f                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

  /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

                                     OF 1934

                 For the quarterly period ended January 31, 2005

   // TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE

                                   ACT OF 1934

             For the transition period from __________ to __________

                        Commission file number: 0 - 32093

                           HIENERGY TECHNOLOGIES, INC.
                           ---------------------------
        (Exact name of small business issuer as specified in its charter)

                 Delaware                                 91-2022980
                 --------                                 ----------
       State or other jurisdiction of          (IRS Employer Identification No.)
       incorporation or organization

                 1601-B Alton Parkway, Irvine, California 92606
                 ----------------------------------------------
                    (Address of principal executive offices)

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

              (Former name, former address and former fiscal year,
                         if changed since last report.)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 / /

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 17, 2005, the issuer had
45,691,208 shares of Common Stock, par value $0.001 per share, issued and
outstanding.

Transitional Small Business Disclosure Format (Check one): Yes / / No /X/

<PAGE>

                           HIENERGY TECHNOLOGIES, INC.

                                    Index to

                         Quarterly Report on Form 10-QSB

                      For the Period Ended January 31, 2005

                         PART I - FINANCIAL INFORMATION
                         ------------------------------
                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION                                                 2

Item 1 Financial Statements

       Consolidated Balance Sheets as of April 30, 2004 and
       January 31, 2005 (unaudited)                                            3

       Consolidated Statements of Operations for the nine months
       ended January 31, 2005 and 2004 (unaudited) and for the
       period from August 21, 1995 (inception) to January 31, 2005
       (unaudited)                                                             4

       Consolidated Statements of Shareholders' Equity (Deficit)
       for the period from August 21, 1995 (inception) to
       January 31, 2005 (unaudited)                                            4

       Consolidated Statements of Cash Flows for the nine months
       ended January 31, 2005 and 2004 (unaudited) and for the
       period from August 21, 1995 (inception) to January 31, 2005
       (unaudited)                                                            15

       Notes to the Consolidated Financial Statements (unaudited)             18

Item 2 Management's Discussion and Analysis and Plan of Operation             48

Item 3 Controls and Procedures                                                84

PART II - OTHER INFORMATION                                                   85

Item 1 Legal Proceedings                                                      85

Item 2 Changes in Securities                                                  87

Item 6 Exhibits                                                               88

SIGNATURES                                                                    95

                                       2
<PAGE>

                                   HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                  (DEVELOPMENT STAGE COMPANIES)
                                                     CONSOLIDATED BALANCE SHEET
                      FOR THE PERIODS ENDED JANUARY 31, 2005 AND APRIL 30, 2004
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                     January 31,        April 30,
                                                                                                        2005               2004
                                                                                                    (unaudited)
                                                                                                    ------------       ------------
<S>                                                                                                 <C>                <C>
CURRENT ASSETS
            Cash and cash equivalents                                                               $    547,597       $     42,857
            Accounts receivable                                                                          152,491             30,412
            Inventory                                                                                    589,713                 --
            Other current assets                                                                         422,384            224,817
                                                                                                    ------------       ------------

                      Total current assets                                                             1,712,185            298,086
                                                                                                    ------------       ------------

PROPERTY AND EQUIPMENT, net                                                                              603,272            610,468
                                                                                                    ------------       ------------

TOTAL ASSETS                                                                                        $  2,315,457       $    908,554
                                                                                                    ============       ============



CURRENT LIABILITIES
            Accounts payable                                                                        $    944,451       $    578,283
            Accrued expenses                                                                              59,742             88,291
            Accrued payroll and payroll taxes                                                            453,654            458,204
            Accrued interest                                                                             142,766             74,173
            Notes payable                                                                                 44,522             12,368
            Notes payable - related parties                                                               99,000            348,934
            Convertible notes payable - related parties                                                  673,083            609,374
            Convertible notes payable subject to rescission rights                                       514,800            236,000
            Common stock subject to buy-back,  2,000,000 shares                                          694,000            694,000
            Common stock subject to rescission rights,  2,066,320 shares issued and
            outstanding and 1,955,555 shares committed; and 770,424 shares issued and
            outstanding and 1,295,896 shares committed less $425,000 subscription receivable           1,938,153            633,153
            Other current liabilities                                                                    100,000                 --
                                                                                                    ------------       ------------

                      Total current liabilities                                                        5,664,171          3,732,780

LONG-TERM LIABILITIES
            Notes payable                                                                                  4,098              1,942
            Convertible note payable - related party                                                          --             38,061
                                                                                                    ------------       ------------

                      Total liabilities                                                                5,668,269          3,772,783
                                                                                                    ------------       ------------

MINORITY INTEREST IN SUBSIDIARY,  AS OF APRIL 30, 2004; 20,540 MICRODEVICES
  SHARES ISSUED AND OUTSTANDING                                                                               --             18,923
                                                                                                    ------------       ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT
            Preferred stock,  $0.001 par value  20,000,000 shares
             authorized no shares outstanding                                                       $         --       $         --
            Common stock.  $0.001 par value  100,000,000 shares
              authorized 43,336,742 and 30,652,482 shares issued and outstanding                          39,270             30,652
            Additional paid-in capital                                                                26,320,022         19,181,421
            Deferred compensation                                                                        (60,252)          (459,308)
            Committed common stock,  979,598 and 101,986 shares, respectively                            371,960            179,679
            Deficit accumulated during the development stage                                         (30,023,812)       (21,815,596)
                                                                                                    ------------       ------------

                      Total shareholders' deficit                                                     (3,352,812)        (2,883,152)
                                                                                                    ------------       ------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                         $  2,315,457       $    908,554
                                                                                                    ============       ============
</TABLE>


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




                                       3
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE AND NINE MONTHS ENDED JANAURY 31, 2005 AND 2004 AND
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANAURY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                   For the
                                                                                                                 Period from
                                               For the Three Months Ended        For the Nine Months Ended      August 21, 1995
                                              ----------------------------     -----------------------------    (Inception) to
                                              January 31,      Janaury 31,      January 31,      January 31,     January 31,
                                                2005             2004             2005             2004             2005
                                                               Restated                          Restated
                                             (unaudited)      (unaudited)      (unaudited)      (unaudited)      (unaudited)
                                             ------------     ------------     ------------     ------------     ------------
<S>                                          <C>              <C>              <C>              <C>              <C>
OPERATING EXPENSES
  General and administrative                 $    829,124     $  1,105,716     $  3,704,744     $  3,451,321     $ 19,352,319
  Research and development                        167,720          209,529          602,364          546,606        3,014,473
                                             ------------     ------------     ------------     ------------     ------------

TOTAL OPERATING EXPENSES                          996,844        1,315,245        4,307,108        3,997,927       22,366,792

LOSS FROM OPERATIONS                             (996,844)      (1,315,245)      (4,307,108)      (3,997,927)     (22,366,792)
                                             ------------     ------------     ------------     ------------     ------------

OTHER INCOME (EXPENSE)
  Interest income                                     304              108              459              991            9,356
  Other income                                         --               --            1,423
  Interest expense                                (24,510)        (411,972)        (870,578)        (425,239)      (1,449,551)
  Financing expense                                    --               --               --               --         (223,710)
  Penalty expense on issuance of
   convertible promissory notes
   as a penalty for late registration             (20,000)              --          (26,000)              --          (73,748)
  Penalty expense on issuance of
   common stock and warrants
   as a penalty for late registration            (602,076)        (194,882)      (3,003,303)        (403,825)      (4,476,687)
                                             ------------     ------------     ------------     ------------     ------------

Total other expense, net                         (646,282)        (606,746)      (3,899,422)        (828,073)      (6,212,917)
                                             ------------     ------------     ------------     ------------     ------------

LOSS BEFORE PROVISION FOR INCOME TAXES         (1,643,126)      (1,921,991)      (8,206,530)      (4,826,000)     (28,579,709)

PROVISION FOR INCOME TAXES                          1,686               --            1,686              800           15,069
                                             ------------     ------------     ------------     ------------     ------------

NET LOSS                                     $ (1,644,812)    $ (1,921,991)    $ (8,208,216)    $ (4,826,800)    $(28,594,778)

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

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

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS    $ (1,644,812)    $ (1,921,991)    $ (8,208,216)    $ (5,410,043)    $(30,023,812)
                                             ============     ============     ============     ============     ============


Net loss per share                           $      (0.04)    $      (0.07)    $      (0.24)    $      (0.17)
                                             ============     ============     ============     ============

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

BASIC AND DILUTED LOSS AVAILABLE TO
  COMMON SHAREHOLDERS PER SHARE              $      (0.04)    $      (0.07)    $      (0.24)    $      (0.19)
                                             ============     ============     ============     ============

BASIC AND DILUTED WEIGHTED AVERAGE
  COMMON SHARES OUTSTANDING                    38,018,739       28,985,138       34,072,909       27,800,256
                                             ============     ============     ============     ============

</TABLE>


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



                                       4
<PAGE>


                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, August 21, 1995 (inception)                                                              --      $--
Recapitalization upon reverse merger
Issuance of common stock for services rendered                  08/31/95      $        0.01       --       --
Issuance of common stock for services rendered                  09/05/95      $        0.01       --       --
Issuance of common stock for services rendered                  02/13/96      $        0.01       --       --
Net loss

Balance, April 30, 1996 (Restated)                                                                --       --

Issuance of common stock for services rendered                  12/02/96      $        0.01       --       --
Issuance of common stock for services rendered                  12/16/96      $        0.01       --       --
Issuance of common stock for services rendered                  12/20/96      $        0.01       --       --
Net loss

Balance, April 30, 1997 (Restated)                                                                --       --

Issuance of common stock for services rendered                  05/20/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/02/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/03/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/08/97      $        0.28       --       --
Issuance of common stock for cash                               06/14/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/16/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/18/97      $        0.28       --       --
Issuance of common stock for services rendered                  06/23/97      $        0.28       --       --
Issuance of common stock for services rendered                  07/28/97      $        0.28       --       --
Issuance of common stock for cash                               08/11/97      $        0.14       --       --
Issuance of common stock for cash                               08/19/97      $        0.14       --       --
Issuance of common stock for cash                               09/04/97      $        0.28       --       --
Issuance of common stock for cash                               09/04/97      $        0.35       --       --
Issuance of common stock for cash                               09/12/97      $        0.28       --       --
Issuance of common stock for cash                               10/14/97      $        0.22       --       --
Issuance of common stock for cash                               12/17/97      $        0.14       --       --
Issuance of common stock for cash                               12/17/97      $        0.28       --       --
Issuance of common stock for cash                               12/17/97      $        0.49       --       --
Issuance of common stock for services rendered                  12/31/97      $        0.29       --       --
Issuance of common stock for services rendered                  01/29/98      $        0.28       --       --
Issuance of common stock for cash                               01/30/98      $        0.28       --       --
Issuance of common stock for cash                               03/23/98      $        0.05       --       --
Issuance of common stock for cash                               03/23/98      $        0.28       --       --
Issuance of common stock for cash                               03/25/98      $        0.11       --       --
Issuance of common stock for services rendered                  03/25/98      $        0.22       --       --
Issuance of common stock for cash                               03/25/98      $        0.28       --       --
Issuance of common stock for services rendered                  04/04/98      $        0.22       --       --
Issuance of common stock for services rendered                  04/14/98      $        0.22       --       --
Issuance of common stock for services rendered                  04/28/98      $        0.22       --       --
Net loss
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                     Additional         Committed
                                                                           Common Stock               Paid-in             Common
                                                                    Shares             Amount         Capital             Stock
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>                <C>
Balance, August 21, 1995 (inception)                                      --      $         --      $         --       $      --
Recapitalization upon reverse merger                               6,470,000             6,470            (6,456)             --
Issuance of common stock for services rendered                       715,277               715             7,297              --
Issuance of common stock for services rendered                        11,623                12               118              --
Issuance of common stock for services rendered                         7,871                 8                80              --
Net loss

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

Issuance of common stock for services rendered                         1,162                 1                11              --
Issuance of common stock for services rendered                         1,788                 2                19              --
Issuance of common stock for services rendered                           269                --                 3              --
Net loss

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

Issuance of common stock for services rendered                        13,411                13             3,737              --
Issuance of common stock for services rendered                       135,903               136            37,861              --
Issuance of common stock for services rendered                       588,762               589           164,023              --
Issuance of common stock for services rendered                         5,901                 6             1,644              --
Issuance of common stock for cash                                     35,766                36             9,964              --
Issuance of common stock for services rendered                       290,331               290            80,884              --
Issuance of common stock for services rendered                         4,918                 5             1,370              --
Issuance of common stock for services rendered                       206,167               206            57,436              --
Issuance of common stock for services rendered                         8,941                 9             2,491              --
Issuance of common stock for cash                                     40,237                40             5,585              --
Issuance of common stock for cash                                     17,883                18             2,482              --
Issuance of common stock for cash                                      8,942                 9             2,491              --
Issuance of common stock for cash                                      8,942                 9             3,116              --
Issuance of common stock for cash                                      8,942                 9             2,491              --
Issuance of common stock for cash                                     89,417                89            19,911              --
Issuance of common stock for cash                                     53,650                54             7,446              --
Issuance of common stock for cash                                     42,920                43            11,957              --
Issuance of common stock for cash                                     42,920                43            20,957              --
Issuance of common stock for services rendered                        49,175                49            14,229              --
Issuance of common stock for services rendered                        53,646                54            14,945              --
Issuance of common stock for cash                                     44,708                45            12,455              --
Issuance of common stock for cash                                     45,603                46             2,204              --
Issuance of common stock for cash                                     62,771                63            17,489              --
Issuance of common stock for cash                                      4,471                 4               496              --
Issuance of common stock for services rendered                         1,788                 2               398              --
Issuance of common stock for cash                                     89,417                89            24,911              --
Issuance of common stock for services rendered                        89,410                89            19,936              --
Issuance of common stock for services rendered                         2,682                 3               598              --
Issuance of common stock for services rendered                           893                 1               197              --
Net loss
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                                  Accumulated
                                                                                  during the
                                                                  Deferred       Development
                                                                Compensation        Stage               Total
-------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>                 <C>
Balance, August 21, 1995 (inception)                           $       --       $          --       $         --
Recapitalization upon reverse merger                                   --                  --                 14
Issuance of common stock for services rendered                         --                  --              8,012
Issuance of common stock for services rendered                         --                  --                130
Issuance of common stock for services rendered                         --                  --                 88
Net loss                                                                              (39,387)           (39,387)

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

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

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

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

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


                                       5
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, April 30, 1998 (Restated)                                                                --       --

Issuance of common stock for services rendered                  05/05/98      $        1.64       --       --
Issuance of common stock for cash                               05/05/98      $        1.64       --       --
Issuance of common stock for services rendered                  06/01/98      $        0.28       --       --
Issuance of common stock for cash                               06/01/98      $        0.28       --       --
Issuance of common stock for cash                               08/03/98      $        0.28       --       --
Issuance of common stock for cash                               08/10/98      $        0.28       --       --
Issuance of common stock for services rendered                  09/16/98      $        0.28       --       --
Issuance of common stock for services rendered                  10/01/98      $        0.46       --       --
Issuance of common stock for cash                               10/01/98      $        0.36       --       --
Issuance of common stock for cash                               10/01/98      $        0.56       --       --
Issuance of common stock for cash                               10/30/98      $        0.56       --       --
Issuance of common stock for services rendered                  11/02/98      $        0.40       --       --
Issuance of common stock for cash                               11/02/98      $        0.28       --       --
Issuance of common stock for services rendered                  11/12/98      $        0.40       --       --
Issuance of common stock for services rendered                  11/14/98      $        0.40       --       --
Issuance of common stock for services rendered                  11/18/98      $        0.40       --       --
Issuance of common stock for services rendered                  11/19/98      $        0.40       --       --
Issuance of common stock for cash                               11/24/98      $        0.89       --       --
Issuance of common stock for services rendered                  11/28/98      $        0.40       --       --
Stock options issued for services rendered                      11/30/98      $        0.27       --       --
Issuance of common stock for services rendered                  12/02/98      $        0.91       --       --
Issuance of common stock for cash                               12/02/98      $        0.75       --       --
Issuance of common stock for cash                               12/02/98      $        0.78       --       --
Issuance of common stock for cash                               12/02/98      $        0.93       --       --
Issuance of common stock for cash                               12/02/98      $        2.80       --       --
Issuance of common stock for services rendered                  12/17/98      $        0.91       --       --
Issuance of common stock for services rendered                  12/31/98      $        0.91       --       --
Issuance of common stock for cash                               01/08/99      $        0.72       --       --
Issuance of common stock for cash                               01/15/99      $        0.38       --       --
Issuance of common stock for cash                               01/15/99      $        1.41       --       --
Issuance of common stock for services rendered                  03/01/99      $        0.57       --       --
Issuance of common stock for services rendered                  03/16/99      $        0.57       --       --
Issuance of common stock for services rendered                  03/17/99      $        0.57       --       --
Issuance of common stock for cash                               03/17/99      $        0.57       --       --
Issuance of common stock for services rendered                  04/28/99      $        0.57       --       --
Issuance of common stock for services rendered                  04/30/99      $        0.57       --       --
Net loss

Balance, April 30, 1999 (Restated)                                                                --       --

Issuance of common stock for cash                               05/03/99      $        0.10       --       --
Issuance of common stock for services rendered                  05/05/99      $        0.10       --       --
Issuance of common stock for cash                               06/05/99      $        0.56       --       --
Issuance of common stock for services rendered                  06/09/99      $        0.45       --       --
Issuance of common stock for services rendered                  06/28/99      $        0.45       --       --
Issuance of common stock for cash                               06/28/99      $        0.02       --       --
Issuance of common stock for cash                               07/12/99      $        0.52       --       --
Issuance of common stock for cash                               07/14/99      $        0.28       --       --
Issuance of common stock for cash                               07/14/99      $        0.56       --       --
Issuance of common stock for services rendered                  07/22/99      $        0.37       --       --
Issuance of common stock for services rendered                  11/30/99      $        0.42       --       --
Issuance of common stock for cash                               11/30/99      $        0.39       --       --
Issuance of common stock for cash                               11/30/99      $        0.56       --       --
Issuance of common stock for cash                               12/29/99      $        0.56       --       --
Issuance of common stock for services rendered                  03/20/00      $        0.59       --       --
Issuance of common stock for cash                               04/03/00      $        0.56       --       --
Issuance of common stock for services rendered                  04/03/00      $        0.59       --       --
Issuance of common stock for cash                               04/03/00      $        0.72       --       --
Issuance of common stock for cash                               04/03/00      $        0.89       --       --
Issuance of common stock for services rendered                  04/10/00      $        0.59       --       --
Issuance of common stock for services rendered                  04/24/00      $        0.59       --       --
Issuance of common stock for services rendered                  04/26/00      $        0.59       --       --
Net loss
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                    Additional         Committed
                                                                          Common Stock               Paid-in             Common
                                                                   Shares             Amount         Capital             Stock
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>                <C>
Balance, April 30, 1998 (Restated)                                9,256,507             9,257           544,776              --

Issuance of common stock for services rendered                        4,470                 4             7,307              --
Issuance of common stock for cash                                    17,883                18            29,232              --
Issuance of common stock for services rendered                       28,879                29             8,045              --
Issuance of common stock for cash                                    53,649                54            14,946              --
Issuance of common stock for cash                                     8,942                 9             2,491              --
Issuance of common stock for cash                                     8,942                 9             2,491              --
Issuance of common stock for services rendered                       74,501                75            20,755              --
Issuance of common stock for services rendered                       29,818                30            13,686              --
Issuance of common stock for cash                                    13,815                14             4,986              --
Issuance of common stock for cash                                     8,942                 9             4,991              --
Issuance of common stock for cash                                     4,471                 4             2,496              --
Issuance of common stock for services rendered                        4,470                 4             1,794              --
Issuance of common stock for cash                                    44,708                45            12,435              --
Issuance of common stock for services rendered                        8,941                 9             3,588              --
Issuance of common stock for services rendered                       89,410                89            35,876              --
Issuance of common stock for services rendered                       15,647                16             6,278              --
Issuance of common stock for services rendered                       75,998                76            30,494              --
Issuance of common stock for cash                                    11,177                11             9,989              --
Issuance of common stock for services rendered                      447,048               447           179,379              --
Stock options issued for services rendered                               --                --           659,684              --
Issuance of common stock for services rendered                        4,470                 4             4,080              --
Issuance of common stock for cash                                     3,353                 3             2,497              --
Issuance of common stock for cash                                     8,942                 9             6,991              --
Issuance of common stock for cash                                     2,683                 3             2,497              --
Issuance of common stock for cash                                       894                 1             2,499              --
Issuance of common stock for services rendered                        5,208                 5             4,753              --
Issuance of common stock for services rendered                        2,012                 2             1,836              --
Issuance of common stock for cash                                    44,708                45            32,355              --
Issuance of common stock for cash                                     9,389                 9             3,591              --
Issuance of common stock for cash                                     4,471                 4             6,296              --
Issuance of common stock for services rendered                      223,524               224           127,266              --
Issuance of common stock for services rendered                       22,352                22            12,727              --
Issuance of common stock for services rendered                    1,034,979             1,035           589,278              --
Issuance of common stock for cash                                    17,883                18            10,182              --
Issuance of common stock for services rendered                       84,716                85            48,203              --
Issuance of common stock for services rendered                       11,177                11             6,360              --
Net loss

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

Issuance of common stock for cash                                    35,767                36             3,629              --
Issuance of common stock for services rendered                      117,216               117            11,894              --
Issuance of common stock for cash                                    17,883                18             9,982              --
Issuance of common stock for services rendered                       89,410                90            40,307              --
Issuance of common stock for services rendered                      277,170               277           124,953              --
Issuance of common stock for cash                                     4,471                 4                96              --
Issuance of common stock for cash                                     2,861                 3             1,497              --
Issuance of common stock for cash                                    44,708                45            12,455              --
Issuance of common stock for cash                                    17,883                18             9,982              --
Issuance of common stock for services rendered                      247,218               247            90,402              --
Issuance of common stock for services rendered                       52,305                52            21,675              --
Issuance of common stock for cash                                    53,650                54            20,946              --
Issuance of common stock for cash                                     8,942                 9             4,991              --
Issuance of common stock for cash                                    80,475                81            44,919              --
Issuance of common stock for services rendered                        2,235                 2             1,309              --
Issuance of common stock for cash                                   107,301               107            59,893              --
Issuance of common stock for services rendered                    1,307,700             1,308           765,802              --
Issuance of common stock for cash                                     2,794                 3             1,997              --
Issuance of common stock for cash                                     8,383                 8             7,492              --
Issuance of common stock for services rendered                       50,159                50            29,374              --
Issuance of common stock for services rendered                       22,352                22            13,090              --
Issuance of common stock for services rendered                        2,235                 2             1,309              --
Net loss
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                     Deficit
                                                                                    Accumulated
                                                                                    during the
                                                                    Deferred       Development
                                                                  Compensation        Stage               Total
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>                 <C>
Balance, April 30, 1998 (Restated)                                       --            (804,823)          (250,790)

Issuance of common stock for services rendered                           --                  --              7,311
Issuance of common stock for cash                                        --                  --             29,250
Issuance of common stock for services rendered                           --                  --              8,074
Issuance of common stock for cash                                        --                  --             15,000
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for services rendered                           --                  --             20,830
Issuance of common stock for services rendered                           --                  --             13,716
Issuance of common stock for cash                                        --                  --              5,000
Issuance of common stock for cash                                        --                  --              5,000
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for services rendered                           --                  --              1,798
Issuance of common stock for cash                                        --                  --             12,480
Issuance of common stock for services rendered                           --                  --              3,597
Issuance of common stock for services rendered                           --                  --             35,965
Issuance of common stock for services rendered                           --                  --              6,294
Issuance of common stock for services rendered                           --                  --             30,570
Issuance of common stock for cash                                        --                  --             10,000
Issuance of common stock for services rendered                           --                  --            179,826
Stock options issued for services rendered                               --                  --            659,684
Issuance of common stock for services rendered                           --                  --              4,084
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for cash                                        --                  --              7,000
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for cash                                        --                  --              2,500
Issuance of common stock for services rendered                           --                  --              4,758
Issuance of common stock for services rendered                           --                  --              1,838
Issuance of common stock for cash                                        --                  --             32,400
Issuance of common stock for cash                                        --                  --              3,600
Issuance of common stock for cash                                        --                  --              6,300
Issuance of common stock for services rendered                           --                  --            127,490
Issuance of common stock for services rendered                           --                  --             12,749
Issuance of common stock for services rendered                           --                  --            590,313
Issuance of common stock for cash                                        --                  --             10,200
Issuance of common stock for services rendered                           --                  --             48,288
Issuance of common stock for services rendered                           --                  --              6,371
Net loss                                                                             (1,956,565)        (1,956,565)

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

Issuance of common stock for cash                                        --                  --              3,665
Issuance of common stock for services rendered                           --                  --             12,011
Issuance of common stock for cash                                        --                  --             10,000
Issuance of common stock for services rendered                           --                  --             40,397
Issuance of common stock for services rendered                           --                  --            125,230
Issuance of common stock for cash                                        --                  --                100
Issuance of common stock for cash                                        --                  --              1,500
Issuance of common stock for cash                                        --                  --             12,500
Issuance of common stock for cash                                        --                  --             10,000
Issuance of common stock for services rendered                           --                  --             90,649
Issuance of common stock for services rendered                           --                  --             21,727
Issuance of common stock for cash                                        --                  --             21,000
Issuance of common stock for cash                                        --                  --              5,000
Issuance of common stock for cash                                        --                  --             45,000
Issuance of common stock for services rendered                           --                  --              1,311
Issuance of common stock for cash                                        --                  --             60,000
Issuance of common stock for services rendered                           --                  --            767,110
Issuance of common stock for cash                                        --                  --              2,000
Issuance of common stock for cash                                        --                  --              7,500
Issuance of common stock for services rendered                           --                  --             29,424
Issuance of common stock for services rendered                           --                  --             13,112
Issuance of common stock for services rendered                           --                  --              1,311
Net loss                                                                             (1,247,576)        (1,247,576)
</TABLE>

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


                                       6
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, April 30, 2000 (Restated)                                                                --       --

Issuance of common stock for services rendered                  07/28/00      $        0.59       --       --
Issuance of common stock for services rendered                  08/10/00      $        0.59       --       --
Issuance of common stock for services rendered                  08/22/00      $        0.59       --       --
Issuance of common stock for services rendered                  09/28/00      $        0.24       --       --
Issuance of common stock for cash                               09/28/00      $        0.24       --       --
Issuance of common stock for services rendered                  10/09/00      $        0.24       --       --
Issuance of common stock for services rendered                  11/30/00      $        0.24       --       --
Issuance of common stock for services rendered                  12/31/00      $        0.24       --       --
Net loss

Balance, April 30, 2001 (Restated)                                                                --       --

Issuance of common stock for services rendered                  05/10/01      $        0.24       --       --
Issuance of common stock for services rendered                  06/18/01      $        0.45       --       --
Issuance of common stock for cash                               06/18/01      $        0.45       --       --
Issuance of common stock for cash                               07/31/01      $        0.45       --       --
Issuance of common stock for services rendered                  07/31/01      $        0.64       --       --
Issuance of common stock for cash                               07/31/01      $        1.12       --       --
Issuance of common stock for cash                               09/07/01      $        0.22       --       --
Issuance of common stock for services rendered                  09/23/01      $        0.22       --       --
Issuance of common stock for cash                               09/23/01      $        0.22       --       --
Warrants issued for services rendered                           09/23/01      $        0.09       --       --
Issuance of common stock for services rendered                  10/31/01      $        0.22       --       --
Issuance of common stock for services rendered                  11/02/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/07/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/10/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/13/01      $        0.22       --       --
Issuance of common stock for cash                               12/13/01      $        0.22       --       --
Issuance of common stock for cash                               12/20/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/20/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/21/01      $        0.22       --       --
Issuance of common stock for services rendered                  12/30/01      $        0.22       --       --
Stock options issued for services rendered                      01/08/02      $        0.11       --       --
Issuance of common stock for services rendered                  01/14/02      $        0.22       --       --
Stock options issued for services rendered                      01/31/02      $        0.11       --       --
Stock options issued for services rendered                      02/08/02      $        0.09       --       --
Issuance of common stock for services rendered                  02/14/02      $        0.22       --       --
Issuance of common stock for cash                               03/13/02      $        0.24       --       --
Issuance of common stock in private
      placement for cash                                        04/30/02      $        1.00       --       --
Net loss
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                    Additional         Committed
                                                                          Common Stock               Paid-in             Common
                                                                   Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>                <C>
Balance, April 30, 2000 (Restated)                               14,242,097            14,242         3,735,124              --

Issuance of common stock for services rendered                       11,177                11             6,546              --
Issuance of common stock for services rendered                      223,542               224           130,908              --
Issuance of common stock for services rendered                       22,354                22            13,091              --
Issuance of common stock for services rendered                       11,177                11             2,623              --
Issuance of common stock for cash                                    21,214                21             4,979              --
Issuance of common stock for services rendered                       35,767                36             8,394              --
Issuance of common stock for services rendered                          448                 1               105              --
Issuance of common stock for services rendered                      510,793               511           119,878              --
Net loss

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

Issuance of common stock for services rendered                      116,903               117            27,940              --
Issuance of common stock for services rendered                       67,057                67            29,930              --
Issuance of common stock for cash                                    22,354                22             9,978              --
Issuance of common stock for cash                                    22,354                22             9,978              --
Issuance of common stock for services rendered                      350,933               351           223,917              --
Issuance of common stock for cash                                     8,942                 9             9,991              --
Issuance of common stock for cash                                   223,542               224            49,776              --
Issuance of common stock for services rendered                      525,281               525           116,965              --
Issuance of common stock for cash                                    67,062                67            14,933              --
Warrants issued for services rendered                                    --                --            24,924              --
Issuance of common stock for services rendered                       13,411                14             2,986              --
Issuance of common stock for services rendered                       67,057                67            14,932              --
Issuance of common stock for services rendered                       11,176                11             2,489              --
Issuance of common stock for services rendered                      217,176               217            48,359              --
Issuance of common stock for services rendered                       87,235                87            19,425              --
Issuance of common stock for cash                                   223,542               224            49,776              --
Issuance of common stock for cash                                     3,577                 4               796              --
Issuance of common stock for services rendered                    1,230,276             1,230           273,948              --
Issuance of common stock for services rendered                       22,352                22             4,978              --
Issuance of common stock for services rendered                      212,348               212            47,284              --
Stock options issued for services rendered                               --                --             1,402              --
Issuance of common stock for services rendered                       33,529                34             7,465              --
Stock options issued for services rendered                               --                --             2,142              --
Stock options issued for services rendered                               --                --             3,809              --
Issuance of common stock for services rendered                    2,235,241             2,235           497,725              --
Issuance of common stock for cash                                    10,283                10             2,410              --
Issuance of common stock in private
      placement for cash                                          1,225,000             1,225         1,223,775              --
Net loss
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                    Deficit
                                                                                   Accumulated
                                                                                   during the
                                                                   Deferred       Development
                                                                 Compensation        Stage               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>                 <C>
Balance, April 30, 2000 (Restated)                                      --          (4,008,964)          (259,598)

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

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

Issuance of common stock for services rendered                          --                  --             28,057
Issuance of common stock for services rendered                          --                  --             29,997
Issuance of common stock for cash                                       --                  --             10,000
Issuance of common stock for cash                                       --                  --             10,000
Issuance of common stock for services rendered                          --                  --            224,268
Issuance of common stock for cash                                       --                  --             10,000
Issuance of common stock for cash                                       --                  --             50,000
Issuance of common stock for services rendered                          --                  --            117,490
Issuance of common stock for cash                                       --                  --             15,000
Warrants issued for services rendered                                   --                  --             24,924
Issuance of common stock for services rendered                          --                  --              3,000
Issuance of common stock for services rendered                          --                  --             14,999
Issuance of common stock for services rendered                          --                  --              2,500
Issuance of common stock for services rendered                          --                  --             48,576
Issuance of common stock for services rendered                          --                  --             19,512
Issuance of common stock for cash                                       --                  --             50,000
Issuance of common stock for cash                                       --                  --                800
Issuance of common stock for services rendered                          --                  --            275,178
Issuance of common stock for services rendered                          --                  --              5,000
Issuance of common stock for services rendered                          --                  --             47,496
Stock options issued for services rendered                              --                  --              1,402
Issuance of common stock for services rendered                          --                  --              7,499
Stock options issued for services rendered                              --                  --              2,142
Stock options issued for services rendered                              --                  --              3,809
Issuance of common stock for services rendered                          --                  --            499,960
Issuance of common stock for cash                                       --                  --              2,420
Issuance of common stock in private                                                         --
      placement for cash                                                --                  --          1,225,000
Net loss                                                                            (2,399,061)        (2,399,061)
</TABLE>

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



                                       7
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, April 30, 2002 (Restated)                                                                --       --

Common stock committed on exercise of stock
      options in subsidiary                                     05/23/02      $        0.16       --       --
Issuance of common stock for services rendered                  05/24/02      $        2.15       --       --
Financing expense in connection with
      issuance of warrants                                      05/31/02      $        1.49       --       --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock            06/04/02      $        1.00       --       --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock            06/20/02      $        1.00       --       --
Issuance of common stock in private placement for
      cash                                                      06/25/02      $        1.00       --       --
Stock options issued for services rendered                      07/12/02      $        1.52       --       --
Conversion of notes payable - related
      parties into common stock                                 07/16/02      $        1.00       --       --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock            07/22/02      $        1.00       --       --
Stock options issued for services rendered                      08/01/02      $        0.47       --       --
Issuance of common stock for services rendered                  08/24/02      $        1.67       --       --
Stock options issued for services rendered                      09/25/02      $        1.10       --       --
Stock options issued in exchange for settlement
      of accounts payable                                       09/25/02      $        1.10       --       --
Issuance of Series A convertible preferred stock
      in private placement for cash                             10/07/02      $   10,000.00    97.93        1
Offering costs on issuance of Series A convertible
      preferred stock in private placement for cash             10/07/02                          --       --
Dividends on Series A preferred stock                           10/07/02                          --       --
Beneficial conversion feature on issuance of
      Series A preferred stock                                  10/07/02                          --       --
Issuance of common stock in private placement for
      cash                                                      10/29/02      $        1.35       --       --
Offering costs on issuance of common stock in
      private placement for cash                                10/29/02                          --       --
Common stock committed for services rendered                    11/24/02      $        2.35       --       --
Warrants issued for services rendered                           12/09/02      $        2.60       --       --
Warrants issued for services rendered                           12/09/02      $        0.65       --       --
Stock options issued in exchange for settlement
      of accounts payable                                       12/19/02      $        0.55       --       --
Stock options issued for services rendered                      12/31/02      $        0.13       --       --
Issuance of common stock on cashless exercise of
      warrants                                                  01/02/03                          --       --
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock               01/24/03                       (1.05)
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock               01/27/03                       (1.06)
Amortization of deferred compensation                           01/31/03                          --       --
Warrants issued for services rendered                           02/17/03      $        1.63       --       --
Common stock committed for services rendered                    02/24/03      $        0.79       --       --
Reversal of deferred compensation                               02/25/03                          --       --
Issuance of common stock for services rendered                  04/21/03      $        0.48       --       --
Common stock committed for services rendered                    04/21/03      $        0.48       --       --
Warrants issued for services rendered                           04/28/03      $        0.37       --       --
Offering costs on issuance of common stock subject
       to buyback for cash                                      04/23/03                          --       --
Offering costs on issuance of common stock subject
       to buyback for cash                                      04/28/03                          --       --
Issuance of common stock for subscription receivable            04/30/03      $        0.40       --       --
Common stock committed to investors as a penalty
      for delayed registration of common stock                  04/30/03      $        0.45       --       --
Net loss
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                   Additional         Committed
                                                                         Common Stock               Paid-in             Common
                                                                  Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>               <C>                <C>
Balance, April 30, 2002 (Restated)                              22,075,200            22,075         6,743,681              --

