================================================================================

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

                                   -----------
                                   FORM 10-QSB
                                   -----------

|X|   QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE

                                  ACT OF 1934

                 For the quarterly period ended October 31, 2005

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE

                                   ACT OF 1934

             For the transition period from__________ to __________

                        Commission file number: 0 - 32093


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

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

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

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


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 15, 2005, the issuer
had 52,237,258 shares of Common Stock, par value $0.001 per share, issued and
outstanding.

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

================================================================================

<PAGE>

                           HIENERGY TECHNOLOGIES, INC.

                                    INDEX TO

                         QUARTERLY REPORT ON FORM 10-QSB

                      FOR THE PERIOD ENDED OCTOBER 31, 2005

                         PART I - FINANCIAL INFORMATION

                                                                            PAGE

PART I - FINANCIAL INFORMATION

Item 1  Financial Statements

        Consolidated Balance Sheets as of April 30, 2005 and
        October 31, 2005 (unaudited)                                           5

        Consolidated Statements of Operations for the Six Months
        Ended October 31, 2005 and 2004 (unaudited) and for the
        Period from August 21, 1995 (Inception) to October 31,
        2005 (unaudited)                                                       6

        Consolidated Statements of Shareholders' Equity
        (deficit) for the Period from August 21, 1995
        (Inception) to October 31, 2005 (unaudited)

        Consolidated Statements of Cash Flows for the Six Months
        Ended October 31, 2005 and 2004 (unaudited) and for the
        Period from August 21, 1995 (Inception) to October 31,
        2005 (unaudited)                                                       7

        Notes to the Consolidated Financial Statements
        (unaudited)                                                            9

Item 2  Management's Discussion and Analysis and Plan of Operation            38

Item 3  Controls and Procedures                                               73

PART II - OTHER INFORMATION

Item 1  Legal Proceedings                                                     74

Item 2  Changes in Securities                                                 76

Item 3  Default Upon Senior Securities

Item 4  Submission of Matters to a Vote to Security Holders

Item 5  Other Information

Item 6  Exhibits and Reports on Form 8-K                                      80

SIGNATURES                                                                    88


<PAGE>

<TABLE>
<CAPTION>

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

                                                                              October 31,       April 30,
                                                                                  2005            2005
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
CURRENT ASSETS
      Cash and cash equivalents                                               $         --    $     18,452
      Accounts receivable                                                           33,597         275,957
      Inventory, net                                                               943,891         808,650
      Other current assets                                                         396,994         381,829
                                                                              ------------    ------------
           Total current assets                                                  1,374,482       1,484,888
                                                                              ------------    ------------
PROPERTY AND EQUIPMENT, net                                                      1,080,714         542,080
                                                                              ------------    ------------
TOTAL ASSETS                                                                  $  2,455,196    $  2,026,968
                                                                              ============    ============

CURRENT LIABILITIES
      Bank overdraft                                                          $      3,793    $         --
      Accounts payable                                                           2,139,885       1,287,543
      Accrued expenses                                                             128,019          74,205
      Accrued payroll and payroll taxes                                            489,682         436,865
      Accrued interest                                                             156,328         166,591
      Capital lease obligations                                                     10,061           2,039
      Notes payable                                                                  7,125          37,125
      Notes payable - related parties                                               85,000          99,000
      Convertible notes payable                                                    498,530              --
      Convertible notes payable - related parties                                  448,722         673,083
      Convertible notes payable subject to rescission rights                            --         532,800
      Common stock subject to rescission rights,  68,546 and 312,012 shares         50,000         199,560
      Other current liabilities                                                    508,851         200,000
                                                                              ------------    ------------
           Total current liabilities                                             4,525,996       3,708,811

LONG-TERM CAPITAL LEASE OBLIGATIONS                                                 10,971           3,556

           Total liabilities                                                     4,536,967       3,712,367
                                                                              ------------    ------------
SHAREHOLDERS' DEFICIT
      Preferred stock,  $0.001 par value  20,000,000 shares
       authorized no shares outstanding                                       $         --    $         --
      Common stock.  $0.001 par value  100,000,000 shares
        authorized 51,705,999 and 45,817,315 shares issued and outstanding          51,706          45,817
      Additional paid-in capital                                                32,951,818      29,521,570
      Committed common stock,  1,460,612 and 1,378,604 shares, respectively        927,534         547,375
      Deficit accumulated during the development stage                         (36,012,829)    (31,800,161)
                                                                              ------------    ------------
           Total shareholders' deficit                                          (2,081,771)     (1,685,399)
                                                                              ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                   $  2,455,196    $  2,026,968
                                                                              ============    ============
</TABLE>

The accompanying notes are an integral part of these financial statements


                                                    5
<PAGE>

<TABLE>
<CAPTION>
                                                                                   HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                  (DEVELOPMENT STAGE COMPANIES)
                                                                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                         FOR THE SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004 AND
                                                            FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2005
-------------------------------------------------------------------------------------------------------------------------------

                                                                                                                      For the
                                                                                                                   Period from
                                                                                                                    August 21,
                                                    For the Three Months Ended       For the Six Months Ended          1995
                                                   ----------------------------    ----------------------------   (Inception) to
                                                   October 31,      October 31,    October 31,      October 31,     October 31,
                                                       2005            2004            2005            2004            2005
                                                    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)
                                                   ------------    ------------    ------------    ------------    ------------
<S>                                                <C>             <C>             <C>             <C>             <C>
OPERATING EXPENSES
      General and administrative                   $    972,065    $  1,190,747    $  2,067,804    $  2,875,620    $ 22,662,694
      Research and development                          436,826         214,642         854,842         434,644       4,052,211
                                                   ------------    ------------    ------------    ------------    ------------
TOTAL OPERATING EXPENSES                              1,408,891       1,405,389       2,922,646       3,310,264      26,714,905

LOSS FROM OPERATIONS                                 (1,408,891)     (1,405,389)     (2,922,646)     (3,310,264)    (26,714,905)
                                                   ------------    ------------    ------------    ------------    ------------
OTHER INCOME (EXPENSE)
      Interest income                                        32              19              51             155           9,614
      Other income                                           --              --             480              --           2,623
      Interest expense                                 (141,915)        (90,391)       (171,763)       (846,068)     (1,647,442)
      Financing expense                                      --              --              --              --        (223,710)
      Loss on disposal of property and equipment        (75,288)             --        (101,381)             --        (101,381)
      Penalty expense on issuance of
       convertible promissory notes
       as a penalty for late registration                    --          (3,000)        (12,000)         (6,000)        (63,000)
      Penalty expense on issuance of
       common stock and warrants
       as a penalty for late registration              (533,301)       (936,154)     (1,005,409)     (2,401,227)     (5,831,411)
                                                   ------------    ------------    ------------    ------------    ------------
Total other expense, net                               (750,472)     (1,029,526)     (1,290,022)     (3,253,140)     (7,854,707)
                                                   ------------    ------------    ------------    ------------    ------------
LOSS BEFORE PROVISION FOR INCOME TAXES               (2,159,363)     (2,434,915)     (4,212,668)     (6,563,404)    (34,569,612)

PROVISION FOR INCOME TAXES                                   --              --              --              --          14,183
                                                   ------------    ------------    ------------    ------------    ------------
NET LOSS                                           $ (2,159,363)   $ (2,434,915)   $ (4,212,668)   $ (6,563,404)   $(34,583,795)

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

PREFERRED STOCK DIVIDEND                                     --              --              --              --        (661,603)
                                                   ------------    ------------    ------------    ------------    ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS          $ (2,159,363)   $ (2,434,915)   $ (4,212,668)   $ (6,563,404)   $(36,012,829)
                                                   ============    ============    ============    ============    ============

Net loss per share                                 $      (0.04)   $      (0.07)   $      (0.08)   $      (0.20)
                                                   ============    ============    ============    ============
BASIC AND DILUTED LOSS AVAILABLE TO
      COMMON SHAREHOLDERS PER SHARE                $      (0.04)   $      (0.07)   $      (0.08)   $      (0.20)
                                                   ============    ============    ============    ============
BASIC AND DILUTED WEIGHTED AVERAGE
      COMMON SHARES OUTSTANDING                      52,142,680      32,890,869      50,224,137      32,097,797
                                                   ============    ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these financial statements


                                                               6
<PAGE>

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

                                                                                                               For the
                                                                                                             Period from
                                                                                                              August 21,
                                                                               For the Six Months Ended          1995
                                                                             ----------------------------   (Inception) to
                                                                             October 31,      October 31,     October 31,
                                                                                 2005            2004            2005
                                                                              (unaudited)     (unaudited)     (unaudited)
                                                                             ------------    ------------    ------------
<S>                                                                          <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                               $ (4,212,668)   $ (6,563,404)   $(34,583,795)
      Adjustments to reconcile net loss to net cash provided by
       (used in) operating activities
           Depreciation                                                           165,875         102,617         622,792
           Loss on inventory impairment                                            37,000              --          37,000
           Loss on disposal of property and equipment                             101,381              --         101,381
           Issuance or committed issuance of common stock
             for services rendered                                                196,471         452,815       5,459,795
           Issuance or committed issuance of common stock
             for contribution                                                      16,250              --          16,250
           Common stock issued for legal settlement                                    --              --          13,440
           Issuance of common stock as compensation expense
             for services rendered from minority shareholders                          --              --          18,923
           Warrants issued or committed for services rendered                      36,678          38,573       1,012,713
           Financing expense in connection with the
             issuance of warrants                                                 106,904              --         330,614
           Expensing of stock options for services rendered                        32,000              --       2,379,640
           Additional compensation to officer in the form of
             convertible note payable - related party                                  --              --          42,171
           Amortization of deferred compensation                                       --         338,804       1,646,192
           Amortization of debt discount on convertible
             notes payable                                                          4,168         785,934       1,282,882
           Issuance of convertible notes payable as a penalty for the
            delayed registration of the underlying common stock                    12,000           6,000          63,000
           Issuance or committed issuance of common stock as a penalty
             for the delayed registration of shares of common stock               372,706       1,559,844       3,679,194
           Issuance or commitment to issue warrants as a penalty for the
             delayed registration of the underlying common stock                  632,703         841,383       2,151,731
           (Increase) decrease in
                Accounts receivable                                               242,360         (30,412)        (33,599)
                Inventory                                                        (330,077)       (178,235)     (1,138,727)
                Other current assets                                               27,438          63,664        (384,351)
           Increase (decrease) in
                Accounts payable                                                  852,340         411,648       3,038,976
                Accrued expenses                                                   53,815          35,949         128,020
                Accrued payroll and payroll taxes                                  52,817           6,917         911,435
                Accrued interest                                                   53,358          56,336         227,358
                Other current liabilities                                         308,851          51,873         508,851
                                                                             ------------    ------------    ------------
Net cash used in operating activities                                        $ (1,237,630)   $ (2,019,694)   $(12,468,114)
                                                                             ------------    ------------    ------------
</TABLE>

The accompanying notes are an integral part of these financial statements


                                                            7
<PAGE>

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

                                                                                                               For the
                                                                                                             Period from
                                                                                                              August 21,
                                                                               For the Six Months Ended          1995
                                                                             ----------------------------   (Inception) to
                                                                             October 31,      October 31,     October 31,
                                                                                 2005            2004            2005
                                                                              (unaudited)     (unaudited)     (unaudited)
                                                                             ------------    ------------    ------------
<S>                                                                          <C>             <C>             <C>
CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and equipment                                     $   (652,889)   $   (237,737)   $ (1,640,944)
      Sales of property and equipment                                              21,250              --          21,250
                                                                             ------------    ------------    ------------
Net cash used in investing activities                                            (631,639)       (237,737)     (1,619,694)
                                                                             ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds from issuance of common stock in
       private placement                                                     $         --    $         --    $  3,547,406
      Offering costs on issuance of common stock in
            private placement                                                          --              --        (196,793)
      Proceeds from issuance or committed issuance of common stock              1,620,000       1,145,756       6,315,424
      Offering costs on issuance of common stock                                  (42,000)        (31,750)       (181,768)
      Proceeds from the issuance of preferred stock                                    --              --         979,301
      Offering costs on issuance of preferred stock                                    --              --        (178,902)
      Proceeds from issuance of common stock subject
        to rescission rights                                                           --              --       1,355,000
      Proceeds from issuance of common stock subject to buy-back                       --              --         250,518
      Proceeds from collection of subscription receivable for net
        sales of common stock subject to buy-back                                      --              --         443,482
      Recapitalization of reverse merger                                               --              --              14
      Proceeds from exercise of stock options in subsidiary                            --              --           7,164
      Proceeds from bank overdraft                                                  3,793              --           3,793
      Proceeds from issuance of common stock upon exercise
        of warrants                                                                    --              --          54,004
      Proceeds from notes payable                                                      --          59,000          59,000
      Payment on capital lease obligations                                           (976)             --            (976)
      Payment on notes payable                                                    (30,000)         (5,132)        (39,447)
      Proceeds from issuance of notes payable - related parties                        --         476,000         947,853
      Payments on notes payable - related parties                                      --         (42,934)       (807,265)
      Proceeds from convertible notes payable                                     300,000         100,000         400,000
      Proceeds from convertible notes payable - related parties                        --              --          55,400
      Payments on convertible notes payable - related parties                          --              --         (35,400)
      Proceeds from convertible notes payable
        subject to rescission rights                                                   --         300,000         685,000
      Proceeds from collection of subscription receivable for
        sale of convertible note payable sold subject to rescission rights             --         425,000         425,000
                                                                             ------------    ------------    ------------
Net cash provided by financing activities                                       1,850,817       2,425,940      14,087,808
                                                                             ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents                              (18,452)        168,509              --

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     18,452          42,857              --
                                                                             ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                     $         --    $    211,366    $         --
                                                                             ============    ============    ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
       Interest paid                                                         $      4,641    $        352    $     22,605
                                                                             ============    ============    ============
       Income taxes paid                                                     $         --    $         --    $     14,183
                                                                             ============    ============
</TABLE>

The accompanying notes are an integral part of these financial statements


                                                            8
<PAGE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue 333,359, 342,455, and 14,092,341 of common stock, respectively, for
services rendered or to be rendered. The shares of common stock were valued at
$233,391, $452,815, and $5,496,715, respectively.

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue warrants to purchase 157,179, 100,000, and 1,435,408 shares of common
stock, respectively, for services rendered or to be rendered. The warrants were
valued at $42,362, $38,573, and $1,018,397, respectively.

Of the 333,359 shares and warrants for 157,179 shares either issued or committed
during the current period, 154,359 shares and warrants for 77,179 shares related
to prior period services off-setting accounts payable in the amount of $70,820.

Of the $233,391 for shares issued or committed for services during the current
period, $36,920 remained capitalized as prepaid fees for Edgar filing services
as of October 31, 2005. Of the $42,362 for warrants issued for services during
the current period, $5,684 remained capitalized as prepaid fees for Edgar filing
services as of October 31, 2005.

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued unsecured
convertible notes payable-related party, in exchange for accounts payable due to
the legal counsel of the Company of $0, $25,648, and $773,083, respectively.

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company expensed $372,706,
$1,559,844, and $3,679,194, respectively, for the issuance or committed issuance
of 562,898, 1,423,025 and 3,460,655 shares of common stock, respectively, as a
penalty for the late registration of common stock.

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, the Company issued convertible notes payable
of $12,000, $6,000, and $63,000, respectively, as a penalty for the late
registration of common stock to be issued upon conversion of convertible notes
payable.

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company expensed $632,703,
$841,383, and $2,151,731, respectively, for the issuance or committed issuance
of warrants to purchase 2,424,057, 1,050,664, and 5,080,135 shares of common
stock, respectively, as a penalty for the late registration of the common shares
underlying investor warrants.

During the six months ended October 31, 2005, the Company issued 22,463 shares
of common stock on the cashless exercise of warrants to purchase 64,583 shares
of common stock.

During the six months ended October 31, 2005, the Company issued or committed to
issue 1,079,572 shares of common stock to investors, upon the conversion of
$553,612 of convertible notes payable plus accrued interest. Included in the
1,079,572 shares are 273,855 shares committed upon conversion of $271,217 of
convertible notes payable plus accrued interest and 178,173 shares committed and
valued at $106,904 for the induced conversion of the convertible note.

During the six months ended October 31, 2005, the Company issued 32,820 shares
of common stock to an investor, upon the conversion of a promissory note payable
plus accrued interest in the amount of $14,769.

During the six months ended October 31, 2005, the Company removed $149,560 of
current liabilities recorded from the sale of 243,466 common shares sold deemed
subject to rescission rights. The $149,560 of current liabilities was
reclassified to common stock and paid-in-capital.

During the six months ended October 31, 2005, the Company reclassified $278,400
of convertible notes payable deemed subject to rescission rights to convertible
notes payable.

During the six months ended October 31, 2005, the Company issued or committed to
issue 106,667 shares of common stock and warrants to purchase 324,444 additional
shares as offering costs.


                                       9
<PAGE>

During the six months ended October 31, 2005, the Company issued 452,029 shares
of common stock, committed in the prior year, to acquire the remaining
outstanding stock of Microdevices.

During the six month ended October 31, 2005, the Company committed to issue
25,000 shares as a contribution to a non-profit organization.

During the six months ended October 31, 2005, the Company recorded debt
discounts totaling $84,039 upon issuance of convertible notes payable in the
face amount of $300,000 with detachable warrants to purchase 240,000 common
shares.

During the six months ended October 31, 2005, the Company entered into a
two-year capital lease for office equipment valued at $16,413 with lease
payments totaling $17,994 during the term.

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


                                       10
<PAGE>

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

GENERAL

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the
commercialization of its initial proprietary, neutron-based, "stoichiometric"
sensor devices, including (i) the CarBomb FinderTM 3C4, a vehicle-borne system,
for the detection and identification of car bombs, and (ii) the SIEGMATM 3E3 a
portable suitcase-borne system for the detection and identification of home-made
bombs, also known as Improvised Explosive Devices or IEDs. The Company is
marketing its devices to governmental and private entities and is negotiating
licenses for distribution of its devices with various industry partners. To
date, the Company has devoted the bulk of the Company's efforts and resources to
the research, design, testing and development of proprietary "stoichiometric"
sensor devices and underlying technologies, and has yet to generate meaningful
revenues from the sale of any products using its technologies.

The Company continues to focus on the research and development of additional
applications of its technologies and their further exploitation, both internally
and through collaboration with third parties. The Company is currently
developing prototypes in programs with the U.S. Department of Defense and the
Department of Homeland Security for other related uses of its core technology.
The Company entered into a cooperative development agreement with the U.S.
Transportation Security Administration (TSA) to produce a proof of concept which
incorporates its SuperSenzor TM technology into a baggage screening system. The
Company's "stoichiometric" technology, or "Stoitech TM" has been incorporated
into additional prototype applications which, if it is able to raise the funds
necessary to commercialize them, will be the next products the Company attempts
to launch: (i) an in-ground explosive screening system, the CarBomb Finder(TM)
3C5, (ii) a landmine detector, the Anti-Tank Landmine Detector 7AT7; (iii) the
STARRAY(TM), an all-terrain robot-borne IED detector; (iv) an unexploded
ordnance detector, Unexploded Ordnance Sensor 3UXO3, which is also useful to
detect IEDs; and (v) a device the Company calls a "Refractorymeter", which can
detect fissures or erosions in the ceramic lining of oil cracking tanks.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, HiEnergy
has five wholly-owned subsidiaries, HiEnergy Defense, Inc., HiEnergy Mfg
Company, HiEnergy International Co., HiEnergy Europe, Ltd. and HiEnergy Leasing
Co. HiEnergy Defense, Inc. was incorporated under the laws of the State of
Delaware in July 2003 to focus on marketing military and defense applications of
the Company's technology within the Washington D.C. area from its office in
Alexandria, Virginia. HiEnergy Europe Ltd. was incorporated under the laws of
the State of Delaware in March 2004 and is presently not operating, but will
focus on marketing the Company's technology throughout the European Union.
HiEnergy Mfg Company was incorporated under the laws of the State of Delaware in
March 2005 and formed for the purpose of creating a separate entity for the
manufacturing and assembly of the Company's products. HiEnergy International Co.
was incorporated under the laws of the State of Delaware in July 2005, and was
formed for the purpose of creating a separate entity for the sales and servicing
of its products overseas, excluding Europe, and primarily the Middle East and
Africa. Lastly, HiEnergy Leasing Co. was incorporated under the laws of the
State of Delaware in August 2005 and formed for the purpose of creating a
business entity to establish and administrate an equipment lease finance and
equipment rental operations.

Prior to January 2005, HiEnergy also had one majority owned subsidiary, HiEnergy
Microdevices, Inc., which was incorporated in Delaware on August 21, 1995 and
was the vehicle through which StoitechTM was initially developed by its Chairman
and CEO, Dr. Bogdan Maglich ("Microdevices", and together with HiEnergy Europe,
Ltd., HiEnergy Defense, Inc., HiEnergy Mfg Company, HiEnergy International Co.,
and HiEnergy Leasing Co., the "Subsidiaries"). As a result of a short-form
merger, which became effective on January 25, 2005, the Company assumed all of
Microdevices' assets and liabilities and Microdevices ceased to exist as a
separate entity as of that date.

RECAPITALIZATION BETWEEN HIENERGY AND SHAREHOLDERS OF MICRODEVICES

On April 25, 2002, SLW, which was then a "public shell company", was taken over
by the stockholders of Microdevices in a transaction commonly referred to as a
"reverse takeover". Under this transaction, which was structured as a voluntary
exchange of shares, the stockholders of Microdevices, including the Company's
present Chairman of the Board, Chief Executive Officer, President, Treasurer and
Chief Scientific Officer, Dr. Bogdan Maglich, obtained the right to receive up
to 64% percent of the outstanding shares of SLW. The stockholders of SLW prior
to the voluntary share exchange retained, collectively, 36% of SLW. The reverse


                                       11
<PAGE>

takeover was accounted for as a re-capitalization of Microdevices for accounting
purposes, in a manner similar to a pooling of interests, with Microdevices as
the accounting acquirer (reverse acquisition). Since the Company (formerly SLW)
was a "public shell company", with limited assets and liabilities at the date of
the acquisition and no significant operations prior to the acquisition, no pro
forma information has been presented. As a result of the reverse takeover,
Microdevices became the Company's majority-owned subsidiary, and was later
merged with the Company in January 2005 in a short-form merger through which the
Company committed to issue 452,029 shares of common stock to the remaining
stockholders of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares
for 1 share of Microdevices (the same ratio that was used in the original
voluntary share exchange). Additionally, we may be required to issue up to
704,190 shares of the Company's common stock to former holders of options and
warrants of Microdevices who hold rights to purchase HiEnergy shares at $0.156
per share. These rights survived the merger and may be exercised any time before
April 25, 2007, subject to the payment of promissory notes representing the
purchase price.

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company incurred net losses
available to common shareholders of approximately $4,212,668, $6,563,404 and
$36,012,829, respectively, and has had negative cash flows from operations of
approximately $12,468,114 for the period from August 21, 1995 (inception) to
October 31, 2005. In addition, the Company had an accumulated deficit of
$36,012,829 and was in the development stage as of October 31, 2005. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.

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

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             BASIS OF REPRESENTATION

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

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period, and actual results could
differ from those estimates. Results of operations for the six months ended
October 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ended April 30, 2006, or for any other period.


                                       12
<PAGE>

                           PRINCIPLES OF CONSOLIDATION

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

                          DEVELOPMENT STAGE ENTERPRISE

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

                              COMPREHENSIVE INCOME

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

                            CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of unrestricted balances only. The Company
considers all highly liquid investments with original maturities of three months
or less to be 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
("FDIC") up to $100,000. From time to time, deposits at the bank exceed the
$100,000 FDIC insurance limit. 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.

                               ACCOUNTS RECEIVABLE

Current period accounts receivable consists of the amount due under an agreement
with the U.S. Army for reimbursement of expenses related to a demonstration and
evaluation of the Company's vehicle borne system, due 30 days from submission
for reimbursement. Prior year accounts receivable consists of amounts due under
governmental grants billed as monthly reports and submitted detailing work
performed under the contracts and generally due in 30 to 60 days.

                              OTHER CURRENT ASSETS

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

                             PROPERTY AND EQUIPMENT

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


                                       13
<PAGE>

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

                                LONG-LIVED ASSETS

The carrying value of long-lived assets is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value of such assets
may not be recoverable. Measurement of the impairment loss is based on the fair
value of the asset. Generally, fair value will be determined using valuation
techniques such as the present value of expected future cash flows.

                                     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.

                            VALUATION OF INVENTORIES

During the six months ended October 31, 2005, the Company acquired components in
anticipation of future assembly and sale. The components have been recorded at
cost. The Company values its inventory at the lower of cost (first-in, first-out
method) or market. Total inventory as of October 31, 2005 was $943,891.

                       FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair values because of the short term
maturity of these instruments.

The fair value of the Company's debt, which consists of notes payable, notes
payable - related parties, convertible notes payable - related parties and
convertible notes payable deemed subject to rescission rights, is estimated on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Such fair
value approximates the respective carrying values of its debt.

          CONVERTIBLE NOTES PAYABLE WITH BENEFICIAL CONVERSION FEATURES

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

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

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


                                       14
<PAGE>

           PENALTIES ASSOCIATED WITH LATE REGISTRATION OF COMMON STOCK

The Company has entered into Stock Purchase Agreements ("SPA") and Convertible
Note Purchase Agreements ("CNPA") that include provisions that require the
Company to register, as freely trading, the shares of common stock and the
shares of common stock issuable upon exercise of warrants or conversion of
convertible notes payable within certain deadlines, in a Registration Statement
on Form SB-2. Furthermore, if such shares of common stock are not registered
within certain deadlines, a penalty becomes payable or accruable in like
securities. The common stock, warrants and convertible notes payable (the
"penalty securities") issued for late registration are described in Notes 13, 18
and 19, and the commitment to issue such penalty securities is described in
Notes 17 and 20 to this Report.

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

                          CASHLESS EXERCISE OF WARRANTS

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

                         RESEARCH AND DEVELOPMENT COSTS

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

                            STOCK-BASED COMPENSATION

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

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

The weighted average fair value of stock options granted during the six months
ended October 31, 2005 was $0.46. Fair value was determined using the
Black-Scholes option-pricing model. For stock options granted during the six
months ended October 31, 2005, the weighted average assumptions for grants were
a risk free interest rate of 3.87% an expected life of 2 years, an expected
volatility of 140% and an expected dividend yield of 0%.

The following table compares net loss attributable to common stockholders and
loss per share for the six months periods ended October 31, 2005 and October 31,
2004, as reported, to the pro forma amounts that would be recorded had
compensation expense for stock-based compensation been determined based on the
fair value on the grant dates consistent with the method of SFAS No. 123. The
presentation for the six months ended October 31, 2004 has been adjusted to
reflect a warrant issued to the Company's then Controller which was expensed in
the period.


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                          Six months      Six months
                                                             ended           ended
                                                          October 31,     October 31,
                                                             2005            2004
                                                         ------------    ------------
<S>                                                        <C>             <C>
Net loss attributable to common stockholders               (4,212,668)     (6,563,404)

Stock-based employee compensation included in
  reported net income, net of related tax effects              32,000          39,573
Total stock-based employee compensation expense
  determined under fair value based methods for
  all awards, net of related tax effects                     (614,076)       (312,229)
                                                         ------------    ------------
Pro forma net loss attributable to common stockholders     (4,794,744)     (6,836,060)

Basic loss per share:
  As reported                                                   (0.08)          (0.20)
  Pro forma                                                     (0.10)          (0.21)
Diluted loss per share:
  As reported                                                   (0.08)          (0.20)
  Pro forma                                                     (0.10)          (0.21)
</TABLE>


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

                 WARRANTS ISSUED AS FINANCING AND OFFERING COSTS

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

                                  INCOME TAXES

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

                               NET LOSS PER SHARE

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


                                       16
<PAGE>

The following potential shares of common stock have been excluded from the
computation of diluted net loss per share for the periods presented because the
effect would have been anti-dilutive. The presentation as of October 31, 2004
has been adjusted to properly reflect 704,190 shares held by the Company to be
issued upon payment of outstanding promissory notes rather than 324,020
Microdevices options and warrants.

<TABLE>
<CAPTION>
                                                               As of         As of
                                                             October 31,  October 31,
                                                                2005          2004
                                                             ----------   ----------
<S>                                                           <C>          <C>
Stock Options                                                 8,715,655    6,768,675
Warrants                                                     30,342,006   11,209,536
Convertible notes payable and accrued interest - related
   parties                                                      547,714
                                                                             745,997
Convertible notes payable and accrued interest                1,164,918           --
Convertible notes payable and accrued interest - deemed
  subject to rescission rights                                       --
                                                                           1,236,746
Shares of common stock deemed subject to rescission rights       68,546    2,066,320
Shares of common stock deemed subject to buy-back rights             --    2,000,000
Microdevices minority shareholders                                   --      459,222
Shares held by Company to be issued upon
   payment of outstanding promissory notes                      704,190      704,190
                                                             ----------   ----------
                                                             41,543,029   25,190,686
                                                             ----------   ----------
</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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application as the required
method for reporting a change in accounting principle and the reporting of a
correction of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years which begin after December 15, 2005
and is required to be adopted by the Company in the first quarter of fiscal
2007. The Company is currently evaluating the effect that the adoption of SFAS
154 will have on its consolidated results of operations and financial condition
but does not expect it to have a material impact.

In July 2005, the Standards Board issued Statement of FASB Staff Position No.
150-5, which clarifies that warrants on shares that are redeemable or puttable
immediately upon exercise and warrants on shares that are redeemable or puttable
in the future qualify as liabilities under Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity ("FSP FAS 150-5"). The Company is currently evaluating
the effect that the adoption of FSP FAS 150-5 will have on its consolidated
results of operations and financial condition but does not expect it to have a
material impact.

