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, 2004

   /_/ TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

             For the transition period from __________ to __________

                        Commission file number: 0 - 32093


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


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

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

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


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 17, 2004, the issuer
had 42,189,004 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, 2004

                         PART I - FINANCIAL INFORMATION
                      -------------------------------------


<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
<S>                                                                                <C>
PART I - FINANCIAL INFORMATION

Item 1          Financial Statements

                Consolidated Balance Sheets as of April 30, 2004 and
                October 31, 2004 (unaudited)

                Consolidated Statements of Operations for the six months ended
                October 31, 2004 and 2003 (unaudited) and for the period from
                August 21, 1995 (inception) to October 31, 2004 (unaudited)

                Consolidated Statements of Shareholders' Equity (deficit) for
                the period from August 21, 1995 (inception) to October 31, 2004
                (unaudited)

                Consolidated Statements of Cash Flows for the six months ended
                October 31, 2004 and 2003 (unaudited) and for the period from
                August 21, 1995 (inception) to October 31, 2004 (unaudited)

                Notes to the Consolidated Financial Statements (unaudited)

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

Item 3          Controls and Procedures

PART II - OTHER INFORMATION

Item 1          Legal Proceedings

Item 2          Changes in Securities

Item 3          Default Upon Senior Securities

Item 4          Submission of Matters to a Vote of Security Holders

Item 5          Other Information

Item 6          Exhibits

SIGNATURES
</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                 HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                (DEVELOPMENT STAGE COMPANIES)
                                                                                   CONSOLIDATED BALANCE SHEET
                                                     FOR THE PERIODS ENDED OCTOER 31, 2004 AND APRIL 30, 2004
=============================================================================================================

                                                                               October 31,        April 30,
                                                                                  2004               2004
                                                                               (unaudited)
                                                                               ------------      ------------
CURRENT ASSETS
<S>                                                                            <C>               <C>
      Cash and cash equivalents                                                $    211,366      $     42,857
      Accounts receivable                                                            60,824            30,412
      Inventory                                                                     178,235                --
      Other current assets                                                          154,193           224,817
                                                                               ------------      ------------

           Total current assets                                                     604,618           298,086
                                                                               ------------      ------------

PROPERTY AND EQUIPMENT, net                                                         754,131           610,468
                                                                               ------------      ------------

TOTAL ASSETS                                                                   $  1,358,749      $    908,554
                                                                               ============      ============

CURRENT LIABILITIES
      Accounts payable                                                         $    918,991      $    578,283
      Accrued expenses                                                              124,239            88,291
      Accrued payroll and payroll taxes                                             458,832           458,204
      Accrued interest                                                              130,509            74,173
      Notes payable                                                                  76,771            12,368
      Notes payable - related parties                                               782,000           348,934
      Convertible notes payable - related parties                                   673,083           609,374
      Convertible notes payable subject to rescission rights                        542,000           236,000
      Common stock subject to buy-back,  2,000,000 shares                           694,000           694,000
      Common stock subject to rescission rights,  2,066,320 issued and
       outstanding and 770,424 shares issued and outstanding plus
       1,295,896 shares committed less $425,000 subscription receivable           1,058,156           633,153
      Other current liabilities                                                      51,873                --
                                                                               ------------      ------------

           Total current liabilities                                              5,510,454         3,732,780

LONG-TERM LIABILITIES
      Notes payable                                                                   6,234             1,942
      Convertible note payable - related party                                           --            38,061
                                                                               ------------      ------------

           Total liabilities                                                      5,516,688         3,772,783
                                                                               ------------      ------------

MINORITY INTEREST IN SUBSIDIARY,  20,540 MICRODEVICES
  SHARES ISSUED AND OUTSTANDING                                                      18,923            18,923
                                                                               ------------      ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT
      Preferred stock,  $0.001 par value  20,000,000 shares
       authorized no shares outstanding                                        $         --      $         --
      Common stock.  $0.001 par value  100,000,000 shares
        authorized 32,113,767 and 30,652,482 shares issued and outstanding           32,113            30,652
      Additional paid-in capital                                                 22,718,764        19,181,421
      Deferred compensation                                                        (120,505)         (459,308)
      Committed common stock,  3,521,974 and 101,986 shares, respectively         1,571,766           179,679
      Deficit accumulated during the development stage                          (28,379,000)      (21,815,596)
                                                                               ------------      ------------

           Total shareholders' deficit                                           (4,176,862)       (2,883,152)
                                                                               ------------      ------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                    $  1,358,749      $    908,554
                                                                               ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements

                                       3
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                                               CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                    FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2004 AND 2003 AND
                                                                 FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2004
===================================================================================================================================

                                                                                                                         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,
                                                  2004               2003             2004               2003              2004
                                                                   Restated                           Restated
                                               (unaudited)       (unaudited)       (unaudited)       (unaudited)       (unaudited)
                                              ------------      ------------      ------------      ------------      ------------
<S>                                           <C>               <C>               <C>               <C>               <C>
OPERATING EXPENSES
      General and administrative              $  1,190,747      $  1,382,684      $  2,875,620      $  2,345,605      $ 18,523,195
      Research and development                     214,642           238,755           434,644           337,077         2,846,753
                                              ------------      ------------      ------------      ------------      ------------

TOTAL OPERATING EXPENSES                         1,405,389         1,621,439         3,310,264         2,682,682        21,369,948

LOSS FROM OPERATIONS                            (1,405,389)       (1,621,439)       (3,310,264)       (2,682,682)      (21,369,948)
                                              ------------      ------------      ------------      ------------      ------------

OTHER INCOME (EXPENSE)
      Interest income                                   19               519               155               883             9,052
      Other income                                      --                --                --                --             1,423
      Interest expense                             (90,391)           (8,042)         (846,068)          (13,267)       (1,425,041)
      Financing expense                                 --                --                --                --          (223,710)
      Penalty expense on issuance of
       convertible promissory notes
       as a penalty for late registration           (3,000)               --            (6,000)               --           (53,748)
      Penalty expense on issuance of
       common stock and warrants
       as a penalty for late registration         (936,154)         (197,264)       (2,401,227)         (208,943)       (3,874,611)
                                              ------------      ------------      ------------      ------------      ------------

Total other expense, net                        (1,029,526)         (204,787)       (3,253,140)         (221,327)       (5,566,635)
                                              ------------      ------------      ------------      ------------      ------------

LOSS BEFORE PROVISION FOR INCOME TAXES          (2,434,915)       (1,826,226)       (6,563,404)       (2,904,009)      (26,936,583)

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

NET LOSS                                      $ (2,434,915)     $ (1,826,226)     $ (6,563,404)     $ (2,904,809)     $(26,949,966)

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

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

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS     $ (2,434,915)     $ (1,826,226)     $ (6,563,404)     $ (3,488,052)     $(28,379,000)
                                              ============      ============      ============      ============      ============


Net loss per share                            $      (0.07)     $      (0.06)     $      (0.20)     $      (0.11)
                                              ============      ============      ============      ============

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

BASIC AND DILUTED LOSS AVAILABLE TO
      COMMON SHAREHOLDERS PER SHARE           $      (0.07)     $      (0.06)     $      (0.20)     $      (0.13)
                                              ============      ============      ============      ============

BASIC AND DILUTED WEIGHTED AVERAGE
      COMMON SHARES OUTSTANDING                 32,890,869        28,199,605        32,097,797        27,207,815
                                              ============      ============      ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements

                                       4
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                   Price per  Series A Convertible,
                                                                    Equity      Preferred Stock               Common Stock
                                                        Date         Unit     Shares      Amount          Shares         Amount
                                                      --------   ----------   -------   ------------   ------------   ------------
<S>                                               <C>             <C>            <C>             <C>             <C>  <C>
Balance, August 21, 1995 (inception)                                               --   $         --             --   $         --
Recapitalization upon reverse merger                                                                      6,470,000          6,470
Issuance of common stock for services rendered        08/31/95   $     0.01                                 715,277            715
Issuance of common stock for services rendered        09/05/95   $     0.01                                  11,623             12
Issuance of common stock for services rendered        02/13/96   $     0.01                                   7,871              8
Net loss
                                                                              -------   ------------   ------------   ------------
Balance, April 30, 1996  (Restated)                                                --             --      7,204,771          7,205

Issuance of common stock for services rendered        12/02/96   $     0.01                                   1,162              1
Issuance of common stock for services rendered        12/16/96   $     0.01                                   1,788              2
Issuance of common stock for services rendered        12/20/96   $     0.01
Net loss
                                                                              -------   ------------   ------------   ------------

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

Issuance of common stock for services rendered        05/20/97   $     0.28                                  13,411             13
Issuance of common stock for services rendered        06/02/97   $     0.28                                 135,903            136
Issuance of common stock for services rendered        06/03/97   $     0.28                                 588,762            589
Issuance of common stock for services rendered        06/08/97   $     0.28                                   5,901              6
Issuance of common stock for cash                     06/14/97   $     0.28                                  35,766             36
Issuance of common stock for services rendered        06/16/97   $     0.28                                 290,331            290
Issuance of common stock for services rendered        06/18/97   $     0.28                                   4,918              5
Issuance of common stock for services rendered        06/23/97   $     0.28                                 206,167            206
Issuance of common stock for services rendered        07/28/97   $     0.28                                   8,941              9
Issuance of common stock for cash                     08/11/97   $     0.14                                  40,237             40
Issuance of common stock for cash                     08/19/97   $     0.14                                  17,883             18
Issuance of common stock for cash                     09/04/97   $     0.28                                   8,942              9
Issuance of common stock for cash                     09/04/97   $     0.35                                   8,942              9
Issuance of common stock for cash                     09/12/97   $     0.28                                   8,942              9
Issuance of common stock for cash                     10/14/97   $     0.22                                  89,417             89
Issuance of common stock for cash                     12/17/97   $     0.14                                  53,650             54
Issuance of common stock for cash                     12/17/97   $     0.28                                  42,920             43
Issuance of common stock for cash                     12/17/97   $     0.49                                  42,920             43
Issuance of common stock for services rendered        12/31/97   $     0.29                                  49,175             49
Issuance of common stock for services rendered        01/29/98   $     0.28                                  53,646             54
Issuance of common stock for cash                     01/30/98   $     0.28                                  44,708             45
Issuance of common stock for cash                     03/23/98   $     0.05                                  45,603             46
Issuance of common stock for cash                     03/23/98   $     0.28                                  62,771             63
Issuance of common stock for cash                     03/25/98   $     0.11                                   4,471              4
Issuance of common stock for services rendered        03/25/98   $     0.22                                   1,788              2
Issuance of common stock for cash                     03/25/98   $     0.28                                  89,417             89
Issuance of common stock for services rendered        04/04/98   $     0.22                                  89,410             89
Issuance of common stock for services rendered        04/14/98   $     0.22                                   2,682              3
Issuance of common stock for services rendered        04/28/98   $     0.22                                     893              1
Net loss
                                                                              -------   ------------   ------------   ------------

Balance, April 30, 1998 (Restated)                                                 --             --      9,256,507          9,257

Issuance of common stock for services rendered        05/05/98   $     1.64                                   4,470              4
Issuance of common stock for cash                     05/05/98   $     1.64                                  17,883             18
Issuance of common stock for services rendered        06/01/98   $     0.28                                  28,879             29
Issuance of common stock for cash                     06/01/98   $     0.28                                  53,649             54
Issuance of common stock for cash                     08/03/98   $     0.28                                   8,942              9
Issuance of common stock for cash                     08/10/98   $     0.28                                   8,942              9
Issuance of common stock for services rendered        09/16/98   $     0.28                                  74,501             75

<CAPTION>

                                                                                                   Deficit
                                                                                                  Accumulated
                                                  Additional      Committed                       during the
                                                    Paid-in         Common        Deferred        Development
                                                     Capital         Stock       Compensation        Stage            Total
                                                  ------------    ------------   ------------    ------------    ------------
<S>                                               <C>             <C>            <C>             <C>             <C>
Balance, August 21, 1995 (inception)              $         --    $         --   $         --    $         --    $         --
Recapitalization upon reverse merger                    (6,456)                                                            14
Issuance of common stock for services rendered           7,297                                                          8,012
Issuance of common stock for services rendered             118                                                            130
Issuance of common stock for services rendered              80                                                             88
Net loss                                                                                              (39,387)        (39,387)
                                                                                 ------------    ------------    ------------

Balance, April 30, 1996  (Restated)                      1,039              --             --         (39,387)        (31,143)

Issuance of common stock for services rendered              11                                                             12
Issuance of common stock for services rendered              19                                                             21
Issuance of common stock for services rendered                             269             --               3               3
Net loss                                                                                             (110,004)       (110,004)
                                                                                 ------------    ------------    ------------
Balance, April 30, 1997 (Restated)                       1,072              --             --        (149,391)       (141,111)

Issuance of common stock for services rendered           3,737                                                          3,750
Issuance of common stock for services rendered          37,861                                                         37,997
Issuance of common stock for services rendered         164,023                                                        164,612
Issuance of common stock for services rendered           1,644                                                          1,650
Issuance of common stock for cash                        9,964                                                         10,000
Issuance of common stock for services rendered          80,884                                                         81,174
Issuance of common stock for services rendered           1,370                                                          1,375
Issuance of common stock for services rendered          57,436                                                         57,642
Issuance of common stock for services rendered           2,491                                                          2,500
Issuance of common stock for cash                        5,585                                                          5,625
Issuance of common stock for cash                        2,482                                                          2,500
Issuance of common stock for cash                        2,491                                                          2,500
Issuance of common stock for cash                        3,116                                                          3,125
Issuance of common stock for cash                        2,491                                                          2,500
Issuance of common stock for cash                       19,911                                                         20,000
Issuance of common stock for cash                        7,446                                                          7,500
Issuance of common stock for cash                       11,957                                                         12,000
Issuance of common stock for cash                       20,957                                                         21,000
Issuance of common stock for services rendered          14,229                                                         14,278
Issuance of common stock for services rendered          14,945                                                         14,999
Issuance of common stock for cash                       12,455                                                         12,500
Issuance of common stock for cash                        2,204                                                          2,250
Issuance of common stock for cash                       17,489                                                         17,552
Issuance of common stock for cash                          496                                                            500
Issuance of common stock for services rendered             398                                                            400
Issuance of common stock for cash                       24,911                                                         25,000
Issuance of common stock for services rendered          19,936                                                         20,025
Issuance of common stock for services rendered             598                                                            601
Issuance of common stock for services rendered             197                                                            198
Net loss                                                                                             (655,432)       (655,432)
                                                                                 ------------    ------------    ------------

Balance, April 30, 1998 (Restated)                     544,776              --             --        (804,823)       (250,790)

Issuance of common stock for services rendered           7,307                                                          7,311
Issuance of common stock for cash                       29,232                                                         29,250
Issuance of common stock for services rendered           8,045                                                          8,074
Issuance of common stock for cash                       14,946                                                         15,000
Issuance of common stock for cash                        2,491                                                          2,500
Issuance of common stock for cash                        2,491                                                          2,500
Issuance of common stock for services rendered          20,755                                                         20,830
</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 SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                   Price per  Series A Convertible,
                                                                    Equity      Preferred Stock               Common Stock
                                                        Date         Unit     Shares      Amount          Shares         Amount
                                                      --------   ----------   -------   ------------   ------------   ------------
<S>                                               <C>             <C>            <C>             <C>             <C>          <C>
Issuance of common stock for services rendered        10/01/98   $     0.46                                  29,818             30
Issuance of common stock for cash                     10/01/98   $     0.36                                  13,815             14
Issuance of common stock for cash                     10/01/98   $     0.56                                   8,942              9
Issuance of common stock for cash                     10/30/98   $     0.56                                   4,471              4
Issuance of common stock for services rendered        11/02/98   $     0.40                                   4,470              4
Issuance of common stock for cash                     11/02/98   $     0.28                                  44,708             45
Issuance of common stock for services rendered        11/12/98   $     0.40                                   8,941              9
Issuance of common stock for services rendered        11/14/98   $     0.40                                  89,410             89
Issuance of common stock for services rendered        11/18/98   $     0.40                                  15,647             16
Issuance of common stock for services rendered        11/19/98   $     0.40                                  75,998             76
Issuance of common stock for cash                     11/24/98   $     0.89                                  11,177             11
Issuance of common stock for services rendered        11/28/98   $     0.40                                 447,048            447
Stock options issued for services rendered            11/30/98   $     0.27
Issuance of common stock for services rendered        12/02/98   $     0.91                                   4,470              4
Issuance of common stock for cash                     12/02/98   $     0.75                                   3,353              3
Issuance of common stock for cash                     12/02/98   $     0.78                                   8,942              9
Issuance of common stock for cash                     12/02/98   $     0.93                                   2,683              3
Issuance of common stock for cash                     12/02/98   $     2.80                                     894              1
Issuance of common stock for services rendered        12/17/98   $     0.91                                   5,208              5
Issuance of common stock for services rendered        12/31/98   $     0.91                                   2,012              2
Issuance of common stock for cash                     01/08/99   $     0.72                                  44,708             45
Issuance of common stock for cash                     01/15/99   $     0.38                                   9,389              9
Issuance of common stock for cash                     01/15/99   $     1.41                                   4,471              4
Issuance of common stock for services rendered        03/01/99   $     0.57                                 223,524            224
Issuance of common stock for services rendered        03/16/99   $     0.57                                  22,352             22
Issuance of common stock for services rendered        03/17/99   $     0.57                               1,034,979          1,035
Issuance of common stock for cash                     03/17/99   $     0.57                                  17,883             18
Issuance of common stock for services rendered        04/28/99   $     0.57                                  84,716             85
Issuance of common stock for services rendered        04/30/99   $     0.57                                  11,177             11
Net loss
                                                                               -------   ------------   ------------   ------------

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

Issuance of common stock for cash                     05/03/99   $     0.10      0.10            .10         35,767             36
Issuance of common stock for services rendered        05/05/99   $     0.10      0.10            .10        117,216            117
Issuance of common stock for cash                     06/05/99   $     0.56      0.56            .56         17,883             18
Issuance of common stock for services rendered        06/09/99   $     0.45      0.45            .45         89,410             90
Issuance of common stock for services rendered        06/28/99   $     0.45      0.45            .45        277,170            277
Issuance of common stock for cash                     06/28/99   $     0.02      0.02            .02          4,471              4
Issuance of common stock for cash                     07/12/99   $     0.52      0.52            .52          2,861              3
Issuance of common stock for cash                     07/14/99   $     0.28      0.28            .28         44,708             45
Issuance of common stock for cash                     07/14/99   $     0.56      0.56            .56         17,883             18
Issuance of common stock for services rendered        07/22/99   $     0.37      0.37            .37        247,218            247
Issuance of common stock for services rendered        11/30/99   $     0.42      0.42            .42         52,305             52
Issuance of common stock for cash                     11/30/99   $     0.39      0.39            .39         53,650             54
Issuance of common stock for cash                     11/30/99   $     0.56      0.56            .56          8,942              9
Issuance of common stock for cash                     12/29/99   $     0.56      0.56            .56         80,475             81
Issuance of common stock for services rendered        03/20/00   $     0.59      0.59            .59          2,235              2
Issuance of common stock for cash                     04/03/00   $     0.56      0.56            .56        107,301            107
Issuance of common stock for services rendered        04/03/00   $     0.59      0.59            .59      1,307,700          1,308
Issuance of common stock for cash                     04/03/00   $     0.72      0.72            .72          2,794              3
Issuance of common stock for cash                     04/03/00   $     0.89      0.89            .89          8,383              8
Issuance of common stock for services rendered        04/10/00   $     0.59      0.59            .59         50,159             50
Issuance of common stock for services rendered        04/24/00   $     0.59      0.59            .59         22,352             22
Issuance of common stock for services rendered        04/26/00   $     0.59      0.59            .59          2,235              2
Net loss
                                                                              -------   ------------   ------------   ------------

Balance, April 30, 2000 (Restated)                                                 --             --     14,242,097         14,242

Issuance of common stock for services rendered        07/28/00   $     0.59      0.59            .59         11,177             11
Issuance of common stock for services rendered        08/10/00   $     0.59      0.59            .59        223,542            224
Issuance of common stock for services rendered        08/22/00   $     0.59      0.59            .59         22,354             22


<CAPTION>


                                                                                                 Deficit
                                                                                                Accumulated
                                                 Additional      Committed                       during the
                                                   Paid-in         Common        Deferred        Development
                                                    Capital         Stock       Compensation        Stage            Total
                                                 ------------    ------------   ------------    ------------    ------------
<S>                                               <C>             <C>            <C>             <C>             <C>
Issuance of common stock for services rendered         13,686                                                         13,716
Issuance of common stock for cash                       4,986                                                          5,000
Issuance of common stock for cash                       4,991                                                          5,000
Issuance of common stock for cash                       2,496                                                          2,500
Issuance of common stock for services rendered          1,794                                                          1,798
Issuance of common stock for cash                      12,435                                                         12,480
Issuance of common stock for services rendered          3,588                                                          3,597
Issuance of common stock for services rendered         35,876                                                         35,965
Issuance of common stock for services rendered          6,278                                                          6,294
Issuance of common stock for services rendered         30,494                                                         30,570
Issuance of common stock for cash                       9,989                                                         10,000
Issuance of common stock for services rendered        179,379                                                        179,826
Stock options issued for services rendered            659,684                                                        659,684
Issuance of common stock for services rendered          4,080                                                          4,084
Issuance of common stock for cash                       2,497                                                          2,500
Issuance of common stock for cash                       6,991                                                          7,000
Issuance of common stock for cash                       2,497                                                          2,500
Issuance of common stock for cash                       2,499                                                          2,500
Issuance of common stock for services rendered          4,753                                                          4,758
Issuance of common stock for services rendered          1,836                                                          1,838
Issuance of common stock for cash                      32,355                                                         32,400
Issuance of common stock for cash                       3,591                                                          3,600
Issuance of common stock for cash                       6,296                                                          6,300
Issuance of common stock for services rendered        127,266                                                        127,490
Issuance of common stock for services rendered         12,727                                                         12,749
Issuance of common stock for services rendered        589,278                                                        590,313
Issuance of common stock for cash                      10,182                                                         10,200
Issuance of common stock for services rendered         48,203                                                         48,288
Issuance of common stock for services rendered          6,360                                                          6,371
Net loss                                                                                          (1,956,565)     (1,956,565)
                                                 ------------    ------------   ------------    ------------    ------------

Balance, April 30, 1999(Restated)                   2,457,130              --             --      (2,761,388)       (292,569)

