------------------
     First Quarter                           $ 0.09              $ 0.19
     Second Quarter                          $ 0.10              $ 0.15
     Third Quarter                           $ 0.11              $ 0.22
     Fourth Quarter                          $ 0.08              $ 0.13

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

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."

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
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 (over $97 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated October 2005 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 during the 2005 fiscal year




<PAGE>

have been largely unsuccessful. 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 $320 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 outside
the United States 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 our
consolidated financial statements set forth in Item 7 below; 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 require prepayment and our standard international terms for our
medical products is cash. 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.

         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 though
we do expect price increases due to the increased costs of petroleum products.

         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
inventories 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.



<PAGE>

         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 of our 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 authorize all stock option and warrant grants,
and approve any changes to option
or warrant terms.

RESULTS OF OPERATION

FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

         REVENUES

       Total revenues for the fiscal year ended June 30, 2005 were $236
thousand, compared to $357 thousand for the fiscal year ended June 30, 2004, a
decrease of $121 thousand or 34%. We attribute the decrease in revenues to
reductions in sales personnel and other staff, as well as other consequences of
our limited financial and operational resources. We recognize revenue from
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 we retain an ongoing
obligation under a sales arrangement, revenue is deferred until all our
obligations are fulfilled



<PAGE>

       Our medical segment revenues were $136 thousand and $269 thousand for the
fiscal years ended June 30, 2005 and 2004, respectively. The decrease of $133
thousand, or 49% resulted primarily from decreased shipments of TIP units and
Photonic Stimulators.

       The remaining $100 thousand and $88 thousand of revenues reported in 2005
and 2004, respectively, were attributable to our industrial segment. The $71
thousand in industrial revenues that we recognized during fiscal 2005 was
primarily repair work on existing customer cameras.

       As of June 30, 2005, we did not have a backlog of industrial orders for
our TBIS and industrial products, nor did we have a backlog as of June 30, 2004.
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, 2005, 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 testing, 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. Pratt & Whitney has requested the
Company remove the TBIS. We have reclassified the deferred revenue as a
liability until this issue is resolved. 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, 2005 were $70 thousand, compared to $191 thousand for the
fiscal year ended June 30, 2004, a decrease of approximately 64%. This decrease
is principally attributable to the 34% decrease in revenues. However, gross
margins decreased as a percentage of sales from 54% to 30%. This decrease in
gross margin as a percentage of sales was due primarily to the increase of
physical discrepancies (adjustment of inventory to physical count)). Total cost
of goods sold for fiscal 2005 was $166 thousand, compared to $165 thousand in
fiscal 2004, a .4% increase in dollar value.

         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 is also due to the fact that industrial
revenues for fiscal 2005 were principally repair-oriented.

         Gross margins and cost of revenues as a percentage of sales for the
fiscal years ended June 30, 2005 and 2004 were:

<TABLE>


                   Total Sales  Percentage    Total Sales   Percentage     Increase     Percentage
                     2005        of Sales        2004        of Sales     (Decrease)     of Change
                  -----------   -----------   -----------   -----------   -----------   -----------
<S>                   <C>              <C>        <C>              <C>       <C>                <C>
Net Revenue           235,972          100%       356,710          100%      (120,738)         -34%
Cost of Goods Sold    165,100           70%       165,741           46%          (641)           0%
                  -----------   -----------   -----------   -----------   -----------   -----------
Gross Margin           70,872           30%       190,969           54%      (120,097)         -63%
                  ===========   ===========   ===========   ===========   ===========   ===========

</TABLE>

                                    2005          2004
                                -----------   -----------
Leasehold Improvements                   --            --
Office Furniture & Fixtures           8,421        38,421
Machinery & Equipment               409,618       557,281

OPERATING, GENERAL AND ADMINISTRATIVE. Operating, general and administrative
expenses for the year ended June 30, 2005 were $523 thousand, compared $1.235
million for the year ended June 30, 2004. Operating, general and administrative
expenses decreased by $712 thousand, or 58%, from fiscal 2004 to fiscal 2005. 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
customers in Canada or China begin to purchase our BCS 2100, then our expense
level would increase in connection with hiring people to manufacture and market
our BCS 2100.




<PAGE>

         Operating, general and administrative expenses decreased from fiscal
2004 to fiscal 2005 primarily due to: 1) $427 thousand decrease in legal and
other professional services expenses; 2) $135 thousand decrease in insurance
expense; 3) a $102 thousand decrease in wages and related expenses: and 4) a $44
thousand decrease in travel expenses.

         We may also be required to indemnify our officers and directors in
connection for fees incurred in connection with these investigations. The
decrease in wages was due primarily to a material decrease in the number of
employees, as well as salary reductions. The decrease in expense spending in
conjunction with reduction of employees decreased travel expenses. .

         LITIGATION SETTLEMENTS. Litigation settlements were $110 thousand for
the year ended June 30, 2004 and $0 for the year ended June 30, 2005, a decrease
of $110 thousand. Two separate legal issues, which were settled in the year
ending June 30, 2004, were expensed in the same year.

         RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended June 30, 2005 were $182 thousand compared to $997 thousand for fiscal
2004 a decrease of $815 thousand, or 82% from fiscal 2004 to fiscal 2005. The
decrease in research and development expense was primarily a result of: 1) a
$551 thousand decrease in wages; 2) a $147 thousand decrease in insurance
expense; and 3) a $69 thousand reduction in legal fees.

         The decrease of research and development expenses during the year ended
June 30, 2005 primarily relates to our efforts to decrease costs and reduce our
negative cash flow. We no longer employ medical and industrial research and
development personnel and have eliminated all capital projects. 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 private offerings of
our capital 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, 2005 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, 2005 were $24
thousand, compared to $242 thousand for the year ended June 30, 2004. Marketing
expenses decreased by $218 thousand, or 90% from fiscal 2004 to fiscal 2005.

         Marketing expense decreases were primarily a result of: 1) a $147
thousand decrease in wages and related expenses resulting from a material
reduction in the number of sales and marketing employees; 2) a $34 thousand
reduction in insurance expenses: and 3) a $16 thousand decrease in marketing,
travel and tradeshow expenses, reflecting our reduced marketing efforts.



<PAGE>

         Marketing expenses decreased due to our decision to significantly
reduce our marketing activities, including tradeshows and travel expenses, and
sales and marketing personnel. As a result of these significant reductions in
workforce and curtailed marketing efforts since June 30, 2004 sales have dropped
significantly.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the fiscal year ended June 30, 2005 were $17 thousand, compared to $142
thousand for the year ended June 30, 2004 a decrease of $125 thousand, or 88%.

         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. For fiscal
year 2005 we recorded an impairment of equipment for $14 thousand.

         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
the company's statement of operations. In estimating impairments, our 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.

         OPERATING INCOME/LOSS

         We recorded an operating loss of $709 thousand for the fiscal year
ended June 30, 2005, compared to an operating loss of $2.5 million for the
fiscal year ended June 30, 2004 an improvement of $1.79 million or 72%.

         We did not maintain medical and industrial segment information 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 2005 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, 2005 was less than
$1 thousand, compared to $5 thousand for the year ended June 30, 2004. The $4
thousand, or 97%, decrease was primarily a result of decreased investments
available for sale and lower interest rates. Interest income declined as we used
investments available for sale to fund operations.

         Interest expense for the fiscal year ended June 30, 2005 was $20
thousand, compared to $10 thousand for the year ended June 30, 2004. Interest
expense for fiscal year 2005 was comprised of interest accrued but not paid for
three loans 1) $14,178 attributable to a $100 thousand debt to Thermal Imaging
Inc assumed at the time of settlement of the departure of our former president;
2) $12,526 attributable to a $200 thousand loan received June 14, 2004; and 3)
$1,364 attributable to a $20 thousand loan received May 11, 2004. The remaining
interest expense for fiscal 2005 was due to finance charges from vendors for
late payments.

         OTHER INCOME/EXPENSE

         Other income/expense for the fiscal year ended June 30, 2005 was $0,
compared to $69 thousand for the year ended June 30, 2004.

         NET LOSS

         We incurred a loss of $709 thousand, or $(.006) per share, for the
fiscal year ended June 30, 2005, compared to a loss of $2.47 million, or $(.02)
per share, for the fiscal year ended June 30, 2004.



<PAGE>

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, 2005 and 2004. 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>

                                                                    Quarter ended (unaudited)
                                                                         (in thousands)
====================================================================================================================================

                                               6/30/05   3/31/05   12/30/04   9/30/04   6/30/04   3/30/04   12/31/03   9/30/03
                                           -----------------------------------------------------------------------------------------
<S>                                             <C>       <C>        <C>       <C>       <C>       <C>        <C>       <C>
Revenues                                        $ 28      $ 76       $ 56      $ 76      $ 93      $ 107      $ 94      $ 63
Cost of goods sold                              (119)      (23)        (9)      (13)      (90)       (13)      (21)      (42)
                                           -----------------------------------------------------------------------------------------
Gross margin                                     (92)       53         47        63         3         94        73        21
Operating general & administrative               283        23         95       116        58        252       380       545
Litigation Settlement                              -                    -         -         -         10       100         -
Research & development                            71        17         36        58        69        264       297       367
Marketing                                          0        (2)         8        17       (54)        45        97       154
Depreciation & amortization                       (2)       11          3         5        10         36        41        55
Impairment Loss                                   14         -          -         -
                                           -----------------------------------------------------------------------------------------
Total costs and expenses                         366        49        141       196        83        607       915     1,121
Interest income/(expense)                         (6)       (5)        (5)       (5)       64          1         2        (4)
Misc. Income                                       -                    -         -                    -
                                           -----------------------------------------------------------------------------------------
Total other income                                (6)       (5)        (5)       (5)       64          1         2        (4)
                                           -----------------------------------------------------------------------------------------
Net loss                                       $(464)      $(1)       $(99)    $(138)   $ (16)    $ (512)   $ (840) $ (1,104)
                                           =========================================================================================


Period-to-period comparisons of our historical operating results are not necessarily indicative of future performance.
</TABLE>

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

         In the quarter ended June 30, 2005 cost of goods sold increase due to
inventory adjustments related to impairment evaluations and physical count.