NOTE 4 - RISKS AND UNCERTAINTIES

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

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


                                       17
<PAGE>

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

      o     an inability to raise capital from the sale of equity or debt to
            private investors or from government grants or development
            contracts, in order to fund the Company's operations at current
            levels;
      o     an inability to obtain, as and when needed, additional financing on
            commercially reasonable terms;
      o     an inability to achieve profitability or positive cash flows;
      o     an inability to shift resources toward the implementation of the
            Company's plan to commercialize, manufacture and market the
            Company's initial prototype devices;
      o     an inability to transition the Company's prototypes into commercial
            products meeting certain specifications which satisfy the demands of
            prospective customers;
      o     an inability to develop and market viable products;
      o     an inability to control the damage done to the ability to sell
            products and/or raise funds if product demonstrations conducted by
            the Company are unsuccessful;
      o     an inability to reallocate resources successfully if initial product
            lines prove unsuccessful;
      o     an inability to predict and control international risk that could
            materially harm our business, including the threat of terrorism;
      o     an inability to continue as a going concern as previously noted by
            the Company's independent auditors;
      o     an inability to manufacture, or contract for the manufacture of, the
            Company's products in a scalable and cost-effective manner,
            producing sufficient quantities on a timely basis under strict
            quality guidelines and in compliance with regulatory requirements;
      o     an inability to defend against and resolve pending or future
            litigation including any civil lawsuits, including the class action
            suits, and certain disputes involving former consultants and
            employees;
      o     an inability to reconcile any potential payroll tax and use tax
            liabilities;
      o     an inability to maintain directors and officers insurance coverage
            and other protections against legal claims;
      o     an inability to properly record and protect the Company's
            intellectual property rights, and the inability to bring or defend
            against claims of intellectual property infringement;
      o     an inability to recruit and maintain quality management, improve
            internal controls of operations and attain optimal distribution of
            executive powers within the Company;
      o     an inability to obtain approvals from the U.S. Nuclear Regulatory
            Commission, U.S. Department of Commerce, U.S. Department of the
            State, and any other state or federal regulatory agency if and as
            applicable;
      o     changes in the regulatory and legislative environment affecting
            governmental laws and licensing requirements, including without
            limitation export restrictions and controls, which may affect the
            ability of the Company to sell and support its products;
      o     risks associated with the budget processes of governmental agencies
            and departments affecting the availability of future government
            funding for future product development and procurement;
      o     risks associated with international sales including, but not limited
            to, changes in domestic and foreign regulatory requirements,
            political instability in targeted foreign markets, differences in
            technology standards, possible foreign currency controls, longer
            payment cycles and inadequate collection systems, fluctuations in
            currency exchange rates, inconsistent intellectual property
            protections among foreign jurisdictions, export restrictions,
            tariffs, embargoes or other sales barriers, prejudicial employment
            laws and business practices, difficulties in obtaining and managing
            distributors, and potentially negative tax consequences;
      o     changes in pricing policies by the Company, its competitors or
            suppliers, including possible decreases in the average selling
            prices of the CarBomb Finder(TM) and SIEGMA(TM), caused by
            promotional offerings, contracted discounts, customer volume orders,
            and competitive pricing pressures;
      o     an inability to adapt to rapid technological change or shifts in
            market needs;
      o     current or future dependence upon a limited number of suppliers for
            certain component parts;
      o     an inability to anticipate and resolve problems with, or customer
            service issues related to, unqualified variables in product
            performance, dependability and usage, as well as maintenance
            requirements that could affect market acceptance and perceptions
            about the Company's products and after market service capabilities;
      o     product liability and related claims if products were to malfunction
            or fail to detect substances such as explosives accurately, or at
            all;
      o     a limited number of customers and an inability to identify and
            address additional markets or applications for the Company's
            technologies;


                                       18
<PAGE>

      o     sales cycle duration, which if protracted could result in not being
            able to obtain sales orders;
      o     risks associated with special contracting requirements by
            governmental agencies and the Company's ability to meet agency
            certifications, such as those required by the TSA, regarding its
            current or future products;
      o     the public's perception of the threats facing the population and
            unrelated political circumstances, which may lead to significant
            fluctuations in demand for the Company's products and services; and
      o     the economic and social impact of natural and manmade disasters
            generally, as well as the impact of such circumstances on the
            ability of the Company to maintain its business and operations in
            the event it or its customers suffer irreparable harm or injury.

NOTE 5 - OTHER CURRENT ASSETS

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

                                 October 31,    April 30,
                                    2005          2005
                                 -----------   ----------

 Prepaid professional services   $   102,128   $   44,553
 Prepaid insurance                   111,422       10,060
 Equipment deposits                  166,382      311,042
 Other                                17,062       16,174
                                 -----------   ----------
TOTAL                            $   396,994   $  381,829
                                 ===========   ==========

NOTE 6 - INVENTORY

During the six months ended October 31, 2005, the Company continued to acquire
components in anticipation of future assembly and sale. Total net inventory as
of October 31, 2005 was $943,891. The Company values its inventory at the lower
of cost or market. The Company performs quality control reviews of its
components and records inventory reserves based upon specific identification of
potentially defective units. The Company generally does not maintain inventory
reserves based on obsolescence or risk of competition because the shelf life of
its products is long. However, if the Company's current assumptions about demand
or obsolescence were to change, additional inventory reserves may be needed,
which could negatively impact the Company's product gross margins. The Company's
inventory reserves were $37,000 and $0 as of the six months periods ended
October 31, 2005 and 2004, respectively.

SFAS 2, Accounting for Research and Development Costs, allows an enterprise to
draw from its normal inventory and convert the inventory for research and
development purposes. During the six months ended October 31, 2005, the Company
converted $157,837of normal inventory to research and development equipment.

NOTE 7 - PROPERTY AND EQUIPMENT

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

                                 October 31,   April 30,
                                    2005          2005
                                 -----------   ----------

 Prototype equipment             $ 1,093,326   $  327,747
 Laboratory equipment                376,585      535,110
 Furniture and fixtures               88,781       70,587
 Leasehold improvements               51,150       51,150
 Web site development                 14,400       14,400
                                 -----------   ----------
                                   1,624,242      998,994

 Less accumulated depreciation       543,528      456,914
                                 -----------   ----------
              TOTAL              $ 1,080,714   $  542,080
                                 ===========   ==========


                                       19
<PAGE>

Depreciation and amortization expense for the six months ended October 31, 2005
and 2004 and the period from August 21, 1995 (inception) to October 31, 2005,
was $165,875, $102,617, and $622,792, respectively.

NOTE 8 - ACCRUED PAYROLL AND PAYROLL TAXES

The Company's former majority-owned subsidiary, Microdevices, which as of
January 25, 2005 was merged with the Company, is in the process of filing or
amending certain of its IRS Forms W-2 and 1099, and certain payroll tax returns
for the tax years ended December 31, 1997 through 2002, with respect to the
issuance of shares of Microdevices common stock for services rendered to
officers, employees, directors, legal advisors and consultants. As of October
31, 2005, the Company has an accrual of $438,311 for payroll tax, penalties and
interest related to these returns. The Company has filed returns for years 1998,
1999 and 2000 and intends to file, or amend as necessary, all remaining
outstanding 1099's, W-2's and payroll tax returns as soon as possible. In
November 2005, the Company received notice of the filing of a Federal Tax Lien
in the amount of $52,652 for the tax, penalties, and interest on the returns
filed for years 1998, 1999 and 2000 and is currently negotiating a payment plan.

Excluding the payroll tax liability mentioned above, the Company has accrued
payroll and payroll tax of $51,371 as of October 31, 2005, which includes
deferred salaries for certain employees.


NOTE 9 - CAPITAL LEASE OBLIGATIONS

Capital lease obligations consisted of the following as of the periods ended:

                                 October 31,   April 30,
                                    2005          2005
                                 -----------   ----------

 Capital lease for equipment,
  secured by the equipment,
  with an effective interest rate
  of 17.205% per annum through
  October 2007, with monthly
  payments in the amount of $237.$     4,619   $    5,595

 Capital lease for equipment,
  secured by the equipment, with
  an effective interest rate of
  8.99% per annum through October
  2007, with monthly payment in
  the amount of $749.74.              16,413           --
                                 -----------   ----------
                                      21,032        5,595

 Less current portion            $    10,061   $    5,595
                                 -----------   ----------
 LONG-TERM PORTION               $    10,971   $       --
                                 ===========   ==========


NOTE 10 - NOTES PAYABLE

Notes payable consisted of the following as of the periods ended:

                                 October 31,   April 30,
                                    2005          2005
                                 -----------   ----------

 Notes payable to employees for
  deferred compensation,
  unsecured and bearing interest
  at 5% per annum.                     7,125       37,125
                                 -----------   ----------
                                       7,125       37,125

 Less current portion            $     7,125   $   37,125
                                 -----------   ----------
 LONG-TERM PORTION               $        --   $       --
                                 ===========   ==========


                                       20
<PAGE>

NOTE 11 - NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties consisted of the following as of the periods
ended:

                                 October 31,   April 30,
                                    2005          2005
                                 -----------   ----------

 Notes payable to a shareholder
  of the Company, unsecured,
  bearing interest at 10.5% per
  annum, or 15% per annum upon
  default, and due on demand.    $    40,000   $   40,000

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

 Note payable to legal counsel of
  the Company, unsecured, bearing
  interest at 5% per annum and
  due on demand. The note was
  subsequently converted into
  equity in June 2005.                    --       14,000
                                 -----------   ----------
                                      85,000       99,000

 Less current portion                 85,000       99,000
                                 -----------   ----------
 LONG-TERM PORTION               $        --   $       --
                                 ===========   ==========


NOTE 12 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

Convertible notes payable - related parties consisted of the following as of the
periods ended:

<TABLE>
<CAPTION>
                                                                                   October 31,   April 30,
                                                                                      2005         2005
                                                                                   -----------   ---------
<S>                                                                                <C>           <C>
 Convertible notes payable to former legal counsel of the Company,
   unsecured, bearing interest at 10% per annum and due on demand
   The holders of the notes have the option to convert the principal and
   interest into shares of common stock of the company at $1.00 per share
   at any time. In October 2005, the Company induced conversion of $198,930
   of the notes, plus accrued interest, by reducing the conversion price
   to $0.60 per share.                                                             $   397,860   $ 596,790

 Convertible notes payable to former legal counsel of the Company, unsecured,
   bearing interest at 10% per annum and due on demand. The holders of the
   notes have the option to convert the principal and interest into shares of
   common stock of the company at $0.85 per share at any time. In October
   2005, the Company induced conversion of $12,744 of the notes, plus accrued
   interest, by reducing the conversion price to $0.60 per share                        25,488      38,232

 Convertible notes payable to former legal counsel of the Company, unsecured,
   bearing interest at 10% per annum and due on demand The holders of the notes
   have the option to convert the principal and interest into shares of common
   stock of the company at $1.00 per share at any time. In October 2005, the
   Company induced conversion of $12,687 of the notes, plus accrued interest, by
   reducing the conversion price to $0.60 per share.                                    25,374      38,061
                                                                                   -----------   ---------
                                                                                       448,722     673,083

 Less current portion                                                                  448,722     673,083
                                                                                   -----------   ---------
 LONG-TERM PORTION                                                                 $       --    $      --
                                                                                   ===========   =========
</TABLE>


                                       21
<PAGE>


NOTE 13 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following as of the periods ended:

<TABLE>
<CAPTION>
                                                                                   October 31,   April 30,
                                                                                      2005         2005
                                                                                   -----------   ---------
<S>                                                                                <C>           <C>
Convertible notes payable ("CNP"), unsecured, bearing interest at 5% per annum
 and coupled with the proceeds allocated to the detachable warrants, an
 estimated effective annual interest rate of 49%, due in June 2006. The holder
 has the option to convert the principal and accrued interest into shares of
 common stock at $0.45 per share at any time until the later of the prepayment
 date or the maturity date. The CNP were issued with detachable warrants to
 purchase shares of common stock with a three and one-half year term as follows:
 1,066,666 at $0.45 per share; 320,000 at $0.75 per share; and 192,000 shares at
 $1.25 per share. The holder also has registration rights on the underlying
 shares, and has received as penalties for the failure to register them (i)
 additional detachable warrants to purchase up to 2% of the amount of shares
 exercisable under the original warrants and (ii) additional CNP equal to 2% of
 the original face amount, or principal balance, each month until the securities
 became eligible for sale without registration under Rule 144.                     $   240,000   $      --

Convertible note payable, unsecured, bearing interest at 5% per annum due in
 June 2006, issued as a penalty to holders as a result of the Company's
 inability to file a registration statement within certain specified deadlines,
 covering and reflecting the same terms as, the convertible notes payable
 referenced above, with the exception of
 penalties.                                                                             38,400          --

Convertible notes payable ("CNP") to various investors, unsecured, bearing
 interest of 10% per annum, and coupled with the debt discount attributable to
 the beneficial conversion feature and detachable warrants, estimated effective
 annual interest rates in the range of 31% to 50%, due in October 2006. The CNP
 were issued with detachable warrants to purchase 240,000 shares of common stock
 with a three year term at $0.80 per share. The holders have the option to
 convert the principal and accrued interest into shares of common stock at $0.60
 per share at any time until the later of the prepayment date or the maturity
 date. Additionally, the CNP are subject to mandatory conversion into equity
 securities if the Company enters into any sale of equity or equity-based
 securities which yields gross proceeds to the Company of at least $2,500,000.
 The CNP are reduced by the unamortized debt discount of $79,870 for the
 relative values of the beneficial conversion feature and detachable warrants.         220,130          --
                                                                                   -----------   ---------
                                                                                       498,530          --
                                                                                   -----------   ---------
Less current portion                                                               $   498,530   $      --
                                                                                   -----------   ---------
LONG-TERM PORTION                                                                  $        --   $      --
                                                                                   ===========   =========
</TABLE>


                                       22
<PAGE>

In accordance with EITF No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has evaluated its sale of the $240,000 convertible
note payable with detachable warrants for the beneficial conversion feature. The
Company has allocated the proceeds from the placement of the debt to the
warrants and the debt based on their relative pro-rated values. This resulted in
$209,956 being allocated to warrants and $30,044 to debt. Since the convertible
note payable was deemed subject to possible rescission rights, the debt discount
was immediately expensed, resulting in a combined expense of $240,000 in June
2004.

NOTE 14 - CONVERTIBLE NOTES PAYABLE DEEMED SUBJECT TO RESCISSION RIGHTS

Convertible notes payable deemed subject to rescission rights consisted of the
following as of the periods ended:

<TABLE>
<CAPTION>
                                                                                   October 31,   April 30,
                                                                                      2005         2005
                                                                                   -----------   ---------
<S>                                                                                <C>           <C>

Convertible notes payable ("CNP"), unsecured, bearing interest at 5% per annum
 and coupled with the proceeds allocated to the detachable
 warrants, an estimated effective annual interest rate of 49%, due in
 June 2006 (excluding $10,000 due in January 2006).  In June 2005, the
 holders converted $70,000 of the CNP into shares of common stock. As of
 October 31, 2005, the remaining $240,000 of CNP was reclassified as
 convertible notes payable. The outstanding CNP is more fully described
 in Note 13.                                                                       $        --   $ 310,000

Convertible note payable, unsecured, bearing interest at 5% per annum due in
 June 2006, issued as a penalty to holders as a result of the Company's
 inability to file a registration statement within certain specified deadlines.
 As of October 31, 2005, the CNP was reclassified
 as convertible notes payable and is more fully described in Note 13.                       --      37,800

Convertible note payable ("CNP"), unsecured, bearing interest at 5% per annum,
 and, coupled with the proceeds allocated to the detachable warrants, an
 estimated effective annual interest rate of 44%. The CNP are due January 2006
 and may be converted at $0.45 per share at any time before maturity. The CNP
 included detachable warrants with a three and one-half year term to purchase
 shares of common stock as follows: 411,111 at $0.45 per share; 246,667 at $0.75
 per share; 148,000 shares at $1.25 per share and 123,333 shares at $1.50 per
 share. Said detachable warrants issued in the first closing have since expired.
 In June 2005, the holder converted all principle and accrued interest into
 common shares. The holder has registration rights on the shares issued upon
 conversion, as well as rights to a second closing for up to $400,000 of CNP
 prior to filing a registration statement with similar terms. The shares issued
 upon conversion have been deemed no longer
 subject to rescission.                                                                     --     185,000
                                                                                   -----------   ---------
                                                                                            --     532,800
                                                                                   -----------   ---------
Less current portion                                                               $        --   $ 532,800
                                                                                   -----------   ---------
LONG-TERM PORTION                                                                  $        --   $      --
                                                                                   ===========   =========
</TABLE>


                                       23
<PAGE>

Some of the above convertible notes payable effected during the period when the
referenced registration statement was on file may be subject to integration with
previous sales of convertible notes payable to some holders. Earlier, the
Company sold securities to the investors in a private offering, at the same time
the Company had on file a registration statement with the SEC. Such a
contemporaneous, private offering may have resulted in a violation of certain
federal securities laws concerning the contemporaneous sale of securities by the
Company at different terms, where the effect of integration can be to destroy an
exemption upon which a company has relied in issuing its securities privately,
which renders the transaction an illegal unregistered public offering. If this
is the case, the purchasers of convertible notes payable may have similar
rescission rights available to certain of the shareholders as described in Note
15. (See Note 15 for a full description of the circumstances surrounding the
rescission rights of the shareholders). Accordingly, the Company may be required
to pay each rescinding holder of convertible notes payable the amount it
received as consideration, plus any interest with respect to such amount at the
applicable rate, and the securities would be cancelled.

The Company has completed an independent investigation as to whether or not the
rescission rights continue to exist and, based upon legal advice it has received
as to the appropriate state and federal limitations periods pertaining to the
rescission obligations assumed, the Company has reclassified all convertible
notes payable deemed subject to rescission rights to convertible notes payable
as of October 31, 2005.

NOTE 15 - SALES OF COMMON STOCK DEEMED SUBJECT TO RESCISSION RIGHTS

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

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

The Company has completed an independent investigation as to whether or not the
rescission rights continue to exist and, based upon legal advice we have
received as to the appropriate state and federal limitations periods pertaining
to the rescission obligations assumed, the Company has reclassified 4,063,462 of
4,132,008 shares of common stock deemed subject to rescission rights to common
stock and additional paid in capital, and eliminated the related current
liability. For the six months period ended October 31, 2005, the Company
reclassified 243,466 of the 312,012 shares deemed subject to rescission rights,
reported at fiscal year ended April 30, 2005, to common stock and additional
paid in capital, further reducing the recorded current liability for shares
deemed subject to rescission rights from $199,560 to $50,000. Based upon the
advice received, the Company anticipates reclassifying the remaining 68,546
shares deemed subject to rescission rights and eliminating the remaining current
liability of $50,000 in the current fiscal year.


                                       24
<PAGE>

NOTE 16 -RESEARCH AND DEVELOPMENT COSTS

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

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

Since inception, the Company has been able to obtain various governmental grants
and development contracts. During the years ended April 30, 2005 and 2004, the
Company worked on different phases of two separate development contracts with
the DoD.

The Company completed the second year of Phase II of a Small Business Innovation
Research ("SBIR") contract awarded to it in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate ("NVESD"). Under the terms of the
contract, the Company is to develop and test its Anti-Tank Landmine Detector
7AT7TM over a two-year period, which was extended for one additional year at the
option of the U.S. Army. As of July 31, 2005, the Company earned $779,944
against the contract. If further research and development work is required upon
the expiration of Phase II, the Company has the ability to submit a request for
additional Phase II and/or Phase III funding, which the government would
consider based upon the Company's progress to date and the merits of the
project. The U.S. Army is under no obligation to continue to assist in funding
these research and development costs beyond Phase II or any subsequent
extension, or to purchase any of the Company's products, including the Anti-Tank
Landmine Detector 7AT7TM, once the Company has completed development activities.
As of July 31, 2005, the Company had collected all receivables due it in
completion of Phase II.

In September 2004, the Company entered into a Cooperative Agreement with the
U.S. Transportation Security Administration (TSA). Under the agreement, the
Company is to provide proof-of-concept for the Company's "NextGen Checked
Baggage Program (STOXOR)" over a nine month period, which may be extended at the
option of the TSA. The agreement provides funding in the amount of $367,141 for
Stage 1, and an additional $145,381 for Stage 2, if, at the conclusion of Stage
1, the TSA elected to continue with the Company. There is no obligation for the
TSA to fund the Company's development efforts under this agreement beyond the
Stage 1 funded amount or to purchase any of the Company's products once it has
completed development activities. As of October 31, 2005, the Company earned and
collected $367,141 in cooperative financing from the TSA to complete Stage 1.

On July 18, 2005, the Company executed a Time and Material Subcontract in the
amount of $333,688 with Integrated Concepts & Research Corporation (ICRC), which
was awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the
United States Army Tank - Automotive and Armaments Command, Warren Michigan
(TACOM). Under the Subcontract, the Company will deliver one CarBomb FinderTM
head unit and provide the engineering and technical support necessary for its
integration in the SmarTruck II Multi-Mission Vehicle. The finished prototype is
expected to be field tested by the U.S. Army early 2006. As of date, the Company
has received payment in the amount of $222,716 for its performance to date.

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

                                                                  Period from
                                           Six months ended      August 21, 1995
                                              October 31,         (Inception) to
                                     --------------------------    October 31,
                                         2005           2004          2005
                                     -----------    -----------    -----------
Research and development costs       $ 1,138,664    $   617,116    $ 5,788,807
Grant proceeds earned                   (283,822)      (182,472)    (1,736,596)
                                     -----------    -----------    -----------
Net research and development costs   $   854,842    $   434,644    $ 4,052,211
                                     -----------    -----------    -----------


                                       25
<PAGE>

NOTE 17 - COMMITMENTS AND CONTINGENCIES

                      CONSULTANCY AGREEMENTS AND CONTRACTS

In August 2004, the Company entered into an agreement with an engineering and
construction firm, which has agreed to provide design and construction
management services to the Company in connection with a proposed manufacturing
plant capable of producing commercial quantities of the CarBomb Finder. Under
the terms of the proposal, the engineering and management firm is responsible
for designing and implementing a facility which is suitable for its intended
purposes, including creating a flow process recommendation, designing the
optimum configuration for the facility, providing construction management,
assisting with supplier relationships, and reviewing transportation, laboratory
testing and other logistical issues. Under the agreement, the Company is
obligated to pay the firm in consideration for its services the amount of
$82,875, plus actual expenses anticipated not to exceed $4,000.

In August 2004, the Company entered into a Teaming Agreement with a global
maintenance services firm which would allow for the Company to sub-contract
maintenance services and under which both parties would jointly bid on business.

In August 2004, the Company entered into a Retention Agreement with the
Company's current securities counsel, for legal services which include the
preparation and review of the Company's annual and quarterly reports, regulatory
filings and other assistance with corporate and contract needs as the Company
may request from time to time.

In November 2004, as amended in July 2005, the Company entered into a
consultancy agreement with an independent contractor to provide product
engineering management, which provides for services to be rendered for a period
of one year, subject to a review on June 1, 2005. Under the agreement, the
Company is obligated to pay the contractor $1,924 per week, which may be paid in
a combination of cash, stock and/or options. In November 2005, the Company did
not renew the consultancy agreement and ceased to receive the specified
services.

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

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

In April 2005, the Company entered into a retention agreement with an attorney
to act as special counsel to the Company on discovery and litigation matters
related to the arbitration between Isaac Yeffet of Yeffet Security Consultants
and the Company. Pursuant to the agreement, the Company paid the attorney a
retainer of $20,000 against which legal fees and costs associated with the
matter would be offset.

In April 2005, the Company entered into a subcontract with a global maintenance
and services company, in which the subcontractor as Exclusive Service Provider
will provide the Company with product support and aftermarket servicing,
including the installation, repair and preventative maintenance for all products
to be sold and deployed by the Company in the United States. Pursuant to the
subcontract, the Company will pay the contractor on an hourly basis for labor,
plus travel and expenses, and supply all necessary parts and technical support
to allow contractor to fulfill its obligations.

In May 2005, the Company entered into a contract with a consultant for Edgar
filing services in which it prepays one year of services with 104,000 restricted
shares of its common stock of the Company. Pursuant to the agreement, the
Company issued the service provider a three year warrant to purchase 50,000
shares of its common stock with an exercise price of $0.75 per share, as the
shares had not been filed for registration on or before June 30, 2005.

In June 2005, the Company executed an engagement letter agreement with an
independent contractor to provide production and manufacturing consulting for
the Company for a three-month period. Major terms of the agreement are as
follows:

      o     The Company will pay the consultant cash remuneration of $4,667
            bi-weekly for the duration of the engagement, or $28,000.


                                       26
<PAGE>

      o     The Company will issue the consultant as deferred compensation,
            three promissory notes bearing 5% interest in the amount of $4,000,
            one on July 20, 2005, one on August 20, 2005 and one on September
            20, 2005, and due 90 days from issuance, provided the consultant is
            still engaged on said dates.
      o     The Company will grant the consultant a warrant to purchase 30,000
            shares of HiEnergy common stock with a five year term and
            exercisable at a price no greater than the average trading price for
            the thirty-days prior to the engagement. The warrant shall vest,
            provided the consultant is then still a service provider on
            September 20, 2005.
      o     The Company will reimburse consultant for any pre-approved expenses,
            not to exceed $10,500 during the engagement.
      o     In the event the Company files a registration statement on S-8, the
            Company has the option to prepay the consultant's services, or
            settle any outstanding promissory notes, with S-8 stock with value
            equivalent to two (2) months of the above stated salary.

In October 2005, the Company terminated the engagement agreement and ceased to
receive the specified services.

In June 2005, the Company entered into a contract with a consultant to provide
public media relations on a success fee basis. Under the contract, the Company
agrees to pay the consultant pursuant to a fixed fee schedule for successful
placements and media coverage incorporating the Company's products and
technologies.

In September 2005, the Company executed an engagement letter with an independent
contractor to provide software development for the Company for a three-month
period. Major terms of the agreement are as follows:

      o     The Company will pay the consultant cash remuneration of $125 for
            each hour invoiced during the engagement.
      o     The Company will grant the consultant warrants to purchase shares of
            HiEnergy common stock with a five year term and exercisable at a
            price no greater than the average trading price for the thirty-days
            prior to the engagement subject to the completion of milestones.
      o     The Company will reimburse consultant for any pre-approved expenses,
            not to exceed $1,500 per week.
      o     In the event the Company files a registration statement on S-8, the
            Company has the option to prepay the consultant's services, or
            settle any outstanding invoices, with S-8 stock.

In September 2005, the Company entered into a contract with a consultant to
provide engineering services and production planning for a three-month period.
Major terms of the agreement are as follows:

      o     The Company will pay the consultant cash remuneration of $3,500 and
            issue him restricted shares in the amount of $15,000 for each month
            of services performed under the engagement.
      o     The Company will reimburse consultant for any pre-approved expenses
            during the engagement.
      o     In the event the Company files a registration statement on S-8, the
            Company will include restricted shares issued to the consultant for
            resale and the Company has the option to prepay the consultant's
            services with S-8 stock.

In September 2005, the Company entered into a contract with a consultant to
provide investor relations. Under the contract, the Company agrees to pay the
consultant $2,000 per month and make timely reimbursements for any approved
expenses incurred.

In September 2005, the Company entered into a subcontract with a defense
technology organization with regard the assessment of the Company's technologies
and a demonstration of its robot-borne explosive detection equipment, under
which the Company will receive a performance payment in an amount not to exceed
$33,600.

                           PLACEMENT AGENCY AGREEMENTS

In September 2005, the Company entered into an exclusive agreement with a
placement agent to arrange for the sale of debt or equity securities. Major
terms of the agreement are as follows:

      o     The term of the agreement will be for one year, however, the Company
            may cancel after 30 days, with 5 days written notice, in the event
            the placement agent is not successful in completing at least $2
            million of financing.
      o     The Company will pay a retainer in the amount of $10,000, which
            shall be deducted from any fees due under the agreement.
      o     The Company will pay a success fee equal to 10% of any of the gross
            proceeds received by the Company derived from the efforts of the
            placement agent for any amounts up to $3 million and 7% for that
            amount in excess of $3 million, plus reimbursable expenses not to
            exceed $10,000 without written approval of Company.
      o     In connection with advisory services related to strategic
            transactions, the Company shall pay the placement agent a cash fee
            of 3% of the aggregate value/consideration received.


                                       27
<PAGE>

      o     The Company will issue the placement agent warrants to purchase 8%
            of the amounts of securities placed with investors through the
            efforts of the placement agent. The exercise price of the warrants
            will be equal to the price at which the securities were placed. The
            warrants vest immediately, expire four years from the date of grant,
            and include "piggyback" registration rights.
      o     As part of the agreement, the Company executed a separate letter
            indemnifying the placement agent and its related parties for
            services provided under the engagement letter.

                              EMPLOYMENT AGREEMENTS

In January 2005, the Company entered into an employment agreement for the
employment of its current Senior Vice President. Major commitments in the
agreement are as follows:

      o     The Company must pay its Senior Vice President an annual base salary
            of $200,000, of which $140,000 will be payable in cash in cash, and
            the remainder in deferred compensation in the form of three notes,
            bearing interest at 5% per annum, one due April 30, 2005, one due
            August 31, 2005, and one due November 30, 2005
      o     The Company must pay the fee required under the Senior Vice
            President's contract with his then current employer for his
            conversion from consultant employee, which should not exceed
            $12,000.
      o     The Company granted its Senior Vice President a stock option to
            purchase 500,000 shares of common stock which shall be exercisable
            at a price no greater than the average trading price for the last
            thirty (30) day. The option shall be 33% vested on May 1, 2005, 66%
            vested on September 1, 2005, and 100% vested on December 31, 2005.
      o     If the employment agreement is terminated by the Company without
            cause, the Company must pay its Senior Vice President on the
            termination date, severance pay in an amount equal to six (6) months
            of the minimum annual base salary.
      o     The Company will provide its Senior Vice President with
            comprehensive family medical and dental healthcare benefits.

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

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

      o     The Company must pay its Controller an annual base salary of
            $200,000, of which $125,000 will be payable in cash in cash and/or
            stock, and the remainder in deferred compensation in the form of
            three notes, bearing interest at 5% per annum, one due April 6,
            2005, one due August 6, 2005 and one due January 6, 2006.
      o     The Company has the option to prepay services of its Controller with
            common shares having a value equivalent to six (6) months of the
            above stated salary in the event the Company files a registration
            statement on S-8.
      o     The Company granted its Controller a stock option to purchase
            500,000 shares of common stock with an exercise price of $0.72 per
            share. The option will vest 60% on April 6, 2005 and fully vest on
            July 6, 2005.
      o     If the employment agreement is terminated by the Company without
            cause, the Company must pay its Controller on the termination date,
            severance pay in an amount equal to six (6) months of the minimum
            annual base salary.
      o     The Company will provide its Controller with comprehensive family
            medical and dental healthcare benefits.