Common stock committed on exercise of stock
      options in subsidiary                                             --                --                             7,164
Issuance of common stock for services rendered                       5,589                 6            12,010              --
Financing expense in connection with
      issuance of warrants                                              --                --           223,710              --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                 5,780                 6             5,774              --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                 5,438                 5             5,435              --
Issuance of common stock in private placement for
      cash                                                         500,000               500           499,500              --
Stock options issued for services rendered                              --                --           761,007              --
Conversion of notes payable - related
      parties into common stock                                     15,000                15            14,985              --
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                11,680                12            11,664              --
Stock options issued for services rendered                              --                --           187,163              --
Issuance of common stock for services rendered                       5,589                 6             9,328              --
Stock options issued for services rendered                              --                --         3,305,542              --
Stock options issued in exchange for settlement
      of accounts payable                                               --                --            50,000              --
Issuance of Series A convertible preferred stock
      in private placement for cash                                     --                --           979,300              --
Offering costs on issuance of Series A convertible
      preferred stock in private placement for cash                     --                --          (178,902)             --
Dividends on Series A preferred stock                               68,150                68            78,292              --
Beneficial conversion feature on issuance of
      Series A preferred stock                                          --                --           767,431              --
Issuance of common stock in private placement for
      cash                                                       1,349,934             1,350         1,821,056              --
Offering costs on issuance of common stock in
      private placement for cash                                        --                --          (196,793)             --
Common stock committed for services rendered                            --                --                            13,134
Warrants issued for services rendered                                   --                --           390,409              --
Warrants issued for services rendered                                   --                --           162,792              --
Stock options issued in exchange for settlement
      of accounts payable                                               --                --            15,000              --
Stock options issued for services rendered                              --                --            59,373              --
Issuance of common stock on cashless exercise of
      warrants                                                      33,909                34               (34)             --
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock                    9,162                 9                (9)             --
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock                    9,174                 9                (9)             --
Amortization of deferred compensation                                   --                --
Warrants issued for services rendered                                   --                --           130,712              --
Common stock committed for services rendered                            --                --                             4,415
Reversal of deferred compensation                                       --                --        (2,272,561)
Issuance of common stock for services rendered                      21,277                21            10,288              --
Common stock committed for services rendered                            --                --                             9,691
Warrants issued for services rendered                                   --                --            18,284              --
Offering costs on issuance of common stock subject
       to buyback for cash                                              --                --           (20,000)             --
Offering costs on issuance of common stock subject
       to buyback for cash                                              --                --           (24,500)             --
Issuance of common stock for subscription receivable                10,000                10             3,972              --
Common stock committed to investors as a penalty
      for delayed registration of common stock                          --                --                            57,661
Net loss
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                      Deficit
                                                                                     Accumulated
                                                                                     during the
                                                                     Deferred       Development
                                                                   Compensation        Stage               Total
----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>             <C>                 <C>
Balance, April 30, 2002 (Restated)                                        --          (6,860,779)           (95,023)

Common stock committed on exercise of stock
      options in subsidiary                                               --                  --              7,164
Issuance of common stock for services rendered                            --                  --             12,016
Financing expense in connection with
      issuance of warrants                                                --                  --            223,710
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                      --                  --              5,780
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                      --                  --              5,440
Issuance of common stock in private placement for
      cash                                                                --                  --            500,000
Stock options issued for services rendered                                --                  --            761,007
Conversion of notes payable - related
      parties into common stock                                           --                  --             15,000
Conversion of convertible notes payable - related
      parties and accrued interest into common stock                      --                  --             11,676
Stock options issued for services rendered                                --                  --            187,163
Issuance of common stock for services rendered                            --                  --              9,334
Stock options issued for services rendered                        (3,305,542)                 --                 --
Stock options issued in exchange for settlement
      of accounts payable                                                 --                  --             50,000
Issuance of Series A convertible preferred stock
      in private placement for cash                                       --                  --            979,301
Offering costs on issuance of Series A convertible
      preferred stock in private placement for cash                       --                  --           (178,902)
Dividends on Series A preferred stock                                     --             (78,360)                --
Beneficial conversion feature on issuance of
      Series A preferred stock                                            --            (767,431)                --
Issuance of common stock in private placement for
      cash                                                                --                  --          1,822,406
Offering costs on issuance of common stock in
      private placement for cash                                          --                  --           (196,793)
Common stock committed for services rendered                              --                  --             13,134
Warrants issued for services rendered                                     --                  --            390,409
Warrants issued for services rendered                                     --                  --            162,792
Stock options issued in exchange for settlement
      of accounts payable                                                 --                  --             15,000
Stock options issued for services rendered                                --                  --             59,373
Issuance of common stock on cashless exercise of
      warrants                                                            --                  --                 --
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock                         --                  --                 --
Issuance of common stock on cashless conversion
      of the Series A convertible preferred stock                         --                  --                 --
Amortization of deferred compensation                              1,032,981                              1,032,981
Warrants issued for services rendered                                     --                  --            130,712
Common stock committed for services rendered                              --                  --              4,415
Reversal of deferred compensation                                  2,272,561                                     --
Issuance of common stock for services rendered                            --                  --             10,309
Common stock committed for services rendered                              --                  --              9,691
Warrants issued for services rendered                                     --                  --             18,284
Offering costs on issuance of common stock subject
       to buyback for cash                                                --                  --            (20,000)
Offering costs on issuance of common stock subject
       to buyback for cash                                                --                  --            (24,500)
Issuance of common stock for subscription receivable                      --                  --              3,982
Common stock committed to investors as a penalty
      for delayed registration of common stock                            --                  --             57,661
Net loss                                                                              (5,925,680)        (5,925,680)
</TABLE>

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


                                       8
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, April 30, 2003 (Restated)                                                             95.82      $ 1

Warrants issued for services rendered                           05/01/03      $        0.16       --       --
Issuance of common stock for services rendered                  05/13/03      $        0.48       --       --
Warrants issued for services rendered                           05/16/03      $        0.24       --       --
Stock options issued for services rendered                      05/16/03      $        0.18       --       --
Issuance of common stock on cashless conversion
      of Series A preferred stock                               05/16/03                      (95.82)      (1)
Dividend on induced conversion of Series A
      preferred stock                                           05/16/03                          --       --
Issuance of committed common stock                              05/16/03                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          05/16/03      $        0.45       --       --
Issuance of committed common stock                              05/21/03                          --       --
Issuance of common stock on exercise of
      warrants                                                  05/27/03      $        0.01       --       --
Issuance of committed common stock                              06/19/03                          --       --
Issuance of common stock on conversion of
      convertible notes payable - related parties               06/24/03      $        0.33       --       --
Stock options issued for services rendered                      07/16/03      $        0.26       --       --
Issuance of common stock for services rendered                  07/16/03      $        0.50       --       --
Issuance of committed common stock                              08/14/03                          --       --
Issuance of common stock for cash                               08/15/03      $        0.45       --       --
Issuance of common stock for cash                               08/20/03      $        0.52       --       --
Issuance of common stock for cash                               08/25/03      $        0.69       --       --
Issuance of common stock for services rendered                  08/27/03      $        1.06       --       --
Stock options issued for services rendered                      08/27/03      $        0.79       --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           08/28/03
Issuance of common stock for cash                               08/28/03      $        0.69       --       --
Issuance of common stock for cash                               08/29/03      $        0.69       --       --
Issuance of common stock for cash                               08/29/03      $        0.75       --       --
Offering costs on issuance of common stock
      for cash                                                  08/29/03                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          10/15/03      $        1.29       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              10/15/03      $        0.73       --       --
Issuance of common stock for cash                               10/27/03      $        0.95       --       --
Stock options issued for services rendered                      11/07/03      $        0.90       --       --
Issuance of common stock for services rendered                  11/07/03      $        1.25       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          11/15/03      $        1.04       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              11/15/03      $        0.52       --       --
Offering costs on issuance of common stock subject
      to rescission rights for cash                             11/21/03                          --       --
Issuance of common stock for services rendered                  11/21/03      $        0.75       --       --
Stock options issued for services rendered                      12/05/03      $        0.60       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          12/15/03      $        0.90       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              12/15/03      $        0.41       --       --
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                    Additional         Committed
                                                                          Common Stock               Paid-in             Common
                                                                   Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>                <C>
Balance, April 30, 2003 (Restated)                               24,125,882      $     24,126      $ 13,573,900       $  92,065

Warrants issued for services rendered                                    --                --             8,079              --
Issuance of common stock for services rendered                       45,000                45            21,555              --
Warrants issued for services rendered                                    --                --            35,598              --
Stock options issued for services rendered                               --                --             5,458              --
Issuance of common stock on cashless conversion
      of Series A preferred stock                                 2,129,316             2,129            (2,128)             --
Dividend on induced conversion of Series A
      preferred stock                                                    --                --           583,243              --
Issuance of committed common stock                                  128,136               128            57,533         (57,661)
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               25,952                26            11,653              --
Issuance of committed common stock                                   20,000                20             9,671          (9,691)
Issuance of common stock on exercise of
      warrants                                                       34,000                34               306              --
Issuance of committed common stock                                   11,178                11            17,538         (17,549)
Issuance of common stock on conversion of
      convertible notes payable - related parties                   300,000               300            99,700              --
Stock options issued for services rendered                               --                --            52,742              --
Issuance of common stock for services rendered                        6,000                 6             2,994              --
Issuance of committed common stock                                   44,705                45             7,119          (7,164)
Issuance of common stock for cash                                   222,222               222            99,778              --
Issuance of common stock for cash                                   400,000               400           207,600              --
Issuance of common stock for cash                                   272,464               272           187,728              --
Issuance of common stock for services rendered                        6,000                 6             6,354              --
Stock options issued for services rendered                               --                --            31,514              --
Beneficial conversion feature on convertible
      notes payable - related parties                                                                       341              --
Issuance of common stock for cash                                    86,957                87            59,913              --
Issuance of common stock for cash                                   144,928               145            99,855              --
Issuance of common stock for cash                                   666,666               667           499,333              --
Offering costs on issuance of common stock
      for cash                                                           --                --           (40,000)             --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock              148,260               148           191,107              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --             6,009              --
Issuance of common stock for cash                                    63,000                63            59,938              --
Stock options issued for services rendered                               --                --           278,142              --
Issuance of common stock for services rendered                       12,000                12            14,988              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               44,187                44            45,910              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --             7,143              --
Offering costs on issuance of common stock subject
      to rescission rights for cash                                      --                --            (5,250)             --
Issuance of common stock for services rendered                        2,000                 2             1,498              --
Stock options issued for services rendered                               --                --            24,104              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               61,242                61            55,057              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                                                        7,937              --
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                    Deficit
                                                                                   Accumulated
                                                                                   during the
                                                                   Deferred       Development
                                                                 Compensation        Stage               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>                 <C>
Balance, April 30, 2003 (Restated)                              $       --       $ (13,632,250)      $     57,842

Warrants issued for services rendered                                   --                  --              8,079
Issuance of common stock for services rendered                          --                  --             21,600
Warrants issued for services rendered                                   --                  --             35,598
Stock options issued for services rendered                              --                  --              5,458
Issuance of common stock on cashless conversion
      of Series A preferred stock                                       --                  --                 --
Dividend on induced conversion of Series A
      preferred stock                                                   --            (583,243)                --
Issuance of committed common stock                                                                             --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --             11,679
Issuance of committed common stock                                                                             --
Issuance of common stock on exercise of                                                                        --
      warrants                                                          --                  --                340
Issuance of committed common stock                                                                             --
Issuance of common stock on conversion of
      convertible notes payable - related parties                       --                  --            100,000
Stock options issued for services rendered                              --                  --             52,742
Issuance of common stock for services rendered                          --                  --              3,000
Issuance of committed common stock                                                                             --
Issuance of common stock for cash                                       --                  --            100,000
Issuance of common stock for cash                                       --                  --            208,000
Issuance of common stock for cash                                       --                  --            188,000
Issuance of common stock for services rendered                          --                  --              6,360
Stock options issued for services rendered                              --                  --             31,514
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --                341
Issuance of common stock for cash                                       --                  --             60,000
Issuance of common stock for cash                                       --                  --            100,000
Issuance of common stock for cash                                       --                  --            500,000
Offering costs on issuance of common stock
      for cash                                                          --                  --            (40,000)
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --            191,255
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --              6,009
Issuance of common stock for cash                                       --                  --             60,001
Stock options issued for services rendered                              --                  --            278,142
Issuance of common stock for services rendered                          --                  --             15,000
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --             45,954
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --              7,143
Offering costs on issuance of common stock subject
      to rescission rights for cash                                     --                  --             (5,250)
Issuance of common stock for services rendered                          --                  --              1,500
Stock options issued for services rendered                              --                  --             24,104
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --             55,118
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --              7,937
</TABLE>

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



                                       9
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Issuance of common stock for cash                               12/22/03      $        0.71       --       --
Issuance of common stock for services rendered                  01/06/04      $        0.89       --       --
Warrants issued for services rendered                           01/06/04      $        0.59       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          01/15/04      $        0.88       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              01/15/04      $        0.39       --       --
Issuance of common stock on cashless
      exercise of warrants                                      01/15/04                          --       --
Issuance of common stock for services rendered                  01/15/04      $        0.88       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          01/16/04      $        0.89       --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           01/16/04                          --       --
Issuance of warrants in conjunction with
      convertible notes payable - related parties               01/16/04      $        0.18       --       --
Issuance of common stock for services rendered                  01/23/04      $        1.18       --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           01/26/04                          --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           01/28/04                          --       --
Issuance of warrants in conjunction with
      convertible notes payable - related parties               01/28/04      $        0.15       --       --
Issuance of common stock on cashless
      exercise of warrants                                      01/30/04                          --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           01/31/04                          --       --
Issuance of warrants in conjunction with
      convertible notes payable - related parties               01/31/04      $        0.12       --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           01/31/04                          --       --
Issuance of common stock on cashless
      exercise of warrants                                      02/04/04                          --       --
Offering costs on issuance of common stock subject
      to rescission rights for cash                             02/06/04                          --       --
Issuance of common stock for services rendered                  02/06/04      $        1.23       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          02/15/04      $        1.25       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              02/15/04      $        0.69       --       --
Issuance of common stock for services rendered                  02/25/04      $        1.26       --       --
Offering costs on issuance of common stock subject
      to rescission rights for cash                             02/25/04                          --       --
Common stock committed for services rendered                    03/10/04      $        1.42       --       --
Stock options issued for services rendered                      03/10/04      $        0.55       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          03/15/04      $        1.75       --       --
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                     Additional         Committed
                                                                           Common Stock               Paid-in             Common
                                                                    Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>                <C>
Issuance of common stock for cash                                     42,254                42            29,958              --
Issuance of common stock for services rendered                        27,500                28            24,447              --
Warrants issued for services rendered                                     --                --            17,775              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                75,739                76            66,574              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                        --                --             9,837              --
Issuance of common stock on cashless
      exercise of warrants                                            54,053                54               (54)             --
Issuance of common stock for services rendered                        12,000                12            10,548              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 2,520                 3             2,240              --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --            58,245              --
Issuance of warrants in conjunction with
      convertible notes payable - related parties                         --                --            91,755              --
Issuance of common stock for services rendered                        55,000                55            64,845              --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --             4,026              --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --            41,196              --
Issuance of warrants in conjunction with
      convertible notes payable - related parties                         --                --           143,804              --
Issuance of common stock on cashless
      exercise of warrants                                            48,000                48               (48)             --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --             6,046              --
Issuance of warrants in conjunction with
      convertible notes payable - related parties                         --                --            43,954              --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --             9,558              --
Issuance of common stock on cashless
      exercise of warrants                                            25,049                25               (25)             --
Offering costs on issuance of common stock subject
      to rescission rights for cash                                       --                --            (5,250)             --
Issuance of common stock for services rendered                         3,333                 3             4,097              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                99,332                99           124,066              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                        --                --            19,415              --
Issuance of common stock for services rendered                         2,667                 3             3,357              --
Offering costs on issuance of common stock subject
      to rescission rights for cash                                       --                --            (7,000)             --
Common stock committed for services rendered                              --                --                             9,940
Stock options issued for services rendered                                --                --            15,917              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               120,464               121           210,691              --
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                    Deficit
                                                                                   Accumulated
                                                                                   during the
                                                                   Deferred       Development
                                                                 Compensation        Stage               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>                 <C>
Issuance of common stock for cash                                       --                  --             30,000
Issuance of common stock for services rendered                          --                  --             24,475
Warrants issued for services rendered                                   --                  --             17,775
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --             66,650
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --              9,837
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock for services rendered                          --                  --             10,560
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --              2,243
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --             58,245
Issuance of warrants in conjunction with
      convertible notes payable - related parties                       --                  --             91,755
Issuance of common stock for services rendered                          --                  --             64,900
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --              4,026
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --             41,196
Issuance of warrants in conjunction with
      convertible notes payable - related parties                       --                  --            143,804
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --              6,046
Issuance of warrants in conjunction with
      convertible notes payable - related parties                       --                  --             43,954
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --              9,558
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Offering costs on issuance of common stock subject
      to rescission rights for cash                                     --                  --             (5,250)
Issuance of common stock for services rendered                          --                  --              4,100
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --            124,165
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             19,415
Issuance of common stock for services rendered                          --                  --              3,360
Offering costs on issuance of common stock subject
      to rescission rights for cash                                     --                  --             (7,000)
Common stock committed for services rendered                            --                  --              9,940
Stock options issued for services rendered                              --                  --             15,917
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --            210,812
</TABLE>

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



                                       10
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              03/15/04      $        1.13       --       --
Issuance of common stock on cashless
      exercise of warrants                                      03/15/04                          --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           03/16/04                          --       --
Issuance of common stock for cash                               03/19/04      $        0.75       --       --
Issuance of common stock on cashless
      exercise of warrants                                      03/23/04                          --       --
Issuance of common stock for cash                               03/25/04      $        0.75       --       --
Issuance of common stock for services rendered and
      to be rendered                                            03/25/04      $       --          --       --
Issuance of common stock for cash                               03/26/04      $        0.75       --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/01/04                          --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              04/01/04      $        1.03       --       --
Warrants issued for services rendered                           04/07/04      $        1.57       --       --
Issuance of common stock for services rendered                  04/07/04      $        2.95       --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/12/04                          --       --
Issuance of common stock for services rendered                  04/12/04      $        2.78       --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/14/04                          --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/15/04                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          04/15/04      $        2.55       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              04/15/04      $        1.88       --       --
Issuance of common stock on exercise of warrants                04/16/04      $        1.50       --       --
Warrants issued for services rendered
      and to be rendered                                        04/16/04      $       --          --       --
Issuance of common stock for services rendered
      and to be rendered                                        04/16/04      $       --          --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           04/19/04                          --       --
Issuance of common stock for cash                               04/20/04      $        0.99       --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/23/04                          --       --
Issuance of common stock on cashless
      exercise of warrants                                      04/28/04                          --       --
Warrants issued for services rendered                           04/29/04      $        1.09       --       --
Common stock committed for legal settlement                     04/30/04      $        1.28       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              04/30/04      $        1.62       --       --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                              04/30/04      $        1.71       --       --
Common stock committed to investors as a penalty
      for delayed registration of common stock                  04/30/04      $        1.85       --       --
Warrants accrued but not issued to investors as a
      penalty for delayed registration of the underlying
      common stock                                              04/30/04      $        1.22       --       --
Amortization of deferred compensation
Net Loss
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                    Additional         Committed
                                                                          Common Stock               Paid-in             Common
                                                                   Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>                <C>
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            38,323              --
Issuance of common stock on cashless
      exercise of warrants                                            2,958                 3                (3)             --
Beneficial conversion feature on convertible
      notes payable - related parties                                    --                --            15,831              --
Issuance of common stock for cash                                    40,000                40            29,960              --
Issuance of common stock on cashless
      exercise of warrants                                           17,334                17               (17)             --
Issuance of common stock for cash                                    40,000                40            29,960              --
Issuance of common stock for services rendered and
      to be rendered                                                200,000               200           323,800
Issuance of common stock for cash                                    40,000                40            29,960              --
Issuance of common stock on cashless
      exercise of warrants                                            7,879                 8                (8)             --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            10,735              --
Warrants issued for services rendered                                    --                --            78,297              --
Issuance of common stock for services rendered                       12,000                12            35,388              --
Issuance of common stock on cashless
      exercise of warrants                                          302,638               303              (303)             --
Issuance of common stock for services rendered                      100,000               100           277,900              --
Issuance of common stock on cashless
      exercise of warrants                                           12,701                13               (13)             --
Issuance of common stock on cashless
      exercise of warrants                                           18,235                18               (18)             --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock              141,383               141           360,386              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            74,639              --
Issuance of common stock on exercise of warrants                     35,776                36            53,628              --
Warrants issued for services rendered
      and to be rendered                                                 --                --            75,461              --
Issuance of common stock for services rendered
      and to be rendered                                             75,000                75           213,675
Beneficial conversion feature on convertible
      notes payable - related parties                                    --                --            78,024              --
Issuance of common stock for cash                                    30,303                30            29,970              --
Issuance of common stock on cashless
      exercise of warrants                                            6,269                 6                (6)             --
Issuance of common stock on cashless
      exercise of warrants                                            2,000                 2                (2)             --
Warrants issued for services rendered                                    --                --            54,675              --
Common stock committed for legal settlement                              --                --                            13,440
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            11,738              --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            17,790              --
Common stock committed to investors as a penalty
      for delayed registration of common stock                           --                --                           156,299
Warrants accrued but not issued to investors as a
      penalty for delayed registration of the underlying
      common stock                                                       --                --            27,717              --
Amortization of deferred compensation
Net Loss
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                    Deficit
                                                                                   Accumulated
                                                                                   during the
                                                                   Deferred       Development
                                                                 Compensation        Stage               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>                 <C>
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             38,323
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --             15,831
Issuance of common stock for cash                                       --                  --             30,000
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock for cash                                       --                  --             30,000
Issuance of common stock for services rendered and
      to be rendered                                              (324,000)                                    --
Issuance of common stock for cash                                       --                  --             30,000
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             10,735
Warrants issued for services rendered                                   --                  --             78,297
Issuance of common stock for services rendered                          --                  --             35,400
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock for services rendered                          --                  --            278,000
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --            360,527
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             74,639
Issuance of common stock on exercise of warrants                        --                  --             53,664
Warrants issued for services rendered
      and to be rendered                                           (75,461)                 --                 --
Issuance of common stock for services rendered
      and to be rendered                                          (213,750)                                    --
Beneficial conversion feature on convertible
      notes payable - related parties                                   --                  --             78,024
Issuance of common stock for cash                                       --                  --             30,000
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Issuance of common stock on cashless
      exercise of warrants                                              --                  --                 --
Warrants issued for services rendered                                   --                  --             54,675
Common stock committed for legal settlement                             --                  --             13,440
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             11,738
Issuance of warrants to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             17,790
Common stock committed to investors as a penalty
      for delayed registration of common stock                          --                  --            156,299
Warrants accrued but not issued to investors as a
      penalty for delayed registration of the underlying
      common stock                                                      --                  --             27,717
Amortization of deferred compensation                              153,903                                153,903
Net Loss                                                                            (7,600,103)        (7,600,103)
</TABLE>


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


                                       11
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Balance, April 30, 2004                                                                           --      $--

Beneficial conversion feature on convertible
      notes payable                                             05/01/04                          --       --
 Issuance of warrants in conjunction with
       convertible notes payable                                05/01/04      $        0.10       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       05/01/04      $        1.69       --       --
Issuance of common stock for services rendered                  05/05/04      $        2.19       --       --
Issuance of common stock for services rendered                  05/07/04      $        1.97       --       --
Offering costs on issuance of common stock                      05/10/04
Common stock committed for services rendered                    05/12/04      $        1.87       --       --
Issuance of committed common stock to investors as
 a penalty for delayed registration of common stock             05/15/04      $        1.85       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          05/15/04      $        1.85       --       --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       05/15/04      $        1.22       --       --
Issuance of common stock for cash                               05/21/04      $        1.51       --       --
Offering costs on issuance of common stock                      05/25/04                          --       --
Offering costs on issuance of common stock                      05/26/04                          --       --
Amortization of deferred compensation                           05/31/04                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          06/01/04      $        1.90       --       --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       06/01/04      $        1.27       --       --
Issuance of common stock for cash                               06/01/04      $        1.51       --       --
Issuance of common stock for cash                               06/01/04      $        1.51       --       --
Issuance of common stock for cash                               06/04/04      $        1.51       --       --
Issuance of common stock for cash                               06/07/04      $        1.51       --       --
Issuance of common stock for cash                               06/07/04      $        1.51       --       --
Issuance of common stock for cash                               06/07/04      $        1.51       --       --
Offering costs on issuance of common stock                      06/10/04                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          06/15/04      $        1.26       --       --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       06/15/04      $        0.69       --       --
Common stock committed for services rendered                    06/16/04      $        1.11       --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           06/16/04                          --       --
Beneficial conversion feature on convertible
      notes payable - related parties                           06/17/04                          --       --
Issuance of common stock for cash                               06/18/04      $        1.01       --       --
Beneficial conversion feature on convertible
      notes payable                                             06/23/04                          --       --
Issuance of warrants in conjunction with
       convertible notes payable                                06/23/04      $        0.15       --       --
Beneficial conversion feature on convertible
      notes payable                                             06/23/04                          --       --
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                     Additional         Committed
                                                                           Common Stock               Paid-in             Common
                                                                    Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>                <C>
Balance, April 30, 2004                                           30,652,482      $     30,652      $ 19,181,421       $ 179,679

Beneficial conversion feature on convertible
      notes payable                                                       --                --            25,262              --
 Issuance of warrants in conjunction with
       convertible notes payable                                          --                --           399,739              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 6,667                 7            15,661              --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --           186,733              --
Issuance of common stock for services rendered                        95,000                95           207,955              --
Issuance of common stock for services rendered                         3,500                 4             6,891              --
Offering costs on issuance of common stock                                                               (13,000)             --
Common stock committed for services rendered                              --                --                --          13,090
Issuance of committed common stock to investors as
 a penalty for delayed registration of common stock                   84,486                84           156,215        (156,299)
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                77,823                78           143,894              --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --            27,732              --
Issuance of common stock for cash                                     29,801                30            44,970              --
Offering costs on issuance of common stock                                --                --            (5,000)             --
Offering costs on issuance of common stock                                --                --            (2,250)             --
Amortization of deferred compensation                                     --                --                --              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                32,223                32            61,192              --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --           140,443              --
Issuance of common stock for cash                                     13,245                13            19,987              --
Issuance of common stock for cash                                     19,868                20            29,980              --
Issuance of common stock for cash                                     66,225                66            99,934              --
Issuance of common stock for cash                                     33,113                33            49,967              --
Issuance of common stock for cash                                     19,868                20            29,980              --
Issuance of common stock for cash                                     66,225                66            99,934              --
Offering costs on issuance of common stock                                                               (11,500)             --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               187,028               187           235,468              --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --            36,412              --
Common stock committed for services rendered                              --                --                --           9,990
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --             1,305              --
Beneficial conversion feature on convertible
      notes payable - related parties                                     --                --             3,859              --
Issuance of common stock for cash                                     99,010                99            99,901              --
Beneficial conversion feature on convertible
      notes payable                                                       --                --            30,044              --
Issuance of warrants in conjunction with
       convertible notes payable                                          --                --           209,956              --
Beneficial conversion feature on convertible
      notes payable                                                       --                --             7,511              --
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                   Deficit
                                                                                  Accumulated
                                                                                  during the
                                                                  Deferred       Development
                                                                Compensation        Stage               Total
-------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>                 <C>
Balance, April 30, 2004                                        $ (459,308)      $ (21,815,596)      $ (2,883,152)

Beneficial conversion feature on convertible
      notes payable                                                    --                  --             25,262
 Issuance of warrants in conjunction with
       convertible notes payable                                       --                  --            399,739
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --             15,668
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --            186,733
Issuance of common stock for services rendered                         --                  --            208,050
Issuance of common stock for services rendered                         --                  --              6,895
Offering costs on issuance of common stock                             --                  --            (13,000)
Common stock committed for services rendered                           --                  --             13,090
Issuance of committed common stock to investors as
 a penalty for delayed registration of common stock                    --                  --                 --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --            143,972
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --             27,732
Issuance of common stock for cash                                      --                  --             45,000
Offering costs on issuance of common stock                             --                  --             (5,000)
Offering costs on issuance of common stock                             --                  --             (2,250)
Amortization of deferred compensation                              92,202                  --             92,202
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --             61,224
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --            140,443
Issuance of common stock for cash                                      --                  --             20,000
Issuance of common stock for cash                                      --                  --             30,000
Issuance of common stock for cash                                      --                  --            100,000
Issuance of common stock for cash                                      --                  --             50,000
Issuance of common stock for cash                                      --                  --             30,000
Issuance of common stock for cash                                      --                  --            100,000
Offering costs on issuance of common stock                             --                  --            (11,500)
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --            235,655
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --             36,412
Common stock committed for services rendered                           --                  --              9,990
Beneficial conversion feature on convertible
      notes payable - related parties                                  --                  --              1,305
Beneficial conversion feature on convertible
      notes payable - related parties                                  --                  --              3,859
Issuance of common stock for cash                                      --                  --            100,000
Beneficial conversion feature on convertible
      notes payable                                                    --                  --             30,044
Issuance of warrants in conjunction with
       convertible notes payable                                       --                  --            209,956
Beneficial conversion feature on convertible
      notes payable                                                    --                  --              7,511
</TABLE>

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


                                       12
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Issuance of warrants in conjunction with
       convertible notes payable                                06/23/04      $        0.15       --       --
Issuance of committed common stock for legal settlement         06/24/04      $        1.28       --       --
Amortization of deferred compensation                           06/30/04                          --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          07/01/04      $        1.86       --       --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       07/01/04      $        1.23       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          07/15/04      $        1.20       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          07/15/04      $        1.20       --       --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock       07/15/04      $        0.64       --       --
Common stock committed for services rendered                    07/21/04      $        0.94       --       --
Warrants issued for services rendered                           07/26/04      $        0.39       --       --
Issuance of common stock for services rendered                  07/28/04      $        0.97       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          07/31/04      $        1.00       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  07/31/04      $        0.47       --       --
Amortization of deferred compensation                           07/31/04                          --       --
Common stock committed for services rendered                    08/05/04      $        1.14       --       --
Common stock committed for services rendered                    08/11/04      $        1.02       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          08/15/04      $        1.00       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  08/15/04      $        0.47       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          08/31/04      $        0.85       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  08/31/04      $        0.37       --       --
Amortization of deferred compensation                           08/31/04                          --       --
Beneficial conversion feature on convertible
      notes payable                                             09/01/04                          --       --
Committment to Issue common stock for subscription
      receivable                                                09/07/04      $        0.46       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          09/15/04      $        0.82       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  09/15/04      $        0.34       --       --
Issuance of common stock upon conversion of
      Convertible Note payable                                  09/20/04                          --       --
Common stock committed for services rendered                    09/21/04      $        0.78       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          09/30/04      $        0.82       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  09/30/04      $        0.44       --       --
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                     Additional         Committed
                                                                           Common Stock               Paid-in             Common
                                                                    Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>                <C>
Issuance of warrants in conjunction with
       convertible notes payable                                          --                --            52,489              --
Issuance of committed common stock for legal settlement               10,500                11            13,429         (13,440)
Amortization of deferred compensation                                     --                --                --              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                32,223                32            59,903              --
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --           136,473              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock               209,217               209           250,851              --
Common stock committed to investors as a
      penalty for delayed registration of common stock                    --                --                --             546
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock                 --                --            37,715              --
Common stock committed for services rendered                              --                --                             8,460
Warrants issued for services rendered                                     --                --            38,573              --
Issuance of common stock for services rendered                       182,955               183           177,283              --
Common stock committed to investors as a
      penalty for delayed registration of common stock                    --                --                --         116,004
Warrants committed to investors as a penalty
      for delayed registration of common stock                            --                --            15,500              --
Amortization of deferred compensation                                     --                --                --              --
Common stock committed for services rendered                              --                --                --          10,260
Common stock committed for services rendered                              --                --                --          12,240
Common stock committed to investors as a                                  --                --
      penalty for delayed registration of common stock                    --                --                --         116,004
Warrants committed to investors as a penalty
      for delayed registration of common stock                            --                --            15,500              --
Common stock committed to investors as a
      penalty for delayed registration of common stock                    --                --                --          27,390
Warrants committed to investors as a penalty
      for delayed registration of common stock                            --                --            41,405              --
Amortization of deferred compensation                                     --                --                --              --
Beneficial conversion feature on convertible
      notes payable                                                       --                --            55,769              --
Committment to Issue common stock for subscription
      receivable                                                          --                --                --          33,000
Common stock committed to investors as a
      penalty for delayed registration of common stock                    --                --                --         208,567
Warrants committed to investors as a penalty
      for delayed registration of common stock                            --                --            24,260              --
Issuance of common stock upon conversion of
      Convertible Note payable                                       192,308               192            99,808              --
Common stock committed for services rendered                              --                --                --          11,700
Common stock committed to investors as a
      penalty for delayed registration of common stock                    --                --                --          26,423
Warrants committed to investors as a penalty
      for delayed registration of common stock                            --                --            49,026              --
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                   Deficit
                                                                                  Accumulated
                                                                                  during the
                                                                  Deferred       Development
                                                                Compensation        Stage               Total
-------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>                 <C>
Issuance of warrants in conjunction with
       convertible notes payable                                       --                  --             52,489
Issuance of committed common stock for legal settlement                --                  --                 --
Amortization of deferred compensation                             114,150                  --            114,150
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --             59,935
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --            136,473
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                 --                  --            251,060
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --                546
Issuance of warrants to investors as a penalty for
      delayed registration of the underlying common stock              --                  --             37,715
Common stock committed for services rendered                           --                  --              8,460
Warrants issued for services rendered                                  --                  --             38,573
Issuance of common stock for services rendered                         --                  --            177,466
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --            116,004
Warrants committed to investors as a penalty
      for delayed registration of common stock                         --                  --             15,500
Amortization of deferred compensation                              72,199                  --             72,199
Common stock committed for services rendered                           --                  --             10,260
Common stock committed for services rendered                           --                  --             12,240
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --            116,004
Warrants committed to investors as a penalty
      for delayed registration of common stock                         --                  --             15,500
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --             27,390
Warrants committed to investors as a penalty
      for delayed registration of common stock                         --                  --             41,405
Amortization of deferred compensation                              20,084                                 20,084
Beneficial conversion feature on convertible
      notes payable                                                    --                  --             55,769
Committment to Issue common stock for subscription
      receivable                                                       --                  --             33,000
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --            208,567
Warrants committed to investors as a penalty
      for delayed registration of common stock                         --                  --             24,260
Issuance of common stock upon conversion of
      Convertible Note payable                                         --                  --            100,000
Common stock committed for services rendered                           --                  --             11,700
Common stock committed to investors as a
      penalty for delayed registration of common stock                 --                  --             26,423
Warrants committed to investors as a penalty
      for delayed registration of common stock                         --                  --             49,026
</TABLE>

