<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,  2006

|_|    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 small business issuer in its charter)

                             -----------------------

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

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

        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)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

Check whether the issuer (1) 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 issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer'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. |_|

Indicate by check mark whether the issuer is a shell company. Yes |_| No |X|

Revenues of the issuer for its most recent fiscal year were $77,219.

The aggregate market value of Common Stock held by non-affiliates of the issuer
at September 1, 2006 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 September 14, 2006, there were 114,561,698 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:        None

Transitional Small Business Disclosure Format:  Yes |_| No |X|

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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                                       18

ITEM 3.         Legal Proceedings                                             18

ITEM 4.         Submission of Matters to a Vote of Security Holders           19


PART II
-------

ITEM 5.         Market for Common Equity, Related Stockholder Matters and
                Small Business Issuer Purchases of Equity Securities          19

ITEM 6.         Management's Discussion and Analysis or Plan of Operation     20

ITEM 7.         Financial Statements                                          27

ITEM 8.         Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure                                      46

ITEM 8A         Controls and Procedures                                       46

ITEM 8B         Other Information                                             46


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                                        47

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                                                      49

ITEM 14.        Principal Accountant Fees and Services                        50


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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.  DESCRIPTION OF BUSINESS

INTRODUCTION

Computerized Thermal Imaging, Inc. ("WE," "US," "CTI," or the "COMPANY") has
historically designed, manufactured and marketed thermal imaging and infrared
devices and services used for clinical diagnosis, pain management and
non-destructive testing of industrial products and materials. As discussed in
greater detail below, we have substantially reduced our operations. Prior to
that reduction, we developed, manufactured and marketed the following principal
products:

    o   PAIN MANAGEMENT--THERMAL IMAGE PROCESSORS: Our Thermal Image Processor
        (or "TIP,") measures 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 pain
        and soft-tissue related injuries. We believe 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   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.

    o   BREAST IMAGING: Prior to substantially reducing our operations, we were
        seeking pre-market approval from the U.S. Food and Drug Administration
        (the "FDA") of our breast imaging system, called the BCS 2100(TM). We
        believe the BCS 2100, if approved and marketed, could 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 13
        below, we do not currently have the resources necessary to conduct the
        additional clinical studies requested by the FDA. 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

    o   TURBINE BLADE INSPECTION SYSTEM: Our Turbine Blade Inspection System
        (the "TBIS") is a quality assurance tool designed to meet 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.

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<PAGE>

Prior to substantially reducing our operations, we manufactured 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 "COIB." As of September 1, 2006, we
had approximately 115 million shares of common stock outstanding held by
approximately 1,591 shareholders of record. In addition to the outstanding
shares of our common stock, there are outstanding options to acquire
approximately 3.3 million shares of our common stock at exercise prices ranging
from $0.10 to $3.50. 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 currently face substantial financial challenges. For each of the past five
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 primary target markets for our pain management products have historically
consisted of physical therapists, pain management practitioners, orthopedic and
sports medicine practitioners, occupational therapists, and chiropractors
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 has historically been
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 - Pain Management
----------------------------------

We have historically marketed two devices used for diagnostic imaging and
therapeutic treatment, the TIP and the Photonic Stimulator.

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

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

The TIP uses an infrared camera 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 pain and
soft-tissue related injuries. We have not conducted clinical studies confirming
the effectiveness of the TIP for any specific uses.

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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") a number of years ago
provided an 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. In addition to the standard software suite, TIP-MED, used for the
imaging of pain and soft tissue instances, CTI has developed a unique software
suite specifically designed for use in pandemic flu screening environments. One
of the outward symptoms of SARS and more recently publicized H5N1 (avian bird
flu 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 tested positive
for a specific type of flu.

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 have participated 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.

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.
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.

The retail price for the Thermal Imaging Processor (TIP) Suite is $100,000.
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. The past two fiscal
years we have not sold 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
an infrared intensity of up to 350 microns providing 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."

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 2006 was $4,120, during 2005 it averaged $3,593. 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.

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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.

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

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

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

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

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

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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.

During the fiscal year ending June 30, 2006 the complete BCS inventory was
impaired. This decision was due in part to the extended time frame which has
passed in trying to get a reversal on the FDA panel's decision not to approve
the BCS 2100.

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 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.

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.

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, 2006, we had the following patents or patent applications pending
before the United States Patent and Trademark Office:

    o   Patent No. 5,999,842, dated December 7, 1999, acquired by assignment
        from TRW on a Functional Thermal Imaging Apparatus (our BCS 2100 Patient
        Positioning Table).
    o   Patent No. 6,366,802, dated April 2, 2002, covering techniques designed
        to reduce or eliminate pain by the application of infrared therapy while
        monitoring the process as it is being conducted. The techniques involve
        the use of our Photonic Stimulator to apply infrared energy to a patient
        while using the TIP to monitor the patient's response to the therapy.

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    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

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 represent valid
and enforceable rights 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 there under 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.

SOURCE OF SUPPLY

Manufacture and assembly of our thermal imaging and pain management 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. Due to our present
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 orthopedic, physical
therapy, and pain management imaging and treatment facilities, hospital
radiology departments, cancer research facilities and imaging centers, and
manufacturers of products with complex cast components or processes.

Critical to our business strategy is to retain the required approval from the
FDA with respect to 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 use 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 have historically relied upon building relationships with
manufacturers, local medical equipment dealers, physicians and clinical
investigators. When we were actively marketing our products, 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 also attended trade shows and conferences and made direct sales calls
to industrial customers and sponsor clinics, where we introduced and
demonstrated our breast imaging, pain management and non-destructive testing


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<PAGE>

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 June 30, 2006 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
sufficient additional capital, we plan to continue investing resources in these
programs.

In order to conserve cash, we have scaled back operations and staffing levels
by, among other things, eliminating our research and development group, and
reducing our manufacturing group from 20 full-time employees in the fall of 2002
to no full time employees in September 2006. We do have past employees who have,
on occasion been willing to provide services on a will-call basis. The software
development for the TIP has been suspended due to lack of resources. Due to the
significantly reduced level of our operation, we have contracted with several
former employees to service and repair equipment when required.

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 pain management products have historically competed 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 BCS 2100 is designed to provide physiological information that would
supplement the anatomical information obtained from mammography and would 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 industrial applications have historically competed 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 is designed to provide defect analysis more quickly than
other products, primarily by using less skilled labor and no special
environment, and may replace high pressure water and air or x-ray for certain
applications.

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, which may be able to determine whether a patient's mass is benign
without the use of an invasive surgical procedure.

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

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

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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 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 have historically allowed 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 our distributors 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 in recent years.

INTERNET. We have used 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.

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. Due to our limited financial resources, we are not currently
developing collateral, advertising in trade journals, or presenting papers and
research results at conferences and trade shows.

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


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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
capital 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 were:


-        USC/Norris Comprehensive Cancer Center, Los Angeles;
-        Los Angeles County Hospital, Los Angeles;
-        Mt. Sinai Hospital, Miami;
-        St. Agnes Hospital, Baltimore;
-        Lahey Clinic, Boston;
-        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 to provide
consulting and other services if requested, but we have no written commitments
to such effect.

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

If we obtain pre-market approval from the FDA for our BCS 2100, of which we can
provide no assurance, 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.

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GOVERNMENT REGULATION

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

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

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

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

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

    o   that an investigational device exemption be obtained in connection with
        clinical studies,
    o   that the manufacturer adhere to specified clinical and investigational
        practices and procedures (called Good Clinical Practices) in connection
        with its studies,
    o   that the manufacturer obtain specified approvals from an institutional
        review board at each study site,
    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, 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. 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." 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, 1998As 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 TIP or the Photonic Stimulator, and 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


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TIP and Photonic Stimulator to foreign countries, we have obtained (in
accordance with import regulations of the destination countries) certification
of United States clearance and complied with specific labeling and quality
management requirements. As explained above, because the TIP and Photonic
Stimulator are not Class III devices, rules related to investigational device
exemptions, clinical investigator monitoring, institutional review board
approval and pre-market approval do not apply to such devices.

