<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A

                                 AMENDMENT NO. 1


[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                  For the quarterly period ended     July 31, 2003
                                                 ----------------------

[ ]  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 Alton Parkway, Unit B, 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 December 31, 2003, the issuer
had 31,279,853  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 QUARTER ENDED JULY 31, 2003

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                                          PAGE
<S>                                                                                                     <C>
Item 1     Financial Statements..........................................................................1

           Consolidated Balance Sheets as of April 30, 2003 and July 31, 2003 (unaudited)

           Consolidated Statements of Operations for the three months ended July 31, 2003 and 2002 (unaudited)
           and for the Period from August 21, 1995 (Inception) to July 31, 2003 (unaudited)

           Consolidated  Statements  of  Shareholders'  Equity  (Defecit)  for the Period from August 21, 1995
           (Inception) to July 31, 2003 (unaudited)

           Consolidated Statements of Cash Flows for the three months ended July 31, 2003 and 2002 (unaudited)
           and for the Period from August 21, 1995 (Inception) to July 31, 2003 (unaudited)

           Notes to the Consolidated Financial Statements (unaudited)

Item 2     Management's Discussion and Analysis or Plan of Operation....................................30

Item 3     Controls and Procedures......................................................................46

PART II - OTHER INFORMATION

Item 1     Legal Proceedings............................................................................46

Item 2     Changes in Securities........................................................................48

Item 5     Other Information............................................................................48

Item 6     Exhibits and Reports on Form 8-K.............................................................49

SIGNATURES .............................................................................................51

INSET FINANCIAL STATEMENTS
</TABLE>

                                       i

<PAGE>

<TABLE>
<CAPTION>
                                                                          HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                         (DEVELOPMENT STAGE COMPANIES)
                                                                                           CONSOLIDATED BALANCE SHEETS
                                                                          JULY 31, 2003 (UNAUDITED) AND APRIL 30, 2003
----------------------------------------------------------------------------------------------------------------------

                                           ASSETS
                                                                                       July 31,            April 30,
                                                                                         2003                 2003
                                                                                     ------------         ------------
<S>                                                                                  <C>                  <C>
CURRENT ASSETS                                                                       (unaudited)
       Cash and cash equivalents                                                     $     32,396         $     35,774
       Restricted cash                                                                         --               71,234
       Accounts receivable                                                                 34,583               34,583
       Subscription receivable                                                                 --              443,482
       Other current assets                                                               481,623              427,650
                                                                                     ------------         ------------

            Total current assets                                                          548,602            1,012,723

PROPERTY AND EQUIPMENT, net                                                               498,451              504,424
OTHER ASSETS                                                                              232,531              295,948
                                                                                     ------------         ------------

TOTAL ASSETS                                                                         $  1,279,584         $  1,813,095
                                                                                     ============         ============

                                   LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
       Accounts payable                                                              $    538,067         $    670,895
       Accrued expenses                                                                        --                1,600
       Accrued payroll and payroll taxes                                                   17,116               28,525
       Accrued interest                                                                    40,514               35,288
       Notes payable - related parties                                                     85,000               85,000
       Convertible notes payable - related parties                                        295,933               57,117
       Note payable                                                                         1,077                   --
                                                                                     ------------         ------------

            Total current liabilities                                                     977,707              878,425
                                                                                     ------------         ------------

MINORITY INTEREST IN SUBSIDIARY, 20,540 (UNAUDITED) AND
       20,540 SHARES ISSUED AND OUTSTANDING                                                18,923               18,923
                                                                                     ------------         ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
       Series A convertible, redeemable preferred stock 8% dividends, voting
            rights, liquidation preference $10,000 per share, 345 shares
            authorized 0 (unaudited) and 95.82, shares issued and outstanding                  --                    1
       Common stock, $0.001 par value
            100,000,000 shares authorized
            28,819,464 (unaudited) and 25,525,882 shares
            issued and outstanding                                                         28,819               25,525
       Additional paid-in capital                                                      10,972,210            9,837,436
       Committed common stock, 45,759 (unaudited) and
            76,937 committed                                                                7,164               34,404
       Deficit accumulated during the development stage                               (10,725,239)          (8,981,620)
                                                                                     ------------         ------------

                      Total shareholders' equity                                          282,954              915,746
                                                                                     ------------         ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           $  1,279,584         $  1,813,094
                                                                                     ============         ============
</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>
                                                  HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                 (DEVELOPMENT STAGE COMPANIES)
                                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                            FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002 (UNAUDITED), AND
                  FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2003 (UNAUDITED)
----------------------------------------------------------------------------------------------

                                                                                    For the
                                                                                  Period from
                                                                                   August 21,
                                                                                     1995
                                           Three Months Ended July 31,          (Inception) to
                                        ---------------------------------           July 31,
                                           2003                  2002                 2003
                                        ------------         ------------         ------------
                                        (unaudited)           (unaudited)          (unaudited)
<S>                                     <C>                  <C>                  <C>
OPERATING EXPENSES
     General and administration         $  1,028,240         $    519,145         $  6,937,304
     Research and development                 98,322              166,595            2,056,001
                                        ------------         ------------         ------------
        Total operating expenses           1,126,562              685,740            8,993,305
                                        ------------         ------------         ------------

LOSS FROM OPERATIONS                      (1,126,562)            (685,740)          (8,993,305)
                                        ------------         ------------         ------------

OTHER INCOME (EXPENSE)
     Interest income                             364                2,158                8,250
     Interest expense                         (5,225)              (3,020)             (46,135)
     Financing expense                            --             (223,710)            (223,710)
     Other income                                 --                   --                  231
                                        ------------         ------------         ------------

Total other income
     (expense)                                (4,861)            (224,572)            (261,364)
                                        ------------         ------------         ------------

LOSS BEFORE PROVISION
     FOR INCOME TAXES                     (1,131,423)            (910,312)          (9,254,669)

PROVISION FOR INCOME
     TAXES                                       800                   --               13,383
                                        ------------         ------------         ------------

NET LOSS                                  (1,132,223)            (910,312)          (9,268,052)

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

PREFERRED STOCK
     DIVIDENDS                              (611,396)                  --             (689,756)
                                        ------------         ------------         ------------

NET LOSS AVAILABLE TO
     COMMON
     SHAREHOLDERS                       $ (1,743,619)        $   (910,312)        $(10,725,239)
                                        ============         ============         ============

NET LOSS PER SHARE                      $      (0.04)        $      (0.04)

BENEFICIAL CONVERSION
     FEATURE GRANTED ON
     PREFERRED STOCK
     PER SHARE                                    --                   --

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

BASIC AND DILUTED LOSS
     AVAILABLE TO COMMON
     SHAREHOLDERS PER
     SHARE                              $      (0.06)        $      (0.04)
                                        ============         ============

BASIC AND DILUTED
     WEIGHTED-AVERAGE
     COMMON SHARES
     OUTSTANDING                          27,857,330           22,591,996
                                        ============         ============
</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                               (DEVELOPMENT STAGE COMPANIES)
                                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                            FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2003
------------------------------------------------------------------------------------------------------------

                                                                                   Series A Convertible,
                                                                      Price per  Redeemable Preferred Stock
                                                                       Equity    ---------------------------
                                                         Date           Unit         Shares     Amount
                                                         ----           ----         ------     ------
<S>                                                    <C>           <C>          <C>          <C>
BALANCE, AUGUST 21, 1995 (INCEPTION)                                                   --       $  --
RECAPITALIZATION UPON REVERSE TAKEOVER
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (1)         $    0.01
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 1996                                                                --         --
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (2)         $    0.01
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 1997                                                                --         --

ISSUANCE OF COMMON STOCK FOR CASH                      03/23/98      $    0.05
ISSUANCE OF COMMON STOCK FOR CASH                      03/25/98      $    0.11
ISSUANCE OF COMMON STOCK FOR CASH                        (3)         $    0.14
ISSUANCE OF COMMON STOCK FOR CASH                      10/14/97      $    0.22
ISSUANCE OF COMMON STOCK FOR CASH                        (3)         $    0.28
ISSUANCE OF COMMON STOCK FOR CASH                      09/04/97      $    0.35
ISSUANCE OF COMMON STOCK FOR CASH                      12/17/97      $    0.49
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (3)         $    0.01
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 1998                                                                --         --

ISSUANCE OF COMMON STOCK FOR CASH                        (4)         $    0.28
ISSUANCE OF COMMON STOCK FOR CASH                      10/01/98      $    0.36
ISSUANCE OF COMMON STOCK FOR CASH                      01/15/99      $    0.38
ISSUANCE OF COMMON STOCK FOR CASH                      10/30/98      $    0.56
ISSUANCE OF COMMON STOCK FOR CASH                      03/17/99      $    0.57
ISSUANCE OF COMMON STOCK FOR CASH                      01/08/99      $    0.72
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                      11/24/98      $    0.89
ISSUANCE OF COMMON STOCK FOR CASH                      12/02/98      $    0.93
ISSUANCE OF COMMON STOCK FOR CASH                      01/15/99      $    1.41
ISSUANCE OF COMMON STOCK FOR CASH                      05/05/98      $    1.64
ISSUANCE OF COMMON STOCK FOR CASH                      12/02/98      $    2.80
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (4)         $    0.02
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 1999                                                                --         --

ISSUANCE OF COMMON STOCK FOR CASH                      06/28/99      $    0.02
ISSUANCE OF COMMON STOCK FOR CASH                      05/03/99      $    0.10
ISSUANCE OF COMMON STOCK FOR CASH                      07/14/99      $    0.28
ISSUANCE OF COMMON STOCK FOR CASH                      11/30/99      $    0.39
ISSUANCE OF COMMON STOCK FOR CASH                      07/12/99      $    0.52
ISSUANCE OF COMMON STOCK FOR CASH                        (5)         $    0.56
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 CASH                        (5)         $    0.46
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (5)         $    0.04
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 2000                                                                --         --

ISSUANCE OF COMMON STOCK FOR CASH                      09/28/00      $    0.24
ISSUANCE OF COMMON STOCK FOR CASH                        (6)         $    0.24
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (6)         $    0.10
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 2001                                                                --         --

ISSUANCE OF COMMON STOCK FOR CASH                        (7)         $    0.22
ISSUANCE OF COMMON STOCK FOR CASH                      03/13/02      $    0.24
ISSUANCE OF COMMON STOCK FOR CASH                        (7)         $    0.45
ISSUANCE OF COMMON STOCK FOR CASH                      07/31/01      $    1.12
ISSUANCE OF COMMON STOCK FOR CASH                        (7)         $    0.26
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED           (7)         $    0.05
ISSUANCE OF COMMON STOCK IN PRIVATE
     PLACEMENT FOR CASH                                04/30/02      $    1.00
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 2002                                                                --         --
ISSUANCE OF PREFERRED STOCK
     IN PRIVATE PLACEMENT FOR CASH                     10/31/03                     97.93          1
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                      04/30/03      $    0.32
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                      04/30/03      $    0.33
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                      04/30/03      $    0.40
ISSUANCE OF COMMON STOCK
     IN PRIVATE PLACEMENT FOR CASH                     10/07/02      $    1.26
OFFERING COSTS
ISSUANCE OF COMMON STOCK
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                             01/27/03                     (2.11)
ISSUANCE OF COMMON STOCK
     IN CASHLESS EXERCISE OF
     WARRANTS                                          01/02/03
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED AS A BONUS                                (8)         $    1.35
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED FOR SERVICES
     RENDERED                                          04/21/03      $    0.65
DIVIDENDS ON PREFERRED STOCK                           10/31/02
BENEFICIAL CONVERSION FEATURE
     GRANTED IN CONNECTION WITH
     ISSUANCE OF PREFERRED
     STOCK                                             10/31/02
CONVERSION OF CONVERTIBLE
     NOTES PAYABLE - RELATED
     PARTIES INTO COMMON
     STOCK                                             07/18/02      $    1.00
FINANCING EXPENSE IN CONNECTION WITH
     ISSUANCE OF WARRANTS                              05/31/02      $    1.49
STOCK OPTIONS ISSUED FOR SERVICES RENDERED             07/12/02      $    1.52
STOCK OPTIONS ISSUED FOR SERVICES RENDERED             08/01/02      $    0.47
STOCK OPTIONS ISSUED AS COMPENSATION                   02/11/03      $    0.13
STOCK OPTIONS ISSUED AS COMPENSATION                   09/25/02      $    1.10
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                    09/25/02      $    1.10
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                    05/01/02      $    0.55
WARRANTS ISSUED FOR SERVICES RENDERED                  12/09/02      $    0.65
WARRANTS ISSUED FOR SERVICES RENDERED                  02/17/03      $    1.63
WARRANTS ISSUED FOR SERVICES RENDERED                  04/28/03      $    0.37
WARRANTS ISSUED FOR TERMINATION OF CONTRACT            12/09/02      $    1.56
AMORTIZATION OF DEFERRED COMPENSATION
REVERSAL OF DEFERRED COMPENSATION
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY
NET LOSS
                                                                                  -------       -----

BALANCE, APRIL 30, 2003                                                              95.82         1

ISSUANCE OF COMMON STOCK FOR CASH                      06/24/03      $    0.33
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES            06/24/03      $    0.33
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES            05/13/03      $    0.48
ISSUANCE OF COMMON STOCK
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                             05/16/03                    (95.82)        (1)
DIVIDENDS ON PREFERRED STOCK                           05/16/03
ISSUANCE OF COMMON STOCK AS PENALTY SHARES             05/16/03
ISSUANCE OF COMMITTED COMMON STOCK                     05/21/03
ISSUANCE OF COMMITTED COMMON STOCK                     06/19/03
ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS       05/27/03
WARRANTS ISSUED FOR SERVICES RENDERED                  05/16/03      $    0.40
WARRANTS ISSUED FOR SERVICES RENDERED                  05/01/03      $    0.32
STOCK OPTIONS ISSUED FOR SERVICES                      07/16/03      $    0.45
STOCK OPTIONS ISSUED FOR SERVICES                      05/16/03      $    0.38
NET LOSS

BALANCE AT JULY 31, 2003 (UNAUDITED)                                                   --       $ --
                                                                                  -------       -----
</TABLE>

(1)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1996

(2)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1997

(3)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1998

(4)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1999

(5)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2000

(6)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2001

(7)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2002

(8)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2003


                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                                          HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                         (DEVELOPMENT STAGE COMPANIES)
                                                             CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                      FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2003
----------------------------------------------------------------------------------------------------------------------

                                                                                                          Additional
                                                                               Common Stock                Paid-in
                                                         Date           Shares            Amount            Capital
                                                         ----           ------            ------            -------
<S>                                                   <C>           <C>               <C>                <C>
BALANCE, AUGUST 21, 1995 (INCEPTION)                                          --      $         --       $         --
RECAPITALIZATION UPON REVERSE TAKEOVER                                 6,470,000             6,470             (6,456)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (1)          734,771               735              7,495
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 1996                                                7,204,771             7,205              1,039
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (2)            3,219                 3                 33
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 1997                                                7,207,990             7,208              1,072

ISSUANCE OF COMMON STOCK FOR CASH                     03/23/98            45,603                46              2,206
ISSUANCE OF COMMON STOCK FOR CASH                     03/25/98             4,470                 4                496
ISSUANCE OF COMMON STOCK FOR CASH                           (3)          111,771               112             15,513
ISSUANCE OF COMMON STOCK FOR CASH                     10/14/97            89,417                89             19,911
ISSUANCE OF COMMON STOCK FOR CASH                           (3)          293,466               293             81,757
ISSUANCE OF COMMON STOCK FOR CASH                     09/04/97             8,942                 9              3,115
ISSUANCE OF COMMON STOCK FOR CASH                     12/17/97            42,920                43             20,957
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (3)        1,451,928             1,452             15,598
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 1998                                                9,256,507             9,257            160,625

ISSUANCE OF COMMON STOCK FOR CASH                           (4)          116,241               116             32,364
ISSUANCE OF COMMON STOCK FOR CASH                     10/01/98            13,815                14              4,986
ISSUANCE OF COMMON STOCK FOR CASH                     01/15/99             9,389                 9              3,591
ISSUANCE OF COMMON STOCK FOR CASH                     10/30/98            13,413                13              7,487
ISSUANCE OF COMMON STOCK FOR CASH                     03/17/99            17,883                18             10,182
ISSUANCE OF COMMON STOCK FOR CASH                     01/08/99            44,708                45             32,355
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98             3,353                 3              2,497
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98             8,942                 9              6,991
ISSUANCE OF COMMON STOCK FOR CASH                     11/24/98            11,177                11              9,989
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98             2,683                 3              2,497
ISSUANCE OF COMMON STOCK FOR CASH                     01/15/99             4,471                 4              6,296
ISSUANCE OF COMMON STOCK FOR CASH                     05/05/98            17,883                18             29,232
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98               894                 1              2,499
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (4)        2,167,620             2,168             47,591
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 1999                                               11,688,979            11,689            359,182

ISSUANCE OF COMMON STOCK FOR CASH                     06/28/99             4,471                 4                 96
ISSUANCE OF COMMON STOCK FOR CASH                     05/03/99            35,767                36              3,631
ISSUANCE OF COMMON STOCK FOR CASH                     07/14/99            44,708                45             12,455
ISSUANCE OF COMMON STOCK FOR CASH                     11/30/99            53,650                54             20,946
ISSUANCE OF COMMON STOCK FOR CASH                     07/12/99             2,861                 3              1,497
ISSUANCE OF COMMON STOCK FOR CASH                           (5)          232,484               232            129,768
ISSUANCE OF COMMON STOCK FOR CASH                     04/03/00             2,794                 3              1,997
ISSUANCE OF COMMON STOCK FOR CASH                     04/03/00             8,383                 8              7,492
ISSUANCE OF COMMON STOCK FOR CASH                           (5)          253,430               253            117,126
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (5)        1,914,570             1,915             83,322
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 2000                                               14,242,097            14,242            737,512

ISSUANCE OF COMMON STOCK FOR CASH                     09/28/00            21,214                21              4,979
ISSUANCE OF COMMON STOCK FOR CASH                           (6)          444,223               444            104,286
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (6)          371,035               371             36,097
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 2001                                               15,078,569            15,078            882,874

ISSUANCE OF COMMON STOCK FOR CASH                           (7)          517,723               518            115,282
ISSUANCE OF COMMON STOCK FOR CASH                     03/13/02            10,283                10              2,410
ISSUANCE OF COMMON STOCK FOR CASH                           (7)           44,708                45             19,955
ISSUANCE OF COMMON STOCK FOR CASH                     07/31/01             8,942                 9              9,991
ISSUANCE OF COMMON STOCK FOR CASH                           (7)          130,415               130             33,219
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED              (7)        5,059,560             5,060            227,110
ISSUANCE OF COMMON STOCK IN PRIVATE
     PLACEMENT FOR CASH                               04/30/02         1,225,000             1,225          1,223,775
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 2002                                               22,075,200            22,075          2,514,615
ISSUANCE OF PREFERRED STOCK
     IN PRIVATE PLACEMENT FOR CASH                    10/31/03           800,399
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03           700,000               700            219,800
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03           700,000               700            228,300
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03            10,000                10              3,972
ISSUANCE OF COMMON STOCK
     IN PRIVATE PLACEMENT FOR CASH                    10/07/02         1,849,934             1,850          2,320,556
OFFERING COSTS                                                                                               (196,793)
ISSUANCE OF COMMON STOCK
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                            01/27/03            18,336                18                (18)
ISSUANCE OF COMMON STOCK
     IN CASHLESS EXERCISE OF
     WARRANTS                                         01/02/03            33,909                34                (34)
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED AS A BONUS                                   (8)           11,178                11             21,339
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED FOR SERVICES
     RENDERED                                         04/21/03            21,277                21             10,288
DIVIDENDS ON PREFERRED STOCK                          10/31/02            68,150                68             78,292
BENEFICIAL CONVERSION FEATURE
     GRANTED IN CONNECTION WITH
     ISSUANCE OF PREFERRED
     STOCK                                            10/31/02                                                767,431
CONVERSION OF CONVERTIBLE
     NOTES PAYABLE - RELATED
     PARTIES INTO COMMON
     STOCK                                            07/18/02            37,898                38             37,858
FINANCING EXPENSE IN CONNECTION WITH
     ISSUANCE OF WARRANTS                             05/31/02                                                223,710
STOCK OPTIONS ISSUED FOR SERVICES RENDERED            07/12/02                                                761,007
STOCK OPTIONS ISSUED FOR SERVICES RENDERED            08/01/02                                                187,163
STOCK OPTIONS ISSUED AS COMPENSATION                  02/11/03                                                 59,373
STOCK OPTIONS ISSUED AS COMPENSATION                  09/25/02                                              3,305,542
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                   09/25/02                                                 50,000
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                   05/01/02                                                 15,000
WARRANTS ISSUED FOR SERVICES RENDERED                 12/09/02                                                162,792
WARRANTS ISSUED FOR SERVICES RENDERED                 02/17/03                                                130,712
WARRANTS ISSUED FOR SERVICES RENDERED                 04/28/03                                                 18,284
WARRANTS ISSUED FOR TERMINATION OF CONTRACT           12/09/02                                                390,409
AMORTIZATION OF DEFERRED COMPENSATION
REVERSAL OF DEFERRED COMPENSATION                                                                          (2,272,561)
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE, APRIL 30, 2003                                               25,525,882            25,525          9,837,436