Issuance of common stock for cash                       3,629                                                          3,665
Issuance of common stock for services rendered         11,894                                                         12,011
Issuance of common stock for cash                       9,982                                                         10,000
Issuance of common stock for services rendered         40,307                                                         40,397
Issuance of common stock for services rendered        124,953                                                        125,230
Issuance of common stock for cash                          96                                                            100
Issuance of common stock for cash                       1,497                                                          1,500
Issuance of common stock for cash                      12,455                                                         12,500
Issuance of common stock for cash                       9,982                                                         10,000
Issuance of common stock for services rendered         90,402                                                         90,649
Issuance of common stock for services rendered         21,675                                                         21,727
Issuance of common stock for cash                      20,946                                                         21,000
Issuance of common stock for cash                       4,991                                                          5,000
Issuance of common stock for cash                      44,919                                                         45,000
Issuance of common stock for services rendered          1,309                                                          1,311
Issuance of common stock for cash                      59,893                                                         60,000
Issuance of common stock for services rendered        765,802                                                        767,110
Issuance of common stock for cash                       1,997                                                          2,000
Issuance of common stock for cash                       7,492                                                          7,500
Issuance of common stock for services rendered         29,374                                                         29,424
Issuance of common stock for services rendered         13,090                                                         13,112
Issuance of common stock for services rendered          1,309                                                          1,311
Net loss                                                                                          (1,247,576)     (1,247,576)
                                                 ------------    ------------   ------------    ------------    ------------

Balance, April 30, 2000 (Restated)                  3,735,124              --             --      (4,008,964)       (259,598)

Issuance of common stock for services rendered          6,546                                                          6,557
Issuance of common stock for services rendered        130,908                                                        131,132
Issuance of common stock for services rendered         13,091                                                         13,113
</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 SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                   Price per  Series A Convertible,
                                                                    Equity      Preferred Stock               Common Stock
                                                        Date         Unit     Shares      Amount          Shares         Amount
                                                      --------   ----------   -------   ------------   ------------   ------------
<S>                                               <C>             <C>            <C>             <C>             <C>         <C>
Issuance of common stock for services rendered        09/28/00   $     0.24      0.24            .24         11,177             11
Issuance of common stock for cash                     09/28/00   $     0.24      0.24            .24         21,214             21
Issuance of common stock for services rendered        10/09/00   $     0.24      0.24            .24         35,767             36
Issuance of common stock for services rendered        11/30/00   $     0.24      0.24            .24            448              1
Issuance of common stock for services rendered        12/31/00   $     0.24      0.24            .24        510,793            511
Net loss
                                                                              -------   ------------   ------------   ------------

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

Issuance of common stock for services rendered        05/10/01   $     0.24      0.24            .24        116,903            117
Issuance of common stock for services rendered        06/18/01   $     0.45      0.45            .45         67,057             67
Issuance of common stock for cash                     06/18/01   $     0.45      0.45            .45         22,354             22
Issuance of common stock for cash                     07/31/01   $     0.45      0.45            .45         22,354             22
Issuance of common stock for services rendered        07/31/01   $     0.64      0.64            .64        350,933            351
Issuance of common stock for cash                     07/31/01   $     1.12      1.12            .12          8,942              9
Issuance of common stock for cash                     09/07/01   $     0.22      0.22            .22        223,542            224
Issuance of common stock for services rendered        09/23/01   $     0.22      0.22            .22        525,281            525
Issuance of common stock for cash                     09/23/01   $     0.22      0.22            .22         67,062             67
Warrants issued for services rendered                 09/23/01   $     0.09      0.09            .09            .09            .09
Issuance of common stock for services rendered        10/31/01   $     0.22      0.22            .22         13,411             14
Issuance of common stock for services rendered        11/02/01   $     0.22      0.22            .22         67,057             67
Issuance of common stock for services rendered        12/07/01   $     0.22      0.22            .22         11,176             11
Issuance of common stock for services rendered        12/10/01   $     0.22      0.22            .22        217,176            217
Issuance of common stock for services rendered        12/13/01   $     0.22      0.22            .22         87,235             87
Issuance of common stock for cash                     12/13/01   $     0.22      0.22            .22        223,542            224
Issuance of common stock for cash                     12/20/01   $     0.22      0.22            .22          3,577              4
Issuance of common stock for services rendered        12/20/01   $     0.22      0.22            .22      1,230,276          1,230
Issuance of common stock for services rendered        12/21/01   $     0.22      0.22            .22         22,352             22
Issuance of common stock for services rendered        12/30/01   $     0.22      0.22            .22        212,348            212
Stock options issued for services rendered            01/08/02   $     0.11      0.11            .11            .11            .11
Issuance of common stock for services rendered        01/14/02   $     0.22      0.22            .22         33,529             34
Stock options issued for services rendered            01/31/02   $     0.11      0.11            .11            .11            .11
Stock options issued for services rendered            02/08/02   $     0.09      0.09            .09            .09            .09
Issuance of common stock for services rendered        02/14/02   $     0.22      0.22            .22      2,235,241          2,235
Issuance of common stock for cash                     03/13/02   $     0.24      0.24            .24         10,283             10
Issuance of common stock in private
     placement for cash                               04/30/02   $     1.00      1.00            .00      1,225,000          1,225
Net loss
                                                                               -------   ------------   ------------   ------------

Balance, April 30, 2002 (Restated)                                                 --             --     22,075,200         22,075

Common stock committed on exercise of stock
     options in subsidiary                            05/23/02   $     0.16      0.16            .16            .16            .16
Issuance of common stock for services rendered        05/24/02   $     2.15      2.15            .15          5,589              6
Financing expense in connection with
     issuance of warrants                             05/31/02   $     1.49      1.49            .49            .49            .49
Conversion of convertible notes payable - related
     parties and accrued interest into common stock   06/04/02   $     1.00      1.00            .00          5,780              6
Conversion of convertible notes payable - related
     parties and accrued interest into common stock   06/20/02   $     1.00      1.00            .00          5,438              5
Issuance of common stock in private placement for
     cash                                             06/25/02   $     1.00      1.00            .00        500,000            500
Stock options issued for services rendered            07/12/02   $     1.52      1.52            .52            .52            .52
Conversion of notes payable - related
     parties into common stock                        07/16/02   $     1.00      1.00            .00         15,000             15
Conversion of convertible notes payable - related
     parties and accrued interest into common stock   07/22/02   $     1.00      1.00            .00         11,680             12
Stock options issued for services rendered            08/01/02   $     0.47      0.47            .47            .47            .47
Issuance of common stock for services rendered        08/24/02   $     1.67      1.67            .67          5,589              6
Stock options issued for services rendered            09/25/02   $     1.10      1.10            .10            .10            .10
Stock options issued in exchange for settlement
     of accounts payable                              09/25/02   $     1.10      1.10            .10            .10            .10


<CAPTION>


                                                                                                   Deficit
                                                                                                  Accumulated
                                                   Additional      Committed                       during the
                                                     Paid-in         Common        Deferred        Development
                                                      Capital         Stock       Compensation        Stage            Total
                                                   ------------    ------------   ------------    ------------    ------------
<S>                                               <C>             <C>            <C>             <C>             <C>
Issuance of common stock for services rendered            2,623                                                          2,634
Issuance of common stock for cash                         4,979                                                          5,000
Issuance of common stock for services rendered            8,394                                                          8,430
Issuance of common stock for services rendered              105                                                            106
Issuance of common stock for services rendered          119,878                                                        120,389
Net loss                                                                                              (452,754)       (452,754)
                                                   ------------    ------------   ------------    ------------    ------------

Balance, April 30, 2001 (Restated)                    4,021,648              --             --      (4,461,718)       (424,991)

Issuance of common stock for services rendered           27,940                                                         28,057
Issuance of common stock for services rendered           29,930                                                         29,997
Issuance of common stock for cash                         9,978                                                         10,000
Issuance of common stock for cash                         9,978                                                         10,000
Issuance of common stock for services rendered          223,917                                                        224,268
Issuance of common stock for cash                         9,991                                                         10,000
Issuance of common stock for cash                        49,776                                                         50,000
Issuance of common stock for services rendered          116,965                                                        117,490
Issuance of common stock for cash                        14,933                                                         15,000
Warrants issued for services rendered                    24,924                                                         24,924
Issuance of common stock for services rendered            2,986                                                          3,000
Issuance of common stock for services rendered           14,932                                                         14,999
Issuance of common stock for services rendered            2,489                                                          2,500
Issuance of common stock for services rendered           48,359                                                         48,576
Issuance of common stock for services rendered           19,425                                                         19,512
Issuance of common stock for cash                        49,776                                                         50,000
Issuance of common stock for cash                           796                                                            800
Issuance of common stock for services rendered          273,948                                                        275,178
Issuance of common stock for services rendered            4,978                                                          5,000
Issuance of common stock for services rendered           47,284                                                         47,496
Stock options issued for services rendered                1,402                                                          1,402
Issuance of common stock for services rendered            7,465                                                          7,499
Stock options issued for services rendered                2,142                                                          2,142
Stock options issued for services rendered                3,809                                                          3,809
Issuance of common stock for services rendered          497,725                                                        499,960
Issuance of common stock for cash                         2,410                                                          2,420
Issuance of common stock in private
     placement for cash                               1,223,775                                                      1,225,000
Net loss                                                                                            (2,399,061)     (2,399,061)
                                                   ------------    ------------   ------------    ------------    ------------

Balance, April 30, 2002 (Restated)                    6,743,681              --             --      (6,860,779)        (95,023)

Common stock committed on exercise of stock
     options in subsidiary                                  .16           7,164                                          7,164
Issuance of common stock for services rendered           12,010                                                         12,016
Financing expense in connection with
     issuance of warrants                               223,710                                                        223,710
Conversion of convertible notes payable - related
     parties and accrued interest into common stoc        5,774                                                          5,780
Conversion of convertible notes payable - related
     parties and accrued interest into common stoc        5,435                                                          5,440
Issuance of common stock in private placement for
     cash                                               499,500                                                        500,000
Stock options issued for services rendered              761,007                                                        761,007
Conversion of notes payable - related
     parties into common stock                           14,985                                                         15,000
Conversion of convertible notes payable - related
     parties and accrued interest into common stoc       11,664                                                         11,676
Stock options issued for services rendered              187,163                                                        187,163
Issuance of common stock for services rendered            9,328                                                          9,334
Stock options issued for services rendered            3,305,542                     (3,305,542)                             --
Stock options issued in exchange for settlement
     of accounts payable                                 50,000                                                         50,000
</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 SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                    Price per  Series A Convertible,
                                                                     Equity      Preferred Stock               Common Stock
                                                         Date         Unit     Shares      Amount          Shares         Amount
                                                       --------   ----------   -------   ------------   ------------   ------------
<S>                                                      <C>             <C>       <C>             <C>             <C>      <C>
Issuance of Series A convertible preferred stock
     in private placement for cash                     10/07/02   $10,000.00     97.93              1
Offering costs on issuance of Series A convertible
     preferred stock in private placement for cash     10/07/02
Dividends on Series A preferred stock                  10/07/02                                               68,150             68
Beneficial conversion feature on issuance of
     Series A preferred stock                          10/07/02
Issuance of common stock in private placement for
     cash                                              10/29/02   $     1.35      1.35            .35      1,349,934          1,350
Offering costs on issuance of common stock in
     private placement for cash                        10/29/02
Common stock committed for services rendered           11/24/02   $     2.35      2.35            .35            .35            .35
Warrants issued for services rendered                  12/09/02   $     2.60      2.60            .60            .60            .60
Warrants issued for services rendered                  12/09/02   $     0.65      0.65            .65            .65            .65
Stock options issued in exchange for settlement
     of accounts payable                               12/19/02   $     0.55      0.55            .55            .55            .55
Stock options issued for services rendered             12/31/02   $     0.13      0.13            .13            .13            .13
Issuance of common stock on cashless exercise of
     warrants                                          01/02/03                                               33,909             34
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock       01/24/03                  (1.05)                        9,162              9
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock       01/27/03                  (1.06)                        9,174              9
Amortization of deferred compensation                  01/31/03
Warrants issued for services rendered                  02/17/03   $     1.63      1.63            .63            .63            .63
Common stock committed for services rendered           02/24/03   $     0.79      0.79            .79            .79            .79
Reversal of deferred compensation                      02/25/03
Issuance of common stock for services rendered         04/21/03   $     0.48      0.48            .48         21,277             21
Common stock committed for services rendered           04/21/03   $     0.48      0.48            .48            .48            .48
Warrants issued for services rendered                  04/28/03   $     0.37      0.37            .37            .37            .37
Offering costs on issuance of common stock subject
      to buyback for cash                              04/23/03
Offering costs on issuance of common stock subject
      to buyback for cash                              04/28/03
Issuance of common stock for subscription receivable   04/30/03   $     0.40      0.40            .40         10,000             10
Common stock committed to investors as a penalty
     for delayed registration of common stock          04/30/03   $     0.45      0.45            .45            .45            .45
Net loss
                                                                               -------   ------------   ------------   ------------

Balance, April 30, 2003 (Restated)                                               95.82   $          1     24,125,882   $     24,126

Warrants issued for services rendered                  05/01/03   $     0.16
Issuance of common stock for services rendered         05/13/03   $     0.48                                  45,000             45
Warrants issued for services rendered                  05/16/03   $     0.24
Stock options issued for services rendered             05/16/03   $     0.18
Issuance of common stock on cashless conversion
     of Series A preferred stock                       05/16/03                 (95.82)            (1)     2,129,316          2,129
Dividend on induced conversion of Series A
     preferred stock                                   05/16/03
Issuance of committed common stock                     05/16/03                                              128,136            128
Issuance of common stock to investors as a
     penalty for delayed registration of common stock  05/16/03   $     0.45      0.45            .45         25,952             26
Issuance of committed common stock                     05/21/03                                               20,000             20
Issuance of common stock on exercise of
     warrants                                          05/27/03   $     0.01      0.01            .01         34,000             34
Issuance of committed common stock                     06/19/03                                               11,178             11
Issuance of common stock on conversion of
     convertible notes payable - related parties       06/24/03   $     0.33                                 300,000            300
Stock options issued for services rendered             07/16/03   $     0.26
Issuance of common stock for services rendered         07/16/03   $     0.50                                   6,000              6
Issuance of committed common stock                     08/14/03                                               44,705             45
Issuance of common stock for cash                      08/15/03   $     0.45                                 222,222            222


<CAPTION>

                                                                                                       Deficit
                                                                                                      Accumulated
                                                       Additional      Committed                       during the
                                                         Paid-in         Common        Deferred        Development
                                                          Capital         Stock       Compensation        Stage            Total
                                                       ------------    ------------   ------------    ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Issuance of Series A convertible preferred stock
     in private placement for cash                          979,300                                                        979,301
Offering costs on issuance of Series A convertible
     preferred stock in private placement for cash         (178,902)                                                      (178,902)
Dividends on Series A preferred stock                        78,292                                        (78,360)             --
Beneficial conversion feature on issuance of
     Series A preferred stock                               767,431                                       (767,431)             --
Issuance of common stock in private placement for
     cash                                                 1,821,056                                                      1,822,406
Offering costs on issuance of common stock in
     private placement for cash                            (196,793)                                                      (196,793)
Common stock committed for services rendered                    .35          13,134                                         13,134
Warrants issued for services rendered                       390,409                                                        390,409
Warrants issued for services rendered                       162,792                                                        162,792
Stock options issued in exchange for settlement
     of accounts payable                                     15,000                                                         15,000
Stock options issued for services rendered                   59,373                                                         59,373
Issuance of common stock on cashless exercise of
     warrants                                                   (34)                                                            --
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock                 (9)                                                            --
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock                 (9)                                                            --
Amortization of deferred compensation                                                    1,032,981                       1,032,981
Warrants issued for services rendered                       130,712                                                        130,712
Common stock committed for services rendered                    .79           4,415                                          4,415
Reversal of deferred compensation                        (2,272,561)                     2,272,561                              --
Issuance of common stock for services rendered               10,288                                                         10,309
Common stock committed for services rendered                    .48           9,691                                          9,691
Warrants issued for services rendered                        18,284                                                         18,284
Offering costs on issuance of common stock subject
      to buyback for cash                                   (20,000)                                                       (20,000)
Offering costs on issuance of common stock subject
      to buyback for cash                                   (24,500)                                                       (24,500)
Issuance of common stock for subscription receivable          3,972                                                          3,982
Common stock committed to investors as a penalty
     for delayed registration of common stock                   .45          57,661                                         57,661
Net loss                                                                                                (5,925,680)     (5,925,680)
                                                       ------------    ------------   ------------    ------------    ------------

Balance, April 30, 2003 (Restated)                     $ 13,573,900    $     92,065   $         --    $(13,632,250)   $     57,842

Warrants issued for services rendered                         8,079                                                          8,079
Issuance of common stock for services rendered               21,555                                                         21,600
Warrants issued for services rendered                        35,598                                                         35,598
Stock options issued for services rendered                    5,458                                                          5,458
Issuance of common stock on cashless conversion
     of Series A preferred stock                             (2,128)                                                            --
Dividend on induced conversion of Series A
     preferred stock                                        583,243                                       (583,243)             --
Issuance of committed common stock                           57,533         (57,661)                                            --
Issuance of common stock to investors as a
     penalty for delayed registration of common stock        11,653                                                         11,679
Issuance of committed common stock                            9,671          (9,691)                                            --
Issuance of common stock on exercise of                                                                                         --
     warrants                                                   306                                                            340
Issuance of committed common stock                           17,538         (17,549)                                            --
Issuance of common stock on conversion of
     convertible notes payable - related parties             99,700                                                        100,000
Stock options issued for services rendered                   52,742                                                         52,742
Issuance of common stock for services rendered                2,994                                                          3,000
Issuance of committed common stock                            7,119          (7,164)                                            --
Issuance of common stock for cash                            99,778                                                        100,000
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                       8
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                        Price per  Series A Convertible,
                                                                         Equity      Preferred Stock               Common Stock
                                                             Date         Unit     Shares      Amount          Shares         Amount
                                                           --------   ----------   -------   ------------   ------------   ---------
<S>                                                        <C>             <C>            <C>             <C>      <C>           <C>
Issuance of common stock for cash                          08/20/03   $     0.52                                 400,000         400
Issuance of common stock for cash                          08/25/03   $     0.69                                 272,464         272
Issuance of common stock for services rendered             08/27/03   $     1.06                                   6,000           6
Stock options issued for services rendered                 08/27/03   $     0.79
Beneficial conversion feature on convertible
     notes payable - related parties                       08/28/03
Issuance of common stock for cash                          08/28/03   $     0.69                                  86,957          87
Issuance of common stock for cash                          08/29/03   $     0.69                                 144,928         145
Issuance of common stock for cash                          08/29/03   $     0.75                                 666,666         667
Offering costs on issuance of common stock
     for cash                                              08/29/03
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      10/15/03   $     1.29                                 148,260         148
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          10/15/03   $     0.73
Issuance of common stock for cash                          10/27/03   $     0.95                                  63,000          63
Stock options issued for services rendered                 11/07/03   $     0.90      0.90            .90            .90         .90
Issuance of common stock for services rendered             11/07/03   $     1.25                                  12,000          12
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      11/15/03   $     1.04      1.04            .04         44,187          44
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          11/15/03   $     0.52      0.52            .52            .52         .52
Offering costs on issuance of common stock subject
     to rescission rights for cash                         11/21/03
Issuance of common stock for services rendered             11/21/03   $     0.75                                   2,000           2
Stock options issued for services rendered                 12/05/03   $     0.60
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      12/15/03   $     0.90                                  61,242          61
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          12/15/03   $     0.41
Issuance of common stock for cash                          12/22/03   $     0.71                                  42,254          42
Issuance of common stock for services rendered             01/06/04   $     0.89                                  27,500          28
Warrants issued for services rendered                      01/06/04   $     0.59
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      01/15/04   $     0.88                                  75,739          76
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          01/15/04   $     0.39
Issuance of common stock on cashless
     exercise of warrants                                  01/15/04                                               54,053          54
Issuance of common stock for services rendered             01/15/04   $     0.88                                  12,000          12
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      01/16/04   $     0.89                                   2,520           3
Beneficial conversion feature on convertible
     notes payable - related parties                       01/16/04
Issuance of warrants in conjunction with
     convertible notes payable - related parties           01/16/04   $     0.18
Issuance of common stock for services rendered             01/23/04   $     1.18                                  55,000          55
Beneficial conversion feature on convertible
     notes payable - related parties                       01/26/04
Beneficial conversion feature on convertible
     notes payable - related parties                       01/28/04
Issuance of warrants in conjunction with
     convertible notes payable - related parties           01/28/04   $     0.15
Issuance of common stock on cashless
     exercise of warrants                                  01/30/04                                               48,000          48
Beneficial conversion feature on convertible
     notes payable - related parties                       01/31/04


<CAPTION>

                                                                                                         Deficit
                                                                                                        Accumulated
                                                         Additional      Committed                       during the
                                                           Paid-in         Common        Deferred        Development
                                                            Capital         Stock       Compensation        Stage            Total
                                                         ------------    ------------   ------------    ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Issuance of common stock for cash                             207,600                                                        208,000
Issuance of common stock for cash                             187,728                                                        188,000
Issuance of common stock for services rendered                  6,354                                                          6,360
Stock options issued for services rendered                     31,514                                                         31,514
Beneficial conversion feature on convertible                                                                                      --
     notes payable - related parties                              341                                                            341
Issuance of common stock for cash                              59,913                                                         60,000
Issuance of common stock for cash                              99,855                                                        100,000
Issuance of common stock for cash                             499,333                                                        500,000
Offering costs on issuance of common stock
     for cash                                                 (40,000)                                                       (40,000
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         191,107                                                        191,255
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               6,009                                                          6,009
Issuance of common stock for cash                              59,938                                                         60,001
Stock options issued for services rendered                    278,142                                                        278,142
Issuance of common stock for services rendered                 14,988                                                         15,000
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          45,910                                                         45,954
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               7,143                                                          7,143
Offering costs on issuance of common stock subject
     to rescission rights for cash                             (5,250)                                                        (5,250
Issuance of common stock for services rendered                  1,498                                                          1,500
Stock options issued for services rendered                     24,104                                                         24,104
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          55,057                                                         55,118
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               7,937                                                          7,937
Issuance of common stock for cash                              29,958                                                         30,000
Issuance of common stock for services rendered                 24,447                                                         24,475
Warrants issued for services rendered                          17,775                                                         17,775
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          66,574                                                         66,650
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               9,837                                                          9,837
Issuance of common stock on cashless
     exercise of warrants                                         (54)                                                            --
Issuance of common stock for services rendered                 10,548                                                         10,560
Issuance of common stock to investors as a
     penalty for delayed registration of common stock           2,240                                                          2,243
Beneficial conversion feature on convertible
     notes payable - related parties                           58,245                                                         58,245
Issuance of warrants in conjunction with
     convertible notes payable - related parties               91,755                                                         91,755
Issuance of common stock for services rendered                 64,845                                                         64,900
Beneficial conversion feature on convertible
     notes payable - related parties                            4,026                                                          4,026
Beneficial conversion feature on convertible
     notes payable - related parties                           41,196                                                         41,196
Issuance of warrants in conjunction with
     convertible notes payable - related parties              143,804                                                        143,804
Issuance of common stock on cashless
     exercise of warrants                                         (48)                                                            --
Beneficial conversion feature on convertible
     notes payable - related parties                            6,046                                                          6,046
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                       9
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                        Price per  Series A Convertible,
                                                                         Equity      Preferred Stock               Common Stock
                                                             Date         Unit     Shares      Amount          Shares         Amount
                                                           --------   ----------   -------   ------------   ------------   ---------
<S>                                                        <C>             <C>            <C>             <C>     <C>          <C>
Issuance of warrants in conjunction with
     convertible notes payable - related parties           01/31/04   $     0.12
Beneficial conversion feature on convertible
     notes payable - related parties                       01/31/04
Issuance of common stock on cashless
     exercise of warrants                                  02/04/04                                               25,049         25
Offering costs on issuance of common stock subject
     to rescission rights for cash                         02/06/04
Issuance of common stock for services rendered             02/06/04   $     1.23                                   3,333          3
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      02/15/04   $     1.25                                  99,332         99
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          02/15/04   $     0.69
Issuance of common stock for services rendered             02/25/04   $     1.26                                   2,667          3
Offering costs on issuance of common stock subject
     to rescission rights for cash                         02/25/04
Common stock committed for services rendered               03/10/04   $     1.42
Stock options issued for services rendered                 03/10/04   $     0.55
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      03/15/04   $     1.75                                 120,464        121
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          03/15/04   $     1.13
Issuance of common stock on cashless
     exercise of warrants                                  03/15/04                                                2,958          3
Beneficial conversion feature on convertible
     notes payable - related parties                       03/16/04
Issuance of common stock for cash                          03/19/04   $     0.75                                  40,000         40
Issuance of common stock on cashless
     exercise of warrants                                  03/23/04                                               17,334         17
Issuance of common stock for cash                          03/25/04   $     0.75                                  40,000         40
Issuance of common stock for services rendered and
     to be rendered                                        03/25/04   $       --                                 200,000        200
Issuance of common stock for cash                          03/26/04   $     0.75                                  40,000         40
Issuance of common stock on cashless
     exercise of warrants                                  04/01/04          =                                     7,879          8
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          04/01/04   $     1.03
Warrants issued for services rendered                      04/07/04   $     1.57
Issuance of common stock for services rendered             04/07/04   $     2.95                                  12,000         12
Issuance of common stock on cashless
     exercise of warrants                                  04/12/04                                              302,638        303
Issuance of common stock for services rendered             04/12/04   $     2.78                                 100,000        100
Issuance of common stock on cashless
     exercise of warrants                                  04/14/04                                               12,701         13
Issuance of common stock on cashless
     exercise of warrants                                  04/15/04                                               18,235         18
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      04/15/04   $     2.55                                 141,383        141
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          04/15/04   $     1.88
Issuance of common stock on exercise of warrants           04/16/04   $     1.50                                  35,776         36
Warrants issued for services rendered
     and to be rendered                                    04/16/04   $       --
Issuance of common stock for services rendered
     and to be rendered                                    04/16/04   $       --                                  75,000         75
Beneficial conversion feature on convertible
     notes payable - related parties                       04/19/04
Issuance of common stock for cash                          04/20/04   $     0.99                                  30,303         30
Issuance of common stock on cashless
     exercise of warrants                                  04/23/04                                                6,269          6