THE BCS 2100. The BCS 2100 is 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.

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.

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

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

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

In light of our shortage of 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.

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.

Because of the financial condition of the company, we have not had the resources
to follow up on the citizen's petition.

CURRENT EMPLOYEES

As of September 2006, we have one full-time employee in accounting and
administration. This employee cross tasks in various areas of operation where a
need exists. Consultants are used in other areas when needed. Our employee is
not 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 five 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


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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 sufficient
operating revenues to offset our operating expenses. We have experienced a loss
from operations in every fiscal year since our inception to current fiscal year
ending June 30, 2006. 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, 2006, we had $39 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. As a result of our limited capital
resources, we have substantially reduced our operations. The only way we will be
able to restore 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 resume our business
operations or to continue our reduced level of operations through 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 VIEW RESUMED OPERATIONS TO BE
DIFFICULT.

Due to our extremely limited financial resources, we have significantly reduced
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 one employee,
who is responsible for general and administrative matters, and has 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.

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

OUR FAILURE TO OBTAIN FDA APPROVAL OF OUR BCS 2100 HAS SIGNIFICANTLY AFFECTED
OUR BUSINESS 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. Subsequent to the FDA's decision, we advocated a reversal or
modification of the decision through multiple channels, but we 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 restore our operations to their
former level or pursue an appeal. We do not know whether our negotiations or any


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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.

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

The Securities and Exchange Commission (the "SEC") and the U.S. Attorney's
Office for the Southern District of New York have conducted, and may still be
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 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.

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 years ending June
30, 2006 and 2005, there were no additional legal costs.

No communication or correspondence has been received in reference to these
investigations during the fiscal years ended June 30, 2005 and 2006.

WE HAVE LIMITED REVENUES FROM OPERATIONS AND VIEW RESUMED OPERATIONS TO BE
DIFFICULT.

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, 2006, we recorded accumulated operating losses of $97.9 million. We
recorded revenues of approximately $77 thousand and $236 thousand for the fiscal
years ended June 30, 2006 and 2005, respectively. The decrease in revenue is
largely due to a reduction in TIP and TBIS service revenue. 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.

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
TIP and Photonic Stimulator, 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, 2006, we incurred accumulated losses of approximately
$97.9 million. We recorded a net loss of $251 thousand for fiscal year ending
June 30, 2006 and a net loss of $709 thousand for the fiscal year ended June 30,
2005. During the fiscal year ended June 30, 2005, we recorded a major change in
inventory value due to correcting inventory count and costs. During the fiscal
year ended June 30, 2006 we eliminated accrual accounts for legal, audit,
property taxes and clinical trials in the amount of $78 thousand. We also
expunged long standing liabilities in the amount of $368 thousand which include
but are not limited to medical consulting, clinical trials, legal fees and
miscellaneous expenses. Agreements were also reached with some of the vendors to
reduce the balance owed in return for payments in full. 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.

                                       16



<PAGE>

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

During the fiscal year ended June 30, 2005, we lost substantially all of our
then-remaining key management personnel, due to workforce reductions and
resignations. During the fiscal year ended June 30, 2006 we were forced to
reduce our total workforce from two full and part-time employees to one
full-time employee. 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 CTI AND ITS OFFICERS AND
DIRECTORS VULNERABLE.

Due to our lack of resources, we have terminated all of our insurance policies,
including directors and officers insurance, clinical trials insurance, liability
and employee life insurance. We continue to carry minimal employee health and
workers compensation coverage. The reduction in insurance policies leaves CTI,
as well as our officers and directors, vulnerable to claims of third parties.
The lack of directors and officers insurance will limit our ability to attract
quality executives and directors for future growth.

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 from $4.05 to
$.03 in the past 5 years.

         ----------------------------------------------
                                  HIGH            LOW
         ----------------------------------------------
              2002              $ 4.05          $ 0.56
         ----------------------------------------------
              2003              $ 1.29          $ 0.09
         ----------------------------------------------
              2004              $ 0.68          $ 0.06
         ----------------------------------------------
              2005              $ 0.22          $ 0.06
         ----------------------------------------------
              2006              $ 0.21          $ 0.03
         ----------------------------------------------

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 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.

                                       17



<PAGE>

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, 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.

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.

If we are able to resume our business operations, we will likely 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.

If we are able to resume our business operations, our business activities will
depend, in part, on our ability to use and prevent others from using our
patents, trademarks and other intellectual property. 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.  DESCRIPTION OF PROPERTY

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.
Given the limited nature of our current operations, we believe that our existing
offices and other physical facilities are adequate for our present needs.

ITEM 3.  LEGAL PROCEEDINGS

GOVERNMENT INVESTIGATIONS

The SEC and the U.S. Attorney's Office for the Southern District of New York
have conducted, and may still be 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 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


                                       18



<PAGE>

affairs, and advancing legal fees on behalf of officers who are or may be
entitled to indemnification in connection with these investigations. 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. For the fiscal years ending June 30, 2006 and 2005, there were
no additional legal costs.

No communication or correspondence has been received in reference to these
investigations during the fiscal years ended June 30, 2005 and 2006,

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, 2006.

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.OB.

PRICE RANGE OF OUR COMMON STOCK

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

          YEAR ENDED JUNE 30, 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


          YEAR ENDED JUNE 30, 2006
          ------------------------

          First Quarter                 $    0.03      $    0.11
          Second Quarter                $    0.03      $    0.07
          Third Quarter                 $    0.04      $    0.15
          Fourth Quarter                $    0.11      $    0.21


On June 30, 2006, the closing bid for our common stock as reported on the OTCBB
was $0.12 per share. On June 30, 2006, we had approximately 14 million shares of
our common stock held by beneficial shareholders and approximately 115 million
shares of our common stock outstanding.

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

                                       19



<PAGE>

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

At CTI, our mission is to enhance the quality of our customers' lives through
the development, distribution, and education of superior digital infrared
imaging solutions. We intend 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 intend to design, manufacture and
market thermal imaging devices and services used for clinical diagnosis, pain
management and industrial non-destructive testing. We also intend to provide
inspection services and design and build non-destructive test systems for
industrial customers.

Our current products are the TIP, Photonic Stimulator 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 TIP, Photonic Stimulator,
TBIS and related services.

Given our inability to market our BCS 2100 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 September 2006 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 2006 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 $795 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.

                                       20



<PAGE>

Our standard domestic terms for our sales of 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 and estimated consumption is recorded to cost of revenues
and an excess and obsolete reserve which is included as an element of net
inventory reported on our balance sheet. Amounts charged into the inventory
reserves are not reversed to income until the reserved inventory is sold or
otherwise disposed.

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

STOCK-BASED COMPENSATION--We measure compensation expense for our employee
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD
(APB) OPINION NO. 25 ("FIN 44"). Pursuant to the prescribed guidelines, we have
recorded adjustments associated with the exercise price of employee stock
options, extension of the exercise period of employee stock options, issuing
stock options at a strike price lower than the then prevailing price for our
common stock and issuing stock to directors or stock to an employee.

During 2001, we modified the exercise price of certain stock options granted to
certain 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.

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting for transactions in which an

                                       21



<PAGE>

entity obtains employee services in share-based payment transactions. This
statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in Statement of
Financial Accounting Standards No. 123. This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Management believes the adoption of this statement will have no impact
on the financial statements of the Company.