ISSUANCE OF COMMON STOCK FOR CASH                     06/24/03           600,000               600            199,400
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES           06/24/03           300,000               300             99,700
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES           05/13/03            45,000                45             21,555
ISSUANCE OF COMMON STOCK
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                            05/16/03         2,191,878             2,192             (2,192)
DIVIDENDS ON PREFERRED STOCK                          05/16/03                                                611,396
ISSUANCE OF COMMON STOCK AS PENALTY SHARES            05/16/03            91,526                92                (92)
ISSUANCE OF COMMITTED COMMON STOCK                    05/21/03            20,000                20              9,671
ISSUANCE OF COMMITTED COMMON STOCK                    06/19/03            11,178                11             17,538
ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS      05/27/03            34,000                34                306
WARRANTS ISSUED FOR SERVICES RENDERED                 05/16/03                                                 60,518
WARRANTS ISSUED FOR SERVICES RENDERED                 05/01/03                                                 15,864
STOCK OPTIONS ISSUED FOR SERVICES                     07/16/03                                                 89,760
STOCK OPTIONS ISSUED FOR SERVICES                     05/16/03                                                 11,348
NET LOSS
                                                                    ------------      ------------       -------------

BALANCE AT JULY 31, 2003 (UNAUDITED)                                  28,819,464      $     28,819       $ 10,972,209
                                                                    ============      ============       ============
</TABLE>

(1)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1996

(2)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1997

(3)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1998

(4)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1999

(5)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2000

(6)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2001

(7)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2002

(8)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2003


                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                                      HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                     (DEVELOPMENT STAGE COMPANIES)
                                                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                  FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2003
----------------------------------------------------------------------------------------------------------------------------------

                                                                                                        Deficit
                                                                                                      Accumulated
                                                                   Committed                           during the
                                                                    Common           Deferred         Development
                                                        Date         Stock         Compensation          Stage            Total
                                                        ----         -----         ------------          -----            -----
<S>                                                   <C>

BALANCE, AUGUST 21, 1995 (INCEPTION)                              $         --     $        --       $         --     $         --
RECAPITALIZATION UPON REVERSE TAKEOVER                                                                                          14
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (1)                                                                  8,230
NET LOSS                                                                                                   (39,387)        (39,387)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 1996                                                     --              --             (39,387)        (31,143)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (2)                                                                     36
NET LOSS                                                                                                  (110,004)       (110,004)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 1997                                                     --              --            (149,391)       (141,111)

ISSUANCE OF COMMON STOCK FOR CASH                     03/23/98                                                               2,252
ISSUANCE OF COMMON STOCK FOR CASH                     03/25/98                                                                 500
ISSUANCE OF COMMON STOCK FOR CASH                       (3)                                                                 15,625
ISSUANCE OF COMMON STOCK FOR CASH                     10/14/97                                                              20,000
ISSUANCE OF COMMON STOCK FOR CASH                       (3)                                                                 82,050
ISSUANCE OF COMMON STOCK FOR CASH                     09/04/97                                                               3,124
ISSUANCE OF COMMON STOCK FOR CASH                     12/17/97                                                              21,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (3)                                                                 17,050
NET LOSS                                                                                                  (293,019)       (293,019)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 1998                                                     --               --           (442,410)       (272,528)

ISSUANCE OF COMMON STOCK FOR CASH                       (4)                                                                 32,480
ISSUANCE OF COMMON STOCK FOR CASH                     10/01/98                                                               5,000
ISSUANCE OF COMMON STOCK FOR CASH                     01/15/99                                                               3,600
ISSUANCE OF COMMON STOCK FOR CASH                     10/30/98                                                               7,500
ISSUANCE OF COMMON STOCK FOR CASH                     03/17/99                                                              10,200
ISSUANCE OF COMMON STOCK FOR CASH                     01/08/99                                                              32,400
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98                                                               2,500
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98                                                               7,000
ISSUANCE OF COMMON STOCK FOR CASH                     11/24/98                                                              10,000
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98                                                               2,500
ISSUANCE OF COMMON STOCK FOR CASH                     01/15/99                                                               6,300
ISSUANCE OF COMMON STOCK FOR CASH                     05/05/98                                                              29,250
ISSUANCE OF COMMON STOCK FOR CASH                     12/02/98                                                               2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (4)                                                                 49,759
NET LOSS                                                                                                  (272,426)       (272,426)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 1999                                                     --               --           (714,836)       (343,965)

ISSUANCE OF COMMON STOCK FOR CASH                     06/28/99                                                                 100
ISSUANCE OF COMMON STOCK FOR CASH                     05/03/99                                                               3,667
ISSUANCE OF COMMON STOCK FOR CASH                     07/14/99                                                              12,500
ISSUANCE OF COMMON STOCK FOR CASH                     11/30/99                                                              21,000
ISSUANCE OF COMMON STOCK FOR CASH                     07/12/99                                                               1,500
ISSUANCE OF COMMON STOCK FOR CASH                       (5)                                                                130,000
ISSUANCE OF COMMON STOCK FOR CASH                     04/03/00                                                               2,000
ISSUANCE OF COMMON STOCK FOR CASH                     04/03/00                                                               7,500
ISSUANCE OF COMMON STOCK FOR CASH                       (5)                                                                117,379
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (5)                                                                 85,237
NET LOSS                                                                                                  (332,131)       (332,131)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 2000                                                     --               --         (1,046,967)       (295,213)

ISSUANCE OF COMMON STOCK FOR CASH                     09/28/00                                                               5,000
ISSUANCE OF COMMON STOCK FOR CASH                       (6)                                                                104,730
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (6)                                                                 36,468
NET LOSS                                                                                                  (288,067)       (288,067)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 2001                                                     --               --         (1,335,034)       (437,082)

ISSUANCE OF COMMON STOCK FOR CASH                       (7)                                                                115,800
ISSUANCE OF COMMON STOCK FOR CASH                     03/13/02                                                               2,420
ISSUANCE OF COMMON STOCK FOR CASH                       (7)                                                                 20,000
ISSUANCE OF COMMON STOCK FOR CASH                     07/31/01                                                              10,000
ISSUANCE OF COMMON STOCK FOR CASH                       (7)                                                                 33,349
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED          (7)                                                                232,170
ISSUANCE OF COMMON STOCK IN PRIVATE
     PLACEMENT FOR CASH                               04/30/02                                                           1,225,000
NET LOSS                                                                                                (1,389,530)     (1,389,530)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 2002                                                     --              --         (2,724,564)        (187,873)
ISSUANCE OF PREFERRED STOCK
     IN PRIVATE PLACEMENT FOR CASH                    10/31/03                                                             800,400
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03                                                             220,500
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03                                                             229,000
ISSUANCE OF COMMON STOCK
     FOR SUBSCRIPTIONS RECEIVABLE                     04/30/03                                                               3,982
ISSUANCE OF COMMON STOCK
     IN PRIVATE PLACEMENT FOR CASH                    10/07/02                                                           2,322,406
OFFERING COSTS                                                                                                            (196,793)
ISSUANCE OF COMMON STOCK
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                            01/27/03                                                                  --
ISSUANCE OF COMMON STOCK
     IN CASHLESS EXERCISE OF
     WARRANTS                                         01/02/03                                                                  --
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED AS A BONUS                                (8)            17,549                                              38,899
ISSUANCE OF COMMON STOCK
     AND COMMON STOCK
     COMMITTED FOR SERVICES
     RENDERED                                         04/21/03           9,691                                              20,000
DIVIDENDS ON PREFERRED STOCK                          10/31/02                                             (78,360)             --
BENEFICIAL CONVERSION FEATURE
     GRANTED IN CONNECTION WITH
     ISSUANCE OF PREFERRED
     STOCK                                            10/31/02                                            (767,431)             --
CONVERSION OF CONVERTIBLE
     NOTES PAYABLE - RELATED
     PARTIES INTO COMMON
     STOCK                                            07/18/02                                                              37,896
FINANCING EXPENSE IN CONNECTION WITH
     ISSUANCE OF WARRANTS                             05/31/02                                                             223,710
STOCK OPTIONS ISSUED FOR SERVICES RENDERED            07/12/02                                                             761,007
STOCK OPTIONS ISSUED FOR SERVICES RENDERED            08/01/02                                                             187,163
STOCK OPTIONS ISSUED AS COMPENSATION                  02/11/03                                                              59,373
STOCK OPTIONS ISSUED AS COMPENSATION                  09/25/02                       (3,305,542)                --
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                   09/25/02                                                              50,000
STOCK OPTIONS ISSUED IN EXCHANGE FOR
     SETTLEMENT OF ACCOUNTS PAYABLE                   05/01/02                                                              15,000
WARRANTS ISSUED FOR SERVICES RENDERED                 12/09/02                                                             162,792
WARRANTS ISSUED FOR SERVICES RENDERED                 02/17/03                                                             130,712
WARRANTS ISSUED FOR SERVICES RENDERED                 04/28/03                                                              18,284
WARRANTS ISSUED FOR TERMINATION OF CONTRACT           12/09/02                                                             390,409
AMORTIZATION OF DEFERRED COMPENSATION                                                 1,032,981                          1,032,981
REVERSAL OF DEFERRED COMPENSATION                                                     2,272,561                                --
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY                                  7,164                                               7,164
NET LOSS                                                                                                (5,411,265)     (5,411,265)
                                                                  ------------     ------------       ------------    ------------

BALANCE, APRIL 30, 2003                                                 34,404               --         (8,981,620)        915,747

ISSUANCE OF COMMON STOCK FOR CASH                     06/24/03                                                             200,000
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES           06/24/03                                                             100,000
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES           05/13/03                                                              21,600
ISSUANCE OF COMMON STOCK                                                                                                        --
     ON CASHLESS CONVERSION
     OF THE SERIES A PREFERRED
     STOCK                                            05/16/03                                                                  --
DIVIDENDS ON PREFERRED STOCK                          05/16/03                                             (611,396)            --
ISSUANCE OF COMMON STOCK AS PENALTY SHARES            05/16/03              --
ISSUANCE OF COMMITTED COMMON STOCK                    05/21/03          (9,691)                                                 --
ISSUANCE OF COMMITTED COMMON STOCK                    06/19/03         (17,549)                                                 --
ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS      05/27/03                                                                 340
WARRANTS ISSUED FOR SERVICES RENDERED                 05/16/03                                                              60,518
WARRANTS ISSUED FOR SERVICES RENDERED                 05/01/03                                                              15,864
STOCK OPTIONS ISSUED FOR SERVICES                     07/16/03                                                              89,760
STOCK OPTIONS ISSUED FOR SERVICES                     05/16/03                                                              11,348
NET LOSS                                                                                                 (1,132,223)    (1,132,223)
                                                                   ------------    ------------       ------------    ------------

BALANCE AT JULY 31, 2003 (UNAUDITED)                               $      7,164    $         --       $(10,725,239)   $    282,954
                                                                   ============    ============       ============    ============
</TABLE>

(1)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1996

(2)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1997

(3)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1998

(4)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 1999

(5)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2000

(6)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2001

(7)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2002

(8)    Multiple  transactions  valued at the per share  price in the year  ended
       April 30, 2003


                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                                   HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                            (DEVELOPMENT STAGE COMPANIES) CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002 (UNAUDITED), AND
                                   FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2003 (UNAUDITED)
---------------------------------------------------------------------------------------------------------------

                                                                                                    For the
                                                                                                  Period from
                                                                                                    August 21,
                                                                  Three Months Ended                  1995
                                                                      July 31,                   (Inception) to
                                                             ------------------------------          July 31,
                                                                2003                2002              2003
                                                             -----------        -----------       -----------
                                                             (unaudited)        (unaudited)       (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                          <C>               <C>               <C>
     Net loss                                                $(1,132,223)      $  (910,312)      $(9,268,052)
     Adjustments to reconcile net loss to net cash
        used in operating activities
           Depreciation                                           30,281            14,112           129,706
           Issuance of common stock as
              compensation expense                                    --                --           428,950
           Compensation expense relating to issuance of
              common stock in exchange for services
              rendered to minority shareholders                       --                --            18,923
           Warrants issued for services rendered
              or to be rendered                                       --                --           311,788
           Warrants issued for termination of contract                --                --           390,409
           Issuance of common stock for services
              rendered                                           121,600                --           141,600
           Stock options issued for services
              rendered                                                --                --           351,762
           Issuance of common stock to an employee
              for a bonus                                             --                --            38,899
           Stock options issued as compensation                  101,108                --           160,481
           Warrants issued as compensation                        76,382                --            76,382
           Additional compensation to officer                         --                --            42,171
           Amortization of deferred compensation                      --            21,139         1,032,981
           Financing expense                                          --           223,710           223,710
           (Increase) decrease in
              Restricted cash                                     71,234                --                --
              Accounts receivable                                     --                --           (34,583)
              Subscription receivable                            443,482                --           443,482
              Other current assets                                72,861           (69,525)          251,619
              Other assets                                       (63,417)               --          (359,365)
           Increase (decrease) in
              Accounts payable                                   105,988           279,650           888,602
              Accrued expenses                                    (1,600)         (112,822)               16
              Accrued payroll and payroll taxes                  (10,332)               --            18,193
              Accrued interest                                     5,226             1,406            43,412
                                                             -----------       -----------       -----------

Net cash used in operating activities                           (179,410)         (552,642)       (4,668,914)
                                                             -----------       -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                          (24,308)         (294,000)         (628,158)
                                                             -----------       -----------       -----------

Net cash used in investing activities                            (24,308)         (294,000)         (628,158)
                                                             -----------       -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable - related parties                    --                --           604,160
     Payments on notes payable - related parties                      --          (279,803)         (546,331)
     Proceeds from convertible notes payable - related                --
        parties                                                       --                --            55,400
     Payments on convertible notes payable - related                  --
        parties                                                       --           (19,280)          (25,000)
     Proceeds from issuance of common stock in
        private placement                                             --           500,000         3,547,406
     Proceeds from issuance of preferred stock                        --                --           979,301
     Offering costs on preferred stock                                --                --          (178,902)
     Proceeds from issuance of common stock                      200,000                --         1,082,723
     Offering costs on common stock                                   --                --          (196,793)
     Exercise of stock options in subsidiary                          --             7,164             7,164
     Exercise of warrants                                            340                --               340
                                                             -----------       -----------       -----------

Net cash provided by financing activities                        200,340           208,081         5,329,468
                                                             -----------       -----------       -----------

Net increase (decrease) in cash and cash
     equivalents                                                  (3,378)         (638,561)           32,396

CASH AND CASH EQUIVALENTS, BEGINNING OF
     PERIOD                                                       35,774         1,078,136                --
                                                             -----------       -----------       -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                     $    32,396       $   439,575       $    32,396
                                                             ===========       ===========       ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     INTEREST PAID                                           $        --       $        --       $     2,888
                                                             ===========       ===========       -----------
     INCOME TAXES PAID                                       $     2,400       $        --       $    14,183
                                                             ===========       ===========       -----------

</TABLE>


                                       6
<PAGE>

SUPPLEMENT SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995  (inception)  to July 31,  2003,  the  Company  issued 0; 0; and 37,898
shares,  respectively,   of  common  stock  for  the  outstanding  principal  on
convertible  notes payable - related parties and accrued interest of $0; $0; and
$37,896, respectively.

During the three  months ended July 31, 2003 and 2002 and the period from August
21,  1995  (inception)  to July 31,  2003,  the  holders of 95.82,  0, and 97.93
shares,  respectively,  of the Series A convertible,  redeemable preferred stock
converted their shares into 2,191,878;  0; and 2,210,214  shares,  respectively,
which also included  62,562 penalty shares as a result of the late  registration
of their common stock.

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995  (inception)  to July 31,  2003,  the holders of shares of the Series A
convertible,  redeemable  preferred stock received a preferred stock dividend of
$611,396;  0; and  $689,756,  respectively,  as a result of the  exchange  price
difference upon conversion of their preferred stock into common stock.

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995 (inception) to July 31, 2003, the Company issued 91,526;  0; and 91,526
shares  of  common  stock to  certain  shareholders  who  invested  in a private
placement,  dated October 29, 2002, to compensate them for the late registration
of the common stock.

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995 (inception) to July 31, 2003, the Company issued 31,178;  0; and 31,178
shares,  respectively,  of  committed  common  stock  valued at $27,240;  0; and
$27,240, respectively.

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995  (inception)  to July 31, 2003, the Company  issued  convertible  notes
payable-related  parties to it's legal  counsel for legal  services that were in
accounts payable for $238,816; $0; and $285,533, respectively.

During the three  months ended July 31, 2003 and 2002 and the period from August
21, 1995  (inception)  to July 31, 2003,  the Company issued notes payable to an
employee  for  accrued  payroll and  payroll  taxes for $1,077;  $0; and $1,077,
respectively.


                                       7
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

      General

      HiEnergy  Technologies,  Inc.  ("HiEnergy")  was incorporated on March 22,
      2000 under the laws of the state of Washington.  In October 2002, HiEnergy
      reincorporated  under  the  laws  of  the  state  of  Delaware.   HiEnergy
      Microdevices,  Inc.  ("Microdevices"),   a  subsidiary  of  HiEnergy,  was
      incorporated on August 21, 1995 in the state of Delaware.  In August 2003,
      HiEnergy Defense,  Inc. ("Defense") was incorporated under the laws of the
      state of Delaware.  HiEnergy  owns  approximately  92% of the  outstanding
      common stock of Microdevices  and 85% of the  outstanding  common stock of
      Defense.

      HiEnergy  and  its   subsidiaries   (collectively,   the   "Company")  are
      development stage companies  commercializing a proprietary  technology for
      assembling  sensor  systems  for  numerous   governmental  and  commercial
      applications  and markets.  The Company's  technology has  applications in
      detecting  almost every  chemical  element and  compound,  such as plastic
      explosives, Anthrax and cocaine.

      As  contemplated  by the  Securities  and Exchange  Commission  under Item
      310(b) of  Regulation  S-B,  the  accompanying  financial  statements  and
      footnotes have been condensed and therefore do not contain all disclosures
      required by accounting  principles generally accepted in the United States
      of America.  The interim  financial  data is  unaudited;  however,  in the
      opinion  of   HiEnergy's   management,   the  interim  data  includes  all
      adjustments,  consisting only of normal recurring  adjustments,  necessary
      for a fair statement of the results for the interim  periods.  Results for
      the three months  ended July 31, 2003 are not  necessarily  indicative  of
      those to be expected for the year ended April 30, 2004.

      Recapitalization between HiEnergy and Shareholders of Microdevices

      On April 25,  2002,  HiEnergy  entered  into a  voluntary  share  exchange
      agreement  whereby  it would  exchange  92% of the  outstanding  shares of
      common stock of Microdevices for 14,380,200  shares of newly issued common
      stock.  For accounting  purposes,  the  transaction  has been treated as a
      recapitalization of HiEnergy, with Microdevices as the accounting acquirer
      (reverse  takeover),  and has been  accounted for in a manner similar to a
      pooling of interests.  HiEnergy had minimal assets and  liabilities at the
      date of the reverse takeover and did not have significant operations prior
      to the reverse  takeover.  Since  HiEnergy was a "public  shell" pro forma
      information is not presented.



                                       8
<PAGE>


NOTE 2 - RECLASSIFICATIONS

      The Company  reclassified $71,234 included in cash and cash equivalents to
      restricted cash as of April 30, 2003. There was no restricted cash at July
      31, 2003. The Company also  reclassified  $232,531  included in short-term
      prepaid  consulting fees which were included in other current assets as of
      July 31, 2003 to  long-term  other assets as of the same date to match the
      contract term to which the consulting fees apply.