Effective October 2005, the Company entered into an employment agreement with an
executive assistant in which the Company committed to pay the executive
assistant an annual base salary of $42,000 in cash. Pursuant to the employment
agreement, the executive assistant may participate in the Company's stock option
plan, receive standard medical and dental healthcare benefits and tuition
reimbursement.

Effective October 2005, the Company entered into an employment agreement with a
junior research scientist in which the Company committed to pay the scientist an
annual base salary of $52,000 in cash and $24,000 in shares of common stock in
equal quarterly installments if the Company files a registration statement on
Form S-8. Pursuant to the employment agreement, the scientist may participate in
the Company's stock option plan and will receive standard medical and dental
healthcare benefits.


                                       28
<PAGE>

                          PURCHASE AND SALES AGREEMENTS

In April and May 2004, the Company issued a purchase order for neutron
generators at a total cost of approximately 678,000 euros, or approximately
$813,260. The generators were scheduled to be delivered approximately one per
month, starting in August 2004. The delivery schedule for the above-mentioned
neutron generator order was protracted due to delays by the manufacturer. As of
October 31, 2005, the Company has received only 4 neutron generators on order
with this vendor. The Company has the option to lease these units from the
vendor for up to 12 months. Under the terms of the lease, the Company is
required to pay $10,200 (euros), approximately $12,235 per generator prior to or
upon receipt, with the remaining balance due in twelve monthly lease payments of
$4,800 (euros), approximately $5,760 each. Anytime during the lease term, or at
the end of the lease, the Company has the option to convert the lease to a
purchase and apply 80% of the monthly payments towards the purchase price of
approximately $95,000 per unit.

In May 2004, the Company ordered gamma radiation detectors for a total cost of
$1,368,000. The Company began receiving the detectors in May and will continue
to receive these units at varying intervals. Payment terms for the detectors are
50% due upon order and the balance due 30 days following receipt and acceptance
by the Company. As of October 31, 2005, the Company received gamma radiation
detectors in the aggregate sum of $590,000. Due to its decision to better
balance inventory, the Company had delivery halted for the remaining gamma
radiation detectors until such time it receives orders sufficient to justify
adding to the inventory of the detectors.

In November 2004, the Company issued a purchase order for two advanced neutron
generators at a total cost of approximately $335,000 for use in research and
development related to the Company's SuperSenszorTM program and the Company's
cooperative research agreement with the TSA. As of October 31, 2005, the Company
has received one of the generators and has a remaining non-refundable deposit of
$92,997 against the remaining unit which is to be delivered the later of
fourteen weeks of acceptance, twelve weeks after progress payment or eight weeks
following receipt by manufacturer of API window.

In January 2005, the Company received an order for one SIEGMATM system, along
with a down payment in the amount of $75,000, and a guarantee of the balance
upon delivery, from a company located in Tenerife, Canary Islands, Spain.
Payment of the balance in the amount of $227,000 is due upon testing and
acceptance of the unit, which has been postponed due to delays in the securing
of the purchaser of the appropriate licenses and end-used permits for local
regulatory bodies.

In February 2005 and in March 2005, the Company issued purchase orders in the
amount of $304,000 and $611,000, respectively, for robotic vehicles to be used
to facilitate remote deployment of its explosive detection devices. Under the
terms of the purchase orders, the Company is to be notified thirty-days prior to
shipping with payment due thirty-days following receipt. As of July 31, 2005,
the Company received all of the robotic vehicles ordered, then in October 2005
returned four of the units for a complete cancellation of the amount owed for
those units.

In May 2005, the Company entered into an Equipment Sales Agreement with a major
transit authority in connection with the purchase of two SIEGMATM systems for an
aggregate sum of $603,104. Accordingly, on June 10, 2005, the Company received
Purchase Order No. 4500233769 from the Commonwealth of Pennsylvania in the
amount of $603,104. In September 2005, the Company received a down payment in
the amount of $375,581 and in November 2005, the Company invoiced for the
balance of the purchase order following completion of Factory Acceptance Test
and launch of customization and integration program. During the first six
months, the Company will provide the buyer with any upgrades made to the
hardware and software delivered as part of its cooperative sales program and one
year of maintenance and service.

                           MEMORANDUM OF UNDERSTANDING

On January 28, 2005, the Company entered into a non-binding Memorandum of
Understanding ("MOU") to form a joint venture company which will establish and
maintain an assembly, testing, sales and service center in Tenerife, Spain. The
parties intend that the joint venture company will provide for the construction
and/or build-out of an assembly, testing, and service center the Company's
Stoitech(TM) explosive detection products, including the CarBomb Finder(TM) and
SIEGMA systems, as well as sell and market these products to private,
governmental and military clients, including NATO, throughout Spain and the
European Union on an exclusive basis, and throughout South America and Africa on
a non-exclusive basis, subject to certain conditions and exclusions. The Company
is currently working on completing definitive agreements related to the proposed
joint venture and had proposed the formation of a commission to secure EU
governmental support.


                                       29
<PAGE>

                                 LEASE AGREEMENT

In October 2002, the Company entered into a three-year operating lease agreement
with one of its directors at that time for its corporate offices in Irvine,
California. In October 2005, the Company extended the lease for an additional
year adding 2,265 square feet of space within the same building, bringing the
total building space to 13,262. The new space is being used additional offices,
inventory storage, with space set aside for some product assembly. The Company
also has an option for additional space if needed for expanded assembly or
manufacturing. The addendum for one additional year provides for monthly rent of
$17,591. The Company also leases 2,400 feet of outdoor testing space which is
included in the monthly rent under the terms of the addendum. Rent expense for
the six months ended October 31 was $87,662. The addendum to the lease expires
October 2006 and the aggregate future minimum payment under the lease agreements
is $202,291.

                                   LITIGATION

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

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

In October 2003, the Company notified YSCI that it was terminating its contract.
In February 2004, YSCI filed a Demand for Arbitration, alleging that the Company
breached the consulting agreement and seeking to recover $450,000 in unpaid
consulting fees. In April 2004, YSCI amended its Demand for Arbitration to
include a claim for commissions that YSCI claims it is owed in connection with
investments made by individuals who purchased shares of the Company's stock. The
Amended Demand for Arbitration also seeks a determination as to whether Mr.
Yeffet is entitled to exercise options to purchase 500,000 shares of common
stock issued to him under the Company's Stock Option Agreement. In June 2004,
the Company filed an answer generally denying YSCI's allegations set forth in
the original and amended Demands for Arbitration. The Company also filed a cross
Demand for Arbitration seeking disgorgement of all monies paid to YCSI and
rescission of the consulting agreement and stock option agreement. Depositions
in this matter began in New Jersey on December 15, 2004 for the Company and in
January 2005 for YSCI. At present, the parties are exchanging discovery and
awaiting arbitration hearings to commence within the next 30 to 60 days.. The
Company intends to defend itself vigorously in the arbitration. As of this date,
the Company and its legal counsel have made no other determination as to the
merits of, or possible defenses to, the arbitration.

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

In January 2005, the Company was served with a Summons and Class Action
Complaint For Violations of Federal Securities Laws, which was filed on October
18, 2004, in the Federal District Court for the Southern District of California
under case number SACV04-1226 GLT. The Complaint filed named the Company, its
Chairman, among other named defendants on behalf of a class of persons who
acquired the stock of the Company during the period from February 22, 2002
through July 8, 2004. In February 2005, plaintiff's counsel filed a First
Amended Complaint entitled and styled, "In re: HiEnergy Technologies, Inc.
Securities Litigation," Master File No. 8:04-CV-01226-DOC (JTLx), alleging
various violations of the federal securities laws, generally asserting the same
claims involving Philip Gurian, Barry Alter, and the Company's failure to
disclose their various securities violations including, without limitation,
allegations of fraud. The First Amended Complaint seeks, among other things,
monetary damages, attorney's fees, costs, and declaratory relief. The Company
engaged two legal firms to vigorously defend itself in this matter and assess
the impact of the pending lawsuit. On Friday, March 25, 2005, the Company timely
filed responsive pleadings as well as Motions to Dismiss the Plaintiffs' First
Amended Complaint arguing that the Complaint failed to state a claim upon which
relief can be granted. On June 17, 2005, the Court issued an Order Granting the
Motions to Dismiss (the "Order"), finding that the Plaintiffs failed in the
First Amended Complaint to allege causation of loss resulting from any alleged
omissions and/or misrepresentations of the Company or Dr. Maglich, to sustain a


                                       30
<PAGE>

cause of action for securities fraud under ss.10(b) of the Exchange Act and Rule
10b-5 of the SEC, that the Plaintiffs had failed to plead actual reliance on any
allegedly false or misleading filings of the Company to sustain a claim under
ss.18 of the Exchange Act, and that the Plaintiffs had failed to allege a
primary violation of any securities laws to sustain a claim for a violation of
ss.20(a) of the Exchange Act. On July 5, 2005, the Plaintiffs filed a Second
Amended Complaint in compliance with the Court's Order. On October 24, 2005, the
Court issued a Minute Order granting in part and denying in part Motions to
Dismiss filed by the Company, finding that the Plaintiffs failed in the Second
Amended Complaint to sustain a cause of action for securities fraud under
ss.10(b) of the Exchange Act and Rule 10b-5 of the SEC against Dr. Maglich and
for claims that the Company filed false and misleading financial statements and
executed suspicious stock sales. On November 14, 2005, the Court held a
scheduling conference at which the Plaintiff informed the Company that it would
not file a Third Amended Complaint. In accordance with the Scheduling Order from
the Court, class representative motions are to be filed within 90 to 120 days
and pre-trial conference has been scheduled for September 11, 2007. Company
counsel will respond to any motions with appropriate challenges to its legal
sufficiency to state a claim upon which relief may be granted. As of date, the
costs to defend the class action have been substantial and it is unable to
predict an exact amount, or even a meaningful estimate, of the aggregate costs
that may be incurred, at this time.

In April 2005, a claim was filed against the Company with the 101st Judicial
District Court, Dallas County, Texas by Data Discovery Inc., ("DDI") (Civil
Action No. 3-05-CV-0949-M). DDI, representing one party of a dissolved
partnership, is seeking the collection on behalf of the partnership of $107,300
allegedly owed to it for services purported to have been fully-provided to the
Company. The Company engaged local counsel and filed, on May 10, 2005, a Notice
of Removal to move the case to federal court, and a Motion for Dismissal. In
July 2005, the District Court delivered a Memorandum Opinion and Order granting
the Company's Motion for Dismissal and ordered that within twenty days DDI amend
its suit to the satisfaction of the District Court, or the order will become a
dismissal with prejudice, which would bar DDI from filing any other suit against
the Company related to the subject matter of its current claim. In August 2005,
DDI filed a new lawsuit on behalf of the partnership which is expected to go
before the Court following an appropriate period for discovery. The costs of
defending against the Complaint could be substantial; however the Company is
unable to predict an exact amount, or even a meaningful estimate, at this time.

In October 2005, a claim was filed against the Company with the Supreme Court of
the County of New York, New York by HWH Enterprises ("HWH") (Index No.
603438/05). HWH is seeking collection of $101,621.18 allegedly owed to it for
its public relations services purported to have been provided to the Company
during the prior fiscal year. The Company engaged local counsel and intends to
defend itself and counsel will respond with appropriate challenges. As of this
date, the Company and its legal counsel have made no other determination as to
the merits of, or possible defenses to, the claim, and are unable to predict a
meaningful estimate of the costs of defending against the claim at this time.

                              MINORITY SHAREHOLDERS

On January 25, 2005, Microdevices was effectively merged into the Company
through a short form merger effected by the Company and certified by the
Secretary of the State of Delaware, whereupon the Company assumed all assets and
liabilities of Microdevices. Under the terms of the merger, the Company issued
452,029 shares of common stock to the remaining stockholders of HiEnergy
Microdevices on the basis of 22.3524 HiEnergy shares for 1 share of HiEnergy
Microdevices (the same ratio that was used in the original voluntary share
exchange). Additionally, we may be required to issue up to 704,190 shares of the
Company's common stock to former holders of options and warrants of Microdevices
who hold rights to purchase HiEnergy shares at $0.156 per share. These rights
survived the merger and may be exercised any time before April 25, 2007, subject
to the payment of promissory notes representing the purchase price.

                            CONVERTIBLE NOTES PAYABLE

As of October 31, 2005, the Company has outstanding $578,400 of convertible
notes payable ("CNP") issued to investors, which together with accrued interest
are convertible into 1,164,918 shares of common stock. The $578,400 of CNP
includes $300,000 of convertible notes issued by the Company to various
investors in September and October 2005, which bear interest at 10% per annum
(except if an event of default in which case they bear interest at the default
rate of 12% per annum from the default date until such default is cured or
waived) and are due in October 2006. The CNP were issued with detachable
warrants to purchase 240,000 shares of common stock with a three year term at an
exercise price of $0.80 per share. The holders have the option to convert the
principal and accrued interest into shares of common stock at a conversion price
of $0.60 per share at any time until the later of the prepayment date or the
maturity date. If the Company enters into any sale of equity or equity-based
securities which yields gross proceeds to the Company of at least $2,500,000,
the holders must exercise this conversion option. The Notes are senior to all of
the Company's existing indebtedness, other than any current or future accounts
receivable financing up to an aggregate face amount of $1,000,000. The CNP has
been recorded net a remaining unamortized debt discount of $79,870 for the
relative values of the beneficial conversion feature and detachable warrants.


                                       31
<PAGE>

In June 2004, we issued $240,000 of CNP and together with $38,400 of CNP issued
as a penalty due to the Company's inability to file an effective registration
statement , and with accrued interest of $19,729 are convertible into 662,509
common shares. The notes have two-year maturities in which the holders of the
notes have the option to convert the principal and accrued interest into shares
of common stock at a conversion price of $0.45 per share at any time until the
later of the prepayment date or the maturity date. The conversion price is
subject to adjustment for stock splits, stock dividends, combinations, and other
similar structural events. The CNP also had detachable warrants to purchase
shares of common stock with a three and one-half year term following the
registration date for prices between $0.45 and $1.25. The CNP and detachable
warrants have registration rights on the underlying shares, and in certain
cases, if the shares of common stock issuable upon conversion of the CNP or
exercise of the detachable warrants are not registered within certain specified
deadlines, the holders are due penalties in the form of (i) additional CNP equal
to 2% of the original face amount, or principal balance, and/or (ii) additional
detachable warrants to purchase 2% of the amount of shares exercisable under the
original warrants, for each subsequent month until a registration statement is
filed and maintained effective by the Company, or when the penalties become
impermissible as a matter of law as prescribed in the instrument, or can be sold
without registration under Rule 144.

In June 2005, a note holder converted $185,000 of convertible notes originally
purchased in January 2004, plus $11,932 of accrued interest into 437,627 shares.
The holder maintains an option to purchase an additional $400,000 worth of CNP,
which have detachable warrants to purchase a number of shares of common stock
which terminates prior to the filing of the Company's next registration
statement.

In July 2005, a note holder converted $70,000 of convertible notes, originally
purchased in January 2004 and $11,400 worth of convertible notes accrued as
penalties for the Company's failure to timely file a registration statement,
plus $3,739 of accrued interest into 189,917 shares.

                   CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

As of October 31, 2005, the Company has outstanding $448,722 of convertible
notes payable - related parties to its former legal counsel for conversion of
accounts payable which are unsecured, bearing interest at 10% per annum and
became due on demand in April 2005. The convertible notes payable - related
parties, together with accrued interest may be converted into 547,714 shares of
common parties at a conversion prices between $0.85 and $1.00 per share at any
time. The conversion price is subject to adjustment for stock splits, stock
dividends, combinations, and other similar structural events with respect to the
issuance of the Company's common stock. In October 2005, the related party
converted $224,361 of the convertible notes, plus $46,856 of accrued interest
into 452,028 committed shares, subsequently issued in November 2005.

                               PENALTY SECURITIES

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

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

For illustration purposes only, the table below estimates the approximate
amounts of penalty securities to be issued by the Company through April 30,
2006, on a monthly basis, in accordance with current agreements under which the
Company is, or may be, delinquent in satisfying its registration requirements:


                                       32
<PAGE>

                                                        Number of Shares
                                Shares of Common            Underlying
                                    Stock                   Warrants
                                ----------------        ----------------
   Nov-05                                 98,780                 506,176
   Dec-05                                 90,795                 509,783
   Jan-06                                 78,439                 540,009
   Feb-06                                 79,550                 514,367
   Mar-06                                 74,750                 523,259
   Apr-06                                 68,750                 525,951
                                ----------------        ----------------
   Total                                 491,064               3,119,545
                                ----------------        ----------------

The above estimates reflect monthly amounts to be issued or committed and may
not correspond to amounts appearing elsewhere in this report due to accruals for
expense purposes.

For illustrative purposes only, the table below estimates the number of shares
underlying warrants that will be exercisable under cashless provisions. If the
closing price for the Company's shares is greater than the exercise price, then
the holders may exercise the warrant by a cashless exercise. The number of
shares to be received by the holders upon cashless exercise is determined by the
spread between the closing price of the Company's common stock on the exercise
date and the exercise price of the warrant, but would not exceed the number of
the underlying shares to the warrant so exercised. These common shares would be
issued to the holder with no proceeds to the Company.


                                Number of Shares
                                   Underlying
                                    Warrants
                                ----------------
                  Nov-05                 826,524
                  Dec-05                 426,414
                  Jan-06               1,504,445
                  Feb-06                      --
                  Mar-06                      --
                  Apr-06                      --
                                ----------------
                  Total                2,757,383
                                ----------------


                         GOVERNMENT CONTRACT COMMITMENTS

The Company completed the second year of Phase II of a Small Business Innovation
Research ("SBIR") contract awarded to it in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate ("NVESD"). Under the terms of the
contract, the Company is to develop and test its Anti-Tank Landmine Detector
7AT7TM over a two-year period, which was extended for one additional year at the
option of the U.S. Army. As of October 31, 2005, the Company earned $779,944
against the contract. If further research and development work is required upon
the expiration of Phase II, the Company has the ability to submit a request for
additional Phase II and/or Phase III funding, which the government would
consider based upon the Company's progress to date and the merits of the
project. The U.S. Army is under no obligation to continue to assist in funding
these research and development costs beyond Phase II or any subsequent
extension, or to purchase any of the Company's products, including the Anti-Tank
Landmine Detector 7AT7TM, once the Company has completed development activities.
Under the terms of the contract, the U.S. Army pays a portion of the Company's
research and development costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress. The Company recognizes the proceeds from the contract as
an offset against research and development expenses following the submission of
the monthly written reports. When the written report is accepted by the U.S.
Army, the Company usually receives payment in about 30 to 45 days. As of October
31, 2005, the Company had collected all receivables due it in completion of
Phase II.


                                       33
<PAGE>

In September 2004, the Company entered into a Cooperative Agreement with the
U.S. Transportation Security Administration (TSA). Under the agreement, the
Company is to provide proof-of-concept for the Company's "NextGen Checked
Baggage Program (STOXOR)" over a nine month period, which may be extended at the
option of the TSA. The agreement provides funding in the amount of $367,141 for
Stage 1, and an additional $145,381 for Stage 2, if, at the conclusion of Stage
1, the TSA elected to continue with the Company. There is no obligation for the
TSA to fund the Company's development efforts under this agreement beyond the
Stage 1 funded amount or to purchase any of the Company's products once it has
completed development activities. The TSA will pay the Company's research and
development costs on a periodic basis during the term of the contract, for which
the Company is required to submit monthly written reports detailing its progress
under the contract. When the written report is accepted by the TSA, the Company
receives payment in about 30 to 45 days. Payments commenced in November 2004 and
the Company recognized the Stage 1 funding amount as an offset against research
and development expenses upon submission of the monthly written reports. As of
October 31, 2005, the Company had collected all receivables due it in completion
of Stage 1.

On July 18, 2005, the Company executed a Time and Material Subcontract in the
amount of $333,688 with Integrated Concepts & Research Corporation (ICRC), which
was awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the
United States Army Tank - Automotive and Armaments Command, Warren Michigan
(TACOM). Under the Subcontract, the Company will deliver one CarBomb FinderTM
head unit and provide the engineering and technical support necessary for its
integration in the SmarTruck II Multi-Mission Vehicle. The finished prototype is
expected to be field tested by the U.S. Army early 2006. As of date, the Company
has received payment in the amount of $222,716 for its performance. Funding of
the program was provided through a supplemental authorization of the Defense
Appropriations Act for Fiscal Year 2005. ICRC will pay the Company's time and
material costs on a periodic basis during the term of the contract, for which
the Company is required to submit monthly written reports detailing its progress
under the subcontract. The Company recognizes the proceeds from the subcontract
as an offset against research and development expenses following the submission
of the monthly written reports. Pursuant to the subcontract, when the written
report is accepted by ICRC, the Company receives payment in about 30 to 45 days,
or no later than 5 days after payment by the U.S. Army Contracting Officer to
ICRC.

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

                                  SUBSIDIARIES

In August 2005, the Company formed a wholly-owned subsidiary, HiEnergy Leasing
Co., for the purpose of creating a business entity to establish and administrate
an equipment lease finance and equipment rental operations.

NOTE 18 - COMMON STOCK

                    COMMON STOCK ISSUED OR COMMITTED FOR CASH

During the six months ended October 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to October 31, 2005, the Company issued or committed
to issue 3,564,447, 1,805,058 and 17,316,321 shares of common stock,
respectively, in exchange for cash of $1,620,000, $1,145,756 and $8,364,424,
respectively. Included in both the current period amount and the
inception-to-date amount are 68,546 shares sold deemed subject to rescission
rights for $50,000. Of the 3,564,447 shares sold during the six months ended
October 31, 2005, 191,111 shares remained committed.

               OFFERING COSTS ON ISSUANCE OF COMMON STOCK FOR CASH

During the six months ended October 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to October 31, 2005, the Company incurred offering
costs of $42,000, $31,750 and $181,768, respectively. During the six months
ended October 31, 2005 the Company issued 106,667 shares of common stock as
offering costs.

    COMMON STOCK ISSUED OR COMMITTED FOR SERVICES RENDERED OR TO BE RENDERED

During the six months ended October 31, 2005 and 2004, and the period from
August 21, 1995 (inception) to October 31, 2005, the Company issued or committed
to issue 333,359, 342,455 and 14,092,341 shares of common stock, respectively,
in exchange for services rendered or to be rendered, valued at the fair market
of the common stock issued of $233,391, $452,815 and $5,496,715, respectively.
Included in the current period and inception-to-date amount remains $36,920 for
prepaid services which will be expensed in future periods.


                                       34
<PAGE>

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

      o     During the six months ended October 31, 2005, 30,000 restricted
            shares of common stock valued at $21,000 were issued to a
            design/manufacturing consultant as compensation for services.
      o     During the six months ended October 31, 2005, 104,000 restricted
            shares of common stock valued at $73,840 were issued for prepaid
            Edgar filing services, of which $36,920 was expensed in the current
            period with the remaining balance of $36,920 a deposit to be applied
            against future filing services.
      o     During the six months ended October 31, 2005, 154,359 restricted
            shares valued at $108,051 were issued or committed to settle
            accounts payable of $70,820 for prior legal services. The difference
            between the GAAP value of the shares and the accounts payable
            balance of $37,231 was expense in the current period.
      o     During the six months ended October 31, 2005, the Company issued or
            committed to issue a total of 45,000 restricted shares of common
            stock valued at $30,500 to members of its Board of Directors for
            their attendance at scheduled meetings. Each member of the Company's
            board received 5,000 restricted shares of common stock for each
            meeting attended.

 COMMON STOCK ISSUED OR COMMITTED ON THE CONVERSION OF CONVERTIBLE NOTES PAYABLE

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue 1,079,572, 192,308 and 2,977,909 shares of common stock, respectively, for
the outstanding principal and accrued interest on convertible notes payable
balances of $553,612, $100,000 and $1,386,325, respectively. Included in both
the current period and inception-to-date conversions are 452,028 shares still
committed as of October 31, 2005. These 452,028 shares represent 273,855 shares
committed upon conversion of $271,217 of convertible notes payable plus accrued
interest, and 178,173 shares committed valued at $106,904 for the induced
conversion of the convertible note. The inception-to-date shares also include
944,444 shares committed at the end of fiscal-year 2004 for a subscription
receivable collected at the beginning of fiscal-year 2005 in the amount of
$425,000.

            COMMON STOCK ISSUED ON THE CONVERSION OF PROMISSORY NOTES

During the six months ended October 31, 2005, the Company issued 32,820 shares
of common stock for the settlement of outstanding promissory notes and accrued
interest in the aggregate amount of $14,769.

            COMMON STOCK ISSUED ON THE CASHLESS EXERCISE OF WARRANTS

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued 22,463, 1,046,687
and 1,895,294 shares of common stock, respectively, on the cashless exercise of
warrants.

       COMMON STOCK ISSUED OR COMMITTED AS A PENALTY FOR LATE REGISTRATION

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue 562,898, 1,423,025, and 3,460,655 shares of common stock, respectively, as
penalty expenses in the amount of $372,706, $1,559,844 and $3,679,194,
respectively, for the late registration of the Company's common stock. See "Note
17 - Commitments and Contingencies, Penalty Securities".

NOTE 19 - STOCK OPTIONS AND WARRANTS

                             STOCK OPTIONS - GENERAL

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


                                       35
<PAGE>

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

The following summarizes the stock option and warrant transactions for employees
and other service providers:

<TABLE>
<CAPTION>
                                                   Stock
                                     Weighted      Options      Weighted                      Weighted
                                     Average       and          Average       Total           Average
                     Stock           Exercise      Warrants     Exercise      Options         Exercise
                     Options         Price         Non-         Price         And             Price
                     Employee        Per Share     Employee     per Share     Warrants        per Share
                     -------------   ----------    ----------   -----------   -------------   ----------
<S>                  <C>             <C>           <C>          <C>           <C>             <C>
 Outstanding,
August 21, 1995
 (inception) to
April 30, 2001           2,482,011   $     0.13         1,051   $      0.28       2,483,062   $     0.13

 Granted                   287,653   $     0.20       346,373   $      0.28         634,026   $     0.24
                     -------------   ----------    ----------   -----------   -------------   ----------
 Outstanding,
April 30, 2002           2,769,664   $     0.14       347,424   $      0.28       3,117,088   $     0.16
                     =============   ==========    ==========   ===========   =============   ==========

 Granted                 3,461,755   $     1.24     2,002,726   $      2.02       5,464,481   $     1.43

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

 Outstanding,
April 30, 2003           3,967,211   $     0.42     2,349,099   $      1.76       6,316,310   $     0.84
                     =============   ==========    ==========   ===========   =============   ==========

Granted                  1,738,221   $     1.03     1,029,000   $      1.11       2,767,221   $     1.01

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

Outstanding
April 30, 2004           4,646,949   $     0.42     3,258,394   $      1.61       7,905,343   $     0.83
                     -------------   ----------    ----------   -----------   -------------   ----------
Granted                  2,956,980   $     0.76       100,000   $      0.99       3,056,980   $     0.77

Canceled                  (910,000)  $     1.08      (876,668)  $      2.79      (1,786,668)  $     1.92
                     -------------   ----------    ----------   -----------   -------------   ----------
Outstanding
April 30, 2005           6,693,929   $     0.70     2,481,726   $      1.17       9,175,655   $     0.82
                     -------------   ----------    ----------   -----------   -------------   ----------
Granted                    520,000   $     0.68       157,179   $      0.69         677,179   $     0.68

Canceled                 (220,000)   $     0.73            --   $        --        (220,000)  $     0.73

Outstanding
October 31, 2005         6,993,929   $     0.69     2,638,905   $      1.14       9,632,834   $     0.82

Exercisable
October 31, 2005         5,940,596   $     0.68     2,138,905   $      1.17       8,079,501   $     0.81
                     -------------   ----------    ----------   -----------   -------------   ----------
</TABLE>


                                       36
<PAGE>

The weighted-average remaining contractual life of the options and warrants
outstanding at October 31, 2005 was 4.05 years. The exercise prices of the
options and warrants outstanding at October 31, 2005 ranged from $0.01 to $2.95,
and information relating to these options and warrants is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted-       Weighted-
                                                       Weighted-         Average         Average
                                                        Average          Exercise        Exercise
                          Stock           Stock        Remaining         Price of        Price of
        Range of        Options &       Options &     Contractual       Options &       Options &
        Exercise        Warrants         Warrants         Life           Warrants        Warrants
         Prices        Outstanding     Exercisable      (years)        Outstanding     Exercisable
      -------------    -----------     -----------    -----------      -----------     -----------
<S>                    <C>             <C>            <C>              <C>             <C>
      $0.01 - $0.99      6,514,391       5,653,558           4.39      $      0.48     $      0.44
      $1.00 - $1.99      2,184,454       1,491,954           3.70      $      1.09     $      1.13
      $2.00 - $2.99        933,989         933,989           2.48      $      2.54     $      2.54
                       -----------     -----------
                         9,632,834       8,079,501
                       ===========     ===========
</TABLE>


         WARRANTS ISSUED OR COMMITTED TO INVESTORS AND PLACEMENT AGENTS

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, the Company issued or committed to issue
warrants to purchase 8,580,018, 2,840,316, and 28,623,314 shares of common stock
to investors and placement agents in private placements.

               WARRANTS ISSUED OR COMMITTED FOR SERVICES RENDERED

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue warrants to purchase 157,179, 100,000, and 1,435,408 shares of common
stock, respectively, for services rendered. The warrants were valued at $42,362,
$38,573 and $1,018,397, respectively, which is the fair value as determined by
the Black-Scholes option pricing model. Warrants issued in the current period to
purchased 77,179 common shares were issued in conjunction with common stock to
settle accounts payable for prior legal services. As the GAAP valuation of the
common stock more than offset the accounts payable balance, the $22,531 value of
the warrants was expensed in the current period. A warrant was issued in the
current period to purchase 50,000 common shares valued $11,369 for prepaid Edgar
filing services, of which $5,685 of the amount was expensed during the current
period and $5,684 remained as a deposit to be applied against future filing
services.