          Operating expenses steadily declined as we attempt to conserve cash.
In the quarter ended June 30, 2005 expenses increased due to impairment losses.

         Gross margin decreased for June 30, 2005 due to the physical adjustment
to cost of goods sold when reconciling the physical count of inventory.

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 ($97 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 2005
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 during the 2005 fiscal
year have been largely unsuccessful. 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 $330 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 outside the United States and marketing and manufacturing
expenses.



<PAGE>

         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 $217 thousand of cash during the fiscal year ended
June 30, 2005, compared to $1.8 million in the fiscal year ended June 30, 2004.
The reduction of cash usage was due primarily to a significant decrease in our
operating costs.

         Investing activities provided no cash in fiscal year 2005. During the
fiscal year ended June 30, 2005, we received a short term note to assist in
continuing operations of $100 thousand in June of 2005. The term and details 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, 2005, we believed that we had sufficient liquidity to
sustain current operations for three to four months. We have received $300
thousand of debt proceeds since June 30, 2005 and we continue to engage in
discussions with other prospective sources of equity capital. To restore
operations to former levels, we must secure additional funding. As of June 30,
2005, our current monthly cash outlay rate was approximately $30 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, 2005, we hold four notes totaling
$420 thousand. No payment schedule has been determined for repayment.

         As of June 30, 2005 we had no contractual obligations, other than
payment plans for existing vendors whose invoices are reflected on our balance
sheet as accounts payable.

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.

         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 $30 thousand by: a) reducing staff from 72 to 2 employees and
eliminating certain benefit programs; b) eliminating regional trade shows and
related marketing expenses; c) consolidating our Bales Scientific facility into
our Ogden, Utah facility; d) eliminating research and development activities;
and e) decreasing manufacturing and production expenditures.




<PAGE>

         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, 2005, such
indemnification obligations totaled approximately $33 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 ($97.6 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 2005
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 during the 2005 fiscal
year have been largely unsuccessful. 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 $320 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 outside the United States 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. 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 June 30, 2005 there were no new accounting
pronouncements that had a material effect on our operations or financial
conditions.




<PAGE>

ITEM 7. FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                       30


Consolidated Balance Sheets as of June 30, 2005 and 2004                      31


Consolidated Statements of Operations for the years ended
June 30, 2005 and 2004.                                                       32


Consolidated Statements of Stockholders' Equity/Deficit for the
years ended June 30, 2005 and 2004                                            33


Consolidated Statements of Cash Flows for the years ended
June 30, 2005 and 2004                                                        34


Notes to Consolidated Financial Statements                                    35



<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Computerized
Thermal Imaging, Inc. and subsidiaries as of June 30, 2005, and the related
consolidated statements of operations and other comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the years ended June 30, 2005
and 2004. 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 and the consolidated
results of their operations and their cash flows for the years ended June 30,
and 2005 in conformity with United States Generally Accepted Accounting
Principles.

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, 2005 of $1.944 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

October 12, 2005


                                       30


<PAGE>
<TABLE>
                                      COMPUTERIZED THERMAL IMAGING, INC.
                                          CONSOLIDATED BALANCE SHEETS


                                                                       JUNE 30,          JUNE 30,
                    ASSETS                                               2005               2004

CURRENT ASSETS:
<S>                                                                 <C>                <C>
 Cash and cash equivalents                                          $     51,688       $    168,955
 Accounts Receivable - trade, less allowance for doubtful                     40             53,328
  accounts of $0 on June 30, 2005
 Accounts Receivable- other (net)                                             --              1,391
 Inventories                                                              87,276            260,331
 Prepaids expenses                                                        33,809             91,474
                                                                    --------------------------------
   Total current assets                                                  172,813            575,479
                                                                    --------------------------------

NET PROPERTY PLANT & EQUIPMENT (Net)                                       7,525            169,358
                                                                    --------------------------------

INTANGIBLE ASSETS:
  Intellectual property rights, less accumulated amortization
  of $20,107 and $17,437 respectfully                                     12,740             15,410
                                                                    --------------------------------

TOTAL ASSETS                                                        $    193,078       $    760,247
                                                                    ================================

                    LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts Payable                                                   $    558,045       $    512,542
 Accrued Liabilities                                                     555,262            172,036
 Short-term Note Payable with interest                                   333,891            220,690
 Deferred Revenue                                                        669,991          1,083,100
                                                                    --------------------------------
     Total Current Liabilities                                         2,117,189          1,988,368
                                                                    --------------------------------
LONG-TERM NOTE PAYABLE                                                   114,181            109,178
                                                                    --------------------------------
TOTAL LIABILITIES                                                      2,231,370          2,097,546
                                                                    --------------------------------

STOCKHOLDERS' EQUITY
 Convertible preferred stock, no par value, 3,000,000
  shares authorized; none issued                                              --                 --
 Common stock, $.001 par value, 200,000,000 shares authorized,
  114,561,698 and 114,561,698 issued and outstanding on
  June 30, 2005 and June 30, 2004, respectively                          114,562            114,562
 Additional paid-in capital                                           95,462,474         95,454,274
 Deficit accumulated                                                 (97,615,328)       (96,906,135)
                                                                    --------------------------------
TOTAL STOCKHOLDERS' EQUITY                                            (2,038,292)        (1,337,299)
                                                                    --------------------------------
TOTAL LIABILITIES & STOCKHOLDERS'  EQUITY                           $    193,078       $    760,247
                                                                    ================================