      During the three  months  ended July 31, 2003 and 2002 and the period from
      August 21, 1995  (inception)  to July 31, 2003,  the Company  reclassified
      $103,749,  $0 and  $574,252,  respectively  of grant  income  as an offset
      against research and development  costs in accordance with section 3.50 of
      the Government  Contract  Audit Guide for  Fixed-Price  Best-Efforts  Cost
      Sharing Arrangements.

      The Company also made the appropriate  reclassifications to the Statements
      of Cash Flows for the  quarters  ended July 31,  2003 and the period  from
      August  21,  1995  (inception)  to July  31,  2003 to  reflect  the  items
      mentioned  above.  The  Company  also  reclassified  a  convertible  notes
      payable-related  party of $238,816  and a note  payable of $1,077 from the
      financing  activities  section  of the  statement  of  cash  flows  to the
      operating activities section as these were a noncash transaction.

      There were no reclassifications made to the quarter ended July 31, 2002 in
      the  Consolidated  Statements of Operations or Consolidated  Statements of
      Cash Flows because there was no grant income during the period  related to
      development  contracts,  and therefore there was no offset to research and
      development expense.


                                       9
<PAGE>


     Below is the  reclassification  effect as of and for the quarter ended July
31, 2003:

<TABLE>
<CAPTION>
                                                      As Originally     Reclassification           As
                                                        Reported           Adjustment         Reclassified
                                                      -----------         -----------         -----------
<S>                                                   <C>                 <C>                 <C>
BALANCE SHEET
Other current assets                                  $   714,154         $  (232,531)        $   481,623
Total current assets                                      781,133            (232,531)            548,602
Other assets                                                   --             232,531             232,531
Total assets                                            1,279,584                  --           1,279,584
Total current liabilities                                 977,707                  --             977,707
Total liabilities and shareholders' equity            $ 1,279,584         $        --         $ 1,279,584

STATEMENT OF OPERATIONS
Contract revenues                                     $   103,749         $  (103,749)        $        --
Research and development                                  202,071            (103,749)             98,322
Total operating expenses                                1,230,311            (103,749)          1,126,562
Loss from operations                                   (1,126,562)                 --          (1,126,562)
Net loss                                               (1,132,223)                 --          (1,132,223)
Net loss available to common shareholders             $(1,743,619)        $        --         $(1,743,619)
Loss per common  share:
        Basic and diluted loss per share              $      0.04         $        --         $      0.04
        Basic and diluted loss available to
          common shareholders per share               $      0.06         $        --         $      0.06

STATEMENT OF CASH FLOWS
Restricted cash                                       $        --         $    71,234         $    71,234
Other current assets                                        9,444              63,417              72,861
Other assets                                                   --             (63,417)            (63,417)
Accounts payable                                         (132,828)            238,816             105,988
Accrued payroll and payroll taxes                         (11,409)              1,077             (10,332)
Net cash used in operating activities                    (490,537)            311,127            (179,410)
Proceeds from convertible notes
       payable - related parties                          238,816            (238,816)                 --
Notes payable issued for services                           1,077              (1,077)                 --
Net cash provided by financing activities                 440,233            (239,893)            200,340
Net increase (decrease) in cash and
       cash and cash equivalents                          (74,612)             71,234              (3,378)
Cash and cash equivalents, beginning of period            107,008             (71,234)             35,774
Cash and cash equivalents, end of period              $   107,008         $   (71,234)        $    35,774
</TABLE>


                                       10
<PAGE>


         Below is the  reclassification  effect for the period  from  August 21,
1995 (inception) to July 31, 2003:

<TABLE>
<CAPTION>
                                                  As Originally       Reclassification          As
                                                    Reported            Adjustment          Reclassified
                                                  ------------         ------------         ------------
<S>                                               <C>                  <C>                  <C>
STATEMENT OF OPERATIONS
Contract revenues                                 $    574,252         $   (574,252)        $         --
Research and development                             2,630,253             (574,252)           2,056,001
Total operating expenses                             9,567,557             (574,252)           8,993,305
Loss from operations                                (8,993,305)                  --           (8,993,305)
Net loss                                            (9,268,052)                  --           (9,268,052)
Net loss available to common shareholders         $(10,725,239)        $         --         $(10,725,239)

STATEMENT OF CASH FLOWS
Other current assets                              $   (107,746)        $    359,365         $    251,619
Other assets                                                --             (359,365)            (359,365)
Accounts payable                                       603,069              285,533              888,602
Accrued payroll and payroll taxes                       17,116                1,077               18,193
Net cash used in operating activities               (4,955,524)             286,610           (4,668,914)
Proceeds from convertible notes
       payable - related parties                       345,933             (290,533)              55,400
Notes payable issued for services                        1,077               (1,077)                  --
Payments on convertible notes payable-
       related parties                                 (30,000)               5,000              (25,000)
Net cash provided by financing activities            5,616,078             (286,610)           5,329,468
Net increase (decrease) in cash and
       cash and cash equivalents                  $     32,396         $         --         $     32,396
</TABLE>

      The  Company has also  amended  the  Statements  of  Shareholders'  Equity
      (Deficit) for the period from August 21, 1995 (inception) to July 31, 2003
      to  disclose  the  date,  price  per  equity  unit and  number  of  equity
      instruments  for each issuance  since  inception.  Transactions  with same
      price per equity unit in the same fiscal year have been aggregated.

      The  Company  has also  improved  disclosures  in a number of areas in the
      notes to the consolidated financial statements.

NOTE 3 - GOING CONCERN

      The  accompanying  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.
      However,  during the three  months  ended  July 31,  2003 and 2002 and the
      period from  August 21, 1995  (inception)  to July 31,  2003,  the Company
      incurred  net  losses  available  to common  shareholders  of  $1,743,619;
      $910,312;  and $10,725,239,  respectively,  and it had negative cash flows
      from operations of $179,410;  $552,642; and $4,668,916,  respectively.  In
      addition, the Company had an accumulated deficit of $10,725,239 and was in
      the development stage as of July 31, 2003. These factors raise substantial
      doubt about the Company's ability to continue as a going concern.


                                       11
<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 the Company's 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
      financial  statements  do not  include  any  adjustments  relating  to the
      recoverability and classification of recorded asset amounts or 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 July 31, 2003 through the sales of
      equity, the Company is currently  negotiating with certain investors about
      raising 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 until the Company's sales volume reaches a
      sufficient level to cover operating expenses.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation

      The consolidated financial statements include the accounts of HiEnergy and
      its 92% owned  subsidiary,  Microdevices.  All  significant  inter-company
      accounts and  transactions are eliminated in  consolidation.  In May 2003,
      the Board of Directors  approved the  liquidation  and  termination of the
      Company's  subsidiary,  VWO,  Inc.,  which had no  assets or  transactions
      during the year ended April 30, 2003 or quarter ended July 31, 2003.

      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."  The Company is devoting  all of its
      present  efforts to its  formation  and to  fundraising,  and its  planned
      principal operations have not yet commenced.  All losses accumulated since
      inception have been considered as part of the Company's  development stage
      activities.

      Reclassifications

      Certain  amounts  included in the prior period  financial  statements have
      been  reclassified to conform with the current period  presentation.  Such
      reclassifications did not have any effect on the reported net loss.

      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 financial  statements since the Company did not
      have any of the items of comprehensive income in any period presented.

      Cash and Cash Equivalents

      The Company  maintains its cash deposits at a bank located in  California.
      Deposits  at the  bank  are  insured  by  the  Federal  Deposit  Insurance
      Corporation up to $100,000.  The Company has not experienced any losses in
      such  accounts and believes it is not exposed to any  significant  risk on
      cash and cash equivalents.

      For the purpose of the statements of cash flows, the Company considers all
      highly liquid  investments  purchased  with  original  maturities of three
      months or less to be cash equivalents.


                                       12
<PAGE>


      Accounts Receivable

      Accounts  receivable at October 31, 2003 and 2002 consisted of amounts due
      from separate  governmental  development  contracts.  Contract amounts are
      billed as monthly reports are submitted detailing work performed under the
      contract and are generally due in 30 days.

      Property and Equipment

      Property and equipment are recorded at cost and are depreciated  using the
      straight-line method over an estimated useful life of five years.

      Patents

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

      Fair Value of Financial Instruments

      The Company's  financial  instruments  include cash and cash  equivalents,
      accounts receivable,  subscriptions receivable,  accounts payable, accrued
      expenses,  accrued payroll and payroll taxes,  and accrued  interest.  The
      book value of all other financial  instruments are representative of their
      fair values.

      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
      development  contracts  with the  Department  of Defense  have been offset
      against research and development  costs, in accordance with the provisions
      of that section, in all periods presented.

      Stock-Based Compensation

      The Company accounts for its stock-based  compensation plans in accordance
      with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
      "Accounting for Stock Issued to Employees,"  and related  interpretations.
      As such, compensation expense is recorded on the date of grant only if the
      current market price of the underlying  stock exceeds the exercise  price.
      The  Company  adopted  the  disclosure   requirements  of  SFAS  No.  123,
      "Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company
      must  disclose  certain pro forma  information  related to employee  stock
      option grants as if the fair  value-based  method  defined in SFAS No. 123
      had been applied.

      The Company accounts for common stock issued for services  rendered at the
      fair value of the common stock issued on the date of issuance.


                                       13
<PAGE>


      The following table  illustrates the effect on net income and earnings per
      share if the Company had applied the fair value-recognition  provisions of
      SFAS No. 123, to the stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                                           Quarter Ended July 31,
                                                                                         2003                  2002
                                                                                         ----                  ----
<S>                                                                                 <C>                   <C>
Net loss, as reported                                                               $  (1,132,223)        $    (910,312)
Add: Stock-based employee compensation expense included in reported net loss
determined under APB No. 25, net of related tax effects                                        --                    --
                                                                                    -------------         -------------

Deduct: Total stock-based employee compensation expense determined under
fair-value-based method for all awards, net of related tax effects                             --                    --
                                                                                    -------------         -------------
Pro forma net loss                                                                  $  (1,132,223)        $    (910,312)

Loss per share:
Basic and diluted - as reported                                                     $       (0.04)        $       (0.04)
Basic and diluted - pro forma                                                       $       (0.04)        $       (0.04)
</TABLE>

      Stock  options or 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.

      All warrants and options issued to  non-employees  for financing  expenses
      and services  rendered have been valued using the fair value of the equity
      instrument issued, as this was readily determinable.  Stock options issued
      in exchange for accounts  payable have been valued using the fair value of
      the goods or services provided, as this had already been determined.

      Warrants  issued to investors in private  placements,  as offering  costs,
      have been valued using the fair value of the equity instrument  issued, as
      this was more readily  determinable.  As these  warrants  were issued as a
      cost associated with raising  capital through the private  placements,  no
      entry was recorded to additional paid-in 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.  Because the Company has incurred net losses,  basic
      and diluted loss per share are the same.


                                       14
<PAGE>


      The  following  potential  common  shares  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 three  months
      ended July 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                             July 31,
                                                    ----------------------------
                                                       2003              2002
                                                    ---------          ---------
<S>                                                 <C>               <C>
Stock Options                                       5,190,864                 --
Warrants                                            1,761,686                 --
Microdevices minority shareholders                    459,222            459,222
Microdevices options and warrants                     368,725            636,954
                                                    ---------          ---------
                                                    7,780,527          1,096,176
                                                    ---------          ---------
</TABLE>

      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 April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
      on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
      clarifies accounting and reporting for derivative  instruments and hedging
      activities under SFAS No. 133, "Accounting for Derivative  Instruments and
      Hedging Activities." SFAS No. 149 is effective for derivative  instruments
      and  hedging  activities  entered  into or modified  after June 30,  2003,
      except for certain forward purchase and sale securities. For these forward
      purchase and sale  securities,  SFAS No. 149 is effective for both new and
      existing  securities  after  June 30,  2003.  Management  does not  expect
      adoption  of SFAS  No.  149 to have a  material  impact  on the  Company's
      statements of earnings, financial position, or cash flows.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
      Financial   Instruments  with  Characteristics  of  both  Liabilities  and
      Equity." SFAS No. 150 establishes  standards for how an issuer  classifies
      and  measures in its  statement of financial  position  certain  financial
      instruments  with  characteristics  of both  liabilities  and  equity.  In
      accordance   with  the  standard,   financial   instruments   that  embody
      obligations  for the issuer are required to be classified as  liabilities.
      SFAS No. 150 will be effective for financial  instruments  entered into or
      modified  after  May 31,  2003  and  otherwise  will be  effective  at the
      beginning of the first interim period beginning after June 15, 2003.

NOTE 5 - OTHER CURRENT ASSETS

      Other current assets consisted of the following at:

<TABLE>
<CAPTION>
                                                    July 31, 2003    April 30, 2003
                                                    -------------    --------------
<S>                                                   <C>               <C>
Prepaid consulting                                    $284,519          $313,250
Prepaid insurance                                       89,104             6,400
Deposits on equipment                                  100,000           100,000
Other                                                    8,000             8,000
                                                      --------          --------

                   TOTAL                              $481,623          $427,650
                                                      ========          ========
</TABLE>


                                       15
<PAGE>


NOTE 6 - PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at:


<TABLE>
<CAPTION>
                                                  July 31, 2003      April 30, 2003
                                                  -------------      --------------
<S>                                                 <C>                 <C>
Prototype equipment                                 $111,114            $111,114
Laboratory equipment                                 460,648             436,340
Furniture and fixtures                                41,995              41,995
Web site development                                  14,400              14,400
                                                    --------            --------

                                                     628,157             603,849

Less accumulated depreciation                        129,706              99,425
                                                    --------            --------

                   TOTAL                            $498,451            $504,424
                                                    ========            ========
</TABLE>

      Property and  equipment is recorded at cost and is  depreciated  using the
      straight-line  method  over  an  estimated  useful  life  of  five  years.
      Depreciation expense for the three months ended July 31, 2003 and 2002 and
      the period from August 21, 1995  (inception) to July 31, 2003 was $30,281,
      $14,112, and $129,706, respectively.

NOTE 7 - NOTES PAYABLE - RELATED PARTIES

      Notes payable - related parties consisted of the following at:


<TABLE>
<CAPTION>
                                                                    July 31, 2003  April 30, 2003
                                                                    -------------  --------------
<S>                                                                    <C>            <C>
Unsecured  note  payable  to  a  shareholder  of  the  Company,
    interest payable at 10.5% per annum, or 15% per annum if in
    default,  and due in November 1997. As of July 31, 2003 and
    April 30, 2003, the notes were in default                          $40,000        $40,000

Unsecured note payable to a shareholder of the
    Company, non-interest bearing, and payable
    on demand                                                           45,000         45,000
                                                                       -------        -------

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

    LONG-TERM PORTION                                                  $    --        $    --
                                                                       =======        =======
</TABLE>


                                       16
<PAGE>


NOTE 8 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

      Convertible notes payable - related parties consisted of the following at:

<TABLE>
<CAPTION>
                                                                        July 31, 2003   April 30, 2003
                                                                        -------------   --------------
<S>                                                                        <C>             <C>
Unsecured  notes  payable  to a  shareholder  of  the  Company,
        interest  payable at 8% per  annum,  $5,000 due in July
        2001 and $5,400 due in July 2002. The notes payable are
        secured by the patent  applications for Europe,  Canada
        and  Japan.  The  holder of the notes  payable  has the
        option to  convert  the  principal  and  interest  into
        shares  of  common  stock  at the  market  price of the
        Company's  common stock at the  conversion  date. As of
        July 31, 2003 and April 30, 2003, the notes were in default         $ 10,400        $ 10,400

Unsecured  notes  payable  to  legal  counsel  of the  Company,
        interest  payable at 10% per annum and due in September
        2003.  The holder of the note has the option to convert
        the  principal and interest into shares of common stock
        of the  company  at the market  price of the  Company's
        common stock at the conversion date                                  285,533          46,717
                                                                            --------        --------

                                                                             295,933          57,117
Less current portion                                                         295,933          57,117
                                                                            --------        --------

        LONG-TERM PORTION                                                   $     --        $     --
                                                                            ========        ========
</TABLE>


NOTE 9 - NOTE PAYABLE

            Notes payable consisted of the following at:

<TABLE>
<CAPTION>
                                                       July 31, 2003  April 30, 2003
                                                       -------------  --------------
<S>                                                       <C>           <C>
Unsecured note payable to an employee, interest at
        5% per annum, due in December 2003                $1,077        $   --
                                                          ------        ------

Less current portion                                       1,077            --
                                                           1,077            --
                                                          ------        ------

        LONG-TERM PORTION                                 $   --        $   --
                                                          ======        ======
</TABLE>


                                       17
<PAGE>

NOTE 10 -RESEARCH AND DEVELOPMENT COSTS

      The Company has been engaged in  commercializing a proprietary  technology
      for  assembling  sensor systems for numerous  governmental  and commercial
      applications  and markets.  The Company's  technology has  applications in
      detecting  almost every  chemical  element and  compound,  such as plastic
      explosives, Anthrax and cocaine.

      The  Company's  research and  development  expenses  consist  primarily of
      salaries and  benefits,  facilities,  depreciation,  consulting  services,
      supplies  and  travel.  Research  and  development  costs are  charged  to
      operations as incurred.  Amounts  earned under the  Company's  development
      contracts with the Department of Defense have been offset against 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  Department of Defense have been offset  against  research
      and development costs, in accordance with the provisions of that section.

      Since inception,  the Company has been able to obtain various governmental
      grants and development  contracts.  During the three months ended July 31,
      2003 and 2002,  the Company  worked on  different  phases of two  separate
      development  contracts  with the  Department of Defense.  During the three
      months  ended July 31, 2002 the Company  worked on a different  government
      development contract.

      In August  2002,  the  Company  was  awarded an SBIR Phase II  development
      contract for up to $780,000 in funding over two years for Phase II testing
      and development of an anti-tank  landmine detection system. On January 15,
      2003,  we executed  the  contract  with the  Department  of Defense.  Work
      commenced in January  2003 under the first year of the contract  valued at
      $415,000.  We  estimate  our costs of the first  year of the SBIR Phase II
      development  contract to be  $1,100,000.  The second year of the contract,
      valued at approximately $364,000, is under an option that can be exercised
      by the Department of Defense at the end of the first year. Under the terms
      of the  contract,  we are  required  to  submit  monthly  written  reports
      detailing  our  progress  under  the  contract.   The  Company  recognizes
      one-twelfth  of  the  first-year  contract  amount  as an  offset  against
      research and development expenses each month.