Details of the warrants issued for services performed or to be performed during
the six months ended October 31, 2005 are as follows:


No. of Warrants      50,000           77,179           30,000
                    ----------     ----------        -----------
Grant               June 2005        June 2005        June 2005
Term                Three Years      Five Years       Three Years
Compensation
   value             $ 11,369         $ 22,531         $8,463
Stock price on
 commitment date     $ 0.65           $ 0.70           $0.70
Exercise price       $ 0.75           $ 0.65           $0.68
Expected life        1.0 years        1.0 years        1.0 years
Risk-free rate
  of return          3.51%            3.61%            3.61%
Expected annual
  volatility         100%             100%             100%
Annual rate of
  dividends          0%               0%               0%
Services provided   Edgar Filing     Prior Legal       Manufact.
                     Services          Fees             Planning


                                       37
<PAGE>

          WARRANTS ISSUED OR COMMITTED AS PENALTY FOR LATE REGISTRATION

During the six months ended October 31, 2005 and 2004 and the period from August
21, 1995 (inception) to October 31, 2005, the Company issued or committed to
issue warrants to purchase 2,424,057, 1,050,664, and 5,080,135 shares of common
stock, respectively, as a penalty with a fair value of $632,703 , $841,383 and
$2,151,731, respectively, for the late registration of the Company's common
stock. The fair values of the warrants were determined using the Black-Scholes
model. See "Note 17 - Commitments and Contingencies, Penalty Securities".

           WARRANTS BECOMING CASHLESS AS PENALTY FOR LATE REGISTRATION

In October 2005, warrants to purchase 2,151,022 common shares became cashless
due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines. If the closing price for the
Company's shares is greater than the exercise price, then the holders may
exercise the warrant by a cashless exercise. The number of shares to be received
by the holders upon cashless exercise is determined by the spread between the
closing price of the Company's common stock on the exercise date and the
exercise price of the warrant, but would not exceed the number of the underlying
shares to the warrant so exercised. These common shares would be issued to the
holder with no proceeds to the Company. See "Note 17- Commitments and
Contingencies, Penalty Securities".

                                CASHLESS WARRANTS

As of October 2005, of the total 30,342,006 total warrants outstanding,
6,465,636 warrants have cashless exercise rights. If the closing price for the
Company's shares is greater than the exercise price, then the holders may
exercise the warrant by a cashless exercise. The number of shares to be received
by the holders upon cashless exercise is determined by the spread between the
closing price of the Company's common stock on the exercise date and the
exercise price of the warrant, but would not exceed the number of the underlying
shares to the warrant so exercised. These common shares would be issued to the
holder with no proceeds to the Company.

NOTE 20 - SUBSEQUENT EVENTS

                    RECENT SALES AND ISSUANCES OF SECURITIES

In November 2005, the Company issued a convertible promissory note in exchange
for $100,000 in cash. The note bears interest at 10% per annum and is due
January 18, 2006. In connection with the financing, the Company assigned as
security to the holder receivables in the amount of $ $227,524. The holder has
the option to convert the principal and accrued interest into shares of common
stock at a conversion price of $0.50 per share at any time until the later of
the prepayment date or the maturity date. As additional consideration, the
holder received a detachable warrant to purchase 50,000 shares of common stock
at an exercise price of $0.75 per share and expiring in three years.

In November 2005, the Company issued $200,000 of convertible promissory notes
("CNP") to various investors for $200,000 in cash. The CNP bear interest at 10%
per annum (except if an event of default in which case they bear interest at the
default rate of 12% per annum from the default date until such default is cured
or waived) and are due in November 2006. The CNP were issued with detachable
warrants to purchase 160,000 shares of common stock with a three year term at an
exercise price of $0.80 per share. The holders have the option to convert the
principal and accrued interest into shares of common stock at a conversion price
of $0.60 per share at any time until the later of the prepayment date or the
maturity date. If the Company enters into any sale of equity or equity-based
securities which yields gross proceeds to the Company of at least $2,500,000,
the holders must exercise this conversion option. The Notes are senior to all of
the Company's existing indebtedness, other than any current or future accounts
receivable financing up to an aggregate face amount of $1,000,000.


                                       38
<PAGE>

                               PENALTY SECURITIES

In December 2005, the Company issued 150,741 Shares, previously committed in the
prior year period, to various holders of securities with registration rights as
a penalty, due to the Company's inability to file and maintain effective a
registration statement within certain specified deadlines.

In November 2005, the Company committed to issue 98,780 Shares and warrants to
purchase 366,714 Shares, of which a portion of the warrant values was accrued in
October 2005, at various exercise prices between $0.45 and $1.75, to various
holders of securities with registration rights as a penalty, due to the
Company's inability to file and maintain effective a registration statement
within certain specified deadlines.

In November 2005, the Company issued 10,685 Shares, previously committed in the
prior year period, to various holders of securities with registration rights as
a penalty, due to the Company's inability to file and maintain effective a
registration statement within certain specified deadlines.

                      CONSULTANCY AGREEMENTS AND CONTRACTS

In November 2005, the Company entered into an engagement letter with an attorney
to act as special counsel to the Company on discovery and litigation matters
related to the arbitration between HWH Enterprises and the Company. Pursuant to
the agreement, the Company will pay the attorney $200 per hour and agrees to
reimburse the attorney for any pre-approved expenses.

In November 2005, the Company engaged a research physicist as a scientific
advisor and consultant to the Company. Pursuant to the letter agreement, the
Company will pay the consultant an annual consultancy fee 10,000 euros,
approximately $11,750 in cash and/or stock of the Company payable in quarterly
installments. Either party may terminate the agreement at any time.

In November 2005, the Company entered into a reseller agreement with a leading
governmental sales organization related to non-exclusive rights to market and
resell the Company's products and services to federal, state and local
customers. The reseller agreement expires in six months but may be extended at
the sole option of the reseller.

In November 2005, the Company entered into a Memorandum of Understanding (MOU)
with a service disabled veteran owned sales organization to negotiate and enter
into an exclusive teaming and reseller agreement, under which the Company will
work with no other qualified service disabled veteran-owned sales organization
in the sales and marketing of its products and services. The MOU terminates in
one year or upon 30 days' written notice from one party to the other.

In November 2005, the Company entered into a letter agreement with technology
management consultant in which the consultant will provide the Company with
advisory services to the Company as to business strategy, technology management
and new product/innovation development. The Company will pay the consultant a
retainer of $25,000, payable in restricted common stock of the Company. The
agreement may be terminated by any party with 60 days' written notice to the
other.

                                   LITIGATION

In November 2005, a claim was filed against the Company with the District Court
of Orange County, California by SBI-USA ("SBI"). SBI is seeking collection of a
fee in the amount $50,000 allegedly owed to it for financial advisory services
purported to have been provided to the Company during the fiscal year ended
2003. The Company is in the process of engaging local counsel and intends to
defend itself and counsel will respond with appropriate challenges. As of this
date, the Company and its legal counsel have made no other determination as to
the merits of, or possible defenses to, the claim, and are unable to predict a
meaningful estimate of the costs of defending against the claim at this time.

In December 2005, a claim was filed against the Company with the County Court of
Dallas County by Lockwood Greene Engineers Inc. ("LGE") (Cause No.
cc-05-12059-b). LGE is seeking collection of a fee in the amount of $35,039
allegedly owed to it for engineering and construction services purported to have
been provided to the Company during the fiscal year ended 2005. The Company is
in the process of engaging local counsel and intends to defend itself and
counsel will respond with appropriate challenges. As of this date, the Company
and its legal counsel have made no other determination as to the merits of, or
possible defenses to, the claim, and are unable to predict a meaningful estimate
of the costs of defending against the claim at this time.

In December 2005, the Company was served with regard to a Complaint filed
against it by a former consultant with the California Labor Commissioner
regarding purported unpaid wages in the amount of $20,000. A hearing before the
California Labor Commissioner is expected will be held in January 2006. As of
this date, the Company has made no other determination as to the merits of,
possible defenses to, or any other aspect of such claim.


                                       39
<PAGE>

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

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

FORWARD LOOKING STATEMENTS

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

Forward looking statements necessarily involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievement expressed or
implied by such forward-looking statements. Readers are cautioned to review
carefully the discussion concerning these and other risks which can materially
affect our business, operations, financial condition and future prospects, which
is found under the heading Risk Factors at the end of this Item 2 and in "Note 4
- Risks and Uncertainties" to our unaudited Consolidated Financial Statements.

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

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

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


                                       40
<PAGE>

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

GENERAL

The following discussion and analysis of our financial condition and plan of
operation should be read in conjunction with the unaudited Consolidated
Financial Statements and accompanying Notes and the other financial information
appearing elsewhere herein. Certain statements contained herein may constitute
forward-looking statements, as discussed at the beginning of this Item 2. Our
actual results could differ materially from the results anticipated in the
forward-looking statements as a result of a variety of factors, including those
discussed in our filings with the Securities and Exchange Commission and as
discussed in the sections under the heading Risk Factors at the end of this Item
2 and in "Note 4 - Risks and Uncertainties" to our unaudited Consolidated
Financial Statements.

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the
commercialization of its initial proprietary, neutron-based, "stoichiometric"
sensor devices, including (i) the CarBomb FinderTM 3C4, a vehicle-borne system,
for the detection and identification of car bombs, and (ii) the SIEGMATM 3E3, a
portable suitcase-borne system for the detection and identification of home-made
bombs, also known as Improvised Explosive Devices or IEDs. We are marketing our
devices to governmental and private entities and are negotiating licenses for
distribution of our devices with various industry partners. To date, we have
devoted the bulk of our efforts and resources to the research, design, testing
and development of proprietary "stoichiometric" sensor devices and underlying
technologies, and have yet to generate meaningful revenues from the sale of any
products using its technologies.

We also continue to focus on the research and development of additional
applications of our technologies and their further exploitation, both internally
and through collaboration with third parties. We are currently developing
prototypes in programs with the U.S. Department of Defense and the Department of
Homeland Security for other related uses of our core technology. We entered into
a funded cooperative development agreement with the U.S. Transportation Security
Administration (TSA) to produce a proof of concept which incorporates our
SuperSenzor TM technology into a baggage screening system. Our "stoichiometric"
technology, or "StoitechTM" has been incorporated into additional prototype
applications which, if we are able to raise the funds necessary to commercialize
them, will be the next products we attempt to launch: (i) an in-ground explosive
screening system, the CarBomb Finder(TM) 3C5, (ii) a landmine detector, the
Anti-Tank Landmine Detector 7AT7; (iii) the STARRAY(TM), an all-terrain
robot-borne IED detector; (iv) an unexploded ordnance detector, Unexploded
Ordnance Sensor 3UXO3, which is also useful to detect IEDs; and (v) a device we
call a "Refractorymeter", which can detect fissures or erosions in the ceramic
lining of oil cracking tanks.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, we have
five wholly-owned subsidiaries, HiEnergy Defense, Inc., HiEnergy Mfg Company,
HiEnergy International Co., HiEnergy Europe, Ltd. and HiEnergy Leasing Co.
HiEnergy Defense, Inc. was incorporated under the laws of the State of Delaware
in July 2003 to focus on marketing military and defense applications of our
technology within the Washington D.C. area from its office in Alexandria,
Virginia. HiEnergy Europe Ltd. was incorporated under the laws of the State of
Delaware in March 2004 and is presently not operating, but will focus on
marketing our technology throughout the European Union. HiEnergy Mfg Company was
incorporated under the laws of the State of Delaware in March 2005 and formed
for the purpose of creating a separate entity for the manufacturing and assembly
of our products. HiEnergy International Co. was incorporated under the laws of
the State of Delaware in July 2005 and was formed for the purpose of creating a
separate entity for the sales and servicing of our products overseas, excluding
Europe, and primarily the Middle East and Africa. Lastly, HiEnergy Leasing Co.
was incorporated under the laws of the State of Delaware in August 2005 and
formed for the purpose of creating a business entity to establish and
administrate an equipment lease finance and equipment rental operations.

Prior to January 2005, we also had one majority-owned subsidiary, HiEnergy
Microdevices, Inc., which was incorporated in Delaware on August 21, 1995 and
was the vehicle through which StoitechTM was initially developed by our Chairman
and CEO, Dr. Bogdan Maglich ("Microdevices", and together with HiEnergy Europe,
Ltd., HiEnergy Defense, Inc., HiEnergy Mfg Company, HiEnergy International Co.
and HiEnergy Leasing Co., the "Subsidiaries"). As a result of a short-form
merger, which became effective on January 25, 2005, we assumed all of
Microdevices' assets and liabilities and Microdevices ceased to exist as a
separate entity as of that date.


                                       41
<PAGE>

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

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

BASIS OF PRESENTATION

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

We have prepared our accompanying 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 in Risk Factors:
Risks Related to Our Business at the end of this Item 2, there is substantial
uncertainty about our ability to continue as a going concern. Our financial
statements do not include adjustments that might result from the outcome of this
uncertainty.

The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for a complete
set of annual financial statements. We believe our disclosures are adequate so
that the information presented is not misleading. These accompanying unaudited
Consolidated Financial Statements should be read with our annual audited
financial statements and the notes thereto included in our Annual Report on Form
10-KSB for the year ended April 30, 2005, and other reports filed with the SEC.
In our opinion, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of results of the financial
position and the operations have been included in the accompanying unaudited
Consolidated Financial Statements. Results of operations for the six months
ended October 31, 2005 are not necessarily indicative of the results that may be
expected for the current fiscal year ending April 30, 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

LONG-LIVED ASSETS

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


                                       42
<PAGE>

STOCK-BASED COMPENSATION

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

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

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

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

RESEARCH AND DEVELOPMENT COSTS

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

THREE MONTHS ENDED OCTOBER 31, 2005 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2004

For the three months ended October 31, 2005, we incurred a net loss of $
$2,159,000, as compared to a net loss of $2,435,000 for the three months ended
October 31, 2004. Included in the losses are equity based expenses of $703,000
and $1,086,000, respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $972,000 for the three months ended
October 31, 2005, a decrease of $219,000 from the prior year. In lieu of cash,
we have often engaged service providers by offering common stock, warrants,
options and convertible notes payable ("CNP") as compensation. Through various
arrangements, these providers have provided services such as business
development, business and financial consulting, Edgar filing services, legal and
other professional services, and directorship. Some warrants and options have
been issued and expensed, but then subsequently forfeited causing no dilution to
us. The major components of general and administration expenses, both cash and
equity, are as follows:

<TABLE>
<CAPTION>
                        Three Months Ended October 31, 2005        Three Months Ended October 31, 2004
                    ------------------------------------------  ----------------------------------------
                        Cash &         Equity                      Cash &       Equity
                       Accrued         Based                      Accrued        Based                       Increase/
                       Expenses     Compensation     Total        Expenses    Compensation     Total         (Decrease)
                    ------------------------------------------  ----------------------------------------    -----------
<S>                 <C>             <C>             <C>         <C>           <C>            <C>            <C>
 Salaries &         $      264,000  $          --   $  264,000  $    185,000  $         --   $   185,000    $    79,000
 benefits
 Consulting                     --         13,000       13,000       121,000        35,000       156,000       (143,000)
 Legal fees                154,000             --      154,000       220,000            --       220,000        (66,000)
 Accounting fees            71,000             --       71,000       258,000            --       258,000       (187,000)
 Investor & public
  relations                 42,000             --       42,000        67,000            --        67,000        (25,000)
 Insurance                  48,000             --       48,000        43,000            --        43,000          5,000
 Travel                    122,000             --      122,000        87,000            --        87,000         35,000
 Other                     220,000         38,000      258,000       115,000        60,000       175,000         83,000
                    ------------------------------------------  ----------------------------------------    -----------
           Total    $      921,000  $      51,000   $  972,000  $  1,096,000  $     95,000   $ 1,191,000    $  (219,000)
                    ------------------------------------------  ----------------------------------------    -----------
</TABLE>

                                                           43
<PAGE>

For the three months ended October 31, 2005, as compared to the prior year
period, salary and benefits expense increased $79,000. This increase was
primarily due to normal pay increases and incentives as well as the hiring over
the last year of two additional personnel, including our senior vice president
in January 2005 and our controller in March 2005. Both had served as consultants
from July 2004 until their conversion to employees, filling vacancies left by
employees who received comparable lower wages. This increase in employee wages
for both new hires has a corresponding decrease in consultancy expense due to
their conversion as related below. We expect salaries and benefits expense to
increase during the second half of fiscal 2006 with the hiring of additional
administrative personnel to fulfill our public reporting requirements, internal
controls, sales and marketing activities, and other legal and financial matters
related to our commercialization objectives. For the remainder of fiscal 2006,
we expect an increase in equity-based compensation as we attempt to better
conserve cash by issuing registered securities to employees in lieu of cash
bonuses and wage increases, but at lesser or no discount and pursuant to more
favorable terms than in prior periods.

Consulting expenses for the three months ended October 31, 2005 decreased
$143,000 from the prior year period. This decrease was attributable to a
decrease of $22,000 in equity-based compensation from $35,000 to $13,000 for the
three months ended October 31, 2005. The equity-based compensation was due to
the issuance of common shares for director fees with an additional Board meeting
in the prior year period. Excluding the equity-based compensation, consulting
expenses decreased $121,000 and was primarily attributable to the conversion of
consultants to employees, as discussed above, and is off-set by the $79,000
increase to salary and benefits. For the remainder of fiscal year 2006, we
expect little cash compensation consulting expenses with the hiring of employees
and a lower reliance on consultants.

Legal fees decreased $66,000 for the three months ended October 31, 2005 as
compared to the prior year period. The decrease was primarily due to being able
to accomplish savings by internalizing many legal and regulatory functions
reducing our reliance on outside legal services. We expect overall legal expense
to remain comparatively high through the remainder of fiscal year 2006, as we
attempt to settle a class action law suit and other pending legal matters
disclosed in this Report, as well as file registration statements on behalf of
employees and selling shareholders, and the Company. We also expect an increase
in equity-based compensation as we attempt to better conserve cash by issuing
registrable securities to legal advisors, but at lesser or no discount and
pursuant to more favorable terms than in prior periods.

Accounting fees decreased $187,000 for the three months ended October 31, 2005
as compared to the prior year period. This decrease was due to a reduction in
accounting activity. As with legal fees, accounting fees began decreasing
significantly in the second half of fiscal year 2005 compared to prior year
periods, and continued the savings trend in the first half of fiscal year 2006.
The savings is the result of normalized accounting activity and improvements to,
and efficiencies achieved, in our internal reviews. We expect accounting fees to
decrease slightly but remain higher than the norm as we complete the filing of
our restated annual and quarterly financial results as well as file registration
statements on behalf of employees and selling shareholders, and the Company. For
the remainder of fiscal 2006, we expect to continue to make improvements to and
generate efficiencies in our financial controls by increasing accounting staff,
which should reduce external accounting costs.

Investor and public relations expense decreased $25,000 for the three months
ended October 31, 2005 as compared to the prior year period. During the fiscal
year 2005, we had redirected resources toward more immediate concerns, such as
product development, the funding of internal operations, and expenditures
related to legal and regulatory matters, and had internalized many investor
relations and shareholder services. In June 2005, we entered into a
cost-effective contract with a consultant to provide public media relations on a
success fee basis and most recently engaged an outside consultant to provide
investor relations services. Going forward we intend to increase our public
relations and investor relations activities as we seek to develop increased
awareness among the investor community and, accordingly, we anticipate a
moderate increase in investor and public relations fees throughout the remainder
of fiscal year 2006.

Insurance expense increased nominally by $5,000 for the three months ended
October 31, 2005 over the prior year period. This increase was primarily
attributable to an increase for health insurance associated with new hires. In
May 2005, we renewed our Directors and Officers liability policy for an
additional year. Without a substantial cost increase, we were able to increase
our coverage from $2,000,000 to $3,000,000. We expect insurance expense to
increase throughout the remainder of fiscal year 2006 as a result of increasing
health insurance coverage as we expand operations.


                                       44
<PAGE>

Travel expenses increased by $35,000 for the three months ended October 31, 2005
over the prior year period. The increase was attributed primarily to increased
travel to demonstrate our prototype product. We have improved our administration
of costs for offsite demonstrations and have reduced the personnel requirement
for demonstrations to one or two scientific staff and one or two sales
representatives. Further, we are conducting all demonstrations with our
suitcase-borne system which is more cost effective to ship than our vehicle
system. Lastly, we have placed significant emphasis on the domestic market and
have limited demonstrations overseas. We expect that travel expenses for fiscal
year 2006 will remain high as our sales and marketing personnel continue to
attend numerous key industry conferences and trade shows, management continues
to meet with investors, consultants and potential strategic partners, such as in
Spain and the Middle East, and general business activity increases in connection
with our commercialization objectives.

Other expenses for the three months ended October 31, 2005 increased $83,000 to
$258,000 as compared to the prior year period amount of $175,000. Excluding
equity-based compensation expenses for filing services, other expenses increased
$105,000 and was primarily due to business development expenses of $45,000,
marketing expenses of $13,000, and payments to outside sales representatives of
$40,000 upon receipt of a $375,000 deposits towards two of our SIGMA units.
Savings were achieved in other areas such as, sponsor/participant fees and
contributions to industry symposiums and related events, postage and delivery
expense, stock transfer agent services, telecommunications, office equipment and
supplies, and licenses and permits. For the remainder of fiscal 2006, we expect
other expenses to remain high as general business activity increases in
connection with our commercialization objectives and our growing emphasis on
marketing and business development.

RESEARCH AND DEVELOPMENT

Net research and development expenses for the three month period ended October
31, 2005 increased $223,000 from the prior year period. Excluding grant income,
which increased $132,000, from the prior fiscal year, research and development
expenses increased $356,000. The major components of research and development
expenses are as follows:

<TABLE>
<CAPTION>
                         Three Months Ended October 31, 2005      Three Months Ended October 31, 2004
                    ------------------------------------------  ----------------------------------------
                        Cash &         Equity                       Cash &        Equity
                       Accrued         Based                       Accrued        Based                     Increase/
                       Expenses     Compensation      Total        Expenses   Compensation     Total        (Decrease)
                    ------------------------------------------  ----------------------------------------    -----------
<S>                 <C>             <C>             <C>         <C>           <C>            <C>            <C>
 Salaries &         $      180,000  $          --   $  180,000  $    144,000  $         --   $   144,000    $    36,000
 benefits
 Consultants               177,000          8,000      185,000        71,000            --        71,000        114,000
 Supplies                   43,000             --       43,000        24,000            --        24,000         19,000
 Travel                         --             --           --         3,000            --         3,000         (3,000)
 Depreciation               90,000             --       90,000        39,000            --        39,000         51,000
 Other                     162,000             --      162,000        24,000            --        24,000        138,000
Grant Income              (223,000)            --     (223,000)      (91,000)           --       (91,000)      (132,000)
                    ------------------------------------------  ----------------------------------------    -----------
           Total    $      429,000  $       8,000   $  437,000  $    214,000  $         --   $   214,000    $   223,000
                    ------------------------------------------  ----------------------------------------    -----------
</TABLE>

Salaries and benefits related to research and development activities increased
$36,000 for the three months ended October 31, 2005 as compared to the prior
year period. This increase was due to normal increases as well as the hiring of
one research scientist in February 2005 to fill one of two research and
development positions vacated in July 2004. Consulting expenses for the three
months ended October 31, 2005 increased $114,000 from $71,000 to $185,000. Part
of the $114,000 increase in consulting expense was due to issuance of a warrant
valued at $8,000 to a consultant. Excluding the equity-based compensation,
consulting expenses increased $106,000 over the prior year period. The increase
was primarily due to increased development activity in efforts to bring our
product to market. We expect salaries and benefits to increase throughout fiscal
year 2006 with the addition of new scientific personnel to fill in current
vacancies in our scientific team and to advance the development of our
technology and devices. We also estimate an increase in equity-based
compensation as we attempt to better conserve cash by issuing registered
securities to research and development employees in lieu of cash bonuses and
wage increases and consultants, but at lesser or no discount and pursuant to
more favorable terms than in prior periods.


                                       45
<PAGE>

Supply expense increased $19,000 for the three months ended October 31, 2005 as
compared to the prior year period due to increased activity under our
cooperative and research development agreements and the testing of new
configurations of our prototypes. In light of an increase in our grant
application activity and anticipated cooperative and research development
agreement, we expect that expenses related to supplies will increase for the
remainder of fiscal 2006. However, we intend to continue focusing on the
completion of final product design for commercialization and will direct most
resources toward that objective.

Travel expenses decreased $3,000 for the three months ended October 31, 2005 as
compared to the prior year period as our scientists were more involved in onsite
research and development during the current year period than the prior year
period. We expect travel expenses to increase throughout fiscal year 2006, with
increased activity, anticipated co-development programs and offsite testing.

For the three months ended October 31, 2005, depreciation expense increased by
$51,000 as we have continued to purchase equipment for research and development
activities. Cumulatively, these additions have increased depreciation expense.
Also included in the current year period is $13,000 extra depreciation expense
from the transfer of $134,000 of equipment during the period that was originally
recorded as inventory. In light of our expected increase in research and
development activities as we advance and/or develop prototypes and make
technology improvements, we expect further research and development purchases.
Accordingly, depreciation expense should increase as we continue to expense
current equipment and increase our capital expenditures year over year.

Other research and development expenses for the three months ended October 31,
2005 increased $138,000 compared to the prior year period. The primary increase
was due to $83,000 of expenses for key research equipment acquired under an
operating lease. We intend to return the equipment at the end of its
twelve-month lease or sooner, as we have been successful in making other
arrangements. The remaining increase was primarily due to an increase for health
insurance and building lease expense. In October, we extended our facility lease
for an additional year with both an increase in square footage as well as cost
per square foot.

We have completed the second year of Phase II of a Small Business Innovation
Research ("SBIR") contract awarded to us in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate ("NVESD"). Under the terms of the
contract, we are to develop and test its Anti-Tank Landmine Detector 7AT7TM over
a two-year period, which was extended for one additional year at the option of
the U.S. Army. As of October 31, 2005, we have earned $779,944 against the
contract. If further research and development work is required upon the
expiration of Phase II, we have the ability to submit a request for additional
Phase II and/or Phase III funding, which the government would consider based
upon our progress to date and the merits of the project. The U.S. Army is under
no obligation to continue to assist in funding these research and development
costs beyond Phase II or any subsequent extension, or to purchase any of our
products, including the Anti-Tank Landmine Detector 7AT7TM, once we have
completed the development activities. Under the terms of the contract, the U.S.
Army pays a portion of our research and development costs on a periodic basis
during the term of the contract, for which we are required to submit monthly
written reports detailing its progress. We recognize the proceeds from the
contract as an offset against research and development expenses following the
submission of the monthly written reports. When the written report is accepted
by the U.S. Army, we usually receive payment in about 30 to 45 days. As of
October 31, 2005, we collected all receivables due us in completion of Phase II.

In September 2004, we entered into a Cooperative Agreement with the U.S.
Transportation Security Administration (TSA). Under the agreement, we are to
provide proof-of-concept for the Company's "NextGen Checked Baggage Program
(STOXOR)" over a nine month period, which may be extended at the option of the
TSA. The agreement provides funding in the amount of $367,141 for Stage 1, and
an additional $145,381 for Stage 2, if, at the conclusion of Stage 1, the TSA
elects to continue with us. As of October 31, 2005, we have earned $367,141 in
cooperative financing from the TSA to complete Stage 1. There is no obligation
for the TSA to fund our development efforts under this agreement beyond the
Stage 1 funded amount or to purchase any of our products once we have completed
the development activities. The TSA will pay our research and development costs
on a periodic basis during the term of the contract, for which we are required
to submit monthly written reports detailing our progress under the contract.
When the written report is accepted by the TSA, we receive payment in about 30
to 45 days. Payments commenced in November 2004 and we recognize the Stage 1
funding amount as an offset against research and development expenses upon
submission of the monthly written reports. As of October 31, 2005, we collected
all receivables due it in completion of Stage 1.


                                       46
<PAGE>

On July 18, 2005, we executed a Time and Material Subcontract in the amount of
$333,688 with Integrated Concepts & Research Corporation (ICRC), which was
awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the United
States Army Tank - Automotive and Armaments Command, Warren Michigan (TACOM).
Under the Subcontract, we will deliver one CarBomb FinderTM head unit and
provide the engineering and technical support necessary for its integration in
the SmarTruck Multi-Mission Vehicle platform. The finished prototype is expected
to be field tested by the U.S. Army early 2006. As of date, we have received
payment in the amount of $222,716 for performance to date. ICRC will pay the
Company's time and material costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress under the subcontract. The Company recognizes the
proceeds from the subcontract as an offset against research and development
expenses following the submission of the monthly written reports. Pursuant to
the subcontract, when the written report is accepted by ICRC, we receive payment
in about 30 to 45 days, or no later than 5 days after payment by the U.S. Army
Contracting Officer to ICRC.

DEPRECIATION

Total depreciation expense for the three months ended October 31, 2005 and 2004
was $99,000 and $50,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period. Also included in the current year period is $13,000 extra
depreciation expense from the transfer of $134,000 of equipment during the
period that was originally recorded as inventory.

INTEREST EXPENSE AND INCOME

Interest expense for the three months ended October 31, 2005 increased to
$142,000 from $90,000 for the prior year period. $107,000 of the current period
interest expense was due to inducement of $271,000 of convertible notes payable
which included accrued interest. The inducement allowed the note holder to
receive 178,173 additional shares than under the original conversion terms.
$56,000 of the prior period interest expense was due to expensing of the debt
discount recorded upon issuance of a $100,000 convertible note payable with a
beneficial conversion feature upon conversion. The current year period included
$4,000 for the amortization of the debt discount recorded upon issuance of
$300,000 of convertible notes payable with both beneficial conversion features
and detachable warrants. Under GAAP accounting rules the debt discount
associated with a convertible note payable is amortized over the term of the
note. During the prior year period, the note was converted in the same month
issued so the debt discount was immediately expensed. The fair value of the
beneficial conversion feature was determined by taking the spread between the
market price of the common stock at the date of issuance and the conversion
price, multiplied by the number of shares underlying the CNP. The value of
detachable warrants was determined using the Black-Scholes pricing model. Other
interest expense for the three months ended October 31, 2005 was comprised of
interest generated on outstanding CNP in the amount of $673,000 issued to our
former legal counsel for services and a CNP issued to an investor. The CNP to
our former legal counsel carry a 10% interest and the CNP to the investor carry
a 5% interest rate. $224,000 of the CNP were converted and together with $47,000
of accrued interest account for the $107,000 inducement charge.