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

RESULTS OF OPERATION

FISCAL YEARS ENDED JUNE 30, 2006 AND 2005

REVENUES

Total revenues for the fiscal year ended June 30, 2006 were $77 thousand,
compared to $236 thousand for the fiscal year ended June 30, 2005, a decrease of
$159 thousand or 67%. Reductions in sales personnel and other staff, as well as
other consequences of our limited financial and operational resources are
reflected in the total. 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

Our medical segment revenues were $77 thousand and $136 thousand for the fiscal
years ended June 30, 2006 and 2005, respectively. The decrease of $59 thousand,
or 43%, resulted primarily from decreased shipments of TIP units and Photonic
Stimulators in conjunction with decreased service and repairs.

Our industrial segment revenues for fiscal year ended June 30, 2006 were $0, yet
$100 thousand was reported for the fiscal year ended June 30, 2005 and
attributable to sales in our industrial segment. Industrial revenues of $71
thousand were received during the fiscal year ended June 30, 2005. The main
portion of this revenue was repair work on existing customer cameras.

As of June 30, 2006, 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, 2005. 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, 2006, 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 only if all of our sales commitments and obligations have
been fulfilled. There was no correspondence or communications with Pratt and
Whitney in reference to this issue during the fiscal year ended June 30, 2006.

EXPENSES

GROSS MARGINS AND COST OF REVENUES. Total gross margins for the fiscal year
ended June 30, 2006 were $44 thousand, compared to $57 thousand for the fiscal
year ended June 30, 2005, a decrease of approximately $13 thousand. Factors
which contribute to the cost of revenues include materials of $52 thousand,
freight of $12 thousand, adjustments to inventory for $27 thousand and a $58
thousand gain due to the reevaluation of the inventory reserve. Gross margins
increased as a percentage of sales from 57% to 24% for the fiscal years ended
June 30, 2005 and 2006 respectively.

Total cost of goods sold for the fiscal year ended June 30, 2006 was $33
thousand, compared to $179 thousand for the fiscal year ended June 30, 2005, an
81% decrease in dollar value. Cost of goods consist of $52 thousand in materials
for the fiscal year ended June 30, 2006 compared to $28 thousand for the fiscal
year ended June 30, 2005. Materials include any and all components used in the
repair and/or service of the units. Physical discrepancies include the
adjustments to the inventory to correct the actual count and costs during the
fiscal year ended June 30, 2005 and again for the fiscal year ended June 30,
2006. For the fiscal year ended June 30, 2005 there was a major adjustment of


                                       22



<PAGE>

$129 thousand, compared to the fiscal year ended June 30, 2006, in which the
adjustment totaled $26 thousand, a 79% decrease. The $129 thousand adjustment
for the fiscal year ended June 30, 2005 was due primarily to a significantly
lower inventory count than was originally thought. During the fiscal year ended
June 30, 2006, we impaired the complete inventory associated with our BCS 2100,
due to the lack of approval from the FDA for the BCS 2100 and also corrected the
status on some of the finished goods.

Gross margins and cost of revenues as a percentage of sales for the fiscal years
ended June 30, 2006 and 2005 were:

         TOTAL SALES    PERCENTAGE OF  TOTAL SALES  PERCENTAGE OF
            2006            SALES         2005         SALES
         --------------------------------------------------------
            77,219          100%         235,972        100%
            33,420           43%         179,090         76%
         --------------------------------------------------------
          $ 43,799           57%        $ 56,882         24%
         ========================================================

OPERATING, GENERAL AND ADMINISTRATIVE. Operating, general and administrative
expenses for the year ended June 30, 2006 were $692 thousand, compared to $523
thousand for the fiscal year ended June 30, 2005. Operating, general and
administrative expenses increased by $169 thousand, or 32%, from the fiscal year
ended June 30, 2005 to the fiscal year ended June 30, 2006. This is primarily
due to: 1) $358 thousand of debts were eliminated due to non-performance of
services 2) $78 thousand eliminating accruals which are no longer valid and 3)
$9 thousand in settlements reached with vendors.

LITIGATION SETTLEMENTS. Litigation settlements were $0 for the year ended June
30, 2005 and $1 thousand for the year ended June 30, 2006, an increase of $1
thousand. The legal issue, which was settled in the fiscal year ended June 30,
2006, was expensed in the same year.

RESEARCH AND DEVELOPMENT. Research and development expenses were $0 for the year
ended June 30, 2006. Because of our financial condition, our research and
development department has been abandoned until such time as funds would be
available. Research and development expenses for the year ended June 30, 2005
were $182 thousand.

The absence of research and development expenses during the fiscal year ended
June 30, 2006 reflects the elimination of all capital projects in an effort to
reduce our negative cash flow. We no longer employ medical and industrial
research and development personnel. 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
performed 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 would likely be required to
conduct more clinical trials in order to obtain FDA approvals necessary to
market the BCS 2100 in the United States. 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.

We have 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 in prior periods.

MARKETING. Marketing expenses for the fiscal year ended June 30, 2006 were $0,
compared to $24 thousand for the fiscal year ended June 30, 2005. Marketing
expenses decreased by 100% from fiscal 2005 to fiscal 2006.

Marketing expenses were non-existent due to the lack of operating capital during
the fiscal year ending June 30, 2006.

Marketing expenses decreased due to our decision to eliminate our marketing
activities, including tradeshows and travel expenses, and sales and marketing
personnel. As a result of this decision, since June 30, 2005 our sales have
dropped significantly.

                                       23



<PAGE>

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the
fiscal year ended June 30, 2006 were $10 thousand, compared to $17 thousand for
the year ended June 30, 2005 a decrease of $7 thousand, or 42%.

IMPAIRMENT GAINS / LOSSES. Impairment gains of $58 thousand were due to the
reversal of previous impairments. We evaluate our property, plant and equipment
for impairment when indicators of impairment exist. For the fiscal year ended
June 30, 2005 we recorded an impairment of equipment for $14 thousand. This
consisted primarily of BCS inventory.

Accounting standards require that if the sum of the future cash flows expected
to result from the assets, undiscounted and without interest charges, is less
than a company's reported value of the assets, then the asset is not recoverable
and the company must recognize an impairment. The amount of impairment to be
recognized is the excess of the reported value of the assets over the fair value
of those assets and is recorded as an impairment expense on our statement of
operations. In estimating impairments, 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 a net loss of $251 thousand for fiscal year ended June 30, 2006 and
a net loss of $709 thousand for the fiscal year ended June 30, 2005. The loss
for the fiscal year ended June 30, 2006 reflected a decrease in net loss of $459
thousand or 65%. During the fiscal year ended June 30, 2005, we recorded a major
change in inventory value due to correcting inventory count and costs. During
the fiscal year ended June 30, 2006 we eliminated accrual accounts for legal,
audit, property taxes and clinical trials in the amount of $78 thousand. We also
expunged long standing liabilities in the amount of $369 thousand which include
but are not limited to medical consulting, clinical trials, legal fees and
miscellaneous expenses. Agreements were also reached with some of the vendors to
reduce the balance owed in return for payment in full.

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 the fiscal year ended June 30, 2006 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, 2006 was approximately $3
thousand, compared to a fraction of $1 thousand for June 30, 2005. During the
fiscal year ended June 30, 2006, the $2 thousand increase was a result of funds
available for money market investment until such time as required to fund
operations

Interest expense for the fiscal year ended June 30, 2006 was $43 thousand,
compared to $20 thousand for the year ended June 30, 2005. Interest expense for
fiscal year 2006 was comprised of interest accrued but not paid for six loans:
1) $5,000 attributable to a $100 thousand debt to Thermal Imaging Inc., assumed
at the time of settlement of the departure of our former president; 2) $12,000
attributable to a $200 thousand loan received June 14, 2004; and 3) $1,200
attributable to a $20 thousand loan received May 11, 2004. The remaining three
loans, with funds received on three different occasions over the year were from
the same entity totaling $575 thousand. Accrued interest for these three loans
total $24,386. The remaining interest expense for fiscal 2006 was due to finance
charges from vendors for late payments.