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

<TABLE>
<CAPTION>
                                                                                   For the
                                                                                 Period from
                                                                                  August 21,
                                                                                    1995
                                            Three Months Ended July 31,        (Inception) to
                                          -------------------------------          July 31,
                                             2003                2002               2003
                                          -----------         -----------        -----------
<S>                                       <C>                 <C>                <C>
Research and development costs            $   202,071         $   166,595        $ 2,630,253

Grant income earned                          (103,749)                 --           (574,252)
                                          -----------         -----------        -----------
Net research and development costs        $    98,322         $   166,595        $ 2,056,001
                                          -----------         -----------        -----------
</TABLE>


                                       18
<PAGE>


NOTE 11 - COMMITMENTS AND CONTINGENCIES

      Employment Agreements

      In March 2002, the Company  entered into an employment  agreement with its
      Chief Scientist/Chairman of the Board. Major terms of the agreement are as
      follows:

      o     The Company paid a signing bonus of $100,000,  during the year ended
            April 30, 2003.

      o     The Company is obligated to pay an annual  bonus,  which must not be
            less than 20% of the total amount of bonuses paid to officers of the
            Company.  If the pretax  profit in any fiscal year exceeds $0.20 per
            share, then his bonus in that year must not be less than $50,000.

      o     Microdevices  granted  options to purchase  111,040 shares of common
            stock at an exercise price of $3.00 per share,  vesting immediately,
            and which are exercisable from time to time within the period ending
            November 30, 2008.  The stock  options were issued with the exercise
            price above the market  price of the common stock on the date of the
            grant.  At  the  time  of  the  reverse  take-over  of  HiEnergy  by
            Microdevices,  the Company exchanged the Microdevices  stock options
            at an exchange rate of 22.3524 per share or 2,482,011 HiEnergy stock
            options with an exercise price of $0.134 per share.

      o     The Company is  obligated to grant its Chief  Scientist/Chairman  of
            the Board annually during the term of five years 1% per annum of the
            Company's stock issued and outstanding with an exercise price of the
            average  price for the  preceding 30 days. He must receive a minimum
            of 10% of the total  number of options  granted by the  Company  for
            services in that year.  As of April 30,  2003,  the Company  granted
            options to purchase  456,717  shares of common  stock at an exercise
            price of $2.81 per share.  In the fiscal year ended April 30,  2003,
            the Company recorded  $59,373 in compensation  expense because these
            stock  options  were issued with an exercise  price below the market
            price of the Company's common stock on the date of grant.

      o     The Company will provide its Chief Scientist/Chairman of the Board a
            car, pay his and his  family's  health  insurance,  provide life and
            disability   insurance  and  will   reimburse  him  for   reasonable
            out-of-pocket  expenses,  not to exceed $20,000 in any one year, and
            reimburse  him  for  any  personal  tax  liabilities  arising  up to
            $75,000.  During the year ended April 30,  2003,  the  Company  paid
            $17,500   for  an   automobile   deposit  on  behalf  of  its  Chief
            Scientist/Chairman of the Board. In addition, the Company reimbursed
            the  Chief  Scientist/Chairman  of the Board  for  $29,900  in other
            expenses covered under the terms of the employment agreement.

      o     The Company must pay a base salary payable in cash as follows:

<TABLE>
<CAPTION>
<S>                                                                   <C>
            o     January 1, 2002 to December 31, 2002                $125,000 per year

            o     January 1, 2003 to December 31, 2003                $175,000 per year

            o     January 1, 2004 to December 31, 2004                $175,000 per year

            o     January 1, 2005 to December 31, 2005                $175,000 per year

            o     January 1, 2006 to December 31, 2006                $283,013 per year
</TABLE>

      In December 2002, the Company  increased its Chief  Scientist/Chairman  of
      the Board's base salary to $175,000 per year plus an expense  allowance of
      $17,200 per year effective November 2002.

      If the agreement is terminated by the Company  without cause,  the Company
      must pay its Chief  Scientist/Chairman  of the Board,  on the  termination
      date, an amount equal to two years of the minimum annual base salary.

      In   July   2003,   the   Board   of   Directors   increased   the   Chief
      Scientist/Chairman of the Board's salary to $208,600 per year.


                                       19
<PAGE>


      Employment Agreements

      In  September  2002,  the Company  entered  into a  three-year  employment
      agreement      with      its      then      President/Chief      Executive
      Officer/Treasurer/Director, who resigned in March 2003. Major terms of the
      agreement are as follows:

      o     The Company had to pay a base salary as follows:

            o     $135,000 per year

            o     $175,000 per year when the Company received new revenue and/or
                  new financing in excess of $2,000,000

            o     $250,000 per year when the Company received new revenue and/or
                  new financing in excess of $4,000,000

      o     The  officer was  entitled  to a bonus  equal to  $250,000  once the
            Company  achieved two  consecutive  quarters of positive  cash flows
            from operations.

      o     The Company granted options to purchase  3,005,038  shares of common
            stock,  which  represents  an amount  equal to 10% of the  Company's
            outstanding  common stock on a fully  diluted  basis as of September
            30, 2002. Of these options,  75% vest 1/12 on a quarterly basis over
            the next 36 months.  The remaining 25% vest on the earlier of a) the
            date  when the  Company's  closing  price of its  common  stock  has
            equaled or exceeded $1.75 for 90  consecutive  calendar days, b) the
            date immediately preceding a sale of the Company for $1.75 per share
            of common stock or more, or c) if the Company's  common stock ceased
            to be  publicly  traded  on the date  following  the  closing  of an
            offering  at a deemed  price per  share of common  stock of $1.75 or
            more.

            The  exercise  price would be fixed six months after  September  25,
            2002 at the  lesser  of a) $1 per  share or b) for any  offering  of
            preferred  or common  stock  that  closes  within  six  months  from
            September 25, 2002, the following  percentage of price per unit: (i)
            for  preferred  with  warrants  - 70%,  (ii) for  preferred  without
            warrants - 80%,  (iii) for  common  with  warrants  - 90%,  (iv) for
            common  without  warrants  - 100%.  The  Company  granted  the stock
            options below the fair market on the date of grant;  therefore,  the
            Company recorded deferred compensation of $3,305,542.

            As of April 30, 2003,  options to purchase  939,073 shares of common
            stock had vested,  and $1,032,981 of the deferred  compensation  was
            expensed.       Since      the       President/Chief       Executive
            Officer/Treasurer/Director  resigned  in March  2003,  the  unvested
            portion of deferred compensation of $2,272,561 was reversed.  During
            the quarter ended July 31, 2003, the vested stock options expired.

      In  February  2002,   Microdevices  entered  into  a  one-year  employment
      agreement with its Vice  President/Corporate  Secretary.  In May 2002, the
      Company assumed the employment agreement. Under the agreement, the Company
      paid a salary of $91,000 per year,  a car  allowance  of $100 per week,  a
      quarterly  bonus of 5,589 shares of the Company's  common stock,  starting
      May 2002, and a  non-qualified  stock option to purchase  89,410 shares of
      common  stock at  $0.157  per  share,  vesting  immediately  and  having a
      five-year  term.  During the year ended April 30, 2003,  11,178  shares of
      common  stock  were  issued,  and  11,178  shares  of  common  stock  were
      committed.  . Each  quarterly  bonus of 5,589  shares of common  stock was
      valued using the  Company's  stock price on the date the bonus was earned.
      The fair value of the quarterly  bonuses  totaled $38,899 and was included
      in general  and  administration  expenses  during the year ended April 30,
      2003. In March 2003, the Vice  President/Corporate  Secretary resigned her
      positions. During the quarter ended July 31, 2003, 11,178 committed shares
      were issued.


                                       20
<PAGE>

      Consulting Agreements

      In April 2003, the Company  entered into a one-year  consulting  agreement
      with an investor  relations  firm.  Under the terms of the agreement,  the
      Company agreed to pay $6,500 per month, plus approved expenses.

      In July 2002, the Company entered into a three-year  consulting agreement,
      whereby the consultant will assist the Company with business  development,
      product and corporate image  advertising,  and access to government grants
      and purchases. The Company will pay the consultant $20,000 per month, plus
      5% of any  gross  revenues  collected  in cash from  government  grants or
      business and other third-party  business that the consultant  produces for
      the Company.  Furthermore,  the consultant was granted options to purchase
      1,000,000  shares  of  common  stock.  Of these  options,  500,000  vested
      immediately,  and the remaining  500,000 vest one year after the Company's
      MiniSenzor product is operational and ready to be shown. The stock options
      have an exercise price of $1 per share and are  exercisable  for six years
      from the date of grant.

      The vested  500,000 stock options were valued at $761,000.  The fair value
      of the  options  were  determined  using  the  Black  Scholes  model.  The
      assumptions used to determine the valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                                     <C>
                        Value of warrants per share                                     $ 0.52
                        Stock price on date of grant                                    $ 2.13
                        Exercise price                                                  $ 1.00
                        Expected life of option                                         2.0 years
                        Risk-free rate of return                                        3.07%
                        Expected annual volatility                                      105%
                        Annual rate of dividends                                        0%
</TABLE>

      As of July 31, 2003, $274,807 has been expensed and is included in general
      and administration  expenses on the accompanying  statement of operations.
      During the quarter ended July 31, 2003,  $63,417 was expensed.  As of July
      31, 2003, the remaining  unamortized balance was $486,200.  The short-term
      portion of the remaining  unamortized  balance is $284,519 and is included
      in other  current  assets and the  long-term  balance is  $232,531  and is
      included in other assets.

      In August 2002, the Company entered into a one-year  consulting  agreement
      with an  investor  and  media  relations  firm.  Under  the  terms  of the
      agreement, the Company will pay $10,000 per month, plus approved expenses.
      In addition,  upon execution of the agreement,  the Company issued options
      to purchase  400,000  shares of common stock,  vesting  immediately  at an
      exercise  price of $2 per share,  exercisable  for two years.  The options
      were valued at $187,163, of which $140,372 was expensed and is included in
      general and  administration  expenses during the year ended April 30, 2003
      and the  remaining  balance of $46,791 was  expensed  in the three  months
      ended July 31, 2003. This agreement was terminated  after six months.  The
      fair value of the options were  determined  using the Black Scholes model.
      The assumptions used to determine the valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                                      <C>
                        Value of warrants per share                                     $ 0.47
                        Stock price on date of grant                                    $ 1.76
                        Exercise price                                                  $ 2.00
                        Expected life of option                                         1.0 years
                        Risk-free rate of return                                        1.75%
                        Expected annual volatility                                      105%
                        Annual rate of dividends                                        0%
</TABLE>


                                       21
<PAGE>


      In November 2002,  the Company  entered into a  month-to-month  consulting
      agreement with a public  relations firm. Under the terms of the agreement,
      the Company agreed to pay $12,500 per month, plus out-of-pocket expenses.

      Lease Agreement

      In September 2002, the Company  entered into a three-year  operating lease
      agreement  with one of its directors for its corporate  offices in Irvine,
      California. The lease provides for monthly rent of $8,000 for the first 18
      months and $8,320 for the remaining term of the lease, expiring in October
      2005.  In July 2003,  the Company  entered into a  five-month  lease for a
      2,400 square feet test site ending  December 31, 2003 with a monthly lease
      rate of  $1,200.  The lease  agreement  is with the same  Director  as the
      office lease.  Future minimum  payments at July 31, 2003 under these lease
      agreements were as follows:


<TABLE>
<CAPTION>
                             Year Ending
                               July 31,
                        ----------------------
<S>                                                                    <C>
                                2004                                   $  103,120
                                2005                                       99,840
                                2006                                        8,320
                                                                      -----------
                                TOTAL                                  $  211,280
                                                                      -----------
</TABLE>

      Rent expense for the quarters ended July 31, 2003 and 2002 was $29,400 and
      $9,400, respectively

      Placement Agent Agreements

      In August 2002, the Company entered into an exclusive  one-year  agreement
      with a  placement  agent  to  arrange  for the  sale  of  debt  or  equity
      securities. Major terms of the agreement are as follows:

      o     Upon  execution of the  agreement,  the Company  issued  warrants to
            purchase  100,000  shares of common stock,  exercisable at $0.01 per
            share. The warrants vest immediately and expire five years from date
            of grant.

      o     The Company paid a placement  fee equal to 8% of any gross  proceeds
            received by the Company.

      o     The  Company  issued  warrants  to  purchase  10% of the  amounts of
            securities  issued to investors.  The exercise price of the warrants
            will be equal to the price at which the  security  was  issued.  The
            warrants  vest  immediately  and expire  five years from the date of
            grant. Upon the closing of the preferred stock private placement and
            closing of the common stock private  placement,  the Company  issued
            warrants to purchase  117,546  and 161,994  shares of common  stock,
            respectively,  at an exercise price of $1.15 per share and $1.35 per
            share, respectively.

      o     In  November  2002,  to cancel  the  remainder  of the terms of this
            agreement, the Company issued warrants to purchase 150,000 shares of
            common stock. The warrants vest immediately,  with an exercise price
            of $2.48 per share, and expire five years from the date of grant.

      In December 2002, the Company entered into an exclusive one-year agreement
      with a  placement  agent  to  arrange  for the  sale  of  debt  or  equity
      securities. Major terms of the agreement are as follows:

      o     Upon execution of the agreement,  the Company paid a retainer fee of
            $25,000 and is obligated to pay an  additional  $25,000.  As of July
            31, 2003,  the  additional  $25,000 was still unpaid and in accounts
            payable.

      o     The  Company  will pay a  placement  fee  equal  to 8% of any  gross
            proceeds received by the Company.

      o     The Company  will issue  warrants to purchase  10% of the amounts of
            securities  issued to investors.  The exercise price of the warrants
            will be equal to the price at which the  security  was  issued.  The
            warrants vest immediately, expire five years from the date of grant,
            and include piggyback registration rights.

      o     The  placement  agent has the  right to  participate  in any  equity
            transaction under the same terms as other investors.  Its investment
            will be limited to 10% of the total capital raised.

      o     The placement  agent will act as a financial  advisor to the Company
            with  respect  to any  potential  business  combinations.  Upon  the
            closing of such business combination, the Company will pay a minimum
            transaction fee of $250,000.

      The Company  terminated  its agreement  with the  placement  agent in July
      2003.


                                       22
<PAGE>

      Litigation

      The company  received a letter  dated  December 5, 2002,  from an attorney
      representing  a  former  consultant,   demanding  payment  for  accounting
      services  allegedly  performed  by the  consultant  pursuant  to a  Letter
      Agreement  dated  November 7, 2001,  between the  consultant  and HiEnergy
      Microdevices,  Inc. The Letter Agreement  provides that the consultant was
      to be paid $350 per hour,  which was to be paid as follows:  (i) one-third
      or $117 in cash;  (ii) one-third or $117 paid by a Promissory  Note at 10%
      annual interest,  maturing when HiEnergy  Technologies receives government
      funding of $900,000 or an investment  totaling $300,000 or more; and (iii)
      one-third or $117 paid by Class A common stock of HiEnergy Microdevices at
      $5.00 per  share.  Mr.  Eckhouse  filed a  lawsuit  against  the  Company,
      Microdevices and the Chairman and CEO of the Company on May 2, 2003 in the
      Superior  Court of the  State of  California,  County of  Orange,  Central
      Justice Center,  and an amended complaint on June 20, 2003,  alleging that
      Microdevices  owes  the  consultant  a  total  of  $313,580  for  services
      rendered,  plus interest,  attorney's  fees and costs.  The company denies
      these allegations and is vigorously defending this lawsuit.

      On November  24,  2003,  Yeffet  Security  Consultants  initiated  binding
      arbitration  proceedings  with the Rhode  Island  office  of the  American
      Arbitration Association claiming that $59,540.91 in expense reimbursements
      and $390,000 in future  consulting  fees for the period from  November 16,
      2003  through  June 30,  2005 are owed by the  Company to Yeffet  Security
      Consultants under a terminated  Consulting  Agreement with Yeffet Security
      Consultants, Inc. We are in the process of studying the matter.

      In  addition,  the  Company  is  also  involved  in  certain  other  legal
      proceedings  and  claims  which  arise in the normal  course of  business.
      Management  does not believe that the outcome of these matters will have a
      material  effect  on  the  Company's  financial  position  or  results  of
      operations.

      SEC Investigation

      After reading news reports that connected our reverse takeover of HiEnergy
      Microdevices  with  known  stock  manipulators,  our  Board  of  Directors
      directed our  President  to hire a team of  independent  investigators  to
      investigate  whether the company or any of its officers and  directors had
      engaged  in any  wrongdoing.  The core team of  independent  investigators
      consisted of two former federal  prosecutors,  a former  Assistant  United
      States  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.   The   independent   investigators   reviewed
      disclosures we have made,  reviewed other publicly available  information,
      and conducted a number of interviews,  including  interviews with a person
      who had previously been involved in stock manipulation  schemes and two of
      our directors who know him. The independent  investigators  have completed
      their  investigation.  Except  as  discussed  in the next  paragraph,  the
      independent investigators have concluded the following:

            1.    The independent investigators have not identified any evidence
                  that our  current  executive  management  team  engaged in any
                  wrongdoing.

            2.    The independent investigators have not identified any evidence
                  of wrongdoing  following the April 2002 reverse acquisition by
                  HiEnergy of HiEnergy Microdevices

            3.    The  independent  investigators  believe there is insufficient
                  evidence to fully  conclude  that there was no  wrongdoing  by
                  HiEnergy prior to the reverse merger.

            4.    Our current  officers  and  directors  responded  promptly and
                  cooperated fully with the investigation.

      As mentioned in item 3, above, the independent investigators believe there
      is insufficient evidence to fully conclude that there was no wrongdoing by
      HiEnergy  prior to the April 2002  reverse  acquisition.  The  independent
      investigators   obtained  evidence  that  some  of  our  stockholders  who
      purchased  significant  amounts of  HiEnergy  shares  prior to the reverse
      acquisition  knew or had business  dealings with Phil Gurian, a person who
      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 a
      director of the Company and for a short time as our interim President, was
      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  whether,  if so, our  former  President  and
      director had any knowledge of such control.

      On or about May 27 , 2003,  a former  director  and officer of the Company
      filed a complaint against the Company for advancement of fees in the State
      Court of Delaware.  The  plaintiff  was seeking the  reimbursement  of his
      legal  fees   associated  with  a  pending  SEC   investigation.   Through
      negotiations,   the  Company  was  successful  in  getting  the  complaint
      dismissed  without  prejudice on or about June 17,  2003.  If and when the
      plaintiff  re-files his lawsuit,  the Company intends to vigorously defend
      itself in this matter.

      Minority Shareholders

      Microdevices  has  20,540  minority  shares  issued and  outstanding.  The
      Company  may agree that in the event of any merger or other  consolidation
      of Microdevices  with HiEnergy,  each remaining  Microdevices  shareholder
      will  receive  the  greater  of the market  value of his/her  Microdevices
      shares or shares in the Company on the same terms as the  voluntary  share
      exchange.  If shares of common  stock in the  Company  were  issuable in a
      merger or other consolidation,  the minority shareholders would receive an
      aggregate of 459,222 shares of common stock.

      Warrant and Option Holders

      During  the  quarters  ended July 31,  2003 and 2002 and the  period  from
      August 21, 1995 (inception) through July 31, 2003 Microdevices  granted to
      non-employees  stock  options  and  warrants  to  purchase 0, 0 and 35,743
      shares,  respectively,  of common stock. The Company  determined using the
      Black-Scholes  option pricing model that the fair value of the options and
      warrants issued to non-employees for services rendered was immaterial.


                                       23
<PAGE>

      During the  quarters  ended July 31,  2003,  and 2002 and the period  from
      August 21, 1995 (inception) through July 31,, 2003 Microdevices granted to
      employees stock options to purchase 0, 0 and 123,909 shares, respectively,
      of common  stock.  The Company  accounted  for these options in accordance
      with  APB  Opinion  No.  25  and  related  interpretations.  As  such,  no
      compensation expense was recorded at the date of grant as the market price
      of the underlying stock exceeded the exercise price.

      As of July 31,  2003  Microdevices  has  stock  options  and  warrants  to
      non-employees  to purchase  16,496  shares of common  stock,  and no stock
      options outstanding to employees.  If the stock option and warrant holders
      exercise their stock options and warrants, the Company may agree, to allow
      these stock option and warrant  holders,  to  voluntarily  exchange  their
      shares in  Microdevices  for shares in  HiEnergy  at an  exchange  rate of
      22.3524 per share,  or a range of $0.22 to $0.32 per share,  resulting  in
      the issuance of 368,725 additional shares of common stock.

      During  the  year  ended  April  30,  2003,   stock   options   issued  to
      non-employees   were  exercised  for  the  purchase  of  2,047  shares  of
      Microdevices'  common  stock via a cash  payment of  $7,164,  or $3.50 per
      share.  Variable  plan  accounting  has not been  applied  to these  stock
      options  as the  difference  was  immaterial.  The  Company  has agreed to
      exchange  these  shares  in  Microdevices  for  shares in  HiEnergy  at an
      exchange rate of 22.3524 per share, or 45,759 shares of common stock.

      In April and May 2002, in conjunction  with the reverse takeover (see Note
      1) of  Microdevices  and HiEnergy,  stock  options  issued to employees to
      purchase  111,040  and 4,000  shares of  Microdevices'  common  stock were
      exchanged by the Company for HiEnergy stock options at an exchange rate of
      22.3524  per share.  Therefore,  the  Company  issued  options to purchase
      2,482,011  and 89,410  shares of its common stock at an exercise  price of
      $0.134 and $0.156 per share,  respectively.  In accordance with EITF Issue
      No. 00-23, "Accounting for Stock Compensation under APB Opinion No. 25 and
      FASB  Interpretation  No. 44" as the  reverse  takeover  of  HiEnergy  and
      Microdevices  was accounted for as a pooling of interest,  no modification
      to the original accounting for these stock options was recorded.