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

OTHER EXPENSES

During the three months ended October 31, 2005, we wrote-off property, plant and
equipment with a book value of $88,000 and recorded a loss on the disposal of
$75,000.

PENALTIES ON DEBT AND EQUITY ISSUANCES

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, common stock and warrants with registration rights, as a result of our
inability to file and maintain an effective a registration statement within
certain specified deadlines. The penalties will stop accruing on all of the
instruments once a registration statement covering the instruments is filed and
maintained effective, or when the penalties become impermissible as a matter of
law as prescribed in the instrument.

During the three months ended October 31, 2005, the Company issued or committed
to issue 325,952 shares of common stock as penalty expenses valued in the amount
of $206,000 for the late registration of common stock. Certain holders of
unregistered common stock received will continue to receive each month, as
applicable, additional shares calculated as a percentage of the original number
of shares they purchased.

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


                                       47
<PAGE>

purchasers of common stock, the increase is a percentage of the number of shares
underlying the original warrants. For the three months ended October 31, 2005,
we recorded $327,000 as a penalty expense upon amending warrants to provide for
the purchase of an additional 1,356,219 common shares as penalties to these
investors. The fair value of these warrants was determined using the
Black-Scholes model.

For the three months ended October 31, 2004, we recorded penalty expenses in the
amount of $676,000, $260,000, and $3,000, against the issuance of 761,385 common
shares, amendment warrants to purchase 551,062 common shares and $3,000 of CNP
as penalties, respectively. The fair value of the warrants was determined using
the Black-Scholes model.

SIX MONTHS ENDED OCTOBER 31, 2005 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2004

For the six months ended October 31, 2005, we incurred a net loss of $
$4,213,000, as compared to a net loss of $6,563,000 for the six months ended
October 31, 2004. Included in the losses are equity based expenses of $1,327,000
and $4,017,000, respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $2,068,000 for the six months ended
October 31, 2005, a decrease of $808,000 from the prior year. In lieu of cash,
we have often engaged service providers by offering common stock, warrants,
options and convertible notes payable ("CNP") as compensation. Through various
arrangements, these providers have provided services such as business
development, business and financial consulting, Edgar services, legal and other
professional services, and directorship. Some warrants and options have been
issued and expensed, but then subsequently forfeited causing no dilution to us.
The major components of general and administration expenses, both cash and
equity, are as follows:

<TABLE>
<CAPTION>
                        Six Months Ended October 31, 2005           Six Months Ended October 31, 2004
                    ------------------------------------------  ----------------------------------------
                        Cash &         Equity                      Cash &        Equity
                       Accrued         Based                      Accrued         Based                      Increase/
                       Expenses     Compensation       Total      Expenses    Compensation      Total        (Decrease)
                    ------------------------------------------  ----------------------------------------    -----------
<S>                 <C>             <C>             <C>         <C>           <C>            <C>            <C>
 Salaries and       $      541,000  $      32,000   $  573,000  $    339,000  $     39,000   $   378,000    $   195,000
 benefits
 Consulting                 22,000         31,000       53,000       206,000       281,000       487,000       (434,000)
 Legal fees                311,000         60,000      371,000       420,000       390,000       810,000       (439,000)
 Accounting fees           192,000             --      192,000       398,000            --       398,000       (206,000)
 Investor  & public
  relations                107,000             --      107,000       129,000            --       129,000        (22,000)
 Insurance                  95,000             --       95,000        86,000            --        86,000          9,000
 Travel                    218,000             --      218,000       216,000            --       216,000          2,000
 Other                     400,000         59,000      459,000       252,000       120,000       372,000         87,000
                    ------------------------------------------  ----------------------------------------    -----------
           Total    $    1,886,000  $     182,000   $2,068,000  $  2,046,000  $    830,000   $ 2,876,000    $  (808,000)
                    ------------------------------------------  ----------------------------------------    -----------
</TABLE>

For the six months ended October 31, 2005, as compared to the prior year period,
salary and benefits expense increased $195,000. This increase was primarily due
to normal pay increases and incentives as well as the hiring over the last year
of two additional personnel, including our senior vice president in January 2005
and our controller in March 2005. Both had served as consultants from July 2004
until their conversion to employees, filling vacancies left by employees who
received comparable lower wages. This increase in employee wages for both new
hires has a corresponding decrease in consultancy expense due to their
conversion as related below. We expect salaries and benefits expense to increase
during the second half of fiscal 2006 with the hiring of additional
administrative personnel to fulfill our public reporting requirements, internal
controls, sales and marketing activities, and other legal and financial matters
related to our commercialization objectives. For the remainder of fiscal 2006,
we expect an increase in equity-based compensation as we attempt to better
conserve cash by issuing registered securities to employees in lieu of cash
bonuses and wage increases, but at lesser or no discount and pursuant to more
favorable terms than in prior periods.


                                       48
<PAGE>

Consulting expenses for the six months ended October 31, 2005 decreased $434,000
from the prior year period. This decrease was attributable to a decrease of
$250,000 in equity-based compensation from $281,000 to $31,000 for the six
months ended October 31, 2005. The prior year equity-based compensation was due
to the issuance of common shares for various consulting services, as well as for
director fees. The current year period only includes shares issued for
director's fees. Excluding the equity-based compensation, consulting expenses
decreased $184,000 and was primarily attributable to the conversion of
consultants to employees, as discussed above, and is off-set by the $195,000
increase to salary and benefits. Since the prior year period, we have reduced
our reliance on paying for services with restricted equity instruments because
of the significant discounting required to compensate for their illiquidity. For
the remainder of fiscal year 2006, we expect cash compensation consulting
expenses to decrease with the hiring of employees and a lower reliance on
consultants; however, we do expect an increase in equity-based compensation as
we attempt to better conserve cash by issuing registrable securities to
consultants and other service providers, but at lesser or no discount and
pursuant to more favorable terms than in prior periods.

Legal fees decreased $439,000 for the six months ended October 31, 2005 as
compared to the prior year period. The decrease was primarily due to our being
less reliant upon the issuance of equity-based compensation as discussed above.
The prior year period included $390,000 of equity based compared to $60,000 for
the current year, a decrease of $330,000. The $60,000 of equity-based
compensation expense incurred for the six months ended October 31, 2005
represents the excess cost of having settled certain outstanding accounts
payable to a related party for legal services. Excluding equity-based
compensation, legal fees decreased $109,000 as we have been able to accomplish
savings by internalizing many legal and regulatory functions reducing our
reliance on outside legal services. We expect overall legal expense to remain
comparatively high through the remainder of fiscal year 2006, as we attempt to
settle a class action law suit and other pending legal matters disclosed in this
Report, as well as file registration statements on behalf of employees and
selling shareholders, and the Company. We also expect an increase in
equity-based compensation as we attempt to better conserve cash by issuing
registrable securities to legal advisors, but at lesser or no discount and
pursuant to more favorable terms than in prior periods.

Accounting fees decreased $206,000 for the six months ended October 31, 2005 as
compared to the prior year period. This decrease was due to a reduction in
accounting activity. As with legal fees, accounting fees began decreasing
significantly in the second half of fiscal year 2005 compared to prior year
periods, and continued the savings trend in the first half of fiscal year 2006.
The savings is the result of normalized accounting activity and improvements to,
and efficiencies achieved, in our internal reviews. We expect accounting fees to
decrease slightly but remain higher than the norm as we complete the filing of
our restated annual and quarterly financial results as well as file registration
statements on behalf of employees and selling shareholders, and the Company. For
the remainder of fiscal 2006, we expect to continue to make improvements to and
generate efficiencies in our financial controls by increasing accounting staff,
which should reduce external accounting costs.

Investor and public relations expense decreased $22,000 for the six months ended
October 31, 2005 as compared to the prior year period. During the fiscal year
2005, we had redirected resources toward more immediate concerns, such as
product development, the funding of internal operations, and expenditures
related to legal and regulatory matters, and had internalized many investor
relations and shareholder services. In June 2005, we entered into a
cost-effective contract with a consultant to provide public media relations on a
success fee basis and most recently engaged an outside consultant to provide
investor relations services. Going forward we intend to increase our public
relations and investor relations activities as we seek to develop increased
awareness among the investor community and, accordingly, we anticipate a
moderate increase in investor and public relations fees throughout the remainder
of fiscal year 2006.

Insurance expense increased nominally by $9,000 for the six months ended October
31, 2005 over the prior year period. This increase was primarily attributable to
an increase in health insurance associated with new hires. In May 2005, we
renewed our Directors and Officers liability policy for an additional year.
Without a substantial cost increase, we were able to increase our coverage from
$2,000,000 to $3,000,000. We expect insurance expense to increase throughout the
remainder of fiscal year 2006 as a result of increasing health insurance
coverage as we expand operations.

Travel expenses increased nominally by $2,000 for the six months ended October
31, 2005 over the prior year period. The slight increase, in spite of expanding
operations and increased outside sales activity, was attributed primarily to our
better administration of costs for offsite demonstrations. During the prior year
period, we incurred significant costs with regards to a demonstration of our
CarBomb FinderTM prototype in Istanbul, Turkey, which was attended by a team of
scientific personnel and required expedited shipments of heavy equipment and
materials utilized in the demonstration. We have since reduced the personnel
requirement for demonstrations to one or two scientific staff and one or two
sales representatives. Further, we are conducting all demonstrations with our
suitcase-borne system which is more cost effective to ship than our vehicle
system. Lastly, we have placed significant emphasis on the domestic market and
have limited demonstrations overseas. We expect that travel expenses for fiscal


                                       49
<PAGE>

year 2006 will remain high as our sales and marketing personnel continue to
pursue offsite sales demonstrations and attend numerous key industry conferences
and trade shows, as management continues to meet with investors, consultants and
potential strategic partners, such as in Spain and the Middle East, and as
general business activity increases in connection with our commercialization
objectives.

Other expenses for the six months ended October 31, 2005 increased $87,000 to
$459,000 as compared to the prior year period amount of $372,000. Excluding
equity-based compensation expenses for filing services and 25,000 shares
contributed to a non-profit organization valued at $16,000, other expenses
increased $148,000. The increase was attributed to an inventory reserve of
$37,000, business development expenses of $75,000, marketing expenses of
$20,000, and payments to outside sales representatives of $40,000 upon receipt
of a $375,000 deposit towards the purchase of two of our SIGMA units. Savings
were achieved in other areas such as, sponsor/participant fees and contributions
to industry symposiums and related events, postage and delivery expense, stock
transfer agent services, telecommunications, office equipment and supplies, and
licenses and permits. For the remainder of fiscal 2006, we expect other expenses
to remain high as general business activity increases in connection with our
commercialization objectives and our growing emphasis on marketing and business
development.

RESEARCH AND DEVELOPMENT

Net research and development expenses for the six month period ended October 31,
2005 increased $421,000 from the prior year period. Excluding grant income,
which increased $102,000, from the prior fiscal year, research and development
expenses increased $523,000. During the six month period ended October 31, 2005,
we have issued equity-based compensation to service providers in lieu of cash.
The major components of research and development expenses are as follows:

<TABLE>
<CAPTION>
                         Six Months Ended October 31, 2005         Six Months Ended October 31, 2004
                    ------------------------------------------  ----------------------------------------
                        Cash &         Equity                       Cash &       Equity
                       Accrued         Based                       Accrued       Based                       Increase/
                       Expenses     Compensation      Total       Expenses    Compensation      Total        (Decrease)
                    ------------------------------------------  ----------------------------------------    -----------
<S>                 <C>             <C>             <C>         <C>           <C>            <C>            <C>
 Salaries &         $      381,000  $          --   $  381,000  $    309,000  $         --   $   309,000    $    72,000
 benefits
 Consultants               218,000         29,000      247,000        84,000            --        84,000        163,000
 Supplies                   68,000             --       68,000        41,000            --        41,000         27,000
 Travel                         --             --           --        13,000            --        13,000        (13,000)
 Depreciation              145,000             --      145,000        82,000            --        82,000         63,000
 Other                     298,000             --      298,000        87,000            --        87,000        211,000
Grant Income              (284,000)            --     (284,000)     (182,000)           --      (182,000)      (102,000)
                    ------------------------------------------  ----------------------------------------    -----------
           Total    $      826,000  $      29,000   $  855,000  $    434,000  $         --   $   434,000    $   421,000
                    ------------------------------------------  ----------------------------------------    -----------
</TABLE>

Salaries and benefits related to research and development activities increased
$72,000 for the six months ended October 31, 2005 as compared to the prior year
period. This increase was due to normal increases and increased bonuses as well
as the hiring of one research scientist in February 2005 to fill one of two
research and development positions vacated in July 2004. Consulting expenses for
the six months ended October 31, 2005 increased $163,000 from $84,000 to
$247,000. Part of the $163,000 increase in consulting expense was due to
issuance of common stock valued at $21,000 and a warrant valued at $8,000 to
consultants. Excluding the equity-based compensation, consulting expenses
increased $134,000 over the prior year period. The increase was primarily due to
increased development activity in efforts to bring our product to market. We
expect salaries and benefits to increase throughout fiscal year 2006 with the
addition of new scientific personnel to fill in current vacancies in our
scientific team and to advance the development of our technology and devices. We
also estimate an increase in equity-based compensation as we attempt to better
conserve cash by issuing registered securities to research and development
employees in lieu of cash bonuses and wage increases and consultants, but at
lesser or no discount and pursuant to more favorable terms than in prior
periods.

Supply expense increased $27,000 for the six months ended October 31, 2005 as
compared to the prior year period due to increased activity under our
cooperative and research development agreements and the testing of new
configurations of our prototypes. In light of an increase in our grant
application activity and anticipated cooperative and research development
agreement, we expect that expenses related to supplies will increase for the
remainder of fiscal 2006. However, we intend to continue focusing on the
completion of final product design for commercialization and will direct most
resources toward that objective.


                                       50
<PAGE>

Travel expenses decreased $13,000 for the six months ended October 31, 2005 as
compared to the prior year period as our scientists were more involved in onsite
research and development during the current year period than the prior year
period. We expect travel expenses to increase throughout fiscal year 2006, with
increased activity, anticipated co-development programs and offsite testing.

For the six months ended October 31, 2005, depreciation expense increased by
$63,000 as we have continued to purchase equipment for research and development
activities. Cumulatively, these additions have increased depreciation expense.
Also included in the current year period is $17,000 extra depreciation expense
from the transfer of $158,000 of equipment during the period that was originally
recorded as inventory. In light of our expected increase in research and
development activities as we advance and/or develop prototypes and make
technology improvements, we expect further research and development purchases.
Accordingly, depreciation expense should increase as we continue to expense
current equipment and increase our capital expenditures year over year.

Other research and development expenses for the six months ended October 31,
2005 increased $211,000 compared to the prior year period. The primary increase
was due to $166,000 of expenses for key research equipment acquired under an
operating lease. We intends to return the equipment at the end of its
twelve-month lease or sooner, as we have been successful in making other
arrangements. The remaining increase was primarily due to an increase for health
insurance and building lease expense. In October, we extended our facility lease
for an additional year with both an increase in square footage as well as cost
per square foot.

We have completed the second year of Phase II of a Small Business Innovation
Research ("SBIR") contract awarded to us in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate ("NVESD"). Under the terms of the
contract, we are to develop and test its Anti-Tank Landmine Detector 7AT7TM over
a two-year period, which was extended for one additional year at the option of
the U.S. Army. As of October 31, 2005, we have earned $779,944 against the
contract. If further research and development work is required upon the
expiration of Phase II, we have the ability to submit a request for additional
Phase II and/or Phase III funding, which the government would consider based
upon our progress to date and the merits of the project. The U.S. Army is under
no obligation to continue to assist in funding these research and development
costs beyond Phase II or any subsequent extension, or to purchase any of our
products, including the Anti-Tank Landmine Detector 7AT7TM, once we have
completed the development activities. Under the terms of the contract, the U.S.
Army pays a portion of our research and development costs on a periodic basis
during the term of the contract, for which we are required to submit monthly
written reports detailing its progress. We recognize the proceeds from the
contract as an offset against research and development expenses following the
submission of the monthly written reports. When the written report is accepted
by the U.S. Army, we usually receive payment in about 30 to 45 days. As of
October 31, 2005, we collected all receivables due us in completion of Phase II.

In September 2004, we entered into a Cooperative Agreement with the U.S.
Transportation Security Administration (TSA). Under the agreement, we are to
provide proof-of-concept for the Company's "NextGen Checked Baggage Program
(STOXOR)" over a nine month period, which may be extended at the option of the
TSA. The agreement provides funding in the amount of $367,141 for Stage 1, and
an additional $145,381 for Stage 2, if, at the conclusion of Stage 1, the TSA
elects to continue with us. As of October 31, 2005, we have earned $367,141 in
cooperative financing from the TSA to complete Stage 1. There is no obligation
for the TSA to fund our development efforts under this agreement beyond the
Stage 1 funded amount or to purchase any of our products once we have completed
the development activities. The TSA will pay our research and development costs
on a periodic basis during the term of the contract, for which we are required
to submit monthly written reports detailing our progress under the contract.
When the written report is accepted by the TSA, we receive payment in about 30
to 45 days. Payments commenced in November 2004 and we recognize the Stage 1
funding amount as an offset against research and development expenses upon
submission of the monthly written reports. As of October 31, 2005, we collected
all receivables due it in completion of Stage 1.

On July 18, 2005, we executed a Time and Material Subcontract in the amount of
$333,688 with Integrated Concepts & Research Corporation (ICRC), which was
awarded as part of ICRC's Prime Contract Number DAAE07-02-C-L062 with the United
States Army Tank - Automotive and Armaments Command, Warren Michigan (TACOM).
Under the Subcontract, we will deliver one CarBomb FinderTM head unit and
provide the engineering and technical support necessary for its integration in
the SmarTruck Multi-Mission Vehicle platform. The finished prototype is expected
to be field tested by the U.S. Army early 2006. As of date, we have received
payment in the amount of $222,716 for performance to date. ICRC will pay the
Company's time and material costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress under the subcontract. The Company recognizes the
proceeds from the subcontract as an offset against research and development
expenses following the submission of the monthly written reports. Pursuant to
the subcontract, when the written report is accepted by ICRC, we receive the
remaining payments in about 30 to 45 days, or no later than 5 days after payment
by the U.S. Army Contracting Officer to ICRC.


                                       51
<PAGE>

DEPRECIATION

Total depreciation expense for the six months ended October 31, 2005 and 2004
was $166,000 and $103,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period. Also included in the current year period is $17,000 extra
depreciation expense from the transfer of $158,000 of equipment during the
period that was originally recorded as inventory.

INTEREST EXPENSE AND INCOME

Interest expense for the six months ended October 31, 2005 decreased to $172,000
from $846,000 for the prior year period. Most of the expense for the prior year
period was due to immediate expensing of the debt discount from the beneficial
conversion feature of the notes and the detachable warrants issued in
conjunction with the notes payable. The full amount of the debt discount was
expensed in the period as the notes were deemed subject to rescission rights, as
discussed elsewhere in this report, or converted. Of the $846,000 total interest
expense, $124,000 was attributed to expensing the debt discount for the
beneficial conversion feature and $662,000 was attributed to expensing the debt
discount for the detachable warrants. The debt discount was proportionately
allocated based on the intrinsic value of the convertible note and the fair
value of the detachable warrants capped by the proceeds received. The intrinsic
value of the beneficial conversion feature was determined by taking the spread
between the market price of the common stock at the date of issuance and the
conversion price, multiplied by the number of shares underlying the CNP. The
fair value of the warrants was determined using the Black-Scholes model.
Interest expense for the six months ended October 31, 2005 was comprised of
interest generated primarily on outstanding CNP in the amount of $673,000
previously issued to our former legal counsel for services, of which $224,400
was converted October 31, 2005, $240,000 of CNP issued in June 2004 to an
investor, $38,400 of CNP earned as a penalty to the investor, and $300,000 of
new CNP issued during the current six month period. The notes bear interest
rates per annum of 10%, 5%, and 10%, respectively.

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

OTHER EXPENSES

During the six months ended October 31, 2005, we disposed of property, plant and
equipment either by sale or write-off with book value of $202,000. We received
$21,000 of proceeds and recorded a loss on the disposal of $101,000.

PENALTIES ON DEBT AND EQUITY ISSUANCES

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, common stock and warrants with registration rights, as a result of our
inability to file and maintain an effective a registration statement within
certain specified deadlines. The penalties will stop accruing on all of the
instruments once a registration statement covering the instruments is filed and
maintained effective, or when the penalties become impermissible as a matter of
law as prescribed in the instrument, or when the securities became saleable
under Rule 144.

For the six months ended October 31, 2005, we recorded $12,000 as a penalty
expense upon issuance of CNP with a face value of $12,000 as penalties for our
delayed registration statement.

During the six months ended October 31, 2005, the Company issued or committed to
issue 562,898 shares of common stock as penalty expenses in the amount of
$373,000 for the late registration of common stock. Certain holders of
unregistered common stock received and will continue to receive each month, as
applicable, additional shares calculated as a percentage of the original number
of shares they purchased.

The purchasers of the CNP and shares of common stock discussed above also
received detachable warrants with their purchases. The Company has and will
continue to accrue each month, increases to the number of shares underlying each
original warrant as a penalty. For the purchasers of the CNP, the increase is 2%
of the number of shares underlying the original warrants. For the purchasers of
common stock, the increase is a percentage of the number of shares underlying
the original warrants. For the six months ended October 31, 2005, we recorded
$633,000 as a penalty expense with the accrual of increases to shares underlying
warrants as penalties, which provide for the purchase of an additional 2,424,057
common shares to these investors. The fair value of these warrants was
determined using the Black-Scholes model.


                                       52
<PAGE>

For the six months ended October 31, 2004, we recorded penalty expenses in the
amount of $1,560,000, $841,000, and $6,000, against the issuance of 1,423,025
common shares, warrants to purchase 1,050,664 common shares and $6,000 of CNP as
penalties, respectively. The fair value of the warrants was determined using the
Black-Scholes model.

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2005, we had neither cash nor cash equivalents and had drawn
$4,000 from our line of credit. We recorded a $34,000 receivable from the U.S.
Army to reimburse for expenses occurred as part of a demonstration and
evaluation of our vehicle borne unit.

Other current assets, as of October 31, 2005 increased to $397,000 from $382,000
as of prior year end and consisted primarily of $111,000 of prepaid insurance,
$105,000 in deposits for an advanced generator and other equipment, $42,000 of
equity compensation for prepaid Edgar filing services, and $30,000 of prepaid
legal services.

During the six months ended October 31, 2005, our sources of cash were as
follows:

                                                                    Amount
                                                                --------------
         Sales or commitments of common stock                   $    1,620,000
         Sales of convertible notes payable                            300,000
         Offering costs                                                (42,000)
                                                                --------------
                                                                $    1,878,000
                                                                --------------

As of October 31, 2005, accounts payable increased to $2,140,000, an increase of
$852,000 from April 30, 2005. A great part of this increase, 381,000, was due to
the receipt of robots ordered for the development of a new deployment platform
for our devices. Because we continue to operate under a tightened cash position,
which has resulted in delays to our making payments to some service providers
and vendors, we have adopted a policy to mitigate the risks of high stock
inventories and growing accounts payable, especially in the event of any
unexpected delays or difficulties introducing our products into the marketplace.
For the remainder of fiscal year 2006, we foresee accounts payable remaining
high as we will require significant cash conservation measures.

Accrued expenses of $128,000 as of October 31, 2005 consisted of $32,000 for an
equipment operating lease, $34,000 for accrued use tax and a fee payable to an
investment bank as discussed in our Annual Report on Form 10-KSB for the year
ended April 30, 2005.

As of October 31, 2005, we continue to carry an estimated payroll tax liability
of $438,000 for stock compensation (in the form of Microdevices shares) given
for services rendered by officers, employees, directors, legal advisors and
consultants during the period from June 1997 through February 2002. See "Note 8
- Accrued Payroll and Payroll Taxes" to our unaudited Consolidated Financial
Statements. Excluding the payroll tax liability mentioned above, as of October
31, 2005, we have accrued payroll and payroll tax of $52,000, which includes
deferred salaries for certain employees.

As of October 31, 2005, we were delinquent on notes payable totaling $85,000
with a shareholder and related party. The notes payable have been due on demand
since November 1997; however, no demand has been received.

As of October 31, 2005, we have outstanding unsecured convertible promissory
notes totaling $449,000 to our former legal counsel. During the six months ended
October 31, 2005, $224,000 of the original $673,000 of convertible notes was
converted. The legal fees were expensed as a general and administration expense
in the periods incurred. The remaining notes bear 10% interest and are due on
demand. As of October 31, 2005, no demand has been received on these notes.

In September and October, 2005, we sold $300,000 of CNP to various investors.
The CNP bear interest at 10% per annum (except if an event of default in which
case they bear interest at the default rate of 12% per annum from the default
date until such default is cured or waived) and are due in October 2006. The CNP
were issued with detachable warrants to purchase 240,000 shares of common stock
with a three year term at an exercise price of $0.80 per share. The holders have
the option to convert the principal and accrued interest into shares of common
stock at a conversion price of $0.60 per share at any time until the later of
the prepayment date or the maturity date. If the Company enters into any sale of
equity or equity-based securities which yields gross proceeds to the Company of
at least $2,500,000, the holders must exercise this conversion option. The Notes
are senior to all of the Company's existing indebtedness, other than any current
or future accounts receivable financing up to an aggregate face amount of
$1,000,000.


                                       53
<PAGE>

In June 2004, we sold $300,000 of CNP deemed subject to rescission rights to
Richard Melnick and Sherbrooke Partners LLC in connection with the exercise of
an option to a second closing obtained in January 2004. As of October 31, 2005,
$240,000 of the CNP held by Richard Melnick remains currently outstanding and
based upon legal advice we have received as to the appropriate state and federal
limitations periods pertaining to the rescission obligations assumed, we
reclassified the $240,000 of CNP deemed subject to rescission rights to
convertible notes payable. The notes when combined with $38,400 of CNP issued as
penalties for late registration and interest of $13,860 accrued as of October
31, 2005 are convertible into 649,512 shares of our common stock. The CNP have a
two year term and bear interest at 5%, and when coupled with the proceeds
allocated to the detachable warrants have an estimated effective annual interest
rate of 49%. They are convertible into common stock at $0.45 per share. The
outstanding CNP also contain warrants to purchase common stock with a six and
one-half year term as follows: 1,066,666 at $0.45 per share; 320,000 at $0.75
per share; and 192,000 shares at $1.25 per share.

The CNP holder also has registration rights on the underlying shares and since
the securities were not registered by us before October 30, 2004, the investors
have received as penalties, additional detachable warrants to purchase 2% of the
amount of shares exercisable under the original warrants and CNP equal to 2% of
the principal balance of the original CNP, for each subsequent month through
June 2005, when the securities became saleable under Rule 144. See "Note 13 -
Convertible Notes Payable" to our unaudited Consolidated Financial Statements.

Pursuant to the terms of a note purchase agreement as described in "Note 12 -
Convertible Notes Payable - Related Parties" to our unaudited Consolidated
Financial Statements, Nicholas J. Yocca has the option to purchase an additional
$400,000 worth of CNP prior to the filing of a registration statement, which
have detachable warrants to purchase a number of shares of common stock as
follows: (i) a warrant to purchase common stock at $0.45 per share, for the
number of shares of common stock that could be purchased at that price with an
amount in cash equal to the face amount or principal balance of the CNP; (ii) a
warrant to purchase common stock at $0.75 per share, for the number of shares of
common stock that could be purchased at that price with an amount in cash equal
to the face amount or principal balance of the CNP; (iii) a warrant to purchase
common stock at $1.25 per share, for the number of shares of common stock that
could be purchased at that price with an amount in cash equal to the face amount
or principal balance of the CNP; and (iv) a warrant to purchase common stock at
$1.50 per share, for the number of shares of common stock that could be
purchased at that price with an amount in cash equal to the face amount or
principal balance of the CNP. The warrants expire between 120 days and three and
one-half years after issuance. The holder also has registration rights on the
underlying shares but is not entitled to receive penalties for delays or failure
to register the underlying shares. In order to preserve his registration rights,
the investor must make additional purchases before the filing of the
registration statement incorporating the underlying shares. In June 2005, Mr.
Yocca elected to convert $185,000 of CNP originally purchased in January 2004,
plus $11,932 of accrued interest, into 437,627 shares of our common stock. The
detachable warrants issued in the first closing to Mr. Yocca have since expired.

For the six month period ended October 31, 2005, we reclassified 243,466 of the
remaining 312,012 shares deemed subject to rescission rights, reported at fiscal
year ended April 30, 2005, to common stock and additional paid in capital,
further reducing the recorded current liability for shares deemed subject to
rescission rights from $199,560 to $50,000. As of October 31, 2005, a total of
68,546 shares remained deemed subject to rescission rights. Based upon legal
advice received, we anticipate reclassifying the remaining 68,546 shares deemed
subject to rescission rights and eliminating the remaining current liability of
$50,000 in the current fiscal year.

As of October 31, 2005, we had total current liabilities of approximately $4.5
million and our liabilities continue to significantly exceed our cash on hand.
While we anticipate cash inflows from purchases from SEPTA, ICRC and Spain, we
currently do not have any significant revenue. Unless and until revenues reach a
sufficient level to cover operating expenses and our liabilities, we are
required to continue to sell equity or debt instruments in order to pay present
liabilities and fund on-going operations. If we cannot attract investment or
generate revenues, our ability to grow may be severely hindered and we may not
be able to continue as a going concern.

In April and May 2004, we issued purchase orders for $2.4 million to two vendors
for the purchase of components for our bomb detection units. In April 2004, we
ordered neutron generators at a cost of approximately $1,033,000 through vendor
financing. We received our first unit from this order in October 2004. We may
lease these units from the vendor for up to 12 months, with a buy-out option at
the termination of the lease, for estimated monthly payments of $5,800, and with
80% of the lease payments allocated toward the purchase price. In May 2004, we
ordered gamma ray detectors for $1,368,000. We have received 27 of the 60 gamma


                                       54
<PAGE>

radiation directors and included these as inventory to be assembled for sale as
of October 31, 2005. Payment terms for these detectors require 50% down payment
upon order with the balance due following our receipt and acceptance of the
goods. In order to meet our payment requirements under these purchase orders, we
have been, and must continue, raising capital through the sale of securities.
Our reliance on new equity capital for the financing of these component
purchases, as with the funding of our operating deficit, will continue until we
successfully commercialize a product, generate sales revenues, and achieve a
sufficient level of positive operating cash flow or qualify to borrow funds
against purchase orders to acquire components for fulfillment.