OTHER INCOME/EXPENSE

Other income for the fiscal year ended June 30, 2006 was $409 thousand. Interest
income increased in fiscal year ended June 30, 2006 $2,870 due to the
availability of funds from loans to invest bearing interest until such time as
it was needed for daily operation expenses. Interest expense more than doubled
from $20 thousand to over $43 thousand due to addition of two notes payable and
late payments on vendor accounts. Other income for the fiscal year ended June
30, 2006 is a gain on sale of assets, specifically office equipment and salvage
wire.

Gain on extinguishment of debts included $359 thousand consisted of non receipt
of services and the statute of limitations for three vendors. Accruals were
eliminated in the amount of $78 thousand and settlements amounting to $9
thousand were reached with vendors which reduced the balance owed when full
payment was made.

                                       24



<PAGE>
<TABLE>
                                                   2006          2005
                                               -------------------------
<S>                                                <C>              <C>
         Interest Income                           2,988            119
         Interest Expense                        (43,484)       (20,319)
         Other Income                              2,743              -
         Gain from Extinguishment of Debt        446,465              -
         Other Expense                               (70)           51
                                               -------------------------
                                               $ 408,642      $ (20,151)
                                               =========================

 STATUTE OF LIMITATIONS - NON- RECEIPT OF SERVICES FROM THREE VENDORS          $  358,945
                                                                               ==========
Legal accrual                              No longer required                      40,000
Legal class action fee accrual             No longer required                      16,783
Clinical trials accrual                    No longer required                       9,500
Audit fee accrual                          No longer required                       6,277
Property tax accrual                       No longer required                       5,987
                                                                               ----------
            EXPUNGED ACCRUALS                                                      78,547
                                                                               ==========
SETTLEMENTS WITH VENDORS Reduced balance owed on account                       $    8,973
                                                                               ==========
            GAIN ON EXTINGUISHMENT OF DEBTS                                    $  446,465
                                                                               ==========
</TABLE>

NET LOSS / PROFIT

We incurred a loss of $709 thousand, or $(.01) per share, for the fiscal year
ended June 30, 2005, compared to a loss of $251 thousand, or ($.00) per share,
for the fiscal year ended June 30, 2006.

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 ($97.8 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 2006
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 2006 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 $795 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.

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 $488 thousand in the fiscal year ended June 30, 2006. The
increase of cash usage was due primarily to the extinguishment of debt in the
amount of $368 thousand and accruals being purged, amounting to $78 thousand.

Investing activities provided no cash during the fiscal year ended June 30,
2005. During the fiscal year ended June 30, 2006, we received short term notes,
to assist in continuing operations, of $475 thousand. The term and details of
those notes are yet to be determined. We are, however, accruing on our financial
statements the obligation to repay the loans, together with interest at an
imputed interest rate for accounting purposes.

As of June 30, 2006, we believed that we had sufficient liquidity to sustain
current operations for three to four months. We continue to engage in
discussions with prospective sources of equity capital. To restore operations to
former levels, we must secure additional funding. As of June 30, 2006, our
current monthly cash outlay rate was approximately $35 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, 2006, we hold six notes totaling $895
thousand. No payment schedule has been determined for repayment.

                                       25



<PAGE>

As of June 30, 2006 we have 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, 10) market acceptance of our products and the
cost of obtaining acceptance, and 11) inflation costs.

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. Since June 30,
2002, we have reduced our monthly cash outlays from $1.1 million to
approximately $35 thousand, primarily through the following actions: a) we
reduced staff from 72 employees to one employee and eliminated all benefit
programs; b) we eliminated regional trade shows and related marketing expenses;
c) we consolidated our Bales Scientific facility into our Ogden, Utah facility;
d) eliminated research and development activities; and e) we decreased
manufacturing and production expenditures to service work only.

Given our need to raise capital to fund our operations, our history of losses
($97.2 million since inception), and the risk of pending or future litigation,
our independent auditor's opinion dated September 2006 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 2006 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, $1.32million
through a private issuance of restricted stock, $660 thousand from the NanDa
License Agreement and $795 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. 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, 2006 there were no new accounting pronouncements
that had a material effect on our operations or financial condition.

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in Statement of
Financial Accounting Standards No. 123. This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Management believes the adoption of this statement will have no impact
on the financial statements of the Company.

FASB 123r will not take effect for CTI until the quarter ending September 30,
2006 of fiscal year 2007.

                                       26



<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                       28


Consolidated Balance Sheets as of June 30, 2006 and 2005                      29


Consolidated Statements of Operations for the years ended June 30,
2006 and 2005.                                                                30


Consolidated Statements of Stockholders' Equity/Deficit for the
years ended June 30, 2006 and 2005                                            31


Consolidated Statements of Cash Flows for the years ended
June 30, 2006 and 2005                                                        32


Notes to Consolidated Financial Statements                                    33



                                       27



<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, 2006 and 2005 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended June 30, 2006 and 2005. 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, 2006 and 2005 and the consolidated
results of their operations and their cash flows for the years ended 2006 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, 2006 of $2.2 million. Together these
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


HJ & Associates, LLC
Salt Lake City, Utah
September 25, 2006

                                       28



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


                                                                       JUNE 30,           JUNE 30,
ASSETS                                                                   2006               2005

CURRENT ASSETS:
<S>                                                                 <C>                <C>
 Cash and cash equivalents                                          $     39,075       $     51,688
 Accounts Receivable - trade, less allowance for doubtful
  accounts of $1,701 on June 30, 2006                                      3,157                 40
 Inventories                                                              58,857             87,276
 Prepaids expenses                                                        33,809             33,809
                                                                    --------------------------------
    Total current assets                                                 134,898            172,813
                                                                    --------------------------------

NET PROPERTY PLANT & EQUIPMENT (Net)                                       5,834              7,525
                                                                    --------------------------------

INTANGIBLE ASSETS:
  Intellectual property rights, less accumulated amortization
  of $22,769 and $20,107 respectfully        8                            10,078             12,740
                                                                    --------------------------------

TOTAL ASSETS                                                        $    150,810       $    193,078
                                                                    ================================

LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
 Accounts Payable                                                   $    163,507       $    544,694
 Accounts Payable - Related Party                                         47,782             13,351
 Other Accrued Liabilities                                               279,956            374,412
 Accrued Employee Liabilities                                            322,321            180,850
 Short-term Note Payable with interest                                   824,388            312,524
 Short-term Note Payable with interest - Related Party                    22,567             21,367
 Deferred Revenue                                                        660,000            669,991
                                                                    --------------------------------
     Total Current Liabilities                                         2,320,521          2,117,189
                                                                    --------------------------------
LONG-TERM NOTE PAYABLE                                                   119,183            114,181
                                                                    --------------------------------
TOTAL LIABILITIES                                                      2,439,704          2,231,370
                                                                    --------------------------------

STOCKHOLDERS' EQUITY (DEFICIT)
 Convertible preferred stock, $5.00 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, 2006 and June 30, 2005, respectively                         114,562            114,562
 Additional paid-in capital                                           95,462,474         95,462,474
 Deficit accumulated                                                 (97,865,930)       (97,615,328)
                                                                    --------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                  (2,288,894)        (2,038,292)
                                                                    --------------------------------
TOTAL LIABILITIES & STOCKHOLDERS'  EQUITY (DEFICIT)                 $    150,810       $    193,078
                                                                    ================================