NOTE 12 - SHAREHOLDERS' EQUITY

      Series A Convertible, Redeemable Preferred Stock

      In August  2002,  the Board of  Directors  approved  an  amendment  to the
      Company's  Articles of Incorporation to authorize the Company to issue 345
      shares of Series A convertible,  redeemable  preferred  stock (the "Series
      A"), par value $0.001 per share. Each share of Series A was convertible on
      either of these  events a) any time at the  option of the  holder at $1.15
      per share or b) mandatorily  convertible  two years following the issuance
      date at $1.15 per share. Under certain  circumstances the conversion price
      would  be  subject  to  adjustment.  Furthermore,  upon  a  certain  major
      transaction or triggering  event, the holder of the Series A had the right
      to  require  the  Company  to redeem all or a portion of the Series A at a
      price per share equal to the liquidation preference,  plus any accrued but
      unpaid dividends and liquidated damages.

      The  liquidation  preference  was  $10,000  per share.  The holders of the
      Series A were  entitled to  receive,  when and as declared by the Board of
      Directors,  dividends  at a rate of 8%, or $800 per share in  advance  for
      each of the first two years. The dividends could be paid in cash or common
      stock at the election of the Board of Directors.  The Series A had certain
      class voting rights and general voting rights.

      In October  2002,  the Company  sold 97.93  shares of the Series A for net
      cash proceeds of $800,400.  At the time of issuance,  the conversion price
      of the preferred  stock was $1.15 which is less than the fair market value
      of the common  stock which was $2.05.  Since the Series A was  convertible
      immediately,  the Company  recorded a beneficial  conversion  feature upon
      issuance of  $767,431  using the  intrinsic  value  method.  The number of
      shares  issued upon  conversion of 851,755  multiplied  by the  beneficial
      conversion feature price per share of $0.90 or $767,431.

      In January 2003,  2.11 shares of the Series A were  converted  into 18,336
      shares of the Company's common stock totaling $17,246.


                                       24
<PAGE>


      In May 2003,  all 17 of the remaining  holders of the Series A surrendered
      and exchanged  their shares for 2,191,878  shares of the Company's  common
      stock valued at $0.45 per share.  During the quarter  ended July 31, 2003,
      the Company recorded a preferred stock dividend of $611,396 as a result of
      conversion of the preferred  stock into common stock.  The dividend is the
      result of the price  difference  between the stated  conversion  price per
      share of $1.15 and the  actual  conversion  price  per share of $0.45,  in
      addition to the issuance of 62,562 penalty shares of common stock for late
      registration.  In addition,  the Company  issued  91,526  shares of common
      stock to certain  shareholders who invested in a private placement,  dated
      October 29, 2002,  to  compensate  them for the late  registration  of the
      common stock.

      Stock Incentive Plan

      In May 2003, the Board of Directors approved the establishment of the 2003
      Stock  Incentive  Plan and reserved  2,000,000  shares of  authorized  and
      unissued  shares of common stock for such plan.  As of July 31, 2003,  the
      Board of  Directors  also  approved  the  issuance  of options to purchase
      690,000  shares  of  common  stock to  various  directors,  employees  and
      non-employee  consultants of the Company at various exercise  prices.  The
      plan and the grants are subject to approval by the Company's  shareholders
      at annual meeting scheduled for November 7, 2003.

COMMON STOCK ISSUED FOR CASH AND SERVICES

<TABLE>
<CAPTION>
                                 Three Months ended July 31, 2003    Three Months ended July 31, 2002
                                 --------------------------------    --------------------------------
                                  No. of Shares             $          No. of Shares          $
                                    ---------           ---------        ---------        ---------
<S>                              <C>                    <C>           <C>                 <C>
Common stock issued for cash          600,000           $ 200,000        $      --        $      --

Common stock issued for
  services rendered                   345,000(1)          121,600               --               --

Common stock issued to
  convert preferred stock           2,191,878                  --               --               --

Common stock issued as
  penalty shares                       91,526                  --               --               --

 Common stock issued for
  committed stock                      31,178                  --               --               --

 Common stock issued for
  exercise of warrants                 34,000                 340               --               --

 Common stock issued to
  exchange convertible
  notes payable                            --                  --           37,898           37,896
                                    ---------           ---------        ---------        ---------

                                    3,293,582             321,940           37,898        $  37,896
                                    ---------           ---------        ---------        ---------
</TABLE>


                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                Period from August 21, 1995 to
                                                        July 31, 2003
                                               ---------------------------------
                                               No. of Shares           Amount
                                               -------------         -----------
<S>                                            <C>                   <C>
 Recapitalization upon reverse
   takeover                                       6,470,000          $        14
Common stock issued for cash                      4,484,556            1,536,209
Common stock issued in
   private placement                              3,074,934            3,350,613
Common stock issued for
   services rendered                             12,290,257              571,168
Common stock issued for
   dividends on Series A
   preferred stock                                   68,150               78,340
Common stock issued for
   a bonus to an employee                            11,178               21,350
Common stock issued to
   convert preferred stock                        2,191,878                   --
Common stock issued as
   penalty shares                                    91,526                   --
 Common stock issued for
   committed stock                                   31,178               34,404
 Common stock issued for
   exercise of warrants                              67,909                  340
 Common stock issued to
   exchange convertible
   notes payable                                     37,898               37,896
                                                -----------          -----------
                                                 28,819,464          $ 5,630,320
                                                -----------          -----------
</TABLE>


(1) In May 2003,  the Company  issued 45,000 shares of common stock to its legal
counsel as payment  for  $15,000 of legal  services.  In June 2003,  the Company
issued  300,000  shares of common  stock to its legal  counsel  as  payment  for
$100,000 of legal services.


                                       26
<PAGE>


COMMON STOCK WARRANTS AND OPTIONS ISSUED

<TABLE>
<CAPTION>
                                       Three Months ended July 31, 2003         Three Months ended July 31, 2002
                                  ------------------------------------------    ------------------------------
                                                           Exercise Price                       Exercise Price
                                      Number                   Range              Number            Range
                                      ------                   -----              ------            -----
<S>                               <C>                      <C>                  <C>                <C>
WARRANTS
Warrants issued as
 financing expense                          --                     --               150,000        $   1.50
Warrants issued for services
 rendered                              200,000(2)(3)         $0.45 to $0.50              --              --

STOCK OPTIONS
Employee stock options                 315,000                  $  0.75           2,842,221         $  0.13
Non-employee stock options
 issued to directors                   210,000                  $  0.75                 --
Non-employee stock options
 issued for services rendered          230,000(4)(5)        $ 0.50 to $ 0.75      1,000,000         $  1.00
                                   -----------                                  -----------
                                        955,00                                    3,992,221
                                   -----------                                  -----------
</TABLE>


(2) In May 2003,  the Company  issued  warrants to  purchase  150,000  shares of
common stock to a placement  agent for  placement  services.  The warrants  vest
immediately,  have an exercise price of $0.45 per share, and expire in May 2005.
The Company  recorded $60,518 in the quarter ended July 31, 2003 as compensation
expense.  The fair value of the warrants were determined using the Black Scholes
model. The assumptions used to determine the valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
            Value of warrants per share                                          $0.40
            Stock price on grant date                                            $0.45
            Exercise price                                                       $0.45
            Expected life                                                        2.0 years
            Risk-free rate of return                                             1.44 %
            Expected annual volatility                                           100%
            Annual rate of dividends                                             0%
</TABLE>

(3) In May 2003, the Company issued warrants to purchase 50,000 shares of common
stock  to  a  placement  agent  for  placement   services.   The  warrants  vest
immediately,  have an exercise price of $0.50 per share, and expire in May 2008.
The Company  recorded $15,864 in the quarter ended July 31, 2003 as compensation
expense.  The fair value of the warrants were determined using the Black Scholes
model. The assumptions used to determine the valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
            Value of warrants per share                                          $0.32
            Stock price on grant date                                            $0.36
            Exercise price                                                       $0.50
            Expected life                                                        2.0 years
            Risk-free rate of return                                             1.59 %
            Expected annual volatility                                           100%
            Annual rate of dividends                                             0%
</TABLE>


                                       27
<PAGE>


(4) In July 2003, the Company issued stock options to purchase 200,000 shares of
common stock to two consultants  for business  development  services.  The stock
options  vest over 18 months,  have an  exercise  price of $0.50 per share,  and
expire in July 2009. The Company  recorded $89,761 in the quarter ended July 31,
2003  as  compensation  expense.  The  fair  value  of the  stock  options  were
determined  using the Black Scholes model. The assumptions used to determine the
valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
            Value of option per share                                            $0.45
            Stock price on grant date                                            $0.50
            Exercise price                                                       $0.50
            Expected life                                                        2.0 years
            Risk-free rate of return                                             1.45 %
            Expected annual volatility                                           100%
            Annual rate of dividends                                             0%
</TABLE>

(5) In May 2003, the Company  issued stock options to purchase  30,000 shares of
common stock to a  consultants  for  business  development  services.  The stock
options  vest over 18 months,  have an  exercise  price of $0.75 per share,  and
expire in May 2009. The Company  recorded  $11,348 in the quarter ended July 31,
2003  as  compensation  expense.  The  fair  value  of the  stock  options  were
determined  using the Black Scholes model. The assumptions used to determine the
valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
            Value of options per share                                           $0.38
            Stock price on grant date                                            $0.45
            Exercise price                                                       $0.75
            Expected life                                                        2.0 years
            Risk-free rate of return                                             1.44 %
            Expected annual volatility                                           100%
            Annual rate of dividends                                             0%
</TABLE>

NOTE 13 - FINANCING EXPENSE - RELATED PARTY

      In May 2002,  the Company  issued  warrants to purchase  150,000 shares of
      common stock to a shareholder/former  officer/director of the Company. The
      warrants vest immediately,  are exercisable at $1.50 per share, and expire
      on May 31, 2005.  Since the Company was in default on the note payable for
      $150,000 to this  shareholder/former  officer/director of the Company, the
      Company  granted  these  warrants.   Accordingly,   the  Company  recorded
      financing expense of $223,710 during the three months ended July 31, 2002.
      The fair value of the warrants  were  determined  using the Black  Scholes
      model. The assumptions used to determine the valuation are as follows:

<TABLE>
<CAPTION>
<S>                                                                           <C>
             Value of warrants per share                                      $1.49
             Stock price on grant date                                        $2.09
             Exercise price                                                   $1.50
             Expected life                                                    2.0 years
             Risk-free rate of return                                         3.72 %
             Expected annual volatility                                       105%
             Annual rate of dividends                                         0%
</TABLE>

NOTE 14 - RELATED PARTY TRANSACTIONS

      During the three  months  ended July 31, 2003 and 2002 and the period from
      August 21, 1995  (inception) to July 31, 2003,  the Company  purchased $0,
      $0, and $4,767,  respectively,  of  property  and  equipment  from a Board
      member.

      See  Notes  7,  8,  11,  12,  13  and  15  for  additional  related  party
      transactions.


                                       28
<PAGE>


NOTE 15 - SUBSEQUENT EVENTS

      In July 2003, the Company signed an Exclusive  International  Distribution
      Agreement  for  its  beta-model   CarBomb  FinderTM  with  the  Electronic
      Equipment  Marketing  Company  (EEMCO)  based in Riyadh  and  London.  The
      agreement  covers the following  entities and countries:  Kingdom of Saudi
      Arabia Land Forces, Signal Corps, RSAF, Ministry of Interior and Navy; the
      Middle-East countries of Saudi Arabia,  Kuwait, Qatar, Bahrain, Oman, UAE,
      Iraq, Yemen, Syria,  Jordan, and Lebanon;  and the North African countries
      of Sudan, Libya, Egypt, Morocco, Tunis, Algeria, and Mauritania.  Mr. Harb
      S. Al Zuhair, who is one of HiEnergy's  Directors,  serves as the Chairman
      of the Board of EEMCO.

      During August 2003, the Company sold 1,793,237  shares of its common stock
      and raised $1,116,000, net of commissions. In connection with these sales,
      the Company  also issued  warrants  to  purchase  its common  stock in the
      following  amounts and exercise  prices;  100,000 shares at $0.65,  55,556
      shares at $0.60, 68,116 shares at $0.69, and 243,188 shares at $0.75

      In August  2003,  the  Company  announced  that it has  secured  financial
      backing from an investment bank, for its bid to obtain a contract with the
      U.S. Navy to develop a prototype  SuperSenzor  for detection of biological
      agents in sealed containers. The investment bank has confirmed to the Navy
      that it would provide the necessary funding of a minimum of $2,500,000 and
      a maximum of  $4,000,000,  by  purchasing  common  stock of the Company to
      guarantee  that the  Company  will have  positive  cash flow  through  the
      performance of the 18-month contract.  In exchange for the guarantee,  the
      Company will owe fees to the investment  bank ranging from $50,000 (if the
      contract is not awarded to the Company) to $150,000 (upon the award of the
      contract).  The  Company  had been  approved  for a grant  of  $1,600,000;
      however, the Contracting Office of the Naval Surface Warfare Center denied
      the contract due to the Company's financial condition.

      In August  2003,  the  Company  announced  the  incorporation  of HiEnergy
      Defense,  Inc. an 85% owned  subsidiary  that will focus on developing and
      marketing defense  applications of the Company's  SuperSenzor  technology.
      HiEnergy  Defense,  Inc.  will operate in the  Washington  D.C.  area from
      Arlington,  Virginia. Colonel William J. Lacey, Jr. has been appointed CEO
      of HiEnergy  Defense,  Inc. and the  Honorable  William A. Nitze,  Esq. is
      Chairman of the Board.

      In September  2003,  Bruce Del Mar resigned  from the  Company's  Board of
      Directors for personal reasons.


                                       29
<PAGE>


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

Except for the historical  information  presented in this document,  the matters
discussed in this Form 10-QSB, and specifically in "Management's  Discussion and
Analysis or Plan of Operation," or otherwise incorporated by reference into this
document,  are  "forward  looking  statements"  (as such term is  defined in the
Private  Securities  Litigation  Reform Act of 1995).  These  statements  can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes,"
"expects," "may," "will," "intends,"  "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties.  The safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended,  and Section 27A
of the Securities Act of 1933, as amended,  apply to forward-looking  statements
made by HiEnergy Technologies,  Inc. (the "Company"). You should not place undue
reliance on forward-looking statements. Forward-looking statements involve risks
and uncertainties. The actual results that we achieve may differ materially from
any  forward-looking  statements  due to such  risks  and  uncertainties.  These
forward-looking  statements are based on current expectations,  and we assume no
obligation to update this information. Readers are urged to carefully review and
consider the various disclosures made by us in this report on Form 10-QSB and in
our other reports filed with the Securities and Exchange Commission ("SEC") that
attempt to advise  interested  parties of the risks and factors  that may affect
our business.

The following  discussion  and analysis of our  financial  condition and plan of
operation should be read in conjunction with the unaudited financial  statements
and accompanying notes and the other financial  information  appearing elsewhere
in this report and with the audited financial  statements  contained in our Form
10-KSB for the year ended April 30, 2003.

OVERVIEW

We are a development stage company  commercializing a proprietary technology for
assembling  sensor systems that utilize a neutron  emitter to send  neutrons,  a
gamma-ray  spectrometer  to read  reflected  gamma ray photons  and  proprietary
technology  that  derives an  empirical  molecular  formula  from the  gamma-ray
spectrograph.

Our technology identifies the chemical formula (e.g., CO2; C6H2O6) of a chemical
element  or  compound,  as  does  a  spectroscope.   However,   testing  with  a
spectroscope  requires  handling and burning the chemical.  Our  technology  has
applications in detecting  almost every chemical  element and compound,  such as
plastic explosive, Anthrax and cocaine. Our beta-models can, within a few inches
of physical proximity, but without touching,  sampling or oxidizing, and through
solid  matter,  determine  the  quantitative  chemical  formula  of a  concealed
substance.  Our  prototype  sensors  have  successfully  identified  explosives,
biological weapons and illegal drugs in previous government-supervised trials.

We were  originally  incorporated  under the laws of the State of  Washington on
March 22,  2000,  under the name SLW  Enterprises  Inc.  On April 30,  2002,  we
changed our name to HiEnergy  Technologies,  Inc. following our reverse takeover
with HiEnergy Microdevices,  Inc. in a transaction treated as a recapitalization
of HiEnergy, with Microdevices as the accounting acquirer (reverse takeover). We
reincorporated in Delaware on October 22, 2002. HiEnergy Microdevices,  Inc., is
a Delaware  corporation formed in 1995. Dr. Bogdan Castle Maglich,  our Chairman
of the Board, Chief Executive Officer, President, Treasurer and Chief Scientific
Officer,  founded HiEnergy  Microdevices in 1995 to commercialize the technology
he   developed   to   determine   the   chemical   composition   of   substances
non-intrusively, from a modest distance, even through solid matter and despite a
hermetically sealed container. HiEnergy Defense, Inc., is a Delaware corporation
formed in 2003.

The reverse  takeover of  Microdevices  by SLW occurred on April 25,  2002.  SLW
merged with Microdevices  pursuant to a Voluntary Share Exchange  Agreement that
provided the framework for the exchange of outstanding  common stock of HiEnergy
Microdevices for shares of common stock of SLW.  Pursuant to the voluntary share
exchange,  SLW offered to exchange  22.3524  shares of its common stock for each
outstanding share of HiEnergy Microdevices' common stock. On the closing date of
the offering,  14,380,200  shares of common stock of SLW were issued in exchange
for approximately  92% of HiEnergy  Microdevices'  outstanding  shares of common
stock in a reverse take-over transaction.  As a result of this transaction,  SLW
changed its name to HiEnergy  Technologies,  Inc.,  the former  stockholders  of
HiEnergy Microdevices came to own approximately 65% of the outstanding equity of
the parent  public  company  and the five  directors  of  HiEnergy  Microdevices
comprised  five  of  the  six  directors  of  the  parent  public  company.  The
composition  of  our  board  of  directors  has  subsequently   evolved  due  to
resignations and appointments and currently consists of five directors.


                                       30
<PAGE>

SLW  Enterprises  was a  "public  shell  company"  on the  date  of the  reverse
take-over.  The transaction was accounted for as a re-capitalization of HiEnergy
Microdevices.  The costs of the transaction were approximately $451,000 and were
expensed as a general and administration expense in the periods incurred.

Our common  shares  continue  to trade on the NASD's  Over-the-Counter  Bulletin
Board(R) under the symbol "HIET".

BASIS OF PRESENTATION

For accounting  purposes,  the voluntary share exchange  transaction between SLW
and HiEnergy  Microdevices has been treated as a  recapitalization  of SLW, with
HiEnergy  Microdevices as the accounting  acquirer (reverse  takeover),  and has
been accounted for in a manner similar to a pooling of interests.

We have  prepared our  unaudited  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 below under  Liquidity and Capital  Resources,
there is  substantial  uncertainty  about our  ability  to  continue  as a going
concern.  Our financial  statements do not include adjustments that might result
from the outcome of this uncertainty.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements,  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,
revenues  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.

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 the Company's  employee
stock options equals or exceeds the market price of the underlying  stock on the
date  of  grant,  no  compensation   expense  is  recognized  in  the  Company's
Consolidated Statements of Operations. Where the exercise price of the Company's
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 the
Company's  Consolidated  Statement of Operations.  The application of APB No. 25
requires judgment, including the fair value of underlying stock. During the year
ended April 30, 2002,  Microdevices  granted  123,909 stock options to employees
with exercise  prices of between $3.00 and $5.00. We estimated the fair value of
the underlying stock of Microdevices, a private company, to be $0.97. Changes in
the estimated fair value of the underlying  Microdevices  stock could materially
impact  the  amount  of  stock-based  compensation  expense  recognized  in  the
consolidated  statement of operation,  if the change in the estimated fair value
of the  underlying  Microdevices  stock  resulted  in stock  options  that  were
in-the-money.


                                       31
<PAGE>

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.  In accordance with SFAS
No.  123  Stock  options  and  warrants  issued to  non-employees  for goods and
services  received  can be  valued at the fair  value of the goods and  services
received or the fair value of the equity instruments,  whichever is more readily
determinable. Historically we have found the fair value of the equity instrument
granted has been more  readily  determinable,  and expect this to be true in the
future.

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. Furthermore, if the fair value of the goods and services received
had been more readily determinable than the fair value of the equity instruments
granted then the amount of expense  recognized  in the  statement of  operations
could also be materially different.

Furthermore,  if the Company adopted the recognition  provisions of SFAS No. 123
for stock-based  employee  compensation then the amount of compensation  expense
recognized  in the statement of  operations  could also be materially  different

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 the Company's development contracts with the
Department of Defense have been offset against  research and development  costs,
in accordance with the provisions of that section, in all periods presented.