<CAPTION>
                                                                                                          Deficit
                                                                                                         Accumulated
                                                          Additional       Committed                       during the
                                                            Paid-in         Common        Deferred        Development
                                                             Capital         Stock       Compensation        Stage         Total
                                                          ------------    ------------   ------------    ------------   -----------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Issuance of warrants in conjunction with
     convertible notes payable - related parties                43,954                                                      43,954
Beneficial conversion feature on convertible
     notes payable - related parties                             9,558                                                       9,558
Issuance of common stock on cashless
     exercise of warrants                                          (25)                                                         --
Offering costs on issuance of common stock subject
     to rescission rights for cash                              (5,250)                                                     (5,250)
Issuance of common stock for services rendered                   4,097                                                       4,100
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          124,066                                                     124,165
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               19,415                                                      19,415
Issuance of common stock for services rendered                   3,357                                                       3,360
Offering costs on issuance of common stock subject
     to rescission rights for cash                              (7,000)                                                     (7,000)
Common stock committed for services rendered                                     9,940                                       9,940
Stock options issued for services rendered                      15,917                                                      15,917
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          210,691                                                     210,812
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               38,323                                                      38,323
Issuance of common stock on cashless
     exercise of warrants                                           (3)                                                         --
Beneficial conversion feature on convertible
     notes payable - related parties                            15,831                                                      15,831
Issuance of common stock for cash                               29,960                                                      30,000
Issuance of common stock on cashless
     exercise of warrants                                          (17)                                                         --
Issuance of common stock for cash                               29,960                                                      30,000
Issuance of common stock for services rendered and
     to be rendered                                            323,800                       (324,000)                          --
Issuance of common stock for cash                               29,960                                                      30,000
Issuance of common stock on cashless
     exercise of warrants                                           (8)                                                         --
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               10,735                                                      10,735
Warrants issued for services rendered                           78,297                                                      78,297
Issuance of common stock for services rendered                  35,388                                                      35,400
Issuance of common stock on cashless
     exercise of warrants                                         (303)                                                         --
Issuance of common stock for services rendered                 277,900                                                     278,000
Issuance of common stock on cashless
     exercise of warrants                                          (13)                                                         --
Issuance of common stock on cashless
     exercise of warrants                                          (18)                                                         --
Issuance of common stock to investors as a
     penalty for delayed registration of common stock          360,386                                                     360,527
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                               74,639                                                      74,639
Issuance of common stock on exercise of warrants                53,628                                                      53,664
Warrants issued for services rendered
     and to be rendered                                         75,461                        (75,461)                          --
Issuance of common stock for services rendered
     and to be rendered                                        213,675                       (213,750)                          --
Beneficial conversion feature on convertible
     notes payable - related parties                            78,024                                                      78,024
Issuance of common stock for cash                               29,970                                                      30,000
Issuance of common stock on cashless
     exercise of warrants                                           (6)                                                         --
</TABLE>


   The accompanying notes are an integral part of these financial statements

                                       10
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                        Price per  Series A Convertible,
                                                                         Equity      Preferred Stock               Common Stock
                                                             Date         Unit     Shares      Amount          Shares         Amount
                                                           --------   ----------   -------   ------------   ------------   ---------
<S>                                                          <C>             <C>            <C>   <C>             <C>        <C>
Issuance of common stock on cashless
     exercise of warrants                                  04/28/04                                             2,000              2
Warrants issued for services rendered                      04/29/04   $     1.09
Common stock committed for legal settlement                04/30/04   $     1.28
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          04/30/04   $     1.62
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                          04/30/04   $     1.71
Common stock committed to investors as a penalty
     for delayed registration of common stock              04/30/04   $     1.85      1.85         .85            .85            .85
Warrants accrued but not issued to investors as a
     penalty for delayed registration of the underlying
     common stock                                          04/30/04   $     1.22                                    ~
Amortization of deferred compensation
Net Loss
                                                                                   -------   ------------   ------------   ---------

Balance, April 30, 2004                                                                 --   $      --     30,652,482   $     30,652

Beneficial conversion feature on convertible
     notes payable                                         05/01/04
 Issuance of warrants in conjunction with
      convertible notes payable                            05/01/04   $     0.10
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                           6,667              7
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   05/01/04   $     1.69
Issuance of common stock for services rendered             05/05/04   $     2.19                               95,000             95
Issuance of common stock for services rendered             05/07/04   $     1.97                                3,500              4
Offering costs on issuance of common stock                 05/10/04
Common stock committed for services rendered               05/12/04   $     1.87
Issuance of committed common stock to investors as
  a penalty for delayed registration of common stock       05/15/04   $     1.85                               84,486             84
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      05/15/04   $     1.85                               77,823             78
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   05/15/04   $     1.22
Issuance of common stock for cash                          05/21/04   $     1.51                               29,801             30
Offering costs on issuance of common stock                 05/25/04
Offering costs on issuance of common stock                 05/26/04
Amortization of deferred compensation                      05/31/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      06/01/04   $     1.90                               32,223             32
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   06/01/04   $     1.27
Issuance of common stock for cash                          06/01/04   $     1.51                               13,245             13
Issuance of common stock for cash                          06/01/04   $     1.51                               19,868             20
Issuance of common stock for cash                          06/04/04   $     1.51                               66,225             66
Issuance of common stock for cash                          06/07/04   $     1.51                               33,113             33
Issuance of common stock for cash                          06/07/04   $     1.51                               19,868             20
Issuance of common stock for cash                          06/07/04   $     1.51                               66,225             66
Offering costs on issuance of common stock                 06/10/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      06/15/04   $     1.26                              187,028            187
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   06/15/04   $     0.69
Common stock committed for services rendered               06/16/04   $     1.11
Beneficial conversion feature on convertible
     notes payable - related parties                       06/16/04
Beneficial conversion feature on convertible
     notes payable - related parties                       06/17/04


<CAPTION>

                                                                                                        Deficit
                                                                                                       Accumulated
                                                        Additional      Committed                       during the
                                                          Paid-in         Common        Deferred        Development
                                                           Capital         Stock       Compensation        Stage            Total
                                                        ------------    ------------   ------------    ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Issuance of common stock on cashless
     exercise of warrants                                         (2)                                                            --
Warrants issued for services rendered                         54,675                                                         54,675
Common stock committed for legal settlement                                   13,440                                         13,440
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             11,738                                                         11,738
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             17,790                                                         17,790
Common stock committed to investors as a penalty
     for delayed registration of common stock                    .85         156,299                                        156,299
Warrants accrued but not issued to investors as a
     penalty for delayed registration of the underlying
     common stock                                             27,717                                                         27,717
Amortization of deferred compensation                                                       153,903                         153,903
Net Loss                                                                                                 (7,600,103)     (7,600,103)
                                                        ------------    ------------   ------------    ------------    ------------
Balance, April 30, 2004                                 $ 19,181,421    $    179,679   $   (459,308)   $(21,815,596)   $ (2,883,152)

Beneficial conversion feature on convertible
     notes payable                                            25,262                                                         25,262
 Issuance of warrants in conjunction with
      convertible notes payable                              399,739                                                        399,739
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         15,661                                                         15,668
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock     186,733                                                        186,733
Issuance of common stock for services rendered               207,955                                                        208,050
Issuance of common stock for services rendered                 6,891                                                          6,895
Offering costs on issuance of common stock                   (13,000)                                                       (13,000)
Common stock committed for services rendered                                  13,090                                         13,090
Issuance of committed common stock to investors as
  a penalty for delayed registration of common stock         156,215        (156,299)                                            --
Issuance of common stock to investors as a
     penalty for delayed registration of common stock        143,894                                                        143,972
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock      27,732                                                         27,732
Issuance of common stock for cash                             44,970                                                         45,000
Offering costs on issuance of common stock                    (5,000)                                                        (5,000)
Offering costs on issuance of common stock                    (2,250)                                                        (2,250)
Amortization of deferred compensation                                                        92,202                          92,202
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         61,192                                                         61,224
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock     140,443                                                        140,443
Issuance of common stock for cash                             19,987                                                         20,000
Issuance of common stock for cash                             29,980                                                         30,000
Issuance of common stock for cash                             99,934                                                        100,000
Issuance of common stock for cash                             49,967                                                         50,000
Issuance of common stock for cash                             29,980                                                         30,000
Issuance of common stock for cash                             99,934                                                        100,000
Offering costs on issuance of common stock                   (11,500)                                                       (11,500)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock        235,468                                                        235,655
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock      36,412                                                         36,412
Common stock committed for services rendered                                   9,990                                          9,990
Beneficial conversion feature on convertible
     notes payable - related parties                           1,305                                                          1,305
Beneficial conversion feature on convertible
     notes payable - related parties                           3,859                                                          3,859
</TABLE>


   The accompanying notes are an integral part of these financial statements


                                       11
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                        Price per  Series A Convertible,
                                                                         Equity      Preferred Stock               Common Stock
                                                             Date         Unit     Shares      Amount          Shares         Amount
                                                           --------   ----------   -------   ------------   ------------   ---------
<S>                                                   <C>             <C>            <C>             <C>       <C>           <C>
Issuance of common stock for cash                          06/18/04   $     1.01                              99,010             99
Beneficial conversion feature on convertible
     notes payable                                         06/23/04
Issuance of warrants in conjunction with
      convertible notes payable                            06/23/04   $     0.15
Beneficial conversion feature on convertible
     notes payable                                         06/23/04
Issuance of warrants in conjunction with
      convertible notes payable                            06/23/04   $     0.15
Issuance of committed common stock for legal settlement    06/24/04   $     1.28                              10,500             11
Amortization of deferred compensation                      06/30/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      07/01/04   $     1.86                              32,223             32
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   07/01/04   $     1.23
Issuance of common stock to investors as a
     penalty for delayed registration of common stock      07/15/04   $     1.20                             209,217            209
Common stock committed to investors as a
     penalty for delayed registration of common stock      07/15/04   $     1.20
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock   07/15/04   $     0.64
Common stock committed for services rendered               07/21/04   $     0.94
Warrants issued for services rendered                      07/26/04   $     0.39
Issuance of common stock for services rendered             07/28/04   $     0.97                             182,955            183
Common stock committed to investors as a
     penalty for delayed registration of common stock      07/31/04   $     1.00
Warrants committed to investors as a penalty
     for delayed registration of common stock              07/31/04   $     0.47
Amortization of deferred compensation                      07/31/04
Common stock committed for services rendered               08/05/04   $     1.14
Common stock committed for services rendered               08/11/04   $     1.02
Common stock committed to investors as a
     penalty for delayed registration of common stock      08/15/04   $     1.00
Warrants committed to investors as a penalty
     for delayed registration of common stock              08/15/04   $     0.47
Common stock committed for services rendered
Common stock committed to investors as a
     penalty for delayed registration of common stock      08/31/04   $     0.85
Warrants committed to investors as a penalty
     for delayed registration of common stock              08/31/04   $     0.37
Amortization of deferred compensation                      08/31/04
Beneficial conversion feature on convertible
     notes payable                                         09/01/04
Committment to Issue common stock for subscription
     receivable                                            09/07/04   $     0.46
Common stock committed to investors as a
     penalty for delayed registration of common stock      09/15/04   $     0.82
Warrants committed to investors as a penalty
     for delayed registration of common stock              09/15/04   $     0.34
Issuance of common stock upon conversion of
     Convertible Note payable                              09/20/04                                          192,308            192
Common stock committed for services rendered               09/21/04   $     0.78
Common stock committed to investors as a
     penalty for delayed registration of common stock      09/30/04   $     0.82
Warrants committed to investors as a penalty
     for delayed registration of common stock              09/30/04   $     0.44
Expensing of deferred compensation                         09/30/04
Common stock committed to investors as a
     penalty for delayed registration of common stock      10/15/04   $     0.88
Warrants committed to investors as a penalty
     for delayed registration of common stock              10/15/04   $     0.51
Common stock committed for cash                            10/18/04


<CAPTION>

                                                                                                       Deficit
                                                                                                      Accumulated
                                                        Additional      Committed                       during the
                                                         Paid-in         Common        Deferred        Development
                                                          Capital         Stock       Compensation        Stage            Total
                                                       ------------    ------------   ------------    ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Issuance of common stock for cash                            99,901                                                        100,000
Beneficial conversion feature on convertible
     notes payable                                           30,044                                                         30,044
Issuance of warrants in conjunction with
      convertible notes payable                             209,957                                                        209,957
Beneficial conversion feature on convertible
     notes payable                                            7,511                                                          7,511
Issuance of warrants in conjunction with
      convertible notes payable                              52,489                                                         52,489
Issuance of committed common stock for legal settlement      13,429         (13,440)                                            --
Amortization of deferred compensation                                                      114,150                         114,150
Issuance of common stock to investors as a
     penalty for delayed registration of common stock        59,903                                                         59,935
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stoc     136,473                                                        136,473
Issuance of common stock to investors as a
     penalty for delayed registration of common stock       250,851                                                        251,060
Common stock committed to investors as a
     penalty for delayed registration of common stock                           546                                            546
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stoc      37,715                                                         37,715
Common stock committed for services rendered                                  8,460                                          8,460
Warrants issued for services rendered                        38,573                                                         38,573
Issuance of common stock for services rendered              177,283                                                        177,466
Common stock committed to investors as a
     penalty for delayed registration of common stock                       116,004                                        116,004
Warrants committed to investors as a penalty
     for delayed registration of common stock                15,500                                                         15,500
Amortization of deferred compensation                                                       72,199                          72,199
Common stock committed for services rendered                                 10,260                                         10,260
Common stock committed for services rendered                                 12,240                                         12,240
Common stock committed to investors as a
     penalty for delayed registration of common stock                       116,004                                        116,004
Warrants committed to investors as a penalty
     for delayed registration of common stock                15,500                                                         15,500
Common stock committed for services rendered
Common stock committed to investors as a
     penalty for delayed registration of common stock                        27,390                                         27,390
Warrants committed to investors as a penalty
     for delayed registration of common stock                41,405                                                         41,405
Amortization of deferred compensation                                                       20,084                          20,084
Beneficial conversion feature on convertible
     notes payable                                           55,769                                                         55,769
Committment to Issue common stock for subscription
     receivable                                                              33,000                                         33,000
Common stock committed to investors as a
     penalty for delayed registration of common stock                       208,566                                        208,566
Warrants committed to investors as a penalty
     for delayed registration of common stock                24,260                                                         24,260
Issuance of common stock upon conversion of
     Convertible Note payable                                99,808                                                        100,000
Common stock committed for services rendered                                 11,700                                         11,700
Common stock committed to investors as a
     penalty for delayed registration of common stock                        26,423                                         26,423
Warrants committed to investors as a penalty
     for delayed registration of common stock                49,026                                                         49,026
Expensing of deferred compensation                                                          20,084                          20,084
Common stock committed to investors as a
     penalty for delayed registration of common stock                       207,383                                        207,383
Warrants committed to investors as a penalty
     for delayed registration of common stock                39,793                                                         39,793
Common stock committed for cash                                             241,956                                        241,956
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       12
<PAGE>


<TABLE>
<CAPTION>
                                                                                        HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                       (DEVELOPMENT STAGE COMPANIES)
                                                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                                    FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
====================================================================================================================================

                                                                        Price per  Series A Convertible,
                                                                         Equity      Preferred Stock               Common Stock
                                                             Date         Unit     Shares      Amount          Shares         Amount
                                                           --------   ----------   -------   ------------   ------------   ---------
<S>                                                       <C>             <C>            <C>             <C>             <C>  <C>
Common stock committed for cash                            10/19/04
Common stock committed for cash                            10/21/04
Common stock committed for cash                            10/22/04
Common stock committed to investors as a
     penalty for delayed registration of common stock      10/31/04   $     0.99
Warrants committed to investors as a penalty
     for delayed registration of common stock              10/31/04   $     0.66
Common stock committed to investors as a
     penalty for delayed registration of common stock      10/31/04   $     0.99
Warrants committed to investors as a penalty
     for delayed registration of common stock                         $     0.49
Amortization of deferred compensation                      10/31/04
Net loss                                                                                --         --             --             --
                                                                                  -------   ------------   ------------   ---------

Balance at October 31, 2004                                                             --         --     32,113,767   $     32,113
                                                                                  -------   ------------   ------------   ---------

<CAPTION>

                                                                                                         Deficit
                                                                                                        Accumulated
                                                       Additional      Committed                       during the
                                                         Paid-in         Common        Deferred        Development
                                                          Capital         Stock       Compensation        Stage            Total
                                                       ------------    ------------   ------------    ------------    ------------
<S>                                                     <C>             <C>            <C>             <C>             <C>
Common stock committed for cash                                             370,500                                        370,500
Common stock committed for cash                                              25,300                                         25,300
Common stock committed for cash                                              33,000                                         33,000
Common stock committed to investors as a
     penalty for delayed registration of common stock                        31,901                                         31,901
Warrants committed to investors as a penalty
     for delayed registration of common stock                69,745                                                         69,745
Common stock committed to investors as a
     penalty for delayed registration of common stock                        58,113                                         58,113
Warrants committed to investors as a penalty
     for delayed registration of common stock                20,645                                                         20,645
Amortization of deferred compensation                                                       20,084                          20,084
Net loss                                                         --              --             --      (6,563,404)     (6,563,404)
                                                       ------------    ------------   ------------    ------------    ------------
Balance at October 31, 2004                            $ 22,718,764    $  1,571,766   $   (120,505)   $(28,379,000)   $ (4,176,862)
                                                       ------------    ------------   ------------    ------------    ------------
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       13
<PAGE>


<TABLE>
<CAPTION>

                                                                                 HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                                                                (DEVELOPMENT STAGE COMPANIES)
                                                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                       FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND 2003 AND
                                                          FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2004
=============================================================================================================================

                                                                                                                   For the
                                                                                                                 Period from
                                                                                                                  August 21,
                                                                                For the Six Months Ended            1995
                                                                            ------------------------------      (Inception) to
                                                                             October 31,       October 31,        October 31,
                                                                                 2004             2003                2004
                                                                                                Restated
                                                                              (unaudited)      (unaudited)        (unaudited)
                                                                             ------------      ------------      ------------
<S>                                                                          <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                               $ (6,563,404)     $ (2,904,809)     $(26,949,966)
      Adjustments to reconcile net loss to net cash
       used in operating activities
           Depreciation                                                           102,617            64,492           346,155
           Issuance of common stock for services rendered                         387,075            30,960         5,145,684
           Common stock committed for services rendered                            65,740                --            65,740
           Common stock issued for legal settlement                                    --                --            13,440
           Issuance of common stock as compensation expense
             for services rendered from minority shareholders                          --                --            18,923
           Warrants issued or committed for services rendered                      38,573            43,677           976,035
           Financing expense in connection with the
             issuance of warrants                                                      --                --           223,710
           Stock options issued for services rendered                                  --            89,714         2,066,540
           Additional compensation to officer in the form of
             convertible note payable - related party                                  --                --            42,171
           Amortization of deferred compensation                                  338,804                --         1,525,688
           Amortization of debt discount on convertible
             notes payable                                                        785,934               341         1,278,714
           Issuance of convertible notes payable as a penalty for the
            delayed registration of the underlying common stock                     6,000                --            13,000
           Issuance of common stock as a penalty for the delayed
             registration of shares of common stock                               767,514           202,934         2,049,877
           Issuance or commitment to issue warrants as a penalty for the
             delayed registration of the underlying common stock                  841,383             6,009         1,072,665
           Common stock committed as a penalty for the delayed
             registration of shares of common stock                               792,330                --           792,330
           (Increase) decrease in
                Accounts receivable                                               (30,412)               --           (60,824)
                Inventory                                                        (178,235)               --          (178,235)
                Other current assets                                               63,664           225,404          (151,153)
                Other assets                                                           --           295,948                --
           Increase (decrease) in
                Accounts payable                                                  411,648           280,316         1,818,070
                Accrued expenses                                                   35,949            64,361           124,240
                Accrued payroll and payroll taxes                                   6,917            54,820           855,989
                Accrued interest                                                   56,336            10,712           135,558
                Other current liabilities                                          51,873                --            51,873
                                                                             ------------      ------------      ------------

Net cash used in operating activities                                        $ (2,019,694)     $ (1,535,121)     $ (8,723,767)
                                                                             ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and equipment                                     $   (237,737)     $   (121,564)     $ (1,087,266)
                                                                             ------------      ------------      ------------

Net cash used in investing activities                                            (237,737)         (121,564)       (1,087,266)
                                                                             ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds from issuance of common stock in
       private placement                                                     $         --      $         --      $  3,547,406
      Offering costs on issuance of common stock in
            private placement                                                          --                --          (196,793)
      Proceeds from issuance of common stock                                      475,000         1,216,001         2,468,268
      Offering costs on issuance of common stock                                  (31,750)          (40,000)         (139,768)
      Proceeds from commitment to issue common stock                              670,756                --           670,756
      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                                                           --                --           475,000
      Proceeds from issuance of common stock subject
        to buy-back                                                                    --           200,000           694,000
      Recapitalization of reverse merger                                               --                --                14
      Proceeds from exercise of stock options in subsidiary                            --                --             7,164
      Proceeds from issuance of common stock upon exercise
        of warrants                                                                    --               340            54,004
      Proceeds from notes payable                                                  59,000                --            59,000
      Payment on notes payable                                                     (5,132)               --            (5,639)
      Proceeds from issuance of notes payable - related parties                   476,000                --           947,853
      Payments on notes payable - related parties                                 (42,934)               --          (589,265)
      Proceeds from convertible notes payable                                     100,000                --           100,000
      Proceeds from convertible notes payable - related parties                        --                --            55,400
      Payments on convertible notes payable - related parties                          --           (10,400)          (35,400)
      Proceeds from convertible notes payable
        subject to rescission rights                                              300,000                --           685,000
      Proceeds from collection of subscription receivable                         425,000           443,482           425,000
                                                                             ------------      ------------      ------------

Net cash provided by financing activities                                       2,425,940         1,809,423        10,022,399
                                                                             ------------      ------------      ------------

Net increase (decrease) in cash and cash equivalents                              168,511           152,738           211,368

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                                     $    211,366      $    259,746      $    211,366
                                                                             ============      ============      ============

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

       Interest paid                                                         $        352      $         --      $      3,240
                                                                             ============      ============      ============

       Income taxes paid                                                     $      1,924      $      2,400      $     16,107
                                                                             ============      ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements


                                       14
<PAGE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued unsecured
convertible notes payable-related party, in exchange for accounts payable due to
legal counsel for the Company of $25,648, $392,629, $773,083, respectively.