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

                                                 29



<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                 YEARS ENDED JUNE 30
Revenue                                        2006               2005
                                          ----------------------------------
PS                                        $      49,819       $      82,652
TIP                                              11,750              94,570
Turbine                                              --              48,173
Warranty Revenue                                  9,951                  --
Other Services                                    4,192               6,475
Discounts                                            --              (4,995)
Freight                                           1,507               9,097
                                          ----------------------------------
  Net Revenue                                    77,219             235,972


Cost of Sales
  Total Cost of Sales                            33,420             179,090
                                          ----------------------------------
    Gross Margin                          $      43,799       $      56,882
                                          ----------------------------------
Operating Expenses
General & Administration                        692,142             523,079
Sales & Marketing                                    --              23,855
Research & Development                               --             181,878
Depreciation                                      7,239              14,442
Amortization                                      2,662               2,670
                                          ----------------------------------
  Total Depreciation & Amortization               9,901              17,112
                                          ----------------------------------
Litigation settlement                             1,000                  --
                                          ----------------------------------
  Total Operating Expenses                      703,043             745,924
                                          ----------------------------------

OPERATING  (LOSS)                         $    (659,244)      $    (689,042)
                                          ==================================
Other Income / Expense
Interest Income                                   2,988                 118
Interest Expense                                (43,485)            (20,320)
Other income                                      2,744                  --
Gain from Extinguishment of Debt                446,465                  --
Other Expense                                       (70)                 51
                                          ----------------------------------
Total Other Income /( Expense)                  408,642             (20,151)
                                          ----------------------------------
                          Net (Loss)      $    (250,602)      $    (709,193)
                                          ==================================
WEIGHTED AVERAGE SHARES
  OUTSTANDING                               114,561,698         114,561,698
                                          ==================================

BASIC LOSS PER COMMON SHARE               $       (0.00)      $       (0.01)
                                          ==================================

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

                                       30



<PAGE>

                                           COMPUTERIZED THERMAL IMAGING, INC.
                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                       FOR THE YEARS ENDED JUNE 30, 2006 AND 2005


                                                                      Additional
                                   COMMON STOCK                     PAID-IN        ACCUMULATED
                                      SHARES         AMOUNT         CAPITAL          DEFICIT           TOTAL
                                  --------------------------------------------------------------------------------
Balance at June 30, 2004             114,561,698     $ 114,562     $ 95,454,274      $(96,906,135)    $ (1,337,299)
Intrinsic 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)
                                  --------------------------------------------------------------------------------
Net Loss                                       -             -                -          (250,602)        (250,602)
                                  --------------------------------------------------------------------------------
Balance at June 30, 2006             114,561,698     $ 114,562     $ 95,462,474      $(97,865,930)    $ (2,288,894)
                                  =================================================================================

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

                                                           31



<PAGE>

                                 COMPUTERIZED THERMAL IMAGING, INC.
                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                       YEAR             YEAR
                                                                       ENDED            ENDED
                                                                      30-JUN           30-JUN
                                                                     --------------------------
                                                                       2006             2005
                                                                     ---------       ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net profit/loss                                                    $(250,602)      $(709,193)
  Depreciation and amortization                                          9,901          17,113
  Common stock, warrants, and options issued
    as compensation for services                                            --           8,200
  Impairment loss and loss on disposition of assets                     (5,548)         13,990
  Changes in operating assets and liabilities:
    Accounts receivable - trade                                         (3,117)         53,289
    Accounts receivable - other                                             --           1,391
    Inventories                                                         28,420         173,055
    Prepaid expenses                                                        --          57,663
    Accounts payable                                                  (381,188)         32,152
    Accounts payable - related parties                                  34,431          13,351
    Other accrued liabilities                                          (51,390)         (6,730)
    Accrued employee liabilities                                       141,471         151,660
    Deferred revenues                                                   (9,991)        (23,208)
                                                                     ---------       ----------
           Net cash used in operating activities                      (487,613)       (217,267)
                                                                     ---------       ----------

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

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan                                                     475,000         100,000
                                                                     ---------       ---------
           Net cash provided by financing activities                   475,000         100,000
                                                                     ---------       ---------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                 (12,613)       (117,267)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                                   51,688         168,955
                                                                     ---------       ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $  39,075       $  51,688
                                                                     =========       =========

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

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

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

                                            32



<PAGE>

                       COMPUTERIZED THERMAL IMAGING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
                   ------------------------------------------

           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, 2006, of $97.8 million. 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
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.

                                       33



<PAGE>

Management of the Company has taken certain actions in response to these risk
factors. Management believes that regulatory approval is contingent upon, among
other things, successful negotiations and resolution to FDA concerns and a
device panel review and an audit of the Company's manufacturing and clinical
trial practices. The Company cannot guarantee whether or when the FDA 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, Inc. ("CTI"), 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. These estimates do not take
into consideration the effects of inflation.

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.

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-- 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:

                                       34



<PAGE>

    o   PAIN MANAGEMENT--THERMAL IMAGE PROCESSORS: Our Thermal Image Processor
        (or "TIP,") measures 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 pain
        and soft-tissue related injuries. 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   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.

    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

    o   TURBINE BLADE INSPECTION SYSTEM: Our Turbine Blade Inspection System
        (the "TBIS") is a quality assurance tool which 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.

The primary target markets for our pain management products consist of 120,000
physical therapists, pain management practitioners, 17,500 orthopedic and sports
medicine practitioners, occupational therapists, and chiropractors 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.

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.

                                       35



<PAGE>

As of June 30, 2006 the Company held $660 thousand in deferred revenues from
Nanda licensing and manufacturing agreements. Deferred revenues on June 30, 2005
were 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 warranties consist of a predetermined portion of the revenue from sales
of products. A portion is claimed each financial period as deferred revenue to
match against any costs of warranty work completed during this period.

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

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

RESEARCH AND DEVELOPMENT EXPENSES--The Company expenses as incurred the direct,
indirect, and purchased research and development costs associated with its
products. Because of the financial condition of the company no research and
development expenses were incurred for the year ended June 30, 2006, while
approximately $181 thousand were incurred for the year ended June 30, 2005.

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 year 2005 with no
impairments for 2006.

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-- Throughout the fiscal year ending June
30, 2006, the Company received $475 thousand in the form of a short term loan to
assist in operations. 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. Accrued liabilities consisted of the following on June 30,
2006.

                                       36



<PAGE>
<TABLE>

------------------------------------------------------------------------------------
                                                                            ACCRUED
                                                                           INTEREST
                                                                           JUNE 30,
SHORT TERM DEBT                                             PRINCIPAL      2006
------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
Note payable to an individual, payable on demand, bearing
an imputed interest rate of 6%, unsecured                   $ 200,000      $ 24,522
------------------------------------------------------------------------------------
Note payable to an entity, payable on demand, bearing an
imputed interest rate of 6%, unsecured                        100,000         6,478
------------------------------------------------------------------------------------
Note payable to an entity, payable on demand, bearing an
imputed interest rate of 6%, unsecured                        325,000        16,883
------------------------------------------------------------------------------------
Note payable to an entity, payable on demand, bearing an
imputed interest rate of 6%, unsecured                        150,000         1,504
------------------------------------------------------------------------------------
SHORT TERM DEBT - RELATED PARTY
------------------------------------------------------------------------------------
Note payable to an individual, payable on demand.  bearing
an imputed interest rate of 6%, unsecured                      20,000         2,568
------------------------------------------------------------------------------------
TOTAL SHORT TERM DEBT                                         795,000        51,955
------------------------------------------------------------------------------------
LONG TERM DEBT
------------------------------------------------------------------------------------
Note payable to an entity, payable in 2010, bearing an
interest rate of 6%, unsecured                                100,000        19,183
------------------------------------------------------------------------------------
TOTAL LONGTERM DEBT                                           100,000        19,183
------------------------------------------------------------------------------------
TOTAL SHORT AND LONG TERM DEBT                              $ 895,000      $ 71,138
------------------------------------------------------------------------------------

</TABLE>

Accrued employee costs for the fiscal period ending June 30, 2006 was $322
thousand compared to $180 thousand for the fiscal period ending June 30, 2005.
The $142 thousand increase is due to the accrual of wages for the CEO who has
been accepting reduced wages because of the financial condition of the company.
Accrued vacation was reduced due to the fact we have lost another employee,
therefore vacation accruals were reduced for the fiscal year ending June 30,
2006.