In November 2004, the Company issued a purchase order for two advanced neutron
generators at a total cost of approximately $335,000 for use in research and
development related to our SuperSenszorTM program and the Company's cooperative
research agreement with the TSA. As of October 31, 2005, the Company has
received one of the generators and has made a non-refundable deposit of $92,997
against the remaining unit which is to be delivered the later of fourteen weeks
of acceptance, twelve weeks after progress payment or eight weeks following
receipt by manufacturer of API window.

In February 2005 and in March 2005, we issued purchase orders in the amount of
$304,000 and $611,000, respectively, for the purchase of remotely controlled
robotic vehicles to be used to facilitate the transportation of our explosive
detecting technology to suspicious targets. The orders were issued based on
indications from potential buyers in the U.S. Military and Middle East that they
would require a remote robotic deployment capability if they were to purchase
our devices. Under the terms of the purchase orders, we are to be notified 30
days prior to shipping with payment due 30 days following receipt. As of July
31, 2005, we had received all of the robotic vehicles ordered, then in October
returned four of the units for a complete cancellation of the amount owed for
those units.

In April 2005, we revised our financial requirements for calendar 2005 from a
range of $5 to $10 million to a range of $8 to $10 million. The need to revise
our estimates was prompted by delays in our product launch of the CarBomb
FinderTM system, a shift in our priorities and resources toward accelerating the
commercialization of the SIEGMATM 3E3, and the inability to eliminate the high
costs associated with regulatory and legal issues facing us. Aside from
diverting a tremendous amount of resources that otherwise would have gone toward
product development and other working capital purposes, the regulatory and legal
issues disclosed in our filings have been a major barrier to our raising more
substantial cost-effective capital. Until such time as we can (i) generate
sufficient sales revenues to fund operations and research and development costs;
and/or (ii) leverage our financial and developmental capabilities through
strategic partnerships which provide financial support; and/or (iii) receive
significant governmental grants, cooperative funding or purchase contracts, we
will be required to raise an additional $3 million to $4 million through the
sale of securities to cover estimated expenditures for the remainder of fiscal
2006.

As to the status of efforts to raise $8 to $10 million, representing our revised
financial requirements, we have raised through private placements to accredited
investors and institutional investors a total of nearly $7 million in proceeds
from financing activities from May 2004 to present. Additionally, we earned
$610,000 from grants and other governmental funding for the fiscal year ended
April 2005. In October 2005, we received grant proceeds in the amount of
$222,000 for performance under a subcontract with ICRC, which provides for an
additional $112,000 in grant proceeds upon the delivery of one CarBomb FinderTM
head unit to the U.S. Army. Further, we received payment in the amount of
$375,000 against an order of two SIEGMATM 3E3 systems from Southeastern
Pennsylvania Transportation Authority (SEPTA) in the amount of $603,000, and
expect an additional $228,000, representing the balance of the order, to be paid
30 days following completion of the Factory Acceptance Test and launch of the
customization and integration program. In September 2005, the Company entered
into a subcontract with a defense technology organization which entitles it to
receive a performance payment of $33,600. Lastly, we currently maintain a
deposit against an order by Compania de Aprovisionamiento Especifico S.L. of
Tenerife, Spain for one SIEGMATM 3E3 system and expect to collect the balance of
$227,000 upon delivery. In September 2005, we engaged a placement agent to
provide certain advisory and placement services in connection with securing
financing. Although we have been able to raise capital through self-managed
private placements of our equity, we currently do not have an institutional
commitment for the additional capital necessary as of the date of this Report.

As to strategic partnerships, we entered into a non-binding Memorandum of
Understanding on January 28, 2005 to form a joint venture company to be located
in Tenerife, Spain, which is intended to serve as a complementary platform for
sales and distribution into the European and other markets. We expect to
finalize the negotiation and execution of the joint venture agreement before end
of end of the current fiscal year, which may provide up to $3 million in paid-in
capital to the joint venture by investors. Although the transaction described in
the press release dated December 9, 2003 did not transpire as contemplated at
that time, our efforts and relationships made in Spain are expected beneficially
to serve the development, funding and growth of the joint venture. We intend to
explore and pursue other joint ventures such as the one in Spain, which provide
for the contribution of capital and resources from a strategic partner to
develop an assigned territory and accomplish the certification, importing,
licensing, permitting, maintenance and service of our products overseas, in
exchange for a regional license from us for the assembly, sale, and marketing of
our products in certain markets. Such arrangements can also reduce the capital
requirements necessary for us to build and maintain the infrastructure necessary
to manufacture and support our products outside North America.


                                       55
<PAGE>

PLAN OF OPERATION

Our continuing corporate objective for the remainder of fiscal year 2006 is to
commercialize and bring to market the CarBomb FinderTM 3C4 and SIEGMATM system,
as well as new prototypes incorporating our proprietary "stoichiometric"
technologies, including the STARRAY(TM), an all-terrain robot-borne IED
detector, and our in-ground explosives detection and identification device, the
CarBomb FinderTM 3C5. Additionally, we expect to continue with research and
development activities focused on the design, testing and development of sensor
systems incorporating our core technologies for other governmental and
commercial applications and markets.

During the first half of fiscal year 2006, we continue to see an increase in
significant positive feedback as to the potential demand for our explosives
identification and detection products and have correspondingly increased, and
directed greater resources toward, the direct and indirect sales and marketing
of our products both domestically and overseas. As of the date of this Report,
we have developed a strategic sales and marketing plan and have expanded our
relationship with distributors and resellers specializing in the security and
anti-terrorism industry, defense industry consultants, as well as potential
strategic partners in developing some key geographic markets and verticals. In
November 2005, we executed a strategic reseller agreement with GTSI Corp. to
offer our products and services to federal, state and local governmental
organizations through their purchasing vehicles and are in the process of
expanding our reseller program.

We have also entered into a memorandum of understanding to form a joint venture
which is intended to serve as a complementary platform for sales and
distribution into the European and other markets, as well as reduce the capital
requirements necessary for us to build and maintain the infrastructure necessary
to manufacture and support our products outside North America. The joint
venture, as contemplated, provides for the contribution of capital and resources
from a strategic partner to develop an assigned territory and accomplish the
certification, importing, licensing, permitting, maintenance and service of our
products overseas, in exchange for a regional license from HiEnergy for the
assembly, sale, and marketing of our products in certain markets. We are
currently working through a E.U. commission comprised of local Spanish officials
and industry sponsors to secure local and regional governmental support and to
resolve other considerations required for the joint venture, or similar business
formation, to move forward.

For the remainder of fiscal year 2006, we intend to continue to accelerate and
enhance our pre-market and aftermarket efforts, which address the warranty,
service, maintenance, certification, licensing, export policy, product liability
and customer service elements of our commercialization strategy. We have entered
into a teaming agreement with a global maintenance company, submitted our
technology for coverage under the Safety Act to address product liability
issues, and have engaged outside specialists involved in certification,
inspection, and risk management. In November 2005 we also established a new
program to provide comprehensive licensing and operator training support as part
of our aftermarket servicing, which includes equipment training, in field
support and radiation licensing and safety certification programs. We intend to
negotiate and enter into additional outsourcing servicing with the overall
objective of providing a uniform and uncompromising package of product and
customer support.

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

During the remainder of fiscal year 2006, we will continue to direct a greater
portion of our production budget to our SIEGMATM system, which management has
prioritized in response to the positive reception from the industry,
specifically airport and transit system operators. In January 2005, we received
our first order for one SIEGMATM 3E3, followed by the order of two systems from
SEPTA in June 2005. The systems have been assembled in our Irvine, CA facility,
completed factory acceptance testing and are being field tested by the customer
this quarter. As for our vehicle-borne CarBomb FinderTM 3C4, we have upgraded
the delivery platform design and are making enhancements to the vehicle assembly
with the assistance of integration partners. In October 2005, we announced the
order of one CarBomb FinderTM to the U.S. Army under a subcontract providing for
the integration of our system in the Army's SmarTruck Multi-Mission Vehicle
platform, which is expected to be delivered before end of next quarter.


                                       56
<PAGE>

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

In March 2005, we formed a wholly-owned subsidiary, HiEnergy Mfg Company, in
order to create a semi-autonomous division to develop and manage the
infrastructure, policies and controls for the manufacture and assembly of the
SIEGMA(TM) 3E3 and CarBomb Finder(TM) 3C4. In June 2005, we also hired a
consultant for three months experienced in strategic planning and financial and
operational management to help us establish and refine a production system which
includes supplier relations, material handling, manufacturing processes, labor
force capabilities, and distribution systems. During the remainder of fiscal
year 2006 and into 2007, we will continue to incorporate the business practices,
management philosophies and technology tools necessary to optimize product
design and engineering to allow for the easiest production, fastest assembly,
best quality/reliability, and shortest time to market of our systems. Further,
in September 2005, we engaged an experienced engineering and production
consultant to build the internal mechanisms necessary to engineer and package
our core technologies in the most cost effective manner, as well as develop a
product test plan and quality control procedures.

In line with our commercialization activities, we will continue to increase
inventory during fiscal year 2006 of those core components and parts that have
greater delivery lead-times from vendors to prevent potentially harmful delays
in our product delivery cycle. Although we remain adverse to building
inventories, in light of the lead-times and the perceived demand for our
products, we have estimated that in order to meet, and properly manage the sales
cycle of, anticipated orders, we will require at any one time sufficient
components to deliver at least 5 to 10 units of our explosive detection systems
to buyers. In order to control inventory risk, we will continue to identify and
seek to engage additional sources of components in order to reduce, limit or
eliminate our exposure to single-source suppliers and protracted delivery
schedules. We have entered discussions with various vendors and are in the
process of securing commitments for volume discounting and to shorten production
times in anticipation of an increase in sales volume.

In light of an increase in our grant application activity and current and
anticipated cooperative and research development agreements, including a funded
program with the TSA, we plan to continue to focus on the research and
development of additional applications of our technologies and the further
exploitation of our technology assets both internally and through collaboration
with third parties. We also intend to build upon our investments in the base
units and core technologies upon which our explosives identification and
detection prototypes are based, as well as introduce more sophisticated
applications and configurations. We will use the proceeds of existing government
grants, new grants and/or research and development contracts, together with
other available funds, to accomplish these objectives. Further, we intend to
continue to work on expanding the number of explosive substances that can be
detected and identified by our systems, so as to provide the customer with the
most effective, reliable and adaptable tools possible.

We believe that general and administrative costs will show improvement in the
remainder of fiscal year 2006, as we reduce legal and accounting expenses
associated with certain pending litigation. While there can be no assurance, we
are hopeful that many of the open legal matters will be resolved during this
period. Materials and production costs for our explosive identification units
will be significant in remainder of fiscal year 2006 and fiscal year 2007.
Working capital requirements and inventories are also expected to grow in
remainder of fiscal year 2006 and fiscal year 2007, as necessary components are
purchased. Initial sales are projected to be at or near cost with margins
expected to improve significantly with the elimination of non-recurring
engineering costs, the realization of economies of scale attendant to the
opening of our production facility or the outlay of the assembly function to a
manufacturing partner, and the increased demand anticipated with the
introduction of our products into the marketplace.

We anticipate significant increases in personnel requirements throughout our
organization. An off-site production facility, when operational, will require
the hiring or contracting of approximately 20 new personnel. As we proceed with
our commercialization phase of our products and expand our operating structures,
significant enhancements to corporate management will also be necessary. We
anticipate the need to hire individuals to manage the product engineering,


                                       57
<PAGE>

manufacturing and distribution functions, and to fill and upgrade key executive
positions in fiscal year 2006, including, among others, a Chief Financial
Officer. Other areas that may require additional personnel include sales and
marketing, customer service and human resources. As funds are available, we also
anticipate hiring additional skilled personnel, such as advanced engineering
professionals, as part of a product development team that can operate and manage
projects with minimal supervision, additional scientists, and experienced
technicians. Our current facilities will be adequate to conduct our
administrative, research and development activities as well as initial assembly
and distribution.

Historically, we have financed operations with periodic cash infusions through
various financing vehicles. The uncertainties of securing financing has limited
our capacity to make greater investments in research and development, inventory
and component procurement, and human resources, as well as the commercialization
of our products. The estimated total costs to commercialize our current product
line, excluding contributions received through research and development grants,
is approximately $2 million. This amount includes personnel and consultant
expenses, property and materials, and ancillary costs related to concept
development, market assessment and verification, prototype development and
production of field testing units. We are currently seeking a larger capital
infusion in the range of $2 to $3 million, and we estimate that our total
financial requirements for calendar year 2006 will be between $8 and $10
million. The total requirement includes commercialization costs, manufacturing
facility build out, inventory procurement, as well as general administrative and
operational costs. In an attempt to control dilution, we intend to secure
financing on a quarterly or rolling basis to take advantage of any favorable
pricing that our stock may experience as we progress through the implementation
of our business plan. We also seek to limit our dependency on the sale of our
securities in funding working capital through proceeds from other sources, such
as pre-sales, sales, additional development grants, government contracts, the
formation of joint ventures, and from more traditional funding, such as working
lines of credit, receivables financing and purchase order/asset based lending.
Although we have been able to raise capital through self-managed private
placements of our equity, we currently do not have a firm institutional
commitment to raise the additional capital necessary as of the date of this
Report.


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<PAGE>

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

GENERAL BUSINESS RISKS

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED SHAREHOLDERS' DEFICIT OF
$36,012,829 AS OF OCTOBER 31, 2005, AND WE MAY NEVER ACHIEVE PROFITABILITY.

We have not generated any significant revenue from operations during the past
two fiscal years, and we have incurred net losses available to common
shareholders every year since our inception, including $4,212,668 for the six
months ended October 31, 2005, as compared to $6,563,404 for the prior year
period, and $36,012,829 for the period from August 21, 1995 (inception) through
October 31 2005. We expect that our operating expenses will increase in the near
term, due in part to investments that we intend to make in connection with our
plans to commercialize, manufacture and market our initial prototype devices:
the CarBomb Finder(TM) and SIEGMA(TM). To achieve profitability, we will need to
generate significant revenue, while achieving reasonable costs and expense
levels. We may not be able to generate enough revenue to achieve profitability.
If we cannot achieve or sustain profitability, we may not be able to fund our
expected cash needs or continue our operations.

WE WILL NEED ADDITIONAL CAPITAL TO MEET OUR OPERATING NEEDS, AND ADDITIONAL
CAPITAL MAY NOT BE AVAILABLE ON FAVORABLE TERMS OR AT ALL.

For the last two fiscal years, we have experienced average monthly operating
expenses of approximately $360,000, and no revenues from operations to offset
that amount. As such, we must continually raise capital from the sale of equity
or the placement of debt to private investors, or from government grants or
development contracts, in order to fund our operations at current levels or at
all. Our ability to raise additional funds in the public and private markets
will be adversely affected if the results of our business operation are not
favorable, or if the commercialization of the CarBomb Finder(TM) and SIEGMA(TM)
is poorly received or fails altogether.

Although we intend to seek additional funding through corporate collaborations
or from loans or investments from new or existing stockholders, additional
capital may not be available to us and, even if available, it may not be on
terms which our Board of Directors would be willing to accept. If we cannot
obtain the capital we need to fund our operations on terms which we can accept,
we may be required to curtail our operations significantly, or cease our
operations altogether, which would have a material adverse effect on our
business, our operations and our financial condition.

AS A DEVELOPMENT STAGE COMPANY WITH AN UNPROVEN BUSINESS STRATEGY, WE MAY NOT BE
ABLE TO ACHIEVE POSITIVE CASH FLOWS AND OUR LIMITED HISTORY OF OPERATIONS MAKES
EVALUATION OF OUR BUSINESS AND PROSPECTS DIFFICULT.

While we have developed prototypes of our CarBomb Finder(TM) and SIEGMA(TM)
systems, and are introducing our first commercial products, which include the
CarBomb Finder(TM) 3C4 and the SIEGMA(TM) 3E3, except for the orders placed by
our exclusive distributor in the Middle East, EEMCO, which is owned by one of
our Directors, Compania de Aprovisionamiento Especifico S.L. of Spain, and
Southeastern Pennsylvania Transportation Authority (SEPTA), we have made few
sales. Because of the few orders and the fact that the markets of the CarBomb
Finder(TM) and SIEGMA(TM) remain largely untested and undefined in general, we
are still classified as a development stage company with a limited operating
history.


                                       59
<PAGE>

Since April 25, 2002, we have focused our resources on the development of
products using our proprietary stoichiometric technology. We believe that we are
the only company working on a commercial product using stoichiometric
technology, and so there is no proven market for our products once development
is complete. To date, we have no commercialization experience with our
technology, and it is difficult to evaluate our prospects for sustained growth
and profitability. Our future success is more uncertain than if we had a more
established and proven history of operations and greater experience in executing
similar business strategies. Furthermore, it is expected that our current
business and marketing approach will be modified from time to time, as we
continue to assess the markets and applications for our technology as well as
evaluate prospective customer interest. No assurance can be made that the
current strategies or any future changes in our business model, and the
marketing of products, will be met with success. For the last two fiscal years
we have not generated any significant revenues and, as a result, we have limited
resources and our potential ability to generate and maintain income also remains
unproven.

THE COMMERCIAL VIABILITY OF THE CARBOMB FINDER(TM) AND SIEGMA(TM) IS UNPROVEN,
AND MAY NEVER BE REALIZED.

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

FROM TIME TO TIME WE DEMONSTRATE OUR PRODUCTS TO POTENTIAL CUSTOMERS AND/OR
SOURCES OF FUNDING, AND ANY FAILURES IN THESE DEMONSTRATIONS COULD HAVE A
MATERIALLY ADVERSE IMPACT UPON OUR ABILITY TO SELL OUR PRODUCTS, AND ON OUR
BUSINESS AND FINANCIAL CONDITION GENERALLY.

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

WE HAVE LIMITED RESOURCES TO DEVOTE TO PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. IF THE COMMERCIALIZATION OF THE CARBOMB FINDER(TM) AND
SIEGMA(TM) SYSTEMS PROVES UNSUCCESSFUL, ANY REALLOCATION OF RESOURCES COULD
SUBSTANTIALLY HARM OUR BUSINESS.

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

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


                                       60
<PAGE>

      o     our ability to raise additional capital for general and
            administrative costs relating to our operations;
      o     our ability to manufacture the CarBomb Finder(TM) and SIEGMA(TM)
            systems in commercial quantities, at a reasonable profit margin;
      o     receipt of any requisite approvals from the Nuclear Regulatory
            Commission (NRC), the Department of State, the Department of
            Commerce, the Department of Defense, and similar state or foreign
            authorities, as applicable;
      o     market acceptance of the CarBomb Finder(TM) and SIEGMA(TM) and
            after-market satisfaction related to performancE And maintenance
            issues;
      o     legislative or other government actions driven, in part, by the
            public's perception of the threats facing the population and
            unrelated political circumstances, which may leading to significant
            fluctuations in demand for our products and services;
      o     the availability and cost of key components for the CarBomb
            Finder(TM) and SIEGMA(TM);
      o     the timing of completion of acceptance testing for the CarBomb
            Finder(TM) and SIEGMA(TM); and
      o     changes in pricing policies by us, our competitors or our suppliers,
            including possible decreases in average selling prices of the
            CarBomb Finder(TM) and SIEGMA(TM), caused by promotional offerings,
            cusTOMer volume orders, or competitive pricing pressures.

We have introduced our systems, the CarBomb Finder(TM) 3C4 and SIEGMA(TM) 3E3
only recently, and all other applicaTIOns of our technology are still in the
early stages of development. These include, at present, our CarBomb Finder(TM)
3C5, STARRAY(TM), Anti-Tank Landmine Detector 7AT7, Unexploded Ordnance Sensor
3UXO3, Bomb BombSquad Detector, and our Refractorymeter. For the six months
ended October 31, 2005, we spent $854,842 or 29% of total operating expenses on
research and development, and we spent $2,067,804 or 71% of total operating
expenses on general and administrative expenses. We anticipate an increase in
general and administrative expenses due to additional operating expenses
demanded for commercialization of the CarBomb Finder(TM) and SIEGMA(TM) systems.
We anticipate research and development costs to stay approximately at the same
level, to the extent that independent testing of the CarBomb Finder(TM) and
SIEGMA(TM) systems will be required in order to obtain approvals from regulatory
authorITIes or gain better market acceptance by industry partners or
governmental officials.

If we fail to commercialize the CarBomb Finder(TM) 3C4 and SIEGMA(TM) 3E3, we
will have no other products to sell UNTil we complete their development and
commercialization, which will require additional capital and time. As a result,
our ability to generate revenues will decrease, which could substantially harm
our business. Because we have limited resources to devote to product development
and commercialization, any reallocation of resources to the commercialization of
the CarBomb Finder(TM) 3C4 and SIEGMA(TM) 3E3 that proves unsuccessful may delay
or jeopaRDIze the development of other products. The development of new products
may require time and financial resources much greater than what we currently
anticipate and, despite significant investments in research and development, may
not yield commercially successful products. The development of our products for
the detection of explosives, illicit drugs, biological agents and other
contraband is highly complex.

DUE TO OUR LOSSES AND ACCUMULATED DEFICIT, OUR AUDITORS HAVE RAISED CONCERNS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our independent certified public accountants qualified their opinion contained
in our consolidated financial statements as of and for the six months ended
October 31, 2005, and all subsequent periods, to include an explanatory
paragraph related to our ability to continue as a going concern, stating that
"the Company had negative cash flows from operations of approximately
$12,468,114 for the period from August 21, 1995 (inception) to October 31,
2005,. In addition, the Company had an accumulated deficit of $36,012,829 and
was in the development stage as of October 31, 2005. These factors raise
substantial doubt about the Company's ability to continue as a going concern."
The auditors recognize that the cash flow uncertainty makes their basic
assumptions about value uncertain. When it seems uncertain whether an asset will
be used in a "going concern" or sold at auction, the auditors assume that the
business is a "going concern" for purposes of all their work, and then they
disclose that there is material uncertainty about that assumption. It is
definitely a consequence of our negative cash flows from operations that we
continually need additional cash. At any time, a serious deficiency in cash
flows could occur and it is not always possible or convenient to raise
additional capital. A problem in raising capital could result in temporary or
permanent insolvency and consequently potential lawsuits by unpaid creditors and
perhaps closure of the business. All of these things are possibilities. It is
certain, in any case, that analysts and investors view unfavorably any report of
independent auditors expressing substantial doubt about a company's ability to
continue as a going concern. Consequently, we urge potential investors to review
the report of our independent certified public accountants and our consolidated
financial statements before making a decision to invest in us, and not to invest
in our common stock unless they can afford the potential loss of their entire
investment.


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COMPANIES WHICH POSSESS MUCH GREATER FINANCIAL AND OTHER RESOURCES AND HAVE MORE
MANUFACTURING, MARKETING, SALES AND DISTRIBUTION EXPERIENCE THAN WE HAVE, MAY
DEVELOP A TECHNOLOGY WHICH COMPETES EFFECTIVELY WITH OUR STOICHIOMETRIC
TECHNOLOGY, AND WE MAY BE UNABLE TO CAPTURE OR MAINTAIN MARKET SHARE.

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

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

      o     adversely impact our competitive position;
      o     require write-downs of obsolete technology;
      o     require us to discontinue production of obsolete products before we
            can recover any or all of our related research, development and
            commercialization expenses; or
      o     require significant capital expenditures beyond those currently
            contemplated.

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

WE DEPEND ON KEY MANAGEMENT AND PERSONNEL AND MAY NOT BE ABLE TO HIRE OR RETAIN
ADDITIONAL KEY MANAGERS, EMPLOYEES AND TECHNICAL AND SCIENTIFIC PERSONNEL WHEN
NEEDED.

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

WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM AND
THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE PUBLIC
MAY HAVE ON OUR FINANCIAL CONDITION AND ABILITY TO CONTINUE TO IMPLEMENT THE
GOVERNMENT SALES PORTION OF OUR BUSINESS PLAN.

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


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OUR BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS THAT COULD MATERIALLY HARM
OUR BUSINESS.

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

      o     changes in domestic and foreign regulatory requirements;
      o     political instability in the countries where we sell products;
      o     differences in technology standards;
      o     foreign currency controls;
      o     longer payment cycles and inadequate collection system;
      o     fluctuations in currency exchange rates;
      o     inconsistent intellectual property protections in foreign
            jurisdictions;
      o     export restrictions, tariffs, embargoes or other barriers;
      o     prejudicial employment laws and business practices;
      o     difficulties in obtaining and managing distributors; and
      o     potentially negative tax consequences.

MANUFACTURING RISKS

WE HAVE NO MANUFACTURING EXPERIENCE AND OUR ABILITY TO BE ABLE TO SUCCESSFULLY
EXECUTE A MANUFACTURING PLAN IS UNTESTED.

In order to be successful, we must be able to manufacture, or contract for the
manufacture of CarBomb Finder(TM) aND SIEGMA(TM) systems in a scalable and cost
effective manner, producing sufficient quantities on a timely basis, undER
strict quality guidelines and in compliance with regulatory requirements. To
date, we have not manufactured any CarBomb Finder(TM) or SIEGMA(TM) systems for
commercial sale, nor have we contracted with any third parties to manufacture
the product for us. In order to move toward commercial production, in August
2004, we retained engineering and construction consultants to develop a detailed
conceptual plan for a manufacturing facility, and in March 2005, we formed
HiEnergy Mfg Company in order to create a semi-autonomous division to develop
and manage the infrastructure, policies and controls for the manufacture and
assembly of CarBomb Finder(TM) and SIEGMA(TM) systems. We anticipate that we
will need to make a substantial capital investment and recruit qualified
personnel in order to build, equip and/or operate any manufacturing facility.
Although we have not yet determined the timing as to the construction or
build-out of a manufacturing facility, we intend to begin the initial phases of
production of the first 10 CarBomb Finder(TM) and/or SIEGMA(TM) systems at our
facilities in IrvINE and to continue this effort during fiscal year 2006, or
until either a manufacturing facility is constructed and/or equipped or an
outsourced manufacturing contract is secured.

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

      o     the ability to raise additional capital to cover the costs of
            constructing and equipping a facility and for the manufacturing of
            the CarBomb Finder(TM) and SIEGMA(TM) systems in quantities
            necessary to meeT anticipated demand should approval by regulatory
            authorities be obtained;
      o     the ability to manufacture products that have minimal and acceptable
            defects;
      o     the ability to obtain product liability insurance;
      o     the ability to obtain approvals from any applicable state or federal
            regulatory agencies;
      o     unexpected changes in regulatory requirements;
      o     inadequate protection of intellectual property; and
      o     risks of fire, earthquake, or other man-made or natural acts
            affecting manufacturing facilities.

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


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BEFORE WE CAN AFFORD TO HAVE OUR OWN MANUFACTURING FACILITY, OR ENGAGE A
THIRD-PARTY TO MANUFACTURE UNITS FOR US ON AN OEM BASIS, WE MUST MANUFACTURE THE
INITIAL UNITS WE SELL IN OUR LABORATORY FACILITY WITH LIMITED STAFF ON A ONE-OFF
BASIS, WHICH RENDERS US UNABLE TO CREATE ANY MANUFACTURING EFFICIENCIES OR TO
REALIZE A PROFIT FROM THE RESULTING SALES. IF WE ARE NOT ABLE SUCCESSFULLY TO
TRANSITION OUR MANUFACTURING TO FULL-SCALE COMMERCIAL PRODUCTION, IT WILL HAVE A
MATERIALLY ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.

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

WE RELY SUBSTANTIALLY ON THIRD-PARTY SUPPLIERS AND DEPEND UPON A LIMITED NUMBER
OF SUPPLIERS OF ONE OF OUR COMPONENTS FOR OUR CARBOMB FINDER(TM) AND SIEGMA(TM)
SYSTEMS (THE GAMMA RAY DETECTOR). THE INABILITY TO OBTAIN PARTS FROM THESE
SUPPLIERS ON A TIMELY BASIS AND THE LOSS OF PRODUCT OR DELAYS IN PRODUCT
AVAILABILITY FROM ONE OR MORE THIRD-PARTY SUPPLIERS COULD SUBSTANTIALLY HARM OUR
BUSINESS.

We currently rely on third-party suppliers for various parts of the CarBomb
Finder(TM) and SIEGMA(TM) devices, including neutron generators with custom
modifications and certain sub-assemblies. We have placed orders for these key
components for the first 10 CarBomb Finder(TM) and/or SIEGMA(TM) systems from a
small number of sources. For example, we obtain the standard sealed tube neutron
generators we use from limited sources, EADS-Sodern and Thermo MF Physics, on a
purchase order basis.

We believe that alternative sources for these components in the event of a delay
or interruption in supply would be readily available on a timely basis, however,
any inability by us to find alternative sources of key components, alternative
third party manufacturers or sub-assemblers, or sufficient quantities of these
key components, would impair our ability to manufacture and sell the CarBomb
Finder(TM) and SIEGMA(TM) and result in dELAys or interruptions in shipments,
which could cause current or potential customers to seek out competitors. In
addition, if we are unable to pay for these components on a timely basis, or
cannot arrange sufficient available credit, our third-party suppliers may delay
or cease shipments, which would also impair our ability to manufacture and sell
the CarBomb Finder(TM) and SIEGMA(TM). We currently do not have long-term
agreements with anY Of these suppliers. Furthermore, in view of the high cost of
many key components, we would strive to avoid excess supplies. If our suppliers
experience financial, operational, production or quality assurance difficulties,
or our sole source suppliers are acquired or otherwise influenced by our
competitors, the supply of components to us would be reduced or interrupted. In
the event that a supplier ceases operations, discontinues a product or withholds
or interrupts supply for any reason, we may be unable to acquire the product
from alternative sources within a reasonable period of time, which would impair
our ability to manufacture and sell the CarBomb Finder(TM) and SIEGMA(TM) and
cause substantial harm to our business.

INTERRUPTIONS, DELAYS OR COST INCREASES AFFECTING OUR MATERIALS, PARTS,
EQUIPMENT OR SUPPLIERS MAY ADVERSELY AFFECT OUR MANUFACTURING OPERATIONS.

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

OUR COMPETITORS COULD PURCHASE THE SAME COMPONENTS FROM OUR SUPPLIERS AND
ATTEMPT TO COPY OUR PRODUCTS TO THE EXTENT NOT COVERED BY PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS.