OPERATING RESULTS

For the three months ended July 31, 2003, we incurred a net loss of  $1,132,000,
as compared to a net loss of $910,000 for the same period in 2002. For the three
months  ended July 31,  2003,  we had  negative  cash flows from  operations  of
$179,000 as compared to negative cash flows from  operations of $553,000 for the
same period in 2002. In addition,  we had an accumulated  deficit of $10,725,000
and were in the  development  stage as of July 31, 2003.  These  factors,  among
others,  raise  substantial  doubt  about our  ability  to  continue  as a going
concern.  Our Consolidated  Financial  Statements do not include any adjustments
that might result from the outcome of this uncertainty.

THREE MONTHS ENDED JULY 31, 2003 COMPARED TO THREE MONTHS ENDED JULY 31, 2002

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

Our  general and  administration  expenses  consist  primarily  of salaries  and
benefits, costs for general corporate functions,  including finance,  accounting
and facilities,  professional services such as legal,  accounting,  investor and
public relations.


                                       32
<PAGE>


Our general and  administration  expenses were  $1,028,000 for the quarter ended
July 31,  2003  versus  $519,000  for the same  period in 2002 or an increase of
$509,000.  A comparison  of the major  components of the increase in general and
administration expenses follows:

<TABLE>
<CAPTION>
                                                  Three Months Ended
                                           July 31, 2003     July 31, 2002       Increase
                                           -------------     -------------       --------
<S>                                            <C>               <C>             <C>
Warrant and stock option compensation          288,000           21,000          267,000
Legal fees                                     248,000          202,000           46,000
Accounting fees                                 55,000           35,000           20,000
Public relations                                45,000           25,000           20,000
Investor relations                              43,000           42,000            1,000
Consultants                                    100,000           46,000           54,000
Facilities                                      25,000            5,000           20,000
Directors liability insurance                   30,000           13,000           17,000
Salaries and benefits                           65,000           42,000           23,000
All other                                      129,000           88,000           41,000
                                             ---------        ---------        ---------
                                Total        1,028,000          519,000          509,000
                                             ---------        ---------        ---------
</TABLE>

Warrant and stock option compensation expense relates to warrant or stock option
grants to non-employee consultants of the Company. Non-employee consultants that
received  warrants or stock options for services include  business  development,
investor  relations and capital  placement  services.  The compensation  expense
recorded for various  option and warrant  grants are amortized  over the life of
the  agreements to which they  pertain.  During the quarter ended July 31, 2003,
the Company expensed $110,000 relating to prior year options grants and $178,000
for options and warrant grants during the current quarter. The services received
were for business development and capital placement.

Legal and accounting  fess increased due to increased SEC filing activity in the
current fiscal quarter compared to the previous fiscal quarter.

Public and investor relations  increased because a new public relations firm was
hired and a new public  relations  initiative  was  launched  during the quarter
ended July 31, 2003.

As detailed in Note -11 Commitment and Contingencies, the Company entered into a
three-year business  development  consulting agreement in July 2002. The monthly
cost is $20,000 per month plus  expenses.  For the quarter  ended July 31, 2003,
the expenses under the agreement were $60,000 compared to $20,000 for the fiscal
year 2002 quarter.

The Company moved into new office space in November 2002. Under the terms of the
three-year  lease  agreement,  the Company  pays  $8,000 per month in rent.  The
Company's prior facilities  contained  substantially less square footage and the
cost was $1,200 per month.

The Company maintains  $2,000,000 of Directors and Officers liability insurance.
The current  policy  which began on May 30,,  2003 was obtained at a much higher
rate that the policy that expired in May 2003.

The Company's  salaries and benefits were higher in the current  fiscal  quarter
because  scheduled  salary and benefit  increases  contained  in the  employment
agreement with the Company's  Chairman and CEO. There were also salary increases
included for other general and administration employees.

RESEARCH AND DEVELOPMENT

Our  research  and  development  expenses  consist  primarily  of  salaries  and
benefits,  facilities,  consulting  services and travel,  offset by grant income
earned.

Our research and  development  expenses  were $98,000 for the quarter ended July
31, 2003 versus $167,000 for the same period in 2002 or a decrease of $69,000. A
comparison of the major  components of the increase in research and  development
expenses follows:


                                       33
<PAGE>

<TABLE>
<CAPTION>
                                                 Three Months Ended            Increase/
                                          July 31, 2003     July 31, 2002     (Decrease)
                                          -------------     -------------     ----------
<S>                                           <C>               <C>             <C>
Salaries and benefits                         135,000           51,000          84,000
Travel                                          1,000           22,000         (21,000)
Consultants                                    18,000           31,000         (13,000)
Depreciation                                   29,000           14,000          15,000
Other                                          19,000           49,000         (30,000)
Grant income earned                          (104,000)              --        (104,000)
                                             --------         --------       ---------
                                Total          98,000          167,000         (69,000)
                                             --------         --------       ---------
</TABLE>


Salaries and benefits  increased in the current fiscal  quarter  compared to the
same  quarter in the prior  fiscal year  because the  Company  added  additional
scientific  personnel to advance to development of it's detection  systems.  The
use of  consultants  decreased  during the same period because the work formerly
done by consultants was done by company personnel.

During the first quarter in fiscal 2002, the Company demonstrated it's detection
system to the  Department  of Defense  on the east coast in the US. The  Company
incurred much higher travel  expenses  during the prior year quarter in order to
ship equipment and personnel to the site for the demonstration.

The Company  added  $482,000 of equipment  during the year ended April 30, 2003.
Most of the  equipment  purchased  was for  research and  development  purposes.
Depreciation  expenses  increased in the current fiscal quarter  compared to the
same  quarter in the prior year due to the  increased  purchases of research and
development equipment.

In August  2002,  our  project  to develop  the  SuperSenzor  was  competitively
selected by the Department of Defense Small Business  Innovation Research (SBIR)
program to receive up to $780,000 in funding over two years for Phase II testing
and development of an anti-tank  landmine detection system. On January 15, 2003,
we executed the contract with the Department of Defense.  We have commenced work
under  year one of the  contract  valued at  $415,000.  The  second  year of the
contract,  valued  at  approximately  $364,000  is  under a  option  that can be
exercised by the  Department  of Defense at the end of the first year.  Prior to
August 2002,  we completed  Phase I of the SBIR contract for $70,000 for testing
out MiniSenzor technology for landmine detection.

Under the terms of the  contract,  we are  required  to submit  monthly  written
reports  detailing our progress under the contract.  We accompany  those written
reports with an invoice for  one-twelfth  of the first-year  contract  amount or
$34,583.  When the written report is accepted by the  Department of Defense,  we
receive payment in about 30 to 45 days after invoice.

We had grant income of $104,000  during the three months ended July 31, 2003 and
no grant income during the same period in 2002.  Our only grant income have been
derived from grants from the Department of Defense for  development  and testing
of our remote detection technology.  We have not commenced selling our products.
Until we complete  development of one of our detector systems,  our grant income
will  most  likely be  limited  to  government  grants.  We  expect to  complete
development  and begin  production of Beta-models of some of our products in the
current fiscal year, which ends on April 30, 2004.


                                       34
<PAGE>


DEPRECIATION

Accumulated  depreciation  for  property  and  equipment  at July  31,  2003 was
$130,000. Depreciation expense for the three months ended July 31, 2003 and 2002
was $30,000 and  $14,000,  respectively.  The increase in  depreciation  expense
reflects additional equipment put into service during the intervening period.

OTHER INCOME AND EXPENSE

Interest expense for the current fiscal quarter was $5,000 compared to $3,000 in
the same period in the prior year.  Interest  expense  increased  in the current
fiscal quarter  because the  convertible  notes payable with the Company's legal
counsel  with an  interest  rate  of 10% was  outstanding.  No  comparable  debt
interest bearing was outstanding during same period of the prior year.

Interest income during the current fiscal quarter was $364 compared to $2,000 in
the same period in the prior year. During the current quarter the Company had an
average  balance of $175,000 in it's cash  investment  account cash  compared to
$725,000 in the same period of the previous year.

FINANCING EXPENSE

In the quarter ended July 31, 2002, the Company recorded a charge of $223,710 as
financing expense because it issued 150,000 warrants exercisable for three years
at $1.00 as  compensation to a former officer and director for late payment of a
$150,000 note payable.  The fair value of the warrants were determined using the
Black  Scholes  model.  The  assumptions  used to determine the valuation are as
follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
            Value of warrants per share                                          $1.49
            Stock price on grant date                                            $2.09
            Exercise price                                                       $1.00
            Expected life                                                        2.0 years
            Risk-free rate of return                                             3.72 %
            Expected annual volatility                                           105%
            Annual rate of dividends                                             0%
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

The  subsection  of Note 3 to the unaudited  Notes to the  Financial  Statements
entitled "Recently Issued Accounting Pronouncements" is incorporated herein.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2003, we had  unrestricted  cash and cash equivalents of $32,000.
We used $180,000 for operating  activities and approximately  $24,000 to acquire
equipment in the quarter  ended July 31, 2003.  Of our  $1,132,000  net loss, we
recorded  approximately $288,000 in non-cash expenses related to the issuance of
common stock and stock based securities as compensation for services. During the
quarter  ended July 31, 2003,  we raised  approximately  $200,000  from sales of
common stock. As of July 31, 2003, we had current  liabilities of  approximately
$978,000  which  exceeded our cash on hand.  The Company has to continue to sell
equity in order to pay for on-going operations and pay its present liabilities.

In  the  period  since  July  31,  2003,  we  have  raised  $1,470,000,  net  of
commissions, through the sale of our common stock.

As of July 31,  2003 the  Company  was in  default  of a note  payable  totaling
$40,000  with a  shareholder  and related  party.  The note payable have been in
default since November  1997.  Also, the Company was in default of a convertible
notes payable as of July 31, 2003 of $10,400 with a former  director and related
party. The convertible note payable was paid in full in August 2003.


                                       35
<PAGE>

In August 2003,  the Company  signed and agreement  with an  investment  bank to
support its bid to obtain a  $1,600,000  grant  contract  with the U.S.  Navy to
develop a prototype  SuperSenzor  for detection of  biological  agents in sealed
containers.  The investment bank has confirmed to the Navy that it would provide
the necessary funding of a minimum of $2,500,000 and a maximum of $4,000,000, by
purchasing  common stock of the Company to guarantee  that the Company will have
sufficient funding through the performance of an 18-month contract.  The Company
estimates  that its  costs  to  execute  the  contract  will be in a range  from
$800,000 to $1,200,000.

In exchange for the guarantee,  the Company will owe fees to the investment bank
ranging from $50,000 (if the contract is not awarded to the Company) to $150,000
(upon the award of the  contract).  The Company had been approved for a grant of
$1,600,000;  however, the Contracting Office of the Naval Surface Warfare Center
denied the contract due to the Company's financial condition.

As of October 31, 2003, we issued unsecured convertible  promissory notes at 10%
interest  totaling  $450,000 to our legal counsel for legal services provided to
the  Company.  The legal  fees were  expensed  as a general  and  administration
expense  in the  periods  incurred.  The  amount of the notes  totaled  $47,000,
$286,000  and  $450,000 at April 30,  2003,  July 31, 2003 and October 31, 2003,
respectively. The notes are due on January 15, 2004 unless converted into common
stock.  Also in June 2003,  the Company issued 300,000 shares of common stock to
its legal counsel to pay $100,000  worth of legal fees. The numbers of shares of
common stock and the price per share issued to our legal counsel was  negotiated
by the parties in order to offset $100,000 of legal services.

In August 2003, the Company  announced the  incorporation  of HiEnergy  Defense,
Inc. an 85% owned subsidiary that will focus on developing and marketing defense
applications of the Company's  SuperSenzor  technology.  HiEnergy Defense,  Inc.
will operate in the Washington D.C. We expect to fund approximately  $300,000 in
operating expenses during the fiscal year 2004.

Below is a summary of our  agreements  showing the  monthly  and annual  minimum
cost:


<TABLE>
<CAPTION>
                                                                         Minimum            Minimum
                                    Beginning          Ending            Monthly             Annual
      Commitments                     Date              Date               Cost               Cost              Status
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>                 <C>                <C>          <C>
Employment agreement
  with Chairman and CEO           January 2002       December 2006       $ 18,800           $ 225,600    In effect
Building lease agreement          September 2002     September 2005      $  8,000           $  96,000    In effect
Test site lease agreement         July2003           December 2003       $  1,200           $   7,200    In effect
Business development services     July 2002          October 2003        $ 20,000           $ 240,000    Terminated in October 2003
Public relations services         November 2002      February 2003       $ 12,500           $ 150,000    Currently month to month
Investor relations services       April 2003         December 2003       $  6,500           $  78,000    Terminated in December 2003
</TABLE>


                                       36
<PAGE>

PLAN OF OPERATION

GENERAL

Our  strategic  goal is to  capture  a third of the  market  for  secondary,  or
confirmation,  detectors. In order to achieve this goal quickly, we are pursuing
partnerships with security equipment manufacturers,  with whom we are interested
in pursuing strategic alliances,  joint ventures,  or partnerships.  The goal of
these  industrial  partnerships  is to  establish  the  Company as an  equipment
supplier to an existing  manufacturer of primary  scanning  systems,  such as an
X-ray  manufacturer.  This would allow the X-ray  manufacturer,  for example, to
supply an  integrated,  improved  product to their  customer,  and allow  faster
access to the market. We would supply an original  equipment  manufacturer (OEM)
version  of its  technology  to the  industrial  partner.  In other  words,  the
industrial  partner  incorporates  in  its  final  unit  an OEM  version  of our
technology. We intend to begin assembling and selling beta models of our systems
in calendar year 2004. We intend to begin with the MiniSenzor.

PRODUCTION AND SALES

The CarBomb Finder is currently  available as a commercial  beta model using the
MiniSenzor.  We hope to begin selling  systems to customers in Europe as soon as
our field tests by the Spanish Aviation Security Agency have been completed.  In
addition,  we have  signed an  agreement  with  Electronic  Equipment  Marketing
Company,  an ISO 9001 certified  electronic company in Saudi Arabia, to sell the
product to companies in the Middle East and Africa.

The Anti-Tank  Landmine  Confirmation  Sensor uses the  SuperSenzor  and will be
available in a beta model in 2004.  We hope to begin  selling beta models to the
U.S.  Army in 2004.  We also hope to enter  into a joint  venture  with  another
company to use our detection  products as part of an integrated system to screen
cargo  containers  at ports of entry.  If we were to enter into an  agreement in
calendar year 2004, a beta model system could be available in late calendar year
2004.

We intend to sell our False Alarm  Eliminator as a false alarm reduction  system
to accompany a primary scanning system such as an X-ray machine. In addition, we
also intend to establish a joint venture with an existing  manufacturer of X-ray
systems for development of an integrated system.

FACILITIES AND PERSONNEL

We intend to assemble these units at our facilities in Irvine,  California.  Our
landlord has indicated the  availability  of an additional  8,000 square feet of
manufacturing space that is adjacent to our offices. We may choose to lease this
space to support  our  growth,  which  would  require  that we  install  testing
facilities,  shielding,  and work  areas.  We will also need to hire  additional
people to  assemble  and test our  products.  We will need to  develop  customer
installation  and training systems to include  additional  personnel and written
manuals about our products.

GOVERNMENT CONTRACTS

We intend to pursue  government  contracts  which are  outlined  in the  section
entitled  "Government  Grants and  Contracts"  under  "Description  of Business"
below. We are presently working on the completion of the first year of the Small
Business  Innovation Research Phase II contract for $415,000 in contract income.
We  anticipate  the U.S.  Army will  exercise its option in January 2004 for the
second  year  for  $364,000  in  contract  income.  We have  applied  for  other
government contracts and expect we will be awarded one or more in 2004 or 2005.

ADDITIONAL CAPITAL REQUIREMENTS

We intend  to sell  common or  preferred  stock in order to fund our  operations
until we become cash flow positive. We have included $10 to $15 million in sales
of equity in our plans.  If we are  unsuccessful in obtaining  government  grant
revenue or our product  sale plans are  delayed,  we will have to  increase  the
amount of equity raised in the public  markets.  During the remaining  period of
our current fiscal year ending April 30, 2004, we intend to spend  approximately
$2.1 million on operating  expenses  and  approximately  $2.4 million on capital
expenditures for equipment needed to continue our development of the technology.


                                       37
<PAGE>


RISKS RELATED TO OUR BUSINESS

WE UNDERSTAND  THERE PRESENTLY IS A FORMAL SEC INQUIRY THAT RELATES TO INVESTORS
IN OUR PREDECESSOR  COMPANY ABOUT THE TIME OF THE REVERSE  TAKEOVER  TRANSACTION
BETWEEN SLW ENTERPRISES INC. AND HIENERGY MICRODEVICES, INC.

We were  first made aware by a  reporter  with the Dow Jones News  Service  that
there may be an alleged  relationship  between an individual by the name of Phil
Gurian,  who had previously  been  convicted and awaits  sentencing for previous
alleged stock  manipulation  schemes,  and a former director and Chief Executive
Officer of each of SLW and HiEnergy  Technologies,  Barry Alter. We initiated an
independent  investigation into whether such relationship existed, and if so, to
determine  further  whether we or any of our  directors  or officers  engaged in
wrongdoing.  The  investigation  concluded  that Mr.  Alter had contact with Mr.
Gurian in connection with the reverse  takeover of HiEnergy  Microdevices by SLW
in April  2002.  Mr.  Gurian was never a record  stockholder  of SLW or HiEnergy
Technologies  or HiEnergy  Microdevices.  However,  we believe  that Mr.  Gurian
introduced other investors to SLW who did own our stock or do own our stock. Our
investigation  revealed that some stockholders who purchased significant amounts
of SLW shares  shortly prior to the reverse  takeover knew or had other business
dealings with Mr. Gurian.  One of these  stockholders  was a company  reportedly
owned by Mr.  Gurian's  mother,  which disposed of its shares in April 2002 at a
substantial profit. We believe that, innocently or intentionally, Mr. Alter knew
of these purchases.  Please see the section entitled "Legal  Proceedings." After
our  independent  investigation  concluded,  the  Dow  Jones  News  Service  has
developed  further its story about various  connections  that allegedly may have
existed  between  these and other  investors  and Mr.  Gurian  himself and other
connections  including  some between a former  market maker and Mr.  Gurian.  We
continue the  development of our  technology and products.  Thus far our efforts
are proceeding  undisturbed and without interruption.  Naturally,  we cooperated
fully with the SEC's every request. We feel that we have fully complied with the
request by the SEC for  information.  For instance,  we have provided over 3,000
pages of documents.  As to the conclusions of the independent committee,  please
see "Legal  Proceedings." We will also rely upon the SEC's investigation to help
us determine whether and what kind of corporate legal action is appropriate.  We
anticipate that the SEC will not swiftly conclude its investigation.

The price of our stock  declined  sharply in connection  with the news story and
our  announcements   concerning  our  independent   investigation  and  the  SEC
investigation.  A loss of value is understandable  based on the incident itself.
For  instance,  if Mr. Alter  committed  any  wrongful act while  serving as our
agent, we could have liability for any resulting damages. Also, our shareholders
could  lose  confidence  in us if they  believe  this  incident  is a result  of
unresolved problems.  There may be material additional costs and expenses,  such
as legal  expenses,  that  could be  involved  in sorting  out these  issues and
assisting the SEC with such work. Much worse yet, this incident could materially
damage  the  public's  perception  of  us,  and  adverse  public  sentiment  can
materially  adversely  affect  the  market  price of our  common  stock  and our
financial  results.  One of the  possible  effects  on us could be a  continuing
depressed stock price,  which may result in difficulty raising equity capital or
the sale of equity at prices that are unfavorable to us. Current  management may
also  consider  instituting  litigation  as a result of any  wrongdoing  that is
found.  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.

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,
2003, 2002 and 2001 to include an explanatory  paragraph  related to our ability
to continue as a going  concern,  stating  that "during the year ended April 30,
2003, the Company  incurred a net loss of  $5,411,265,  and it had negative cash
flows from operations of $2,942,480. In addition, the Company had an accumulated
deficit of  $8,981,620  and was in the  development  stage as of April 30, 2003.
These factors, among others, as discussed in Note 2 to the financial statements,
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern." Analysts and investors generally view reports of independent  auditors
that mention  substantial doubt about a company's ability to continue as a going
concern  unfavorably.  This qualified audit report, and the facts underlying the
qualification,  may make it challenging and difficult for us to raise additional
debt or equity  financing to the extent needed for our  continued  operations or
for  planned  increases,  particularly  if we are unable to attain and  maintain
profitable  operations  in the future.  Consequently,  future  losses may have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.  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 HiEnergy Technologies,  and not
to invest in our common stock unless they can afford the potential loss of their
investment.