During the six months ended October 31, 2004 the Company issued 94,986 shares of
common stock which were previously committed to be issued.

During the six months ended October 31, 2004 the Company issued 192,308 shares
of common stock for the outstanding principal on a convertible note payable
balance of $100,000. The Company expensed a beneficial conversion feature upon
conversion in the amount of $55,769.

During the six months ended October 31, 2004, the Company committed to issue
71,739 shares of common stock for proceeds of $33,000 that was deposited with a
law firm for prepaid legal services.

During the six months ended October 31, 2004, the Company applied a $39,959
deposit to its former legal counsel to outstanding accounts payable.

During the six months ended October 31, 2004, the Company entered into a
three-year capital lease for office equipment valued at $6,633. Total payments
during the lease term are $8,538.

During the six months ended October 31, 2004, the Company committed to issue
1,046,687 shares of common stock on the cashless exercise of warrants to
purchase 1,384,444 shares of common stock. The committed shares were issued in
November 2004.

During the six months ended October 31, 2004, the Company issued unsecured notes
payable to various employees in exchange for deferred salaries of $6,288.

During the six months ended October 31, 2003, the Company issued 300,000 shares
of common stock for the outstanding principal on a convertible note
payable-related party balance of $100,000.

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


                                       15
<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 research and
development of proprietary, neutron-based, "stoichiometric" sensor devices, and
the commercialization of devices incorporating its technologies. To date, the
Company has devoted the bulk of its efforts and resources to the research,
design, testing and development of its proprietary, "stoichiometric" sensor
devices and underlying technologies, and has yet to generate sales revenues from
the sale of any products using this technology. HiEnergy's primary focus is
currently on the commercialization of the Company's initial prototype devices,
primarily the vehicle-borne "CarBomb Finder", and the more compact and mobile
suitcase-borne "SIEGMA" system, which the Company intends to market to
governmental and private entities and to distribute or license through industry
partners. The Company's stoichiometric technology has also been incorporated
into additional prototype applications which, if the Company is able to raise
the funds necessary to commercialize them, will be the next products it attempts
to launch: (i) an anti-tank landmine detector; (ii) an unexploded ordnance
detector, which is also useful to detect Improvised Explosive Devices (IEDs),
both of which are typically above the ground; and (iii) a device the Company
calls a "Refractorymeter" which can detect fissures or erosions in the ceramic
lining of oil cracking tanks. The Company entered recently into a funded
cooperative development agreement with the U.S. Transportation Security
Administration (TSA) to produce a proof of concept which incorporates the
Company's SuperSenzor technology into a baggage screening system. Additionally,
the Company continues to be focused on the research and development of
additional applications of the Company's technologies and their further
exploitation, both internally and through collaboration with third parties.

HiEnergy was originally incorporated under the laws of the State of Washington
on March 22, 2000 under the name SLW Enterprises Inc. ("SLW") and was
redomiciled on October 22, 2002 as a Delaware corporation. At present, HiEnergy
has two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy Defense")
and HiEnergy Europe, Ltd. ("HiEnergy Europe"), which were incorporated under the
laws of the state of Delaware on July 28, 2003 and March 11, 2004, respectively,
and one majority owned subsidiary, HiEnergy Microdevices, Inc., which was
incorporated in Delaware on August 21, 1995 ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). HiEnergy holds an
approximate 92% interest in Microdevices, which was the vehicle through which
the Company's "stoichiometric" technology was initially developed by its
Chairman and CEO, Dr. Bogdan Maglich. In November 2003, HiEnergy's Board of
Directors approved a short form merger to acquire the remaining outstanding
stock of HiEnergy Microdevices. Under the terms of the proposed merger, the
Company will issue 459,222 shares of common stock to the remaining stockholders
of HiEnergy Microdevices on the basis of 22.3524 HiEnergy shares for 1 share of
HiEnergy Microdevices (the same ratio that was used in the original voluntary
share exchange), and all the assets and liabilities of HiEnergy Microdevices
will then become assets and liabilities of HiEnergy. As of the date of this
Report, the merger has not been effected, but the Company anticipates its
completion by the end of 2004.

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. Of this amount, as of the date
of this Report, approximately 8% of the shares of Microdevices remain
non-exchanged and are held by several Microdevices stockholders who did not
participate in the voluntary share exchange, and who are not affiliates of the
Company. The stockholders of SLW prior to the voluntary share exchange retained,
collectively, 36% of SLW. The reverse takeover was accounted for as a
re-capitalization of Microdevices for accounting purposes, in a manner similar
to a pooling of interests, with Microdevices as the accounting acquirer (reverse
acquisition). Since the Company (formerly SLW) was a "public shell company",
with limited assets and liabilities at the date of the acquisition and no
significant operations prior to the acquisition, no pro forma information has
been presented. As a result of the reverse takeover, Microdevices became the
Company's majority-owned subsidiary.


                                       16
<PAGE>

NOTE 2 - RESTATEMENT AND RECLASSIFICATIONS

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

      o     Stock Options and warrants granted to employees and non-employees
            during fiscal years 1996 through 2002 which were valued using the
            Black-Scholes valuation model, in accordance with SFAS No. 123,
            "Accounting for Stock-Based Compensation" and related
            interpretations.

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

As a result of this revision and the change in how the Company determines the
fair value of Microdevices common stock, the Company's financial results for the
fiscal years ended April 30, 2002 and 2003, as well as the quarter ended October
31, 2003, have been restated to correct certain accounting errors made in
preparing those financial statements as well as other reclassifications and
adjustments. The Company has also made additional corrections to previously
unrecognized accounting discrepancies discovered during the restatement process,
including adjustments for estimated payroll tax liability as discussed in item 7
below.

Below is the reclassification effect to the Balance Sheet as of October 31, 2003
and the Statements of Operations for the three and six months ended October 31,
2003:


                                       17
<PAGE>

BALANCE SHEET AS OF OCTOBER 31, 2003

<TABLE>
<CAPTION>
                                         As Originally        Restatement                 As
                                            Reported           Adjustment              Restated
                                      --------------------- -----------------      ------------------
<S>                                      <C>                  <C>                  <C>
                      Current assets           $   496,575             $   -             $   496,575
                                      --------------------- -----------------      ------------------

                        Total assets             1,058,071                 -               1,058,071
                                      ===================== =================      ==================


   Accrued payroll and payroll taxes                68,757           378,492    7            447,249

    Common stock subject to buy-back                     -           694,000    6            694,000

           Total current liabilities             1,163,647           378,492    7
                                                                     694,000    6          2,236,139
                                      --------------------- -----------------      ------------------

                   Minority interest                18,923                 -                  18,923
                                      --------------------- -----------------      ------------------

 SHAREHOLDERS' DEFICIT
                        Common stock                30,868           (2,000)    6             28,868
                                      --------------------- -----------------      ------------------

          Additional paid-in capital            12,194,682         3,792,564    1
                                                                     667,037    2
                                                                   (255,460)    3
                                                                      24,924    4
                                                                      57,661    5
                                                                   (492,600)    6
                                                                    (42,908)    8
                                                                    (32,705)    9
                                                                     202,934    5
                                                                    (28,153)   11
                                                                   (199,400)    6
                                                                     (9,843)   12
                                                                         341   13
                                                                       6,009   14         15,885,083
                                      --------------------- -----------------      ------------------

              Committed common stock                     -             9,360   10              9,360
                                      --------------------- -----------------      ------------------

      Deficit accumulated during the
                   development stage          (12,350,049)       (3,792,564)    1
                                                                   (667,037)    2
                                                                    255,460     3
                                                                   (363,904)    7
                                                                    (24,924)    4
                                                                    (57,661)    5
                                                                      42,908    8
                                                                      32,705    9
                                                                     (9,360)   10
                                                                    (14,588)    7
                                                                   (202,934)    5
                                                                     28,153    11
                                                                       9,843   12
                                                                      (341)    13
                                                                     (6,009)   14        (17,120,302)
                                      --------------------- -----------------      ------------------

         Total stockholders' deficit             (124,499)         (694,000)    6
                                                                   (378,492)    7        (1,196,991)
                                      --------------------- -----------------      ------------------

Total liabilities & shareholders'
equity                                           1,058,071                 -               1,058,071
                                      ===================== =================      ==================
</TABLE>


                                       18
<PAGE>

STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED OCTOBER 31, 2003

<TABLE>
<CAPTION>
                                        As Originally         Restatement                 As
                                           Reported            Adjustment              Restated
                                    ----------------------- -----------------      ------------------
<S>                                     <C>                   <C>                     <C>
          General & Administration               1,378,873             6,360   10
                                                                       7,294    7
                                                                     (9,843)   12          1,382,684
                                    ----------------------- -----------------      ------------------


          Total operating expenses               1,617,628             6,360   10
                                                                       7,294    7
                                                                     (9,843)   12          1,621,439
                                    ----------------------- -----------------      ------------------


              Loss from operations             (1,617,628)           (6,360)   10
                                                                     (7,294)    7
                                                                       9,843   12        (1,621,439)
                                    ----------------------- -----------------      ------------------

                  Interest expense                 (7,701)             (341)   13            (8,042)

               Penalties on equity                       -         (191,255)    5
                                                                     (6,009)   14          (197,264)
                                    ----------------------- ----------------- ---- ------------------

               Total other expense                 (7,182)             (341)   13
                                                                   (191,255)    5
                                                                     (6,009)   14          (204,787)
                                    ----------------------- ----------------- ---- ------------------

  Loss before provision for income
                             taxes             (1,624,810)           (6,360)   10
                                                                     (7,294)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (191,255)    5
                                                                     (6,009)   14        (1,826,226)
                                    ----------------------- -----------------      ------------------

                          Net loss             (1,624,810)           (6,360)   10
                                                                     (7,294)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (191,255)    5
                                                                     (6,009)   14        (1,826,226)
                                    ----------------------- -----------------      ------------------

             Net loss available to
                      shareholders             (1,624,810)           (6,360)   10
                                                                     (7,294)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (191,255)    5
                                                                     (6,009)   14        (1,826,226)
                                    ======================= =================      ==================
</TABLE>


                                       19
<PAGE>

STATEMENT OF OPERATIONS FOR SIX MONTHS ENDED OCTOBER 31, 2003

<TABLE>
<CAPTION>
                                           As Originally         Restatement                 As
                                              Reported            Adjustment              Restated
                                    ----------------------- -----------------      ------------------
<S>                                     <C>                    <C>                    <C>
          General & Administration               2,407,113          (42,908)    8
                                                                    (32,705)    9
                                                                       9,360   10
                                                                      14,588    7
                                                                     (9,843)   12          2,345,605
                                    ----------------------- -----------------      ------------------

          Total operating expenses               2,744,190          (42,908)    8
                                                                    (32,705)    9
                                                                       9,360   10
                                                                      14,588    7
                                                                     (9,843)   12          2,682,682
                                    ----------------------- -----------------      ------------------

              Loss from operations             (2,744,190)            42,908    8
                                                                      32,705    9
                                                                     (9,360)   10
                                                                    (14,588)    7
                                                                       9,843   12         (2,682,82)
                                    ----------------------- -----------------      ------------------
                  Interest expense                (12,926)             (341)   13           (13,267)

               Penalties on equity                       -         (202,934)    5
                                                                     (6,009)   14          (208,943)
                                    ----------------------- ----------------- ---- ------------------

               Total other expense                (12,043)             (341)   13
                                                                   (202,934)    5
                                                                     (6,009)   14          (221,327)
                                    ----------------------- ----------------- ---- ------------------

  Loss before provision for income
                             taxes             (2,756,233)            42,908    8
                                                                      32,705    9
                                                                     (9,360)   10
                                                                    (14,588)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (202,934)    5
                                                                     (6,009)   14        (2,904,009)
                                    ----------------------- -----------------      ------------------

                          Net loss             (2,757,033)            42,908    8
                                                                      32,705    9
                                                                     (9,360)   10
                                                                    (14,588)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (202,934)    5
                                                                     (6,009)   14        (2,904,809)
                                    ----------------------- -----------------      ------------------

          Preferred stock dividend               (611,396)            28,153   11          (583,243)
             Net loss available to
                      shareholders             (3,368,429)            42,908    8
                                                                      32,705    9
                                                                     (9,360)   10
                                                                    (14,588)    7
                                                                       9,843   12
                                                                       (341)   13
                                                                   (202,934)    5
                                                                     (6,009)   14
                                                                      28,153   11        (3,488,052)
                                    ======================= =================      ==================
</TABLE>


                                       20
<PAGE>

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

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

3) For the period ended April 30, 2002, the Company reversed $255,460 of expense
for the issuance of common stock for cash that was originally recorded as stock
for services. Accordingly additional accumulated deficit was reduced by the same
amount

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

5) For the year ended April 30, 2003, the Company recorded an expense of $57,661
for the issuance of common stock as a penalty for delayed registration. The
issuance was originally recorded as an issuance cost. Accumulated deficit and
additional paid-in capital were increased accordingly. For the three and six
months ended October 31, 2003, the Company recorded an expense of $191,255 and
$202,934, respectively, for the issuance of common stock as a penalty for
delayed registration. The issuance was also originally recorded as an issuance
cost. Accumulated deficit and additional paid-in capital were increased
accordingly.

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


                                       21
<PAGE>

7) For the three and six months ended October 31, 2003, the Company recorded an
estimated payroll tax liability of $7,294 and $14,588, respectively, for
interest on an unpaid estimated payroll tax liability of $363,904 for the period
from August 21, 1995 (inception) through April 30, 2003. Accordingly, current
liabilities and accumulated deficit increased by the combined amount of $378,492
as of October 31, 2003. The Company has accrued the liability for its failure to
timely file payroll tax returns, W-2s and 1009s.

8) For the six months ended October 31, 2003, the Company reversed $42,908 of
expense for stock options that were overvalued when issued. Accordingly,
additional paid-in capital and accumulated deficit were decreased by the same
amount.

9) For the six months ended October 31, 2003, the Company reversed $32,705 of
expense for warrants that were overvalued when issued. Accordingly, additional
paid-in capital and accumulated deficit were decreased by the same amount.

10) For the three and six months ended October 31, 2003, the Company expensed
$6,360 and $9,360, respectively, for common stock issued to Members of the Board
of Directors. Accordingly, additional paid-in capital and accumulated deficit
were increased by the same amounts.

11) For the six months ended October 31, 2003, the Company reversed $28,153 of
preferred stock dividends to remove the penalty portion of the dividend.
Accordingly, additional paid-in capital and accumulated deficit were decreased
by the same amount.

12) For the three months ended October 31, 2003, the Company reversed $9,843 of
option expense for options issued to the certain service providers following the
discovery that the options had been overvalued based on incorrect assumptions
used with the Black-Scholes valuation model.

13) For the three months ended October 31, 2003, the Company expensed $341 of
interest expense due to the beneficial conversion feature of a convertible notes
payable issued to the Company's then legal counsel in settlement of amounts
owed.

14) For the three months ended October 31, 2003, the Company recorded an expense
of $6,009 for the issuance of warrants as a penalty for delayed registration of
an effective registration statement. Accumulated deficit and additional paid-in
capital were increased accordingly.

NOTE 3 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, during the
six months ended October 31, 2004 and 2003 and the period from August 21, 1995
(inception) to October 31, 2004, the Company incurred net losses available to
common shareholders of $6,563,404, $3,488,052, and $28,379,000, respectively,
and it had negative cash flows from operations of $2,019,694, $1,535,121, and
$8,723,767, respectively. In addition, the Company had an accumulated deficit of
$28,379,000 and was in the development stage as of October 31, 2004. 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 consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.


                                       22
<PAGE>

In addition to the capital raised as of October 31, 2004 through private
placements, the Company is currently negotiating with certain investors to raise
additional capital through private placement offerings. Unless the Company
raises additional funds, either by debt or equity issuances, management believes
that its current cash on hand will be insufficient to cover its working capital
needs unless and until the Company's sales volume reaches a sufficient level to
cover operating expenses. Furthermore, the Company is involved in various
litigation matters. The effect of such litigation on the Company's financial
statements is indeterminable at this time.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                           PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
HiEnergy and its 92% owned subsidiary, Microdevices, and its wholly owned
subsidiaries, HiEnergy Defense and HiEnergy Europe. 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.

                              OTHER CURRENT ASSETS

Other current assets consist primarily of prepaid insurance, prepaid consulting
and services, and an equipment deposit that was refunded to the Company in May
2004, following the return of the equipment to the supplier. Prepaid insurance
and prepaid consulting and services are capitalized and amortized over the
estimated period for which such services are provided.

                             PROPERTY AND EQUIPMENT

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

                           Prototype Equipment                5 years

                           Laboratory Equipment               5 years

                           Furniture and Fixtures             5 years

                           Website Development                5 years

                           Leasehold Improvements             20 months


                            VALUATION OF INVENTORIES

In the recent quarter the Company acquired components in anticipation of future
assembly and sale. The components have been recorded at cost. The Company plans
to adopt a first-in, first-out historic cost basis for inventory valuation.
Total inventory as of October 31, 2004 was $178,235.


                                       23
<PAGE>

          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.

           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 a provision that requires 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 the
convertible notes payable within certain deadlines, in a Registration Statement
on Form SB-2. Furthermore, if such shares of common stock were not registered
within certain deadlines, a penalty becomes payable or accruable in like
securities. The common stock, warrants and convertible notes payable (the
"penalty securities") issued for late registration are described in Notes 12,
16, 17 and 18 and the commitment to issue such penalty securities is described
in Note 15.

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.


                                       24
<PAGE>

                            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.

No stock options were granted during the six month period ended October 31,
2004.

The following table compares net loss attributable to common stockholders and
loss per share for the six months ended October 31, 2004 and 2003, 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:

<TABLE>
<CAPTION>
                                                                Six Months Ended       Six Months Ended
                                                                October 31, 2004       October 31, 2003
                                                             ----------------------- ---------------------
<S>                                                            <C>                      <C>
     Net loss attributable to common stockholders                       (6,563,404)           (3,488,052)
     Total stock-based employee compensation expense
              determined under fair value based methods
              for all awards, net of related tax effects                (312,229)                     -
                                                             ----------------------- ---------------------
     Pro forma net loss attributable to common stockholders             (6,875,633)           (3,488,052)

     Basic loss per share:
              As reported                                                    (0.20)                (0.13)
              Pro forma                                                      (0.21)                (0.13)

     Diluted loss per share:
              As reported                                                    (0.20)                (0.11)
              Pro forma                                                      (0.21)                (0.11)
</TABLE>

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

                 WARRANTS ISSUED AS FINANCING AND OFFERING COSTS

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

                                  INCOME TAXES

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


                                       25
<PAGE>

                               NET LOSS PER SHARE

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

The following potential shares of common stock have been excluded from the
computation of diluted net loss per share for the periods presented because the
effect would have been anti-dilutive for the six months ended October 31, 2004:


                                                              Six Months Ended
                                                              October 31, 2004
                                                          ----------------------
     Stock Options                                                    6,768,675
     Warrants                                                        11,209,536
     Convertible notes payable and acrued
           interest - related parties                                   745,997
     Convertible notes payable and accrued
           interest - subject to rescission rights                    1,236,746
     Common stock subject to buy-back                                 2,000,000
     Common stock subject to rescission rights                        2,066,320
     Microdevices minority shareholders                                 459,222
     Microdevices options and warrants                                  324,020
                                                          ----------------------
                                                                     24,810,516
                                                          ----------------------


                                    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.

NOTE 5 - RISKS AND UNCERTAINTIES

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

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


                                       26
<PAGE>

If any of the following events described below were to occur, the Company's
business, prospects, 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 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 a
            commercial products meeting certain specifications which satisfy the
            demands of prospective customers;

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

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

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

      o     an inability to reconcile any potential payroll tax liabilities;

      o     an inability to 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 and SIEGMA, caused by promotional
            offerings, contracted discounts, customer volume orders, and
            competitive pricing pressures;

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

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

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

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

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

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

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


                                       27
<PAGE>

      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 disasters and acts of
            terrorism 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 6 - OTHER CURRENT ASSETS

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

                                           October 31, 2004      April 30, 2004
                                         ---------------------------------------

           Prepaid consulting                 $    33,000          $    52,021
           Prepaid insurance                       70,779                9,634
           Inventory deposit                       33,852                    -
           Equipment deposit                            -              150,000
           Other                                   16,562               13,162
                                         ---------------------------------------

          TOTAL                              $    154,193          $   224,817
                                         =======================================


NOTE 7 - PROPERTY AND EQUIPMENT

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

                                     October 31, 2004          April 30, 2004
                                    ------------------   --------------------

 Prototype equipment                     $    427,978            $   228,399
 Laboratory equipment                         545,092                501,445
 Furniture and fixtures                        61,660                 58,610
 Leasehold improvements                        51,150                 51,150
 Web site development                          14,400                 14,400
                                    ------------------   --------------------
                                            1,100,280                854,004

 Less accumulated depreciation                346,149                243,536
                                    ------------------   --------------------

                  TOTAL                  $    754,131            $   610,468
                                    ==================   ====================


Depreciation and amortization expense for the six months ended October 31, 2004
and 2003 and the period from August 21, 1995 (inception) to October 31, 2004,
was $102,617, $64,492 and $346,155, respectively.