On June 30, 2006, accruals for legal and professional expenses were eliminated.
The need for these accruals is no longer required. The Company has reduced
legal, professional and audit fees to a minimum. Accrued legal of $57 thousand
and professional services of $6 thousand were included in legal and audit
accruals. Because of this action, accrued legal and professional fees have been
reduced by $63 thousand from fiscal year ending 2005 to June 30, 2006.

The major portion of other accrued liabilities for fiscal year ending June 30,
2005 in the amount of $256 thousand is Pratt and Whitey. As of June 30, 2006, 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. At
the time of this reporting there has been no correspondence or communications
with Pratt and Whitney in reference to this issue within the fiscal year ending
June 30, 2006.

                                       37



<PAGE>

<TABLE>
--------------------------------------------------------------------------------
                                                            2006          2005
--------------------------------------------------------------------------------
<S>                                                       <C>           <C>
 Accrued Bonuses                                          $     --      $     --
--------------------------------------------------------------------------------
 Accrued Vacation                                           15,878        17,992
--------------------------------------------------------------------------------
 Other Accrued Employee Costs                              322,321       180,850
--------------------------------------------------------------------------------
 Accrued Legal and Professional Services                        --        63,060
--------------------------------------------------------------------------------
 Other Accrued Liabilities                                 264,077       293,360
--------------------------------------------------------------------------------
 Total Accrued Liabilities                                 602,276       555,262
--------------------------------------------------------------------------------
 Imputed Interest Payable                                   51,956        13,891
--------------------------------------------------------------------------------
 Short-term Notes Payable                                  795,000       320,000
--------------------------------------------------------------------------------
 Total Short-term Notes Payable                            846,956       333,891
--------------------------------------------------------------------------------
 Imputed Interest Payable                                   19,183        14,181
--------------------------------------------------------------------------------
 Long-term Notes Payable                                   100,000       100,000
--------------------------------------------------------------------------------
 Total Long-term Notes Payable                            $119,183      $114,181
--------------------------------------------------------------------------------

</TABLE>

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. Options to
purchase 3.33 million and 3.6 million shares of common stock and warrants to
purchase 0 and 740 thousand shares were outstanding at June 30, 2006 and 2005,
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, 2006 and 2005, the Company did not adopt any new accounting pronouncements.

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in Statement of
Financial Accounting Standards No. 123. This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Management believes the adoption of this statement will have no impact
on the financial statements of the Company.

FASB 123r will not take effect for CTI until the quarter ending September 30,
2006 of fiscal year 2007.

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

2. ACCOUNTS RECEIVABLE

Accounts receivable consist of products and services provided to customers.
Under most circumstances credit is not issued to our customers. Because of our
financial condition we require payment before shipment of products and before
services are performed. On occasion we have issued credit to our preferred
distributors. Accounts receivable were $4,858 as of June 30, 2006. Since that
time we have received payments of $3,157.

Doubtful receivables consist of amounts from accounts receivable where
collection is questionable due to various circumstances. As of June 30, 2006
this included $1,701 which was outstanding in receivables for a contested
amount due from one of our preferred distributors.

                                       38



<PAGE>

3.       INVENTORIES

Inventories consisted of the following on June 30, 2006 and 2005:

                                         JUNE 30,       JUNE 30,
                                          2006           2005
                                        ---------      ---------
                 Raw materials            428,356      $ 536,053
                  Inventory reserve      (529,701)      (639,664)
                  Work-in process          31,900             --
                  Finished goods          128,300        190,887
                                        ---------      ---------
                  Total                 $  58,856      $  87,276
                                        =========      =========

Finished goods inventories include approximately $105 thousand in TIP cameras
and $23 thousand in Photonic Stimulators on June 30, 2006. Minor work,
consisting of $32 thousand, was in progress at fiscal year end 2006. Raw
materials inventory was approximately $428 thousand and $536 thousand for the
years ending June 30, 2006 and 2005 respectively. The inventory reserve
represents the impairment and obsolescence adjustments to inventory.

Inventory and commitments are based upon future demand forecasts. During fiscal
2005, the Company impaired the inventory 88%. For fiscal year 2006, inventory
levels were impaired 90%. 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, 2006 and 2005:


-------------------------------------------------------------------------------
                                                            2006        2005
-------------------------------------------------------------------------------
Leasehold Improvements                                         --            --
-------------------------------------------------------------------------------
Office Furniture & Fixtures                                38,421        38,421
-------------------------------------------------------------------------------
Machinery & Equipment                                     415,108       409,618
-------------------------------------------------------------------------------

                                                          453,529       448,039
-------------------------------------------------------------------------------
Less Accumulated Depreciation                            (447,695)     (440,514)
-------------------------------------------------------------------------------
Property & Equipment, Net                               $   5,834     $   7,525
-------------------------------------------------------------------------------

Depreciation expense for the years ended June 30, 2006 and 2005 was
approximately $7 thousand and $14 thousand, respectively.

As of June 30, 2006, 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.

In fiscal year 2005 the Company fully impaired a Turbine Blade Test System worth
$147,390 and held by Pratt & Whitney. The equipment was due to be sold to Pratt
& Whitney. However due to lack of financing the Company was not able to get the
equipment to work properly and Pratt & Whitney has asked that the equipment be
removed. There were no impairments in fiscal year 2006. Impairment losses
related to property, plant, & equipment are aggregated in the income statement
line General & Administration.

                                       39



<PAGE>

5. INTANGIBLE ASSETS

Intangible assets are our patent rights and consisted of the following at June
30, 2006 and 2005:

------------------------------------------------------------------------------
                                                         2006        2005
------------------------------------------------------------------------------
Intellectual Property Rights                           $ 32,847       $ 32,847
------------------------------------------------------------------------------
Less Accumulated Amortization                           (22,769)       (20,107)
------------------------------------------------------------------------------
Net Intangible Assets                                  $ 10,078       $ 12,740
------------------------------------------------------------------------------

The intangible assets, intellectual properties, are amortized over a ten year
period using the straight line method - therefore we have 4 more years off
amortization at almost $2,500 per year. 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
questions 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 no additional
impairment was required for the fiscal years ending June 30, 2006 and 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. Due to the
Company filing an extension for income tax filings we lack the information for
deferred taxes. However, at June 30, 2006, for federal income tax and
alternative minimum tax reporting purposes, the Company had approximately $61
million of unused net operating losses available for carry forward to future
years. The benefit from carry forward of such net operating losses will expire
in various years between 2006 and 2025 and could be subject to severe
limitations if significant ownership changes occur in the Company.