                                       38
<PAGE>


IF OUR LOSSES CONTINUE INTO THE FUTURE,  OUR BUSINESS AND OUR STOCKHOLDERS  WILL
BE ADVERSELY  AFFECTED  AND OUR  DEPENDENCE  ON  GOVERNMENTAL  CUSTOMERS,  AS WE
ANTICIPATE, CAN REQUIRE LONGER THAN AVERAGE LEAD TIMES BEFORE SALES ARE MADE.

We have  incurred  net losses  since our  inception.  For the six  months  ended
October 31, 2003,  we reported a net loss  available to common  shareholders  of
approximately  $3,368,429,  as  compared  to a  net  loss  available  to  common
shareholders  of  approximately  $2,759,016 for the six months ended October 31,
2002.  Our  accumulated  deficit  through  October  31,  2003 was  approximately
$12,350,049.  We have  financed  operations  to date  through a  combination  of
government funding and equity financing. As of October 31, 2003, we had received
an aggregate of  approximately  $678,001 in government grant funding as from the
U.S. Department of Defense,  U.S. Energy Department and U.S. Customs Service. We
expect  that our losses will  continue in fiscal year 2004 and further  into the
future.  We cannot assure you that we will attain  profitable  operations in the
future.  In the past,  the cash  available  from  financial  sources  has funded
operations with aggregate  losses of $12,350,049 and has left a small deficit at
October 31, 2003 of $124,499.  It appears that our financial  requirements until
we can become  breakeven  are at least  $15,000,000.  One of the reasons for the
continuation  of such  anticipated  losses is that we are  highly  dependent  on
governmental customers, which typically require long lead times.

ONE OF OUR FORMER DIRECTORS HAS DEMANDED THAT WE ADVANCE HIM EXPENSES OF DEALING
WITH THE SEC'S INVESTIGATION.

Our former  director Barry Alter has engaged his own separate legal counsel with
respect to the SEC investigation regarding SLW Enterprises and is a recipient of
what we  understand  to be an  informal  request  from the SEC as to a desire to
obtain  documents  from him in its  investigation.  Mr. Alter  demanded  that we
advance him in excess of $24,000 in connection  with the informal  investigation
that the SEC has  conducted.  Mr. Alter brought an action against us in Delaware
seeking  payment of his costs and expenses,  and 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. We will, if  financially
able,  vigorously  contest  any such  action by Mr.  Alter and could  also bring
action  against Mr. Alter for  indemnity,  breach of fiduciary  duty,  fraud and
other  relief.  If it  is  determined  that  Mr.  Alter's  claim  satisfies  the
conditions for advancement of expenses incurred in the SEC investigation, we may
be obligated to advance any expenses,  liabilities or losses  incurred by him in
connection with the  investigation  prior to a final  determination  whether Mr.
Alter has satisfied the standard of conduct to justify indemnification. We could
be  subject  to  indemnification  demands by Mr.  Alter  until  there is a final
judgment,   which  could  be  years  away.  See  "Legal  Proceedings"  for  more
information.

FORMER DIRECTOR FAILED TO DISCLOSE OUTSIDE LEGAL PROCEEDINGS.

If certain legal  proceedings  involve a director of ours, and do not involve us
whatsoever,  we  nevertheless  are  required  to  disclose  them in Form  10-KSB
pursuant to Item 401(d) of Regulation S-B. This Item relates specifically to any
involvement  of directors in outside  legal  proceedings,  such as serving as an
executive  officer of any company declaring  bankruptcy or, for instance,  being
subjected to certain kinds of judgments and injunctions.  Gregory F. Gilbert,  a
former  director  of ours,  had not  disclosed  to us,  during the course of our
preparation  of our annual  report on Form  10-KSB for the year ended  April 30,
2002 and subsequent reports up to February 2003, that he was involved in certain
legal proceedings.  Because Mr. Gilbert had not disclosed the information to us,
and we did  not  otherwise  become  aware  of  it,  we  could  not  include  the
information  in any filings with the SEC prior to filing,  on March 11, 2003, an
amendment to our annual report on Form 10-KSB for the year ended April 30, 2002.
The amendment disclosed additional  biographical  information about Mr. Gilbert.
Mr. Gilbert was involved in several legal proceedings that were unknown to us at
the times when we filed  various  reports  with the SEC.  Afterward we were made
aware of a judgment  that  permanently  restrains  and enjoins Mr.  Gilbert from
violating the anti-fraud  provisions of the Securities  Exchange Act of 1934 and
imposes  a  civil  penalty  of  $100,000  on  him.  Specifically,  we  base  our
information on a "Final  Judgment as to Gregory  Gilbert" from the United States
District  Court  for the  District  of  Columbia  dated May 7,  1999,  in SEC v.
Bio-Tech Industries,  Inc., et al., Case No. 98 Civ. 2298; and based on a review
of the  civil  docket  for  this  case,  we do not  believe  this  judgment,  as
reinstated on or about July 20, 1999, has been  reversed,  suspended or vacated.
We also determined, based on an SEC Litigation Release No. 16182 (June 9, 1999),
that a predecessor to Hamilton-Biophile Companies, of which Mr. Gilbert is Chief
Executive Officer,  was affirmatively  required to file its quarterly and annual
reports   under   the   Securities   Exchange   Act   of   1934.   Additionally,
Hamilton-Biophile,  including its predecessors, reported in its filings with the
SEC that it had  filed or had filed  against  it  petitions  for  voluntary  and
involuntary  bankruptcy  during  Mr.  Gilbert's  tenure as its  Chief  Executive
Officer.  We  have  seen  no  official  evidence  of  a  waiver  of  the  filing
requirements during the bankruptcy.


                                       39
<PAGE>

Certain kinds of legal proceedings perhaps may be considered especially relevant
to a  person's  suitability  to  serve  as a  director  of any  public  company.
Shareholders  could  potentially  assert that we acted negligently in failing to
uncover an involvement of a director  personally in such legal  proceedings.  We
did  unwittingly  fail to apprise  ourselves  of the  existence  of these  legal
proceedings,  but we feel we acted with a reasonable amount of caution,  in that
we circulated a standard  questionnaire  to directors and nominees and exercised
due  care.  These  matters  never  came  to  our  attention.   Nonetheless,  our
shareholders could lose confidence in our corporate governance practices if they
believe  this  incident  is a result  of an  unresolved  problem  of  inadequate
screening of potential nominees for the Board of Directors. Much worse yet, this
incident  could  materially  damage the public's  perception  of us, and adverse
public sentiment can materially  adversely affect the market price of our common
stock and our financial results.  Finally,  the purchasers of common stock prior
to our disclosure of the legal  proceedings  could claim that we are responsible
for alleged  monetary  damages  related to a decline in the market  price of our
stock.

PREVIOUS  PURCHASERS OF OUR SECURITIES AND STOCKHOLDERS  COULD ATTEMPT TO ASSERT
CLAIMS AGAINST US FOR INADEQUATE DISCLOSURE.

Facts  related  to  Gregory  Gilbert  and a  separate  investigation  by the SEC
involving  persons  suspected of stock  manipulation,  which are described under
"Former director failed to disclose outside legal  proceedings,"  "We understand
there is  presently  a formal  SEC  inquiry  that  relates to  investors  in our
predecessor  company about the time of the reverse takeover  transaction between
SLW Enterprises Inc. and HiEnergy  Microdevices,  Inc." and "Legal Proceedings,"
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, 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, that could
result in liability  under the Securities  Act or under the Securities  Exchange
Act, or under state  securities laws. State securities 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.  Obviously,  we have  disclosed  these
matters  to the  stockholders  and the  public.  Therefore,  purchasers  in this
offering,  and any other  purchasers of shares of our common stock subsequent to
our making such  disclosure  in  February  2003 would have no basis to bring any
cause of action for our previously  having failed to ascertain and disclose such
facts.  In  April,  June and  October  2002,  we sold  5,204,248  shares  of our
presently   outstanding   common  stock  for  gross  proceeds  of  approximately
$4,455,000  in  private  equity  offerings  and  these  persons  and some  other
stockholders of ours during calendar year 2002 could make such allegations.

WE MAY BE ADVERSELY  AFFECTED BY PRIOR  WEAKNESSES IN OUR INTERNAL  CONTROLS AND
LACK OF SEGREGATION OF DUTIES THAT IS IN THE PROCESS OF IMPROVEMENT.

Notwithstanding  generally  adequate present  internal  controls and procedures,
previously  we had a general  weakness  in our  segregation  of duties and other
internal controls over equity  transactions.  We have now addressed the weakness
in our internal  controls over equity  transactions  and continue to improve our
segregation  of  duties.  These  improvements  will  occur over time as and when
additional personnel are identified, authorized, hired and trained.

WE HAVE A SINGLE INDIVIDUAL  SERVING AS OUR CHAIRMAN,  CHIEF EXECUTIVE  OFFICER,
PRESIDENT AND TREASURER.

The  potential  success  of  our  business  depends  to a  great  extent  on the
capability  and  capacity of Dr.  Bogdan  Maglich,  the Chairman of our Board of
Directors, Chief Executive Officer,  President,  Treasurer, and Chief Scientific
Officer. In such capacities,  Dr. Maglich is not only responsible for monitoring
the research and  development of our technology,  but also actively  involved in
negotiating  transactions  on behalf of the Company and  marketing the Company's
technology through various  presentations to the scientific  community.  We have
not sought key man insurance with respect to Dr. Maglich or any of our executive
officers.  We  also  do not  have  succession  plans.  We do  anticipate  hiring
additional  senior  personnel.  As a result,  our future growth and success will
depend in large part upon our need and ability to attract  additional  qualified
management, scientific and professional personnel. The competition for qualified
personnel in the technological industry is intense, and our inability to attract
and retain  additional  key personnel  could  adversely  affect our business and
financial operations.


                                       40
<PAGE>

WE MUST  PREDICT  THE AMOUNT OF  PHYSICAL  SHIELDING  REQUIRED IN OUR PRODUCT TO
SATISFY PRESENT AND FUTURE NATIONAL, STATE AND LOCAL REGULATIONS.

For the  time  being,  we will try to  maintain  a  strategy  to  segregate  the
deployment of our technology from the general  public.  We anticipate a possible
adverse public reaction to the associated  level of neutron  radiation  exposure
that may  accompany  operation of our  technology.  We  anticipate  the need for
neutron  shielding to make our equipment  satisfactory as a matter of health and
safety in certain  applications,  such as  airports,  to shield  personnel  from
anticipated levels of radiation  exposure.  We have not determined the levels of
shielding  that are  required,  which  may vary  tremendously  depending  on the
applicable regulations of the jurisdiction in which the system is installed.  We
believe that any public objections can ultimately be overcome through education.
Our  Chief  Scientific  Officer,  Dr.  Maglich,  believes  that our  equipment's
anticipated  level of neutron radiation dose will result in 10 times less tissue
damage  than the level of x-ray  radiation  dose  needed to  accomplish  baggage
security  screening.  Fast neutrons,  which are used in our  technology,  do not
produce  the same  radioactive  environment  as thermal  neutrons.  Despite  the
relative  safety of our  technology,  we  propose to use it  initially  only for
screening  procedures that are remote from the general public, such as screening
checked baggage, to avoid this adverse public reaction,  instead of for check-in
procedures,  such  as  carry-on  baggage  screening.  As  public  knowledge  and
awareness increase, we believe that the broader array of uses for our technology
will  become  available.  Concerns  about  safety may  challenge  our ability to
generate  revenues and adversely affect our financial  position,  cash flows and
results of operations.

WE ARE A DEVELOPMENT STAGE COMPANY THAT HAS NOT COMMENCED COMMERCIAL OPERATIONS;
WE ALSO EXPECT TO HAVE  COMPETITION IN OUR FIELD;  WE EXPECT OUR  COMPETITORS TO
HAVE MORE THOROUGHLY DEVELOPED FINANCIAL, SALES AND MARKETING PLANS THAN US; AND
WE MAY NOT BE ABLE TO ACHIEVE POSITIVE CASH FLOWS.

We are a development  stage  company.  As a result,  we have limited  resources.
Also,  our  business  model  is still in an  evolving  stage.  Since we have not
commenced commercial operations, we do not have the benefit of the many years of
experience  that some other  companies  have.  We  anticipate  responding to the
markets that present  themselves  at the time our products are ready to be sold,
and as such,  our business and marketing  approach may change from time to time.
No assurances can be made that the changes in the marketing of our products will
meet with  success.  Our  business  plan might  benefit  from  modification  and
optimization  if  we  had  more  past  experience  executing  our  own  business
strategies.   Our  potential  ability  to  generate  income  is  unproven.   Our
competitors are established  companies with operating  histories and substantial
existing  contracts  and  relationships  with the  potential  customers  for our
products.

COMPETITION  MAY ARISE AND  OVERTAKE US BEFORE WE COMPLETE THE  DEVELOPMENT  AND
TESTING OF OUR  STOICHIOMETRIC  TECHNOLOGY  AND OUR  DETECTION  SYSTEMS  ARE NOT
COMPLETED WITHIN A REASONABLE PERIOD OF TIME.

Our  competitors and potential  competitors  have greater  financial  resources.
Other enterprises are seeking to develop products with similar capabilities.  If
we are  unable to  complete  the  development  of our  technology  and  commence
manufacturing  at  least  one  of our  models  of  detection  systems  within  a
reasonable  period  of  time  and  if  other  stoichiometric   technologies  are
developed, we may miss the opportunity to capitalize on our lead-time to market.
A delay in  development  or testing  of our  prototypes  may result in  foregone
potential  sources  of  investment  or  revenue.   Laboratory  experiments  have
demonstrated  the basic  capability of our  stoichiometric  technology,  and our
technology has been converted into prototype  products.  Our technology must now
be converted  into  additional  saleable  products.  Experiments to increase the
effectiveness  of our technology are ongoing.  The development of products based
on our technology may take longer, cost more or be more difficult than expected.
Our  directed  neutron  device is  complicated,  and we have been  protected  by
skepticism that such an instrument can be  successfully  made into an industrial
product  because  the  concept  upon which our  product is based was  previously
considered  impractical.   However,  as  our  competitors  learn  that  we  have
successfully  demonstrated our product, they may be further encouraged to pursue
similar devices.  Please see the separate section entitled  "Competition"  under
the major heading "Description of Business."


                                       41
<PAGE>

OUR  COMPETITORS MAY HAVE ACCESS TO INFORMATION  RELATING TO OUR TECHNOLOGY,  OR
MAY OBTAIN LICENSES TO OUR TECHNOLOGY FROM THE GOVERNMENT, BECAUSE WE HAVE SMALL
BUSINESS INNOVATION RESEARCH GRANTS.

Also we anticipate that our competitors will have access to information relating
to our  technology  because we have Small  Business  Innovation  Research  grant
contracts.  The  federal  government  does  not  undertake  to  protect  data or
inventions from public  disclosure beyond four years after the term of our Small
Business Innovation  Research grant contract.  The federal government might also
create  competition  by  utilizing  its own right and license to our  technology
developed  under the  Small  Business  Innovation  Research  contract.  The U.S.
federal  government has  royalty-free  rights in the products and data resulting
from our federal  government  Small  Business  Innovation  Research  grants.  We
nevertheless  own the data and title to the  products  resulting  from our Small
Business   Innovation  Research  grants  and  are  permitted  to  obtain  patent
protection.  SBIR grants  previously  obtained by  HiEnergy  Microdevices,  Inc.
expired as early as 1997, and HiEnergy  Microdevices filed for patent protection
of methods and systems related to such SBIR grants  consistent with the terms of
these  grants.  The SBIR grant  obtained  by HiEnergy  Technologies  in 2002 for
anti-tank landmine detection has not expired.

IF WE ARE  UNABLE TO SECURE  ANTICIPATED  FUNDING,  WE MAY BE FORCED TO  CURTAIL
SPENDING FURTHER THAN ANTICIPATED.

We have successfully obtained a total of seven government  development contracts
from the U.S.  Department of Defense,  U.S. Energy  Department and U.S.  Customs
Service to finance our research and development.  We have failed to obtain three
government  contracts for which we had made proposals,  although one of these is
currently  under a second  review  by the U.S.  Navy,  and we have  applied  for
additional  government  grants that are pending a decision.  These grants may de
denied for reasons that include  funding of the program  (presently  at issue in
our Navy proposal), our financial position and abilities (which has twice before
been the basis for declining our  proposals),  or other reasons.  Our government
grants and equity  financings  have been  sufficient to finance our research and
development and operating  activities to date; however, at certain times we have
been compelled to slow research and development to conserve our cash.

There is no  assurance  that  funds  will be  available  from any  source or, if
available,  that they can be obtained on terms acceptable to us. If unavailable,
our operations  could be severely  limited,  and we may not be able to implement
our business plan in a timely manner or at all.

IF WE ARE  UNABLE TO RETAIN  KEY  TECHNICAL  AND  SCIENTIFIC  PERSONNEL,  IT MAY
PREVENT US FROM  IMPLEMENTING  OUR BUSINESS PLAN,  LIMIT OUR  PROFITABILITY  AND
DECREASE THE VALUE OF YOUR STOCK.

We are dependent on the talent and resources of our key managers and  employees.
In  particular,  the success of our  business  depends to a great  extent on the
capability and the capacity of Dr. Bogdan Maglich,  the Chairman of our Board of
Directors,  Chief Executive Officer and Chief Scientific Officer. Dr. Maglich is
the inventor of the  stoichiometric  technology and the three  detection  system
prototypes that we are developing, and his services are critical to our success.
We have not sought key man insurance  with respect to Dr.  Maglich.  The loss of
Dr. Maglich may prevent us from  implementing our business plan, which may limit
our  profitability and decrease the value of your stock. Dr. Maglich is 75 years
of age. We do not have a succession plan or a policy for  succession;  the Board
of Directors of the Company  would meet and name a successor  or  successors  to
offices held now by Dr.  Maglich.  We do  anticipate  hiring  additional  senior
personnel.  As a result, our future growth and success will depend in large part
upon our need and ability to attract additional qualified management, scientific
and  professional  personnel.  The  competition  for qualified  personnel in the
technological  industry  is  intense,  and our  ability  to  attract  and retain
additional  key  personnel  could  adversely  affect our business and  financial
operation.

WE MAY HAVE INCREASING  DIFFICULTY IN ATTRACTING AND INTERESTING 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 to lawsuits and shareholder
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 becoming increasingly concerned with the availability of directors
and officers' liability insurance to pay on a timely basis the costs incurred in
defending  shareholder  claims.  Directors and officers liability  insurance has
recently become much more expensive and difficult to obtain than it had been. If
we are unable to obtain directors and officers liability insurance at affordable
rates, it may become increasingly more difficult to attract and retain qualified
outside  directors  to serve on our Board.  The fees of  directors  will rise in
response to increased exposure to such risks.


                                       42
<PAGE>

BECAUSE WE BELIEVE THAT  PROPRIETARY  RIGHTS ARE ONE OF THE MATERIAL  FACTORS TO
OUR   SUCCESS,    THEIR   VARIOUS   LIMITATIONS,    POTENTIAL   FOR   AVOIDANCE,
MISAPPROPRIATION  OF THOSE  RIGHTS OR CLAIMS OF  INFRINGEMENT  OR LEGAL  ACTIONS
RELATED TO  INTELLECTUAL  PROPERTY OR MATERIAL  LIMITATIONS  OF OUR RIGHTS COULD
ADVERSELY IMPACT OUR FINANCIAL CONDITION,  EXCEPT TO THE EXTENT WE OTHERWISE CAN
PROTECT OUR INTERESTS.