NOTE 8 - ACCRUED PAYROLL AND PAYROLL TAXES

Microdevices has not filed, or needs to amend, certain of its IRS Forms 1099 and
W-2, and certain payroll tax returns for the tax years ended December 31, 1997
through 2002, with respect to the issuance of shares of Microdevices common
stock for services rendered by officers, employees, directors, legal advisors
and consultants. As of October 31, 2004, the Company has accrued $408,536 for
payroll taxes, penalties and interest. The Company intends to file, or amend as
necessary, its IRS Forms 1099 and W-2, and certain payroll tax returns, and pay
therewith any amounts due as soon as possible.

Excluding the payroll tax liability mentioned above, the Company has salaries
and wages payable of $50,296 as of October 31, 2004.


                                       28
<PAGE>

NOTE 9 - NOTES PAYABLE

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

<TABLE>
<CAPTION>
                                                                          October 31, 2004     April 30, 2004
                                                                        ------------------- --------------------
<S>                                                                       <C>                   <C>
Note payable to an equipment supplier, secured by equipment,                 $     2,906          $     3,970
 bearing interest at 18% per annum due in January 2007, and payable
 in monthly installments of $169. The note was repaid in December 2004.

Note payable to an equipment supplier, secured by equipment,
 bearing interest at 10% per annum due in October 2007, and payable
 in monthly installments of $237.                                                  8,300                    -

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

Notes payable to employees for salary deferral, unsecured,
 bearing interest at 5% per annum, due at varying dates from July 2004
 to October 2004.                                                                 12,798                7,840

Note payable, unsecured, bearing interest at 5% per annum, due on
 demand. The note was converted into shares of common stock in
 December 2004.                                                                   59,000                    0
                                                                        -------------------- -----------------
                                                                                  83,004               14,310

Less current portion                                                              76,770               12,368
                                                                        -------------------- -----------------

    LONG-TERM PORTION                                                          $   6,234          $     1,942
                                                                        ==================== ================
</TABLE>

NOTE 10 - NOTES PAYABLE - RELATED PARTIES

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

<TABLE>
<CAPTION>
                                                                             October 31, 2004       April 30, 2004
                                                                             ----------------       --------------
<S>                                                                          <C>                   <C>
Notes payable to a shareholder of the Company, unsecured, bearing
  interest at 10.5% per annum, or 15% per annum upon default, and due
  in November 1997.  As of April 30, 2004, the notes were in default.          $      40,000         $     40,000

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

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

 Notes payable to the Chairman of the Company and an affiliate,
  bearing interest at 5% per annum, and due on demand. Notes
  in the amount of $465,000 were converted into shares of common
  stock in November 2004.                                                            683,000              249,934
                                                                               -------------         ------------
                                                                                     782,000              348,934

Less current portion                                                                 782,000              348,934
                                                                               -------------         ------------

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



                                       29
<PAGE>

NOTE 11 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

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

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

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

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

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

 LONG-TERM PORTION                                                                   $      -          $      38,061
                                                                               ----------------        --------------
</TABLE>



                                       30
<PAGE>

NOTE 12 - CONVERTIBLE NOTES PAYABLE SUBJECT TO RESCISSION RIGHTS

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

<TABLE>
<CAPTION>
                                                                               October 31, 2004      April 30, 2004
                                                                             --------------------- --------------------
<S>                                                                             <C>                   <C>
Convertible notes payable, unsecured, bearing interest at 5% per annum, and
 coupled with the proceeds allocated to the detachable warrants, with an
 effective annual interest rate of 49%, due in January 2006. The note holders
 have the option to convert the principal and accrued interest into shares of
 common stock at $0.45 per share at any time until the later of the prepayment
 date or the maturity date. The convertible notes payable have detachable
 warrants to purchase shares of common stock with a three and one-half year term
 as follows: 1,333,332 at $0.45 per share; 400,000 at $0.75 per share; and
 240,000 shares at $1.25 per share. The investors also have registration rights
 on the underlying shares, and, as of April 30, 2004, receive as penalties for
 the failure to register them: (i) additional detachable warrants to purchase up
 to 2% of the amount of shares exercisable under the original warrants; and (ii)
 additional convertible notes payable equal to 2% of the original face amount,
 or principal balance, for each subsequent month until a registration statement
 is filed and maintained effective by the Company, or until such penalties
 become impermissible as a matter of law as prescribed in the instrument or the
 relevant shares can be sold without registration under Rule 144. Additionally,
 the convertible notes payable provide the note holders with ratchet rights,
 whereby the conversion price of the convertible notes payable will be reduced
 to equal the price of any new shares sold in unrelated transactions prior to
 January 15, 2005 at a price per share below $0.45. If shares are offered for
 sale at a price per share under $0.45 prior to January 15, 2005, the note
 holders also have a first right of refusal to purchase the shares offered as
 well. The holders exercised their rights to a second closing during
 the quarter ended July 31, 2004.                                                    $    350,000         $     50,000

Convertible note payable, unsecured, bearing interest at 5% per annum, and due
 in May 2006, issued as a penalty to holders of certain convertible notes
 payable as a result of the Company's inability to file a registration statement
 within certain specified deadlines on, and reflecting the same terms as, the
 convertible notes payable referenced above, with the
 exception of penalties.                                                                    7,000                1,000

Convertible note payable, unsecured, bearing interest at 5% per annum, and
 coupled with the proceeds allocated to the detachable warrants, with an
 effective annual interest rate of 44%, due in January 2006. The holder of the
 note has the option to convert the principal and accrued interest into shares
 of common stock at $0.45 per share at any time until the later of the note's
 stated prepayment date or maturity date. The convertible note payable has
 detachable warrants with a three and one-half year term to purchase shares of
 common stock as follows: 411,111 at $0.45 per share; 246,667 at $0.75 per
 share; 148,000 shares at $1.25 per share and 123,333 shares at $1.50 per share.
 The investor also has registration rights on the underlying shares. The holder
 also has rights to a second closing for up to $400,000 of convertible
 note payable having similar terms.                                                       185,000              185,000
                                                                             --------------------- --------------------
                                                                                          542,000              236,000

Less current portion                                                                      542,000              236,000
                                                                             --------------------- --------------------

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



                                       31
<PAGE>

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

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

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

The above convertible notes payable may be subject to integration with previous
sales of convertible notes payable to some holders. Earlier, the Company sold
securities to the investors in a private offering, at the same time the Company
had on file a registration statement with the SEC. Such a contemporaneous,
private offering may have resulted in a violation of certain federal securities
laws concerning the contemporaneous sale of securities by the Company at
different terms, where the effect of integration can be to destroy an exemption
upon which a company has relied in issuing its securities privately, which
renders the transaction an illegal unregistered public offering. If this is the
case, the purchasers of convertible notes payable may have similar rescission
rights available to certain of the shareholders as described in Note 13. (See
Note 13 for a full description of the circumstances surrounding the rescission
rights of the shareholders). Accordingly, the Company may be required to pay
each rescinding holder of convertible notes payable the amount it received as
consideration, plus any interest with respect to such amount at the applicable
rate, and the convertible notes payable would be cancelled. To date, the Company
has not made a final determination as to whether or not a violation has
occurred. Even though it does not anticipate receiving any demands for
repurchase of these convertible notes payable, the Company has recorded $539,000
from the sale of convertible notes payable effected during the period when the
referenced registration statement was on file, as a current liability as of
October 31, 2004.

NOTE 13 - SALES OF COMMON STOCK SUBJECT TO RESCISSION

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


                                       32
<PAGE>

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

While the Company has not completed any independent investigation into whether
or not the rescission rights are in fact due to certain shareholders or whether
or not there may be defenses which could negate the requirement to offer
buy-back or rescission rights to prior investors. Based upon certain advice it
has received, the Company recorded $1,058,156 from the sales of 2,066,320 shares
of common stock during this period when the registration statement was on file,
as a liability as of October 31, 2004.

NOTE 14 -RESEARCH AND DEVELOPMENT COSTS

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

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

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

The Company is currently in Phase II of a Small Business Innovation Research
("SBIR") contract awarded to the Company in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate. Under the contract, the Company is to
develop and test the Company's Anti-Tank Landmine Detector 7AT7 over a two year
period, which may be eligible for extension at the option of the U.S. Army. The
Company received $70,000 in SBIR proceeds to complete Phase I and, on January
15, 2003, the Company executed a contract with the U.S. Army for Phase II valued
at $415,000. Work commenced in January 2003 under Phase II of the contract. In
January 2004, the U.S. Army exercised its option for the second year of Phase
II, valued at approximately $364,000. Work commenced on the second year of Phase
II in March 2004. Phase II ends in March 2005. The Company's anticipated cost to
complete Phase II is approximately $1,400,000. 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 7AT7, once the Company has completed
development activities.


                                       33
<PAGE>

Under the terms of the contract, the U.S. Army pays a portion of the Company's
research and development costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress under the contract. When the written report is accepted
by the U.S. Army, the Company usually receives payment in about 30 to 45 days.
The Company recognizes one-twelfth of the annual contract amount as an offset
against research and development expenses each month.

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

<TABLE>
<CAPTION>
                                                                                     For the Period from
                                                                                       August 21, 1995
                                                 Six Months Ended October 31,          (Inception) to
                                               ----------------------------------------------------------
                                                     2004               2003            October 31,2004
                                               ----------------------------------------------------------
<S>                                               <C>               <C>                     <C>
 Research and development costs                   $  617,116        $ 544,575               $ 3,879,472
 Grant proceeds                                     (182,472)        (207,498)               (1,025,046)
                                                  -----------       ----------              ------------

 Net research and development costs               $  434,644        $ 337,077               $  2,854,426
                                                  ===========       ==========              ============
</TABLE>

NOTE 15 - COMMITMENTS AND CONTINGENCIES


                      CONSULTANCY AGREEMENTS AND CONTRACTS

In August 2004, the Company entered into an agreement with an engineering and
construction firm, which agreed to provide design and construction management
services to the Company in connection with a proposed manufacturing plant
capable of producing commercial quantities of the CarBomb 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.

                                 LEASE AGREEMENT

In October 2002, the Company entered into a three-year operating lease agreement
with one of its directors at that time for its corporate offices in Irvine,
California. The lease provides for monthly rent of $8,000 for the first 18
months and $8,320 for months 19 through 36. In January 2004, the Company
executed an addendum to the lease agreement to lease an additional 4,570 square
feet of space within the same building in which the Company's offices are
located. The new space is being used for production and testing of the Company's
products. The addendum began in February 2004 and expires in September 2005 with
the master lease. The additional monthly rent is $4,123.

Rent expense for the six months ended October 31, 2004 and 2003 was $83,358 and
$57,000, respectively. The lease expires in September 2005 and future minimum
payments under these lease agreements are $132,333.


                                       34
<PAGE>

                               SEC INVESTIGATIONS

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

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

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

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

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

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


                                       35
<PAGE>

                                   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 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 the consultant would assist the Company with business development,
product and corporate image advertising, and access to government grants and
purchases. For his 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 produces
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 April
2004, YSCI amended its Demand for Arbitration to include a claim for commissions
that YSCI claims it is owed in connection with investments made by individuals
who purchased shares of the Company's stock. The Amended Demand for Arbitration
also seeks a determination as to whether Mr. Yeffet is entitled to exercise
options to purchase 500,000 shares of common stock issued to him under the
Company's Stock Option Agreement. In June 2004, the Company filed an answer
generally denying YSCI's allegations set forth in the original and amended
Demands for Arbitration. The Company also filed a cross Demand for Arbitration
seeking disgorgement of all monies paid to YCSI and rescission of the consulting
agreement and stock option agreement. The parties are in the process of
exchanging discovery. The Company intends to vigorously defend itself in and
prosecute this arbitration in hearings, which commenced October 2004.

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.

On October 19, 2004, the Company learned about, but has not yet been served
with, a Complaint filed in federal court in Orange County, California, and which
is styled as a "Complaint for Violation of Federal Securities Laws (Class
Action)". On November 2, 2004, the Company filed a notice of claim with its D&O
insurance carrier with regard to the Complaint. Neither the Company nor its
legal counsel have yet had an opportunity to study the Complaint, and therefore
cannot make any determination as to the merit of any of the claims asserted,
possible defenses to any such claims, or any other aspect of the lawsuit.


                                       36
<PAGE>

                              MINORITY SHAREHOLDERS

As of October 31, 2004, Microdevices has 20,540 minority shares issued and
outstanding. In November 2003, HiEnergy's Board of Directors approved a short
form merger to acquire the remaining outstanding stock of HiEnergy Microdevices.
Under the terms of the proposed merger, the Company would issue 459,222 shares
of common stock to the remaining stockholders of HiEnergy Microdevices on the
basis of 22.3524 HiEnergy shares for 1 share of HiEnergy Microdevices (the same
ratio that was used in the original voluntary share exchange), and all the
assets and liabilities of HiEnergy Microdevices would then become assets and
liabilities of HiEnergy. As of the date of this Report, the merger has not been
effected, but the Company anticipates its completion by the end of 2004.

                            CONVERTIBLE NOTES PAYABLE

During the six months ended October 31, 2004, the Company issued $300,000 of
convertible notes payable ("CNP") to investors, which are convertible into
666,667 shares of common stock, all of which were in-the-money as of October 31,
2004. The convertible notes have two-year maturities in which the holders of the
notes have the option to convert the principal and accrued interest into shares
of common stock at a conversion price of $0.45 per share at any time until the
later of the prepayment date or the maturity date. The conversion price is
subject to adjustment for stock splits, stock dividends, combinations, and other
similar structural events and the CNP provide for full-ratchet anti-dilution
protection, subject to standard exceptions, with respect to the issuance of the
Company's common stock before January 15, 2005 at a purchase price per share
which is below $0.45, or with respect to the issuance of CNP before January 15,
2005 with a conversion price below $0.45. Most of the CNP also have detachable
warrants to purchase shares of common stock with a three and one-half year term
following the registration date for prices between $0.45 and $1.25. All CNP have
registration rights on the underlying shares, and in certain cases, if the
shares of common stock issuable upon conversion of the CNP or exercise of the
detachable warrants are not registered within certain specified deadlines, the
holders are due penalties in the form of (i) additional convertible notes
payable equal to 2% of the original face amount, or principal balance, and (ii)
additional detachable warrants to purchase 2% of the amount of shares
exercisable under the original warrants, for each subsequent month until a
registration statement is filed and maintained effective by the Company, or when
the penalties become impermissible as a matter of law as prescribed in the
instrument or can be sold without registration under Rule 144. Additionally, in
certain cases, the CNP provide the holders with rights of first refusal if
shares are sold at a price per share less than $0.45.

During the six months ended October 31, 2004, the Company issued an additional
$100,000 of CNP to an investor, which are convertible into 192,308 shares of
common stock for the outstanding principal. The convertible note has a two-year
maturities in which the holder of the notes has the option to convert the
principal and accrued interest into shares of common stock at a conversion price
of $0.52 per share at any time until the later of the prepayment date or the
maturity date. The conversion price is subject to adjustment for stock splits,
stock dividends, combinations, and other similar structural events. The CNP had
no detachable but provide for registration rights on the underlying shares. The
holder converted the note during the period and the Company expensed a
beneficial conversion feature upon conversion in the amount of $55,769.

                   CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

During the six months ended October 31, 2004, the Company issued $25,648 of
convertible notes payable - related parties to its former legal counsel for
conversion of accounts payable, which are unsecured, bearing interest at 10% per
annum and due in April 2005. The holder of the notes have the option to convert
the principal and accrued interest into shares of common stock at a conversion
price of $1.00 per share at any time until the later of the prepayment date or
the maturity date. The conversion price is subject to adjustment for stock
splits, stock dividends, combinations, and other similar structural events and
the convertible notes provide for full-ratchet anti-dilution protection, subject
to standard exceptions, with respect to the issuance of the Company's common
stock.

                               PENALTY SECURITIES

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


                                       37
<PAGE>

As of October 31, 2004, 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.

For illustration purposes only, the table below estimates the approximate
amounts of penalty securities to be issued by the Company through April 30,
2005, on a monthly basis, in accordance with current agreements under which the
Company is, or may be, delinquent in satisfying its registration requirements:

                 Shares of Common   Number of Shares
                                       Underlying
                      Stock             Warrants              CNP
                 -------------------------------------------------------
     Nov-04               149,622               207,406           7,000
     Dec-04               111,850               213,699           7,000
     Jan-05                70,708               219,991           7,000
     Feb-05                41,004               226,283           7,000
     Mar-05                34,423               232,577           7,000
     Apr-05                20,707               238,869           7,000
                          -------             ---------      ----------
     Total                428,314             1,338,825      $   42,000
                          =======             =========      ==========



                         GOVERNMENT CONTRACT COMMITMENTS

The Company is currently in Phase II of a Small Business Innovation Research
("SBIR") contract awarded to the Company in August 2002 by the U.S. Army Night
Vision and Electronic Sensor Directorate. Under the terms of the contract, the
Company is to develop and test its Anti-Tank Landmine Detector 7AT7 over a
two-year period, which may be extended at the option of the U.S. Army, and the
U.S. Army pays a portion of the Company's research and development costs on a
periodic basis during the term of the contract, for which the Company is
required to submit monthly written reports detailing its progress under the
contract. The Company's entitlement to SBIR funds is conditioned upon compliance
with the terms and conditions of the SBIR contract and applicable federal
regulations, including auditing of the expenditure of the resources for
allowable purposes by grantor agencies of the federal government or their
designees. As of October 31, 2004, 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.

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 six month period, which may be extended at the
option of the TSA. The agreement provides funding in the amount of $367,141 for
Phase 1, and an additional $145,381 for Phase 2, if, at the conclusion of Phase
1, the TSA elects to continue with the Company. There is no obligation for the
TSA to fund the Company's development efforts under this agreement beyond the
Phase 1 funded amount. 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 shall commence November 2004 and the
Company intends to recognize one-sixth of the Phase 1 funding amount as an
offset against research and development expenses each month.


                                       38
<PAGE>

NOTE 16 - COMMON STOCK

                          COMMON STOCK ISSUED FOR CASH

During the six months ended October 31, 2004 and 2003, and the period from
August 21, 1995 (inception) to October 31, 2004, the Company issued 347,355,
2,456,237, and 7,016,002 shares of common stock, respectively, in exchange for
cash proceeds of $475,000, $1,416,001, and $3,637,268, respectively. Included in
the prior period amount are 600,000 shares subject to repurchase for $200,000.
Included in the inception-to-date amount are 2,000,000 shares subject to
repurchase for $694,000 and 770,424 shares sold subject to rescission for
$475,000.

                           COMMITMENT OF COMMON STOCK

As of October 31, 2004, the Company has committed to issue 1,457,703 shares of
common stock for proceeds of $670,756 received during the six months ended
October 31, 2004.

               OFFERING COSTS ON ISSUANCE OF COMMON STOCK FOR CASH

During the six months ended October 31, 2004 and 2003, and the period from
August 21, 1995 (inception) to October 31, 2004, the Company paid offering costs
of $31,750, $40,000, and $139,768, respectively.

           COMMON STOCK ISSUED FOR SERVICES RENDERED OR TO BE RENDERED

During the six months ended October 31, 2004 and 2003, and the period from
August 21, 1995 (inception) to October 31, 2004, the Company issued 281,455,
57,000, and 13,637,982 shares of common stock, respectively, in exchange for
services rendered valued at the fair market of the common stock $387,075,
$30,960, and $5,145,684, respectively.

Details of the services performed, in consideration for the common stock, during
the six months ended October 31, 2004, are as follows:

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

      o     During the six months ended October 31, 2004, HiEnergy issued 95,000
            shares of common stock valued at $208,050 to a contracted consultant
            for services which included strategic planning, development and
            assisting in the implementation of short- and long-term strategic
            planning initiatives to enhance and accelerate the commercialization
            of the Company's business objectives.

      o     During the six months ended October 31, 2004, the Company issued
            3,500 shares of common stock valued at $6,895, to a strategic
            marketing and planning consultancy as compensation for services.

                  COMMON STOCK COMMITTED FOR SERVICES RENDERED

As of October 31, 2004, the Company has committed issue 68,000 shares of common
stock valued at $75,680 for services rendered to members of the Board of
Directors of the Company and that of its subsidiaries for their attendance at
scheduled meetings. Of the total shares committed as of October 31, 2004, 61,000
shares valued at $65,740 are for services rendered during the six months ended
October 31, 2004 and 7,000 shares valued at $9,940 are for services rendered in
April 2004. Each member of the HiEnergy's board received 3,000 restricted shares
of common stock for each meeting attended and each member of the board of
HiEnergy Defense received 2,000 restricted shares of common stock for each
meeting attended, with the exception of the Chairman of HiEnergy Defense who
received 3,000 restricted shares for each such meeting attended.


                                       39
<PAGE>

       COMMON STOCK ISSUED ON THE CONVERSION OF CONVERTIBLE NOTES PAYABLE

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued 192,308, 0,
1,488,204 shares of common stock for the outstanding principal on a convertible
note payable balance of $100,000, 0, $ 583,153.

                 COMMON STOCK ISSUED ON THE EXERCISE OF WARRANTS

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued 0, 34,000 and
69,776 shares of common stock, respectively, for the exercise of warrants for
cash proceeds of $0, $340 and $54,004, respectively.

            COMMON STOCK ISSUED ON THE CASHLESS EXERCISE OF WARRANTS

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued 1,046,687, 0 and
1,577,712 shares, respectively, of common stock following the cashless exercise
of warrants. See Note 15 - Commitments and Contingencies, Cashless Exercise of
Warrants.

             COMMON STOCK ISSUED AS A PENALTY FOR LATE REGISTRATION

During the six months ended October 31, 2004 and 2003, and the period from
August 21, 1995 (inception) to October 31, 2004, the Company expensed $767,514,
$202,934, and $2,049,877, respectively, for the issuance of 545,181, 174,212,
and 1,476,882 shares of common stock, respectively, as penalties for the late
registration of common stock. See "Note 15 - Commitments and Contingencies,
Penalties Associated with the Late Registration of Common Stock."

     COMMON STOCK COMMITTED FOR ISSUANCE AS A PENALTY FOR LATE REGISTRATION

During the six months ended October 31, 2004, the Company committed to issue
877,844 shares of common stock valued at $792,330 as penalties for the late
registration of common stock. See "Note 15 - Commitments and Contingencies,
Penalties Associated with the Late Registration of Common Stock."