            The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                                      31


<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
              THE TWELVE MONTH PERIOD ENDED JUNE 30, 2005 AND 2004

                                                     YEARS ENDED JUNE 30,
Revenue                                             2005              2004
                                              ----------------------------------
PS                                            $      82,652       $     124,499
TIP                                                  94,570              26,859
Turbine                                              48,173              13,748
Warranty Revenue                                         --              19,929
Other Services                                        6,475              87,520
Discounts & Other                                    (4,995)             (2,875)
Freight                                               9,097               4,364
                                              ----------------------------------
Net Revenue                                         235,972             356,710

COST OF SALES
Materials                                            28,762             149,175
Variance                                                 --                 611
Physical Discrepancies                              129,439                  --
Freight                                               6,899                 306
                                              ----------------------------------
Total Cost of Sales                                 165,100             165,741

                                              ----------------------------------
GROSS MARGIN                                         70,872             190,969
                                              ----------------------------------

OPERATING EXPENSES
General & Administration                            523,079           1,235,482
Sales & Marketing                                    23,855             242,373
Research & Development                              181,878             996,567
Depreciation                                         14,442             139,346
Amortization                                          2,670               2,656
                                              ----------------------------------
Total Depreciation & Amortization                    17,112             142,002
                                              ----------------------------------
Litigation settlement                                    --             110,000
Impairments                                          13,990                  --
                                              ----------------------------------
Total Operating Expenses                            759,914           2,726,424
                                              ----------------------------------

OPERATING INCOME  (LOSS)                           (689,042)         (2,535,455)
                                              ----------------------------------

OTHER INCOME / EXPENSE
Interest Income                                         118               4,512
Interest Expense                                    (20,320)            (10,478)
Other                                                    51              69,074
                                              ----------------------------------
Total Other Income / Expense                        (20,151)             63,108
                                              ----------------------------------
Profit / (Loss) Before Taxes                       (709,193)         (2,472,347)
                                              ----------------------------------
Tax Expense                                              --                  --
State                                                    --                  --
                                              ----------------------------------
               NET LOSS                            (709,193)         (2,472,347)
                                              ==================================

WEIGHTED AVERAGE SHARES
  OUTSTANDING                                   114,566,981         114,566,981
                                              ==================================

BASIC AND DILUTED LOSS PER COMMON SHARE       $       (0.01)      $       (0.02)
                                              ==================================


    The accompanying notes are an integral part of these financial statements

                                       32


<PAGE>
<TABLE>

                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            FOR THE YEARS ENDED JUNE 30, 2005 AND 2004


                                                                                  ADDITIONAL
                                                        COMMON STOCK                PAID-IN         ACCUMULATED
                                                  SHARES            AMOUNT          CAPITAL            DEFICIT             TOTAL
                                               -------------------------------------------------------------------------------------
<S>                                              <C>              <C>            <C>               <C>                 <C>
Balance at June 30, 2003                         109,329,098      $ 109,329      $ 94,041,104      $ (94,433,788)      $   (283,355)

 Converion of remaining premium pntly 7.7.04         196,451            196            88,206                                88,403
 Kuwait Restriced 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
  Nabeel Al Mulla Stock Sale 5.14.2004               666,667            667            99,333                               100,000
Net loss                                                                                              (2,472,347)        (2,472,347)
Balance at June 30, 2004                         114,561,698        114,562        95,454,274        (96,906,135)        (1,337,299)
In trin sic Value of Options                                                            8,200                                 8,200
Net Loss                                                                                                (709,193)          (709,193)
                                               -------------------------------------------------------------------------------------
Balance at June 30, 2005                         114,561,698      $ 114,562      $ 95,462,474      $ (97,615,328)      $ (2,038,292)
                                               =====================================================================================

                         The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                                                33


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


                                                                         YEAR              YEAR
                                                                         ENDED             ENDED
                                                                        30-JUN            30-JUN
                                                                     ------------      ------------
                                                                         2005              2004
                                                                     ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>                <C>
  Net loss                                                           $  (709,193)       (2,472,347)
  Depreciation and amortization                                           17,113           142,002
  Common stock, warrants, and options issued                                  --
    as compensation for services                                           8,200                --
  Impairment loss and loss on disposition of assets                       13,990             4,013
  Common stock issued to pay debenture                                        --           (68,873)
  Bad debt expense                                                            --             1,061
  Changes in operating assets and liabilities:
    Accounts receivable - trade                                           53,289           366,006
    Accounts receivable - other                                            1,391            (1,392)
    Inventories                                                          173,055            45,533
    Prepaid expenses                                                      57,665           218,774
    Accounts payable                                                      45,503          (122,533)
    Accrued liabilities                                                  144,930          (224,129)
    Deferred revenues                                                    (23,208)          296,450
                                                                     ------------      ------------
           Net cash used in operating activities                        (217,266)       (1,815,435)
                                                                     -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
           Net cash provided by (used in)  investing activities               --                --
                                                                     -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock and warrants,
    net of offering costs                                                     --         1,310,002
Proceeds from loan                                                       100,000
  Proceeds from related party borrowing                                       --           220,000
                                                                     -----------       -----------
           Net cash provided by financing activities                     100,000         1,530,002
                                                                     -----------       -----------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                  (117,265)         (285,433)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                                    168,955           454,387
                                                                     -----------       -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $    51,690       $   168,955
                                                                     ===========       ===========