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


                                       13
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                 Price per    Series A Convertible,
                                                                                  Equity        Preferred Stock
                                                                 Date              Unit       Shares      Amount
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>             <C>         <C>
Expensing of deferred compensation                              09/30/04                          --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          10/15/04      $        1.28       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  10/15/04      $        0.51       --       --
Common stock committed for cash                                 10/18/04      $        0.58       --       --
Common stock committed for cash                                 10/19/04      $        0.49       --       --
Common stock committed for cash                                 10/21/04      $        0.46       --       --
Common stock committed for cash                                 10/22/04      $        0.46       --       --
Common stock committed for services rendered                    10/25/04      $        0.97       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          10/31/04      $        0.99       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  10/31/04      $        0.61       --       --
Amortization of deferred compensation                           10/31/04                          --       --
Common stock committed upon receipt of cash                     11/01/04                          --       --
Issuance of common stock committed in October
      upon receipt of cash                                      11/05/04                          --       --
Issuance of common stock previously committed as a
      penalty for the delayed registration of common stock      11/05/04                          --       --
Common stock committed for services rendered                    11/05/04      $        1.04       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          11/15/04      $        1.02       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  11/15/04      $        0.49       --       --
Issuance of common stock committed in September
      upon receipt of cash                                      11/16/04      $        0.46       --       --
Issuance of common stock in settlement of
      promissory notes payable - related parties                11/19/04      $        0.46       --       --
Issuance of committed common stock from
      the cashless exercise of warrants                         11/24/04      $        0.00       --       --
Issuance of common stock for cash                               11/30/04      $        0.46       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  11/30/04      $        0.68       --       --
Amortization of deferred compensation                           11/30/04                          --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  12/15/04      $        0.41       --       --
Common stock committed for cash                                 12/23/04      $        0.46       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  12/31/04      $        0.50       --       --
Amortization of deferred compensation                           12/31/04                          --       --
Issuance of common stock for cash                               01/07/05      $        0.46       --       --
Issuance of common stock in settlement of
      promissory notes payable - related parties                01/07/05      $        0.46       --       --
Common stock committed for services rendered                    01/12/05      $        0.70       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          01/15/05      $        0.75       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  01/15/05      $        0.29       --       --
Issuance of common stock committed to investors as a
      penalty for delayed registration of common stock          01/18/05      $        0.96       --       --
Issuance of common stock for cash                               01/18/05      $        0.46       --       --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock          01/18/05      $        0.94       --       --
Common stock committed to former shareholders
      of Microdevices                                           01/25/05      $        0.04       --       --
Common stock committed to investors as a
      penalty for delayed registration of common stock          01/31/05      $        0.85       --       --
Warrants committed to investors as a penalty
      for delayed registration of common stock                  01/31/05      $        0.49       --       --
Common stock committed upon conversion of
      convertible note payable                                  01/31/05      $        0.45       --       --
Amortization of deferred compensation                           01/31/05
Net loss                                                                                          --       --
Balance at January 31, 2005                                                                       --       --
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                    Additional         Committed
                                                                          Common Stock               Paid-in             Common
                                                                   Shares             Amount         Capital             Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>                <C>
Expensing of deferred compensation                                       --                --                --              --
Common stock committed to investors as a
      penalty for delayed registration of common stock                   --                --                --         207,383
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            39,793              --
Common stock committed for cash                                          --                --                --         241,956
Common stock committed for cash                                          --                --                --         370,500
Common stock committed for cash                                          --                --                --          25,300
Common stock committed for cash                                          --                --                --          33,000
Common stock committed for services rendered                             --                --                --          14,550
Common stock committed to investors as a
      penalty for delayed registration of common stock                   --                --                --          90,014
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            90,390              --
Amortization of deferred compensation                                    --                --                --              --
Common stock committed upon receipt of cash                              --                --                --          20,700
Issuance of common stock committed in October
      upon receipt of cash                                        1,436,427             1,436           659,320        (660,756)
Issuance of common stock previously committed as a
      penalty for the delayed registration of common stock          744,799               745           667,903        (668,648)
Common stock committed for services rendered                             --                --                --          15,600
Common stock committed to investors as a
      penalty for delayed registration of common stock                   --                --                --          29,208
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            20,645              --
Issuance of common stock committed in September
      upon receipt of cash                                           71,739                72            32,928         (33,000)
Issuance of common stock in settlement of
      promissory notes payable - related parties                  1,010,870             1,011           463,989              --
Issuance of committed common stock from
      the cashless exercise of warrants                           1,046,687             1,047            (1,047)             --
Issuance of common stock for cash                                 1,707,395             1,707           783,693              --
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            84,276              --
Amortization of deferred compensation                                    --                --                --              --
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            37,352              --
Common stock committed for cash                                          --                --                --          50,000
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            60,990              --
Amortization of deferred compensation                                    --                --                --
Issuance of common stock for cash                                   489,783               490           224,810              --
Issuance of common stock in settlement of
      promissory notes payable - related parties                    128,260               128            58,872              --
Common stock committed for services rendered                             --                --                --          10,500
Common stock committed to investors as a
      penalty for delayed registration of common stock                   --                --                --          28,864
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            28,014              --
Issuance of common stock committed to investors as a
      penalty for delayed registration of common stock               85,700                86            81,787         (81,873)
Issuance of common stock for cash                                   200,000               200            91,800              --
Issuance of common stock to investors as a
      penalty for delayed registration of common stock              234,995               235           219,897              --
Common stock committed to former shareholders
      of Microdevices                                                    --                --                --          18,923
Common stock committed to investors as a
      penalty for delayed registration of common stock                   --                --                --           6,565
Warrants committed to investors as a penalty
      for delayed registration of common stock                           --                --            86,030              --
Common stock committed upon conversion of
      convertible note payable                                           --                --                --          49,560
Amortization of deferred compensation
Net loss                                                                 --                --                --              --
Balance at January 31, 2005                                      39,270,422      $     39,270      $ 26,320,022       $ 371,960
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                    Deficit
                                                                                   Accumulated
                                                                                   during the
                                                                   Deferred       Development
                                                                 Compensation        Stage               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>                 <C>
Expensing of deferred compensation                                  20,084                  --             20,084
Common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --            207,383
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             39,793
Common stock committed for cash                                         --                  --            241,956
Common stock committed for cash                                         --                  --            370,500
Common stock committed for cash                                         --                  --             25,300
Common stock committed for cash                                         --                  --             33,000
Common stock committed for services rendered                            --                  --             14,550
Common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --             90,014
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             90,390
Amortization of deferred compensation                               20,084                  --             20,084
Common stock committed upon receipt of cash                             --                  --             20,700
Issuance of common stock committed in October
      upon receipt of cash                                              --                  --                 --
Issuance of common stock previously committed as a
      penalty for the delayed registration of common stock              --                  --                  0
Common stock committed for services rendered                            --                  --             15,600
Common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --             29,208
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             20,645
Issuance of common stock committed in September
      upon receipt of cash                                              --                  --                 --
Issuance of common stock in settlement of
      promissory notes payable - related parties                        --                  --            465,000
Issuance of committed common stock from
      the cashless exercise of warrants                                 --                  --                 --
Issuance of common stock for cash                                       --                  --            785,400
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             84,276
Amortization of deferred compensation                               20,084                  --             20,084
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             37,352
Common stock committed for cash                                         --                  --             50,000
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             60,990
Amortization of deferred compensation                               20,084                                 20,084
Issuance of common stock for cash                                       --                  --            225,300
Issuance of common stock in settlement of
      promissory notes payable - related parties                        --                  --             59,000
Common stock committed for services rendered                            --                  --             10,500
Common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --             28,864
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             28,014
Issuance of common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --                 --
Issuance of common stock for cash                                       --                  --             92,000
Issuance of common stock to investors as a
      penalty for delayed registration of common stock                  --                  --            220,132
Common stock committed to former shareholders
      of Microdevices                                                   --                  --             18,923
Common stock committed to investors as a
      penalty for delayed registration of common stock                  --                  --              6,565
Warrants committed to investors as a penalty
      for delayed registration of common stock                          --                  --             86,030
Common stock committed upon conversion of
      convertible note payable                                          --                  --             49,560
Amortization of deferred compensation                               20,085                                 20,085
Net loss                                                                --          (8,208,216)        (8,208,216)
Balance at January 31, 2005                                     $  (60,252)      $ (30,023,812)      $ (3,352,812)
</TABLE>


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


                                       14
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE NINE MONTHS ENDED JANUARY 31, 2005 AND 2004 AND
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                                        For the
                                                                                                                      Period from
                                                                                       For the Nine Months Ended    August 21, 1995
                                                                                      ---------------------------    (Inception) to
                                                                                      January 31,     Janaury 31,     January 31,
                                                                                         2005            2004            2005
                                                                                                       Restated
                                                                                      (unaudited)     (unaudited)     (unaudited)
                                                                                      ------------    ------------    ------------
<S>                                                                                   <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
            Net loss                                                                  $ (8,208,216)   $ (4,826,800)   $(28,594,778)
            Adjustments to reconcile net loss to net cash
             used in operating activities
                      Depreciation                                                         157,816         102,894         401,354
                      Issuance of common stock for services rendered                       387,075         132,210       5,145,684
                      Common stock committed for services rendered                         106,390              --         106,390
                      Common stock issued for legal settlement                                  --              --          13,440
                      Issuance of common stock as compensation expense
                        for services rendered from minority shareholders                        --              --          18,923
                      Warrants issued or committed for services rendered                    38,573          50,424         976,035
                      Financing expense in connection with the
                        issuance of warrants                                                    --              --         223,710
                      Stock options issued for services rendered                                --         391,960       2,066,540
                      Additional compensation to officer in the form of
                        convertible note payable - related party                                --              --          42,171
                      Amortization of deferred compensation                                399,055         596,408       1,585,939
                      Amortization of debt discount on convertible
                        notes payable                                                      785,934         398,925       1,278,714
                      Issuance of convertible notes payable as a penalty for the
                       delayed registration of the underlying common stock                  26,000              --          33,000
                      Issuance of common stock as a penalty for the delayed
                        registration of shares of common stock                           1,738,167         372,899       3,020,530
                      Issuance or commitment to issue warrants as a penalty for the
                        delayed registration of the underlying common stock              1,158,690          30,926       1,389,972
                      Common stock committed as a penalty for the delayed
                        registration of shares of common stock                             106,447              --         106,447
                      (Increase) decrease in
                                Accounts receivable                                       (122,079)             --        (152,491)
                                Inventory                                                 (589,713)             --        (589,713)
                                Other current assets                                      (237,528)        (46,971)       (452,345)
                                Other assets                                                    --              --              --
                      Increase (decrease) in
                                Accounts payable                                           437,109         515,539       1,843,540
                                Accrued expenses                                           (28,548)         54,813          59,743
                                Accrued payroll and payroll taxes                           31,778          52,254         880,850
                                Accrued interest                                            70,954          22,069         150,176
                                Other current liabilities                                  100,000              --         100,000
                                                                                      ------------    ------------    ------------

Net cash used in operating activities                                                 $ (3,642,096)   $ (2,152,450)   $(10,346,169)
                                                                                      ------------    ------------    ------------
</TABLE>


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




                                       15
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE NINE MONTHS ENDED JANUARY 31, 2005 AND 2004 AND
             FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2005
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                                                        For the
                                                                                                                      Period from
                                                                                       For the Nine Months Ended    August 21, 1995
                                                                                      ---------------------------    (Inception) to
                                                                                      January 31,     Janaury 31,     January 31,
                                                                                         2005            2004            2005
                                                                                                       Restated
                                                                                      (unaudited)     (unaudited)     (unaudited)
                                                                                      ------------    ------------    ------------
<S>                                                                                   <C>             <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES
            Purchase of property and equipment                                        $   (144,154)   $   (177,169)   $   (993,683)
                                                                                      ------------    ------------    ------------

Net cash used in investing activities                                                     (144,154)       (177,169)       (993,683)
                                                                                      ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
            Proceeds from issuance of common stock in
             private placement                                                        $         --    $         --    $  3,547,406
            Offering costs on issuance of common stock in
                       private placement                                                        --              --        (196,793)
            Proceeds from issuance of common stock                                       2,271,456       1,246,003       4,264,724
            Offering costs on issuance of common stock                                     (31,750)        (45,250)       (139,768)
            Proceeds from commitment to issue common stock                                  80,700              --          80,700
            Proceeds from the issuance of preferred stock                                       --              --         979,301
            Offering costs on issuance of preferred stock                                       --              --        (178,902)
            Proceeds from issuance of common stock subject
              to rescission rights                                                         880,000         225,000       1,355,000
            Proceeds from issuance of common stock subject
              to buy-back                                                                       --         200,000         250,518
            Proceeds from collection of subscription receivable for
              sales of common stock subject to buy-back                                         --         443,482         443,482
            Recapitalization of reverse merger                                                  --              --              14
            Proceeds from exercise of stock options in subsidiary                               --              --           7,164
            Proceeds from issuance of common stock upon exercise
              of warrants                                                                       --             340          54,004
            Proceeds from notes payable                                                     59,000              --          59,000
            Payment on notes payable                                                        (8,482)             --          (8,989)
            Proceeds from issuance of notes payable - related parties                      476,000          36,000         947,853
            Payments on notes payable - related parties                                   (260,934)             --        (807,265)
            Proceeds from convertible notes payable                                        100,000              --         100,000
            Proceeds from convertible notes payable - related parties                           --              --          55,400
            Payments on convertible notes payable - related parties                             --         (10,400)        (35,400)
            Proceeds from convertible notes payable
              subject to rescission rights                                                 300,000         335,000         685,000
            Proceeds from collection of subscription receivable for
              sale of convertible note payable                                             425,000              --         425,000
                                                                                      ------------    ------------    ------------

Net cash provided by financing activities                                                4,290,990       2,430,175      11,887,449
                                                                                      ------------    ------------    ------------

Net increase in cash and cash equivalents                                                  504,740         100,556         547,597

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                              42,857         107,008              --
                                                                                      ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                              $    547,597    $    207,564    $    547,597
                                                                                      ============    ============    ============

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

             Interest paid                                                            $     13,771    $         --    $     16,659
                                                                                      ============    ============    ============

             Income taxes paid                                                        $      1,686    $      2,400    $     15,869
                                                                                      ============    ============

</TABLE>


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

                                       16
<PAGE>


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, , HiEnergy Technologies, Inc.
(the "Company") issued unsecured convertible notes payable-related party, in
exchange for accounts payable due to former legal counsel for the Company of
$25,648, $685,388 and $773,083, respectively.

During the nine months ended January 31, 2004, the Company issued 300,000 shares
of common stock in settlement of $100,000 of the above unsecured convertible
notes payable-related party balance due to former legal counsel of the Company.

During the nine months ended January 31, 2005, the Company issued 94,986 shares
of common stock which were committed to be issued as of the year ended April 30,
2004.

During the nine months ended January 31, 2005, the Company issued 192,308 shares
of common stock for the outstanding principal on a convertible note payable
balance of $100,000. The Company expensed a beneficial conversion feature upon
conversion in the amount of $55,769.

During the nine months ended January 31, 2005, the Company committed to issue
110,133 shares of common stock in settlement of $47,200 worth of convertible
notes payable plus accrued interest.

During the nine months ended January 31, 2005, the Company issued 71,739 shares
of common stock for proceeds of $33,000 that was deposited with a law firm for
prepaid legal services.

During the nine months ended January 31, 2005, the Company applied $39,959
deposited with its former legal counsel to outstanding accounts payable.

During the nine months ended January 31, 2005, the Company entered into a
three-year capital lease for office equipment valued at $6,633. Total payments
during the lease term are $8,538.

During the nine months ended January 31, 2005, the Company issued 1,046,687
shares of common stock on the cashless exercise of warrants to purchase
1,384,444 shares of common stock.

During the nine months ended January 31, 2005, the Company issued unsecured
notes payable to various employees in exchange for deferred salaries of $13,827
in the aggregate and $25,000 to a consultant in exchange for deferred consulting
fees.

During the nine months ended January 31, 2005, the Company issued 128,260 shares
of common stock to an investor, upon the conversion of notes payable of $59,000.

During the nine months ended January 31, 2005, the Company issued 1,010,870
shares of common stock to the chairman of the Company and an affiliate, upon the
conversion of notes payable-related parties of $465,000.

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


                                       17
<PAGE>

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

General

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the
commercialization of its initial proprietary, neutron-based, "stoichiometric"
sensor devices, including (i) the CarBomb FinderTM 3C4, a vehicle-borne system,
for the detection and identification of car bombs, and (ii) the SIEGMA(TM) a
portable suitcase-borne system for the detection and identification of home-made
bombs, also known as Improvised Explosive Devices or IEDs. The Company is
marketing its devices to governmental and private entities and is negotiating
licenses for distribution of its devices with various industry partners. To
date, the Company has devoted the bulk of its efforts and resources to the
research, design, testing and development of proprietary "stoichiometric" sensor
devices and underlying technologies, and has yet to generate meaningful revenues
from the sale of any products using its technologies.

The Company also continues to focus on the research and development of
additional applications of its technologies and their further exploitation, both
internally and through collaboration with third parties. HiEnergy is currently
developing prototypes in programs with the U.S. Department of Defense and the
Department of Homeland Security for other related uses of its core technology.
Recently, it entered into a funded cooperative development agreement with the
U.S. Transportation Security Administration (TSA) to produce a proof of concept
which incorporates the Company's SuperSenzor TM technology into a baggage
screening system. The Company's "stoichiometric" technology, or "Stoitech TM"
has been incorporated into additional prototype applications which, if the
Company is able to raise the funds necessary to commercialize them, will be the
next products it attempts to launch: (i) an in-ground explosive screening
system, the CarBomb Finder(TM) 3C5, (ii) an anti-tank landmine detector; (iii)
an unexploded ordnance detector, which is also useful to detect IEDs; and (iv) a
device the Company calls a "Refractorymeter", which can detect fissures or
erosions in the ceramic lining of oil cracking tanks.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, HiEnergy
has two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy Defense")
and HiEnergy Europe, Ltd. ("HiEnergy Europe"), which were incorporated under the
laws of the state of Delaware on July 28, 2003 and March 11, 2004, respectively.
Prior to January 2005, HiEnergy also had one majority owned subsidiary, HiEnergy
Microdevices, Inc., which was incorporated in Delaware on August 21, 1995 and
was the vehicle through which Stoitech TM was initially developed by its
Chairman and CEO, Dr. Bogdan Maglich. ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). As a result of a
short-form merger, which became effective on January 25, 2005, the Company
assumed all of Microdevices' assets and liabilities and Microdevices ceased to
exist as a separate entity as of that date.

RECAPITALIZATION BETWEEN HIENERGY AND SHAREHOLDERS OF MICRODEVICES

On April 25, 2002, SLW, which was then a "public shell company", was taken over
by the stockholders of Microdevices in a transaction commonly referred to as a
"reverse takeover". Under this transaction, which was structured as a voluntary
exchange of shares, the stockholders of Microdevices, including the Company's
present Chairman of the Board, Chief Executive Officer, President, Treasurer and
Chief Scientific Officer, Dr. Bogdan Maglich, obtained the right to receive up
to 64% percent of the outstanding shares of SLW. The stockholders of SLW prior
to the voluntary share exchange retained, collectively, 36% of SLW. The reverse
takeover was accounted for as a re-capitalization of Microdevices for accounting
purposes, in a manner similar to a pooling of interests, with Microdevices as
the accounting acquirer (reverse acquisition). Since the Company (formerly SLW)
was a "public shell company", with limited assets and liabilities at the date of
the acquisition and no significant operations prior to the acquisition, no pro
forma information has been presented. As a result of the reverse takeover,
Microdevices became the Company's majority-owned subsidiary, and was later
merged with the Company in January 2005 in a short-form merger through which the
Company committed to issue 459,222 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of Microdevices (the same ratio that was used in the original
voluntary share exchange).


                                       18
<PAGE>

NOTE 2 - RESTATEMENT AND RECLASSIFICATIONS

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

      o     Stock Options and warrants granted to employees and non-employees
            during fiscal years 1996 through 2002. Stock options granted to
            employees and directors were valued using the intrinsic value method
            as prescribed in APB No. 25, "Accounting for Stock Issued to
            Employees," and related interpretations while stock options and
            warrants issued to non-employees were valued using the Black-Scholes
            valuation model, in accordance with SFAS No. 123, "Accounting for
            Stock-Based Compensation" and related interpretations.

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

As a result of this revision and the change in how the Company determines the
fair value of Microdevices common stock, the Company's financial results for the
fiscal years ended April 30, 2002 and 2003, as well as the quarter ended January
31, 2004, have been restated to correct certain accounting errors made in
preparing those financial statements as well as other reclassifications and
adjustments. The Company has also made additional corrections to previously
unrecognized accounting discrepancies discovered during the restatement process,
including adjustments for estimated payroll tax liability as discussed in item 5
below.

Below is the reclassification effect to the Balance Sheet as of January 31, 2004
and the Statements of Operations for the three and nine months ended January 31,
2004:


                                       19
<PAGE>

Balance Sheet as of January 31, 2004
<TABLE>
<CAPTION>
                                                As Originally    Restatement                   As
                                                   Reported       Adjustment                Restated
                                                   --------       ----------                --------
<S>                                             <C>             <C>                      <C>
Current assets                                  $    492,520    $         --             $    492,520
                                                ------------    ------------             ------------
  Total assets                                     1,075,696              --                1,075,696
                                                ============    ============             ============
Accrued payroll and payroll taxes                     50,038         385,786         5        435,824

CNP subject to rescission rights                          --         385,000        12        385,000

Common stock subject to buy-back                          --         694,000        13        694,000

Common stock subject to rescission
  rights                                                  --         225,000                  225,000


Total current liabilities                          1,428,845         385,786         8
                                                                     385,000        12
                                                                     694,000        13
                                                                     225,000        14      3,118,631
                                                ------------    ------------             ------------
Convertible notes payable-related parties             78,205         (78,205)       12             --

Minority interest                                     18,923              --                   18,923
                                                ------------    ------------             ------------
Shareholders' Deficit

Common stock                                          31,557          (2,000)
                                                                        (303)       14         29,254
                                                ------------    ------------             ------------

Additional paid-in capital                        13,291,768       3,792,564         1
                                                                     667,037         2
                                                                    (255,460)        3
                                                                      24,924         4
                                                                      57,661         6
                                                                     372,899         6
                                                                      30,926         7
                                                                    (122,545)        8
                                                                     (39,513)        9
                                                                      13,925        10
                                                                     (28,153)       11
                                                                    (692,000)       13
                                                                    (224,697)       14     16,889,336
                                                ------------    ------------             ------------

Deficit accumulated during the
  development stage                              (13,835,447)     (3,792,564)        1
                                                                    (667,037)        2
                                                                     255,460         3
                                                                     (24,924)        4
                                                                    (363,904)        5
                                                                     (21,882)        5
                                                                     (57,661)        6
                                                                    (372,899)        6
                                                                     (30,926)        7
                                                                     122,545         8
                                                                      39,513         9
                                                                     (13,925)       10
                                                                      28,153        11
                                                                    (306,795)       12    (19,042,293)
                                                ------------    ------------             ------------

Total stockholders' deficit                         (452,727)       (385,786)        5
                                                                    (385,000)        2
                                                                      78,205        12
                                                                    (694,000)       13
                                                                    (225,000)       14     (2,064,308)
                                                ------------    ------------             ------------
Total liabilities & shareholders'
  deficit                                          1,075,696              --                1,075,696
                                                ============    ============             ============
</TABLE>


                                       20
<PAGE>

Statement of Operations for Three Months Ended January 31, 2004
<TABLE>
<CAPTION>
                                                As Originally    Restatement                   As
                                                   Reported       Adjustment                Restated
                                                   --------       ----------                --------

Contract Revenues                               $         --    $         --             $         --

<S>                                                <C>                 <C>           <C>
General & Administration                           1,186,415           7,294         5
                                                                     (69,794)        8
                                                                      (6,808)        9
                                                                      (9,360)       15      1,107,747
                                                ------------    ------------             ------------

Research & development                               209,529              --                  209,529

Total operating expenses                           1,395,944           7,294         5
                                                                     (69,794)        8
                                                                      (6,808)        9
                                                                      (9,360)       15      1,317,276
                                                ------------    ------------             ------------

Loss from operations                              (1,395,944)         (7,294)        5
                                                                      69,794         8
                                                                       6,808         9
                                                                       9,360        15     (1,317,276)
                                                ------------    ------------             ------------

Interest expense                                     (13,388)        (13,584)       10
                                                                    (306,795)       12
                                                                     (76,174)       17       (409,941)
                                                ------------    ------------             ------------

Financing expense                                    (76,174)         76,174        17             --

Penalties on equity                                       --        (169,965)        6
                                                                     (24,917)        7       (194,882)
                                                ------------    ------------             ------------

Total other expense                                  (89,454)       (169,965)        6
                                                                     (24,917)        7
                                                                     (13,584)       10
                                                                    (306,795)       12       (604,715)
                                                ------------    ------------             ------------

Net loss available to shareholders                (1,485,398)         (7,294)        5
                                                                    (169,965)        6
                                                                     (24,917)        7
                                                                      69,794         8
                                                                       6,808         9
                                                                     (13,584)       10
                                                                    (306,795)       12
                                                                       9,360        15     (1,921,991)
                                                ============    ============             ============
</TABLE>


                                       21
<PAGE>


Statment of Operations for Nine Months Ended January 31, 2004
<TABLE>
<CAPTION>
                                                As Originally    Restatement                   As
                                                   Reported       Adjustment                Restated
                                                   --------       ----------                --------
<S>                                                <C>                <C>            <C>             <C>
Contract Revenues                               $         --    $         --             $         --

General & Administration                           3,593,528          21,882         5
                                                                    (122,545)        8
                                                                     (39,513)        9      3,453,352
                                                ------------    ------------             ------------

Research & development                               546,606              --                  546,606

Total operating expenses                           4,140,134          21,882         5
                                                                    (122,545)        8
                                                                     (39,513)        9      3,999,958
                                                ------------    ------------             ------------

Loss from operations                              (4,140,134)        (21,882)        5
                                                                     122,545         8
                                                                      39,513         9     (3,999,958)
                                                ------------    ------------             ------------

Interest expense                                     (26,314)        (13,925)       10
                                                                    (306,795)       12
                                                                     (76,174)       17       (423,208)
                                                ------------    ------------             ------------

Financing expense                                    (76,174)         76,174        17             --

Penalties on equity                                       --        (372,899)        6
                                                                     (30,926)        7       (403,825)
                                                ------------    ------------             ------------

Total other expense                                 (101,497)       (372,899)        6
                                                                     (30,926)        7
                                                                     (13,925)       10
                                                                    (306,795)       12       (826,042)
                                                ------------    ------------             ------------

Loss before provision for income taxes            (4,241,631)        (21,882)        5
                                                                    (372,899)        6
                                                                     (30,926)        7
                                                                     122,545         8
                                                                      39,513         9
                                                                     (13,925)       10
                                                                    (306,795)       12     (4,826,000)
                                                ------------    ------------             ------------

Net loss                                          (4,242,431)        (21,882)        5
                                                                    (372,899)        6
                                                                     (30,926)        7
                                                                     122,545         8
                                                                      39,513         9
                                                                     (13,925)       10
                                                                    (306,795)       12     (4,826,800)
                                                ------------    ------------             ------------

Preferred stock dividend                            (611,396)         28,153        11       (583,243)

Net loss available to shareholders                (4,853,827)        (21,882)        5
                                                                    (372,899)        6
                                                                     (30,926)        7
                                                                     122,545         8
                                                                      39,513         9
                                                                     (13,925)       10
                                                                      28,153        11
                                                                    (306,795)       12     (5,410,043)
                                                ============    ============             ============
</TABLE>


                                       22
<PAGE>

1) For the period from August 21, 1995 (inception) to April 30, 2002, the
Company issued common stock, options and warrants to its founder, company
directors and other service providers as compensation for services rendered in
lieu of cash. The Company determined the fair value of the stock issued for this
purpose as the value of the service provided by the service provider. The
Company later determined that a more appropriate fair value for the common stock
was the weighted average per share value of cash received upon the sale of
common stock during the same period. Accordingly, the Company increased
compensation expense during the period by $3,792,564 as well as additional paid
in capital and accumulated deficit.

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

3) For the period ended April 30, 2002, the Company reversed $255,460 of expense
for the issuance of common stock for cash that was originally recorded as both
stock for cash and stock for services. As the shares were originally recorded
twice, additional paid in capital was overstated by the amount of $255,460.
Accordingly, additional accumulated deficit and additional paid in capital were
both reduced by the amount of $255,460.

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

5) For the three and nine months ended January 31, 2004, the Company recorded an
estimated payroll tax liability of $7,294 and $21,882, respectively, for
interest on an unpaid estimated payroll tax liability of $363,904 for the period
from August 21, 1995 (inception) through April 30, 2003. Accordingly, current
liabilities and accumulated deficit increased by the combined amount of $385,786
as of January 31, 2004. The Company has accrued the liability for its failure to
timely file payroll tax returns, Forms W-2 and 1099.

6) For the year ended April 30, 2003, the Company recorded an expense of $57,661
for the issuance of common stock as a penalty for delayed registration. The
issuance was originally recorded as an issuance cost. Accumulated deficit and
additional paid in capital were increased accordingly. For the three and nine
months ended January 31, 2004, the Company recorded an expense of $169,965 and
$372,899, respectively, for the issuance of common stock as a penalty for
delayed registration. The issuance was also originally recorded as an issuance
cost. Accumulated deficit and additional paid in capital were increased
accordingly.

7) For the three and nine months ended January 31, 2004, the Company recorded an
expense of $24,917 and $30,926, respectively, for the issuance of warrants as a
penalty for delayed registration of an effective registration statement.
Accumulated deficit and additional paid in capital were increased accordingly.

8) For the three and nine months ended January 31, 2004, the Company reversed
$69,794 and $122,545, respectively, of expense for stock options that were
overvalued when issued. Accordingly, additional paid in capital and accumulated
deficit were decreased by the same amount.


                                       23
<PAGE>

9) For the three and nine months ended January 31, 2004, the Company reversed
$6,808 and $39,513, respectively, of expense for warrants that were overvalued
when issued. Accordingly, additional paid in capital and accumulated deficit
were decreased by the same amount.

10) For the three and six months ended January 31, 2004, the Company expensed
$13,584 and $13,925, respectively, of interest expense due to the beneficial
conversion feature of a convertible note payable issued to the Company's former
legal counsel in settlement of amounts owed.

11) For the nine months ended January 31, 2004, the Company reversed $28,153 of
preferred stock dividends to remove the penalty portion of the dividend.
Accordingly, additional paid in capital and accumulated deficit were decreased
by the same amount.

12) For the three and nine months ended January 31, 2004, the Company expensed
an additional amount of $306,795 as interest expense related to the issuance of
convertible notes with detachable warrants. Previously the Company was
amortizing the values assigned to the beneficial conversion feature and
detachable warrants over the term of the note. Upon discovery that the offering
may be subject to rescission rights and immediately callable, the Company was
required to immediately expense the full values. See Note - 12 Convertible Notes
Payable Subject to Rescission Rights.

13) For the year ended April 30, 2003, the Company reclassified $494,000 from
stockholders' deficit to current liabilities. For the nine months ended January
31, 2004, the Company reclassified $200,000 from stockholder's deficit to
current liabilities. In April and June 2003, the Company engaged in a public
offering of its shares to purchasers who bought 1,400,000 and 900,000 shares of
common stock in reliance upon a prospectus that did not, at the time the sales
were made, contain a fixed price for the shares. These sales were made through
private negotiation of the prices to be paid by each investor, and the prices
were not consistent during the offering. The rules and regulations governing the
sale of securities through a prospectus under the Securities Act of 1933 do not
permit companies of our size to conduct a continuous public offering at prices
which are negotiated, and vary by investor. As a result of this violation, the
people who purchased the Company's common stock in the public primary offering
would have the right, which may but does not have to be waived by them, to
require the Company to buy back their shares at the price they paid for them.
This right continues until two years from the date of the last sale made in
violation of the fixed price rules. The Company has received waivers with
respect to 300,000 of the shares sold in the public offering.

14) For the period ending January 31, 2004, the Company has reclassified
$225,000 from common stock and additional paid in capital, to current
liabilities. This reclassification was required upon discovery that the shares
may be subject to rescission requiring the Company to buy the shares back from
the investors. See Note - 13 Sales of Common Stock Subject to Rescission.

15) For the three month period ended January 31, 2004, the Company reversed
$9,360 of expense for common stock issued to members of its Board of Directors
which the Company had committed to issue during the prior two fiscal quarters.
During the three months ended July 31, 2003, 3,000 shares of common stock with a
fair value of $3,000 were earned and committed, and during the three months
ended October 31, 2003 and 3,000 shares of common stock with a fair value of
$6,360 were earned and committed. The expense attributable to issuance of these
Directors' shares was originally recorded at the time the shares were issued,
rather than the date the shares were deemed earned and committed.