NOTE 17 - STOCK OPTIONS AND WARRANTS

                             STOCK OPTIONS - GENERAL

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

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


                                       40
<PAGE>

The following summarizes the stock option and warrant transactions:

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

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

 Outstanding,
April 30, 2002        2,769,664      $     0.14        347,424      $     0.28      3,117,088      $     0.16
                    -----------      ----------     ----------      ----------     ----------      ----------

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

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

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

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

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

Outstanding
April 30, 2004        4,646,949      $     0.42      3,258,394      $     1.61      7,905,343      $     0.83
                    -----------      ----------     ----------      ----------     ----------      ----------

Granted                      --      $       --             --      $       --             --      $       --

Canceled                     --      $       --       (831,668)     $     0.45       (831,668)     $     0.45
                    -----------      ----------     ----------      ----------     ----------      ----------

Outstanding
October 31, 2004      4,646,949      $     0.42      2,426,726      $     1.71      7,073,675      $     0.84

Exercisable
October 31, 2004      3,939,449      $     0.65      1,317,726      $     1.26      5,482,175      $     0.83
                    -----------      ----------     ----------      ----------     ----------      ----------
</TABLE>


                                       41
<PAGE>

The weighted-average remaining contractual life of the options and warrants
outstanding at October 31, 2004 was 4.48 years. The exercise prices of the
options and warrants outstanding at October 31, 2004 ranged from $0.13 to $2.95,
and information relating to these options and warrants is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted-       Weighted-
                                                       Weighted-         Average         Average
                                                        Average         Exercise        Exercise
                          Stock          Stock         Remaining        Price of        Price of
        Range of        Options &      Options &      Contractual       Options &       Options &
        Exercise        Warrants        Warrants          Life          Warrants        Warrants
         Prices        Outstanding    Exercisable       (years)        Outstanding     Exercisable
     --------------- --------------- -------------- ---------------- --------------- ---------------
<S>                  <C>             <C>              <C>             <C>             <C>
      $0.01 - $0.99        3,990,232      3,530,232        4.73             $ 0.36        $ 0.31

      $1.00 - $1.99        1,949,454        967,954        4.71             $1.11         $ 1.10

      $2.00 - $2.99        1,133,989        983,989        3.22             $2.42         $ 2.47
                     --------------- --------------
                           7,073,675      5,482,175
                     =============== ==============
</TABLE>

                      WARRANTS ISSUED FOR SERVICES RENDERED

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued or committed to
issue warrants to purchase 100,000, 200,000 and 1,010,000 shares of common
stock, respectively, for services rendered valued at $38,573, $43,677, and
$976,035, respectively, which is the fair value as determined by the
Black-Scholes option pricing model.

           WARRANTS RE-PRICED IN CONJUNCTION WITH ADDITIONAL FINANCING

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

A summary of the amended warrants and exercise prices follows:

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



                                       42
<PAGE>

          WARRANTS ISSUED OR COMMITTED AS PENALTY FOR LATE REGISTRATION

During the six months ended October 31, 2004 and 2003 and the period from August
21, 1995 (inception) to October 31, 2004, the Company issued or committed to
issue warrants to purchase 1,050,664, 8,239 and 1,229,205 common shares,
respectively, as a penalty with a fair value of $841,383, $6,009, and
$1,072,665, respectively, related to the delayed registration of the Company's
common stock. The fair values of the warrants were determined using the
Black-Scholes model.

NOTE 18 - SUBSEQUENT EVENTS

                 CONSULTANCY AGREEMENTS AND EMPLOYMENT CONTRACTS

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

In December 2004, the Company agreed to an amendment to an employment services
contract with a professional legal and financial staffing corporation entered
into in July 2004. As of the date of this Report, one professional remains
actively contracted and performing services. Major terms of the agreement as
amended are as follows:

      o     The Company will pay the staffing corporation $55.00 per hour, plus
            overtime, for personnel assigned per project, to be invoiced and
            paid on a weekly basis for the duration of the assignment.

      o     Any balances due for services rendered and remaining outstanding
            after forty-five (45) days of the invoice date shall incur late
            charges at the greater of (i) 1 1/2 % per month or (ii) the highest
            rate allowable by law.

      o     The Company shall pay a fee of $10,000 after January 1, 2005 in the
            event the contracted professional converts to a full-time employee
            of the Company, subject to the contracted professional being
            employed on or after said date.


                    RECENT SALES AND ISSUANCES OF SECURITIES

In November 2004, the Company issued 3,143,822 restricted shares of common stock
to various investors in private placements in exchange for cash in the aggregate
amount of $1,446,156. As additional consideration for this amount, the Company
issued to the investors warrants to purchase an additional number of shares of
common stock equal to 50% of the number of shares of common stock issued
pursuant to this private placement at an exercise price of $0.82 per share. Said
warrants are to expire three and one half years following the date of
effectiveness of the Company's next filed registration statement.

In November 2004, the Company issued 1,010,870 shares of common stock to an
investor affiliated with the Chairman of the Company, upon the conversion of
promissory notes evidencing loans made to the Company in the aggregate amount of
$465,000. As additional consideration for the conversion, the Company issued to
the note holder warrants to purchase an additional 505,435 shares of common
stock issued upon conversion at an exercise price of $0.82 per share. Said
warrants are to expire three and one half years following the date of
effectiveness of the Company's next filed registration statement. Upon
conversion, the note holder waived all accrued but unpaid interest.

In November 2004, the Company issued 1,046,687 shares of common stock to an
investor pursuant to the cashless exercise of warrants. The warrants were
exercisable for a total of 1,384,444 shares of common stock at an exercise price
of $0.45 per share. In connection with the cashless exercise, 337,757 shares
issuable pursuant to the warrant were tendered for conversion to pay the
exercise price.


                                       43
<PAGE>

In December 2004, the Company committed to issue 272,392 shares of common stock
to various investors in a private placement in exchange for cash in the
aggregate amount of $125,300. As additional consideration for this amount, the
Company issued to the investors warrants to purchase an additional number of
shares of common stock equal to 50% of the number of shares of common stock
issued pursuant to this private placement at an exercise price of $0.82 per
share. Said warrants are to expire three and one half years following the date
of effectiveness of the Company's next filed registration statement.

In December 2004, the Company committed to issue 128,260 shares of common stock
to an investor, upon the conversion of promissory notes evidencing loans made to
the Company in the aggregate amount of $59,000. As additional consideration for
the conversion, the Company issued to the note holder warrants to purchase an
additional 64,130 shares of common stock issued upon conversion at an exercise
price of $0.82 per share. Said warrants are to expire three and one half years
following the date of effectiveness of the Company's next filed registration
statement. Upon conversion, the note holder waived all accrued but unpaid
interest.

                               PENALTY SECURITIES

In November 2004, the Company committed to issue $7,000 in convertible notes to
certain note holders with registration rights as a penalty, due to the Company's
inability to file a registration statement within specified deadlines.

In November 2004, the Company committed to issue 130,737 shares of common stock
and warrants to purchase 237,665 shares of common stock at various exercise
prices, 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 2004, the Company issued 264,231, 286,573, and 193,995 shares of
common stock against previously committed shares 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 December 2004, the Company committed to issue $7,000 in convertible notes to
certain note holders with registration rights as a penalty, due to the Company's
inability to file a registration statement within specified deadlines.

In December 2004, the Company committed to issue 91,280 shares of common stock
and warrants to purchase 243,957 shares of common stock at various exercise
prices, 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.


                                       44
<PAGE>

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

Any reference to "we," "us" and "our" herein shall mean HiEnergy Technologies,
Inc., together with its consolidated subsidiaries, comprised of HiEnergy
Microdevices, Inc., HiEnergy Defense, Inc., and HiEnergy Europe, Ltd.

FORWARD LOOKING STATEMENTS

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

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

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

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


                                       45
<PAGE>

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.

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

GENERAL

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

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the research and
development of proprietary, neutron-based, "stoichiometric" sensor devices, and
the commercialization of devices incorporating its technologies. To date, we
have devoted the bulk of our efforts and resources to the research, design,
testing and development of our proprietary, "stoichiometric" sensor devices and
underlying technologies, and have yet to generate any sales revenues from the
sale of any products using said technology. Our primary focus is currently on
the commercialization of our initial prototype devices, primarily the
vehicle-borne "CarBomb Finder", and the more compact and mobile suitcase-borne
"SIEGMA" system, which we intend to market to governmental and private entities
and to distribute or license through industry partners. Our stoichiometric
technology has also 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 will attempt to launch: (i) an anti-tank landmine
detector; (ii) an unexploded ordnance detector; and (iii) a device the Company
calls a "Refractorymeter" which can detect fissures or erosions in the ceramic
lining of oil cracking tanks. The Company entered recently into a funded
cooperative development agreement with the U.S. Transportation Security
Administration (TSA) to produce a proof of concept which incorporates our
SuperSenzor technology, based on associated particle imaging, into a baggage
screening system. Additionally, we continue to be focused 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.

HiEnergy Technologies, Inc. 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 two wholly-owned subsidiaries, HiEnergy Defense, Inc. ("HiEnergy
Defense") and HiEnergy Europe, Inc. ("HiEnergy Europe"), which were incorporated
under the laws of the state of Delaware in August 2003 and March 2003,
respectively, and one majority owned subsidiary, HiEnergy Microdevices, Inc.,
which was incorporated in Delaware in 1995 ("Microdevices", and together with
HiEnergy Europe and HiEnergy Defense, the "Subsidiaries"). We currently hold an
approximate 92% interest in Microdevices, which was the vehicle through which
our "stoichiometric" technology was initially developed by the Company's
Chairman and CEO, Dr. Bogdan Maglich. In November 2003, our Board of Directors
approved a short-form merger to acquire the remaining outstanding stock of
Microdevices. Under the merger, we would issue 459,222 shares of common stock to
the remaining shareholders of Microdevices on the same basis as the voluntary
share exchange of April 2002 of 22.3524 HiEnergy shares to 1 Microdevices share,
and all the assets and liabilities of Microdevices would become assets and
liabilities of HiEnergy. As of the date of this Report, the merger had not been
effected, but we anticipate its completion by the end of 2004.


                                       46
<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") OTC Bulletin Board ("OTCBB") under the symbol "HIET".

BASIS OF PRESENTATION

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

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

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.

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.


                                       47
<PAGE>

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

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

RESEARCH AND DEVELOPMENT COSTS

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

THREE MONTHS ENDED OCTOBER 31, 2004 AS COMPARED TO PRIOR YEAR PERIOD

For the three months ended October 31, 2004, we incurred a net loss of
$2,435,000, as compared to a net loss of $1,826,000 for the three months ended
October 31, 2003. Included in the losses are equity based expenses of $1,086,000
and $721,000, respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $1,191,000 for the three months ended
October 31, 2004, a decrease of $192,000 from the prior year period. In certain
instances, we have engaged service providers by offering common stock, warrants,
options and convertible notes payable (CNP) as compensation in lieu of cash.
Through various arrangements, these providers have provided services such as
business development, business and financial consulting, Edgar services and
directorship. Some of these warrants and options that were issued and
subsequently expensed have been forfeited causing no dilution to the Company.
The major components of general and administration expenses, both cash and
equity, are as follows

<TABLE>
<CAPTION>
                             Three Months Ended October 31, 2004         Three Months Ended October 31, 2003
                          ----------------------------------------     ----------------------------------------

                            Cash &         Equity                        Cash &        Equity
                           Accrued         Based                        Accrued         Based                        Increase/
                           Expenses     Compensation      Total         Expenses    Compensation        Total       (Decrease)
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>            <C>
Salaries and benefits     $  185,000     $       --     $  185,000     $  155,000     $       --     $  155,000     $   30,000

Consulting                   121,000         35,000        156,000        148,000        524,000        672,000       (516,000)

Legal fees                   220,000             --        220,000        194,000             --        194,000         26,000

Accounting fees              258,000             --        258,000         34,000             --         34,000        224,000
Investor & public
relations                     67,000             --         67,000        125,000             --        125,000        (58,000)

Insurance                     43,000             --         43,000         39,000             --         39,000          4,000

Travel                        87,000             --         87,000         71,000             --         71,000         16,000

Other                        115,000         60,000        175,000         93,000             --         93,000         82,000
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------

            Total         $1,096,000     $   95,000     $1,191,000     $  859,000     $  524,000     $1,383,000     $ (192,000)
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------
</TABLE>


                                       48
<PAGE>

For the three months ended October 31, 2004 compared to the prior year period,
salary and benefits expense increased $30,000. This increase was primarily due
to the hiring of two additional personnel, as well as normal pay increases and
incentives. The hiring activity was associated with re-staffing certain
personnel vacancies which resulted from cash saving measures implemented in
March 2003 that aimed to reduce operational expenses with a reduction of
employee head count. For the current year quarter, we did not incur any salary
and benefits expense in the form of equity based compensation. We expect hiring
activity as well as salary and benefits expense to increase for the second half
of fiscal year 2005 as we move forward with the execution of our operating plan

Consulting expenses for the three months ended October 31, 2004 decreased
$516,000 over the prior year period. Excluding a charge in the amount of
$486,000, resulting from the expensing upon termination of a consultant's
agreement in October 2003 of an option issued to the consultant in July 2002,
consulting expenses for the three months ended October 31, 2004 decreased
$30,000 over the prior year period. Based upon our current forecast, we do not
believe we will incur substantial consulting expense in the form of equity based
compensation for the second half of fiscal 2005.

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

Legal fees increased $26,000 for the three months ended October 31, 2004 as
compared to the prior year period. Legal activity increased due to certain
litigation matters primarily concerning ongoing disputes with former directors
and consultants, regulatory matters related to the SEC investigation and the
related Wells Notice, as well as significant patent, statutory and regulatory
filing activity. Notably, a good portion of the legal fees for the period
resulted from activity related to the reconciling of certain reporting
requirement delinquencies, restatement amendments, and the late filing of our
Annual Report. Through the second half of fiscal 2005, we expect overall legal
expense will decrease, but remain comparatively high, as we attempt to settle
current SEC issues and other pending legal matters disclosed in this Report and
to file registration statements on Form SB-2 with the SEC in order to register
shares of our common stock. Additionally, the Company anticipates internalizing
many legal and regulatory functions in connection with its effort to improve
internal controls and reduce outside legal costs.

Accounting fees increased $224,000 for the three months ended October 31, 2004
as compared to the prior year period. This increase was due to significant
accounting activity related to the restatement of our financial results for
fiscal years 2002 and 2003, as well as the completion of the audit for fiscal
year 2004. Notably, a great portion of the accounting fees for the period
derived from accounting activity typically incurred in the first quarter, due to
the duration of our audit for fiscal year 2004 and accountant reviews of
financial reports for the second quarter. We expect accounting fees to decrease
for the second half of fiscal 2005, but remain comparatively high, as we
complete the filing of our restated annual and quarterly financial results.
Additionally, we anticipate that we will make further improvements to and
efficiencies in our financial controls, which should reduce accounting costs.

Investor and public relations expense decreased $58,000 for the three months
ended October 31, 2004 as compared to the prior year period. This decrease was
the result of cost-cutting measures implemented in March 2003, which included
the elimination of one of our investor relations firm, as well as the
redirection of resources toward more immediate concerns such as the funding of
internal operations and expenditures related to the financial restatement and
legal and regulatory matters. For the second half of fiscal 2005, we expect
investor and public relations fees to increase as we intend to increase
awareness of our products and our company in the marketplace and seek broader
shareholder support and institutional coverage.

Insurance expense increased $4,000 over the prior year period. Notably, in May
2004, we renewed our Directors and Officers liability policy for an additional
year without incurring a substantial cost increase. At present, we maintain
$2,000,000 of Directors and Officers liability insurance. The Company expects
insurance expense for the second half of fiscal year 2005 to increase as a
result of our providing health insurance coverage for new hires.


                                       49
<PAGE>

Travel expenses increased $16,000 for the three months ended October 31, 2004
over the prior year period. The increase was attributed primarily to our
attendance at the NATO Symposium held in Madrid, Spain in October 2004, during
which we demonstrated our SIEGMA system. In connection with our
commercialization objectives, sales and marketing personnel also attended
numerous key industry conferences and trade shows, and management traveled to
meet with consultants engaged to design and implement a proposed manufacturing
plan.

Other expenses for the three months ended October 31, 2004 increased $82,000
over the prior year period and include $60,000 of equity based compensation for
Edgar filing services and $21,000 for postage and delivery expense. The issuance
of equity for services by us has been costly historically for the reasons
discussed above. The $21,000 for postage and delivery was primarily incurred
with the shipment of our prototype, equipment and supplies for our demonstration
in Spain. Other expenses, which also include fees associated with stock transfer
agent services, telecommunications, office equipment and supplies, licenses and
permits, and web design and development, have increased during the period, and
are anticipated to continue to increase for the second half of fiscal 2005,
consistent with our expanded business development and international efforts.

RESEARCH AND DEVELOPMENT

Net research and development expenses for the three months ended October 31,
2004 decreased $25,000 over the prior year period. No equity based expenses were
recorded for research and development. The major components of research and
development expenses are as follows:

                                 Three Months Ended
                         -----------------------------------      Increase/
                         October 31, 2004   October 31, 2003     (Decrease)
                         ----------------   ----------------     ----------
Salaries and benefits        $ 144,000         $ 180,000         $ (36,000)
Consultants                     71,000            16,000            55,000
Supplies                        24,000            56,000           (32,000)
Travel                           3,000             4,000            (1,000)
Depreciation                    39,000            32,000             7,000
Other                           24,000            55,000           (31,000)
Grant income                   (91,000)         (104,000)           13,000
                             ---------         ---------         ---------
                Net          $ 214,000         $ 239,000         $ (25,000)
                             ---------         ---------         ---------

Salaries and benefits related to research and development activities decreased
$36,000 for the three months ended October 31, 2004 as compared to the prior
year period. During the first quarter, we lost the services of two scientists,
which we expect to replace during the second half of fiscal 2005. However,
consulting expenses increased $55,000 during the period as a result of our
engagement of independent scientific and technical contractors, as well as
retaining a consulting firm to assess our production needs and aid with the
design and implementation of our manufacturing plan. For the second half of
fiscal 2005, we expect salaries and benefits to increase as we employ additional
scientific personnel to advance the development of our technology and devices,
as well as consulting expenses as we expect to continue to rely on independent
professionals for various specialized functions.

Supply expense and travel expenses decreased $32,000 and $1,000, respectively,
for the three months ended October 31, 2004 as compared to the prior year
period. The decreases were primarily a result of less research and development
activity during the period. In light of an increase in our grant application
activity and current and anticipated cooperative and research development
agreements, we expect that expenses related to supplies and travel will increase
in the second half of fiscal 2005.

During the six months ended October 31, 2004 and fiscal 2004, we added
additional equipment expense of $246,000 and $246,000, respectively. Together
these additions increased depreciation expense by $7,000 period over period. In
light of an increase in our grant application activity and current and
anticipated cooperative and research development agreements, which requires the
purchase of additional equipment, we expect that equipment depreciation expense
will continue to increase in the second half of fiscal 2005.

Other expenses for the three months ended October 31, 2004 decreased $31,000
compared to the prior year period. The decrease in other expenses, including,
telephone, furniture and fixture rentals, was a result of less research and
development activity during the period. In light of an increase in our grant
application activity and current and anticipated cooperative and research
development agreements, we expect that other expenses will increase in the
second half of fiscal 2005.


                                       50
<PAGE>

For the three months ended October 31, 2004, we received grant money of $91,000
compared to $104,000 for the prior year period. In August 2002, our project to
develop and test an anti-tank landmine detection system over a two-year period
was selected by the U.S. Department of Defense under a Small Business Innovation
Research (SBIR) contract. Under this contract, the U.S. Army pays a portion of
our research and development costs on a periodic basis during the term of the
contract. We previously received $70,000 in SBIR contract proceeds to complete
Phase I, and are entitled to receive an additional $780,000 in SBIR contract
proceeds to complete Phase II, of which $597,000 has been earned to date. Under
the terms of the SBIR contract, we are required to submit monthly written
reports detailing our progress accompanied with an invoice for one-twelfth of
the annual amount. When the written report is accepted by the U.S. Department of
Defense, we receive payment in about 30 to 45 days.

DEPRECIATION

Total depreciation expense for the three months ended October 31, 2004 and 2003
was $50,000 and $30,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period.

INTEREST EXPENSE AND INCOME

Interest expense for the three months ended October 31, 2004 increased to
$90,000 from $8,000 for the prior year period. The increase was primarily due to
a $56,000 beneficial conversion expense on a convertible note payable for
$100,000 issued to an investor, which was subsequently converted into 192,308
shares of common stock. The beneficial conversion amount, calculated by taking
the spread between the market price of the common stock at the date of issuance
and the conversion price, multiplied by the number of shares underlying the
note, was expensed upon conversion. Since the prior year period, we issued
additional notes to investors, including convertible notes payable ("CNP") to
investors for $725,000, carrying a 5% interest rate, and CNP to our former legal
counsel, carrying a 10% interest rate, as well as other notes payable of lesser
amounts, which generated aggregate interest expense of $34,000 for the three
months ended October 31, 2004.

Interest income for the three-month periods ended October 31, 2004 and 2003 was
minimal.

PENALTIES ON DEBT AND EQUITY ISSUANCES

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

For the three months ended October 31, 2004, we recorded a $3,000 expense upon
issuance of CNP with a face value of $3,000 as penalties for our delayed
registration statement. Certain holders of previously issued CNP will continue
to receive each month, as applicable, additional CNP equal to 2% of the original
face amount of the notes, or principal balance. In addition, since the original
CNP included detachable warrants, these investors also received and will
continue to receive each month, as applicable, additional detachable warrants to
purchase 2% of the amount of shares underlying the original warrants. For the
three months ended October 31, 2004, we recorded a $9,000 expense upon adjusting
warrants to purchase 20,662 additional common shares as penalties to these
investors. The fair value of these warrants was determined using the
Black-Scholes model.

For the three months ended October 31, 2004, we recorded $677,000 as a penalty
expense upon the issuance or the committed issuance of 761,385 shares of common
stock. Certain holders of unregistered common stock received and will continue
to receive each month, as applicable, additional shares calculated as a
percentage of the original number of shares they purchased. In addition, since
the original shares included warrants, these investors also received and will
continue to receive each month, as applicable, adjustments to their warrants
providing for an additional number of shares underlying each warrant calculated
as a percentage of the original number of shares underlying the warrants. For
the three months ended October 31, 2004, we recorded a $251,000 expense upon
amending warrants to purchase 530,400 additional common shares as penalties to
these investors. The fair value of these warrants was determined using the
Black-Scholes model.


                                       51
<PAGE>

For the three months ended October 31, 2003, we recorded penalty expenses in the
amount of $191,000 and $6,000, against the issuance of 148,260 shares of common
stock and warrants to purchase 8,239 shares of common stock as penalties,
respectively. The fair value of the warrants was determined using the
Black-Scholes model

SIX MONTHS ENDED OCTOBER 31, 2004 AS COMPARED TO PRIOR YEAR PERIOD

For the six months ended October 31, 2004, we incurred a net loss of $6,563,000,
as compared to a net loss of $2,905,000 for the six months ended October 31,
2003. Included in the losses are equity based expenses of $4,017,000 and
$923,000, respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $2,876,000 for the six months ended
October 31, 2004, an increase of $530,000 from the prior year period. In lieu of
cash, we have often engaged service providers by offering common stock,
warrants, options and convertible notes payable (CNP) as compensation. Through
various arrangements these providers have provided services such as business
development, business and financial consulting, Edgar services and directorship.
Some of these warrants and options that were issued and subsequently expensed
have been forfeited causing no dilution to the Company.