SUPPLEMENTAL CASH FLOW INFORMATION
  Cash paid for:
Interest                                                                      --               899

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


                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                                      34


<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
                   ------------------------------------------



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, 2005, of $97,615,328. As explained in the paragraphs below, the Company has
numerous conditions that 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 those 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 current operating plan for fiscal 2006 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 in the FDA non-approval letter, which


                                       35


<PAGE>

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.

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 may
approve the BCS 2100, and proposes to retain third-party 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 proposes to
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. .

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

The Company hopes to secure additional cash from operations through continuing
efforts to market its pain management products in the United States, Canada and
other international markets, to the extent it currently has, or the future
obtains, necessary regulatory approvals.

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 that 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, 2005. 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.

                                       36


<PAGE>

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

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 has been deferred
until cash payment from the distributor has been 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 have been 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, 2005 was approximately $669 thousand and consisted
of $660 thousand of deferred revenues from the NanDa licensing and manufacturing
agreement, and $9 thousand of deferred warranty. Deferred revenues on June 30,
2004 were approximately $1.83million and consisted of $3 thousand of deferred
medical revenues, $13 thousand of deferred warranty revenues, $496 thousand of
deferred industrial revenues and deposits and $660 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.


                                       37


<PAGE>

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, 2005
and 2004 were approximately $181 thousand and $996 thousand respectively.

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
one TBIS machine located at Pratt & Whitney in fiscal 2005 and no impairments in
2004.

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,
2005, the Company received $100 thousand in the form of a short-term loan 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 a 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, 2005 and 2004:

                                       38


<PAGE>

                                                    2005              2004
                                              ----------------  ----------------
Accrued Bonuses                               $           -     $            -
Accrued Vacation                                     17,992             26,088
Other Accrued Employee Costs                        180,850              3,347

Accrued Legal and Professional Services              63,060             93,110

Other Accrued Liabilities                           293,360             49,491
                                             ----------------------------------

Total Accrued Liabilities                           555,262            172,036
                                             ==================================

Imputed Interest Payable                             13,891                690
Short-term Notes Payable                            320,000            220,000
                                             ----------------------------------

Total Short-term Notes Payable                      333,891            220,690
                                             ==================================

Imputed Interest Payable                             14,181              9,178
Long-term Notes Payable                             100,000            100,000
                                             ----------------------------------

Total Long-term Notes Payable                $      114,181     $      109,178
                                             ==================================


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 3.7 million
and 3.6 million shares of common stock and warrants to purchase 74 million and
65 million shares were outstanding at June 30, 2005 and 2004, respectively, but
were not included in the computation of diluted earnings per share because the
effect would be antidilutive.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS-- During the years ending June
30, 2004 and 2005, the Company did not adopt any new accounting pronouncements.

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


3.          INVENTORIES

Inventories consisted of the following at June 30, 2005 and 2004:

                                        JUNE 30,            JUNE 30,
                                         2005                 2004
                                   ----------------------------------

Raw materials                        $  536,053           $  616,508
Inventory reserve                      (639,664)            (629,967)
Work-in process                               -               18,629
Finished goods                          190,887              255,161
                                   ----------------------------------
Total                                $   87,276           $  260,331
                                   ==================================

                                       39


<PAGE>

Finished goods inventories include approximately $174 thousand in TIP cameras
and $16 thousand in assemblies and Photonic Stimulators at June 30, 2005. Due to
cutbacks, no work was in progress at fiscal year end 2005. Raw materials
inventory was approximately $536 thousand and $616 thousand for the years ending
June 30, 2005 and 2004 respectively. The inventory reserve represents the
impairment and obsolescence adjustments to inventory.

Inventory and commitments are based upon future demand forecasts. During fiscal
2004, the Company impaired the inventory no further. For fiscal year 2005,
inventory levels were impaired 10%. 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, 2005 and 2004:

                                              2005                    2004
                                          -----------------------------------
 Leasehold Improvements                            -                       -
 Office Furniture & Fixtures                  38,421                  38,421
 Machinery & Equipment                       409,618                 557,281
                                          -----------------------------------
                                             448,039                 595,702
 Less Accumulated Depreciation              (440,514)               (426,344)
                                          -----------------------------------
 Property & Equipment, Net                     7,525                 169,358
                                          ===================================


Depreciation expense for the years ended June 30, 2005 and 2004 was
approximately $14 thousand and $139 thousand, respectively.

As of June 30, 2005, machinery and equipment included approximately $240
thousand of demonstration equipment. 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, has 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 no additional impairment in
the year ended June 30, 2004. For fiscal year 2005, inventory levels were
impaired 10 %.