We, like most companies, purchase components for our products from third party
suppliers. We have patent applications pending that are directed to various
combinations of some of these components, but do not cover any of these
components separately. Competitors could purchase the same components from the
same suppliers and assemble similar products to the extent not protected by our


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

WE MAY BE UNABLE TO SECURE ANTICIPATED GOVERNMENTAL FUNDING FOR FUTURE PRODUCTS;
WE ARE CURRENTLY UNABLE TO OBTAIN AN SBA CERTIFICATE OF COMPETENCY.

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

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

GOVERNMENTAL AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH CREATE
ADDITIONAL RISKS.

In contracting with governmental agencies, we are subject to public agency
contract requirements that vary from jurisdiction to jurisdiction. Any potential
sales to public agencies will depend, in part, on our ability to satisfy their
contract requirements, which may be difficult or impossible in certain cases.
Moreover, government contracts typically contain unilateral termination
provisions unfavorable to us and are subject to discretionary auditing and
modification by the government, which subject us to additional risks. The U.S.
government may terminate any of its contracts with us either for its convenience
or if we default by failing to perform in accordance with the contract schedule
and terms. Nonetheless, termination for convenience provisions generally enable
us to recover only our costs incurred or committed, and settlement expenses and
profit on the work completed prior to termination. Termination for default
provisions do not permit such recoveries and make us liable for excess costs
incurred by the U.S. government in procuring undelivered items from another
source. Any potential contracts with foreign governmental agencies or bodies may
contain similar provisions.

Consequently, our backlog on government contracts cannot be deemed a true
indicator of our future revenues. The government's termination of one or more of
the contracts for products under development would harm our business. In
addition, U.S. government contracts are conditioned upon the continuing
availability of Congressional appropriations, which are readdressed on an annual
basis. Consequently, our contracts with certain government agencies generally
are only funded in part at the outset and commit additional monies only as
Congress makes appropriations for future periods. The inability or failure by
the government in funding one or more of the contracts for our products under
development would harm our business.


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

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

We have incurred net losses since our inception. For the six months ended
October 31, 2005, we reported net losses available to common shareholders of
$4,212,668 as compared to a net loss available to common shareholders of
approximately $6,563,404 for the six months ended October 31, 2004. Our
accumulated deficit through October 31, 2005 is $36,012,829. We expect that our
losses will continue into fiscal year 2006. We estimate that our aggregate
financial requirements will be between $8,000,000 and $10,000,000 for the fiscal
year, until we can generate sufficient revenues from sales to cover our
operating costs. One of the factors for the continuation of such anticipated
losses is that we are highly dependent on governmental customers, which
typically require long lead times before sales are made.

MARKETING RISKS

A FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH INDUSTRY PARTNERS MAY
HARM OUR BUSINESS.

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

WE MAY GRANT THIRD PARTIES SUBSTANTIAL MARKETING RIGHTS TO THE CARBOMB
FINDER(TM) AND SIEGMA(TM) DEVICES IN AN IMPORTANT MARKET. IF THE THIRD PARTIES
ARE UNSUCCESSFUL IN MARKETING THE CARBOMB FINDER(TM) AND SIEGMA(TM), OUR
MARKETING PLAN IN THE RELEVANT TERRITORY COULD BE JEOPARDIZED OR INTERRUPTED.

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

INTELLECTUAL PROPERTY RISKS

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND MAY INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

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


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

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

INFORMATION RELATING TO ANY INVENTION THAT IS INVENTED UNDER A SMALL BUSINESS
INNOVATION RESEARCH CONTRACT MAY BECOME PUBLIC AT SOME FUTURE TIME.

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

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

LITIGATION AS TO ENFORCEMENT OR DEFENSE AGAINST CLAIMS OF INTELLECTUAL PROPERTY
INFRINGEMENT COULD BE EXPENSIVE, AND ANY JUDGMENT AGAINST US MAY PREVENT US FROM
SELLING OUR PRODUCTS.

We may be called upon to enforce our protections against intellectual property
and trade secrets, or to determine the validity and scope of the proprietary
rights of others. Any subsequent litigation, regardless of the outcome, could be
costly and divert the efforts of key management and technical and scientific
personnel. Both domestic and international competitors may have pre-existing


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claims and patents against intellectual property that may prevent, limit or
interfere with our ability to manufacture and sell our products. As of this
date, we have not conducted an independent review of patents issued to third
parties. Because of the market opportunity we perceive, companies possessing
technology rights, which they believe we may be infringing upon, will be
motivated to assert claims of infringement against us. Any adverse outcome in
the defense of an infringement matter could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or prohibit us from selling our products.

REGULATORY AND LEGAL RISKS

THE CARBOMB FINDER(TM), SIEGMA(TM), AND ANY FUTURE PRODUCTS IN DEVELOPMENT
UTILIZING OUR TECHNOLOGY WOULD BE SUBJECT TO RADIATION SAFETY REGULATIONS AND
LICENSING REQUIREMENTS. COMPLYING WITH THESE REQUIREMENTS MAY RESULT IN DELAYS
IN THE DEPLOYMENT AND CUSTOMER UTILIZATION OF THE CARBOMB FINDER(TM),
SIEGMA(TM), AND FUTURE PRODUCTS.

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

THE MANUFACTURE AND SALE OF DEVICES WHICH EMIT RADIATION ARE SUBJECT TO THE
REGULATORY CONTROLS AND STANDARDS OF VARIOUS DOMESTIC AND FOREIGN JURISDICTIONS.
THESE REGULATIONS MAY BECOME MORE RESTRICTIVE AS POLICIES, GUIDELINES AND
STANDARDS CHANGE, AND OUR ACTIVITIES AS TO CURRENT AND FUTURE PRODUCTS MAY BE
CURTAILED OR INTERRUPTED.

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

IF CURRENT EXPORT ADMINISTRATION ACT REGULATIONS WERE TO CHANGE, OR IF OUR
DEVICES ARE PURCHASED IN COUNTRIES WHICH ARE VIEWED AS A THREAT TO REGIONAL
STABILITY, WE COULD BECOME SUBJECTED TO THE MORE STRINGENT RULES OF THE U.S.
DEPARTMENT OF STATE, AND CERTAIN CURRENTLY PERMISSIBLE SALES ACTIVITIES COULD BE
LIMITED OR PROHIBITED ALTOGETHER.

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


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IF FUTURE PRODUCTS, SUCH AS THE CARBOMB FINDER(TM) AND SIEGMA(TM), FAIL TO
DETECT OR CONFIRM EXPLOSIVES, WE COULD BE EXPOSED TO PRODUCT LIABILITY AND
RELATED CLAIMS AND MAY FAIL TO ACHIEVE MARKET ACCEPTANCE.

Inherent in the manufacturing, sale and maintenance of explosive detection
products are potential product liability risks. If our products malfunction, it
is possible that explosive material could pass undetected through our products,
which could lead to product liability claims. There are also many other factors
beyond our control that could lead to liability claims, such as the reliability
and competence of the customer's operators and the training of the operators.
The cost of defending product liability claims brought against us could be
significant and any adverse determination may result in liabilities in excess of
insurance coverage. We do not currently maintain product liability insurance,
but we anticipate obtaining product liability insurance as soon as it is
necessary. We also intend to address product liability issues by pursuing the
designation and certification of our products by the U.S. Department of Homeland
Security (" DHS") as Qualified Anti-Terrorism Technologies ("QATTs") and relying
upon certain protections provided for under The Support Anti-terrorism by
Fostering Effective Technologies Act of 2002, Public Law 107-296 (the "Safety
Act"). We cannot be certain that we will be able to attain on acceptable terms,
if at all, insurance coverage sufficient to contain liabilities in a meaningful
way, or qualify our products and services as QATTs under the Safety Act. In
addition, the failure of any product to detect explosives, even if due to
operator error and not to the mechanical failure of a product, could result in
public and customer perception that our products are ineffective. In the event
we are held liable for a claim against which we do not have insurance or for
damages exceeding our levels of insurance coverage, or which even if insured
results in significant adverse publicity against us or our products, we may be
required to make substantial payments and lose or fail to achieve market
acceptance.

IF INVESTORS RELY ON PROJECTIONS OR ESTIMATES WE MAY MAKE, THEY COULD ASSERT IN
A LEGAL PROCEEDING THAT WE ISSUED FALSE OR MISLEADING STATEMENTS ABOUT OUR
COMPANY. IF THEY WERE ABLE TO PREVAIL SUCCESSFULLY IN ANY SUCH PROCEEDING, IT
COULD HAVE A MATERIALLY ADVERSE IMPACT ON OUR BUSINESS, OPERATIONS, AND
FINANCIAL CONDITION, AS WELL AS THE MARKET FOR OUR PUBLIC SECURITIES.

 The Company may from time to time make projections as to the sale of its units
or the growth of its business. These are considered forward looking statements
and the Company advises investors to not rely on these projections in making any
determination whether or not to invest in, or maintain an investment in our
stock. However, to the extent that any investor has so relied, and if the
investor can prove that any misstatements we have made were intentional or
reckless, that such investor's reliance on these misstatements was reasonable,
and that the investor has suffered actual damages as a result of such reliance,
than such investor may have a cause of action against us. If any investor were
to prevail in making such assertions in any legal proceeding, it could have a
materially adverse impact on our business, operations, and financial condition,
as well as the market for our public securities.

WE MAY OWE INDEMNIFICATION OBLIGATIONS TO OUR CURRENT AND FORMER DIRECTORS AND
OFFICERS.

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


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CURRENT AND PRIOR STOCKHOLDERS WHO PURCHASED OUR SHARES COULD ATTEMPT TO ASSERT
CLAIMS AGAINST US IF OUR DISCLOSURES THEY RELIED UPON IN MAKING SUCH PURCHASES
ARE DEEMED INADEQUATE.

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

OUR FORMER DIRECTOR'S OUTSIDE LEGAL PROCEEDINGS WERE NOT PROMPTLY DISCLOSED TO
THE PUBLIC.

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

CORPORATE RISKS

ONE OF OUR STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM OTHER OF OUR
STOCKHOLDERS, HAS SUBSTANTIAL INFLUENCE OVER THE DIRECTION OF THE COMPANY.

As of October 31, 2005, Dr. Bogdan C. Maglich, our Chief Executive Officer,
Chairman, Chief Scientific Officer, Treasurer and President, would own
approximately 18% of our common shares currently outstanding upon exercise of
all warrants and options held by him. Accordingly, he has a substantial
influence in determining the outcome of certain corporate transactions or other
matters submitted to stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, the
election of directors, and other significant corporate actions. He also has the
power to prevent or cause a change in control. It is assumed that in certain
instances the interests of Dr. Maglich may differ from the interests of the
other stockholders, and may limit the ability of other stockholders to affect
our management and affairs.

WE HAVE IDENTIFIED WEAKNESSES IN OUR DISCLOSURE CONTROLS AND PROCEDURES WHICH
MAY AFFECT OUR ABILITY TO COMPLY WITH OUR PUBLIC COMPANY REPORTING OBLIGATIONS.,

Although our management has concluded that our system of disclosure controls and
procedures were effective in meeting our disclosure obligations under the
federal securities laws, two weaknesses exist: (i) a lack of segregation of
duties and (ii) a lack of a more systemic and formal approach to the conduct of
our corporate, financial and business affairs. These weaknesses result primarily
from a lack of capital and human resources. Although we plan to hire additional
personnel, we can offer no assurances that we will be successful. If we are
unsuccessful in strengthening our system of disclosure controls and procedures,
and if as a result we were to fail to disclose timely material items as required
under the Securities Exchange Act, it could give rise to potential regulatory
and/or shareholder actions, which could have a material adverse effect on our
business and financial condition, and on the market value of our shares.

WE MAY HAVE INCREASING DIFFICULTY TO ATTRACT AND RETAIN OUTSIDE MEMBERS OF OUR
BOARD OF DIRECTORS.

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


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WE MAY HAVE INSUFFICIENT AMOUNTS OF, OR MAY BE OTHERWISE UNABLE TO DRAW FROM,
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE.

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

ELIMINATION OF MONETARY LIABILITY OF OUR CURRENT AND FORMER DIRECTORS MAY
DISCOURAGE LAWSUITS AGAINST DIRECTORS.

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

RISKS RELATED TO OUR STOCK

WE WILL PAY ACCRUING PENALTIES TO CERTAIN HOLDERS OF OUR SECURITIES BASED ON OUR
FAILURE TO REGISTER THEIR SECURITIES.

After August 2003, we entered into certain agreements for the purchase of
certain shares of stock, convertible notes and warrants in private transactions.
The terms of these securities purchase agreements require us to register the
shares of common stock, and the underlying shares of common stock issuable upon
exercise of the warrants and/or conversion of the convertible notes, with the
SEC for public trading as of certain dates which are specified in each purchase
agreement. If the subject securities are not registered within the dates
specified in the applicable agreement, we must pay (or accrue, as the case may
be) a penalty through the issuance of like securities. In accordance with the
relevant provisions in these securities purchase agreements, we have paid or
accrued penalties due purchasers in these offerings because we failed to meet
the specified deadlines for having a Registration Statement on Form SB-2
declared and maintained effective. Some of these penalties began to accrue as of
October 15, 2003, and we are obligated to continue to issue and pay these
securities as penalties until all of our obligations under the applicable
registration rights provisions in our agreements are satisfied in full, or the
penalties become impermissible or unenforceable as a matter of law or when the
securities can be sold pursuant to Rule 144.

The amount of the penalties paid or accrued as a result of the defaults
described above for the six months ended October 31, 2005 is 562,898 shares of
common stock, $12,000 in aggregate face amount of additional convertible notes,
and warrants to purchase an additional 2,424,057 shares of common stock. Our
existing stockholders have suffered, and will continue to suffer, substantial
dilution as a result of the issuance and payment of these securities as
penalties. Such dilution can have a material and adverse impact upon the actual
and perceived value of our shares, which can be a depressive force upon the
price of our stock at market and cause losses for our existing stockholders, as
well as render it much more difficult for us to raise additional equity capital
in the future.

OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT
IN SUBSTANTIAL LOSSES FOR INVESTORS AND LITIGATION AGAINST US.

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

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


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      o     changes in market valuations of similar companies and stock market
            price and volume fluctuations generally;
      o     economic conditions specific to the industries in which we operate;
      o     legislative and regulatory developments related to homeland security
            and industry controls;
      o     announcements by us or our competitors of new or enhanced products,
            technologies or services, and the formation or cancellation of
            significant contracts, acquisition, strategic relationships, joint
            ventures or capital commitments;
      o     changes in key customer and supplier relationships;
      o     recommendations of research analysts and guidance;
      o     additions or departures of key management or scientific personnel;
            and
      o     future sales of our common stock or other debt or equity securities.

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

WE MAY NOT BE ABLE TO PAY AN ACCRUED PAYROLL TAX LIABILITY.

As of October 31, 2005, we have accrued and recorded a payroll tax liability of
$438,311 for stock compensation given during the period from June 1997 through
February 2002. The stock given during this period was HiEnergy Microdevices
stock, which in April 2002 was exchanged, in a transaction treated as a reverse
takeover. Because, at the time, HiEnergy Microdevices was a closely-held
corporation with negative net worth, no marketable product, no meaningful
revenue potential and no dividend paying capacity, the value originally assigned
to the stock was nil.

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

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

THERE IS A RISK OF DILUTION RESULTING FROM CONTINUED ISSUANCES OF SECURITIES TO
MANAGEMENT, EMPLOYEES, CONSULTANTS, AND RELATED PARTIES WHICH MAY REDUCE THE
MARKET PRICE OF OUR COMMON STOCK, AND MAY ALSO LEAD TO DIFFICULTY IN OBTAINING
ADDITIONAL EQUITY CAPITAL.

We issued options to purchase 313,221 shares of our common stock to Dr. Bogdan
Maglich in fiscal year 2004 and options to purchase 421,980 shares in fiscal
year 2005 for services rendered as our Chief Executive Officer, President,
Treasurer, Chief Scientific Officer and Chairman, pursuant to his employment
contract. Also, pursuant to the terms of various other agreements entered into
by the Company, we also issued or committed to issue options to purchase
2,535,000 shares and options to purchase 1,425,000 in fiscal years 2005 and
2004, respectively, to employees and directors. As to consultants, we issued or
committed to issue 402,455 shares and a warrant to purchase 100,000 shares to
our former controller in fiscal year 2005, as compared to 558,500 shares,
options to purchase 649,000 shares, and warrants to purchase 380,000 shares
issued to consultants in fiscal year 2004. Likewise, we issued notes payable to
our former legal counsel during fiscal years 2003 and 2004 that are convertible
into 547,714 shares of common stock as of October 31, 2005. Under the terms of
Dr. Maglich's employment agreement, we are obligated to issue options to Dr.
Maglich annually for the term of the agreement. Continued issuances of
securities of this magnitude may have a dilutive effect on the market price for
our common stock and of the percentages of ownership of stockholders, if the
options and warrants are exercised, or the notes are converted. The terms upon
which we will be able to obtain additional equity capital could also be
adversely affected.


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WE PLAN TO ISSUE A SIGNIFICANT NUMBER OF ADDITIONAL EQUITY SECURITIES IN THE
FUTURE AND THAT WILL DILUTE THE PERCENTAGE OWNERSHIP OF THE PRESENT HOLDERS OR
PURCHASERS OF OUR COMMON STOCK.

There were 51,774,545 shares of our common stock outstanding as of October 31,
2005 (including 68,546 shares deemed subject to rescission rights), which does
not include 40,770,293 new shares we have committed to issue upon exercise of
options and warrants and convertible notes. We also may be required to issue up
to 704,190 shares of our common stock to former holders of options and warrants
of HiEnergy Microdevices who hold rights to purchase our shares of common stock
at $0.156 per share. These rights survived the short-form merger completed in
January 2005, and may be exercised any time before April 25, 2007, subject to
the payment of promissory notes representing the purchase price. If we issue all
of the shares underlying currently outstanding warrants and options currently
in-the money and convertible notes, this will result in approximately 11%
dilution, based on the October 31 stock price, of the ownership interest of
holders of our common stock. If all currently outstanding warrants, options and
convertible notes were immediately exercised and converted, we would receive
approximately $24,610,327 in cash and approximately $1,142,008 in forgiveness of
indebtedness. While this amount exceeds the current market value of the stock
that would be issued, exercise and conversion might take place when the total
value received by us is much less than the market value of the stock that would
be issued. Under our current business plan, we must also raise funds in part by
issuing new equity securities, which would have a dilutive effect on the
percentage ownership of stockholders. The shares issued in such transactions
could be very large and may even exceed the number of shares issued and
outstanding today, which would significantly decrease the percentage ownership
of current stockholders. Our requirement for new equity capital for the
financing of operating deficits will continue until we successfully
commercialize a product and achieve a sufficient level of positive operating
cash flow. Possible costs that would require funding include investments in
capital equipment, technology and research and development, marketing
initiatives, inventory, accounts receivable and human resources, as well as
financial contributions toward potential joint ventures, acquisitions,
collaborative projects and other general corporate purposes.

We may be required to sell restricted equity securities at prices less than the
market price for unrestricted shares. We have thus far sold restricted equity
securities at prices less than prevailing market prices of our stock and have
issued convertible debt. When the shares that are issuable in connection with
those securities become available for public sale, the additional supply of
shares may adversely affect the market price of our common stock. Also, our
anticipated private financings and the exercise or conversion of securities
outstanding may dilute the voting or other rights of other holders at the time,
or be prior and senior or receive rights that the holders of common stock do not
have, which could reduce the economic value of our common stock. Further, we
have sold through private placements, warrants that have cashless exercise
provisions, in which the holder shall receive a net number of shares based upon
the share price on the trading day preceding the exercise date of the warrant if
the underlying shares of warrants with cashless exercise provisions are not
registered under an effective registration statement by a certain date. At
present we have outstanding warrants to purchase a total 2,168,792 shares which
may be exercised by means of a cashless exercise. Accordingly, in the event
there is a large spread between the exercise price and the share price on the
trading day of our common stock, a cashless exercise of warrants could result in
a significant amount of additional shares.

BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.

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

BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.

Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, like shares of our common stock, generally are equity
securities with a price of less than $5.00, other than securities registered on
some national securities exchanges or quoted on NASDAQ. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market, and monthly account statements


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showing the market value of each penny stock held in the customer's account. In
addition, broker-dealers who sell these securities to persons other than
established customers and "accredited investors" must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security subject to the penny
stock rules, and investors in our common stock may find it difficult to sell
their shares. We would like to raise financing in an amount that might qualify
us for a time for an AMEX listing and a NASDAQ small cap listing. However, doing
so would be very dilutive of existing stockholders.

SHOULD PERSONS ENGAGE IN SHORT SALES OF OUR COMMON STOCK, INCLUDING SALES OF
SHARES TO BE ISSUED UPON EXERCISE OF WARRANTS AND OPTIONS, THE PRICE OF OUR
COMMON STOCK MAY DECLINE.

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

DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN
OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE FOR THEIR SHARES.

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

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

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

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


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<PAGE>

                         ITEM 3. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2005, being the date of our most recently completed
fiscal quarter. This evaluation was carried out by Dr. Bogdan C. Maglich in his
capacity as our Chief Executive Officer and Treasurer. Based upon that
evaluation, Dr. Maglich concluded that our disclosure controls and procedures
were effective in meeting our requirements as to the disclosure of material
information in our reports filed under the Exchange Act. However, two areas of
weakness were identified in the evaluation: (i) a lack of segregation of duties
due to understaffing and (ii) a lack of a more systematic and formal approach to
the conduct of our corporate, financial and business affairs. These weaknesses,
which we continue to experience, are primarily the result of a general lack of
capital and human resources dedicated to make the improvements necessary for
timelier reporting and disclosure with less reliance on internal auditing.
Currently, Dr. Maglich serves simultaneously as our Chairman of the Board, Chief
Executive Officer, President, Treasurer and Chief Scientific Officer. In order
to further segregate the duties of our officer positions, we are attempting to
recruit additional officers as well as other employees experienced with the
implementation and evaluation of disclosure controls and procedures for timely
financial reporting. However, we can offer no assurance that we will
successfully recruit such employees, as our ability to do so is limited by our
available capital resources..

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with Dr. Maglich's evaluation of our disclosure controls and
procedures as of October 31, 2005, as described above, Dr Maglich also
determined that during our most recent fiscal quarter, there has been no change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
or 15d-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


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<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

BARRY ALTER

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

YEFFET SECURITY CONSULTANTS, INC.

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

FILED COMPLAINTS

In January 2005, we were served with a Summons and Class Action Complaint for
Violations of Federal Securities Laws, which was filed on October 18, 2004, in
the Federal District Court for the Southern District of California under case
number SACV04-1226 GLT. The Complaint filed named HiEnergy, its Chairman, among
other named defendants on behalf of a class of persons who acquired our stock
during the period from February 22, 2002 through July 8, 2004. In February 2005,
plaintiff's counsel filed a First Amended Complaint entitled and styled, "In re:
HiEnergy Technologies, Inc. Securities Litigation," Master File No.
8:04-CV-01226-DOC (JTLx), alleging various violations of the federal securities
laws, generally asserting the same claims involving Philip Gurian, Barry Alter,
and our purported failure to disclose their various securities violations
including, without limitation, allegations of fraud. The First Amended Complaint
seeks, among other things, monetary damages, attorney's fees, costs, and
declaratory relief. We engaged two legal firms to vigorously defend us in this
matter and assess the impact of the pending lawsuit. On Friday, March 25, 2005,
we timely filed responsive pleadings as well as Motions to Dismiss the
Plaintiffs' First Amended Complaint arguing that the Complaint failed to state a
claim upon which relief can be granted. On June 17, 2005, the Court issued an
Order Granting the Motions to Dismiss (the "Order"), finding that the Plaintiffs
failed in the First Amended Complaint to allege causation of loss resulting from
any alleged omissions and/or misrepresentations of HiEnergy or Dr. Maglich, to
sustain a cause of action for securities fraud under ss.10(b) of the Exchange
Act and Rule 10b-5 of the SEC, that the Plaintiffs had failed to plead actual
reliance on any allegedly false or misleading filings of HiEnergy to sustain a
claim under ss.18 of the Exchange Act, and that the Plaintiffs had failed to
allege a primary violation of any securities laws to sustain a claim for a
violation of ss.20(a) of the Exchange Act. On July 5, 2005, the Plaintiffs filed
a Second Amended Complaint in compliance with the Court's Order. On October 24,
2005, the Court issued a Minute Order granting in part and denying in part our
Motions to Dismiss, finding that the Plaintiffs failed in the Second Amended
Complaint to sustain a cause of action for securities fraud under ss.10(b) of
the Exchange Act and Rule 10b-5 of the SEC against Dr. Maglich and for claims
that we filed false and misleading financial statements and executed suspicious
stock sales. On November 14, 2005, the Court held a scheduling conference at
which the Plaintiff informed us that it would not file a Third Amended
Complaint. In accordance with the Scheduling Order from the Court, class
representative motions are to be filed within 90 to 120 days and pre-trial
conference has been scheduled for September 11, 2007. Our counsel will respond
to any motions with appropriate challenges to its legal sufficiency to state a
claim upon which relief may be granted. As of date, the costs to defend the
class action have been substantial and it is unable to predict an exact amount,
or even a meaningful estimate, of the aggregate costs that may be incurred, at
this time.


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<PAGE>

In March 2005, we were served with regard to a Complaint filed against us by a
former consultant with the California Labor Commissioner regarding purported
unpaid wages in the amount of $10,640. A hearing before the California Labor
Commissioner was held on April 21, 2005 in which the plaintiff failed to appear
before the Court. We received a Notice of Dismissal of the case on April 25,
2005.

In April 2005, a claim was filed against us with the 101st Judicial District
Court, Dallas County, Texas by Data Discovery Inc. ("DDI") (Civil Action No.
3-05-CV-0949-M). DDI, representing one party of a dissolved partnership, is
seeking the collection of $107,300 allegedly owed to the partnership for
services purported to have been fully-provided to us. We engaged local counsel
and filed on May 10, 2005, a Notice of Removal to move the case to federal
court, and a Motion for Dismissal. In July 2005, the District Court delivered a
Memorandum Opinion and Order granting our Motion for Dismissal and ordered that
within twenty days DDI amend its suit to the satisfaction of the District Court,
or the order will become a dismissal with prejudice, which would bar DDI from
filing any other suit against us related to the matters within its claim. In
August 2005, DDI filed a new lawsuit on behalf of the partnership which is
expected to go before the Court following an appropriate period for discovery.
Our counsel will respond to the allegations in any further pleading with
appropriate challenges to its legal sufficiency to state a claim upon which
relief may be granted. The costs of defending against the Complaint could be
substantial; however we are unable to predict an exact amount, or even a
meaningful estimate, at this time.

In October 2005, a claim was filed against us with the Supreme Court of the
County of New York, New York by HWH Enterprises ("HWH") (Civil Action No. (Index
No. 603438/05). HWH is seeking collection of $101,621.18 allegedly owed to it
for public relations services purported to have been provided to us during the
prior fiscal year. We have engaged local counsel and intend to defend ourselves
and our counsel will respond with appropriate challenges. As of this date, the
Company and its legal counsel have made no other determination as to the merits
of, or possible defenses to, the claim, and are unable to predict a meaningful
estimate of the costs of defending against the claim at this time.

In November 2005, a claim was filed against the Company with the District Court
of Orange County, California by SBI-USA ("SBI"). SBI is seeking collection of a
fee in the amount $50,000 allegedly owed to it for financial advisory services
purported to have been provided to the Company during the fiscal year ended
2003. The Company is in the process of engaging local counsel and intends to
defend itself and will respond with appropriate challenges. As of this date, the
Company and its legal counsel have made no other determination as to the merits
of, or possible defenses to, the claim, and are unable to predict a meaningful
estimate of the costs of defending against the claim at this time.

In December 2005, a claim was filed against the Company with the County Court of
Dallas County by Lockwood Greene Engineers Inc. ("LGE") (Cause No.
cc-05-12059-b). LGE is seeking collection of a fee in the amount of $35,039
allegedly owed to it for engineering and construction services purported to have
been provided to the Company during the fiscal year ended 2005. The Company is
in the process of engaging local counsel and intends to defend itself and
counsel will respond with appropriate challenges. As of this date, the Company
and its legal counsel have made no other determination as to the merits of, or
possible defenses to, the claim, and are unable to predict a meaningful estimate
of the costs of defending against the claim at this time.

In December 2005, we were served with regard to a Complaint filed against it by
a former consultant with the California Labor Commissioner regarding purported
unpaid wages in the amount of $20,000. A hearing before the California Labor
Commissioner is expected will be held in January 2006. As of this date, we have
not made any determination as to the merits of, possible defenses to, or any
other aspect of such claim.