NOTE 3 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company incurred net losses
available to common shareholders of approximately $8,208,216, $5,410,043, and
$30,023,812, respectively, and it had negative cash flows from operations of
approximately $3,642,365, $2,172,544, and $10,346,438, respectively. In
addition, the Company had an accumulated deficit of $30,023,812 and was in the
development stage as of January 31, 2005. These factors raise substantial doubt
about the Company's ability to continue as a going concern.


                                       24
<PAGE>

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

In addition to the capital raised as of January 31, 2005 through private
placements, the Company is currently negotiating with certain investors to raise
additional capital through private placement offerings. Unless the Company
raises additional funds, either by debt or equity issuances, management believes
that its current cash on hand will be insufficient to cover its working capital
needs unless and until the Company's sales volume reaches a sufficient level to
cover operating expenses. Furthermore, the Company is involved in various
litigation matters. The effect of such litigation on the Company's financial
statements is indeterminable at this time.


NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             Basis of Representation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for a complete
set of annual financial statements. The Company believes its disclosures are
adequate so that the information presented is not misleading. These consolidated
financial statements should be read with the annual audited financial statements
and the notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended April 30, 2004, and other reports filed with the SEC. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of results of the
financial position and operations of the Company have been included in the
accompanying consolidated financial statements.

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period, and actual results could
differ from those estimates. Results of operations for the nine months ended
January 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ended April 30, 2005, or for any other period.

                           Principles of Consolidation

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

                          Development Stage Enterprise

The Company is a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises." All losses accumulated since inception have been considered
as part of the Company's development stage activities.

                              Comprehensive Income

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


                                       25
<PAGE>

                               Accounts Receivable

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

                              Other Current Assets

Other current assets consist primarily of prepaid insurance, prepaid consulting
and services, and equipment deposits. Prepaid insurance and prepaid consulting
and services are capitalized and amortized over the estimated period for which
such services are provided.

                             Property and Equipment

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

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

                            Valuation of Inventories

In the recent quarter the Company acquired components in anticipation of future
assembly and sale. The components have been recorded at cost. The Company plans
to adopt a first-in, first-out historic cost basis for inventory valuation.
Total inventory as of January 31, 2005 was $589,713.

          Convertible Notes Payable with Beneficial Conversion Features

The Company accounts for convertible notes payable ("CNP") with non-detachable
conversion options that are in-the-money ("beneficial conversion features"), at
the commitment date, in accordance with EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF Issue No. 00-27, "Application of Issue
No. 98-5 to Certain Convertible Instruments".

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

Where the Company has issued convertible notes payable with beneficial
conversion features without detachable warrants the difference between the
conversion price and the fair value of the common stock, at the commitment date,
is recorded as a debt discount and is amortized to interest expense over the
redemption period of the convertible note payable, in accordance with EITF No.'s
98-5 and 00-27. The redemption period is the shorter of the period to maturity,
conversion, or other event which requires the Company to rescind the convertible
note payable.

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


                                       26
<PAGE>

           Penalties Associated with Late Registration of Common Stock

The Company has entered into Stock Purchase Agreements ("SPA") and Convertible
Note Purchase Agreements ("CNPA") that include provisions that require the
Company to register, as freely trading, the shares of common stock and the
shares of common stock issuable upon exercise of warrants or conversion of
convertible notes payable within certain deadlines, in a Registration Statement
on Form SB-2. Furthermore, if such shares of common stock are not registered
within certain deadlines, a penalty becomes payable or accruable in like
securities. The common stock, warrants and convertible notes payable (the
"penalty securities") issued for late registration are described in Notes 12,
16, 17 and 18, and the commitment to issue such penalty securities is described
in Note 15 to this Report.

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

                          Cashless Exercise of Warrants

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

                         Research and Development Costs

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

                            Stock-Based Compensation

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

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

The weighted average fair value of stock options granted during the nine month
period ended January 31, 2005 was $0.60. Fair value was determined using the
Black-Scholes option-pricing model. For stock options granted in the nine month
period ended January 31, 2005, the weighted average assumptions for grants were
a risk free interest rate of 3.04%, an expected life of 2 years, an expected
volatility of 140% and an expected dividend yield of 0%.

The following table compares net loss attributable to common stockholders and
loss per share for the nine months ended January 31, 2005 and 2004, as reported,
to the pro forma amounts that would be recorded had compensation expense for
stock-based compensation been determined based on the fair value on the grant
dates consistent with the method of SFAS No. 123:


                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                        Nine months ended       Nine months ended
                                                        January 31, 2005        January 31, 2004
                                                        ----------------        ----------------
<S>                                                        <C>                     <C>
Net loss attributable to common stockholders               (8,208,216)             (5,410,043)
Total stock-based employee compensation expense
         determined under fair value based methods
         for all awards, net of related tax effects           764,725                 514,506
                                                            ---------               ---------

Pro forma net loss attributable to common stockholders     (8,972,941)             (5,924,549)

Basic loss per share:
          As reported                                           (0.24)                  (0.16)
            Pro forma                                           (0.26)                  (0.18)
Diluted loss per share:
          As reported                                           (0.24)                  (0.18)
            Pro forma                                           (0.26)                  (0.11)
</TABLE>


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

                 Warrants Issued As Financing and Offering Costs

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

                                  Income Taxes

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

                               Net Loss per Share

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

The following potential shares of common stock have been excluded from the
computation of diluted net loss per share for the periods presented because the
effect would have been anti-dilutive for the nine months ended January 31, 2005:


                                       28
<PAGE>

                                              Nine Months Ended
                                              January 31, 2005
                                              ----------------
Stock Options                                    8,070,655
Warrants                                        18,676,653
Convertible notes payable and accrued
      interest - related parties                   765,137
Convertible notes payable and accrued
      interest - subject to rescission rights    1,185,552
Common stock subject to buy-back                 2,000,000
Common stock subject to rescission rights        4,021,875
                                                ----------
                                                34,719,872
                                                ----------

                                    Estimates

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

                    Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS 123R"). SFAS
123R requires companies to expense the value of employee stock options and
similar awards. SFAS 123R is effective for interim and annual financial
statements beginning after June 15, 2005 and will apply to all outstanding and
unvested share-based payments at the time of adoption. The Company is currently
evaluating the impact SFAS 123R will have on its consolidated financial
statements and will adopt such standard as required.

NOTE 5 - RISKS AND UNCERTAINTIES

In addition to considering these risks and uncertainties, before making any
determination with respect to the Company, readers should refer to the other
information contained in this quarterly report for the period ended January 31,
2005 on Form 10-QSB (the "Report"), and the Company's Annual Report filed on
Form 10-KSB for the year ended April 30, 2004, including the information under
the heading entitled "Risk Factors", as well as review the disclosures included
as Forward-Looking Statements in this Report.

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

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

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

      o     an inability to obtain, as and when needed, additional financing on
            commercially reasonable terms;

      o     an inability to achieve profitability or positive cash flows;

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

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

      o     an inability to develop and market viable products;


                                       29
<PAGE>

      o     an inability to control the damage done to the ability to sell
            products and/or raise funds if product demonstrations conducted by
            the Company are unsuccessful;

      o     an inability to reallocate resources successfully if initial product
            lines prove unsuccessful;

      o     an inability to predict and control international risk that could
            materially harm our business, including the threat of terrorism;

      o     an inability to continue as a going concern as previously noted by
            the Company's independent auditors;

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

      o     an inability to defend against and resolve pending or future
            litigation including the current investigative matters currently
            being investigated by the U.S. Securities and Exchange Commission
            ("SEC"), any civil lawsuits arising out of those matters, and
            certain disputes involving former consultants and employees;

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

      o     an inability to reconcile any potential payroll tax liabilities;

      o     an inability to maintain directors and officers insurance coverage
            and other protections against legal claims;

      o     an inability to properly record and protect the Company's
            intellectual property rights, and the inability to bring or defend
            against claims of intellectual property infringement;

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

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

      o     changes in the regulatory and legislative environment affecting
            governmental laws and licensing requirements, including without
            limitation export restrictions and controls, which may affect the
            ability of the Company to sell and support its products;

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

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

      o     changes in pricing policies by the Company, its competitors or
            suppliers, including possible decreases in the average selling
            prices of the CarBomb Finder(TM) and SIEGMA(TM), caused by
            promotional offerings, contracted discounts, customer volume orders,
            and competitive pricing pressures;

      o     an inability to adapt to rapid technological change or shifts in
            market needs;

      o     current or future dependence upon a limited number of suppliers for
            certain component parts;

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

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

      o     a limited number of customers and an inability to identify and
            address additional markets or applications for the Company's
            technologies;

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

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

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

      o     the economic and social impact of natural and manmade disasters
            generally, as well as the impact of such circumstances on the
            ability of the Company to maintain its business and operations in
            the event it or its customers suffer irreparable harm or injury.


                                       30
<PAGE>

NOTE 6 - OTHER CURRENT ASSETS

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

                       January 31, 2005    April 30, 2004
                         ----------------    --------------
 Prepaid consulting          $ 58,953          $ 52,020
 Prepaid insurance             40,240             9,633
 Inventory deposit             44,838                --
 Equipment deposit            234,000           150,000
 Other                         44,354            13,162
                             --------          --------

 Total                       $422,385          $224,815
                             ========          ========

NOTE 7 - PROPERTY AND EQUIPMENT

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

                                     January 31, 2005     April 30, 2004
                                     ----------------     --------------
Prototype equipment                    $  330,471          $  228,399
Laboratory equipment                      547,364             501,445
Furniture and fixtures                     61,238              58,610
Leasehold improvements                     51,150              51,150
Web site development                       14,400              14,400
                                       ----------          ----------
                                        1,104,623              854,004

Less accumulated depreciation             401,351             243,536
                                       ----------          ----------

                 Total                 $  603,272          $  610,468
                                       ==========          ==========

Depreciation and amortization expense for the nine months ended January 31, 2005
and 2004 and the period from August 21, 1995 (inception) to January 31, 2005,
was $157,816, $102,894 and $401,354, respectively.

NOTE 8 - ACCRUED PAYROLL AND PAYROLL TAXES

The Company's former majority-owned subsidiary, Microdevices, which as of
January 25, 2005 was merged with the Company, has neither filed, nor amended,
certain of its IRS Forms W-2 and 1099, and certain payroll tax returns for the
tax years ended December 31, 1997 through 2002, with respect to the issuance of
shares of Microdevices common stock for services rendered by officers,
employees, directors, legal advisors and consultants. As of January 31, 2005,
the Company has accrued $416,489 for payroll taxes, penalties and interest. The
Company intends to file, or amend as necessary, its IRS Forms W-2 and 1099, and
certain payroll tax returns, and pay therewith any amounts due as soon as
possible.

Excluding the payroll tax liability mentioned above, the Company had salaries
and wages payable of $37,165 as of January 31, 2005.


                                       31
<PAGE>

NOTE 9 - NOTES PAYABLE

Notes payable consisted of the following as of the periods ended:
<TABLE>
<CAPTION>
                                                                                     January 31, 2005   April 30, 2004
                                                                                     ----------------   --------------
<S>                                                                                       <C>              <C>
Note payable to an equipment supplier, secured by equipment,
 bearing interest at 18% per annum due in January 2007, and payable in
 monthly installments of $169. This note was repaid in December 2004                      $    --          $ 3,970

Note payable to an equipment supplier, secured by equipment, bearing interest at
 17.205% per annum due in October 2007, and payable
 in monthly installments of $237                                                            6,053               --

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

Notes payable to employees for salary deferral, unsecured, bearing
 interest at 5% per annum.  These notes were paid in February 2005                         17,567            7,840

Note payable to a consultant for deferred compensation, unsecured, bearing
 interest at 5% per annum.  This note was paid in March 2005                               25,000               --
                                                                                          -------          -------
                                                                                           48,620           14,310

Less current portion                                                                       44,522           12,368
                                                                                          -------          -------
   Long-term portion                                                                      $ 4,098          $ 1,942
                                                                                          =======          =======
</TABLE>

NOTE 10 - NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties consisted of the following as of the periods
ended:
<TABLE>
<CAPTION>

                                                                                     January 31, 2005    April 30, 2004
                                                                                     ----------------    --------------
<S>                                                                                    <C>               <C>
Note payable to a shareholder of the Company, unsecured, bearing interest at
  10.5% per annum, or 15% per annum upon default, and due

  in November 1997.  As of January 31, 2005, the note was in default                     $ 40,000         $ 40,000

Note payable to a shareholder of the Company, unsecured, bearing
  interest at 10.5% per annum, and due on demand                                           45,000           45,000

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

Notes payable to the Chairman of the Company and an affiliate,
  bearing interest at 5% per annum, and due on demand                                          --          249,934
                                                                                         --------         --------
                                                                                           99,000          348,934

Less current portion                                                                       99,000          348,934
                                                                                         --------         --------

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


                                       32
<PAGE>

NOTE 11 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

Convertible notes payable - related parties consisted of the following as of the
periods ended:
<TABLE>
<CAPTION>
                                                                                      January 31, 2005    April 30, 2004
                                                                                      ----------------    --------------
<S>                                                                                       <C>               <C>
Convertible notes payable to former legal counsel of the Company, unsecured,
  bearing interest at 10% per annum and due in April 2005. The holder of the
  notes has the option to convert the principal and interest into shares of
  common stock of the Company at $1.00 per
  share at any time                                                                       $596,790          $571,142

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

Convertible note payable to former legal counsel of the Company, unsecured,
   bearing interest at 10% per annum and due in May 2005. The holder of the note
   has the option to convert the principal and interest into shares of common
   stock of the company at $1.00 per
   share at any time                                                                        38,061            38,061
                                                                                          --------          --------
                                                                                           673,083           647,435

                                                                                          --------          --------
Less current portion                                                                       673,083           609,374
                                                                                          --------          --------


Long-term portion                                                                         $     --          $ 38,061
                                                                                          ========          ========
</TABLE>

NOTE 12 - CONVERTIBLE NOTES PAYABLE SUBJECT TO RESCISSION RIGHTS

Convertible notes payable subject to rescission rights consisted of the
following as of the periods ended:
<TABLE>
<CAPTION>
                                                                                     January 31, 2005      April 30, 2004
                                                                                     ----------------      --------------
<S>                                                                                       <C>               <C>
Convertible notes payable, unsecured, bearing interest at 5% per annum, and
 coupled with the proceeds allocated to the detachable warrants, an estimated
 effective annual interest rate of 49%, due in January 2006. The note holders
 have the option to convert the principal and accrued interest into shares of
 common stock at $0.45 per share at any time until the later of the prepayment
 date or the maturity date. The convertible notes payable have detachable
 warrants to purchase shares of common stock with a three and one-half year term
 as follows: 1,333,332 at $0.45 per share; 400,000 at $0.75 per share; and
 240,000 shares at $1.25 per share. The investors also have registration rights
 on the underlying shares, and, as of April 30, 2004, receive as penalties for
 the failure to register them: (i) additional detachable warrants to purchase up
 to 2% of the amount of shares exercisable under the original warrants; and (ii)
 additional convertible notes payable equal to 2% of the original face amount,
 or principal balance, for each subsequent month until a registration statement
 is filed and maintained effective by the Company, or until such penalties
 become impermissible as a matter of law as prescribed in the instrument or the
 relevant shares can be sold without registration under Rule 144. Additionally,
 the convertible notes payable provide the note holders with ratchet rights,
 whereby the conversion price of the convertible notes payable will be reduced
 to equal the price of any new shares sold in unrelated transactions prior to
 January 15, 2005 at a price per share below $0.45. If shares are offered for
 sale at a price per share under $0.45 prior to January 15, 2005, the note
 holders also have a first right of refusal to purchase the shares offered as
 well. The holders exercised their
 rights to a second closing during the quarter ended July 31, 2004                        $310,000          $ 50,000

Convertible note payable, unsecured, bearing interest at 5% per annum, and due
 in May 2006, issued as a penalty to holders of certain convertible notes
 payable as a result of the Company's inability to file a registration statement
 within certain specified deadlines, covering and reflecting the same terms as,
 the convertible notes payable referenced above, with the
 exception of penalties                                                                     19,800             1,000

Convertible note payable, unsecured, bearing interest at 5% per annum, and
 coupled with the proceeds allocated to the detachable warrants, an estimated
 effective annual interest rate of 44%, due in January 2006. The holder of the
 note has the option to convert the principal and accrued interest into shares
 of common stock at $0.45 per share at any time until the later of the note's
 stated prepayment date or maturity date. The convertible note payable has
 detachable warrants with a three and one-half year term to purchase shares of
 common stock as follows: 411,111 at $0.45 per share; 246,667 at $0.75 per
 share; 148,000 shares at $1.25 per share and 123,333 shares at $1.50 per share
 The investor also has registration rights on the underlying shares, as well as
 rights to a second closing for
 up to $400,000 of convertible note payable having similar terms                           185,000           185,000
                                                                                          --------          --------
                                                                                           514,800           236,000

                                                                                          --------          --------
Less current portion                                                                      $514,800          $236,000
                                                                                          --------          --------

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


                                       33
<PAGE>

In accordance with EITF No.98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its sale of a $425,000 convertible note
payable with detachable warrants for the beneficial conversion feature. The
Company has allocated the proceeds from the placement of the debt to the
warrants and the debt based on their relative pro-rated values. This resulted in
$399,738 being allocated to warrants and $25,262 to debt. Since the convertible
note payable was determined to be subject to possible rescission rights, both
the value attributed to the warrants and the debt were immediately expensed,
resulting in a combined expense of $425,000.

In accordance with EITF No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its sale of a $240,000 convertible note
payable with detachable warrants for the beneficial conversion feature. The
Company has allocated the proceeds from the placement of the debt to the
warrants and the debt based on their relative pro-rated values. This resulted in
$209,956 being allocated to warrants and $30,044 to debt. Since the convertible
note payable was determined to be subject to possible rescission rights, both
the value attributed to the warrants and the debt were immediately expensed,
resulting in a combined expense of $240,000.

In accordance with EITF No.98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its sale of a $60,000 convertible note
payable with detachable warrants for the beneficial conversion feature. The
Company has allocated the proceeds from the placement of the debt to the
warrants and the debt based on their relative pro-rated values. This resulted in
$52,489 being allocated to warrants and $7,511 to debt. Since the convertible
note payable was determined to be subject to possible rescission rights, both
the value attributed to the warrants and the debt were immediately expensed,
resulting in a combined expense of $60,000.


                                       34
<PAGE>

The above convertible notes payable may be subject to integration with previous
sales of convertible notes payable to some holders. Earlier, the Company sold
securities to the investors in a private offering, at the same time the Company
had on file a registration statement with the SEC. Such a contemporaneous,
private offering may have resulted in a violation of certain federal securities
laws concerning the contemporaneous sale of securities by the Company at
different terms, where the effect of integration can be to destroy an exemption
upon which a company has relied in issuing its securities privately, which
renders the transaction an illegal unregistered public offering. If this is the
case, the purchasers of convertible notes payable may have similar rescission
rights available to certain of the shareholders as described in Note 13. (See
Note 13 for a full description of the circumstances surrounding the rescission
rights of the shareholders). Accordingly, the Company may be required to pay
each rescinding holder of convertible notes payable the amount it received as
consideration, plus any interest with respect to such amount at the applicable
rate, and the convertible notes payable would be cancelled. To date, the Company
has not made a final determination as to whether or not a violation has
occurred. Even though it does not anticipate receiving any demands for
repurchase of these convertible notes payable, the Company has recorded $539,000
from the sale of convertible notes payable effected during the period when the
referenced registration statement was on file, as a current liability as of
January 31, 2005.

NOTE 13 - SALES OF COMMON STOCK SUBJECT TO RESCISSION

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

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

While the Company has not completed any independent investigation into whether
or not the rescission rights are in fact due to certain shareholders or whether
or not there may be defenses which could negate the requirement to offer
buy-back or rescission rights to prior investors, upon certain advice it has
received, the Company recorded $1,938,153 from the sales of 4,021,875 shares of
common stock as a result of the advice as a liability as of January 31, 2005.

NOTE 14 -RESEARCH AND DEVELOPMENT COSTS

To date, the Company has devoted the bulk of its efforts and resources to the
research, design, testing and development of sensor systems incorporating its
proprietary "stoichiometric" technologies for numerous governmental and
commercial applications and markets. The Company's technologies have the ability
to determine automatically, in a matter of tens of seconds and with a high
degree of accuracy, whether an object or container carries dangerous substances,
such as explosives, illicit drugs or biological agents, by deciphering the
chemical formula of selected substances. Aside from its current applications,
management believes that its technologies have numerous other applications.


                                       35
<PAGE>

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

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

The Company is currently in the second year of Phase II of a Small Business
Innovation Research ("SBIR") contract awarded to it in August 2002 by the U.S.
Army Night Vision and Electronic Sensor Directorate ("NVESD"). Under the terms
of the contract, the Company is to develop and test its Anti-Tank Landmine
Detector (TM) 7AT7 over a two-year period, which was extended for one additional
year at the option of the U.S. Army and is set to expire March 2005. As of
January 31, 2005, the Company has earned $749,532 against the contract and is
entitled to earn an additional $30,412 in SBIR contract proceeds to complete
Phase II. If further research and development work is required upon the
expiration of Phase II, the Company has the ability to submit a request for
additional Phase II and/or Phase III funding, which the government would
consider based upon the Company's progress to date and the merits of the
project. The U.S. Army is under no obligation to continue to assist in funding
these research and development costs beyond Phase II or any subsequent
extension, or to purchase any of the Company's products, including the Anti-Tank
Landmine Detector (TM) 7AT7, once the Company has completed development
activities. Under the terms of the contract, the U.S. Army pays a portion of the
Company's research and development costs on a periodic basis during the term of
the contract, for which the Company is required to submit monthly written
reports detailing its progress under the contract. When the written report is
accepted by the U.S. Army, the Company usually receives payment in about 30 to
45 days. The Company recognizes one-twelfth of the annual contract amount as an
offset against research and development expenses each month.

In September 2004, the Company entered into a Cooperative Agreement with the
U.S. Transportation Security Administration (TSA). Under the agreement, the
Company is to provide proof-of-concept for the Company's "NextGen Checked
Baggage Program (STOXOR)" over a nine month period, which may be extended at the
option of the TSA. The agreement provides funding in the amount of $367,141 for
Phase 1, and an additional $145,381 for Phase 2, if, at the conclusion of Phase
1, the TSA elects to continue with the Company. As of January 31, 2005, the
Company has earned $122,510 in cooperative financing from the TSA to complete
Phase 1, and is entitled to earn an additional $244,631 in contract proceeds to
complete Phase 1. There is no obligation for the TSA to fund the Company's
development efforts under this agreement beyond the Phase 1 funded amount or to
purchase any of the Company's products once it has completed development
activities. The TSA will pay the Company's research and development costs on a
periodic basis during the term of the contract, for which the Company is
required to submit monthly written reports detailing its progress under the
contract. When the written report is accepted by the TSA, the Company receives
payment in about 30 to 45 days. Payments commenced in November 2004 and the
Company recognizes one-sixth of the Phase 1 funding amount as an offset against
research and development expenses for each month invoiced.

Below is a summary of research and development costs for the following periods:
<TABLE>
<CAPTION>
                                                                                    For the Period from
                                                                                      August 21, 1995
                                               Nine Months Ended January 31,           (Inception) to
                                               -----------------------------           --------------
                                                 2005                  2004           January 31, 2005
                                                 ----                  ----           ----------------
<S>                                         <C>                   <C>                   <C>
Research and development costs              $   998,582           $   857,853           $ 4,253,265
Grant proceeds                                 (396,218)             (311,247)           (1,238,792)
                                            -----------           -----------           -----------
Net research and development costs          $   602,364           $   546,606           $ 3,014,473
                                            ===========           ===========           ===========
</TABLE>

                                       22


NOTE 15 - COMMITMENTS AND CONTINGENCIES

                      Consultancy Agreements and Contracts

In August 2004, the Company entered into an agreement with an engineering and
construction firm, which agreed to provide design and construction management
services to the Company in connection with a proposed manufacturing plant
capable of producing commercial quantities of the CarBomb FinderTM. Under the
terms of the proposal, the engineering and management firm is responsible for
designing and implementing a facility which is suitable for its intended
purposes, including creating a flow process recommendation, designing the
optimum configuration for the facility, providing construction management,
assisting with supplier relationships, and reviewing transportation, laboratory
testing and other logistical issues. As of the date of this Report, the Company
is obligated to pay the firm an amount of $35,039 in consideration for past
services, subject to the terms of the agreement.

In November 2004, the Company entered into a consultancy agreement with an
independent contractor to provide product engineering management, which provides
for services to be rendered for a period of one year, subject to a review on
June 1, 2005. Under the agreement, the Company is obligated to pay the
contractor $1,924 per week, which may be paid at the Company's option in a
combination of cash, stock and/or options.

In November 2004, the Company entered into a retention agreement with an
attorney to act as special counsel to the Company on discovery and litigation
matters related to the arbitration between Isaac Yeffet of Yeffet Security
Consultants and the Company. Pursuant to the agreement, the Company paid the
attorney a retainer of $10,000 against which legal fees and costs associated
with the matter would be offset.

In January 2005, the Company entered into a retention agreement with an attorney
to act as special co-Counsel to the Company on discovery and litigation matters
related to the class action law suit filed against the Company. Pursuant to the
agreement, the Company paid the attorney a retainer of $5,000 with a commitment
to pay legal fees with cash, registered shares of common stock, or a combination
of both.

                              Employment Agreements

In January 2005, the Company entered into an employment agreement with its Vice
President/Corporate Secretary. Major commitments included in the agreement, as
amended, are as follows:

      o     The Company committed to pay its Vice President/Corporate Secretary
            an annual base salary of $200,000, of which $140,000 will be payable
            in cash and the remainder in deferred compensation in the form of
            three Promissory Notes, one due April 30, 2005, one due August 31,
            2005, and one due November 30, 2005, each for $20,000 and bearing
            interest at 5% per annum.

      o     The Company has the option to prepay services of its Vice
            President/Corporate Secretary with S-8 stock having value equivalent
            to six (6) months of the above stated salary.

      o     The Company granted its Vice President/Corporate Secretary stock
            options to purchase 500,000 shares of common stock at an exercise
            price no greater than the average price of the Company's traded
            shares for the preceding 30 days prior to the date of the grant, The
            option shall be 33% vested on May 1, 2005, 66% vested on September
            1, 2005 and 100% vested on December 31, 2005.

      o     If the employment agreement is terminated by the Company without
            cause, the Company must pay its Vice President/Corporate Secretary
            on the termination date severance pay in an amount equal to six
            months of the minimum annual base salary.

      o     The Company will provide its Vice President/Corporate Secretary with
            comprehensive family medical and dental healthcare benefits.

                                 Lease Agreement

In October 2002, the Company entered into a three-year operating lease agreement
with one of its directors at that time for its corporate offices in Irvine,
California. The lease provides for monthly rent of $9,200 for the first 18
months and $13,893 for months 19 through 36. In January 2004, the Company
executed an addendum to the lease agreement to lease an additional 4,570 square
feet of space within the same building in which the Company's offices are
located. The new space is being used for production and testing of the Company's
products. The addendum began in February 2004 and expires in September 2005 with
the master lease. The additional monthly rent is $4,493.


                                       36
<PAGE>

Rent expense for the nine months ended January 31, 2005 and 2004 was $125,037
and $81,600, respectively. The lease expires in September 2005 and future
minimum payments under these lease agreements are $101,544.

                               SEC Investigations

After reading news reports that connected the Company's reverse takeover of
Microdevices with known stock manipulators, its Board of Directors directed the
Company's President to hire a team of independent investigators to investigate
whether any of the Company's officers and directors had engaged in any
wrongdoing. The core team of independent investigators consisted of two former
U.S. federal prosecutors, a former Assistant U.S. Attorney in the civil division
who has been in private practice since 1981 with experience in securities
litigation and regulatory and investigative proceedings, and a former
supervisory agent from the Federal Bureau of Investigation. In their review, the
independent investigators obtained evidence that some of the Company's
stockholders who purchased significant amounts of HiEnergy shares prior to the
reverse takeover knew, or had business dealings with, Phil Gurian, a person who
the Company later learned had previously been involved in stock manipulation,
and that one of these stockholders was a company reportedly owned by Mr.
Gurian's mother, which disposed of its shares in April 2002 at a profit believed
to be between $500,000 and $600,000. Mr. Barry Alter, a person who later served
as one of the Company's directors and, for a short time, as HiEnergy's interim
President, was found to have been aware of these purchases of HiEnergy shares.
The independent investigators believed the evidence was inconclusive whether
Phil Gurian had control over these HiEnergy shares and, if so, whether the
Company's former president and director, Barry Alter, had any knowledge of such
control.

In April 2003, the Enforcement Division of the SEC commenced a formal
investigation as to the undisclosed ownership of the Company's securities, and
actions with respect to its stock taken, by Philip Gurian, Barry Alter and other
of their affiliates who controlled SLW at the time of the Company's reverse
takeover, and the undisclosed identity of, and the origin of funds used to
purchase the Company's stock by, certain of the Company's shareholders. The
Company voluntarily has supplied the Enforcement Division of the SEC attorneys
with reports developed by the independent investigators and the Company has
cooperated in a transparent and timely manner, and intends to continue to
cooperate with the investigation. The Company also agreed voluntarily to provide
the Enforcement Division of the SEC with other documents they have requested in
its informal investigation.

On March 30, 2004, Dr. Bogdan Maglich, the Company's Chief Executive Officer,
Chief Scientific Officer, Treasurer, President and Chairman, gave an oral and
written presentation at the Investment Opportunities in Homeland Security and
Defense Conference in Washington, D.C. regarding HiEnergy's key markets,
business strategy and financial projections. Copies of the presentation were
distributed at the conference. The Company subsequently posted the presentation
on the Company's website from April 7, 2004 to April 13, 2004. Approximately
2,731 computer users visited the website and had access to the presentation. The
total number of hits was 96,937, or a daily average of approximately 13,848. The
presentation contained statements of management's beliefs concerning the
Company's key markets, business strategy, opportunities and financial
projections which were not disclosed in a concurrent registration statement the
Company had filed with the SEC on Form SB-2. In order to reduce the risk of an
investor relying on the presentation, the Company removed the presentation from
the Company's website on April 13, 2004, in part to allow for a "cooling off"
period so that any possible effect of the presentation would dissipate, and the
Company subsequently withdrew the registration statement on April 16, 2004. The
Company's projections made in that presentation have not come to pass and may
never be fully achieved.

The conference and website information stated that we had projected sales of 265
units at an average price of $223,396 per unit, including maintenance fees.
These projections assumed that the Company would raise the money it needed to
fund its conversion from a prototype development company to one which could
manufacture its CarBomb FinderTM and Antitank Landmine Detector (TM) 7AT7 at
commercial levels. Since the date that the projections were made, the Company
has been unable to raise the capital necessary to achieve that objective. In
addition, the availability of greater resources and interest to develop a line
of products in response to the startling increase in the use by terrorists of
home-made Improvised Explosive Devices, or IED's, in Iraq and elsewhere, have
led to a determination by the Company to focus more on deploying its SIEGMA(TM),
suitcase-borne, product which is designed to thwart this particular type of
threat. The confluence of the Company's inability to raise the funds necessary
to scale up to commercial production at the levels previously assumed, together
with the shift in its commercial priorities in order to respond to emerging
risks, caused the Company to fail to meet its 2004 projections. Accordingly,
investors should not rely on these projections in making any determination
whether or not to invest in, or maintain an investment in, the Company.


                                       37
<PAGE>

On April 12, 2004, the Company received a Subpoena for information from the SEC,
which required the Company to supply them with documents pertaining to the
presentation given by Dr. Bogdan Maglich at the Investment Opportunities in
Homeland Security and Defense Conference in Washington, D.C. in March 2004. A
subsequent letter, dated May 24, 2004, requested documents substantiating
statements the Company had previously reported in a press release regarding the
Company's discussions with a consortium calling itself the Dallas-Fort Worth
Homeland Security Alliance. The Company voluntarily responded to both requests
for documents.

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

On June 30, 2004, the SEC sent the Company a Subpoena in which it required the
Company to provide it with copies of all documents concerning the restatement of
the Company's financial statements for the years ended April 30, 2002 and 2003,
as announced on June 9, 2004. The Subpoena requested documentary evidence about
the restatement, including, without limitation, all of the Company's electronic
and written correspondence, notes, journal entries, records, working papers and
other documents that pertain to the restatement, and specifically all
communications between the Company and its auditors. The Company's auditors also
received a similar subpoena from the SEC. The effect of the restatement of the
Company's financial statements was to cause the Company to record additional
expense to the Company of $1,009,531 and $514,415 during the fiscal years ended
April 30, 2002 and April, 30, 2003, respectively, and to increase the amount of
the Company's accumulated deficit and additional paid-in capital brought forward
at May 1, 2001 by $3,126,684 and $3,123,749, respectively.

                                   Litigation

In May 2003, Mr. Alter brought a lawsuit against the Company in the New Castle
County Court of Chancery in Delaware to recover the advancement of expenses in
the amount of $24,000 he allegedly incurred in response to an SEC investigation
which mirrored the Company's investigation by the SEC, and for which Mr. Alter
obtained separate legal counsel to represent him. That action was identified as
Civil Action No. 20320NC. On June 17, 2003, Mr. Alter notified the Company that
this action had been voluntarily dismissed without prejudice. However, to date,
there has been no settlement with Mr. Alter, and there can be no assurance that
the claims he asserted against the Company will not be resuscitated at some time
in the future.

The Company is currently arbitrating a dispute with its former consultant,
Yeffet Security Consultants, Inc. ("YSCI") and Isaac Yeffet, President of YSCI.
The Company entered into a three-year consulting agreement with YSCI in July
2002 whereby YSCI was to assist the Company with business development, product
and corporate image advertising, and access to government grants and purchases.
For its consulting service, the agreement provided that YSCI would be paid
$20,000 per month, plus 5% of any gross revenues collected in cash from
government grants or business and other third-party business that YSCI produced
for the Company.


                                       38
<PAGE>

In October 2003, the Company notified YSCI that it was terminating its contract.
In February 2004, YSCI filed a Demand for Arbitration, alleging that the Company
breached the consulting agreement and seeking to recover $450,000 in unpaid
consulting fees. In April 2004, YSCI amended its Demand for Arbitration to
include a claim for commissions that YSCI claims it is owed in connection with
investments made by individuals who purchased shares of the Company's stock. The
Amended Demand for Arbitration also seeks a determination as to whether Mr.
Yeffet is entitled to exercise options to purchase 500,000 shares of common
stock issued to him under the Company's Stock Option Agreement. In June 2004,
the Company filed an answer generally denying YSCI's allegations set forth in
the original and amended Demands for Arbitration. The Company also filed a cross
Demand for Arbitration seeking disgorgement of all monies paid to YCSI and
rescission of the consulting agreement and stock option agreement. The parties
are in the process of exchanging discovery. The Company intends to defend itself
vigorously in the arbitration. Depositions in this matter began in New Jersey on
December 15, 2004 for the Company and in January 2005 for YSCI. As of this date,
the Company and its legal counsel have made no other determination as to the
merits of, or possible defenses to, the arbitration.