                                       40


<PAGE>

5.          INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2005 and 2004:


                                              2005                    2004
                                         -----------------------------------
 Intellectual Property Rights              $ 32,847                $ 32,847
 Less Accumulated Amortization              (20,107)                (17,437)
                                         -----------------------------------
 Net Intangible Assets                     $ 12,740                $ 15,410
                                         ===================================


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, has 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, 2004. No
additional impairment was recognized for the fiscal year ended June 30, 2005.

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.

Net deferred tax assets consist of the following components as of June 30,2005
and 2004:

                                  2005               2004
                              -------------      -------------
Deferred Tax Assets
  NOL Carryover               $ 29,784,812       $ 29,412,300
  Research Credit                2,193,864          2,193,864
  Accrued Compensation              70,532            243,273
  Deferred Revenue                 298,204            267,327
  Other                                 --            675,487
  Depreciation                          --             54,765
Deferred Tax Liabilities                --                 --
Valuation Allowance           $(32,347,412)      $ 32,847,016)
                              =============      =============
Net Deferred Tax Asset        $          0       $          0


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, 2005 and 2004 due to the
following.

                                       41


<PAGE>

                                               2005               2004
                                         --------------------------------
Book Income                                $ (276,585)        $ (964,254)
Other                                               -              4,443
Accrued Compensation                                -             23,239
Deferred Revenue                                    -            222,862
NOL Expiration                                      -            222,955
True up Prior Year                                  -            (18,104)
Non-deductible Meals & Entertainment              215
Penalties                                         577
Officer Life Insurance Premiums                 2,287

Valuation Allowance                        $  273,506          $ 508,859
                                         --------------------------------
                                           $        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 2005 through 2024. No tax benefit has been reported in the June 30,2005
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

Two separate lawsuits were settled during the year ended June 30, 2005.

         1)       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.

         2)       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.

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 $71 thousand and $88
thousand for the years ended June 30, 2005 and 2004, respectively.

On June 30, 2005, there an amendment to the agreement with SilverCreek
Engineering effective December 2004 to June of 2006. We have two leases: 1)
Ogden, Utah location which houses all offices and manufacturing and 2) a storage
unit also in Ogden. Both leases are on a month-to-month basis with 30 day notice
for termination. Monthly lease payments are $5,783 for the Ogden office and $80
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.

                                       42


<PAGE>

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, 2005 and 2004.

9.       STOCK WARRANTS AND OPTIONS

WARRANTS--A summary of warrant activity for the period from July 1, 2004,
through June 30, 2005 is as follows:


                                              # SHARES         EXERCISE PRICE
                                              --------         --------------
            Balance at June 30, 2003         6,459,096         $1.56  -  $5.0
                                           ============
                        Exercised                    -

            Balance at June 30, 2004         6,459,096         $1.56  -  $5.0
                                           ============
                        Exercised                    -
                        Forfeited           (5,718,070)        $5.0
                                           ------------

         Balance at June 30, 2005              741,026         $0.10 - $2.27
                                           ============

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.

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, 2004, THROUGH June 30, 2005:

                                       43


<PAGE>
<TABLE>
                                                         2005                              2004
                                              ----------------------------------------------------------------
                                                                 Weighted                           Weighted
                                                                  Average                            Average
                                                                 Exercise                           Exercise
                                                Shares            Price          Shares               Price
                                              --------------------------------------------------------------
<S>                                            <C>                 <C>         <C>                    <C>
Outstanding at beginning of year .......       3,592,023           1.27        4,367,719              1.83
Granted ................................       2,560,000           0.10          510,000              0.29
Exercised ..............................              --             --               --                --
Forfeited ..............................      (2,468,091)          1.06        1,360,695              1.73
                                              ----------------------------------------------------------------

Outstanding at end of year .............       3,683,932           1.13        3,592,023              1.27
                                              -----------                    ------------
Options exercisable at year end ........       3,643,932                       3,367,023
                                              ===========                    ============

Weighted average fair value of options
  granted during the year ..............           .0.13                            0.29
                                              ===========                    ============

                                                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
-----------------------------    -----------------------------------------------------------------------------------
      $.10 - .64                     750,000              4.47               $.15           750,000            $.15
     $1.25 - 1.25                  2,000,000               4.5               1.25         2,000,000            1.25
    $1.50 - $1.95                    840,000              5.32               1.53           840,000            1.53
    $2.27 - $2.44                     13,932             5..68               2.27            13,932            2.27
     $3.50 - 3.50                     80,000              5.98               3.50            80,000            3.50
                                 -----------------------------------------------------------------------------------
     $.22 - $3.50                 3, 683,932              2.28              $1.13        3, 683,932           $1.13
                                 ===================================================================================
</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. During 2005 $8,200 intrinsic
expense was claimed for revaluation of options granted to employees.

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:

<TABLE>
                                                             2005                  2004
                                                        --------------        --------------
<S>                                                     <C>                   <C>
         Net loss:
         As reported                                    $    (709,193)        $  (2,472,347)
         Pro forma                                           (769,460)           (2,688,459)
         Basic and diluted loss per common share:
         As reported                                    $       (0.01)        $       (0.02)
         Pro forma                                              (0.01)                (0.02)
</TABLE>

                                       44


<PAGE>

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
2005 and 2004:

         1)       risk-free interest rate between 4.18 percent
         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 2005

NON-EMPLOYEE STOCK OPTIONS--Changes in stock options issued to non-employees are
as follows for the year ended June 30, 2005.