The major components of general and administration expenses, both cash and
equity, are as follows:

<TABLE>
<CAPTION>
                              Six Months Ended October 31, 2004            Six Months Ended October 31, 2003
                           ---------------------------------------     ----------------------------------------

                            Cash &         Equity                        Cash &        Equity
                           Accrued         Based                        Accrued         Based                        Increase/
                           Expenses     Compensation      Total         Expenses    Compensation        Total       (Decrease)
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>            <C>
Salaries and benefits     $  339,000     $   39,000     $  378,000     $  238,000     $       --     $  238,000     $  140,000

Consulting                   206,000        281,000        487,000        248,000        692,000        940,000       (453,000)

Legal fees                   420,000        390,000        810,000        420,000         22,000        442,000        368,000

Accounting fees              398,000             --        398,000         89,000             --         89,000        309,000
Investor  & public
relations                    129,000             --        129,000        260,000             --        260,000       (131,000)

Insurance                     86,000             --         86,000         69,000             --         69,000         17,000

Travel                       216,000             --        216,000        124,000             --        124,000         92,000

Other                        252,000        120,000        372,000        184,000             --        184,000        188,000
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------

               Total      $2,046,000     $  830,000     $2,876,000     $1,632,000     $  714,000     $2,346,000     $  530,000
                          ----------     ----------     ----------     ----------     ----------     ----------     ----------
</TABLE>

For the six months ended October 31, 2004 as compared to the prior year period,
salary and benefits expense increased $140,000. This increase was primarily due
to the hiring of two additional personnel, as well as normal pay increases and
incentives. The hiring activity was associated with re-staffing certain
vacancies which resulted from cash saving measures implemented in March 2003
that aimed to reduce operational expenses with a reduction of employee head
count. The current year period included $39,000 of equity based compensation in
the form of a warrant issued to our corporate controller. We expect hiring
activity as well as salary and benefits expense to increase for the second half
of fiscal year 2005 as we move forward with the execution of our operating plan.

Consulting expenses for the six months ended October 31, 2004 decreased $453,000
over the prior year period. Excluding a charge in the amount of $550,000,
resulting from the expensing upon termination of the consultant's agreement in
October 2003 of an option issued to a consultant in July 2002, consulting
expenses for the six months ended October 31, 2004 increased $97,000 over the
prior year period. Based upon our current forecast, we do not believe we will
incur substantial consulting expense in the form of equity based compensation
for the second half of fiscal 2005.


                                       52
<PAGE>

Historically, we have relied greatly on paying for services with equity
instruments in lieu of cash at significant discounts and at greater cost to our
results of operations, primarily due to the restricted nature of the issued
equity instruments, our failure to file and maintain an effective registration
statement, our difficulty in raising significant capital, as well as other
persistent issues. We anticipate that going forward we will be less reliant on
offering equity for services and/or in a better position from which to negotiate
our equity terms.

Legal fees increased $368,000 for the six months ended October 31, 2004 as
compared to the prior year period. Part of this increase was due to our having
to issue discounted equity for services in the first quarter of fiscal 2005 in
lieu of cash, as discussed above. Equity based compensation expense for legal
services was $390,000 for the six months ended October 31, 2004 compared to only
$22,000 for the prior year period. Overall, legal activity increased due to
certain litigation matters, regulatory matters, as well as significant patent,
statutory and regulatory filing activity. Through the second half of fiscal
2005, we expect overall legal expenses will decrease, but remain comparatively
high, as we attempt to settle current SEC issues and other pending legal matters
disclosed in this Report and to file registration statements on Form SB-2 with
the SEC in order to register shares of our common stock. Additionally, the
Company anticipates internalizing many legal and regulatory functions in
connection with its effort to improve internal controls and reduce outside legal
costs.

Accounting fees increased $309,000 for the six months ended October 31, 2004
compared to the prior year period. This increase was due to significant
accounting activity related to the restatement of our financial results for
fiscal years 2002 and 2003, as well as the completion of the audit for fiscal
year 2004. We expect accounting fees to decrease for the second half of fiscal
2005, but remain comparatively high, as we complete the filing of our restated
annual and quarterly financial results. Additionally, we anticipate that we will
make further improvements to and efficiencies in our financial controls, which
should reduce accounting costs.

Investor and public relations expense decreased $131,000 for the three months
ended October 31, 2004 as compared to the prior year period. This decrease was
the result of our cost-cutting measures implemented in March 2003, which
included the elimination of one of our investor relations firm, as well as the
redirection of resources toward more immediate concerns such as the funding of
internal operations and expenditures related to the financial restatement and
legal and regulatory matters. For the second half of fiscal 2005, we expect
investor and public relations fees to increase as we intend to increase
awareness of our products and our company in the marketplace and seek broader
shareholder support and institutional coverage.

Insurance expense increased $17,000 over the prior year period. This increase
was primarily attributable to a $10,000 increase for health insurance. Notably,
in May 2004, we renewed our Directors and Officers liability policy for an
additional year without incurring a substantial cost increase. At present, we
maintain $2,000,000 of Directors and Officers liability insurance. The Company
expects insurance expense for the second half of fiscal year 2005 to increase as
a result of our providing health insurance coverage for new hires.

Travel expenses increased $92,000 for the six months ended October 31, 2004 over
the prior year period. The increase was attributed primarily to the July
demonstration in Istanbul, Turkey of our CarBomb Finder prototype and our
demonstration the SIEGMA system at the NATO Symposium held in Madrid, Spain in
October 2004. In connection with our commercialization objectives, sales and
marketing personnel also attended numerous key industry conferences and trade
shows, and management traveled to meet with consultants engaged to design and
implement a proposed manufacturing plan.

Other expenses for the six months ended October 31, 2004 increased $188,000 over
the prior year period and includes $120,000 of equity based compensation for
Edgar filing services, and $103,000 for postage and delivery expense. The
issuance of equity for services by us has been costly historically for the
reasons discussed above. The $103,000 for postage and delivery was primarily
incurred with the shipment of our prototype, equipment and supplies for our
demonstrations in Turkey and Spain. Other expenses, which also include fees
associated with stock transfer agent services, telecommunications, office
equipment and supplies, licenses and permits, and web design and development,
have increased during the period, and are anticipated to continue to increase
for the second half of fiscal 2005, consistent with our expanded business
development and international efforts.


                                       53
<PAGE>

RESEARCH AND DEVELOPMENT

Net research and development expenses increased $97,000 over the prior year
period. No equity based expenses were recorded for research and development. The
major components of research and development expenses are as follows:

                                  Six Months Ended
                          -----------------------------------      Increase/
                          October 31, 2004   October 31, 2003     (Decrease)
                              ---------         ---------         ---------
 Salaries and benefits        $ 309,000         $ 316,000         $  (7,000)
 Consultants                     84,000            34,000            50,000
 Supplies                        41,000            62,000           (21,000)
 Travel                          13,000             5,000             8,000
 Depreciation                    82,000            61,000            21,000
 Other                           87,000            67,000            20,000
 Grant income                  (182,000)         (208,000)           26,000
                              ---------         ---------         ---------

 Net                          $ 434,000         $ 337,000         $  97,000
                              ---------         ---------         ---------

Salaries and benefits related to research and development activities decreased
$7,000 for the six months ended October 31, 2004 compared to the prior year
period as we lost the services of two scientists that we are attempting to
replace. Consulting expenses increased $50,000 as we engaged a construction and
engineering firm to design and scout locations for a manufacturing and assembly
facility. We expect salaries and benefits to increase in the second half of
fiscal 2005 as we replace and add additional scientific personnel to advance the
development of our technology and devices.

Supply expense decreased $21,000 for the six months ended October 31, 2004
compared to the prior year period, as we were not required to make as many
material purchases as the prior year period. In light of an increase in our
grant application activity and current and anticipated cooperative and research
development agreements, we expect supply expenses to increase for the remainder
of fiscal 2005.

Travel expenses increased $8,000 for the six months ended October 31, 2004
compared to the prior year period year period due to an increase in grant
application activity, which requires significant cross-continental travel.

We added additional equipment expense of $246,000 during the six months ended
October 31, 2004 and $246,000 during fiscal year 2004. Together these additions
increased depreciation expense $21,000 over the prior year period.

Other expenses for the six months ended October 31, 2004 increased $20,000
compared to the prior year period. The primary increase was due to increased
rent, both our per foot rate and total space increased, this was offset by
$20,000 for moving expenses in the prior year period. Other expenses, including,
telephone, furniture and fixture rentals increased consistent with our expanded
business development efforts during the current period.

For the six months ended October 31, 2004, we received grant money of $182,000
compared to $208,000 for the prior year period. In August 2002, our project to
develop and test an anti-tank landmine detection system over a two-year period
was selected by the U.S. Department of Defense under a Small Business Innovation
Research (SBIR) contract. Under this contract, the U.S. Army pays a portion of
our research and development costs on a periodic basis during the term of the
contract. We previously received $70,000 in SBIR contract proceeds to complete
Phase I, and are entitled to receive an additional $780,000 in SBIR contract
proceeds to complete Phase II, of which $597,000 has been earned to date. Under
the terms of the SBIR contract, we are required to submit monthly written
reports detailing our progress accompanied with an invoice for one-twelfth of
the annual amount. When the written report is accepted by the U.S. Department of
Defense, we receive payment in about 30 to 45 days.

DEPRECIATION

Total depreciation expense for the six months ended October 31, 2004 and 2003
was $103,000 and $64,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the proceeding and
intervening period.


                                       54
<PAGE>

INTEREST EXPENSE AND INCOME

Interest expense for the six months ended October 31, 2004 increased to $846,000
from $13,000 for the prior year. The increase was primarily due to $781,000 of
non-cash charges upon issuance of CNP with detachable warrants to investors and
$5,000 for the issuance of CNP to our former legal counsel.

During the six months ended October 31, 2004, we expensed as interest the total
proceeds of $725,000 derived from the sale of CNP with detachable warrants to
investors, since under GAAP accounting rules the combined fair value of the
beneficial conversion feature and the detachable warrants exceeded $725,000. The
CNP were convertible immediately and subject to rescission rights (as discussed
elsewhere in this Report), and therefore, we expensed the fair value of the
beneficial conversion feature as 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. We expensed the
full value of the warrants as determined by using the Black-Scholes model.
Interest expense upon issuance of the CNP was capped by the $725,000 proceeds
received.

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

During the six months ended October 31, 2004, we expensed as interest a
beneficial conversion feature of $5,000 against $26,000 in CNP issued to our
former legal counsel for services rendered. The CNP were convertible
immediately, therefore, the fair value of beneficial conversion feature was
determined by taking the difference between the market price of the common stock
at the date of issuance and the conversion price, multiplied by the number of
shares underlying the CNP.

The CNP to the investors carry a 5% interest rate and the CNP to our former
legal counsel carries a 10% interest rate. These notes and other notes payable
of lesser amount, generated aggregate interest expense of $60,000 for the six
months ended October 31, 2004.

Interest income for the six month periods ended October 31, 2004 and 2003 was
minimal.

PENALTIES ON DEBT AND EQUITY ISSUANCES

We have issued as penalties, CNP, common stock, and warrants to certain holders
of CNP, common stock and warrants with registration rights, as a result of our
inability to file and maintain an effective 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 can be sold without registration under
Rule 144.

For the six months ended October 31, 2004, we recorded a $6,000 expense upon
issuance of CNP with a face value of $6,000 as penalties for our delayed
registration statement. Certain holders of previously issued CNP will continue
to receive each month additional CNP equal to 2% of the original face amount of
the notes, or principal balance. In addition, since the original CNP included
detachable warrants, these investors also received and will continue to receive
each month, amendments to their warrants to increase the number of shares
underlying each warrant by 2% of the number of shares underlying the original
warrants. For the six months ended October 31, 2004, we recorded a $50,000
expense upon adjusting warrants to purchase 47,062 additional common shares as
penalties to these investors. The fair value of these warrants was determined
using the Black-Scholes model.

For the six months ended October 31, 2004, we recorded $1,560,000 as a penalty
expense upon the issuance or the committed issuance of 1,423,025 shares of
common stock. Certain holders of unregistered common stock received and will
continue to receive each month, as applicable, additional shares calculated as a
percentage of the original number of shares they purchased. In addition, since
the original shares included warrants, these investors also received and will
continue to receive each month, as applicable, amendments to their warrants to
increase the number of shares underlying each warrant by a percentage of the
number of shares underlying the original warrants. For the six months ended
October 31, 2004, we recorded a $791,000 expense upon amending warrants to
purchase 1,003,602 additional common shares as penalties to these investors. The
fair value of these warrants was determined using the Black-Scholes model.


                                       55
<PAGE>

For the six months ended October 31, 2003, we recorded penalty expenses in the
amount of $203,000 and $6,000, against the issuance of 174,212 shares of common
stock and warrants to purchase 8,239 shares of common stock as penalties,
respectively. The fair value of the warrants was determined using the
Black-Scholes model

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2004, we had cash and cash equivalents of $211,000 and $61,000
in grant money receivable for progress completed, of which $30,500 was collected
in November 2004.

Other current assets, as of October 31, 2004, consisted primarily of $71,000 for
prepaid insurance, a $33,000 deposit to a law firm, and a deposit of $34,000
towards the purchase of our neutron generator component.

During the six months ended October 31, 2004, our sources of cash were as
follows:

<TABLE>
<CAPTION>
                                                                                 Amount
                                                                            ------------------
<S>                                                                         <C>
           Sales of common stock                                                   $  443,000
           Proceeds from commitments to deliver common stock                          671,000
           Sales of convertible notes payable                                         100,000
           Sales of convertible notes payable subject to rescission rights            300,000
           Proceeds from notes payable                                                 65,000
           Proceeds from notes payable- related parties                               433,000
           Collection of equity subscription receivable                               425,000
                                                                            ------------------
                                                                                  $ 2,437,000
                                                                            ------------------
</TABLE>

As of October 31, 2004, accounts payable increased to $919,000, an increase of
$341,000 over the amount outstanding as of fiscal year ended April 30, 2004. A
great part of this increase was due to our taking delivery of inventory
components in October 2004, which required payment the next month. This occurred
during a tightened cash position, which required us to delay payments to other
service providers and vendors. In November, we improved our cash position and
were able to reduce accounts payable to a historically standard level. Included
in the total balance of accounts payable are significantly aged amounts that are
being evaluated for legitimacy. Accrued expenses of $124,000 as of October 31,
2004 consisted primarily of $74,000 for accrued legal fees and a $50,000 fee
payable to an investment bank.

The fee payable to the investment bank was accrued upon execution of an
agreement in August 2003, pursuant to which we would receive a guarantee to
support our bid for a $1,600,000 grant under a contract with the U.S. Navy. In
exchange for a suitable guarantee, the Company was obligated to pay the
investment bank a fee, which ranged from $50,000 to $150,000, depending upon
whether or not the contract with the U.S. Navy was awarded to us. A guarantee
was provided to the U.S. Navy in which the investment bank committed to fund
between $2.5 million and $4 million through common stock purchases, so that we
could demonstrate sufficient funding to perform against the 18-month contract.
Although, we had been approved for the grant of $1,600,000, the Contracting
Office of the Naval Surface Warfare Center ultimately disqualified us on the
basis of our financial condition.

As of October 31, 2004, we accrued a payroll and payroll tax liability for the
most recent period of $50,000, and accrued $8,000 interest for a payroll tax
liability, bringing the total liability to $409,000 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. We had previously reported an accrual of $350,000
for the fiscal year ended April 30, 2002, which we subsequently reversed in
fiscal year 2003 based on our belief that the Company had no liability for
payroll taxes and penalties predicated upon information supplied by a tax
consultant. At that time, the value originally assigned to the stock was nil, as
Microdevices was a closely held corporation with negative net worth, no
prospective earnings power, no marketable product, and no dividend paying
capacity. In August 2004, following a reassessment, we engaged additional tax
advisors to determine if the Microdevices shares had a determinable value. Based
upon their determination, we recognized a payroll tax liability which now stands
at $409,000 as calculated, including penalties and interest. See Note 8 to our
unaudited Consolidated Financial Statements.


                                       56
<PAGE>

As of October 31, 2004, we were in default on a note payable totaling $40,000
with a shareholder and related party. The note payable has been in default since
November 1997.

As of October 31, 2004, we have issued unsecured convertible promissory notes
totaling $673,000 to our former legal counsel. The legal fees were expensed as a
general and administration expense in the periods incurred. The notes bear 10%
interest and are due in April and June of 2005.

An investor in our common stock has the option to purchase an additional
$650,000 worth of common stock. The additional purchases can be made at any time
prior to the underlying common stock being registered, provided our stock price
equals or exceeds $0.92. The agreement also provides for the issuance of
warrants to purchase up to 1,648,086 shares at varying terms. The exercise
prices of these warrants range between $0.83 and $1.65, and the warrants expire
between 120 days and three and one-half years after issuance.

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

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

During the six months ended October 31, 2004, we issued to investors $6,000 of
CNP as a penalty for the delay of an effective registration statement for their
underlying stock. The notes have a two-year term, bear interest at 5% per annum
and convert into stock at $0.45 per share. The above sale of CNP and issuance as
a penalty bring our total CNP balance to $542,000 as of October 31, 2004.
Excluding accrued interest, the notes would be convertible into approximately
1,204,444 shares of our common stock.

During the period from April 2003 through June 2003, we sold common stock at
prices between $0.33 and $0.35 per share, which are subject to buy-back. As of
October 31, 2004, 2,000,000 shares remain subject to buy-back; however,
information provided by our transfer agent indicates that many of these shares
have been sold by the original purchaser. We have reserved a current liability
of $694,000 for these shares and will continue to record the potential
repurchase obligation as a liability until the two-year waiver period has
lapsed.

During the fiscal year ended April 30, 2004, we sold 2,066,320 shares of common
stock that may be subject to rescission rights. See "Note 13 - Sales of Common
Stock Subject to Rescission." As of October 31, 2004, we have reserved a current
liability of $1,058,000 against these shares.

As of October 31, 2004, we had total liabilities of approximately $5.5 million,
which includes $2.3 million of liabilities related to rescission and buy-back
obligations on our securities. Since we currently have no sales revenue, and the
amount of liabilities significantly exceeds our cash on hand, we will be
required to continue to sell equity or debt instruments in order to pay present
liabilities and fund on-going operations.

Between May and August 2004, we sold 347,355 shares of common stock at various
prices raising $443,250, net of finders' fees. The sales included warrants to
purchase 261,151 of our common shares with exercise prices between $2.50 and
$2.75. In addition to a cash fee of $31,750, we also paid a finders fee in the
form of warrants to purchase 4,420 of our common shares exercisable at prices
between $2.50 and $2.75.


                                       57
<PAGE>

In September, we committed to issue 71,739 shares of common stock and a warrant
to purchase an additional 23,913 common shares for a subscription receivable of
$33,000. The subscription receivable was paid to a law firm as a deposit on our
behalf.

In October 2004, we committed to issue 1,436,426 shares of common stock for
proceeds of $661,000. The stock was committed at $0.46 per share and included
warrants to purchase 718,214 shares of common stock at $0.82. Also in October
2004, we committed to issue 21,277 shares of common stock for proceeds of
$10,000. The stock was committed at $0.47 per share and included a warrant to
purchase 7,092 shares of common stock at $1.00.

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

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

<TABLE>
<CAPTION>
                                                                        Minimum         Annual
                                  Beginning           Ending            Monthly         Minimum
         Commitments                 Date              Date              Cost            Cost        Status
--------------------------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>              <C>              <C>           <C>
Employment agreement
  with Chairman and CEO         January 2002       December 2006      $  18,820       $  225,600    In effect

Building lease agreement        September 2002     September 2005     $  12,623       $  151,476    In effect

Investor relations services     January  2004      June 2004          $   5,000       $   60,000    Month-to-Month

Public relations services       November  2002     February 2003      $  12,500       $  150,000    Month-to-Month
</TABLE>


                                       58
<PAGE>

PLAN OF OPERATION

Our continuing corporate objective for the remainder of fiscal 2005 is to
commercialize and bring to market our explosives identification prototypes,
which include the CarBomb Finder and the newly designed SIEGMA system.
Additionally, we expect to continue with research and development activities
focused on the design, testing and development of sensor systems incorporating
our proprietary "stoichiometric" technologies for numerous governmental and
commercial applications and markets.

During the quarter, we received significant positive feedback as to the
potential demand for our explosives identification products and have increased
activity and directed resources toward both direct and indirect sales and
marketing of our products domestically and overseas. Although we have not
finalized a comprehensive marketing plan, we have entered into discussions with
various distributors and resellers specializing in the security industry, as
well as potential partners in developing some key geographic markets and
verticals. We have also commenced with the development of an aftermarket service
strategy, which intends to cover warranty and service, maintenance,
certification, licensing, export policy, product liability and customer service.
In line with this strategy, we are negotiating and have entered into certain
outsourcing servicing arrangements. In August 2004, we entered into a teaming
agreement with a global maintenance company, and in October 2004, we submitted
our technology for coverage under the Safety Act. During the second half of
fiscal year 2005, we intend to continue to rely on outside specialists involved
in certification, inspection, and risk management.

Initial assembly of any orders will be performed at our research and development
facility located in Irvine, California. Assembly at this facility will be
limited, and we may be required to outsource certain functions and/or hire
additional technicians as needed. We are currently seeking a location to serve
as our principal assembly facility and have contracted with an engineering and
construction company to help facilitate the location and design, as well as
create and implement an optimal manufacturing plan. We are currently reviewing
different locations and expect to make a final decision as to a location within
the fiscal year. We are seeking approximately 60,000 square feet of space, which
will allow us to expand production. Preliminary marketing data suggests a strong
demand for commercial versions of our explosion detection prototypes.
Accordingly, we will scale production to meet that demand. Construction and/or
build-out costs are estimated to fall between $1 million and $2.5 million and we
are negotiating with local municipalities and state agencies for monetary
incentives to locate a facility to their area. If we decide to move forward on
the manufacturing plan delivered, and have available to us the required capital,
we expect that a facility will be operational in calendar year 2005.

In the current period, we acquired components in anticipation of future assembly
and sale. Although we remain adverse to building inventories, due to the
lead-time for the delivery of components from vendors and the perceived demand
for our products, we have estimated that in order to meet orders we will require
at any one time sufficient components to deliver at least 5 to 10 units of our
explosive detection systems to buyers. In order to control inventory risk, we
will continue to identify and seek to engage additional sources of components in
order to reduce limit or eliminate our exposure to single-source suppliers and
protracted delivery schedules.

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

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


                                       59
<PAGE>

We anticipate significant increases in personnel requirements throughout our
organization. Our production facility, when operational, will require the hiring
or contracting of approximately 40 new personnel. As we begin the
commercialization phase of our products and expand our operating structures,
significant enhancements to corporate management will also be necessary. We
anticipate the need to hire individuals to manage the product engineering,
manufacturing and distribution functions, and to fill and upgrade key executive
positions in the second half of fiscal 2005, including, among others, a Chief
Financial Officer. Other areas that may require additional personnel include
sales and marketing and customer service. 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 some assembly and
distribution.

Historically, we have financed operations with periodic cash infusions through
various financing vehicles. The uncertainties of securing financing has limited
our capacity to make greater investments in research and development, inventory
and component procurement, and human resources, as well as the commercialization
of our products. We are currently negotiating a larger capital infusion in the
range of $2 to $4 million, and we estimate that our total financial requirements
for fiscal 2005 will be between $8 and $10 million. This will cover facility
build out, inventory procurement, and operations. Although we have been able to
raise capital through self-managed private placements of our equity, we
currently do not have an institutional commitment to raise the additional
capital necessary to meet these financial requirements as of the date of this
Report.