Prior to its termination, YSCI was granted options to purchase 1,000,000 shares
of common stock with an exercise price of $1 per share and exercisable for six
years from the date of grant. Of these options, 500,000 vested immediately, and
the remaining 500,000 were to vest one year after the achievement of certain
milestones. The vested 500,000 stock options were valued at $761,000.

In October 2004, the Company first learned about a Complaint filed as a Class
Action against it and its chairman, among other named defendants, in Federal
District Court in Orange County, California, which is styled as a "Complaint for
Violation of Federal Securities Laws - Class Action" (the "Complaint"). The
Complaint was filed on behalf of a class of persons who acquired the stock of
the Company during the period from February 22, 2002 through July 8, 2004. In
January 2005, the Company was officially served and has retained legal counsel
to vigorously defend it and assert all available defenses. In February 2005,
plaintiff's counsel filed a First Amended Complaint entitled and styled, "In re:
HiEnergy Technologies, Inc. Securities Litigation," Master File No.
8:04-CV-01226-DOC (JTLx), alleging various violations of the federal securities
laws, generally asserting the same claims involving Philip Gurian, Barry Alter,
and the Company's failure to disclose their various securities violations
including, without limitation, allegations of fraud. The First Amended Complaint
seeks, among other things, monetary damages, attorneys fees, costs, and
declaratory relief. As of this date, the Company and its legal counsel made no
determination as to the merits of, possible defenses to, or any other aspect of
such claims or the lawsuit.

In February 2005, the Company was served with regard to a Complaint filed
against it by a former consultant with the California Labor Commissioner
regarding purported unpaid wages in the amount of $10,640. A hearing before the
California Labor Commissioner is expected will be held in April 2005. As of this
date, the Company has made no other determination as to the merits of, possible
defenses to, or any other aspect of such claim.

                              Minority Shareholders

As of January 31, 2005, Microdevices has been effectively merged into the
Company. On January 25, 2005, the merger of Microdevices was certified by the
Secretary of the State of Delaware and the Company has assumed all assets and
liabilities of Microdevices. Under the terms of the merger, the Company has
committed to issue 459,222 shares of common stock to the remaining stockholders
of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares for 1 share of
HiEnergy Microdevices (the same ratio that was used in the original voluntary
share exchange).

                            Convertible Notes Payable

During the nine months ended January 31, 2005, the Company issued $300,000 of
convertible notes payable ("CNP") to investors, which are convertible into
666,667 shares of common stock, all of which were in-the-money as of January 31,
2005. The convertible notes have two-year maturities in which the holders of the
notes have the option to convert the principal and accrued interest into shares
of common stock at a conversion price of $0.45 per share at any time until the
later of the prepayment date or the maturity date. The conversion price is
subject to adjustment for stock splits, stock dividends, combinations, and other
similar structural events and the CNP provide for full-ratchet anti-dilution
protection, subject to standard exceptions. Most of the CNP also have detachable
warrants to purchase shares of common stock with a three and one-half year term
following the registration date for prices between $0.45 and $1.25. All CNP and
detachable warrants have registration rights on the underlying shares, and in
certain cases, if the shares of common stock issuable upon conversion of the CNP
or exercise of the detachable warrants are not registered within certain
specified deadlines, the holders are due penalties in the form of (i) additional
convertible notes payable equal to 2% of the original face amount, or principal
balance, and/or (ii) additional detachable warrants to purchase 2% of the amount
of shares exercisable under the original warrants, for each subsequent month
until a registration statement is filed and maintained effective by the Company,
or when the penalties become impermissible as a matter of law as prescribed in
the instrument, or can be sold without registration under Rule 144.
Additionally, the CNP provide the holders with rights of first refusal if shares
are sold at a price per share less than $0.45. In January 2005, a note holder
converted $40,000 of convertible notes, originally purchased in January 2004 and
$7,200 worth of convertible notes accrued as penalties for the Company's failure
to timely file a registration statement, plus $2,360 of accrued interest, into
110,133 committed shares. The committed shares were subsequently issued to the
note holder in February 2005.


                                       39
<PAGE>

During the nine months ended January 31, 2005, the Company issued an additional
$100,000 of CNP to an investor, which are convertible into 192,308 shares of
common stock for the outstanding principal. The convertible note has a two-year
maturities in which the holder of the notes has the option to convert the
principal and accrued interest into shares of common stock at a conversion price
of $0.52 per share at any time until the later of the prepayment date or the
maturity date. The conversion price is subject to adjustment for stock splits,
stock dividends, combinations, and other similar structural events. The CNP had
no detachable but provide for registration rights on the underlying shares. The
holder converted the note in October 2005 and the Company expensed a beneficial
conversion feature upon conversion in the amount of $55,769.

                   Convertible Notes Payable - Related Parties

During the nine months ended January 31, 2005, the Company issued $25,648 of
convertible notes payable - related parties to its former legal counsel for
conversion of accounts payable, which are unsecured, bearing interest at 10% per
annum and due in April 2005. The holder of the notes have the option to convert
the principal and accrued interest into shares of common stock at a conversion
price of $1.00 per share at any time until the later of the prepayment date or
the maturity date. The conversion price is subject to adjustment for stock
splits, stock dividends, combinations, and other similar structural events and
the convertible notes provide for full-ratchet anti-dilution protection, subject
to standard exceptions, with respect to the issuance of the Company's common
stock.

                               Penalty Securities

After August 2003, the Company entered into certain stock and convertible note
purchase agreements which contain a provision that requires the Company to (i)
register, as freely trading, the shares of common stock and the shares of common
stock issuable upon exercise of warrants or conversion of the convertible notes
payable within certain deadlines, in a Registration Statement on Form SB-2; and
(ii) pay or accrue a penalty in like securities if such shares of common stock
are not registered within the specified deadlines. In accordance with the
relevant registration rights provisions in these agreements, the Company has
paid or accrued penalties due purchasers in these offerings, because the Company
failed to meet the specified deadlines for having a Registration Statement on
Form SB-2 declared and maintained effective.

As of January 31, 2005, the Company remains obligated to honor these
registration rights and to issue additional securities as a result of the
related penalties, and it will incur additional financial costs or penalties
until such time as all registrable shares under the agreements have in fact been
registered or when the penalties become impermissible as a matter of law as
prescribed in the instrument or can be sold without registration under Rule 144.
The Company and its stockholders are subject to substantial dilution as a result
of the Company's inability to register shares as required by the Company's
agreements. The warrants issued as penalties whose underlying shares are
estimated below are exercisable at prices ranging from $0.45 to $1.75.

For illustration purposes only, the table below estimates the approximate
amounts of penalty securities to be issued by the Company through July 31, 2005,
on a monthly basis, in accordance with current agreements under which the
Company is, or may be, delinquent in satisfying its registration requirements:

                                                         Number of Shares
                                   Shares of Common         Underlying
                     Stock             Warrants                CNP
                     -----             --------                ---
Feb-05               76,146             236,003               6,000
Mar-05               67,628             246,289               6,000
Apr-05               99,689             368,349               6,000
May-05               78,982             374,641               6,000
June-05              78,982             380,935               6,000
July-05              78,982             387,226               6,000
                 ----------          ----------          ----------
Total               480,409           1,993,443          $   36,000
                 ==========          ==========          ==========



                                       40
<PAGE>

                         Government Contract Commitments

The Company is currently in the second year of Phase II of a SBIR contract
awarded to it in August 2002 by the NVESD. Under the terms of the contract, the
Company is to develop and test its Anti-Tank Landmine Detector (TM) 7AT7 over a
two-year period, which was extended for one additional year at the option of the
U.S. Army and is set to expire March 2005. As of January 31, 2005, the Company
has earned $749,532 against the contract and is entitled to earn an additional
$30,412 in SBIR contract proceeds to complete Phase II. If further research and
development work is required upon the expiration of Phase II, the Company has
the ability to submit a request for additional Phase II and/or Phase III
funding, which the government would consider based upon the Company's progress
to date and the merits of the project. The U.S. Army is under no obligation to
continue to assist in funding these research and development costs beyond Phase
II or any subsequent extension, or to purchase any of the Company's products,
including the Anti-Tank Landmine Detector (TM) 7AT7, once the Company has
completed development activities. Under the terms of the contract, the U.S. Army
pays a portion of the Company's research and development costs on a periodic
basis during the term of the contract, for which the Company is required to
submit monthly written reports detailing its progress under the contract. When
the written report is accepted by the U.S. Army, the Company usually receives
payment in about 30 to 45 days. The Company recognizes one-twelfth of the annual
contract amount as an offset against research and development expenses each
month. The Company has submitted a request for additional Phase II and/or Phase
III funding but has not received any indication that additional funding will be
made available to it under the program.

In September 2004, the Company entered into a Cooperative Agreement with the
TSA. Under the agreement, the Company is to provide proof-of-concept for the
Company's "NextGen Checked Baggage Program (STOXOR)" over a nine month period,
which may be extended at the option of the TSA. The agreement provides funding
in the amount of $367,141 for Phase 1, and an additional $145,381 for Phase 2,
if, at the conclusion of Phase 1, the TSA elects to continue with the Company.
As of January 31, 2005, the Company has earned $122,510 in cooperative financing
from the TSA to complete Phase 1, and is entitled to earn an additional $244,631
in contract proceeds to complete Phase 1. There is no obligation for the TSA to
fund the Company's development efforts under this agreement beyond the Phase 1
funded amount or to purchase any of the Company's products once it has completed
development activities. The TSA will pay the Company's research and development
costs on a periodic basis during the term of the contract, for which the Company
is required to submit monthly written reports detailing its progress under the
contract. When the written report is accepted by the TSA, the Company receives
payment in about 30 to 45 days. Payments commenced in November 2004 and the
Company recognizes one-sixth of the Phase 1 funding amount as an offset against
research and development expenses for each month invoiced.

The Company's entitlement to the abovementioned funding is conditioned upon its
compliance with the terms and conditions of the respective SBIR contract and
cooperative agreement, as well as applicable federal regulations, including
auditing of the expenditure of the resources for allowable purposes by grantor
agencies of the federal government or their designees. As of January 31, 2005,
the Company believes that any commitments or obligations that may arise from
cost disallowance or sanctions as a result of those audits are not expected to
be material to its financial statements.


NOTE 16 - COMMON STOCK

                    Common Stock Issued or Committed for Cash

During the nine months ended January 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue 6,383,227, 2,802,249, and 13,051,874 shares of common stock,
respectively, for cash proceeds of $3,232,156, $1,671,003, and $6,394,424,
respectively. Included in the current year period are 1,955,555 shares for
$880,000 that are considered to be subject to rescission rights. Included in the
prior period amount are 600,000 shares subject to repurchase for $200,000 and
303,758 shares sold subject to rescission for $225,000. Included in the
inception-to-date amount are 2,000,000 shares subject to repurchase for $694,000
and 2,725,979 shares sold subject to rescission for $1,355,000. Of the 6,383,227
shares sold during the nine months ended January 31, 2005; 2,130,528 shares
(1,955,555 shares subject to rescission) remained committed as of January 31,
2005 and were subsequently issued in February 2005.


                                       41
<PAGE>

               Offering Costs on Issuance of Common Stock for Cash

During the nine months ended January 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to January 31, 2005, the Company paid offering costs
of $31,750, $45,250, and $139,768, respectively.

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

During the nine months ended January 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue 387,455, 165,500, and 13,743,982 shares of common stock, respectively,
in exchange for services rendered valued at $493,465, $132,210, and $5,252,074,
respectively, based upon the fair market of the common stock as of the dates the
services were rendered.

Details of the services performed, in consideration for the common stock during
the nine months ended January 31, 2005, are as follows:

      o     During the nine months ended January 31, 2005, 182,955 shares of
            common stock valued at $177,466 were issued for legal counsel and
            advisory services received by HiEnergy on general corporate legal
            matters, including transactional oversight and the preparation of
            transactional and regulatory documentation. Of the $177,466 amount
            $5,336 related to services rendered and expensed during the year
            ended April 30, 2004.

      o     During the nine months ended January 31, 2005, HiEnergy issued
            95,000 shares of common stock valued at $208,050 to a contracted
            consultant for services which included strategic planning,
            development and assisting in the implementation of short- and
            long-term strategic planning initiatives to enhance and accelerate
            the commercialization of the Company's business objectives.

      o     During the nine months ended January 31, 2005, the Company issued
            3,500 shares of common stock valued at $6,895, to a strategic
            marketing and planning consultancy as compensation for services.

      o     During the nine months ended January 31, 2005, the Company committed
            to issue 106,000 shares of common stock valued at $106,390 for
            services rendered to members of the Board of Directors of the
            Company and that of its subsidiaries for their attendance at
            scheduled meetings. Each member of the HiEnergy's board received
            3,000 restricted shares of common stock for each meeting attended
            and each member of the board of HiEnergy Defense received 2,000
            restricted shares of common stock for each meeting attended, with
            the exception of the Chairman of HiEnergy Defense who received 3,000
            restricted shares for each such meeting attended. Also committed as
            of January 31, 2005, were 7,000 shares valued at $9,940 for services
            rendered in April 2004.

 Common Stock Issued or committed on the Conversion of Convertible Notes Payable

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue 302,421, 300,000, 1,898,317 shares of common stock for the outstanding
principal on convertible notes payable balances of $149,560, $100,000, $832,713.
Included in the inception-to-date amount are 1,295,896 shares issued upon
conversion of notes payable that were sold subject to rescission. Therefore, the
1,295,896 shares have been recorded as subject to rescission.

            Common Stock Issued on the Conversion of Promissory Notes

During the nine months ended January 31, 2005, the Company issued 1,139,130
shares of common stock for settlement of outstanding promissory notes evidencing
loans made to the Company in the aggregate amount of $524,000. As additional
consideration for the conversion, the Company issued to the note holders
warrants to purchase an additional 569,565 shares of common stock issued upon
conversion at an exercise price of $0.82 per share. Said warrants are to expire
three and one half years following the date of effectiveness of the Company's
next filed registration statement. Upon conversion, the note holder waived all
accrued but unpaid interest.


                                       42
<PAGE>

                 Common Stock Issued on the Exercise of Warrants

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued 0, 34,000
and 69,776 shares of common stock, respectively, for the exercise of warrants
for cash proceeds of $0, $340 and $54,004, respectively.

            Common Stock Issued on the Cashless Exercise of Warrants

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued 1,046,687,
102,053 and 1,577,712 shares, respectively, of common stock following the
cashless exercise of warrants. See Note 15 - Commitments and Contingencies,
Cashless Exercise of Warrants.

Common Stock Issued or Committed as a Penalty for Late Registration

During the nine months ended January 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue 1,732,945, 357,900, and 2,664,646 shares of common stock as penalty
expenses in the amount of $1,844,613, $372,899, and $3,126,976, respectively,
for the late registration of common stock. See "Note 15 - Commitments and
Contingencies, Penalties Associated with the Late Registration of Common
Stock.". Of the 1,732,945 shares expensed during the nine months ended January
31, 2005; 122,270 shares remained committed as of January 31, 2005 and were
subsequently issued as of the date of this Report.

NOTE 17 - STOCK OPTIONS AND WARRANTS

                             Stock Options - General

The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to outside
parties.

For purposes of computing the pro forma disclosures required by SFAS No. 123,
the fair value of each option granted to employees and directors is estimated
using the Black-Scholes option-pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.


                                       43
<PAGE>

The following summarizes the stock option and warrant transactions:
<TABLE>
<CAPTION>
                                                                   Stock
                                              Weighted             Options         Weighted                            Weighted
                                               Average               and            Average             Total           Average
                             Stock              Grant              Warrants          Grant             Options           Grant
                             Options            Price                Non-            Price               And             Price
                             Employee         per Share            Employee         per Share          Warrants         per Share
                             --------         ---------            --------         ---------          --------         ---------
<S>                         <C>               <C>                    <C>            <C>               <C>              <C>
 Outstanding,
August 21, 1995
 (inception) to

April 30, 2001              2,482,011         $    0.13              1,051          $    0.28         2,483,062        $    0.13

 Granted                      287,653         $    0.20            346,373          $    0.28           634,026        $    0.24
 Outstanding,               ---------         ---------          ---------          ---------         ---------        ---------

April 30, 2002              2,769,664         $    0.14            347,424          $    0.28         3,117,088        $    0.16
                            ---------         ---------          ---------          ---------         ---------        ---------
 Granted                    3,461,755         $    1.24          2,002,726          $    2.02         5,464,481        $    1.43

 Canceled                  (2,264,208)        $    1.33             (1,051)         $    0.28        (2,265,259)       $    1.33

 Outstanding,
April 30, 2003              3,967,211         $    0.42          2,349,099          $    1.76         6,316,310        $    0.84
                            ---------         ---------          ---------          ---------         ---------        ---------
Granted                     1,738,221         $    1.03          1,029,000          $    1.11         2,767,221        $    1.01

Canceled                   (1,058,483)        $    1.42           (119,705)         $    0.36        (1,178,188)       $    1.31

Outstanding
April 30, 2004              4,646,949         $    0.42          3,258,394          $    1.61         7,905,343        $    0.83
                            ---------         ---------          ---------          ---------         ---------        ---------
Granted                     1,996,980         $    0.89                 --          $      --                --        $      --

Canceled                     (695,000)        $    0.66           (831,668)         $    0.45          (831,668)       $    0.45
                            ---------         ---------          ---------          ---------         ---------        ---------
Outstanding
January 31, 2005            5,948,929         $    0.55          2,426,726          $    1.71         8,375,656        $    0.82

Exercisable
January 31, 2005            4,298,929         $    0.67          1,712,226          $    1.31         6,011,155        $    0.85
                            ---------         ---------          ---------          ---------         ---------        ---------
</TABLE>

The weighted-average remaining contractual life of the options and warrants
outstanding at January 31, 2005 was 4.43 years. The exercise prices of the
options and warrants outstanding at January 31, 2005 ranged from $0.13 to $2.95,
and information relating to these options and warrants is as follows:

<TABLE>
<CAPTION>

                                                                     Weighted-     Weighted-
                                                  Weighted-          Average       Average
                                                   Average           Exercise      Exercise
                 Stock        Stock               Remaining          Price of       Price of
 Range of       Options &    Options &           Contractual         Options &     Options &
 Exercise       Warrants     Warrants               Life             Warrants      Warrants
  Prices       Outstanding  Exercisable            (years)          Outstanding   Exercisable
 --------      -----------  -----------          -----------        -----------   -----------
<C>            <C>          <C>                  <C>                <C>           <C>
$0.01 - $0.99   5,097,212    3,465,232              3.84$             0.23$           0.29
$1.00 - $1.99   2,194,454    1,059,954              4.61$             1.09$           1.11
$2.00 - $2.99   1,083,989    1,013,989              2.64$             2.44$           2.46

               -----------  ----------
                8,375,655    6,011,155
               ===========  ==========

</TABLE>

                      Warrants Issued for Services Rendered

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue warrants to purchase 100,000, 230,000 and 1,010,000 shares of common
stock, respectively, for services rendered valued at $38,573, $50,423, and
$976,035, respectively, which is the fair value as determined by the
Black-Scholes option pricing model.


                                       44
<PAGE>

           Warrants Repriced in Conjunction with Additional Financing

In June 2004, the Company amended a previously issued convertible note payable
in the amount of $50,000, which was convertible into shares of common stock at
$0.45 per share, and warrants to purchase 312,222 shares of common stock at
various exercise prices between $0.45 and $1.50. Pursuant to an amended
Convertible Note Purchase Agreement ("CNPA"), the Company issued separate
convertible notes payable of $40,000 and $10,000, respectively, in lieu of the
prior note, to two investors based on an allowable assignment, and certain
warrants were re-priced such that the Company issued additional warrants to
purchase 77,778 shares of common stock at various exercise prices between $0.45
and $1.25. In connection with the amended CNPA, the Company agreed to issue
additional warrants and to reduce the exercise prices of some of the warrants
previously issued in exchange for the two investors' exercising their option to
purchase an additional $300,000 of CNP. The CNP have a two-year term, bear
interest at 5% and are convertible into common stock at $0.45 per share. The
additional CNP also contain warrants to purchase common stock with a three and
one-half year term as follows: 1,333,332 at $0.45 per share; 400,000 at $0.75
per share; and 240,000 at $1.25 per share.

A summary of the amended warrants and exercise prices follows:

              Original CNPA                        Amended CNPA
      ------------------------------ ------------------------------------------
         Exercise       No. of             Exercise              No. of
          Price        Warrants              Price              Warrants
      ------------------------------ ------------------------------------------
             $  0.75         66,667                $  0.45             111,111
             $  1.25         40,000                $  0.75              66,667
             $  1.50         33,333                $  1.25              40,000
             $  0.45        222,222                $  0.45             222,222
                    ----------------                      ---------------------
                            362,222                                    440,000
                    ================                      =====================


In January 2005, the Company amended and restated a previously executed Stock
Purchase Agreement ("SPA") in which an investor purchased 333,333 shares of
common stock at $0.45 per share for cash proceeds of $150,000, and warrants to
purchase 686,450 shares of common stock at various exercise prices between $0.49
and $1.65, and was granted an option to purchase additional shares at $0.45 in a
second closing at a later date. In connection with the amended and restated SPA,
the Company agreed to reduce the exercise prices of some of the warrants
previously issued in exchange for the investor's exercising the option to
purchase an additional $880,000 of shares of common stock at $0.45 in a second
closing, such that additional warrants to purchase 300,216 shares of common
stock were issued at various exercise prices between $0.45 and $1.25. In
connection with the second closing, the Company issued warrants to purchase
common stock with a three and one-half year term as follows: 3,911,110 at $0.45
per share; 1,173,333 at $0.75 per share; and 704,000 at $1.25 per share.

A summary of the amended warrants and exercise prices follows:

           Original SPA                    Amended and Restated SPA
   ------------------------------ ------------------------------------------
      Exercise       No. of             Exercise              No. of
       Price        Warrants              Price              Warrants
   ------------------------------ ------------------------------------------
          $  0.83        180,723                $  0.45             333,333
          $  1.38        108,696                $  0.75             200,000
          $  1.65         90,909                $  1.25             120,000
          $  0.49        306,122                $  0.45             333,333
                 ----------------                      ---------------------
                         686,450                                    986,666
                 ================                      =====================



                                       45
<PAGE>

          Warrants Issued or Committed as Penalty for Late Registration

During the nine months ended January 31, 2005 and 2004 and the period from
August 21, 1995 (inception) to January 31, 2005, the Company issued or committed
to issue warrants to purchase 1,701,204, 66,532 and 1,879,745 common shares,
respectively, as a penalty with a fair value of $1,158,690, $30,926, and
$1,389,972, respectively, related to the delayed registration of the Company's
common stock. The fair values of the warrants were determined using the
Black-Scholes model.


NOTE 18 - SUBSEQUENT EVENTS

                 Consultancy Agreements and Employment Contracts

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

In February 2005, the Company engaged a consultant to provide advisory services
related to the marketing of its devices to civil and military organizations
within the U.S. government and foreign entities participating in U.S. federal or
military sales and advocacy programs. Pursuant to the letter agreement, the
Company will pay the consultant a monthly retainer of $10,000 and either party
may terminate the agreement upon sixty days notice to the other.

In March 2005, the Company entered into an employment agreement with its
Controller. Major commitments included in the agreement are as follows:

      o     The Company must pay its Controller an annual base salary of
            $200,000, of which $125,000 will be payable in cash in cash and/or
            stock, and the remainder in deferred compensation in the form of
            three notes, bearing interest at 5% per annum, one due April 2005,
            one due August 6, 2005 and one due January 6, 2006.

      o     The Company has the option to prepay services of its Controller with
            S-8 stock having with value equivalent to six (6) months of the
            above stated salary.

      o     The Company granted its Controller a stock option to purchase
            500,000 shares of common stock with an exercise price of $0.72 per
            share. The option will vest 60% on April 6, 2005 and fully vest on
            July 6, 2005.

      o     If the employment agreement is terminated by the Company without
            cause, the Company must pay its Controller on the termination date,
            severance pay in an amount equal to six (6) months of the minimum
            annual base salary.

      o     The Company will provide its Controller with comprehensive family
            medical and dental healthcare benefits.

                                   Litigation

In February 2005, the Company was served with regard to a Complaint filed
against it by a former consultant with the California Labor Commissioner
regarding purported unpaid wages in the amount of $10,640. A hearing before the
California Labor Commissioner is expected will be held in April 2005. As of this
date, the Company has made no other determination as to the merits of, possible
defenses to, or any other aspect of such claim.

                    Recent Sales and Issuances of Securities

In February 2005, the Company issued 129,973 restricted shares of common stock
previously committed during the three months ended January 31, 2005 to various
investors in private placements in exchange for cash in the aggregate amount of
$60,000. As additional consideration for this amount, the Company issued to the
investors committed warrants to purchase an additional number of shares of
common stock equal to 50% of the number of shares of common stock purchased at
an exercise price of $0.82 per share. Said warrants are to expire three and one
half years following the date of effectiveness of the Company's next filed
registration statement.

In February 2005, the Company issued 1,955,555 restricted shares of common stock
to an investor and assignees in a private placement upon the exercise of an
option to a second closing, in exchange for cash in the aggregate amount of
$880,000. As additional consideration for this amount, the Company issued to the
investors warrants to purchase common stock as follows: 3,911,110 at $0.45 per
share; 1,173,332 at $0.75 per share; and 704,000 at $1.25 per share. The
warrants expire three and one-half years following the date of effectiveness of
the Company's next-filed registration statement.


                                       46
<PAGE>

In February 2005, the Company committed to issue 182,787 shares of common stock
to an investor pursuant to the cashless exercise of warrants. The warrants were
exercisable for a total of 335,110 shares of common stock at an exercise price
of $0.45 per share, and included 32,889 shares of common stock accrued as
penalties due to the Company's inability to file a registration statement within
specified deadlines. In connection with the cashless exercise, 152,323 shares
issuable pursuant to the warrant were tendered for conversion to pay the
exercise price.

In March 2005, the Company committed to issue 112,332 shares of common stock to
an investor pursuant to the cashless exercise of warrants. The warrants were
exercisable for a total of 222,222 shares of common stock at an exercise price
of $0.45 per share. In connection with the cashless exercise, 109,890 shares
issuable pursuant to the warrant were tendered for conversion to pay the
exercise price.

                               Penalty Securities

In February 2005, the Company committed to issue $6,000 in convertible notes to
certain note holders with registration rights as a penalty, due to the Company's
inability to file a registration statement within specified deadlines.

In February 2005, the Company committed to issue or issued 76,146 shares of
common stock and committed to issue warrants to purchase 236,003 shares of
common stock at various exercise prices between $0.45 and $1.75, to various
holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In March 2005, the Company committed to issue 67,628 shares of common stock and
committed to issue warrants to purchase 246,289 shares of common stock at
various exercise prices between $0.45 and $1.75, to various holders of
securities with registration rights as a penalty, due to the Company's inability
to file and maintain effective a registration statement within certain specified
deadlines.

In March 2005, the Company issued 114,546 shares of common stock previously
committed during the three months ended January 31, 2005 to various holders of
securities with registration rights as a penalty, due to the Company's inability
to file and maintain effective a registration statement within certain specified
deadlines.



                                       47
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

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

FORWARD LOOKING STATEMENTS

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

Forward looking statements necessarily involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievement expressed or
implied by such forward-looking statements. Readers are cautioned to review
carefully the discussion concerning these and other risks which can materially
affect our business, operations, financial condition and future prospects, which
is found under the heading Risk Factors at the end of this Item 2 and in "Note 5
- Risks and Uncertainties" to our unaudited Consolidated Financial Statements.

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

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

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


                                       48
<PAGE>

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

GENERAL

The following discussion and analysis of our financial condition and plan of
operation should be read in conjunction with the unaudited Consolidated
Financial Statements and accompanying Notes and the other financial information
appearing elsewhere herein. Certain statements contained herein may constitute
forward-looking statements, as discussed at the beginning of this Item 2. Our
actual results could differ materially from the results anticipated in the
forward-looking statements as a result of a variety of factors, including those
discussed in our filings with the Securities and Exchange Commission and as
discussed in the sections under the heading Risk Factors at the end of this Item
2 and in "Note 5 - Risks and Uncertainties" to our unaudited Consolidated
Financial Statements.

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the
commercialization of our initial proprietary, neutron-based, "stoichiometric"
sensor devices, including (i) the CarBomb FinderTM 3C4, a vehicle-borne system,
for the detection and identification of car bombs, and (ii) the SIEGMA(TM), a
portable suitcase-borne system for the detection and identification of home-made
bombs, also known as Improvised Explosive Devices or IEDs. We are marketing our
devices to governmental and private entities, and are negotiating licenses for
the distribution of our devices with various industry partners. To date, we have
devoted the bulk of our efforts and resources to the research, design, testing
and development of proprietary "stoichiometric" sensor devices and underlying
technologies, and have yet to generate meaningful sales revenues from the sale
of any products using our technologies.

We also continue to focus on the research and development of additional
applications of our technologies and their further exploitation, both internally
and through collaboration with third parties. We are currently developing
prototypes in programs with the U.S. Department of Defense and the Department of
Homeland Security for other related uses of our core technologies. Recently, we
entered into a funded cooperative development agreement with the U.S.
Transportation Security Administration (TSA) to produce a proof of concept which
incorporates our SuperSenzorTM technology into a baggage screening system. Our
"stoichiometric" technology, or "Stoitech TM" has been incorporated into
additional prototype applications which, if we are able to raise the funds
necessary to commercialize them, will be the next products we attempt to launch:
(i) an in-ground explosive screening system, CarBomb Finder(TM) 3C5, (ii) an
anti-tank landmine detector; (iii) an unexploded ordnance detector, which is
also useful to detect IEDs; and (iv) a device we call a "Refractorymeter", which
can detect fissures or erosions in the ceramic lining of oil cracking tanks.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, HiEnergy
has two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy Defense")
and HiEnergy Europe, Ltd. ("HiEnergy Europe"), which were incorporated under the
laws of the state of Delaware on July 28, 2003 and March 11, 2004, respectively.
Prior to January 2005, HiEnergy also had one majority owned subsidiary, HiEnergy
Microdevices, Inc., which was incorporated in Delaware on August 21, 1995 and
was the vehicle through which our Stoitech TM was initially developed by its
Chairman and CEO, Dr. Bogdan Maglich. ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). As a result of a
short-form merger which became effective on January 25, 2005, the Company
assumed all of Microdevices' assets and liabilities and Microdevices ceased to
exist as a separate entity as of that date.


                                       49
<PAGE>

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

Our common shares currently trade on the National Association of Securities
Dealers ("NASD") Over-the-Counter Bulletin Board ("OTCBB") under the symbol
"HIET".

BASIS OF PRESENTATION

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

We have prepared our audited Consolidated Financial Statements on a
going-concern basis in accordance with accounting principles generally accepted
in the United States of America. This going-concern basis of presentation
assumes that we will continue operations for the foreseeable future and will be
able to realize our assets and discharge our liabilities and commitments in the
normal course of business. As described in Risk Factors: Risks Related to Our
Business at the end of this Item 2, there is substantial uncertainty about our
ability to continue as a going concern. Our financial statements do not include
adjustments that might result from the outcome of this uncertainty.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for a complete
set of annual financial statements. We believe our disclosures are adequate so
that the information presented is not misleading. These consoldiated financial
statements should be read with our annual audited financial statements and the
notes thereto included in our Annual Report on Form 10-KSB for the year ended
April 30, 2004, and other reports filed with the SEC. In our opinion, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of results of the financial position and the operations
have been included in the consolidated financial statements. Results of
operations for the nine months ended January 31, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ended April
30, 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations
are based on our unaudited Consolidated Financial Statements and accompanying
Notes and the other financial information appearing elsewhere in this Report,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates. We base our estimates on assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

Long-lived Assets

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


                                       50
<PAGE>

Stock-based Compensation

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

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

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

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

Research and Development Costs

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

THREE MONTHS ENDED JANUARY 31, 2005 AS COMPARED TO PRIOR YEAR PERIOD

For the three months ended January 31, 2005, we incurred a net loss of
$1,645,000, as compared to a net loss of $1,922,000 for the three months ended
January 31, 2004. Included in the losses are equity based expenses of $703,000
and $1,051,000, respectively.

Operating Expenses

General and Administration

General and administration expenses were $829,000 for the three months ended
January 31, 2005, a decrease of $276,000 from the prior year period. In certain
instances, we have engaged service providers by offering common stock, warrants,
options and convertible notes payable (CNP) as compensation in lieu of cash.
Through various arrangements, these providers have provided services such as
business development, business and financial consulting, Edgar services and
directorship. Some of these warrants and options that were issued and
subsequently expensed have been forfeited causing no dilution to the Company.
The major components of general and administration expenses, both cash and
equity, are as follows:



                                       51
<PAGE>

<TABLE>
<CAPTION>

                         Three Months Ended January 31, 2005     Three Months Ended January 31, 2004
                       ---------------------------------------- --------------------------------------
                           Cash &       Equity                     Cash &    Equity
                          Accrued        Based                    Accrued     Based                    Increase/
                          Expenses     Compensation    Total     Expenses  Compensation     Total     (Decrease)
                          --------     ------------    -----     --------  ------------     -----     ----------
<S>                    <C>          <C>          <C>          <C>          <C>          <C>          <C>
Salaries and benefits   $  183,000   $       --   $  183,000   $  174,000   $       --   $  174,000   $    9,000

Consulting                 117,000       40,000      157,000       45,000      394,000      439,000     (282,000)

Legal fees                 107,000           --      107,000      145,000           --      145,000      (38,000)

Accounting fees             30,000           --       30,000       75,000           --       75,000      (45,000)

Investor & public
relations                   58,000           --       58,000       47,000       47,000       94,000      (36,000)

Insurance                   45,000           --       45,000       38,000           --       38,000        7,000

Travel                      65,000           --       65,000       43,000           --       43,000       22,000

Other                      124,000       60,000      184,000       81,000       16,000       97,000       87,000
                        ----------   ----------   ----------   ----------   ----------   ----------   ----------
            Total       $  729,000   $  100,000   $  829,000   $  648,000   $  457,000   $1,105,000   $ (276,000)
                        ----------   ----------   ----------   ----------   ----------   ----------   ----------

</TABLE>

For the three months ended January 31, 2005 as compared to the prior year
period, salary and benefits expense increased $9,000. The increase is attributed
to addition of a sales and marketing director in May 2004 and our vice
president/corporate secretary in January 2005, as well as normal pay increases
and year-end bonuses. We had previously fulfilled functions of former personnel
who had been employed at comparable lower wages during the prior period through
the first quarter of fiscal 2005 with two consultants who have subsequently
converted to employees. We expect salaries and benefits expense to increase with
the conversion of these consultants to full-time employees for the remainder of
fiscal 2005 and into fiscal 2006. Further, we plan to add additional personnel
to help administrate our public reporting requirements, internal financial
controls, sales and marketing activities, and other legal and financial matters
related to our commercialization objectives.