                                                           2005
                                                           ----
                                                                        WEIGHTED
                                                                         AVERAGE
                                                                        EXERCISE
                                                          SHARES          PRICE
                                                          ----------------------

         Outstanding at beginning of year...........       75,000         $1.88
         Granted....................................       75,000         $0.10
         Exercised .................................           --            --
         Forfeited..................................
                                                          --------
         Outstanding at end of year.................      150,000         $0.99
                                                          --------
         Options exercisable at year end............      150,000
                                                          ========
         Weighted average fair value of
              options granted during the year.......          --
                                                          ========

10.      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.

11.      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 2005, 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:

                                       45


<PAGE>
<TABLE>
-----------------------------------------------------------------------------------------------------------
                           2005                                         2004
                          Medical          Industrial      Total       Medical      Industrial        Total
                    ---------------------------------------------------------------------------------------
<S>                          <C>             <C>           <C>         <C>               <C>         <C>
Product Revenue              $  72           $  29         $ 101       $ 269             $  5        $ 274
Service Revenue              $  64           $  71         $ 135       $   -             $ 83        $  83
-----------------------------------------------------------------------------------------------------------
Total Revenue                $ 136           $ 100         $ 236       $ 269             $ 88        $ 357
-----------------------------------------------------------------------------------------------------------


----------------------------------------------------------   ----------------------------------------------
MEDICAL                                Percentage                                Dollars
----------------------------------------------------------   ----------------------------------------------
Fiscal Year                    USA      Canada      China        USA        Canada       China        Total
----------------------------------------------------------   ----------------------------------------------
                   2005      74%          26%          0%      $ 100          $ 36        $ -        $ 136
                   2004      35%          14%          1%      $ 187          $ 78        $ 4        $ 269
----------------------------------------------------------   ----------------------------------------------

------------------------------------------------             -----------------------------------------------
INDUSTRIAL                      Percentage                                   Dollars
------------------------------------------------             -----------------------------------------------
Fiscal Year                  USA          UK                    USA            UK              Total
------------------------------------------------             -----------------------------------------------
                   2005       0%         100%                  $  -            $ 100          $ 100
                   2004     100%           0%                  $ 88            $  -           $ 88
------------------------------------------------             -----------------------------------------------
</TABLE>


                                2005        Percentage
                               Sales        of Sales
                    --------------------------------
Alstom / Siemens             $ 79,273           34%
Boothroyd                    $ 34,200           14%

Deferred revenues as of June 30, 2005 and 2004 contained the following balances
from significant customers

                                               YEARS ENDED JUNE 30,
                                              2005              2004
                                         ---------------  --------------
Pratt & Whitney                                       0   $     106,000
NanDa                                           660,000         925,000
                                         ---------------   -------------
                                         $      660,000   $   1,031,000
                                         ===============  ==============

13.      SUBSEQUENT EVENTS

We have received $300 thousand of debt proceeds since June 30, 2005 and we
continue to engage in discussions with other prospective sources of equity
capital. To restore operations to former levels, we must secure additional
funding.

14.      FOURTH QUARTER LOSS RECOGNITION

Pursuant to APB 28, "Interim Financial Reporting", the following is a
reconciliation of the net loss as reported in the Company's March 31, 2005
consolidated financial statements to the net loss as recorded at June 30, 2005.

         Net loss reported March 31, 2005                    $(288,146)
         4th quarter accrual of payroll                       (178,456)
         4th quarter accrual of additional legal fees          (53,473)
         Other 4th quarter adjustments and general loss
                from operations in the 4th quarter            (189,118)
                                                             ----------
         Net loss reported June 30, 2005                     $(709,193)
                                                             ==========

                                       46


<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 acting 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, 2005.
Based on this evaluation, our principal executive officer and acting 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
<TABLE>

DIRECTORS                      AGE            POSITION                            DIRECTOR
---------                      ---            --------                            --------
<S>                            <C>            <C>                                 <C>
Richard V. Secord              73             Chairman of the Board, Chief        1996
                                              Executive Officer
Brent M. Pratley, M.D.         69             Director                            1995

Milton R. Geilmann             72             Director                            1998

Harry C. Aderholt              84             Director                            1998
</TABLE>

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.

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.

                                       47


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
<TABLE>
                                                                                            Long Term Compensation
                                                                              ------------------------------------------------------
                                        Annual Compensation                               Awards            Payouts
                               -----------------------------------------------------------------------------------------------------
                                                              Other Annual     Restricted
                                                              compensation        Stock        Securities      LTIP      All other
Name and principal Position    Fiscal Year   Salary   Bonus        (2)            Award    Underlying Option  Payouts  Compensation
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>        <C>       <C>               <C>            <C>           <C>    <C>
Richard V. Secord                  2005      31,544     -         10,200            -                     -      -             -
Chairman, Chief Executive          2004      90,000     -         32,400            -                25,000      -             -
 Officer (1)                       2003     201,000     -         35,309            -                     -      -             -
                                   2002     210,000     -         32,400            -                     -      -             -
                                   2001     210,000     -         13,400            -               750,000      -       975,894

</TABLE>

(1) Under his employment agreement with the Company, which expired in September
2003 but is being extended on a month-to-month basis, Richard V. 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. Effective January 10, 2005, Mr. Secord requested he not receive any
compensation until such time as he determines to demand the full $210,000 per
year salary authorized by the Board. The salary Mr. Secord should have received
has been accrued under employee accruals..