Net deferred tax assets consist of the following components as of June 30, 2006
and 2005:

                                                 2006                   2005
                                             ------------          ------------
Deferred Tax Assets
      NOL Carry Over                         $ 29,840,593          $ 29,791,814
      Research Credit                           2,193,864             2,193,864
      Accrued Compensation                        131,898                70,532
      Deferred Revenue                            777,693               298,204
      Allowance                                       663                    --
Valuation Allowance                          $(32,944,711)         $(32,354,414)
                                             ------------          ------------
Net Deferred Tax Asset                       $         --          $         --

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, 2006 and 2005 due to the
following

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, 2006 and 2005 due to the
following

                                                        2006             2005
                                                     ---------        ---------
Book Income                                          $ (97,735)       $(276,585)
                                                     ---------        ---------
Other                                                                        --
Non-deductible Meals & Entertainment                       322              215
Penalties                                                   43              577
Office Life Insurance Premiums                              --            2,287
                                                     ---------        ---------
Valuation Allowance                                  $  97,370        $ 273,506
                                                     $      --        $      --


                                       40


<PAGE>

On June 30, 2006, the Company had net operating loss carry-forwards of
approximately $76 million that may be offset against future taxable income from
the year 2006 through 2025. No tax benefit has been reported in the June 30,
2006 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

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 $70 thousand and $71
thousand for the years ended June 30, 2006 and 2005, respectively.

During June 2006, the terms stated in the previous agreement (effective December
2004 to June 2006) were renewed on a month to month basis with Silver Creek
Engineering. The company has 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 manufacturing plant and office and $81 for the
storage unit.

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

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

8. STOCKHOLDERS' EQUITY

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

The Company had no preferred stock outstanding as of June 30, 2006 and 2005.

9. STOCK WARRANTS AND OPTIONS

WARRANTS--A summary of warrant activity for the period from July 1, 2005,
through June 30, 2006 is as follows:


                                                # SHARES          EXERCISE PRICE
                                              -------------       --------------
                    Balance at                    6,459,096        $1.87 - $5.00
                                              =============
                    June 30, 2004

                    Exercised                            --
                    Granted
                    Forfeited                    (5,718,070)       $5.00

 Balance at June 30, 2005                           741,026        $1.87 - $1.95
                                              =============

                    Exercised                            --
                    Granted                              --
                    Forfeited                      (741,026)       $1.87 - $1.95
                                              =============

 Balance at June 30, 2006                                --


                                       41


<PAGE>

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 3,105,000 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 6,605,000 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 240,000
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 did not grant any stock options to employees
during the period July 1, 2005, through June 30, 2006:


<TABLE>
EMPLOYEE                     OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
--------                     -------------------                          -------------------
                                           WEIGHTED
                                           AVERAGE       WEIGHTED                       WEIGHTED
                                           REMAINING     AVERAGE                        AVERAGE
                            NUMBER         CONTRACT      EXERCISE        NUMBER         EXERCISE
RANGE OF EXERCISE PRICE     OUTSTANDING    LIFE          PRICE           EXCERCISABLE   PRICE
------------------------------------------------------------------------------------------------
<C>    <C>                   <C>           <C>           <C>               <C>          <C>
$.10 - $.22                  355,000       3.8           $0.12             355,000      $0.12
$1.25                        2,000,000     1             $1.25             2,000,000    $1.25
$1.50                        750,000       4.8           $1.50             750,000      $1.50
$.10 - $1.50                 3,105,000     2.28          $1.09             3,105,000    $1.09
</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, 2006 the Company did not re-price
any options. 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:

                                                        2006              2005
                                                      ---------        ---------
Net income /(loss):
  Pro forma                                           (250,602)        (709,193)
                                                      ---------        ---------
Basic and diluted loss per common share:
Pro forma                                                (0.00)           (0.01)
                                                      ---------        ---------

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
2006 and 2005:

 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 2006


                                       42


<PAGE>

NON-EMPLOYEE STOCK OPTIONS--Changes in stock options issued to non-employees are
as follows for the year ended June 30, 2006. Add 2005 roll forward

                                         2006                 2005
                                         ----                 ----
OUTSIDE PLAN                             SHARES       WAP     SHARES       WAP
------------                             ------       ---     ------       ---

Outstanding at beginning of year         265,000      $0.99   265,000      $0.99
Granted                                   -                   -
Excercised                                -                   -
Forfeited                                -25,000      $1.55   -
                                         -------
Outstanding at end of year               240,000      $0.96   265,000      $0.99
                                         -------              -------
Options exercisable at year end          240,000              265,000      $0.99
                                         =======              =======
Weighted average fair value of
options granted during the year           -                   -


                                                  2006        2005
                                                WEIGHTED    WEIGHTED
                                                 AVERAGE    AVERAGE
TOTAL OPTIONS                                   EXERCISE    EXERCISE
IN PLAN - OUTSIDE PLAN                SHARES      PRICE      SHARES      PRICE
                                    ----------  ---------  ----------  ---------
 Outstanding at beginning of year    3,643,932       1.11   3,552,023       1.27

Granted                                     --         --   2,560,000       0.10
                                    ----------  ---------  ----------  ---------
Exercised                                   --         --          --         --

Forfeited                             (298,932)      1.08  (2,468,091)    106.00
                                    ----------  ---------  ----------  ---------
Outstanding at end of year           3,345,000       1.81   3,643,932       1.13
                                    ----------  ---------  ----------  ---------

Options exercisable at year end      3,345,000         --   3,643,932         --
                                    ==========  =========  ==========  =========

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 2006, 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:


                                       43


<PAGE>

                     2006                            2005
                    Medical   Industrial    Total   Medical   Industrial   Total
Product Revenue      $ 28       $ --        $ 28      $ 72      $ 29        $101
Service Revenue      $ 49       $ --        $ 49      $ 64      $ 71        $135
Total Revenue        $ 77       $ --        $ 77      $136      $100        $236


MEDICAL                 Percentage              Dollars
Fiscal Year             USA          Canada     USA         Canada      Total
2006                    73%          27%        $ 59        $ 18        $ 77
2005                    74%          26%        $100        $ 36        $136

INDUSTRIAL            Percentage              Dollars
Fiscal Year           USA             UK        USA        UK             Total
2006                   0%             0%        $  -      $   -           $   -
2005                   0%             100%      $  -      $ 100           $ 100


12.DEFERRED REVENUES

As of June 30, 2006 the Company held $660 thousand in deferred revenues which
consisted of the NanDa licensing and manufacturing agreement. Deferred revenues
on June 30, 2005 were approximately $669 thousand and included $660 thousand of
deferred revenues from the NanDa licensing and manufacturing agreement, and $9
thousand of deferred warranty.

Deferred warranties consist of a predetermined portion of the revenue from each
sale set aside as warranty revenue. A portion is claimed each financial period
as deferred revenue to match against any costs of warranty work completed during
this period. Warranty revenue, which is not significant, is recognized ratably
over the period of the agreement as services are provided. Until such time as to
recognize the revenue it is referred to as deferred warranty revenue.

Deferred revenues as of June 30, 2006 were $660 thousand while 2005 contained
the following balances from significant customers:


DEFERRED REVENUES

                                                      30-JUN             30-JUN
                                                       2006               2005
                                                     --------           --------
Medical Products                                           --                 --
Nanda Licensing                                       660,000            660,000
Industrial Products                                        --                 --
Warranty Revenue                                           --              9,951
                                                     --------           --------
Total Deferred Revenue                               $660,000           $669,951

13.OTHER INCOME AND EXPENSE

Interest income increased in fiscal year ending June 30, 2006 $2,870 due to the
availability of funds from loans to invest bearing interest until such Tim as it
was needed for daily operation expenses. Interest expense more than doubled from
$20 thousand to over $43 thousand due to addition of two notes payable and late
payments on vendor accounts. Other income for 2006 is a gain on sale of assets,
specifically office equipment and salvage wire.