Consulting expenses for the three months ended January 31, 2005 decreased
$282,000 over the prior year period. However, excluding equity based
compensation expense in the amount of $394,000 during the prior year period,
consulting expenses increased $112,000 over the prior year period. This increase
is attributable to the utilization of consultants rather than employees as
discuss above. We expect consulting expenses to decrease due to the conversion
of two consultants to employees. Included in the equity based consulting expense
for the prior year period is (i) stock option expense of $188,000 for options
given to Directors and Officers of HiEnergy Defense, (ii) $20,000 for common
stock given to our Board of Directors, and (iii) $64,000 for common stock issued
for strategic consulting services. Equity based consulting expense for the
current period of $40,000 is for stock committed to members of our Board of
Directors for the attendance of board meetings.

Historically, we have relied greatly on paying for services with equity
instruments in lieu of cash at significant discounts and at greater cost to our
results of operations, primarily due to the restricted nature of the issued
equity instruments from our failure to file and maintain an effective
registration statement. Although we anticipate that going forward we will be
less reliant on offering equity for services and/or in a better position from
which to offer cash remuneration for services, in the event we must offer, or
elect to offer in order to conserve cash, equity for services, we expect that
equity for services would be issued at lesser discounts, pursuant to more
favorable terms than in prior periods.

Legal fees decreased $38,000 for the three months ended January 31, 2005 as
compared to the prior year period. Legal activity has remained high due to
certain litigation matters primarily concerning ongoing disputes with former
directors and consultants, the class action, and the SEC investigation and
related Wells Notice, as well as significant patent, statutory and regulatory
activities. Although we have internalized many legal and regulatory functions in
connection with our effort to improve internal controls and reduce our reliance
on outside legal services, we expect overall legal expense to remain
comparatively high for the remainder of the fiscal year as we attempt to settle
the current SEC issues and other pending legal matters disclosed in this Report,
and file registration statements on behalf of selling shareholders and the
Company.


                                       52
<PAGE>

Accounting fees decreased $45,000 for the three months ended January 31, 2005 as
compared to the prior year period. This decrease was due to a significant
reduction in accounting activity. In the prior year period, we attempted to make
effective a registration statement on Form SB-2 which generated significant
accounting costs. For the remainder of fiscal 2005, we expect accounting fees to
remain at approximately current levels as we complete the filing of our restated
annual and quarterly financial results, and relatively lower to that of prior
periods. We expect to continue to make improvements to and generate efficiencies
in our financial controls and plan to increase our accounting staff, which
should reduce external accounting costs.

Investor and public relations expense decreased $36,000 for the three months
ended January 31, 2005 as compared to the prior year period. Included in the
prior year period is $47,000 for the expensing of an option upon termination of
an investor relations firm. The decrease is primarily attributed to cost-cutting
measures in March 2003, which demanded the elimination of one of our investor
relations firm, as well as the redirection of resources toward more immediate
concerns such as product development, the funding of internal operations, and
expenditures related to legal and regulatory matters. We expect to internalize
many investor relations and shareholder services, but do plan to increase public
relations and marketing activities. Accordingly, we anticipate a moderate
increase in investor and public relations fees for the remainder of fiscal 2005
and for fiscal 2006.

Insurance expense increased $7,000 over the prior year period. Notably, in May
2004, we renewed our Directors and Officers liability policy for an additional
year without incurring a substantial cost increase. At present, we maintain
$2,000,000 of Directors and Officers liability insurance. We expect insurance
expense to increase for the remainder of fiscal year 2005 as a result of our
providing health insurance coverage for new hires, and for fiscal 2006 as a
result of anticipated increases to premiums for Directors and Officers liability
insurance.

Travel expenses increased $22,000 for the three months ended January 31, 2005
over the prior year period. The increase was primarily related to our trip to
Turkey in December 2004. We expect travel expenses for the remainder of fiscal
2005 as well as fiscal 2006 will remain high as our sales and marketing
personnel continue to attend numerous key industry conferences and trade shows,
management continues to meet with investors, consultants and potential strategic
partners, such as in Spain, and general business activity increases in
connection with our commercialization objectives. We have adopted new budgetary
allocations limiting the number of trade shows and demonstrations to be attended
by sales and technical personnel. Also, with the advent of the SIEGMA(TM)
prototype, which is now utilized principally to demonstrate our core
technologies offsite, we have been able to make improvements to our
demonstration capabilities and presentation methods. Consequently, we now
require smaller support teams and less time on location and incur fewer
expenses.

Other expenses for the three months ended January 31, 2005 increased $87,000
over the prior year period and include $60,000 of equity based compensation for
Edgar filing services, $15,000 for postage and delivery expense and $26,000 for
corporate contributions toward industry symposiums and related events. The
issuance of equity for services, historically, has been costly for the reasons
discussed above. The $15,000 for postage and delivery was primarily incurred
with the shipment of our prototype, equipment and supplies for our demonstration
in Turkey. Other expenses, which also include fees associated with stock
transfer agent services, telecommunications, office equipment and supplies,
licenses and permits, and web design and development, have increased during the
period, and are anticipated to continue to increase for the remainder of fiscal
2005, consistent with our expanded business development and international
efforts.

Research and Development

Net research and development expenses for the three months ended January 31,
2005 decreased $42,000 over the prior year period. The cause of this decrease is
the offsetting of expense with increased grant monies as discussed below. No
equity based expenses were recorded for research and development. The major
components of research and development expenses are as follows:



                                       53
<PAGE>


                                      Three Months Ended
                                      ------------------
                                                              Increase/
                         January 31, 2005  January 31, 2004  (Decrease)
                         ----------------  ----------------  ----------
Salaries and benefits        $ 199,000       $ 179,000       $  20,000

Consultants                     50,000           9,000          41,000

Supplies                        20,000          63,000         (43,000)

Travel                              --           2,000          (2,000)

Depreciation                    54,000          36,000          18,000

Other                           59,000          24,000          35,000

Grant income                  (214,000)       (103,000)       (111,000)
                             ---------       ---------       ---------
                Net          $ 168,000       $ 210,000       $ (42,000)
                             ---------       ---------       ---------


Salaries and benefits related to research and development activities increased
$20,000 for the three months ended January 31, 2005 as compared to the prior
year period. This increase was due to normal increases and increased bonuses.
Consulting expenses increased $41,000 during the period as we engaged
consultants for development of software solutions, product engineering and
production management.

Supply expense and travel expenses decreased $43,000 and $2,000, respectively,
for the three months ended January 31, 2005 as compared to the prior year
period. The decreases were primarily a result of less research and development
activity during the period, as our focus has been on completion of final product
design for commercialization. In light of an increase in our grant application
activity and current and anticipated cooperative and research development
agreements, we expect that expenses related to supplies and travel will increase
for the remainder of fiscal 2005 and into fiscal 2006.

Year-to-date in fiscal year 2005, we have added additional equipment costing
$151,000 and for the previous fiscal year ended April 30, 2004, we added
additional equipment costing $246,000. Together these additions have increased
depreciation expense by $18,000 period over period. In light of an increase in
our grant application activity and current and anticipated cooperative and
research development agreements, which requires the purchase of additional
equipment, we expect that equipment depreciation expense will continue to
increase for the remainder of fiscal 2005 and into fiscal 2006.

Other expenses for the three months ended January 31, 2005 increased $35,000
compared to the prior year period. The increase in other expenses, including,
telephone, furniture and fixture rentals, was a result of activities related to
the commercialization efforts related to our product. In light of an increase in
our grant application activity and current and anticipated cooperative and
research development agreements, we expect that other expenses will increase for
the remainder of the fiscal year ended April 30, 2005.

For the three months ended January 31, 2005, we earned grant money of $214,000
compared to $103,000 for the prior year period. We are currently in the second
year of Phase II of a Small Business Innovation Research ("SBIR") contract
awarded to us in August 2002 by the U.S. Army Night Vision and Electronic Sensor
Directorate ("NVESD"), which is set to expire March 2005. As of January 31,
2005, we have earned $749,532 against the contract and are entitled to earn an
additional $30,412 in SBIR contract proceeds to complete Phase II. If further
research and development work is required upon the expiration of Phase II, we
have the ability to submit a request for additional Phase II and/or Phase III
funding, which the government would consider based upon our progress to date and
the merits of the project. The U.S. Army is under no obligation to continue to
assist in funding these research and development costs beyond Phase II or any
subsequent extension, or to purchase any of our products, including the
Anti-Tank Landmine Detector(TM) 7AT7, once we have completed development
activities. As of this date, we have submitted a request for additional Phase II
and/or Phase III funding but have not received any indication that additional
funding will be made available to us under the program.

Under the cooperative agreement entered into with the U.S. Transportation
Security Administration ("TSA") in September 2004, the TSA is to provide funding
in the amount of $367,141 for Phase 1, and an additional $145,381 for Phase 2,
if, at the conclusion of Phase 1, the TSA elects to continue with us. As of
January 31, 2005, we have earned $122,510 in cooperative financing from the TSA
to complete Phase 1, and are entitled to earn an additional $244,631 in contract
proceeds to complete Phase 1. There is no obligation for the TSA to fund our
development efforts under this agreement beyond the Phase 1 funded amount or to
purchase any of our products once we have completed development activities. The
TSA will pay our research and development costs on a periodic basis during the
term of the contract, for which we are required to submit monthly written
reports detailing its progress under the contract. When the written report is
accepted by the TSA, we receive payment in about 30 to 45 days. Payments
commenced in November 2004 and we recognize one-sixth of the Phase 1 funding
amount as an offset against research and development expenses for each month
invoiced.



                                       54
<PAGE>

Depreciation

Total depreciation expense for the three months ended January 31, 2005 and 2004
was $55,000 and $38,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period.

Interest Expense and Income

Interest expense for the three months ended January 31, 2005 decreased to
$25,000 from $412,000 for the prior year period. The decrease was primarily due
to $385,000 of non-cash charges upon issuance of CNP with detachable warrants to
investors and $14,000 for the issuance of CNP to our former legal counsel in the
prior year period. Under GAAP accounting rules the combined value of the
beneficial conversion feature and the fair value of the detachable warrants, to
the extent of the proceeds received, is amortized over the terms of the notes.
Since the investor note was sold subject to rescission rights (as discussed
elsewhere in this report), and immediately convertible, the full amount was
immediately expensed. The fair value of the beneficial conversion feature was
determined by taking the spread between the market price of the common stock at
the date of issuance and the conversion price, multiplied by the number of
shares underlying the CNP. The value of the warrants was determined using the
Black-Scholes model.

Interest income for the three-month periods ended January 31, 2005 and 2004 was
minimal.

Penalties on Debt and Equity Issuances

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, common stock and warrants with registration rights, as a result of our
inability to file and maintain effective a registration statement within certain
specified deadlines. The penalties will stop accruing on all of the instruments
once a registration statement covering the instruments is filed with the SEC and
maintained effective, or when the penalties become impermissible as a matter of
law as prescribed in the instrument or can be sold without registration under
Rule 144.

For the three months ended January 31, 2005, we recorded a $20,000 expense upon
issuance of CNP with a face value of $20,000 as penalties for our delayed
registration statement. Certain holders of previously issued CNP will continue
to receive each month, as applicable, additional CNP equal to 2% of the original
face amount of the notes, or principal balance.

For the three months ended January 31, 2005, we recorded $285,000 as a penalty
expense upon the issuance or the committed issuance of 309,920 shares of common
stock. Certain holders of unregistered common stock received and will continue
to receive each month, as applicable, additional shares calculated as a
percentage of the original number of shares they purchased.

The purchasers of the CNP and shares of common stock discussed above also
received detachable warrants with their purchases. These investors received and
will continue to receive each month, amendments to their warrants to increase
the number of shares underlying each original warrant. For the purchasers of the
CNP, the increase is 2% of the number of shares underlying the original
warrants. For the purchasers of common stock, the increase is a percentage of
the number of shares underlying the original warrants. For the three months
ended January 31, 2005, we recorded a $318,000 expense upon amending warrants to
purchase 650,540 additional common shares as penalties to these investors. The
fair value of these warrants was determined using the Black-Scholes model.

For the three months ended January 31, 2004, we recorded penalty expenses in the
amount of $170,000 and $25,000, against the issuance of 183,688 shares of common
stock and warrants to purchase 58,293 shares of common stock as penalties,
respectively. The fair value of the warrants was determined using the
Black-Scholes model.


NINE MONTHS ENDED JANUARY 31, 2005 AS COMPARED TO PRIOR YEAR PERIOD

For the nine months ended January 31, 2005, we incurred a net loss of
$8,208,000, as compared to a net loss of $4,827,000 for the nine months ended
January 31, 2004. Included in the losses are equity based expenses of $4,720,000
and $2,074,000, respectively.


                                       55
<PAGE>

Operating Expenses

General and Administration

General and administration expenses were $3,705,000 for the nine months ended
January 31, 2005, an increase of $254,000 from the prior year period. In lieu of
cash, we have often engaged service providers by offering common stock,
warrants, options and convertible notes payable (CNP) as compensation. Through
various arrangements, these providers have provided services such as business
development, business and financial consulting, Edgar services and directorship.
Some of these warrants and options that were issued, and subsequently expensed,
have been forfeited causing no dilution to the Company. The major components of
general and administration expenses, both cash and equity, are as follows:

<TABLE>
<CAPTION>

                          Nine Months Ended January 31, 2005    Nine Months Ended January 31, 2004
                        -------------------------------------- -------------------------------------
                           Cash &        Equity                  Cash &       Equity
                          Accrued        Based                   Accrued       Based                    Increase/
                          Expenses    Compensation    Total      Expenses   Compensation    Total       (Decrease)
                          --------    ------------    -----      --------   ------------    -----       ----------
<S>                    <C>          <C>          <C>          <C>          <C>          <C>          <C>
Salaries and benefits   $  522,000   $   39,000   $  561,000   $  412,000   $       --   $  412,000   $  149,000

Consulting                 323,000      321,000      644,000      293,000    1,086,000    1,379,000     (735,000)

Legal fees                 527,000      390,000      917,000      465,000      122,000      587,000      330,000

Accounting fees            428,000           --      428,000      164,000           --      164,000      264,000
Investor & public
relations                  187,000           --      187,000      307,000       47,000      354,000     (167,000)

Insurance                  131,000           --      131,000      107,000           --      107,000       24,000

Travel                     281,000           --      281,000      167,000           --      167,000      114,000

Other                      376,000      180,000      556,000      265,000       16,000      281,000      275,000
                        ----------   ----------   ----------   ----------   ----------   ----------   ----------
               Total    $2,775,000   $  930,000   $3,705,000   $2,180,000   $1,271,000   $3,451,000   $  254,000
                        ----------   ----------   ----------   ----------   ----------   ----------   ----------

</TABLE>

For the nine months ended January 31, 2005 as compared to the prior year period,
salary and benefits expense increased $149,000. This increase was primarily due
to the hiring of two additional personnel and normal pay increases and
incentives, as well as additional expense related the employment of two
consultants to perform the functions of former personnel who had been employed
at comparable lower wages during the prior period through the first half of
fiscal 2005. The hiring activity was associated with re-staffing certain
vacancies which resulted from cash saving measures implemented in March 2003
that aimed to reduce operational expenses with a reduction of employee head
count. The current year period included $39,000 of equity based compensation in
the form of a warrant issued to our previous controller. We expect hiring
activity as well as salary and benefits expense to increase for the last quarter
of fiscal year 2005 as well as into fiscal year 2006, as we move forward with
the execution of our operating plan.

Consulting expenses for the nine months ended January 31, 2005 decreased
$735,000 from the prior year period. This decrease was primarily attributable to
equity based compensation decreasing by $765,000. Equity based compensation for
the current period of $321,000 was comprised of stock issued or committed for
business consulting and to our board of directors. Relying on paying for
services with equity instruments in lieu of cash has created greater charges to
our results of operations due to the significant discounts required as a result
of the restricted nature of the equity instruments. The restricted nature is
caused by our failure to file and maintain an effective registration statement,
our difficulty in raising significant capital, as well as other persistent
issues. The prior year period included charges of $985,000 due to the issuance
of options and warrants for consulting services and director fees, and $101,000
for stock based compensation. Included in the option and warrant charges was the
expensing of an option in the amount of $550,000 upon the termination of a
consultant's agreement in October 2003, pursuant to which an option was issued
to the consultant in July 2002. No options or warrants were issued to
consultants in the current year period. For the remainder of the fiscal year
ended April 30, 2005, we expect consulting expenses to decrease due to the
conversion of two consultants to employees.


                                       56
<PAGE>

Although we anticipate that going forward we will be less reliant on offering
equity for services and/or in a better position from which to offer cash
remuneration for services, in the event we must offer, or elect to offer in
order to conserve cash, equity for services, we expect that equity for services
would be issued at lesser discounts, pursuant to more favorable terms than in
prior periods.

Legal fees increased $330,000 for the nine months ended January 31, 2005 as
compared to the prior year period. Part of this increase was due to our having
to issue discounted equity for services in the first quarter of fiscal 2005 in
lieu of cash, as discussed above. Equity based compensation expense for legal
services was $390,000 for the nine months ended January 31, 2005 as compared to
$122,000 for the prior year period. Legal expenses decreased in the recent
quarter over the prior two quarters as a result of our internalizing many legal
and regulatory functions in connection with our effort to improve internal
controls and reduce our reliance on outside legal services. However, we expect
overall legal expense to remain comparatively high for the remainder of the
fiscal year, as we attempt to settle the current SEC issues and other pending
legal matters disclosed in this Report, as well as file registration statements
on behalf of selling shareholders and the Company.

Accounting fees increased $264,000 for the nine months ended January 31, 2005
compared to the prior year period. This increase was due to significant
accounting activity related to the restatement of our financial results for
fiscal years 2002 and 2003, as well as the completion of the audit for fiscal
year 2004. We expect accounting fees to stay at current levels as we complete
the filing of our restated annual and quarterly financial results, but
relatively lower to that of prior periods. We expect to continue to make
improvements to and generate efficiencies in our financial controls and plan to
increase accounting staff, which should reduce external accounting costs.

Investor and public relations expense decreased $167,000 for the nine months
ended January 31, 2005 as compared to the prior year period. This decrease was
the result of our cost-cutting measures which included the elimination of one of
our investor relations firm, as well as the redirection of resources toward more
immediate concerns such as product development, the funding of internal
operations, and expenditures related to legal and regulatory matters. We expect
to internalize many investor relations and shareholder services, but do plan to
increase public relations and marketing activities. Accordingly, we anticipate a
moderate increase in investor and public relations fees for the remainder of
fiscal 2005 and fiscal 2006.

Insurance expense increased $24,000 over the prior year period. This increase
was primarily attributable to an increase of $13,000 for health insurance. In
May 2004, we renewed our Directors and Officers liability policy for an
additional year without incurring a substantial cost increase. At present, we
maintain $2,000,000 of Directors and Officers liability insurance. We expect
insurance expense to increase for the remainder of fiscal year 2005 as a result
of our providing health insurance coverage for new hires, and for fiscal 2006 as
a result of anticipated increases to premiums for Directors and Officers
liability insurance.

Travel expenses increased $114,000 for the nine months ended January 31, 2005
over the prior year period. The increase was attributed primarily to the July
demonstration in Istanbul, Turkey of our CarBomb Finder(TM) prototype, our
demonstration of the SIEGMA(TM) system at the NATO Symposium held in Madrid,
Spain in October, and our trip to Turkey in December 2004. We expect that travel
expenses for the remainder of fiscal 2005 as well as fiscal 2006 will remain
high as our sales and marketing personnel continue to attend numerous key
industry conferences and trade shows, management continues to meet with
investors, consultants and potential strategic partners, such as in Spain, and
general business activity increases in connection with our commercialization
objectives.

Other expenses for the nine months ended January 31, 2005 increased $275,000
over the prior year period and includes $180,000 of equity based compensation
for Edgar filing services, and $131,000 for postage and delivery expense. The
issuance of equity for services by us has been costly historically for the
reasons discussed above. The $131,000 for postage and delivery was primarily
incurred with the shipment of our prototype, equipment and supplies for our
demonstrations in Turkey and Spain. Other expenses, which also include fees
associated with stock transfer agent services, telecommunications, office
equipment and supplies, licenses and permits, and web design and development,
have increased during the period, and are anticipated to continue to increase
for the remainder of fiscal 2005, consistent with our expanded business
development and international efforts.


                                       57
<PAGE>

Research and Development

Net research and development expenses increased $55,000 over the prior year
period. No equity based expenses were recorded for research and development. The
major components of research and development expenses are as follows:

                                           Nine Months Ended
                                  ----------------------------------
                                                                       Increase/
                                   January 31, 2005  January 31, 2004  Decrease)
                                  -----------------  ---------------- ----------
Salaries and benefits                $ 508,000       $ 495,000       $  13,000

Consultants                            134,000          43,000          91,000

Supplies                                61,000         125,000         (64,000)

Travel                                  13,000           7,000           6,000

Depreciation                           136,000          97,000          39,000

Other                                  146,000          91,000          55,000

Grant income                          (396,000)       (311,000)        (85,000)
                                      ---------       ---------       ---------
Net                                   $ 602,000       $ 547,000       $  55,000
                                      ---------       ---------       ---------

Salaries and benefits related to research and development activities increased
$13,000 for the nine months ended January 31, 2005 as compared to the prior year
period. This increase was due to normal increases and increased bonuses. In
February 2005, we filled one scientific position vacated in July 2004 with the
hiring of an additional research scientist, and we attempting to fill another.
Consulting expenses increased $91,000 as we engaged consultants for (i)
development of software solutions, (ii) product engineering and production
management, and (iii) a construction and engineering firm to design and scout
locations for a manufacturing and assembly facility. We expect salaries and
benefits to increase in the last quarter of fiscal 2005 with the addition of
certain new scientific personnel to advance the development of our technology
and devices, and to administer current and future grants.

Supplies expense decreased $64,000 for the nine months ended January 31, 2005 as
compared to the prior year period, as we were not required to make as many
material purchases as in the prior year period. In light of an increase in our
grant application activity and current and anticipated cooperative and research
development agreements, we expect supply expenses to increase for the remainder
of fiscal 2005 and into fiscal 2006.

Travel expenses increased $6,000 for the nine months ended January 31, 2005 as
compared to the prior year period year period due to an increase in grant
application activity, which often requires cross-continental travel.

For year-to-date fiscal 2005, we added additional equipment costing $151,000 and
for the previous fiscal year ended April 30, 2004, we added additional equipment
costing $246,000. Together these additions have increased depreciation expense
by $39,000 period over period. In light of an increase in our grant application
activity and current and anticipated cooperative and research development
agreements, which require the purchase of additional equipment, we expect that
equipment depreciation expense will continue to increase for the remainder of
fiscal 2005 and into fiscal 2006.

Other expenses for the nine months ended January 31, 2005 increased $55,000
compared to the prior year period. The primary increase was due to increased
rent, rent; both our per foot rate and total space increased. This increase was
partially offset by a $15,000 decrease for moving expenses from the prior year
period. Other expenses, including, telephone, furniture and fixture rentals
increased consistent with our expanded business development efforts during the
current period.

For the nine months ended January 31, 2005, we earned grant money of $396,000
compared to $311,000 for the prior year period. We are currently in the second
year of Phase II of a SBIR contract awarded to us in August 2002 by the NVESD,
which is set to expire March 2005. As of January 31, 2005, we have earned
$749,532 against the contract and are entitled to earn an additional $30,412 in
SBIR contract proceeds to complete Phase II. If further research and development
work is required upon the expiration of Phase II, we have the ability to submit
a request for additional Phase II and/or Phase III funding, which the government
would consider based upon our progress to date and the merits of the project.
The U.S. Army is under no obligation to continue to assist in funding these
research and development costs beyond Phase II or any subsequent extension, or
to purchase any of our products, including the Anti-Tank Landmine Detector (TM)
7AT7, once we have completed development activities. As of this date, we have
submitted a request for additional Phase II and/or Phase III funding but have
not received any indication that additional funding will be made available to us
under the program.


                                       58
<PAGE>

Under the cooperative agreement entered into with the TSA in September 2004, the
TSA is to provide funding in the amount of $367,141 for Phase 1, and an
additional $145,381 for Phase 2, if, at the conclusion of Phase 1, the TSA
elects to continue with us. As of January 31, 2005, we have earned $122,510 in
cooperative financing from the TSA to complete Phase 1, and are entitled to earn
an additional $244,631 in contract proceeds to complete Phase 1. There is no
obligation for the TSA to fund our development efforts under this agreement
beyond the Phase 1 funded amount or to purchase any of our products once we have
completed development activities. The TSA will pay our research and development
costs on a periodic basis during the term of the contract, for which we are
required to submit monthly written reports detailing its progress under the
contract. When the written report is accepted by the TSA, we receive payment in
about 30 to 45 days. Payments commenced November 2004 and we recognize one-sixth
of the Phase 1 funding amount as an offset against research and development
expenses for each month invoiced.

Depreciation

Total depreciation expense for the nine months ended January 31, 2005 and 2004
was $158,000 and $103,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period.

Interest Expense and Income

Interest expense for the nine months ended January 31, 2005 increased to
$871,000 from $425,000 for the prior year. The increase was primarily due to
$781,000 of non-cash charges upon issuance of CNP with detachable warrants to
investors and $5,000 for the issuance of CNP to our former legal counsel during
the current year period as compared to $385,000 of non-cash charges upon
issuance of CNP with detachable warrants to investors and $14,000 for the
issuance of CNP to our former legal counsel for the prior year period.

During the nine months ended January 31, 2005, we expensed as interest the total
proceeds of $725,000 received from the sale of CNP with detachable warrants to
investors compared to the expensing of the total proceeds of $385,000 received
from the sale of CNP to investors in the prior year period. Under GAAP
accounting rules the combined value of the beneficial conversion feature and the
fair value of the detachable warrants, to the extent of the proceeds received,
is amortized over the terms of the notes. Since the notes in both periods were
sold subject to rescission rights (as discussed elsewhere in this report) and
immediately convertible, the full amounts were immediately expensed. The fair
value of the beneficial conversion feature was determined by taking the spread
between the market price of the common stock at the date of issuance and the
conversion price, multiplied by the number of shares underlying the CNP. The
value of the warrants was determined using the Black-Scholes model.

In September 2004, we issued to an investor a CNP in principal face amount of
$100,000, which note was subsequently converted into 192,308 shares of common
stock. The beneficial conversion amount of $56,000, calculated by taking the
spread between the market price of the common stock at the date of issuance and
the conversion price, multiplied by the number of shares underlying the note,
was fully expensed upon conversion.

During the nine months ended January 31, 2005, we expensed as interest a
beneficial conversion feature of $5,000 against $26,000 in CNP issued to our
former legal counsel for services rendered. This compares to the expensing of
$14,000 against $539,000 in CNP issued to our former legal counsel for services
rendered. The CNP were convertible immediately, therefore, the fair value of
beneficial conversion feature was determined by taking the difference between
the market price of the common stock at the date of issuance and the conversion
price, multiplied by the number of shares underlying the CNP.

The CNP to the investors carry a 5% interest rate and the CNP to our former
legal counsel carry a 10% interest rate. These notes and other notes payable of
lesser amount, generated aggregate interest expense of $85,000 for the nine
months ended January 31, 2005.

Interest income for the nine month periods ended January 31, 2005 and 2004 was
minimal.

Penalties on Debt and Equity Issuances

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, common stock and warrants with registration rights, as a result of our
inability to file and maintain an effective registration statement within
certain specified deadlines. The penalties will stop accruing on all of the
instruments once a registration statement covering the instruments is filed and
maintained effective, or when the penalties become impermissible as a matter of
law as prescribed in the instrument or can be sold without registration under
Rule 144.


                                       59
<PAGE>

For the nine months ended January 31, 2005, we recorded a $26,000 expense upon
issuance of CNP with a face value of $26,000 as penalties for our delayed
registration statement. Certain holders of previously issued CNP will continue
to receive each month additional CNP equal to 2% of the original face amount of
the notes, or principal balance.

For the nine months ended January 31, 2005, we recorded $1,845,000 as a penalty
expense upon the issuance or the committed issuance of 1,732,945 shares of
common stock. Certain holders of unregistered common stock received and will
continue to receive each month, as applicable, additional shares calculated as a
percentage of the original number of shares they purchased.

The purchasers of the CNP and shares of common stock discussed above also
received detachable warrants with their purchases. These investors received and
will continue to receive each month, amendments to their warrants to increase
the number of shares underlying each original warrant. For the purchasers of the
CNP, the increase is 2% of the number of shares underlying the original
warrants. For the purchasers of common stock, the increase is a percentage of
the number of shares underlying the original warrants.

For the nine months ended January 31, 2005, we recorded a $1,159,000 expense
upon amending warrants to purchase 1,701,204 additional common shares as
penalties to these investors. The fair value of these warrants was determined
using the Black-Scholes model.

For the nine months ended January 31, 2004, we recorded penalty expenses in the
amount of $373,000 and $31,000, against the issuance of 357,900 shares of common
stock and warrants to purchase 66,532 shares of common stock as penalties,
respectively. The fair value of the warrants was determined using the
Black-Scholes model


LIQUIDITY AND CAPITAL RESOURCES

As of January 31, 2005, we had cash and cash equivalents of $548,000 and
$152,000 in grant money receivable for progress completed, of which $61,000 was
collected in February 2005.

Other current assets, as of January 31, 2005 increased to 422,000 as we
deposited $180,000 towards the purchase of four (4) neutron generators with one
vendor and increased our deposit to $44,000 toward our purchase order for 10
neutron generators with a different vendor. Other items consisted primarily of
$40,000 for prepaid insurance, $51,000 for prepaid legal services, and a $36,000
purchase of a surety bond, which was refunded in February 2005, which had been
required for a shipment of our prototype for our demonstration in Spain last
October.

During the nine months ended January 31, 2005, our sources of cash were as
follows:

                                                                Amount
                                                             -----------
   Sales of common stock                                     $ 2,320,000
   Sales of common stock subject to rescission                   880,000
   Sales of convertible notes payable                            100,000
   Sales of convertible notes payable subject to
     rescission rights                                           300,000
   Proceeds from notes payable                                    51,000
   Proceeds from notes payable- related parties                  215,000
   Collection of CNP subscription receivable                     425,000
                                                             -----------
                                                             $ 4,291,000
                                                             -----------

As of January 31, 2005, accounts payable increased to $944,000, an increase of
$366,000 over the amount outstanding as of fiscal year ended April 30, 2004. A
great part of this increase was due to our receipt of inventory components which
are pursuant to a payment plan. We have continued to operate under a tightened
cash position, requiring us to delay payments to some service providers and
vendors. We foresee continued need for cash conservation measures as we strive
to introduce our technology into the marketplace. Included in the total balance
of accounts payable are significantly aged amounts that are being evaluated for
legitimacy. Accrued expenses of $60,000 as of January 31, 2005 consisted
primarily of a fee payable to an investment bank as discussed in our annual
report on Form 10-K.


                                       60
<PAGE>

For the nine months ended January 31, 2005, we have accrued $23,000 of interest
on an estimated payroll tax liability for stock compensation (in the form of
Microdevices shares) given for services rendered by officers, employees,
directors, legal advisors and consultants during the period from June 1997
through February 2002. Accrued interest on the estimated balance of $393,000 as
of previous year end brings the total estimated liability to $416,000. See Note
8 to our unaudited Consolidated Financial Statements. As of January 31, 2005 we
have accrued a payroll and payroll tax liability for the most recent period of
$38,000.

As of January 31, 2005, we were in default on a note payable totaling $40,000
with a shareholder and related party. The note payable has been in default since
November 1997.

As of January 31, 2005, we have outstanding unsecured convertible promissory
notes totaling $673,000 to our former legal counsel. The legal fees were
expensed as a general and administration expense in the periods incurred. The
notes bear 10% interest and are due in April and June of 2005.

In January 2005, an investor in our common stock exercised his option to
purchase an additional $880,000 worth of common stock. The additional purchase
was at $0.45 per shares and also provided for the issuance of warrants to
purchase up to 5,788,442 additional shares at varying terms. The exercise prices
of these warrants range between $0.45 and $1.25, and the warrants expire three
and one-half years after issuance. In addition, warrants held by the investor
were amended to purchase up to 300,216 additional shares at reduced prices. The
original exercise prices of the warrants ranging between $0.49 and $1.65 were
reduced to prices ranging between $0.45 and $1.25.

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

In June 2004, we issued $300,000 of CNP to two investors. The CNP have a two
year term, bear interest at 5% per annum and convert into common stock at $0.45
per share. The CNP have detachable warrants to purchase common shares with a
three and one-half year term as follows: 1,333,332 shares at $0.45 per share;
400,000 shares at $0.75 per share; and 240,000 shares at $1.25 per share. If the
securities are not registered by us before October 30, 2004, the investors are
entitled to receive as penalties, additional detachable warrants to purchase 2%
of the amount of shares exercisable under the original warrants and CNP equal to
2% of the original face amount of the CNP, or principal balance, for each
subsequent month until a registration statement is filed and maintained
effective by us, or the penalties become impermissible as a matter of law as
prescribed in the instrument. Additionally, if we sell new shares below $0.45
before January 15, 2005, in unrelated transactions, the conversion price of the
CNP will be reduced to equal the price of the new shares. The notes may be
subject to rescission rights and therefore have all been included in current
liabilities even though they don't mature until fiscal 2006. See "Note 12 -
Convertible Notes Payable Subject to Rescission."

During the nine months ended January 31, 2005, we issued to investors $26,000 of
CNP as a penalty for the delay of an effective registration statement for their
underlying stock. The notes have a two-year term, bear interest at 5% per annum
and convert into stock at $0.45 per share. The above sale of CNP and issuance as
a penalty bring our total CNP balance to $515,000 as of January 31, 2005.
Without giving effect to accrued but unpaid interest, the notes would be
convertible into approximately 1,144,444 shares of our common stock.

During the period from April 2003 through June 2003, we sold common stock at
prices between $0.33 and $0.35 per share, which are subject to buy-back. As of
January 31, 2005, 2,000,000 shares remain subject to buy-back; however,
information provided by our transfer agent indicates that many of these shares
have been sold by the original purchaser. We have reserved a current liability
of $694,000 for these shares and will continue to record the potential
repurchase obligation as a liability until the two-year waiver period has
lapsed.