                                       77
<PAGE>

                          ITEM 2. CHANGES IN SECURITIES

SET FORTH BELOW IS INFORMATION REGARDING THE ISSUANCE AND SALE OF UNREGISTERED
SECURITIES SINCE OUR FISCAL YEAR ENDED APRIL 30, 2005

o     In December 2005, we issued 150,741 Shares previously committed in the
      prior year period, to various holders of securities with registration
      rights as a penalty, due to our inability to file and maintain effective a
      registration statement within certain specified deadlines. We believe the
      issuances of these securities are exempt under Section Regulation D and/or
      Section 4(2) of the Securities Act.

o     In November 2005, we committed to issue 98,780 shares of our common stock,
      par value $0.001 ("Shares") and warrants to purchase 506,176 Shares at
      various exercise prices between $0.45 and $1.75, to various holders of
      securities with registration rights as a penalty, due to our inability to
      file and maintain effective a registration statement within certain
      specified deadlines. We believe the issuances of these securities are
      exempt under Regulation D and/or Section 4(2) of the Securities Act.

o     In November 2005, we issued 10,685 Shares previously committed in the
      prior year period, to various holders of securities with registration
      rights as a penalty, due to our inability to file and maintain effective a
      registration statement within certain specified deadlines. We believe the
      issuances of these securities are exempt under Section Regulation D and/or
      Section 4(2) of the Securities Act.

o     In October 2005, we committed to issue 452,028 Shares to Ryan Patch upon
      conversion of $224,361 of convertible notes payable related party, plus
      $46,856 of accrued interest, issued to our former legal counsel, Yocca,
      Patch and Yocca, for legal services. We believe the issuances of these
      securities are exempt under Section 4(2) of the Securities Act.

o     In October 2005, we committed to issue 30,000 Shares and warrants to
      purchase 15,000 Shares at $0.75 to Mark Collins in a private placement in
      exchange for $15,000. We believe the issuances of these securities are
      exempt under Regulation D and/or Section 4(2) of the Securities Act.

o     In October 2005, we committed to issue 116,303 Shares and warrants to
      purchase 561,954 Shares at various exercise prices between $0.45 and
      $1.75, to various holders of securities with registration rights as a
      penalty, due to our inability to file and maintain effective a
      registration statement within certain specified deadlines. We believe the
      issuances of these securities are exempt under Regulation D and/or Section
      4(2) of the Securities Act.

o     In October 2005, we issued $250,000 of convertible notes payable and
      warrants to purchase 200,000 Shares at $0.80 per shares in exchange for
      $250,000 in cash to various accredited investors. We believe the issuances
      of these securities are exempt under Regulation D and/or Section 4(2) of
      the Securities Act.

o     In October, 2005, we committed to issue 25,000 Shares to the Soldiers',
      Sailors', Marines' and Airmen's Club, a not for profit organization. We
      believe the issuances of these securities are exempt under Section 4(2) of
      the Securities Act.

o     In October, 2005 we committed to issue 20,000 Shares to the independent
      members of our Board of Directors, as compensation for meeting attendance,
      each board member receiving 5,000 shares per meeting. We believe the
      issuances of these securities are exempt under Section 4(2) of the
      Securities Act.

o     In September 2005, we committed to issue 161,111 Shares and warrants to
      purchase 191,666 Shares between $0.45 and $0.75 per share in exchange for
      $75,000 to accredited investors. We believe the issuances of these
      securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In September 2005, we issued $50,000 in convertible notes payable and
      warrants to purchase 40,000 Shares at $0.80 per share in exchange for
      $50,000 in cash to various accredited investors. We believe the issuances
      of these securities are exempt under Regulation D and/or Section 4(2) of
      the Securities Act.


                                       78
<PAGE>

o     In September 2005, we issued a warrant to purchase 30,000 Shares at $0.68
      to Hank Sprintz for services rendered pursuant to his consultancy
      agreement. We believe the issuances of these securities are exempt under
      Section 4(2) of the Securities Act.

o     In September 2005, we issued 240,000 Shares and warrants to purchase
      120,000 Shares at $0.75 to various accredited investors in a private
      placement in exchange for $120,000 in cash. We believe the issuances of
      these securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In September 2005, we committed to issue 130,667 Shares and warrants to
      purchase 497,641 Shares at various exercise prices between $0.45 and
      $1.75, to various holders of securities with registration rights as a
      penalty, due to our inability to file and maintain effective a
      registration statement within certain specified deadlines. We believe the
      issuances of these securities are exempt under Regulation D and/or Section
      4(2) of the Securities Act.

o     In August 2005, we committed to issue 78,982 Shares and warrants to
      purchase 360,039 Shares at various exercise prices between $0.45 and
      $1.75, to various holders of securities with registration rights as a
      penalty, due to our inability to file and maintain effective a
      registration statement within certain specified deadlines. We believe the
      issuances of these securities are exempt under Regulation D and/or Section
      4(2) of the Securities Act.

o     In August 2005, we issued 111,111 Shares and warrants to purchase 111,111
      Shares at $0.45 to accredited investors in a private placement in exchange
      for $50,000 in cash. We believe the issuances of these securities are
      exempt under Regulation D and/or Section 4(2) of the Securities Act.

o     In July 2005, we issued 26,667 Shares and a warrant to purchase 26,667
      shares at $0.45 per share in a private placement to Richard Melnick in
      exchange for the cash equivalent of $12,000 in finders' fees due him. We
      believe the issuances of these securities are exempt under Regulation D
      and/or Section 4(2) of the Securities Act.

o     In July 2005, we issued 1,200,001 Shares and warrants to purchase
      1,200,001 Shares at $0.45 to various accredited investors in a private
      placement in exchange for $540,000 in cash. We believe the issuances of
      these securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In July 2005, we committed to issue 78,982 Shares and warrants to purchase
      358,792 Shares at various exercise prices between $0.45 and $1.75, to
      various holders of securities with registration rights as a penalty, due
      to our inability to file and maintain effective a registration statement
      within certain specified deadlines. We believe the issuances of these
      securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In July 2005, we issued 189,917 Shares to Sherbrooke Partners LLC, which
      converted convertible notes payable for $81,400, deemed subject to
      rescission rights, plus accrued interest of $4,063 with a conversion price
      of $0.45 per Share. We believe the issuances of these securities were
      exempt under Section 3(a)(9) and/or Section 4(2) of the Securities Act.

o     In July 2005, we issued 17,778 Shares and warrants to purchase 80,000
      Shares with an exercise price of $0.45 to Brian C. Corday as a finder's
      fee. We believe the issuances of these securities are exempt under
      Regulation D and/or Section 4(2) of the Securities Act.

o     In July 2005, we issued 22,463 Shares to Matthew Balk and Jason Adelman
      pursuant to the cashless exercise of warrants. The warrants were
      exercisable for a total of 64,583 Shares at an exercise price of $0.45 per
      share. In connection with the cashless exercise, 42,120 Shares issuable
      pursuant to the warrant were tendered for conversion to pay the exercise
      price. We believe the issuances of these securities were exempt under
      Section 3(a)(9) of the Securities Act.

o     In July 2005, we issued 129,174 Shares and warrants to purchase 64,586
      Shares at $0.65 per Share to David R. Baker, a member of our Board, in
      connection with the conversion of accounts payable for legal services
      rendered prior to his directorship in the amount of $59,420 at a price of
      $0.46 per Share. We believe the issuances of these securities were exempt
      under Section 4(2) of the Securities Act.


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<PAGE>

o     In July 2005, we issued 25,185 Shares and warrants to purchase 12,593
      Shares at $0.65 to Baker, Johnston & Wilson, a law firm, in connection
      with the conversion of accounts payable for legal services rendered in the
      amount of $11,586 at a price of $0.46 per Share. We believe the issuances
      of these securities were exempt under Section 4(2) of the Securities Act.

o     In July 2005, we issued 30,000 Shares to Don Abbe, an engineer consultant
      engaged by us for services rendered. We believe the issuances of these
      securities are exempt under Section 4(2) of the Securities Act.

o     In July 2005, we issued 15,000 Shares previously committed during the
      prior year period to the members of our Board of Directors, as
      compensation for meeting attendance, each board member receiving 3,000
      shares per meeting. We believe the issuances of these securities were
      exempt under Section 4(2) of the Securities Act.

o     In July 2005, we issued 25,000 Shares to the independent members of our
      Board of Directors, as compensation for meeting attendance, each board
      member receiving 5,000 shares per meeting. We believe the issuances of
      these securities were exempt under Section 4(2) of the Securities Act.

o     In July 2005, we issued a warrant to purchase 50,000 Shares at $0.75 per
      share. We believe the issuances of these securities were exempt under
      Section 4(2) of the Securities Act.

o     In June 2005, we issued 62,222 Shares and warrants to purchase 217,777
      Shares at various exercise prices between $0.45 and $1.50 to Brian C.
      Corday, in exchange for the cash equivalent of $28,000 in finders' fees
      due him. We believe the issuances of these securities are exempt under
      Regulation D and/or Section 4(2) of the Securities Act.

o     In June 2005, we issued 677,778 Shares and warrants to purchase 2,372,232
      Shares at various exercise prices between $0.45 and $1.50 to various
      accredited investors in a private placement in exchange for $305,000 in
      cash. We believe the issuances of these securities are exempt under
      Regulation D and/or Section 4(2) of the Securities Act.

o     In June 2005, we issued 437,627 Shares to Nicholas J. Yocca upon
      conversion of $185,000 of convertible notes, originally purchased in
      January 2004, plus $11,933 of accrued interest. We believe the issuances
      of these securities were exempt under Section 3(a)(9) and/or Section 4(2)
      of the Securities Act.

o     In June 2005, we issued 32,820 Shares to Nicholas J. Yocca upon the
      conversion of a promissory note evidencing loans made to us in the
      aggregate amount of $14,000, plus $769 of accrued interest. We believe the
      issuances of these securities were exempt under Section 4(2) of the
      Securities Act.

o     In June 2005, we committed to issue 78,982 Shares and warrants to purchase
      353,101 Shares at various exercise prices between $0.45 and $1.75, to
      various holders of securities with registration rights as a penalty, due
      to our inability to file and maintain effective a registration statement
      within certain specified deadlines. We believe the issuances of these
      securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In June 2005, we committed to issue $6,000 in convertible notes as
      penalties to certain note holders with registration rights as a result of
      our inability to file and maintain effective a registration statement
      within specified deadlines. We believe the issuances of these securities
      are exempt under Regulation D and/or Section 4(2) of the Securities Act.

o     In June 2005, we issued 300,000 Shares and warrants to purchase 150,000
      Shares at an exercise price of $0.65, which were previously committed in
      the prior year period, to Jackson Asset Management in exchange for
      $150,000 in cash. We believe the issuances of these securities are exempt
      under Regulation D and/or Section 4(2) of the Securities Act.

o     In May 2005, we issued 400,000 Shares and warrants to purchase 600,000
      Shares various exercise prices between $0.75 and $1.25, which were
      previously committed in the prior year period, to Robert J. Neborsky, M.D.
      Inc., Combination Retirement Trust and Robert & Sandra Neborsky JTWROS in
      exchange for $200,000 in cash. We believe the issuances of these
      securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In May 2005, we issued 452,029 Shares previously committed to the
      remaining stockholders of HiEnergy Microdevices, Inc. in connection with a
      short form merger on the basis of 22.3524 HiEnergy shares for 1 share of
      HiEnergy Microdevices (the same ratio that was used in the original
      voluntary share exchange). We believe the issuances of these securities
      were exempt under Regulation D and/or Section 4(2) of the Securities Act.


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<PAGE>

o     In May 2005, we committed to issue 78,982 Shares and warrants to purchase
      292,530 Shares at various exercise prices between $0.45 and $1.75, to
      various holders of securities with registration rights as a penalty, due
      to our inability to file and maintain effective a registration statement
      within certain specified deadlines. We believe the issuances of these
      securities are exempt under Regulation D and/or Section 4(2) of the
      Securities Act.

o     In May 2005, we issued 1,144,446 Shares and warrants to purchase 4,005,564
      Shares various exercise prices between $0.45 and $1.25 to various
      accredited investors in a private placement in exchange in exchange for
      $515,000 in cash. Said warrants are to expire three and one half years
      following the date of effectiveness of our next filed registration
      statement. We believe the issuances of these securities are exempt under
      Regulation D and/or Section 4(2) of the Securities Act.

o     In May 2005, we committed to issue $6,000 in convertible notes as
      penalties to certain note holders with registration rights as a result of
      our inability to file and maintain effective a registration statement
      within specified deadlines. We believe the issuances of these securities
      are exempt under Regulation D and/or Section 4(2) of the Securities Act.

o     In May 2005, we issued 104,000 Shares for one year of prepaid Edgar filing
      services to Vintage Filings, LLC. We believe the issuance of these
      securities was exempt under Section 4(2) of the Securities Act.

o     In May 2005, we issued 2,000 Shares, which were previously committed in
      the prior year period, to William Lacey, a member of the board of
      directors of HiEnergy Defense, Inc. as compensation for prior meeting
      attendance. We believe the issuance of these securities was exempt under
      Section 4(2) of the Securities Act.


                                       81
<PAGE>

ITEM 6. EXHIBITS

 EXHIBIT INDEX

  EXHIBIT         DESCRIPTION
  NUMBER

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

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

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

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

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

  4.1.1 (5)       Specimen Common Stock Certificate

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

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

  4.4 (3)         Warrant  Certificate issued to Rheal Cote by HiEnergy  Technologies,  Inc. dated June 3,
                  2002

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

  4.5 (5)         Registration Rights Agreement dated July 12, 2002 between the Registrant and Isaac Yeffet
  4.6 (5)         Registration Rights Agreement dated August 19, 2002 between the Registrant and Primoris
                  Group Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       82
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       83
<PAGE>

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

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

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

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

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

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

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

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

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

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

  10.45 (9)       Letter Agreement between HiEnergy Technologies, Inc. and Roth Investor Relations

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

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

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

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

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

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

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

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

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

  10.54 (10)      International  Distribution  Agreement  between the Registrant  and Electronic  Equipment
                  Marketing Company (EEMCO) dated July 25, 2003

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

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

  10.57 (11)      Memorandum of Understanding between HiEnergy Technologies, Inc. and Aeropuertos Espanoles
                  y Navegacion Aerea, Edificio La Piovera - Peonias dated October 6, 2003

  10.58 (12)      Form of Stock Purchase Agreement dated October 15 - December 2, 2003 between HiEnergy
                  Technologies, Inc. and the purchasers of common stock and warrants. See also Exhibit 10.72
                  Form of Escrow Agreement.

  10.59 (12)      Form  of  Warrant  Agreement  dated  October  28 -  December  2,  2003  between  HiEnergy
                  Technologies, Inc. and the purchasers of common stock and warrants.

  10.60 (16)      Letter Agreement  between SBI - USA LLC and HiEnergy  Technologies,  Inc. dated August 1,
                  2003

  10.61 (14)      Promissory Note issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.62 (14)      Note Purchase Agreement dated January 16, 2004 between HiEnergy Technologies, Inc. and
                  Platinum Partners Value Fund LP, with attached Form of Convertible Note and Warrant

  10.63 (14)      Note Purchase Agreement dated January 31, 2004 between HiEnergy Technologies, Inc. and
                  Richard Melnick with attached Form of Convertible Note and Warrant
</TABLE>


                                       84
<PAGE>

<TABLE>
<S>               <C>
  10.64 (14)      Stock Purchase Agreement dated February 9, 2004 between HiEnergy Technologies, Inc. and
                  Bullbear Capital Partners, LLC with attached Form of Warrant

  10.65 (14)      Letter Agreement between KCSA Public Relations Worldwide and HiEnergy Technologies, Inc.
                  dated January 6, 2003

  10.66 (14)      Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Microdevices, Inc. dated
                  March 26, 2002.

  10.66.1 (14)    Assignment of Patent Rights from HiEnergy Microdevices, Inc. to HiEnergy Technologies,
                  Inc. dated November 17, 2003.

  10.67 (14)      Assignment of Patent Rights by Dr. Bogdan C. Maglich to HiEnergy Technologies, Inc. dated
                  November 17, 2003

  10.68 (14)      Employment Agreement between HiEnergy Technologies, Inc. and Ioana C. Nicodin dated
                  February 3, 2004

  10.69 (14)      Note Purchase Agreement dated January 28, 2004 between HiEnergy Technologies, Inc. and
                  Nicholas J. Yocca with attached Form of Convertible Note and Warrant

  10.70 (15)      Form of Consent and Waiver from April 2003 purchasers of common stock.

  10.71 (15)      Form of Release from June 2003 purchasers of common stock.

  10.72 (16)      Form of Escrow Agreement utilized in connection with the Stock Purchase Agreements filed
                  as Exhibits 10.50, 10.51, 10.52 and 10.58.

  10.73 (19)      Employment Letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.

  10.74 (19)      Proposal for Detailed Concept Design Services dated June 7, 2004 between Lockwood Greene
                  Engineering & Construction and HiEnergy Technologies, Inc.

  10.75 (19)      Employment letter dated July 26, 2004 between Jim Hertzog and HiEnergy Technologies, Inc.

  10.76 (19)      Engagement Agreement dated July 27, 2004 between Pacific Summit Securities and HiEnergy
                  Technologies, Inc.

  10.77 (19)      Teaming Agreement dated August 4, 2004 between HiEnergy Technologies, Inc. and Siemens
                  Maintenance Services, LLC

  10.78 (20)      Consulting Agreement dated July 22, 2004 between Greg Henkel and HiEnergy Technologies, Inc.

  10.79 (21)      Form of Stock Purchase Agreement and Warrant dated  October 18, 2004 - December 15, 2004
                  issued in connection with the sale of restricted shares to various accredited investors and
                  HiEnergy Technologies, Inc.

  10.80 (21)      Form of Debt Conversion Agreement and Warrant between Maglich Family Holdings and HiEnergy
                  Technologies, dated November 19, 2004

  10.81 (24)      Amendment to Share Purchase Agreement dated January 24, 2005  between HiEnergy Technologies,
                  Inc. and Bull Bear Capital Partners, LLC

  10.82 (23)      Employment letter dated November 22, 2004 between Roger Spillmann and HiEnergy Technologies,
                  Inc.

  10.83 (22)      Consulting Agreement dated November 22, 2004 between Don Abbe and HiEnergy Technologies,
                  Inc.

  10.84 (25)      Proposal for Preliminary Manufacturing Facility Assessment Consulting Services dated April
                  13, 2004 between HiEnergy Technologies, Inc. and Lockwood Greene Engineering & Construction
                  (filed in its entirety)

  10.85 (25)      Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies,
                  Inc.

  10.86 (25)      Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies,
                  Inc.

  10.87 (25)      Promissory Note dated January 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies,
                  Inc.

  10.88 (25)      Promissory Note dated March 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.89 (25)      Promissory Note dated April 5, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.90 (25)      Promissory Note dated April 15, 2004 issued to Bogdan Maglich by HiEnergy Technologies,
                  Inc.

  10.91 (25)      Promissory Note dated April 29, 2004 issued to Bogdan Maglich by HiEnergy Technologies,
                  Inc.

  10.92 (25)      Promissory Note dated August 3, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.93 (25)      Promissory Note dated August 4, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.94 (25)      Promissory Note dated August 10, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.95 (25)      Promissory Note dated August 18, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.96 (25)      Promissory Note dated August 25, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.97 (25)      Promissory Note dated August 30, 2004 issued to Bogdan Maglich by HiEnergy Technologies, Inc.

  10.98 (25)      Proposal for Detailed Concept Design Services between HiEnergy Technologies, Inc. and
                  Lockwood Greene Engineering & Construction dated June 7, 2004
</TABLE>


                                       85
<PAGE>

<TABLE>
<S>               <C>
  10.99 (25)      Consulting Agreement between HiEnergy Technologies, Inc. and Greg Henkel dated July 22, 2004

  10.100 (25)     Consulting Agreement between HiEnergy Technologies, Inc. and Jim Hertzog dated July 26, 2004

  10.101 (25)     Engagement letter between HiEnergy Technologies, Inc. and Pacific Summit Securities dated
                  July 27, 2004

  10.102 (25)     Employment letter dated April 12, 2004 between Sean Moore and HiEnergy Technologies, Inc.

  10.103 (25)     Teaming Agreement between HiEnergy Technologies, Inc. and Siemens Maintenance Services,
                  LLC dated August 4, 2004

  10.104 (25)     Retention Agreement between HiEnergy Technologies, Inc. and Pellettieri, Rabstein and
                  Altman dated November 11, 2004

  10.105 (25)     Retention Agreement between HiEnergy Technologies, Inc. and Feldhake Roquemore LLP dated
                  January 12, 2005

  10.106 (26)     Form of Stock Purchase Agreement dated March 22, 2005 and issued in connection with the
                  sale of restricted shares to various accredited investors and HiEnergy Technologies, Inc.

  10.107 (26)     Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated
                  March 22, 2005 and issued in connection with the sale of restricted shares to various
                  accredited investors

  10.108 (26)     Form of Stock Purchase Agreement dated April 2005 and issued in connection with the sale
                  of restricted shares to various accredited investors and HiEnergy Technologies, Inc.

  10.109 (26)     Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated
                  April 2005 and issued in connection with the sale of restricted shares to various accredited
                  investors.

  10.110 (26)     Form of Stock Purchase Agreement for the period from May 16, 2005 through July 12, 2005 and
                  issued in connection with the sale of restricted shares to various accredited investors.

  10.111 (26)     Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. for the
                  period from May 16, 2005 through July 12, 2005 and issued in connection with the sale of
                  restricted shares to various accredited investors.

  10.112 (26)     Form of Debt Conversion Agreement between Nicholas J. Yocca and HiEnergy Technologies, Inc.,
                  dated May 13, 2005.

  10.113 (26)     Debt Conversion Agreement between David R. Baker and HiEnergy Technologies, Inc., dated July
                  15, 2005, and form of detachable warrant.

  10.114 (26)     Debt Conversion Agreement between Baker, Johnston & Wilson LLP and HiEnergy Technologies,
                  Inc., dated July 15, 2005, and form of detachable warrant.

  10.115 (26)     Agreement between Mason, Griffin & Pierson and HiEnergy Technologies, Inc., dated April 29,
                  2005.

  10.116 (26)     Subcontract Agreement between Siemens Maintenance Services LLC and HiEnergy Technologies,
                  Inc., dated April 15, 2005

  10.117 (26)     Agreement between Vintage Filings, LLC and HiEnergy Technologies, Inc., dated May 1, 2005.

  10.118 (26)     Engagement Letter between Henry S. Sprintz and HiEnergy Technologies, dated June 20, 2005.

  10.119 (26)     Employment Agreement between Gregory C. Henkel, Controller, and HiEnergy Technologies, Inc.,
                  dated March 1, 2005.

  10.120 (26)     Equipment Sales Agreement between Southeastern Pennsylvania Transportation Authority and
                  HiEnergy Technologies, Inc., dated June 6, 2005.

  10.121 (26)     Time and Material Subcontract between Integrated Concepts & Research Corporation and
                  HiEnergy Technologies, dated July 18, 2005.

  10.122 (26)     International Distribution Agreement between Electronic Equipment Marketing Company (EEMCO)
                  and HiEnergy Technologies, dated July 25, 2003

  10.123 (27)     Form of Stock Purchase Agreement dated July 26, 2005 and issued in connection with the sale
                  of restricted shares to various accredited investors.

  10.124 (27)     Form of Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated July
                  26, 2005 and issued in connection with the sale of restricted shares to various accredited
                  investors.

  10.125 (29)     Engagement Letter between Vladimir Stanich and HiEnergy Technologies, dated September 9,
                  2005.

  10.126 (29)     Independent Contractor Agreement between Metaskill, Inc. and HiEnergy Technologies, dated
                  September 15, 2005.
</TABLE>


                                       86
<PAGE>

<TABLE>
<S>               <C>
  10.127(32)      Form of Senior Convertible Bridge Note and Warrant issued in connection with the sale of
                  restricted shares to various accredited investors.

  10.128*         Secured Convertible Promissory Note issued to First Regional Bank, CFBO Bruce Steinberg Roth
                  IRA dated November 18, 2005.

  10.129*         Warrant to Purchase Shares of Common Stock of HiEnergy Technologies, Inc. dated November 18,
                  2005 issued to Bruce Steinberg Roth IRA.

  10.130*         Assignment of Accounts Receivable issued by HiEnergy Technologies, Inc. to First Regional
                  Bank, CFBO Bruce Steinberg Roth IRA dated November 18, 2005.

  10.131*         Memorandum of Understanding between Williams-Sterling, Inc. and HiEnergy Technologies dated
                  November 16, 2005.

  10.132*         Reseller Agreement between GTSI Corp. and HiEnergy Technologies, Inc. dated November 18,
                  2005.

  10.133*+        Cooperative Agreement between Transportation Security Administration and HiEnergy
                  Technologies, Inc. dated September 27, 2004

  10.134*         Addendum No. 4 to Original Lease Agreement dated August 15, 2002, between the Registrant and
                  Del Mar Avionics dated October 14, 2005

  10.135*         Placement Agent Agreement between Burnham Hill Partners and HiEnergy Technologies, Inc.
                  dated September 26, 2005.

  14.1 (9)        Code of Ethics for Senior Financial Officers of HiEnergy Technologies, Inc.

  16.1 (1)        Letter of Manning Elliott

  21.1 (9)        List of Subsidiaries

  21.2 (26)       List of Subsidiaries

  31.1*           Certification of Chief Executive Officer and Treasurer Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

  32.1*           Certification of Chief Executive Officer and Treasurer Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

  99.1 (28)       Press release dated September 2, 2005 announcing the termination of the formal
                  investigation of HiEnergy Technologies by the Securities and Exchange Commission.

 99.1 (31)        Press Release dated October 19, 2005 announcing the resignation of Col. William J. Lacey,
                  Jr. from our Board of Directors and the appointment of Mr. Ivan Obolensky to our Board of
                  Directors and the Compensation Committee of our Board.

 99.1 (30)        Press  Release  announcing  notification  from  the  U.S.  Army  as to the selection of our
                  white paper for submittal of a full proposal.

 99.2 (30)        Copy of letter of notification from U.S. Army.

 99.2 (33)        Press release dated November 30, 2005 announcing the entry of an agreement with GTSI Corp.
</TABLE>

+     Portions of this exhibit have been omitted pursuant to an Application for
      Confidential Treatment filed by the Company with the Securities and
      Exchange Commission pursuant to the Rules of the Exchange Act.

*     Filed herewith

(1)   Filed on May 10, 2002 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated April 25, 2002 and incorporated herein by reference.

(2)   Filed on June 2, 2000 as an exhibit to HiEnergy Technologies' registration
      statement on Form SB-2 (File No. 333-38536) and incorporated herein by
      reference.

(3)   Filed on July 29, 2002 as an exhibit to HiEnergy Technologies' annual
      report on Form 10-KSB for the fiscal year ended April 30, 2002, and
      incorporated herein by reference.

(4)   Filed on September 20, 2002 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended October 31,
      2002, and incorporated herein by reference.


                                       87
<PAGE>

(5)   Filed on November 6, 2002 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2 and incorporated herein by reference.

(6)   Filed on December 16, 2002 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended October 31,
      2002, and incorporated herein by reference.

(7)   Filed on February 25, 2003 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2/A (File No. 333-101055) and
      incorporated herein by reference.

(8)   Filed on March 24, 2003 as an exhibit to HiEnergy Technologies' quarterly
      report on Form 10-QSB for the fiscal quarter ended January 31, 2003, and
      incorporated herein by reference.

(9)   Filed on August 8, 2003 as an exhibit to HiEnergy Technologies' annual
      report on Form 10-KSB for the fiscal year ended April 30, 2003, and
      incorporated herein by reference.

(10)  Filed on September 19, 2003 as an exhibit to HiEnergy Technologies'
      registration statement on Form SB-2 (File No. 333-108934) and incorporated
      herein by reference.

(11)  Filed on October 8, 2003 as an exhibit to HiEnergy Technologies' report on
      Form 8-K dated October 7, 2003 and incorporated herein by reference.

(12)  Filed on December 16, 2003 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the fiscal quarter ended January 31,
      2004, and incorporated herein by reference.

(13)  Filed on December 24, 2003 as an exhibit to Pre-Effective Amendment No. 1
      to HiEnergy Technologies' registration statement on Form SB-2 (File No.
      333-108934) and incorporated herein by reference.

(14)  Filed on February 25, 2004 as a like numbered exhibit to HiEnergy
      Technologies' current report on Form 8-K dated February 24, 2004 and
      incorporated herein by reference.

(15)  Filed on March 25, 2004 as an exhibit to HiEnergy Technologies'
      Pre-Effective Amendment No 2 registration statement on Form SB-2 (File No.
      333-108934) and incorporated herein by reference.

(16)  Filed on April 12, 2004 as a like numbered exhibit to HiEnergy
      Technologies' current report on Form 8-K/A dated April 9, 2004 and
      incorporated herein by reference.

(17)  Filed on May 17, 2004 as a like numbered exhibit to HiEnergy Technologies'
      current report on Form 8-K dated May 17, 2004 and incorporated herein by
      reference.

(19)  Filed on May 21, 2004 as a like numbered exhibit to HiEnergy Technologies'
      current report on Form 8-K dated May 21, 2004 and incorporated herein by
      reference.

(20)  Filed on September 14, 2004 as a like numbered exhibit to HiEnergy
      Technologies' annual report on Form 10-KSB for the fiscal year ended April
      30, 2004 and incorporated herein by reference.

(21)  Filed on October 20, 2004 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2004,
      and incorporated herein by reference.

(22)  Filed on November 30, 2004 as exhibit 99.1 to HiEnergy Technologies'
      current report on Form 8-K dated November 30, 2004 and incorporated herein
      by reference.

(23)  Filed on December 17, 2004 as Exhibit 10.80 to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended October 31, 2004 and
      incorporated herein by reference.


                                       88
<PAGE>

(24)  Filed on January 11, 2005 as Exhibit 99.3 to HiEnergy Technologies'
      current report on Form 8-K dated January 7, 2005 and incorporated herein
      by reference.

(25)  Filed on February 2, 2005 as Exhibit 10.81 to HiEnergy Technologies'
      current report on Form 8-K dated January 27, 2005 and incorporated herein
      by reference.

(25)  Filed on March 17, 2005 as a like numbered exhibit to HiEnergy
      Technologies' quarterly report on Form 10-QSB for the quarter ended
      January 31, 2005 and incorporated herein by reference.

(26)  Filed on July 27, 2005 as a like numbered exhibit to HiEnergy
      Technologies' amendment to its annual report on Form 10-KSB for the fiscal
      year ended April 30, 2004 and incorporated herein by reference.

(27)  Filed on August 15, 2005 as a like numbered exhibit to HiEnergy
      Technologies' annual report on Form 10-KSB for the fiscal year ended April
      30, 2005 and incorporated herein by reference.

(28)  Filed on September 6, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated September 2, 2005 and incorporated herein by reference.

(29)  Filed on September 19, 2005 as an exhibit to HiEnergy Technologies'
      quarterly report on Form 10-QSB for the quarter ended July 31, 2005 and
      incorporated herein by reference.

(30)  Filed on October 11, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated October 11, 2005 and incorporated herein by reference.

(31)  Filed on October 24, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated October 20, 2005 and incorporated herein by reference.

(32)  Filed on November 17, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated November 17, 2005 and incorporated herein by reference.

(33)  Filed on November 30, 2005 as an exhibit to HiEnergy Technologies' report
      on Form 8-K dated November 30, 2005 and incorporated herein by reference.


                                       89
<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: December 15, 2005                By:  /s/ Bogdan  C. Maglich
      -----------------                   --------------------------------------
                                          Bogdan C. Maglich,
                                          Chief Executive Officer, President,
                                          Treasurer and Chief Scientific Officer
                                          (Principal Executive Officer and
                                          Principal Financial Officer)


                                       90