(2) 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. During 2005
only one quarter of personal life insurance premium was paid - $6,000 and only 6
months of car allowance.

DIRECTOR COMPENSATION

We currently do not pay each non-employee director for attending quarterly board
meetings, special meetings of the board and its committees as needed


ANNUAL MEETINGS, BOARD MEETINGS AND COMMITTEES

We request that all of the members of our Board of Directors attend each annual
meeting of shareholders. During the years ending June 30, 2004 and 2005, 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 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.

                                       48


<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth individual grants of options to acquire shares of
common stock we made to our Chief Executive Officer during the fiscal year ended
June 30, 2005. No other grants were made to executive officers.

<TABLE>

                                              NUMBER OF SECURITIES           PERCENT OF TOTAL OPTIONS          EXERCISE  EXPIRATION
                   NAME                    UNDERLYING OPTIONS GRANTED   GRANTED TO EMPLOYEES IN FISCAL YEAR     PRICE       DATE
----------------------------------------  ---------------------------  ------------------------------------    --------  -----------
<S>                                                 <C>                                     <C>                 <C>       <C>
Richard V. Secord,                                  2,000,000                               83%                 $1.25     6/12/2007
Chairman and Chief Executive Officer (1)

</TABLE>

(1)      Such options were fully vested when granted on June 12, 2005.

AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

The following table provides information regarding options held by our Chief
Executive Officer as of June 30, 2005. No options were exercised by our Chief
Executive Officer or any other executive officers during the year ended June 30,
2005.
<TABLE>

                                                                NUMBER OF SECURITIES
                                                               UNDERLYING UNEXERCISED            VALUE OF UNEXERCISED
                                                                     OPTIONS AT                IN-THE-MONEY OPTIONS AT
                                SECURITIES                          JUNE 30, 2005                  JUNE 30, 2005 (1)
                               ACQUIRED ON      AGGREGATE
                                EXERCISE     VALUE REALIZED   EXERCISABLE    UNEXERCISABLE     EXERCISABLE  UNEXERCISABLE
 NAME AND POSITION                (#)            ($)              (#)             (#)               ($)           ($)
-----------------------------------------------------------------------------------------------------------------------------
Richard V. Secord,
Chairman and Chief
<S>                                <C>            <C>          <C>                 <C>           <C>               <C>
Executive Officer                  0              0            2,775,000           0             $305,250.         0
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)      On June 30, 2005, the closing sale price for a share of our common
         stock on the OTC Bulletin Board was $0.11.

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

The following table sets forth, as of June 30, 2005, the number of common shares
beneficially owned by (i) the persons known 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.

                                       49


<PAGE>
<TABLE>

Title of          Name and Address of                   Amount & Nature of    Percentage of
Class             Beneficial owner                      Beneficial owner      Class
--------------------------------------------------------------------------------------------
<S>               <C>                                    <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%

* Less than 1%
</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company indemnifies all board members and officers. During the fiscal year
2005, the Company did not incur any additional costs for indemnifications.

In May 2004 we entered into a loan transaction with Harry Aderholt, one of our
directors. Mr. Aderholt loaned us $20,000, which we used for general corporate
purposes. The loan is payable, with interest, at the rate of 6%. The loan is
unsecured and does not stipulate maturity date.

ITEM 13. EXHIBITS

(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).
4.4**             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).
10.5**            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).
10.11**           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).
10.16**           Manufacturing license agreement with NanDa Thermal Medical
                  Technology, Inc., (incorporated by reference to Form 8-K filed
                  on June 24, 2003).

                                       50


<PAGE>

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).

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


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 $26,367 the fiscal year ended
June 30, 2005 and approximately $45,513 for the fiscal year ended June 30, 2004.

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, 2005. Audit-related fees
relate primarily to audits of employee benefit plans and miscellaneous
accounting and internal control related consultations.

ALL OTHER FEES

There were no fees billed for other non-audit services during fiscal years 2005
and 2004..

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. Our Audit Committee approved all fees identified in the preceding four
paragraphs. During the fiscal year ended June 30, 2005, 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.

                                       51


<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 27, 2005                      /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 27, 2005
------------------------------------------------------------
RICHARD V. SECORD
Director, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)



/s/ Richard V. Secord                                           October 27, 2005
------------------------------------------------------------
RICHARD V. SECORD
Acting Chief Financial Officer (Principal Financial Officer)



/s/ Brent M. Pratley, M.D.                                      October 27, 2005
------------------------------------------------------------
BRENT M. PRATLEY, M.D.
Director



/s/ Milton R. Geilmann                                          October 27, 2005
------------------------------------------------------------
MILTON R. GEILMANN
Director



/s/ Harry C. Aderholt                                           October 27, 2005
------------------------------------------------------------
HARRY C. ADERHOLT
Director


                                       52