During the fiscal year ended April 30, 2004, we sold 2,066,320 shares of common
stock that may be subject to rescission rights. See "Note 13 - Sales of Common
Stock Subject to Rescission." The abovementioned sales of 1,955,555 shares for
proceeds of $880,000 in January, 2005 may also be integrated as subject to
rescission rights bring the total number of shares to 4,021,875. As of January
31, 2005, we have reserved a current liability of $1,938,000 against these
shares.


                                       61
<PAGE>

As of January 31, 2005, we had total liabilities of approximately $5.7 million,
which includes $2.6 million of liabilities related to rescission and buy-back
obligations on our common stock. Since we currently have no sales revenue, and
the amount of liabilities significantly exceeds our cash on hand, we will be
required to continue to sell equity or debt instruments in order to pay present
liabilities and fund on-going operations.

In April and May 2004, we issued purchase orders for $2.4 million to two vendors
for the purchase of components for our bomb detection units. In April 2004, we
ordered ten neutron generators at a cost of approximately $1,033,000 through
vendor financing. We received our first unit from this order in October 2004. We
may lease these units from the vendor for up to 12 months, with a buy-out option
at the termination of the lease, for estimated monthly payments of $5,800, and
with 80% of the lease payments allocated toward the purchase price. In May 2004,
we ordered 60 gamma ray detectors for $1,368,000. We have included twenty-seven
of these units as inventory to be assembled for sale as of January 31, 2005.
Payment terms for these detectors require 50% down payment upon order with the
balance due following our receipt and acceptance of the goods.

In fiscal 2005, the Company began acquiring components in excess of materials
used for research and development in the amount $590,000. The intent of the
purchases is the anticipation of being able to sell products which require
assimilation of the purchased components. If the Company is unable to sell
products assembled from the inventory and/or the inventory is converted for
research and development purposes, the Company would apply SFAS No. 2 to the
components.



                                       62
<PAGE>

PLAN OF OPERATION

Our continuing corporate objective for the remainder of fiscal 2005 and the
first half of fiscal 2006 is to commercialize and bring to market the CarBomb
Finder(TM) 3C3 and SIEGMA(TM) system, as well as new prototypes incorporating
our proprietary "stoichiometric" technologies, including our in-ground
explosives detection and identification device, CarBomb Finder(TM) 3C5.
Additionally, we expect to continue with research and development activities
focused on the design, testing and development of sensor systems incorporating
our core technologies for other governmental and commercial applications and
markets.

During the quarter, we have seen an increase in significant positive feedback as
to the potential demand for our explosives identification and detection products
and have correspondingly increased, and directed greater resources toward, the
direct and indirect sales and marketing of our products both domestically and
overseas. As of the date of this Report, we have developed a strategic sales and
marketing plan and have expanded our relationship with distributors and
resellers specializing in the security and anti-terrorism industry, defense
industry consultants, as well as potential strategic partners in developing some
key geographic markets and verticals.

We have also entered into a memorandum of understanding to form a joint venture
which is intended to serve as a complementary platform for sales and
distribution into the European and other markets, as well as reduce the capital
requirements necessary for us to build and maintain the infrastructure necessary
to manufacture and support our products outside North America. The joint
venture, as contemplated, provides for the contribution of capital and resources
from a strategic partner to develop an assigned territory and accomplish the
certification, importing, licensing, permitting, maintenance and service of our
products overseas, in exchange for a regional license from HiEnergy for the
assembly, sale, and marketing of our products in certain markets.


For the remainder of fiscal 2005 and the first half of fiscal 2006, we intend to
accelerate and seek enhancements to our pre-market and aftermarket efforts,
which address the warranty, service, maintenance, certification, licensing,
export policy, product liability and customer service elements of our
commercialization strategy. Most recently, we have entered into a teaming
agreement with a global maintenance company, submitted our technology for
coverage under the Safety Act to address product liability issues, and have
engaged outside specialists involved in certification, inspection, and risk
management. We intend to negotiate and enter into a number of other outsourcing
servicing arrangements treating these elements.

In order to be able to complete the commercialization cycle, we have determined
it necessary to field test the first class of our products in the second half of
calendar 2005. Accordingly, we have developed a strategic customization and
integration program which will be first implemented with an initial limited
introduction of 5 to 10 units of the SIEGMA(TM) system. The cooperative
initiative is intended to accelerate our in-field assessment of the SIEGMA(TM)
system and software architecture for user operability and stability, as well as
provide us with critical feedback and suggested design improvements based on
each program participant's specific operational needs. The program is expected
also to stimulate sales by allowing us to bring our first commercial product to
market more effectively and efficiently and will provide us with an opportunity
to test our aftermarket service capabilities. During the remainder of fiscal
2005 and into fiscal 2006, this program will be offered to early adopters in the
first responder community, including emergency response teams, bomb squads and
explosive ordnance disposal units from a wide array of state, municipal and
local agencies around the United States.

During the quarter, we have also directed a greater portion of our production
budget to our SIEGMA(TM) system, which management has prioritized in response to
the positive reception from the industry. In January 2005, we received our first
order for SIEGMA(TM) 3E3. The system deliverable against this order is being
assembled in our Irvine, CA facility and is expected to be delivered during the
next quarter. As to our vehicle-borne CarBomb Finder(TM) 3C4, we have upgraded
the delivery platform design and are making enhancements to the vehicle assembly
with the assistance of integration partners. We had previously announced a
cooperative development program with a government prime contractor for the
purchase and delivery of our CarBomb Finder(TM) 3C4. Although delays in the
release of appropriated funds due the prime contractor have postponed production
under that contract, commercialization activities for CarBomb Finder(TM) 3C4
continue and we expect a launch of CarBomb Finder(TM) 3C4 by end of the current
calendar year.

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


                                       63
<PAGE>

In line with our commercialization activities, we have increased inventory in
the current period with the acquisition of core components and parts that have
greater delivery lead-times from vendors. Although we remain adverse to building
inventories, in light of the lead-times and the perceived demand for our
products, we have estimated that in order to meet, and properly manage the sales
cycle of, anticipated orders, we will require at any one time sufficient
components to deliver at least 5 to 10 units of our explosive detection systems
to buyers. In order to control inventory risk, we will continue to identify and
seek to engage additional sources of components in order to reduce, limit or
eliminate our exposure to single-source suppliers and protracted delivery
schedules.

In light of an increase in our grant application activity and current and
anticipated cooperative and research development agreements, including a funded
program with the TSA, we plan to continue to focus on the research and
development of additional applications of our technologies and the further
exploitation of our technology assets both internally and through collaboration
with third parties. We also intend to build upon our investments in the base
units and core technologies upon which our explosives identification and
detection prototypes are based, as well as introduce more sophisticated
applications and configurations. We will use the proceeds of existing government
grants, new grants and/or research and development contracts, together with
other available funds, to accomplish these objectives.

We believe that general and administrative costs will show improvement in the
remainder of fiscal 2005 and into fiscal 2006, as we reduce legal and accounting
expenses associated with the restatement of the Company's financial statements,
certain pending litigation, and certain regulatory matters related to the SEC
investigation. While there can be no assurance, we are hopeful that many of the
open legal and regulatory matters will be resolved during this period. Materials
and production costs for our explosive identification units will be significant
in fiscal 2005 and into fiscal 2006. Working capital requirements and
inventories are also expected to grow for the remainder of fiscal 2005 and into
fiscal 2006, as necessary components are purchased. Initial sales are projected
to be at or near cost with margins expected to improve with economies of scale
attendant to the opening of our production facility, or the outlay of the
assembly function to a manufacturing partner, and the increased demand
anticipated with the introduction of our products into the marketplace.

We anticipate significant increases in personnel requirements throughout our
organization. An off-site production facility, when operational, will require
the hiring or contracting of approximately 40 new personnel. As we begin the
commercialization phase of our products and expand our operating structures,
significant enhancements to corporate management will also be necessary. We
anticipate the need to hire individuals to manage the product engineering,
manufacturing and distribution functions, and to fill and upgrade key executive
positions in the remainder of fiscal 2005 and fiscal 2006, including, among
others, a Chief Financial Officer. Other areas that may require additional
personnel include sales and marketing, customer service and human resources. As
funds are available, we also anticipate hiring additional skilled personnel,
such as advanced engineering professionals, as part of a product development
team that can operate and manage projects with minimal supervision, additional
scientists, and experienced technicians. Our current facilities will be adequate
to conduct our administrative, research and development activities as well as
initial assembly and distribution.

Historically, we have financed operations with periodic cash infusions through
various financing vehicles. The uncertainties of securing financing has limited
our capacity to make greater investments in research and development, inventory
and component procurement, and human resources, as well as the commercialization
of our products. We are currently negotiating a larger capital infusion in the
range of $2 to $5 million, and we estimate that our total financial requirements
for the remainder of calendar 2005 will be between $5 and $10 million. This will
cover a proposed facility build out, inventory procurement, and operations.
Although we have been able to raise capital through self-managed private
placements of our equity, we currently do not have an institutional commitment
to raise the additional capital necessary to meet these financial requirements
as of the date of this Report.



                                       64
<PAGE>

RISKS RELATED TO OUR BUSINESS


RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

General Business Risks

We have a history of losses and an accumulated stockholders' deficit of
$30,023,812 as of January 31, 2005, and we may never achieve profitability.

We have not generated any revenue from operations during the past two fiscal
years, and we have incurred net losses available to common stockholders every
year since our inception, including $8,183,346 for the year ended April 30, 2004
and $8,208,216 for the nine months ended January 31, 2005. We expect that our
operating expenses will increase in the near term, due in part to investments
that we intend to make in connection with our plans to commercialize,
manufacture and market our initial prototype devices: the CarBomb Finder(TM) and
SIEGMA(TM). To achieve profitability, we will need to generate significant
revenue, while achieving reasonable costs and expense levels. We may not be able
to generate enough revenue to achieve profitability. If we cannot achieve or
sustain profitability, we may not be able to fund our expected cash needs or
continue our operations.

We will need additional capital to meet our operating needs, and additional
capital may not be available on favorable terms or at all.

For the last two fiscal years, we have experienced average monthly operating
expenses of approximately $300,000, and no revenues from operations to offset
that amount. As such, we must continually raise capital from the sale of equity
or the placement of debt to private investors, or from government grants or
development contracts, in order to fund our operations at current levels or at
all. Our ability to raise additional funds in the public and private markets
will be adversely affected if the results of our business operation are not
favorable, or if the commercialization of the CarBomb Finder(TM) and SIEGMA(TM)
is poorly received or fails altogether. Although we intend to seek additional
funding through corporate collaborations or from loans or investments from new
or existing stockholders, additional capital may not be available to us and,
even if available, it may not be on terms which our Board of Directors would be
willing to accept. If we cannot obtain the capital we need to fund our
operations on terms which we can accept, we may be required to curtail our
operations significantly, or cease our operations altogether, which would have a
material adverse effect on our business, our operations and our financial
condition.

As a development stage company with an unproven business strategy, we may not be
able to achieve positive cash flows and our limited history of operations makes
evaluation of our business and prospects difficult.

While we have developed prototypes of our CarBomb Finder(TM) and SIEGMA(TM)
devices, and are preparing to introduce our first commercial products, which
include the CarBomb Finder(TM) 3C4 model and the SIEGMA(TM) 3E3 we have made no
sales of our initial product other than one order placed by our exclusive
distributor in the Middle East, EEMCO, which is owned by one of our Directors,
and the device will be priced effectively at our cost to manufacture the item
with no allocable profit to us. Because of that situation, and that the markets
of the CarBomb Finder(TM) and SIEGMA(TM) remain largely untested and undefined
in general, we are still classified as a development stage company with a
limited operating history. Since April 25, 2002, we have focused our resources
on the development of products using our proprietary stoichiometric technology.
We believe that we are the only company working on a commercial product using
stoichiometric technology, and so there is no proven market for our products
once development is complete. To date, we have no commercialization experience
with our technology, and it is difficult to evaluate our prospects for sustained
growth and profitability. Our future success is more uncertain than if we had a
more established and proven history of operations and greater experience in
executing similar business strategies. Furthermore, it is expected that our
current business and marketing approach will be modified from time to time, as
we continue to assess the markets and applications for our technology as well as
evaluate prospective customer interest. No assurance can be made that the
current strategies or any future changes in our business model, and the
marketing of products, will be met with success. For the last two fiscal years
we have not generated any significant revenues and, as a result, we have limited
resources and our potential ability to generate and maintain income also remains
unproven.


                                       65
<PAGE>

The commercial viability of the CarBomb Finder(TM) and SIEGMA(TM) is unproven,
and may never be realized.

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

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

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

We have limited resources to devote to product development and
commercialization. If the commercialization of the CarBomb Finder(TM) and
SIEGMA(TM) proves unsuccessful, any reallocation of resources could
substantially harm our business.

Our business strategy is to develop, manufacture and market products
incorporating our stoichiometric technology to address initially the security
and counter-terrorism market and the chemical and petrochemical industry control
market. Our current and primary objective is to commercialize our proprietary
CarBomb Finder(TM) and SIEGMA(TM) devices. We believe that in the near term our
revenue growth and profitability, if any, will substantially depend upon several
factors, including the following:


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      o     our ability to raise additional capital to manufacture and market
            our current prototype devices, the CarBomb Finder(TM) and
            SIEGMA(TM);

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

      o     our ability to manufacture the CarBomb Finder(TM) and SIEGMA(TM) in
            commercial quantities, at a reasonable profit margin;

      o     receipt of any requisite approvals from the Nuclear Regulatory
            Commission (NRC), the Department of State, the Department of
            Commerce, the Department of Defense, and similar state or foreign
            authorities, as applicable; market acceptance of the CarBomb
            Finder(TM) and SIEGMA(TM) and after-market satisfaction related to
            performance and maintenance issues;

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

      o     the availability and cost of key components for the CarBomb
            Finder(TM) and SIEGMA(TM);

      o     the timing of completion of acceptance testing for the CarBomb
            Finder(TM) and SIEGMA(TM); and

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

We have introduced our prototype devices, the CarBomb Finder(TM) and SIEGMA(TM),
only recently, and all other applications of our technology are still in the
early stages of development. These include, at present, our BombSquad Detector,
our in-ground explosive detection system, our Unexploded Ordnance Sensor, our
Anti-tank Landmine Detector and our Refractorymeter. For the fiscal year ended
April 30, 2004, we spent $804,000 or 14% of total operating expenses on research
and development, and for the nine months ended January 31, 2005 and January 31,
2004, we spent $602,000 or 14% and $547,000 or 14%, respectively, of total
operating expenses on research and development. For the fiscal year ended April
30, 2004, we spent $4,796,000 or 86% of total operating expenses on general and
administrative expenses and for the nine months ended January 31, 2005 and 2004,
we spent $3,705,000 or 86% and $3,451,000, or 86% respectively, of total
operating expenses, on general and administrative expenses. We anticipate an
increase in general and administrative expenses due to additional operating
expenses demanded for commercialization of the CarBomb Finder(TM) and
SIEGMA(TM). We anticipate research and development costs to stay approximately
at the same level, to the extent that independent testing of the CarBomb
Finder(TM) and SIEGMA(TM) devices will be required in order to obtain approvals
from regulatory authorities or gain better market acceptance by industry
partners or governmental officials.

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

Due to our losses and accumulated deficit, our auditors have raised concerns
about our ability to continue as a going concern.

Our independent certified public accountants qualified their opinion contained
in our consolidated financial statements as of and for the years ended April 30,
2004, 2003 and 2002 to include an explanatory paragraph related to our ability
to continue as a going concern, stating that "during the year ended April 30,
2004, we incurred a net loss available to common stockholders of $8,183,346, and
had negative cash flows from operations of $2,846,157. As of January 31, 2005,
we had an accumulated deficit of $30,023,812 and were in the development stage.
These factors, among others, as discussed in "Note 3- Going Concern" to our
consolidated financial statements, raise substantial doubt about our ability to
continue as a going concern." The auditors recognize that the cash flow



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uncertainty makes their basic assumptions about value uncertain. When it seems
uncertain whether an asset will be used in a "going concern" or sold at auction,
the auditors assume that the business is a "going concern" for purposes of all
their work, and then they disclose that there is material uncertainty about that
assumption. It is definitely a consequence of our negative cash flows from
operations that we continually need additional cash. At any time, a serious
deficiency in cash flows could occur and it is not always possible or convenient
to raise additional capital. A problem in raising capital could result in
temporary or permanent insolvency and consequently potential lawsuits by unpaid
creditors and perhaps closure of the business. All of these things are
possibilities. It is certain, in any case, that analysts and investors view
unfavorably any report of independent auditors expressing substantial doubt
about a company's ability to continue as a going concern. Consequently, we urge
potential investors to review the report of our independent certified public
accountants and our consolidated financial statements before making a decision
to invest in us, and not to invest in our common stock unless they can afford
the potential loss of their entire investment.

Companies which possess much greater financial and other resources and have more
manufacturing, marketing, sales and distribution experience than we have, may
develop a technology which competes effectively with our stoichiometric
technology, and we may be unable to capture or maintain market share.

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

It is possible that competitors may introduce new technologies before we do,
allowing them to offer similar or more effective products at more competitive
prices. Any number of future technological developments could:

      o     adversely impact our competitive position;

      o     require write-downs of obsolete technology;

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

      o     require significant capital expenditures beyond those currently
            contemplated.

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

We depend on key management and personnel and may not be able to hire or retain
additional key managers, employees and technical and scientific personnel when
needed.

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


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We are unable to predict the impact that the continuing threat of terrorism and
the responses to that threat by military, government, business and the public
may have on our financial condition and ability to continue to implement the
government sales portion of our business plan.

The terrorist attacks in the U.S. and other countries have brought devastation
to many people, shaken consumer confidence and disrupted commerce throughout the
world. The continuing threat of terrorism and heightened security measures, as
well as current and any future military and civil action in response to such
threat, may cause significant disruption to the global economy, including
widespread recession. We are unable to predict whether the continuing threat of
terrorism or the responses to such threat will interfere with our efforts to
raise additional capital to fund our operations through the development stage.
If we are unable to raise a sufficient capital due to economic conditions, we
may be unable to finalize development of our detection systems under government
contracts and to bring them to military, civil or commercial markets as planned.

Our business may be subject to international risks that could materially harm
our business.

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

      o     changes in domestic and foreign regulatory requirements;

      o     political instability in the countries where we sell products;

      o     differences in technology standards;

      o     foreign currency controls;

      o     longer payment cycles and inadequate collection system;

      o     fluctuations in currency exchange rates;

      o     inconsistent intellectual property protections in foreign
            jurisdictions;

      o     export restrictions, tariffs, embargoes or other barriers;

      o     prejudicial employment laws and business practices;

      o     difficulties in obtaining and managing distributors; and

      o     potentially negative tax consequences.


Manufacturing Risks

We have no manufacturing experience and our ability to be able to successfully
execute a manufacturing plan is untested.

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


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

      o     the ability to raise additional capital to cover the costs of
            constructing and equipping a facility and for the manufacturing of
            the CarBomb Finder(TM) and SIEGMA(TM) in quantities necessary to
            meet anticipated demand should approval by regulatory authorities be
            obtained;

      o     the ability to manufacture products that have minimal and acceptable
            defects;

      o     the ability to obtain product liability insurance;

      o     the ability to obtain approvals from any applicable state or federal
            regulatory agencies;

      o     unexpected changes in regulatory requirements;

      o     inadequate protection of intellectual property; and

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

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

Before we can afford to have our own manufacturing facility, or engage a
third-party to manufacture units for us on an OEM basis, we must manufacture the
initial units we sell in our laboratory facility with limited staff on a one-off
basis, which renders us unable to create any manufacturing efficiencies or to
realize a profit from the resulting sales. If we are not able successfully to
transition our manufacturing to full-scale commercial production, it will have a
materially adverse effect on our business and financial condition.

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

We rely substantially on third-party suppliers and depend upon a limited number
of suppliers of one of our components for our CarBomb Finder(TM) and SIEGMA(TM)
(the gamma ray detector). The inability to obtain parts from these suppliers on
a timely basis and the loss of product or delays in product availability from
one or more third-party suppliers could substantially harm our business.

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


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Interruptions, delays or cost increases affecting our materials, parts,
equipment or suppliers may adversely affect our manufacturing operations.

Our manufacturing operations depend upon obtaining adequate supplies of
materials, parts and equipment on a timely basis from third parties. In
particular, there are few manufacturers worldwide of particle accelerators and
gamma ray detectors; sophisticated and expensive equipment which are the key
components of our products. Our reliance on third party suppliers limits our
control over product delivery schedules or product quality. Our results of
operations could be adversely affected if we are unable to obtain adequate
supplies of materials, parts and equipment of adequate quality in a timely
manner or if the costs of materials, parts or equipment increase significantly.
From time to time, suppliers may extend lead times, limit supplies or increase
prices due to capacity constraints or other factors. In the event that any of
our suppliers were to experience financial, operational, production or quality
assurance difficulties resulting in a reduction or interruption in supply to us,
our operating results could suffer until alternate suppliers, if any, were to
become available.

Our competitors could purchase the same components from our suppliers and
attempt to copy our products to the extent not covered by patents or other
intellectual property rights.

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

We may be unable to secure anticipated governmental funding for future products;
we are currently unable to obtain an SBA Certificate of Competency.

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

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


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

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

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

If our losses continue into the future, our business and our stockholders will
be adversely affected. We are therefore reducing our dependence on governmental
customers, which can require longer than average lead times before sales are
made.

We have incurred net losses since our inception. For the fiscal year ended April
30, 2004 and the nine months ended January 31, 2005, we reported net losses
available to common stockholders of $8,183,346 and $8,208,216, respectively, as
compared to a net loss available to common stockholders of approximately
$6,771,471 for the fiscal year ended April 30, 2003 and $5,410,043 for the nine
months ended January 31, 2004. Our accumulated deficit through January 31, 2005
is $30,023,812. We expect that our losses will continue into fiscal year 2005.
We estimate that our financial requirements will be between $8,000,000 and
$10,000,000, until we can generate sufficient revenues from sales to cover our
operating costs. One of the factors for the continuation of such anticipated
losses is that we are highly dependent on governmental customers, which
typically require long lead times before sales are made.

Marketing Risks

A failure to establish and maintain relationships with industry partners may
harm our business.

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

We have granted a third party substantial marketing rights to the CarBomb
Finder(TM) and SIEGMA(TM) devices in an important market. If the third party is
unsuccessful in marketing the CarBomb Finder(TM) and SIEGMA(TM), our marketing
plan in the relevant territory could be jeopardized or interrupted.


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

Intellectual Property Risks

We may not be able to protect our intellectual property and may infringe on the
intellectual property rights of others.

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

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

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


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Information relating to any invention that is invented under a Small Business
Innovation Research contract may become public at some future time.

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

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

Litigation as to enforcement or defense against claims of intellectual property
infringement could be expensive, and any judgment against us may prevent us from
selling our products.

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

Regulatory and Legal Risks

The CarBomb Finder(TM), SIEGMA(TM), and any future products in development
utilizing our technology would be subject to radiation safety regulations and
licensing requirements. Complying with these requirements may result in delays
in the deployment and customer utilization of the CarBomb Finder(TM),
SIEGMA(TM), and future products.

Our CarBomb Finder(TM), SIEGMA(TM), and any future products in development
utilize a process that results in neutron radiation. As a potential manufacturer
of a fast neutron emitting device, we and our customers must comply with
applicable governmental laws and regulations and licensing requirements, which
may include those promulgated by the U.S. Nuclear Regulatory Commission ("NRC")
and the U.S. Food and Drug Administration ("FDA"), governing the design and
operation of our products, including appropriate radiation shielding. Although
fast neutron radiation demonstrates some properties different than other forms
of radiation, we do not believe that fast neutron radiation presents any
difficulties or creates any risks beyond those ordinarily encountered in
connection with the fabrication and operation of other forms of radiation
emitting devices commonly used in the general population, such as x-ray
equipment. Further, we believe that the design and incorporation of appropriate
shielding in our products and the development of appropriate operating
procedures in view of their intended use are, as an engineering and public
safety matter, relatively straight-forward matters. Nevertheless, compliance
with these rules and regulations and licensing requirements entails additional
expense, effort and time in bringing our products to market.


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The manufacture and sale of devices which emit radiation are subject to the
regulatory controls and standards of various domestic and foreign jurisdictions.
These regulations may become more restrictive as policies, guidelines and
standards change, and our activities as to current and future products may be
curtailed or interrupted.

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

If current Export Administration Act regulations were to change, or if our
devices are purchased in countries which are viewed as a threat to regional
stability, we could become subjected to the more stringent rules of the U.S.
Department of State, and certain currently permissible sales activities could be
limited or prohibited altogether.

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

If future products, such as the CarBomb Finder(TM) and SIEGMA(TM), fail to
detect or confirm explosives, we could be exposed to product liability and
related claims and may fail to achieve market acceptance.

Inherent in the manufacturing, sale and maintenance of explosive detection
products are potential product liability risks. If our products malfunction, it
is possible that explosive material could pass undetected through our products,
which could lead to product liability claims. There are also many other factors
beyond our control that could lead to liability claims, such as the reliability
and competence of the customer's operators and the training of the operators.
The cost of defending product liability claims brought against us could be
significant and any adverse determination may result in liabilities in excess of
insurance coverage. We do not currently maintain product liability insurance,
but we anticipate obtaining product liability insurance as soon as it is
necessary. We also intend to address product liability issues by pursuing the
designation and certification of our products by the U.S. Department of Homeland
Security (" DHS") as Qualified Anti-Terrorism Technologies ("QATTs") and relying
upon certain protections provided for under The Support Anti-terrorism by
Fostering Effective Technologies Act of 2002, Public Law 107-296 (the "Safety
Act"). We cannot be certain that we will be able to attain on acceptable terms,
if at all, insurance coverage sufficient to contain liabilities in a meaningful


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way, or qualify our products and services as QATTs under the Safety Act. In
addition, the failure of any product to detect explosives, even if due to
operator error and not to the mechanical failure of a product, could result in
public and customer perception that our products are ineffective. In the event
we are held liable for a claim against which we do not have insurance or for
damages exceeding our levels of insurance coverage, or which even if insured
results in significant adverse publicity against us or our products, we may be
required to make substantial payments and lose or fail to achieve market
acceptance.

We have received a Wells Notice and requests for information from the SEC. We
could be required to pay civil penalties and be subject to a permanent
injunction.

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

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

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

If investors rely on projections or estimates we may make, including the
projections which were the subject of the April 2004 subpoena from the SEC
described above, they could assert in a legal proceeding that we issued false or
misleading statements about our company. If they were able to prevail
successfully in any such proceeding, it could have a materially adverse impact
on our business, operations, and financial condition, as well as the market for
our public securities.


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The conference and website information referenced in the preceding Risk Factor
stated that we had projected sales of 265 units at an average price of $223,396
per unit, including maintenance fees. These projections assumed that the Company
would raise the money it needed to fund its conversion from a prototype
development company to one which could manufacture its CarBomb FinderTM and
Antitank Landmine Detector (TM) 7AT7 at commercial levels. Since the date that
the projections were made, the Company has been unable to raise the capital
necessary to achieve that objective. In addition, the availability of greater
resources and interest to develop a line of products in response to the
startling increase in the use by terrorists of home-made Improvised Explosive
Devices, or IED's, in Iraq and elsewhere, have led to a determination by the
Company to focus more on deploying its SIEGMA(TM), suitcase-borne, product which
is designed to thwart this particular type of threat. The confluence of the
Company's inability to raise the funds necessary to scale up to commercial
production at the levels previously assumed, together with the shift in its
commercial priorities in order to respond to emerging risks, caused the Company
to fail to meet its 2004 projections. Accordingly, investors should not rely on
these projections in making any determination whether or not to invest in, or
maintain an investment in, the Company. To the extent that any investor has so
relied, and if the investor can prove that any misstatements we have made were
intentional or reckless, that such investor's reliance on these misstatements
was reasonable, and that the investor has suffered actual damages as a result of
such reliance, than such investor may have a cause of action against us. If any
investor were to prevail in making such assertions in any legal proceeding, it
could have a materially adverse impact on our business, operations, and
financial condition, as well as the market for our public securities.

We may owe indemnification obligations to our current and former directors and
officers.

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

Under the federal securities laws, purchasers of our common stock in a prior
primary offering may have the waivable right to sell their shares back to the
us.

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

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


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Under the federal securities laws, the private offering of our securities by us
while certain selling stockholders' shares were in registration with the SEC may
be deemed to be "integrated" under the federal securities laws of the United
States, and purchasers of shares through the private offering may demand
rescission of the offering.

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

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

While the Company has not completed any independent investigation into whether
or not the rescission rights are in fact due to certain shareholders or whether
or not there may be defenses which could negate the requirement to offer
buy-back or rescission rights to prior investors. Based upon certain advice it
has received, the Company recorded $1,355,000 from the sales of 2,130,518 shares
of common stock during this period when the registration statement was on file,
as a liability as of January 31, 2005.

Current and prior stockholders who purchased our shares could attempt to assert
claims against us if our disclosures they relied upon in making such purchases
are deemed inadequate.

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


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

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

Corporate Risks

One of our stockholders, whose interests may differ from other of our
stockholders, has substantial influence over the direction of the Company.

As of January 31, 2005, Dr. Bogdan C. Maglich , our Chief Executive Officer,
Chairman, Chief Scientific Officer, Treasurer and President, would own
approximately 20% of our outstanding shares upon exercise of all warrants and
options held by him. Accordingly, he has a substantial influence in determining
the outcome of certain corporate transactions or other matters submitted to
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, the election of directors, and other
significant corporate actions. He also has the power to prevent or cause a
change in control. It is assumed that in certain instances the interests of Dr.
Maglich may differ from the interests of the other stockholders, and may limit
the ability of other stockholders to affect our management and affairs.

We have identified areas of weaknesses in our internal controls which existed at
the end of our fiscal year ended April 2004. Although we have taken steps to
remedy these weaknesses, our ability to implement and maintain a full system of
internal controls and proper corporate governance will depend upon our ability
to attract both capital and human resources, and if we are unsuccessful we risk
being in violation of our public company reporting obligations in the future,
which could give rise to potential regulatory and/or shareholder actions that
could have a material adverse effect upon our business and financial condition,
and the market value of our stock.

For the year ended April 30, 2004, our management identified material weakness
in our internal controls and a lack of segregation of duties which resulted
from, among other things, a lack of capital and human resources, a lack of a
systematic and formal system of checks and balances in our corporate governance,
the departure of key personnel and the resignation of various of our directors.
We previously experienced a general weakness in recording equity transactions
involving the grant of options and warrants which caused us to record these
transactions at a later date than they occurred although, to our knowledge, this
weakness did not result in any improper reporting on our financial statements.
We also have a very small finance and accounting staff and, due to our limited
resources, it is not always possible to have optimum segregation of accounting
and finance duties. We believe that our current system of internal controls, in
light of the changes we have made since the end of fiscal year 2004, are
generally adequate. However, if we are unsuccessful in attracting the capital
and human resources necessary to implement and maintain an effective system of
internal controls, and if as a result we were to fail to disclose timely
material items as required under the Securities Exchange Act, it could give rise
to potential regulatory and/or shareholder actions, which could have a material
adverse effect on our business and financial condition, and on the market value
of our shares.

We may have increasing difficulty to attract and retain outside members of our
board of directors.

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


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

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

Elimination of monetary liability of our current and former directors may
discourage lawsuits against directors.

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

RISKS RELATED TO OUR STOCK

We will pay accruing penalties to certain holders of our securities based on our
failure to register their securities.

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

The amount of the penalties paid or accrued as a result of the defaults
described above through January 31, 2005 is 1,732,945 shares of common stock,
$26,000 in aggregate face amount of additional convertible notes, and warrants
to purchase an additional 1,701,204 shares of common stock. Our existing
stockholders have suffered, and will continue to suffer, substantial dilution as
a result of the issuance and payment of these securities as penalties. Such
dilution can have a material and adverse impact upon the actual and perceived
value of our shares, which can be a depressive force upon the price of our stock
at market and cause losses for our existing stockholders, as well as render it
much more difficult for us to raise additional equity capital in the future.

Our common stock price is subject to significant volatility, which could result
in substantial losses for investors and litigation against us.

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


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

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

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

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

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

      o     changes in key customer and supplier relationships;

      o     recommendations of research analysts and guidance;

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

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

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

We may not be able to pay an accrued payroll tax liability.

As of January 31, 2005, we identified an additional payroll tax liability of
$416,489 for stock compensation given during the period from June 1997 through
February 2002. The stock given during this period was HiEnergy Microdevices
stock, which in April 2002 was exchanged, in a transaction treated as a reverse
takeover. Because, at the time, HiEnergy Microdevices was a closely-held
corporation with negative net worth, no marketable product, no meaningful
revenue potential and no dividend paying capacity, the value originally assigned
to the stock was nil.

We identified a public sale of the closely-held HiEnergy Microdevices stock
where a HiEnergy Microdevices shareholder filed for chapter 7 bankruptcy
protection and his stock was sold by the bankruptcy trustee in February 2002. We
have calculated the $416,489 payroll tax liability by treating this sale as an
arms length transaction and recognizing employment taxes, withholding
requirements, penalties and interest. We engaged tax advisors regarding the
nature of our obligations, and we plan to settle this liability as soon as we
have the resources to do so.

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

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

We issued 313,221 options to Dr. Bogdan Maglich in fiscal year 2004 and 421,980
options in fiscal year 2005 for services rendered as our Chief Executive
Officer, President, Treasurer, Chief Scientific Officer and Chairman, pursuant
to his employment contract. We also issued 32,455 shares of our common stock,
1,400,000 options and 1,695,686 warrants to various consultants in fiscal year
2003 and 558,500 shares, 2,358,221 options and 7,787,068 warrants in fiscal year
2004. Likewise, we issued notes payable to our former legal counsel during
fiscal years 2003 and 2004 that are convertible into 693,726 shares of common
stock as of April 30, 2004. Under the terms of Dr. Maglich's employment
agreement, we are obligated to issue options to Dr. Maglich annually for the
term of the agreement. Continued issuances of securities of this magnitude may
have a dilutive effect on the market price for our common stock and of the
percentages of ownership of stockholders, if the options and warrants are
exercised, or the notes are converted. The terms upon which we will be able to
obtain additional equity capital could also be adversely affected.


                                       81
<PAGE>

We plan to issue a significant number of additional equity securities in the
future and that will dilute the percentage ownership of the present holders or
purchasers of our common stock.