                                                      2006               2005
                                                   ---------          ---------
Interest Income                                        2,988                118
Interest Expense                                     (43,485)           (20,320)
Other income                                           2,744                 --
Gain from Extinguishment of Debt                     446,465                 --
Other Expense                                            (70)                51
                                                   ---------          ---------
Total Other Income /(Expense)                      $ 408,642          $ (20,151)


                                       44


<PAGE>

During fiscal year ending June 30, 2006, a gain on extinguishment of debt was
recorded as follows:


STATUTE OF LIMITATIONS - NON- RECEIPT OF SERVICES FROM THREE VENDORS    $358,945
Legal accrual                        No longer required                   40,000
Legal class action fee accrual       No longer required                   16,783
Clinical trials accrual              No longer required                    9,500
Audit fee accrual                    No longer required                    6,277
Property tax accrual                 No longer required                    5,987
EXPUNGED ACCRUALS                                                         78,547
SETTLEMENTS WITH VENDORS             Reduced balance owed on account       8,973
                                                                        --------
GAIN ON EXTINGUISHMENT OF DEBTS                                         $446,465

14.COST OF GOODS SOLD

Total cost of goods sold for fiscal 2006 was $33 thousand, compared to $179
thousand in fiscal 2005, an 81% decrease in dollar value. Cost of goods consist
of $52 thousand in materials for fiscal year ending June 30,2006 compared to $28
thousand for fiscal year ending June 30, 2005. Materials include any and all
components used in the repair and/or service of the units. Physical
discrepancies include the adjustments to the inventory to correct the actual
count and costs in 2005 and again in 2006. In 2005 there was a major adjustment
of $129 thousand where in 2006 the inventory adjustment totaled $26 thousand a
79% decrease. The $129 thousand adjustment in 2005 was due a significantly lower
inventory count than was originally thought. During 2006, we impaired the
complete BCS inventory due to the lack of approval from the FDA for the BCS
2100. Impairment gains of$58 thousand were due to the reversal of previous
impairments. We evaluate our property, plant and equipment for impairment when
indicators of Impairment exist. For fiscal year 2005 we recorded an impairment
of equipment for $14 thousand. This consisted primarily of BCS inventory.

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.

Gross margins and cost of revenues as a percentage of sales for the fiscal years
ended June 30, 2006 and 2005 were:

                         TOTAL SALES    PERCENTAGE     TOTAL SALES    PERCENTAGE
                           2006          OF SALES         2005         OF SALES
Net Revenue                77,219         100%          235,972         100%
Cost of Goods Sold         33,420          43%          179,090          76%
Gross Margin             $ 43,799          57%         $ 56,882          24%


15.FOURTH QUARTER LOSS RECOGNITION

Pursuant to APB 28, "Interim Financial Reporting", the following is a
reconciliation of the net gain as reported in the Company's March 31, 2006
consolidated financial statements to the net gain as recorded at June 30, 2006.


Net Income March 31, 2006                                             $ 521,521
4th Quarter Accrued Payroll                                             (33,228)
4th Quarter Accrued Legal Fees                                           40,000
4th Quarter adjustments and general
   loss from operations                                                (778,895)
Net Loss reported June 30, 2006                                       $(250,602)


                                       45


<PAGE>

The Company reversed the recognition of the Nanda revenue of $660,000 which had
been recognized in the 3rd quarter because it had not yet sent a termination
notice. The termination notice was sent on September 25, 2006. If Nanda does not
cure the defaults in 30 days, the Company will recognize the $660,000 of
deferred revenue.

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, 2006.
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.

ITEM 8B. OTHER INFORMATION

None.

PART III
--------

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

<TABLE>

DIRECTORS                   AGE         POSITION                         DIRECTOR SINCE
---------                   ---         --------                         --------------
<S>                         <C>         <C>                              <C>
Richard V. Secord           74          Chairman of the Board, Chief     1996
                                        Executive Officer

Brent M. Pratley, M.D       71          Director                         1995

Milton R. Geilmann          83          Director                         1998

Harry C. Aderholt           86          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.


                                       46


<PAGE>

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.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
                                                          Long Term Compensation
                 Annual Compensation                      Awards                    Payouts
Name and         Fiscal   Salary    Bonus  Other Annual   Restricted   Securities   LTIP      All other
principal        Year                      compensation   Stock Award  Underlying   Payouts   Compensation
Position                                    (2)                         Option
----------------------------------------------------------------------------------------------------------
<S>              <C>                       <C>
Richard V.       2006     210,000    -        350          -            -            -               -
Secord
Chairman,        2005     210,000    -     10,200          -            -            -               -
Chief
Executive
Officer (1)
                 2004     210,000    -     32,400          -           25,000        -               -
                 2003     210,000    -     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. For the fiscal periods ending June 30, 2006, 2005 and 2004
Richard V. Secord received salaries of $71,500, $31,544 and $90,000 respectively
with remaining balances being accrued.

(2) Other Annual Compensation includes car allowance. For our Chief Executive
Officer, Other Annual Compensation during the fiscal year ended June 30, 2005
consisted of one quarter of life insurance premiums paid, in the amount of
$6,000 and six months of car allowance. During the fiscal year ended June 30,
2006, we paid $350 in car allowance and no life insurance premiums were paid for
our Chief Executive Officer.


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, 2005 and 2006, 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.


                                       47


<PAGE>

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.

OPTION GRANTS IN LAST FISCAL YEAR

During the fiscal year ending June 30, 2006 no grants were made to executive
officers.

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, 2006. No options were exercised by our Chief
Executive Officer or any other executive officers during the year ended June 30,
2006.

<TABLE>

                                                        NUMBER OF SECURITIES
                                        UNDERLYING UNEXERCISED OPTIONS       VALUE OF UNEXERCISED
                       SECURITIES     AGGREGATE                  AT                   IN-THE-MONEY OPTIONS AT
                        ACQUIRED        VALUE               JUNE 30, 2006                  JUNE 30, 2006
                       ON EXERCISE     REALIZED     EXERCISABLE     UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
  NAME AND POSITION        (#)           ($)          (#)              (#)             ($)               ($)
--------------------------------------------------------------------------------------------------------------------
<S>                         <C>           <C>        <C>                  <C>         <C>                 <C>
Richard V. Secord,
Chairman and Chief
Executive Officer           0             0          2,775,000            0           $333,000            0
--------------------------------------------------------------------------------------------------------------------

On June 30, 2006, the closing sale price for a share of our common stock on the
OTC Bulletin Board was $0.12.

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

The following table sets forth, as of June 30, 2006, 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.


Title of          Name and Address of                         Amount & Nature of     Percentage of
Class             Beneficial owner                            Beneficial owner           Class
--------------------------------------------------------------------------------------------------
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


                                       48


<PAGE>

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
2006, 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).
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


                                       49


<PAGE>

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-QSB were approximately $27,000 for the fiscal year
ended June 30, 2006 and $26,367 the fiscal year ended June 30, 2005.

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 $0 in the fiscal years ended June 30, 2006 and 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 the fiscal years
ended June 30, 2006 and 2005.

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, 2006, 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.


                                       50


<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: September 27, 2006                     /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                                         September 27, 2006
------------------------------------------------------
RICHARD V. SECORD
Director, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)


/s/ Richard V. Secord                                         September 27, 2006
------------------------------------------------------
RICHARD V. SECORD
Acting Chief Financial Officer (Principal Financial
Officer)


/s/ BRENT M. PRATLEY, M.D.                                    September 27, 2006
------------------------------------------------------
BRENT M. PRATLEY, M.D.
Director


/s/ MILTON R. GEILMANN                                        September 27, 2006
------------------------------------------------------
MILTON R. GEILMANN
Director


/s/ HARRY C. ADERHOLT                                         September 27, 2006
------------------------------------------------------
HARRY C. ADERHOLT
Director


                                       51