                                       60
<PAGE>

RISKS RELATED TO OUR BUSINESS

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

GENERAL BUSINESS RISKS

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED STOCKHOLDERS' DEFICIT OF $
$28,379,000 AS OF OCTOBER 31, 2004, AND WE MAY NEVER ACHIEVE PROFITABILITY.

We have not generated any revenue from operations during the past two fiscal
years, and we have incurred net losses available to common stockholders every
year since our inception, including $8,183,346 for the year ended April 30, 2004
and $6,563,404 for the six months ended October 31, 2004. 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 and the
SIEGMA. 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 $270,000, 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 and SIEGMA 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.


                                       61
<PAGE>

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 and SIEGMA devices, and
are preparing to introduce our first commercial products, which include the
CarBomb Finder 3C3 and the CarBomb Finder 3C4 models, as well as the SIEGMA E3E,
we have made no sales of our initial product other than one order placed by our
exclusive distributor in the Middle East, EEMCO, which is owned by one of our
Directors, and the device will be priced effectively at our cost to manufacture
the item with no allocable profit to us. Because of that situation, and that the
markets of the CarBomb Finder and SIEGMA remain largely untested and undefined
in general, we are still classified as a development stage company with a
limited operating history. Since April 25, 2002, we have focused our resources
on the development of products using our proprietary stoichiometric technology.
We believe that we are the only company working on a commercial product using
stoichiometric technology, and so there is no proven market for our products
once development is complete. To date, we have no commercialization experience
with our technology, and it is difficult to evaluate our prospects for sustained
growth and profitability. Our future success is more uncertain than if we had a
more established and proven history of operations and greater experience in
executing similar business strategies. Furthermore, it is expected that our
current business and marketing approach will be modified from time to time, as
we continue to assess the markets and applications for our technology as well as
evaluate prospective customer interest. No assurance can be made that the
current strategies or any future changes in our business model, and the
marketing of products, will be met with success. For the last two fiscal years
we have not generated any significant revenues and, as a result, we have limited
resources and our potential ability to generate and maintain income also remains
unproven.

THE COMMERCIAL VIABILITY OF THE CARBOMB FINDER AND SIEGMA 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 device to
detect explosives, other than in demonstrations. We have not had independent
testing of the CarBomb Finder 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 and SIEGMA 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 and SIEGMA, 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 and SIEGMA devices and we have difficulty
attracting and maintaining customers, our ability to generate revenues will be
adversely affected. We also have not had the ability to undertake extensive
testing in real-world situations, and cannot with certainty explain how the
device would be impacted by severe weather, burning or excessive heat, a wartime
environment, various topographies or other circumstances which maybe of
particular importance to certain prospective customers or in certain regions.
Without internal data in respect of these kinds of testing, customers may be
reluctant to spend the funds necessary to purchase our CarBomb Finder, SIEGMA,
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.

WE HAVE LIMITED RESOURCES TO DEVOTE TO PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. IF THE COMMERCIALIZATION OF THE CARBOMB FINDER AND SIEGMA
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 and SIEGMA devices. 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 and SIEGMA;

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

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

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


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      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
            and SIEGMA;

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

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

We have introduced our prototype devices, the CarBomb Finder and SIEGMA, only
recently, and all other applications of our technology are still in the early
stages of development. These include, at present, our BombSquad Detector, our
Unexploded Ordnance Sensor, our Anti-tank Landmine Detector and our
Refractorymeter. For the fiscal year ended April 30, 2004, we spent $804,000, or
14% of total operating expenses on research and development, and for the six
months ended October 31, 2004 and October 31, 2003, we spent $434,644 or 13% and
$337,077 or 13%, respectively, of total operating expenses on research and
development. For the fiscal year 2004, we spent $4,796,000, or 86% of total
operating expenses, on general and administrative expenses and for the six
months ended October 31, 2004 and 2003, we spent $1,684,873, or 88% and
$962,921, or 91%, respectively, of total operating expenses, on general and
administrative expenses. We anticipate an increase in general and administrative
expenses due to additional operating expenses demanded for commercialization of
the CarBomb Finder and SIEGMA. We anticipate research and development costs to
stay approximately at the same level, to the extent that independent testing of
the CarBomb Finder and SIEGMA devices will be required in order to obtain
approvals from regulatory authorities or gain better market acceptance by
industry partners or governmental officials.

If we fail to commercialize the CarBomb Finder and SIEGMA, 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 commercialization of the
CarBomb Finder and SIEGMA devices that proves unsuccessful may delay or
jeopardize the development of other products. The development of new products
may require time and financial resources much greater than what we currently
anticipate and, despite significant investments in research and development, may
not yield commercially successful products. The development of our products for
the detection of explosives, illicit drugs, biological agents and other
contraband is highly complex.

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

Our independent certified public accountants qualified their opinion contained
in our consolidated financial statements as of and for the years ended April 30,
2004, 2003 and 2002 to include an explanatory paragraph related to our ability
to continue as a going concern, stating that "during the year ended April 30,
2004, we incurred a net loss available to common stockholders of $8,183,346, and
had negative cash flows from operations of $2,846,157. In addition, we had an
accumulated deficit of $21,815,596 and were in the development stage as of April
30, 2004. These factors, among others, as discussed in "Note 3- Going Concern"
to our consolidated financial statements, raise substantial doubt about our
ability to continue as a going concern." The auditors recognize that the cash
flow 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, SIEGMA, 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 a sufficient capital due to economic conditions, we
may be unable to finalize development of our detection systems under government
contracts and to bring them to military, civil or commercial markets as planned.


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

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 and SIEGMA 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 and SIEGMA, 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 and SIEGMA 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 Finders and/or
SIEGMA 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 AND SIEGMA (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 and SIEGMA devices, including neutron generators with custom
modifications and certain sub-assemblies. We have placed orders for these key
components for the first 10 CarBomb Finders and/or SIEGMAs from a small number
of sources. For example, we obtain the standard sealed tube neutron generators
we use from a single source, EADS-Sodern, on a purchase order basis, and the
sub-assemblies from a single source, PMB 322, on a purchase order basis. We
believe that alternative sources for these components in the event of a delay or
interruption in supply would be readily available on a timely basis, however,
any inability by us to find alternative sources of key components, alternative
third party manufacturers or sub-assemblers, or sufficient quantities of these
key components, would impair our ability to manufacture and sell the CarBomb
Finder and SIEGMA 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 and SIEGMA. 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 and SIEGMA 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.


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

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

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

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

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


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

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

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

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

We have incurred net losses since our inception. For the fiscal year ended April
30, 2004 and the six months ended October 31, 2004, we reported net losses
available to common stockholders of $8,183,346 and $6,563,404, respectively, as
compared to a net loss available to common stockholders of approximately
$6,771,471 for the fiscal year ended April 30, 2003 and $2,904,809 for the six
months ended October 31, 2003. Our accumulated deficit through October 31, 2004
is $28,379,000. We expect that our losses will continue into fiscal year 2005.
We estimate that our financial requirements will be between $8,000,000 and
$10,000,000, until we can generate sufficient revenues from sales to cover our
operating costs. One of the factors for the continuation of such anticipated
losses is that we are highly dependent on governmental customers, which
typically require long lead times before sales are made.

MARKETING RISKS

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

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

WE HAVE GRANTED A THIRD PARTY SUBSTANTIAL MARKETING RIGHTS TO THE CARBOMB FINDER
AND SIEGMA DEVICES IN AN IMPORTANT MARKET. IF THE THIRD PARTY IS UNSUCCESSFUL IN
MARKETING THE CARBOMB FINDER AND SIEGMA, 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 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 to
any other entity to make sales within that specific territory. If EEMCO meets
its minimum sales requirement by August 2005, it will not be required to do
anything further to retain its exclusivity for that product. Although we have
the right to terminate the agreement upon 60 days notice for any reason, or
immediately if there is a material breach, there may be significant costs
associated with extricating ourselves from the agreement and market share could
be compromised if a smooth transition to another distributor is not made.


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INTELLECTUAL PROPERTY RISKS

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

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

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

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.


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

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

REGULATORY AND LEGAL RISKS

THE CARBOMB FINDER, SIEGMA, 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, SIEGMA, AND FUTURE
PRODUCTS.

Our CarBomb Finder, SIEGMA, 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, SIEGMA 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.


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

IF FUTURE PRODUCTS, SUCH AS THE CARBOMB FINDER AND SIEGMA, 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.

WE HAVE RECEIVED A WELLS NOTICE AND REQUESTS FOR INFORMATION FROM THE SEC. WE
COULD BE REQUIRED TO PAY CIVIL PENALTIES AND BE SUBJECT TO A PERMANENT
INJUNCTION.

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


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

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

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

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

UNDER THE FEDERAL SECURITIES LAWS, PURCHASERS OF OUR COMMON STOCK IN A PRIOR
PRIMARY OFFERING MAY HAVE THE WAIVABLE RIGHT TO SELL THEIR SHARES BACK TO THE
US.

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


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

UNDER THE FEDERAL SECURITIES LAWS, THE PRIVATE OFFERING OF OUR SECURITIES BY US
WHILE CERTAIN SELLING STOCKHOLDERS' SHARES WERE IN REGISTRATION WITH THE SEC MAY
BE DEEMED TO BE "INTEGRATED" UNDER THE FEDERAL SECURITIES LAWS OF THE UNITED
STATES, AND PURCHASERS OF SHARES THROUGH THE PRIVATE OFFERING MAY DEMAND
RESCISSION OF THE OFFERING.

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

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

While the Company has not completed any independent investigation into whether
or not the rescission rights are in fact due to certain shareholders or whether
or not there may be defenses which could negate the requirement to offer
buy-back or rescission rights to prior investors. Based upon certain advice it
has received, the Company recorded $1,058,156 from the sales of 2,066,320 shares
of common stock during this period when the registration statement was on file,
as a liability as of October 31, 2004.


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

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, 2004, Dr. Bogdan C. Maglich , our Chief Executive Officer,
Chairman, Chief Scientific Officer, Treasurer and President, beneficially owns
approximately 24 % of our outstanding shares as of the date of this Report.
Accordingly, he has a substantial influence in determining the outcome of
certain corporate transactions or other matters submitted to stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of our assets, the election of directors, and other significant corporate
actions. He also has the power to prevent or cause a change in control. It is
assumed that in certain instances the interests of Dr. Maglich may differ from
the interests of the other stockholders, and may limit the ability of other
stockholders to affect our management and affairs.

WE HAVE IDENTIFIED AREAS OF WEAKNESSES IN OUR INTERNAL CONTROLS WHICH EXISTED AT
THE END OF OUR FISCAL YEAR ENDED APRIL 2004. ALTHOUGH WE HAVE TAKEN STEPS TO
REMEDY THESE WEAKNESSES, OUR ABILITY TO IMPLEMENT AND MAINTAIN A FULL SYSTEM OF
INTERNAL CONTROLS AND PROPER CORPORATE GOVERNANCE WILL DEPEND UPON OUR ABILITY
TO ATTRACT BOTH CAPITAL AND HUMAN RESOURCES, AND IF WE ARE UNSUCCESSFUL WE RISK
BEING IN VIOLATION OF OUR PUBLIC COMPANY REPORTING OBLIGATIONS IN THE FUTURE,
WHICH COULD GIVE RISE TO POTENTIAL REGULATORY AND/OR SHAREHOLDER ACTIONS THAT
COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS AND FINANCIAL CONDITION,
AND THE MARKET VALUE OF OUR STOCK.

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


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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.

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

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

RISKS RELATED TO OUR STOCK

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

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

The amount of the penalties paid or accrued as a result of the defaults
described above through November 30, 2004 is 1,607,618 shares of common stock,
$20,000 in aggregate face amount of additional convertible notes, and warrants
to purchase an additional 1,466,869 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;

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


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<PAGE>

      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, 2004, we identified an additional payroll tax liability of
$400,734 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 $400,734 payroll tax liability by treating this sale as an
arms length transaction and recognizing employment taxes, withholding
requirements, penalties and interest. We engaged tax advisors regarding the
nature of our obligations, and we plan to settle this liability as soon as we
have the resources to do so.

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

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

We issued 456,717 options to Dr. Bogdan Maglich in fiscal year 2003 and 313,221
options in fiscal year 2004 for services rendered as our Chief Executive
Officer, President, Treasurer, Chief Scientific Officer and Chairman, pursuant
to his employment contract. We also issued 32,455 shares of our common stock,
1,400,000 options and 1,695,686 warrants to various consultants in fiscal year
2003 and 558,500 shares, 2,358,221 options and 7,787,068 warrants in fiscal year
2004. Likewise, we issued notes payable to our former legal counsel during
fiscal years 2003 and 2004 that are convertible into 693,726 shares of common
stock as of April 30, 2004. Under the terms of Dr. Maglich's employment
agreement, we are obligated to issue options to Dr. Maglich annually for the
term of the agreement. Continued issuances of securities of this magnitude may
have a dilutive effect on the market price for our common stock and of the
percentages of ownership of stockholders, if the options and warrants are
exercised, or the notes are converted. The terms upon which we will be able to
obtain additional equity capital could also be adversely affected.


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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 are 42,189,004 shares of our common stock outstanding as of December 17,
2004, which does not include 20,731,751 new shares we have committed to issue
upon exercise of options and warrants and convertible notes. If we issue all of
the shares underlying currently outstanding warrants, options and convertible
notes, this will result in approximately 29% dilution of the ownership interest
of holders of our common stock. If all currently outstanding warrants, options
and convertible notes were immediately exercised and converted, we would receive
approximately $16,200,707 in cash and approximately $1,305,797 in forgiveness of
indebtedness. While this amount exceeds the current market value of the stock
that would be issued, exercise and conversion might take place when the total
value received by us is much less than the market value of the stock that would
be issued. Under our current business plan, we must also raise funds in part by
issuing new equity securities, which would have a dilutive effect on the
percentage ownership of stockholders. The shares issued in such transactions
could be very large and may even exceed the number of shares issued and
outstanding today, which would significantly decrease the percentage ownership
of current stockholders. Our requirement for new equity capital for the
financing of operating deficits will continue until we successfully
commercialize a product and achieve a sufficient level of positive operating
cash flow. Possible costs that would require funding include investments in
capital equipment, technology and research and development, marketing
initiatives, inventory, accounts receivable and human resources, as well as
financial contributions toward potential joint ventures, acquisitions,
collaborative projects and other general corporate purposes.

We also intend to issue up to 459,222 shares of our common stock in exchange for
the remaining 20,540 shares of the common stock of HiEnergy Microdevices, our
majority-owned subsidiary, on substantially the same terms as the voluntary
share exchange by which we acquired 92% of HiEnergy Microdevices' common stock.
We also may issue up to 324,020 additional shares of our common stock to former
holders of options and warrants to acquire HiEnergy Microdevices common stock.
We may be required to sell restricted equity securities at prices less than the
market price for unrestricted shares. We have thus far sold restricted equity
securities at prices less than prevailing market prices of our stock and have
issued convertible debt. When the shares that are issuable in connection with
those securities become available for public sale, the additional supply of
shares may adversely affect the market price of our common stock. Also, our
anticipated private financings and the exercise or conversion of securities
outstanding may dilute the voting or other rights of other holders at the time,
or be prior and senior or receive rights that the holders of common stock do not
have, which could reduce the economic value of our common stock.

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

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

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

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


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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.

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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                         ITEM 3. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this Form 10-QSB, Dr.
Bogdan C. Maglich, serving in his capacity as our CEO and Treasurer, carried out
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 5d-14(c).
Based upon his review, Dr. Maglich concluded that our disclosure controls and
procedures during our fiscal quarter ended October 31, 2004 have improved and
have become more effective than the prior period in alerting us on a timely
basis to material information relating to the Company which is required to be
included in our reports filed under the Securities Exchange Act. Notwithstanding
the improvements, several deficiencies present during the prior period continue
to affect our ability to file periodic reports on schedule. These deficiencies
derive from three primary problems: (1) a general lack of corporate governance
due to a lack of resources and manpower, and an inability to create an effective
segregation of duties due to the requirement of Dr. Maglich to perform too
numerous corporate and business functions simultaneously; (2) a lack of general
oversight through a more systematic and formal approach to the conduct of our
corporate, financial and business affairs; and (3) the lack of a full-time and
experienced chief financial officer.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Since April 30, 2004, the Company has worked diligently, including with our
legal and other professional advisors and our auditors, to address these
deficiencies, which we have taken very seriously. In August 2004, our Board of
Directors was joined by three new members, William A. Nitze, Col. William J.
Lacey, Jr., and Peter J. Le Beau, who collectively bring diverse and significant
experience to us in a variety of areas including corporate governance and
financial accounting and controls. Mr. Le Beau has been designated as the
"financial expert" on our Audit Committee. We have also obtained new
professional assistance, both independent and in-house, designed to help us
improve our corporate governance, public company reporting and other activities
generally. Finally, our Board has determined, subject to our receipt of adequate
financing to support its efforts, to undertake an executive search to recruit a
full-time Chief Financial Officer with public company experience.

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

                           PART II - OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

PHILIP GURIAN AND BARRY ALTER: OUR REVERSE TAKEOVER.

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


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

BARRY ALTER

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

YEFFET SECURITY CONSULTANTS, INC.

HiEnergy is currently arbitrating a dispute with a former consultant, Yeffet
Security Consultants, Inc. ("YSCI"). We entered into a consulting agreement with
YSCI in July 2002. Under the terms of this agreement, YSCI was to provide
consulting services to us to further our marketing and business objectives. On
October 29, 2003, we notified Yeffet Security Consultants that we were
terminating its contract on the grounds of inadequate performance. YSCI alleged
that we breached the consulting agreement and is seeking to recover $449,540.91.
We deny this allegation and intend to defend it vigorously in arbitration.
Depositions in this matter have been set to begin on December 15, 2004 in New
Jersey.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

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


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

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

FILED COMPLAINT

On October 19, 2004, the Company learned about a Complaint filed in federal
court in Orange County, California, and which is styled as a "Complaint for
Violation of Federal Securities Laws (Class Action)". As of the date of this
Report the Company has not been served in connection with the Complaint. On
November 2, 2004, we filed a notice of claim with our D&O insurance carrier with
regard to the Complaint. Neither the Company nor its legal counsel have yet had
an opportunity to study the Complaint, and therefore cannot make any
determination as to the merit of any of the claims asserted, possible defenses
to any such claims, or any other aspect of the lawsuit.


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                          ITEM 2. CHANGES IN SECURITIES

SET FORTH BELOW IS INFORMATION REGARDING THE ISSUANCE AND SALE OF UNREGISTERED
SECURITIES DURING THE THREE-MONTH PERIOD ENDED OCTOBER 31, 2004, EXCLUDING
ISSUANCES PREVIOUSLY INCLUDED IN A CURRENT REPORT ON FORM 8-K

      o     In October 2004, we committed to issue 15,000 Shares to the board
            members of HiEnergy Technologies, Inc. as compensation for meeting
            attendance. We believe the issuances of these securities are exempt
            under Section 4(2) under the Securities Act.

      o     In October 2004, we committed to issue 267,885 shares of our common
            stock, par value $0.001 ("Shares"), and warrants to purchase 182,982
            Shares at various exercise prices, to various holders of securities
            with registration rights as penalties, due to our inability to file
            and maintain effective a registration statement within certain
            specified deadlines. We believe the issuances of these securities
            are exempt under Section 3(a)(9) of the Securities Act.

      o     In September 2004, we committed to issue 15,000 Shares to the board
            members of HiEnergy Technologies, Inc. as compensation for meeting
            attendance. We believe the issuances of these securities are exempt
            under Section 4(2) under the Securities Act.

      o     In September 2004, we committed to issue 286,573 shares of our
            common stock, par value $0.001 ("Shares"), and warrants to purchase
            182,468 Shares at various exercise prices, to various holders of
            securities with registration rights as penalties, due to our
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities are exempt under Section 3(a)(9) of the Securities
            Act.

      o     In September 2004, the Company committed to issue 71,739 shares of
            common stock and warrants to purchase 23,913 shares of common stock
            with an exercise price of $1.00 in a related party transaction to
            Mr. William Nitze in exchange for $33,000 in cash. We believe the
            issuances of these securities were exempt under Regulation S and/or
            Section 4(2) under the Securities Act.

      o     In September 2004, we issued 192,308 shares of common stock at $0.52
            per share to Maria Pilar Galera Escobedo upon conversion of a
            convertible note payable for $100,000. We believe the issuances of
            these securities were exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In August 2004, we committed to issue 264,231 shares of our common
            stock, par value $0.001 ("Shares"), and warrants to purchase 176,174
            Shares at various exercise prices, to various holders of securities
            with registration rights as penalties, due to our inability to file
            and maintain effective a registration statement within certain
            specified deadlines. We believe the issuances of these securities
            are exempt under Section 3(a)(9) of the Securities Act.

      o     In August 2004, we committed to issue warrants to purchase 6,933
            Shares with an exercise price of $1.51 to Julian Eguizabal
            Echeverria as a consulting and finder's fee. We believe the
            issuances of these securities are exempt under Regulation S and/or
            Section 4(2) under the Securities Act.

      o     In August 2004, we committed to issue 21,000 Shares to the board
            members of HiEnergy Technologies, Inc. as compensation for meeting
            attendance. We believe the issuances of these securities are exempt
            under Section 4(2) under the Securities Act.


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                          ITEM 6. EXHIBITS AND REPORTS

EXHIBIT INDEX


EXHIBIT NUMBER    DESCRIPTION

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

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

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

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

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

4.1.1(5)          Specimen Common Stock Certificate

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

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

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

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

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

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

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

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

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

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

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

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

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


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<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.17.1(6)        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*


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<PAGE>

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.

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


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<PAGE>

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       86
<PAGE>

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 issued in
                  connection with the sale of restricted shares to various
                  accredited investors and HiEnergy Technologies, Inc., dated
                  October 18, 2004

10.80(22)         Form of Debt Conversion Agreement and Warrant between Maglich
                  Family Holdings and HiEnergy Technologies, dated November 19,
                  2004

10.80             Consulting Agreement dated November 22, 2004 between Don Abbe
                  and HiEnergy Technologies, Inc., filed herewith

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

*     Indicates a management compensatory plan or arrangement.

(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.


                                       87
<PAGE>

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

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

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

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

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

(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 October 31,
      2003, and incorporated herein by reference.

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

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

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

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

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

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

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

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

(21)  Filed on November 30, 2004 as exhibit 99.1 to HiEnergy Technologies'
      current report on Form 8-K dated May 17, 2004 and incorporated herein by
      reference.

(22)  Filed on November 30, 2004 as exhibit 99.2 to HiEnergy Technologies'
      current report on Form 8-K dated May 17, 2004 and incorporated herein by
      reference.


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<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 17, 2004           By: /s/ Bogdan  C. Maglich
      -----------------------            -------------------------------------
                                         Bogdan C. Maglich,
                                         Chief Executive Officer, President,
                                         Treasurer and Chief Scientific Officer
                                         (Principal Executive Officer and
                                         Principal Financial Officer)

                                       89