There are 43,336,742 shares of our common stock outstanding as of January 31,
2005, which does not include 28,697,997 new shares we have committed to issue
upon exercise of options and warrants and convertible notes. If we issue all of
the shares underlying currently outstanding warrants and options currently
in-the money and convertible notes, this will result in approximately 22%
dilution of the ownership interest of holders of our common stock. If all
currently outstanding warrants, options and convertible notes were immediately
exercised and converted, we would receive approximately $18,440,484 in cash and
approximately $ 1,291,266 in forgiveness of indebtedness. While this amount
exceeds the current market value of the stock that would be issued, exercise and
conversion might take place when the total value received by us is much less
than the market value of the stock that would be issued. Under our current
business plan, we must also raise funds in part by issuing new equity
securities, which would have a dilutive effect on the percentage ownership of
stockholders. The shares issued in such transactions could be very large and may
even exceed the number of shares issued and outstanding today, which would
significantly decrease the percentage ownership of current stockholders. Our
requirement for new equity capital for the financing of operating deficits will
continue until we successfully commercialize a product and achieve a sufficient
level of positive operating cash flow. Possible costs that would require funding
include investments in capital equipment, technology and research and
development, marketing initiatives, inventory, accounts receivable and human
resources, as well as financial contributions toward potential joint ventures,
acquisitions, collaborative projects and other general corporate purposes.

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

Because our stock is not listed on a national securities exchange, you may find
it difficult to dispose of or obtain quotations for our common stock.

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

Because we are subject to the "penny stock" rules, the level of trading activity
in our stock may be reduced.

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


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<PAGE>

Should persons engage in short sales of our common stock, including sales of
shares to be issued upon exercise of warrants and options, the price of our
common stock may decline.

Selling short is a technique used by a stockholder to take advantage of an
anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. Further sales of
common stock issued upon exercise of our warrants and options could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock. As of January 31, 2005, our shares have
appeared on the "Threshold Security List" published in connection with
Regulation SHO, which may indicate questionable shorting activity involving our
securities. We have also learned that our listing on the Berlin-Bremen Stock
Exchange ("BBSE") by a third-party poses a risk to our stock and provides an
avenue for such short trading activity by providing a loophole in the short
sales regulations adopted by the National Association of Securities Dealers. The
loophole is applicable to those shares traded in the U.S. stock market and
listed for trading on a foreign stock market, such as the BBSE, and purportedly
held in foreign brokerage accounts. While we have taken steps to effectuate the
delisting of our stock from the BBSE, under the rules of that exchange an issuer
does not necessarily have the right to compel such delisting and, accordingly,
there can be no assurance if or when our stock might be delisted from the BBSE.
If our stock were not promptly delisted from the BBSE, it could have a
materially adverse effect upon the price of our shares in the market and
increase price volatility, which could in turn affect our ability to raise
needed capital, which could have a materially adverse effect upon our business,
operations and financial condition.

Delaware law and our charter documents contain provisions that could discourage
or prevent a potential takeover of our company that might otherwise result in
our stockholders receiving a premium over the market price for their shares.

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

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

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

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



                                       83
<PAGE>

                         ITEM 3. CONTROLS AND PROCEDURES

                EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this Form 10-QSB, Dr.
Bogdan C. Maglich, serving in his capacity as our CEO and Treasurer, carried out
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 5d-14(c).
Based upon his review, Dr. Maglich concluded that our disclosure controls and
procedures during our fiscal quarter ended January 31, 2005 were effective in
alerting us on a timely basis to material information relating to the Company
which is required to be included in our reports filed under the Securities
Exchange Act. His conclusion was based in part, on the improvements which we
have made in filling needed positions at the Company which have previously not
been filled (thereby placing all of the responsibility on Dr. Maglich), and
creating more effective lines of reporting and communication among our Company
and the legal, accounting and other professionals with whom we work.
Notwithstanding these improvements, we are cognizant that certain deficiencies
still remain to be addressed, most notably, our recruitment of a full-time Chief
Financial Officer. We intend to work on resolving this deficiency during 2005,
as well as to review the areas where we may determine that deficiencies exist.

With these changes, Dr. Maglich has concluded as of the time of the filing of
this Report that our company does have in place an effective system for timely
meeting our Securities Exchange Act requirements, although further refinements
are contemplated as indicated above. Of necessity, the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any system will succeed in
adhering to its stated goals under all potential future conditions. These
include an assumption that we will be able to raise, through equity investment,
grants, or otherwise, the funding necessary to implement and maintain our
internal control system. There can be no assurance that we will be able to
implement or maintain an effective system of internal controls, and if we are
not able to do so, we risk being in violation of our obligations as a public
company in the future. See: Risk Factors: Corporate Risks.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Other than as described above, there were no further significant changes in our
internal controls that in Management's estimates have materially affected, or
are likely to materially affect, our disclosure controls and procedures
subsequent to the date of the evaluation, including any corrective actions with
regards to significant deficiencies and material weaknesses.



                                       84
<PAGE>

                           PART II - OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS


Philip Gurian and Barry Alter: Our Reverse Takeover.

After reading news reports that connected our reverse takeover of HiEnergy
Microdevices with known stock manipulators, our Board of Directors directed our
then President to hire a team of independent investigators to investigate
whether we or any of our officers and directors had engaged in any wrongdoing.
The core team of independent investigators consisted of two former U.S. federal
prosecutors, a former Assistant U.S. Attorney in the civil division who has been
in private practice since 1981 with experience in securities litigation and
regulatory and investigative proceedings, and a former supervisory agent from
the Federal Bureau of Investigation. In their review, the independent
investigators obtained evidence that some of our stockholders who purchased
significant amounts of HiEnergy shares prior to the reverse takeover knew, or
had business dealings with, Phil Gurian, a person who we later learned had
previously been involved in stock manipulation, and that one of these
stockholders was a company reportedly owned by Mr. Gurian's mother, which
disposed of its shares in April 2002 at a profit believed to be between $500,000
and $600,000. Mr. Barry Alter, a person who later served as one of our directors
and, for a short time, as our interim President, was found to have been aware of
these purchases of HiEnergy shares. The independent investigators believe the
evidence is inconclusive whether Phil Gurian had control over these HiEnergy
shares and, if so, whether our former president and director had any knowledge
of that control. On June 24, 2004, we received a letter from the Central
Regional Office of the SEC, in Denver, Colorado, indicating its intention to
recommend that we be charged with violations of several sections of the
Securities Exchange Act, and the rules promulgated under that act, involving the
making of false and misleading statements in our public documents. The false and
misleading statements which the SEC believes were made seem to focus primarily
on, among other things, the undisclosed ownership of our securities by, and
actions with respect to our stock taken by, Philip Gurian, Barry Alter and
certain of their affiliates who controlled SLW Enterprises, Inc. at the time of
our reverse takeover transaction; the undisclosed identity of, and the origin of
funds used to purchase our stock by, certain of our stockholders; the nature of,
and reasons for, a "dividend" provided to our stockholders; and the terms of
other offerings occurring at the same time as one of our private placements of
stock. In addition, the antifraud violations would be based upon private
transactions made by Mr. Alter (formerly a director and executive officer of
HiEnergy Technologies, Inc.) with respect to sales of our stock made by him
without disclosing material facts about us, or our contemporaneous offering of
securities at different prices, to his purchasers. We are currently working with
special securities litigation counsel to assess our legal position and determine
how best to respond to the SEC.

Barry Alter

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

Yeffet Security Consultants, Inc.

HiEnergy is currently arbitrating a dispute with a former consultant, Yeffet
Security Consultants, Inc. ("YSCI"). We entered into a consulting agreement with
YSCI in July 2002. Under the terms of this agreement, YSCI was to provide
consulting services to us to further our marketing and business objectives. On
October 29, 2003, we notified Yeffet Security Consultants that we were
terminating its contract on the grounds of inadequate performance. YSCI alleged
that we breached the consulting agreement and is seeking to recover $449,540.91.
We deny this allegation and intend to defend it vigorously in arbitration. The
Company intends to defend itself vigorously in the arbitration. Depositions in
this matter began in New Jersey on December 15, 2004 for the Company and in
January 2005 for YSCI. As of this date, the Company and its legal counsel have
made no other determination as to the merits of, or possible defenses to, the
arbitration.


                                       85
<PAGE>

Securities and Exchange Commission Investigation

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

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

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

Filed Complaints

In October 2004, we first learned about a Complaint filed as a Class Action
against us and our chairman, among other named defendants, in Federal District
Court in Orange County, California, which is styled as a "Complaint for
Violation of Federal Securities Laws - Class Action" (the "Complaint"). The
Complaint was filed on behalf of a class of persons who acquired our stock
Company during the period from February 22, 2002 through July 8, 2004. In
January 2005, we were officially served and have retained legal counsel to
vigorously defend ourselves and assert all available defenses. In February 2005,
plaintiff's counsel filed a First Amended Complaint entitled and styled, "In re:
HiEnergy Technologies, Inc. Securities Litigation," Master File No.
8:04-CV-01226-DOC (JTLx), alleging various violations of the federal securities
laws, generally asserting the same claims involving Philip Gurian, Barry Alter,
and our failure to disclose their various securities violations including,
without limitation, allegations of fraud. The First Amended Complaint seeks,
among other things, monetary damages, attorneys' fees, costs, and declaratory
relief. As of this date, the Company and its legal counsel made no determination
as to the merits of, possible defenses to, or any other aspect of such claims or
the lawsuit.

In February 2005, we were served with regard to a Complaint filed against us by
a former consultant and general laborer, Arni Suhr, with the California Labor
Commissioner seeking unpaid wages in the amount of $10,640. A hearing before the
California Labor Commissioner is expected to be held in April 2005. As of this
date, the Company has made no other determination as to the merits of, possible
defenses to, or any other aspect of such claim.



                                       86
<PAGE>

                          ITEM 2. CHANGES IN SECURITIES

SET FORTH BELOW IS INFORMATION REGARDING THE ISSUANCE AND SALE OF UNREGISTERED
SECURITIES DURING THE THREE-MONTH PERIOD ENDED JANUARY 31, 2005, EXCLUDING
ISSUANCES PREVIOUSLY INCLUDED IN A CURRENT REPORT ON FORM 8-K

      o     In November 2004, we issued or committed to issue 15,000 shares of
            common stock, par value $0.001 of HiEnergy Technologies, Inc.
            ("Shares") to members of our board of directors as compensation for
            board meeting attendance. We believe the issuances of these
            securities are exempt under Section 4(2) under the Securities Act.

      o     In November 2004, we issued or committed to issue 178,793 Shares and
            Shares and warrants to purchase 207,406 Shares, at various exercise
            prices, to various holders of securities with registration rights as
            penalties, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. We
            believe the issuances of these securities are exempt under Section
            3(a)(9) of the Securities Act.

      o     In December 2004, we issued or committed to issue 111,850 Shares and
            warrants to purchase 213,699 Shares, at various exercise prices, to
            various holders of securities with registration rights as penalties,
            due to our inability to file and maintain effective a registration
            statement within certain specified deadlines. We believe the
            issuances of these securities are exempt under Section 3(a)(9) of
            the Securities Act.

      o     In December 2004, we committed to issued 108,696 Shares and warrants
            to purchase 54,348 Shares with an exercise price of $0.82 in a
            private placement to an accredited investor in exchange for $50,000
            in cash. We believe the issuances of these securities were exempt
            under Regulation D and/or Section 4(2) under the Securities Act.

      o     In January 2005, we committed to issue 15,000 Shares to members of
            our board of directors as compensation for board meeting attendance.
            We believe the issuances of these securities are exempt under
            Section 4(2) under the Securities Act.

      o     In January 2005, we issued or committed to issue 70,708 Shares and
            Shares and warrants to purchase 219,997 Shares, at various exercise
            prices, to various holders of securities with registration rights as
            penalties, due to our inability to file and maintain effective a
            registration statement within certain specified deadlines. We
            believe the issuances of these securities are exempt under Section
            3(a)(9) of the Securities Act.

      o     In January 2005, we issued 128,260 Shares of common stock to an
            accredited note holder and warrants to purchase an additional 64,130
            Shares with an exercise price of $0.82, upon the conversion of notes
            payable of $59,000. We believe the issuances of these securities
            were exempt under Regulation S and/or Section 4(2) under the
            Securities Act.

      o     In January 2005, we issued 689,783 Shares and warrants to purchase
            344,892 Shares with an exercise price of $0.82 in a private
            placement to accredited investors in exchange for $317,000 in cash.
            We believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act.

      o     In January 2005, we committed to issue 459,222 Shares to the
            remaining stockholders of our former majority-owned subsidiary,
            HiEnergy Microdevices, Inc, in connection with a short-form merger.
            We believe the issuances of these securities are exempt under
            Section 4(2) under the Securities Act.


                                       87
<PAGE>

                          ITEM 6. EXHIBITS AND REPORTS


EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT NUMBER    DESCRIPTION

<S>              <C>
2.1 (1)           Voluntary  Share  Exchange  Agreement  by and between  HiEnergy  Technologies,  Inc. and HiEnergy
                  Microdevices, Inc. dated March 22, 2002

2.2 (5)           Agreement and Plan of Merger dated October 18, 2002 by and between the Registrant and its wholly owned
                  subsidiary, HiEnergy Technologies, Inc., a Delaware corporation

3.1 (5)           Certificate of Incorporation of HiEnergy Technologies, Inc., a Delaware corporation, filed on October 17,
                  2002

3.2 (5)           Bylaws of HiEnergy Technologies, Inc., a Delaware corporation, adopted on October 18, 2002

3.3 (10)          Certificate of Elimination of Series A Convertible Preferred Stock

4.1.1 (5)         Specimen Common Stock Certificate

4.2 (1)           Form of Registration Rights Agreement between the Registrant and each April 2002 Private Placement Common
                  Stock Investor. See also Exhibit 10.55 Form of Subscription Agreement between the Registrant and each April
                  2002 Private Placement Common Stock investor.

4.3 (1)           Form of Amendment No. 1 to Registration Rights Agreement between the Registrant and each April 2002 Private
                  Placement Common Stock Investor

4.4 (3)           Warrant  Certificate issued to Rheal Cote by HiEnergy  Technologies,  Inc. dated June 3, 2002
                  Form of Registration Rights Agreement between the Registrant and each June 2002 Private Placement Common
4.4.1 (5)         Stock investor. See also Exhibit 10.24 Form of Subscription Agreement between the Registrant and each June
                  2002 Private Placement Common Stock investor.

4.5 (5)           Registration Rights Agreement dated July 12, 2002 between the Registrant and Isaac Yeffet

4.6 (5)           Registration Rights Agreement dated August 19, 2002 between the Registrant and Primoris Group Inc.

4.7 (5)           Registration Rights Agreement dated October 7, 2002 between the Registrant and the Series A Convertible
                  Preferred Stock Investors set forth below:

4.8 (5)           Form of Warrant Certificate dated October 7, 2002 issued by the Registrant to each Series A Convertible
                  Preferred  Stock investor

4.9 (5)           Form of  Registration  Rights  Agreement  between the  Registrant  and each  October 2002 Private
                  Placement  Common Stock Investor

4.10 (5)          Form of  Warrant  Certificate  issued by the  Registrant  to each  October  2002  Private Placement Common
                  Stock investor

10.1 (5)          Lease Agreement dated August 15, 2002 between the Registrant and Del Mar Avionics

10.1.1 (10)       Addendum to Original Lease  Agreement  dated August 15, 2002,  between the Registrant and Del Mar Avionics
                  dated July 1, 2003

10.1.2 (16)       Addendum No. 2 to Original Lease Agreement dated August 15, 2002, between the Registrant and Del Mar
                  Avionics dated January 1, 2004.

10.1.3 (16)       Addendum No. 3 to Original Lease Agreement dated August 15, 2002, between the Registrant and Del Mar
                  Avionics dated January 20, 2004.
</TABLE>



                                       88
<PAGE>

EXHIBIT NUMBER    DESCRIPTION

<TABLE>
<CAPTION>

<S>              <C>
10.3 (4)          Stock Option Agreement between Isaac Yeffet and HiEnergy  Technologies,  Inc. dated July 12, 2002

10.4 (4)          Letter Agreement between H.C. Wainwright & Co., Inc. and HiEnergy Technologies, Inc. dated August 8, 2002

10.4.1 (3)        Award Contract between HiEnergy Microdevices, Inc. and the U.S. Department of Defense dated February 12, 2002

10.5 (3)          Employment Agreement between HiEnergy Microdevices, Inc. and Dr. Bogdan C. Maglich dated March 6, 2002*

10.6 (3)          Assignment and Assumption of Employment Agreement between HiEnergy Technologies, Inc., HiEnergy
                  Microdevices, Inc. and Dr. Bogdan C. Maglich dated July 16, 2002*

10.7 (3)          Stock Option Agreement between Dr. Bogdan C. Maglich and HiEnergy Technologies, Inc. effective April 24,
                  2002*

10.8 (3)          Consulting Agreement between Yeffet Security Consultant,  Inc. and HiEnergy Technologies, Inc. dated July
                  12, 2002

10.9 (5)          Amended  and  Restated  Nonqualified  Stock  Option  dated  July 12,  2002  issued by the Registrant to
                  Isaac Yeffet

10.11 (5)         Consulting Agreement dated August 1, 2002 between the Registrant and Primoris Group Inc.

10.12 (5)         Amendment No. 1 to the Consulting  Agreement dated August 19, 2002 between the Registrant and Primoris Group
                  Inc.

10.13 (5)         Nonqualified Stock Option  (Warrant)  dated August 1, 2002 issued by the  Registrant  to Primoris Group Inc.

10.15 (5)         Letter Employment Agreement dated February 26, 2002 between HiEnergy  Microdevices,  Inc. and Michal Levy*

10.16 (5)         Assignment, Assumption and Amendment of Employment Agreement dated September 17, 2002 by and among the
                  Registrant, HiEnergy Microdevices, Inc. and Michal Levy*

10.17 (5)         Nonqualified Stock Option dated  September  17, 2002 issued by the  Registrant to Michal Levy*

10.17.1 (6)       Form of Warrant  Certificate  dated  August 11,  2002  issued by the  Registrant  to H.C.
                  Wainwright & Co., Inc. and Assigns

10.18 (5)         Nonqualified  Stock Option dated September 25, 2002 issued by the Registrant to Chapin E. Wilson

10.18 (6)         Form of Warrant Certificate  dated  October  7, 2002  issued by the  Registrant  to H.C. Wainwright &Co.,
                  Inc.

10.19 (6)         Form of Warrant Certificate  dated  October 31, 2002  issued by the  Registrant  to H.C. Wainwright &Co.,
                  Inc.

10.19 (5)         Nonqualified  Stock Option dated  September 25, 2002 issued by the Registrant to Derek W. Woolston

10.20 (5)         Employment Agreement dated September 25, 2002 between the Registrant and Tom Pascoe*

10.21 (5)         Nonqualified  Stock Option  effective  September 25, 2002 issued by the Registrant to Tom Pascoe*

10.22 (16)        Series A Convertible Preferred Stock Purchase Agreement dated October 7, 2002 between the Registrant and the
                  Series A Convertible Preferred Stock investors.

10.23 (16)        Consulting Agreement dated September 25, 2002 between the Registrant and Barry Alter*

10.24 (5)         Form of Subscription Agreement between the Registrant and each June 2002 Private Placement Common Stock
                  investor. See also Exhibit 4.4.1 Form of Registration Rights Agreement between the Registrant and each June
                  2002 Private Placement Common Stock investor.

</TABLE>


                                       89
<PAGE>

EXHIBIT NUMBER    DESCRIPTION

<TABLE>
<CAPTION>
<S>              <C>

10.25 (5)         Form of Subscription Agreement between the Registrant and each October 2002 Private Placement Common Stock
                  investor.

10.26 (7)         Warrant Certificate dated December 9, 2002 issued by the Registrant to Wolfe Axelrod Weinberger Associates
                  LLC.

10.29 (16)        Termination  Agreement dated November 27, 2002 between  HiEnergy  Technologies,  Inc. and H.C. Wainwright &
                  Co., Inc.

10.30 (7)         Termination Agreement dated December 2, 2002 between HiEnergy Technologies, Inc. and Wolfe Axelrod
                  Weinberger Associates LLC.

10.31 (7)         Form of Warrant Certificate dated December 9, 2002 issued by the Registrant to H.C. Wainwright & Co., Inc.
                  and Assigns.

10.32 (16)        Placement Agent Agreement dated December 16, 2002 between HiEnergy Technologies, Inc. and Seabury
                  Transportation Advisors LLC.

10.32.1 (10)      Letter dated July 2003 terminating agreement with Seabury Transportation Advisors, LLC.

10.33 (7)         Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Chapin E. Wilson.

10.34 (7)         Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Derek W. Woolston.

10.35 (7)         Settlement Agreement dated January 15, 2003 between HiEnergy Technologies, Inc. and Keith Cowan.

10.36 (7)         Settlement Agreement dated February 14, 2003 among HiEnergy Technologies, Inc., Columbus Group/cFour
                  Partners, Robert W. Bellano and Shaun Corrales. See also Exhibit 10.37 Form of Warrant Certificate dated
                  February 17, 2003 between HiEnergy  Technologies,  Inc. and the principals of Columbus Group/cFour Partners.

10.37 (7)         Form of Warrant Certificate dated February 17, 2003 between HiEnergy Technologies, Inc. and the principals
                  of Columbus Group/cFour Partners. See also Exhibit 10.36 Settlement Agreement dated February 14, 2003 among
                  HiEnergy Technologies,  Inc., Columbus Group/cFour Partners, Robert W. Bellano and Shaun Corrales.

10.38 (16)        Award Contract dated January 15, 2003 by the U.S.  Department  of Defense to HiEnergy Technologies, Inc.

10.39 (8)         Letter  Agreement  dated November 18, 2002 between  HiEnergy  Technologies,  Inc. and HWH Enterprises, Inc.

10.40.1 (9)       Client Fee Agreement between HiEnergy Technologies and Yocca, Patch & Yocca, LLP

10.40.2 (9)       Form of Promissory Note between HiEnergy Technologies,  Inc. and Yocca, Patch & Yocca, LLP

10.40.3 (12)      Amendment of the Promissory Note issued to Yocca, Patch & Yocca, LLP

10.41 (9)         Jenkins Capital Management LLC Private Placement Agreement dated April 22, 2003

10.42 (9)         Vertical Ventures Investments LLC Stock Purchase Agreement dated April 23, 2003. See also Exhibit 10.72 Form
                  of Escrow Agreement.

10.43 (9)         Greenwich Growth Fund Limited Stock Purchase Agreement dated April 28, 2003. See also Exhibit 10.72 Form of
                  Escrow Agreement.

10.44 (9)         Consulting  Agreement  dated April 15,  2003,  between  HiEnergy  Technologies,  Inc. and Charles Van
                  Musscher
</TABLE>




                                       90
<PAGE>

EXHIBIT NUMBER    DESCRIPTION

<TABLE>
<CAPTION>
<S>              <C>
10.45 (9)         Letter Agreement between HiEnergy Technologies, Inc. and Roth Investor Relations

10.46 (9)         Stock Option Agreement  between Bogdan C. Maglich and HiEnergy  Technologies,  Inc. dated February 11, 2003*

10.47 (10)        HiEnergy Technologies, Inc. 2003 Stock Option Plan*

10.48 (10)        HiEnergy  Technologies,  Inc. Form of Stock Option  Agreement*

10.49 (10)        Yocca, Patch & Yocca, LLP Stock Purchase Agreement dated June 16, 2003

10.50 (10)        Richard Melnick Stock Purchase Agreement dated June 18, 2003. See also Exhibit 10.72 Form of Escrow
                  Agreement.

10.51 (10)        Jeffrey Herman Stock Purchase Agreement dated June 23, 2003. See also Exhibit 10.72 Form of Escrow
                  Agreement.

10.52 (10)        Form of Stock Purchase Agreement dated August 5-29, 2003 between HiEnergy Technologies, Inc. and the
                  purchasers of common stock and warrants. See also Exhibit 10.72 Form of Escrow Agreement.

10.53 (10)        Form of Warrant Certificate dated August 8-29, 2003 between HiEnergy  Technologies,  Inc. and the purchasers
                  of common stock and warrants

10.53.1 (13)      Form of Amendment of Warrant dated December 15, 2003 between HiEnergy Technologies,  Inc. and the purchasers
                  of common stock and warrants

10.54 (10)        International  Distribution  Agreement  between the Registrant  and Electronic  Equipment Marketing Company
                  (EEMCO) dated July 28, 2003

10.55 (10)        Form of Subscription Agreement between the Registrant and each April 2002 Private Placement Common Stock
                  investor. See also Exhibit 4.2 Form of Registration Rights Agreement between the Registrant and each April
                  2002 Private Placement Common Stock investor.

10.56 (16)        Form of Amendment No. 1 to Subscription  Agreement  between the Registrant and each April 2002 Private
                  Placement Common Stock investor

10.57 (11)        Memorandum of Understanding between HiEnergy Technologies, Inc. and Aeropuertos Espanoles y Navegacion
                  Aerea, Edificio La Piovera - Peonias dated October 6, 2003

10.58 (12)        Form of Stock Purchase Agreement dated October 15 - December 2, 2003 between HiEnergy Technologies, Inc. and
                  the purchasers of common stock and warrants. See also Exhibit 10.72 Form of Escrow Agreement.

10.59 (12)        Form  of  Warrant  Agreement  dated  October  28 -  December  2,  2003  between  HiEnergy Technologies, Inc.
                  and the purchasers of common stock and warrants.

10.60 (16)        Letter Agreement  between SBI - USA LLC and HiEnergy  Technologies,  Inc. dated August 1, 2003

10.61 (14)        Promissory Note issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.62 (14)        Note Purchase Agreement dated January 16, 2004 between HiEnergy Technologies, Inc. and Platinum Partners
                  Value Fund LP, with attached Form of Convertible Note and Warrant

10.63 (14)        Note Purchase Agreement dated January 31, 2004 between HiEnergy Technologies, Inc. and Richard Melnick with
                  attached Form of Convertible Note and Warrant

10.64 (14)        Stock Purchase Agreement dated February 9, 2004 between HiEnergy Technologies, Inc. and Bullbear Capital
                  Partners, LLC with attached Form of Warrant

10.65 (14)        Letter Agreement between KCSA Public Relations Worldwide and HiEnergy Technologies, Inc. dated January 6,
                  2003

10.66 (14)        Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Microdevices, Inc. dated March 26, 2002.

</TABLE>


                                       91
<PAGE>

EXHIBIT NUMBER    DESCRIPTION

<TABLE>
<CAPTION>
<S>              <C>
10.66.1 (14)      Assignment of Patent Rights from HiEnergy Microdevices, Inc. to HiEnergy Technologies, Inc. dated November
                  17, 2003.

10.67 (14)        Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Technologies, Inc. dated November 17, 2003

10.68 (14)        Employment Agreement between HiEnergy Technologies, Inc. and Ioana C. Nicodin dated February 3, 2004

10.69 (14)        Note Purchase Agreement dated January 28, 2004 between HiEnergy Technologies, Inc. and Nicholas J. Yocca
                  with attached Form of Convertible Note and Warrant

10.70 (15)        Form of Consent and Waiver from April 2003 purchasers of common stock.

10.71 (15)        Form of Release from June 2003 purchasers of common stock.

10.72 (16)        Form of Escrow Agreement utilized in connection with the Stock Purchase Agreements filed as Exhibits 10.50,
                  10.51, 10.52 and 10.58.

10.73 (19)        Employment Letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.

10.74 (19)        Proposal for Detailed Concept Design Services dated June 7, 2004 between Lockwood Greene Engineering &
                  Construction and HiEnergy Technologies, Inc.

10.75 (19)        Employment letter dated July 26, 2004 between Jim Hertzog and HiEnergy Technologies, Inc.

10.76 (19)        Engagement Agreement dated July 27, 2004 between Pacific Summit Securities and HiEnergy Technologies, Inc.

10.77 (19)        Teaming Agreement dated August 4, 2004 between HiEnergy Technologies, Inc. and Siemens Maintenance Services, LLC

10.78 (20)        Consulting Agreement dated July 22, 2004 between Greg Henkel and HiEnergy Technologies, Inc.

10.79 (21)        Form of Stock Purchase Agreement and Warrant dated October 18, 2004 - December 15, 2004 issued in connection with
                  the sale of restricted shares to various accredited investors and HiEnergy Technologies, Inc.

10.80 (21)        Form of Debt Conversion Agreement and Warrant between Maglich Family Holdings and HiEnergy Technologies, dated
                  November 19, 2004

10.80 (22)        Consulting Agreement dated November 22, 2004 between Don Abbe and HiEnergy Technologies, Inc.

10.82 (23)        Employment letter dated November 22, 2004 between Roger Spillmann and HiEnergy Technologies, Inc.

10.81 (24)        Amendment to Share Purchase Agreement dated January 24, 2005  between HiEnergy Technologies, Inc. and Bull Bear
                  Capital Partners, LLC

10.84*            Proposal for Preliminary Manufacturing Facility Assessment Consulting Services dated April 13, 2004 between
                  HiEnergy Technologies, Inc. and Lockwood Greene Engineering & Construction (filed in its entirety)

10.85*            Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.86*            Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.87*            Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.88*            Promissory Note dated March 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.89*            Promissory Note dated April 5, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.90*            Promissory Note dated April 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.91*            Promissory Note dated April 29, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

</TABLE>


                                       92
<PAGE>

EXHIBIT NUMBER    DESCRIPTION

<TABLE>
<CAPTION>
<S>              <C>
10.92*            Promissory Note dated August 3, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.93*            Promissory Note dated August 4, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.94*            Promissory Note dated August 10, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.95*            Promissory Note dated August 18, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.96*            Promissory Note dated August 25, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.97*            Promissory Note dated August 30, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

10.98*            Proposal for Detailed Concept Design Services between HiEnergy Technologies, Inc. and Lockwood Greene
                  Engineering & Construction dated June 7, 2004

10.99*            Consulting Agreement between HiEnergy Technologies, Inc. and Greg Henkel dated July 22, 2004

10.100*           Consulting Agreement between HiEnergy Technologies, Inc. and Jim Hertzog dated July 26, 2004

10.101*           Engagement letter between HiEnergy Technologies, Inc. and Pacific Summit Securities dated July 27, 2004

10.102*           Employment letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.

10.103*           Teaming Agreement between HiEnergy Technologies, Inc. and Siemens Maintenance Services, LLC dated August 4,
                  2004

10.104*           Retention Agreement between HiEnergy Technologies, Inc. and Pellettieri, Rabstein and Altman

                  dated November 11, 2004

10.105*           Retention Agreement between HiEnergy Technologies, Inc. and Feldhake Roquemore LLP dated January 12, 2005

14.1 (9)          Code of Ethics for Senior Financial Officers of HiEnergy Technologies, Inc.

16.1 (1)          Letter of Manning Elliott

21.1 (9)          List of Subsidiaries

</TABLE>

*        Filed herewith

(1)   Filed on May 10, 2002 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated April 25, 2002 and incorporated herein by reference.

(2)   Filed on June 2, 2000 as an exhibit to HiEnergy Technologies' registration
      statement on Form SB-2 (File No. 333-38536) and incorporated herein by
      reference.

(3)   Filed on July 29, 2002 as an exhibit to HiEnergy Technologies' annual
      report on Form 10-KSB for the fiscal year ended April 30, 2002, and
      incorporated herein by reference.

(4)   Filed on September 20, 2002 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended October 31,
      2002, and incorporated herein by reference.

(5)   Filed on November 6, 2002 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2 and incorporated herein by reference.

(6)   Filed on December 16, 2002 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended October 31,
      2002, and incorporated herein by reference.

(7)   Filed on February 25, 2003 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2/A (File No. 333-101055) and
      incorporated herein by reference.


                                       93
<PAGE>

(8)   Filed on March 24, 2003 as an exhibit to HiEnergy Technologies' quarterly
      report on Form 10-QSB for the fiscal quarter ended January 31, 2003, and
      incorporated herein by reference.

(9)   Filed on August 8, 2003 as an exhibit to HiEnergy Technologies' annual
      report on Form 10-KSB for the fiscal year ended April 30, 2003, and
      incorporated herein by reference.

(10)  Filed on September 19, 2003 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2 (File No. 333-108934) and incorporated
      herein by reference.

(11)  Filed on October 8, 2003 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated October 7, 2003 and incorporated herein by reference.

(12)  Filed on December 16, 2003 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended January 31,
      2004, and incorporated herein by reference.

(13)  Filed on December 24, 2003 as an exhibit to Pre-Effective Amendment No. 1
      to HiEnergy Technologies' registration statement on Form SB-2 (File No.
      333-108934) and incorporated herein by reference.

(14)  Filed on February 25, 2004 as a like numbered exhibit to HiEnergy
      Technologies' current report on Form 8-K dated February 24, 2004 and
      incorporated herein by reference.

(15)  Filed on March 25, 2004 as an exhibit to HiEnergy Technologies'
      Pre-Effective Amendment No 2 registration statement on Form SB-2 (File No.
      333-108934) and incorporated herein by reference.

(16)  Filed on April 12, 2004 as a like numbered exhibit to HiEnergy
      Technologies' current report on Form 8-K/A dated April 9, 2004 and
      incorporated herein by reference.

(17)  Filed on May 17, 2004 as a like numbered exhibit to HiEnergy Technologies'
      current report on Form 8-K dated May 17, 2004 and incorporated herein by
      reference.

(18)  Filed on May 21, 2004 as a like numbered exhibit to HiEnergy Technologies'
      current report on Form 8-K dated May 21, 2004 and incorporated herein by
      reference.

(19)  Filed on September 14, 2004 as a like numbered exhibit to HiEnergy
      Technologies' annual report on Form 10-KSB for the fiscal year ended April
      30, 2004 and incorporated herein by reference.

(20)  Filed on October 20, 2004 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended July 31, 2004, and
      incorporated herein by reference.

(21)  Filed on November 30, 2004 as exhibit 99.1 to HiEnergy Technologies'
      current report on Form 8-K dated November 30, 2004 and incorporated herein
      by reference.

(22)  Filed on December 17, 2004 as Exhibit 10.80 to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2004 and
      incorporated herein by reference.

(23)  Filed on January 11, 2005 as Exhibit 99.3 to HiEnergy Technologies'
      current report on Form 8-K dated January 7, 2005 and incorporated herein
      by reference.

(24)  Filed on February 2, 2005 as Exhibit 10.81 to HiEnergy Technologies'
      current report on Form 8-K dated January 27, 2005 and incorporated herein
      by reference.




                                       94
<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         HIENERGY TECHNOLOGIES, INC.


Date:    March 17, 2005            .     By: /s/ Bogdan  C. Maglich
                                             ----------------------------------
                                         Bogdan C. Maglich,
                                         Chief Executive Officer, President,
                                         Treasurer and Chief Scientific Officer
                                         (Principal Executive Officer and
                                         Principal Financial Officer)



                                       95