We do not solely rely on contractual rights, patents,  copyrights or other legal
protection of intellectual  property for any aspect of our  technology.  Because
the combination of contractual  rights,  patents and copyrights may only provide
narrow  protection of our  proprietary  rights,  we also rely on the  protection
afforded by our trade secrets,  rapid  innovation and  advancement of technology
and scientific  expertise.  However, we believe that our products in development
could benefit from patent  protection.  As a result,  we have six pending patent
applications:  two pending with the United States  Patent and Trademark  Office;
one  pending  under the Patent  Cooperation  Treaty;  and one pending in each of
Canada,  Japan,  and Europe,  only.  Although we rely to a great extent on trade
secret  protection  for much of our technology and plan to rely in the future on
patents to protect a portion of our  technology,  we cannot  assure you that our
means  of  protecting  our  proprietary  rights  will be  adequate  or that  our
competitors will not independently  develop comparable or superior  technologies
or obtain unauthorized access to our proprietary technology and utilize it where
we have no patents.  The failure or  inability  to protect  these  rights and to
fully  exploit  these  rights  could  have  a  material  adverse  effect  on our
operations   due  to  increased   competition  or  the  expense  of  prosecuting
infringements  of our  intellectual  property.  Any  litigation  could result in
substantial  costs and  diversion  of  management  and other  resources  with no
assurance  of  success  and could  seriously  harm our  business  and  operating
results. Investors could lose their entire investment.

We  may  receive   infringement  claims  from  third  parties  relating  to  our
anticipated  products under development and related  technologies.  We intend to
investigate the validity of any infringement  claims that may be made against us
and, if we believe the claims have merit, to respond through  licensing or other
appropriate  actions.  To the extent  claims  relate to  technology  included in
components  purchased  from  third  party  vendors  for  incorporation  into the
products we are  developing,  we would forward  those claims to the  appropriate
vendor. If we or our component manufacturers were unable to license or otherwise
provide  any  necessary  technology  on a  cost-effective  basis,  we  could  be
prohibited from marketing products containing that technology, incur substantial
costs  in  redesigning   products   incorporating  that  technology,   or  incur
substantial costs in defending any legal action taken against us.

IF WE FAIL TO MANAGE  EFFECTIVELY,  IT COULD  IMPAIR  OUR  HOPEFULLY  SUCCESSFUL
PROSPECTS IN BUSINESS OR OF A FINANCIAL NATURE.

Our strategy  envisions a period of increasing  operations that may put a strain
on our  administrative  and operational  resources.  To effectively  manage this
process  will  require  us  to  continue  to  expand  the  capabilities  of  our
operational  and  management  systems and to attract,  train,  manage and retain
qualified management, engineers,  technicians,  salespeople and other personnel.
We  cannot  assure  you that we will be able to do so. If we do not  succeed  in
this, our business,  prospects,  financial condition,  results of operations and
cash flows could be adversely affected.

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  OUR
BUSINESS PLAN.

The  terrorist  attacks in the United  States and other  countries  have brought
devastation to many people,  shaken consumer  confidence and disrupted  commerce
throughout the world.  The  continuing  threat of terrorism in the United States
and other countries 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 amount of capital due to economic conditions,  we will not
be able to  finalize  development  of our  detection  systems  under  government
contracts and to bring them to military, civil or commercial markets as planned.


                                       43
<PAGE>


INTERRUPTIONS,   DELAYS  OR  COST  INCREASES  AFFECTING  OUR  MATERIALS,  PARTS,
EQUIPMENT OR SUPPLIERS MAY ADVERSELY AFFECT OUR OPERATIONS,  AND RELIANCE UPON A
SINGLE SUPPLIER FOR PARTICLE ACCELERATORS INCREASES THIS RISK.

Our operations depend upon obtaining  adequate supplies of materials,  parts and
equipment,  including  particle  accelerators,  on a  timely  basis  from  third
parties.  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.

Particle  accelerators  are  a  central  component  of  our  sensors.   Particle
accelerators  are  scientific  instrument  that  increase the kinetic  energy of
charged particles.  There are many suppliers of the particle accelerator used in
our MiniSenzor.  There are only three suppliers of the particle accelerator used
in our SuperSenzor,  and we are currently using only one supplier. This supplier
has limited production capacity,  also supplies one of our competitors,  and has
delayed delivery of components on three occasions.  The supplier re-designed the
unit we are  using  per our  request,  and this has led to  delays  recently  in
delivery.   While  we  believe  that  alternate   suppliers  for  this  particle
accelerator are available,  further  interruption  could  materially  impair our
operations.

PARTICLE  ACCELERATORS ARE SUBJECT TO REGULATION BY THE U.S. NUCLEAR  REGULATORY
COMMISSION  AND OTHER  FEDERAL AND STATE  AGENCIES,  AND THE BURDEN OF COMPLYING
WITH  THESE  REGULATIONS  MAY IMPAIR OUR  ABILITY  TO TEST AND  DEMONSTRATE  OUR
PRODUCTS.

The  detector  systems   incorporated   within  our  products  utilize  particle
accelerator  equipment.  Particle  accelerators  are scientific  instrument that
increase the kinetic energy of charged particles. Various governmental agencies,
such  as  the  U.S.  Nuclear  Regulatory  Commission,  the  U.S.  Department  of
Transportation  and  state  health  departments,  regulate  the  sale and use of
particle  accelerator  equipment.  There  are  also  federal,  state  and  local
regulations  covering the  occupational  safety and health of our employees.  We
believe that we are in compliance with all applicable governmental requirements.

The primary aspect of the equipment or protocol  associated with our products or
activities that require licensing is the use of particle  accelerator  radiation
sources.  Use of the systems in-house or at a customer facility or demonstration
location  requires the operating  party to obtain a license from the appropriate
state  agency  or  federal  agency,   including  the  U.S.  Nuclear   Regulatory
Commission,  regulating the use of radiation producing systems.  These licensing
requirements  and other regulatory  burdens  associated with the use of particle
accelerator  radiation  sources  makes  the  testing  and  demonstration  of our
products  substantially  more  difficult,  and may  from  time to time  delay or
prevent the testing or demonstration of our products.

WE ARE  INEXPERIENCED  IN DOING BUSINESS IN THE MIDDLE EAST,  EUROPEAN UNION AND
OTHER POTENTIAL  MARKETS FOR OUR PRODUCTS,  AND OUR PLANS MAY RELY ON LEVERAGING
THE SKILLS OF STRATEGIC PARTNERS.

Our management is  inexperienced  in doing business in many overseas  markets in
which we plan to sell our products. We may experience unexpected difficulties in
our  overseas  marketing  and sales  efforts,  and such  efforts may depend upon
leveraging the skills of strategic partners with experience in these markets. We
have entered  into an Exclusive  International  Distribution  Agreement  for our
beta-model CarBomb Finder with the Electronic Equipment Marketing Company, based
in London and Riyadh, for our marketing and sales efforts in the Middle East and
certain European Union nations. Presently, we have not pursued any relationships
with other strategic partners.


                                       44
<PAGE>


LARGE  LONG-TERM  PROJECTS ARE OFTEN UP FOR BIDDING AND WE MAY BE HAMPERED  FROM
PARTICIPATING IN THOSE PROJECTS IF OUR OWN FINANCIAL POSITION PROVES INADEQUATE.

Bidding for large long-term  government or private sector  production  contracts
may require a demonstration of adequate  financial  position for the term of the
contract, and we may be unable to satisfy such requirements without successfully
obtaining substantial  additional financing.  Our plan of operation for the next
twelve  months  calls for  additional  financing  in order to satisfy  stringent
requirements that would apply in obtaining a long-term full production contract.

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 prevented 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  where we expect 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.


                                       45
<PAGE>


ITEM 3. CONTROLS AND PROCEDURES

(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief  Executive  Officer and  Treasurer,  Dr. Bogdan C.  Maglich,  with the
assistance of other management  personnel,  have evaluated the  effectiveness of
the design and operation of our  disclosure  controls and procedures (as defined
in Rules  13a-15(e)and  15d-15(e) under the Securities  Exchange Act of 1934, as
amended  (the  "Exchange  Act"))  as of the end of the  period  covered  by this
report. Based on such evaluation,  he has concluded that our disclosure controls
and  procedures  are effective to ensure that he is alerted on a timely basis to
material   information   relating  to  HiEnergy   Technologies   (including  its
consolidated  subsidiaries)  required to be  included  in our  reports  filed or
submitted  under  the  Exchange  Act and  that  such  information  is  recorded,
processed and reported as and when required.

(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the period covered by this report, there have been no significant changes
in our internal control over financial reporting that have materially  affected,
or are  reasonably  likely to  materially  affect,  our  internal  control  over
financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We  received a letter  dated  December 5, 2002,  from an  attorney  representing
Richard T. Eckhouse,  a consultant,  demanding  payment for accounting  services
allegedly  performed  by Mr.  Eckhouse  pursuant  to a  Letter  Agreement  dated
November 7, 2001,  between Mr.  Eckhouse  and  HiEnergy  Microdevices,  Inc. The
Letter Agreement  provides that Mr. Eckhouse was to be paid $350 per hour, which
was to be paid as follows: (i) one-third or $117 in cash; (ii) one-third or $117
paid by a  Promissory  Note  at 10%  annual  interest,  maturing  when  HiEnergy
Technologies  receives  government funding of $900,000 or an investment totaling
$300,000 or more; and (iii)  one-third or $117 paid by Class A (common stock) of
HiEnergy  Microdevices at $5.00 per share.  Mr. Eckhouse filed a lawsuit against
the Company,  Microdevices and Dr. Bogdan Maglich on May 2, 2003 in the Superior
Court of the State of California,  County of Orange, Central Justice Center, and
an amended  complaint  on June 20, 2003,  alleging  that  Microdevices  owes Mr.
Eckhouse a total of $313,580 for services  rendered,  plus interest,  attorney's
fees and costs.  The Company and Dr.  Maglich were  successful on their demurrer
and motion to strike. As such, Dr. Maglich  individually is no longer a party to
this  action.  The  Company  will be filing a  cross-complaint  against  Richard
Eckhouse and  discovery.  Trial is set for May 3, 2004.  The Company  intends to
vigorously  defend  itself in this  matter.  We deny these  allegations  and are
vigorously defending this lawsuit.


                                       46
<PAGE>

After  reading  news  reports that  connected  our reverse  takeover of HiEnergy
Microdevices with known stock manipulators,  our Board of Directors directed our
President to hire a team of independent investigators to investigate whether the
company or any of its officers and directors had engaged in any wrongdoing.  The
core  team  of  independent   investigators  consisted  of  two  former  federal
prosecutors, a former Assistant United States 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. The independent investigators reviewed
disclosures we have made,  reviewed other publicly  available  information,  and
conducted a number of  interviews,  including  interviews  with a person who had
previously been involved in stock manipulation  schemes and two of our directors
who know him. The independent  investigators have completed their investigation.
Except as discussed in the next paragraph,  the independent  investigators  have
concluded the following:

      1.    The independent  investigators have not identified any evidence that
            our current executive management team engaged in any wrongdoing.

      2.    The  independent  investigators  have not identified any evidence of
            wrongdoing  following the April 2002 reverse takeover by HiEnergy of
            HiEnergy Microdevices

      3.    The independent investigators believe there is insufficient evidence
            to fully  conclude that there was no wrongdoing by HiEnergy prior to
            the reverse takeover.

      4.    Our current officers and directors responded promptly and cooperated
            fully with the investigation.

As mentioned in item 3, above,  the independent  investigators  believe there is
insufficient evidence to fully conclude that there was no wrongdoing by HiEnergy
prior to the April 2002 reverse takeover. 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 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 a director of the Company and for a short time as our interim President,  was
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 whether,  if so, our former  President and director had any
knowledge of such control.

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  he
allegedly incurred in response to an SEC investigation that was exactly the same
investigation  that the Company answered,  but Mr. Alter obtained separate legal
counsel to represent him in connection with the  investigation.  That action was
identified as Civil Action No. 20320NC.  On June 17, 2003, Mr. Alter voluntarily
dismissed his action without prejudice.

On November 24, 2003, Yeffet Security Consultants  initiated binding arbitration
proceedings with the Rhode Island office of the American Arbitration Association
claiming  that  $59,540.91  in expense  reimbursements  and  $390,000  in future
consulting  fees for the period from November 16, 2003 through June 30, 2005 are
owed by the Company to Yeffet Security Consultants under a terminated Consulting
Agreement  with  Yeffet  Security  Consultants,  Inc.  We are in the  process of
studying the matter.

From time to time, we may be subject to other routine  litigation  incidental to
the ordinary course of business.


                                       47
<PAGE>


ITEM 2. CHANGES IN SECURITIES

LIST OF SALES OF UNREGISTERED  SECURITIES  DURING THE  THREE-MONTH  PERIOD ENDED
JULY 31, 2003

      o     In May 2003, we issued  warrants to purchase 50,000 shares of common
            stock, with an exercise price of $0.50 and a term of three years, to
            Dunwoody Brokerage Services as compensation for placement  services,
            and in May 2003,  we issued  warrants to purchase  an  aggregate  of
            150,000 shares of common stock,  with an exercise price of $0.45 and
            a term of two years,  to H.C.  Wainwright & Co., Inc. and assigns as
            compensation  for  placement  services.  We believe the  issuance of
            securities  was exempt under Rule 506 of Regulation D and/or Section
            4(2) under the Securities Act.

      o     In May 2003,  we issued  2,191,878  shares  of common  stock,  which
            includes  62,562 shares of common stock issued as penalty shares for
            late   registration   of  common  stock,  to  holders  of  Series  A
            convertible,   redeemable   preferred   stock  who  surrendered  and
            exchanged  their shares of Series A for common stock of the Company.
            We believe  the  issuance of  securities  was exempt  under  Section
            3(a)(9) of the Securities Act.

      o     In May 2003,  we issued  91,526  shares of common  stock to  certain
            stockholders who invested in a private placement,  dated October 29,
            2002, to  compensate  them for the late  registration  of the common
            stock.   We  believe  the  issuance  of  securities  was  exempt  as
            constituting a dividend rather than a sale.

      o     In May 2003,  we issued 34,000 shares of common stock to an investor
            who exercised  warrants to purchase our common stock. We believe the
            issuance of  securities  was exempt  under Rule 506 of  Regulation D
            and/or Section 4(2) under the Securities Act.

      o     In June 2003,  we issued  11,178  shares of common stock to a former
            employee  as payment of a bonus in  accordance  with her  employment
            contract with the Company. We believe the issuance of securities was
            exempt under Section 4(2) under the Securities Act.

      o     In May,  June,  and July  2003,  we issued  options to  purchase  an
            aggregate  of  690,000  shares of common  stock,  490,000  shares of
            common  stock to  employees  and other  service  providers,  with an
            exercise price of $0.75 and a term of six years;  and 200,000 shares
            of common stock to other service  providers,  with an exercise price
            of  $0.50  and a  term  of  six  years,  pursuant  to  the  HiEnergy
            Technologies  2003 Stock  Incentive Plan. We believe the issuance of
            securities was exempt under Section 4(2) under the Securities Act.

ITEM 5. OTHER INFORMATION

In September 2003, Mr. Bruce Del Mar resigned from the Board of Directors of the
Company .


                                       48
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)         EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
--------------------------------------------------------------------------------
<S>            <C>

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

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

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

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

10.51(10)      Jeffrey Herman Stock Purchase Agreement dated June 23, 2003

10.52(10)      Form of Stock Purchase  Agreement  dated August 2003 between  HiEnergy  Technologies,  Inc. and
               purchase of common stock and warrants

10.53(10)      Form of Warrant  Certificate  dated August 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

31.1           Certification of Chief Executive Officer and Treasurer pursuant to Securities Exchange Act Rule
               13a-14(a)/15d-14(a)

32.1           Certification of Chief Executive Officer and Treasurer  pursuant to 18 U.S.C.  Section 1350, as
               adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>


* Indicates a management compensatory plan or arrangement.

(10)  Filed  on  September  3,  2003 as an  exhibit  to  HiEnergy  Technologies'
post-effective  amendment no. 1 to its registration statement on Form SB-2 (File
No. 333-101055), and incorporated herein by reference.


                                       49
<PAGE>


      (b) REPORTS ON FORM 8-K

On June 20, 2003, we filed a report on Form 8-K dated June 20, 2003.  The report
disclosed  under Item 9 that we had engaged a German-based  business & financial
consultant,  that we had engaged a German investor  relations firm, and that our
stock was listed on the Berlin Stock Exchange.

On June 11, 2003, we filed a report on Form 8-K dated June 10, 2003.  The report
disclosed  under Item 5 that the Company's  $200,000  contract with the Navy had
not been granted on financial grounds,  that the Company's device scored 100% in
tests of explosive  detection through steel, and that the Company was initiating
a "carbomb finder" counter-terrorism product.

On May 19, 2003,  we filed a report on Form 8-K dated May 16,  2003.  The report
disclosed  under Item 5 the results of our exchange  offer to the holders of our
Series A Preferred Stock.

On May 12,  2003,  we filed a report on Form 8-K dated May 9,  2003.  The report
disclosed  under Item 5 that we had  initiated an exchange  offer on May 9, 2003
for the purpose of retiring our Series A Preferred Stock.



                                       50
<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:    January 2, 2004                By: /s/ B. C. Maglich
      -----------------------              ---------------------------------
                                           Name:  Bogdan C. Maglich
                                           Title: Chief Executive Officer and
                                                  President



                                       51
<PAGE>


EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
-----------------------------------------------------------------------------------------------------------------
<S>            <C>
3.3(10)        Certificate of Elimination of Series A Convertible Preferred Stock

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

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

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

10.51(10)      Jeffrey Herman Stock Purchase Agreement dated June 23, 2003

10.52(10)      Form of Stock Purchase  Agreement  dated August 2003 between  HiEnergy  Technologies,  Inc. and
               purchase of common stock and warrants

                      The  following  purchasers  have  executed  this  form  of agreement:

             Purchasers                                        Agreement      # Shares              Total Purchase Price
                                                                    Date
             Nicholas Yocca                                     8/5/2003        66,667                        $30,000
             Mark Yocca                                         8/5/2003        66,667                        $30,000
             Paul Kim                                           8/5/2003        44,444                        $20,000
             Central Answering Service, Inc.                    8/5/2003        44,444                        $20,000
             BullBear Capital Partners LLC                      8/8/2003       400,000                       $208,000
             BullBear Capital Partners LLC                     8/25/2003       200,000                       $138,000
             Richard Melnick                                   8/25/2003        72,464                     $50,000.16
             Platinum Partners Value Arbitrage Fund LP         8/28/2003       333,333                       $250,000
             Platinum Partners Value Arbitrage Fund LP         8/29/2003       333,333                       $250,000
             Richard Melnick                                   8/28/2003       144,928                       $100,000
             Nicholas J. Yocca                                 8/28/2003        43,478                        $30,000
             Danny M. Beadle                                   8/28/2003        14,493                        $10,000
             Patrick Bevilacqua                                8/28/2003        28,986                        $20,000
             SBI-USA LLC                                       9/17/2003        76,923                       $100,000

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

                      The following warrants have been issued in this form:

              Holder                                              Issue Date       # Shares   Price        Termination
              BullBear Capital Partners LLC                         8/8/2003        100,000    $0.65       3 1/2 years
              Nicholas Yocca                                       8/14/2003         16,667    $0.60       3 1/2 years
              Mark Yocca                                           8/14/2003         16,667    $0.60       3 1/2 years
              Paul Kim                                             8/14/2003         11,111    $0.60       3 1/2 years
              Central Answering Service, Inc.                      8/14/2003         11,111    $0.60       3 1/2 years
              BullBear Capital Partners LLC                        8/25/2003         50,000    $0.69       3 1/2 years
              Richard Melnick                                      8/25/2003         18,116    $0.69       3 1/2 years
              Platinum Partners Value Arbitrage Fund LP            8/28/2003        110,000    $0.75       3 1/2 years
              Platinum Partners Value Arbitrage Fund LP            8/29/2003        110,000    $0.75       3 1/2 years
              Richard Melnick                                      8/28/2003         47,826    $0.75       3 1/2 years
              Nicholas J. Yocca                                    8/28/2003         14,348    $0.75       3 1/2 years
              Danny M. Beadle                                      8/28/2003          4,783    $0.75       3 1/2 years
              Patrick Bevilacqua                                   8/28/2003          9,565    $0.75       3 1/2 years
              SBI-USA LLC                                          9/17/2003         25,641    $1.30       3 1/2 years

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

31.1           Certification of Chief Executive Officer and Treasurer pursuant to Securities Exchange Act Rule
               13a-14(a)/15d-14(a)

32.1           Certification of Chief Executive Officer and Treasurer  pursuant to 18 U.S.C.  Section 1350, as
               adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

</TABLE>
* Indicates a management compensatory plan or arrangement.

(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.

                                       52