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 July 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


                 1601B ALTON PARKWAY, IRVINE, CALIFORNIA 92606
                    (Address of principal executive offices)


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


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 15, 2004, the issuer
had 36,180,087 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 JULY 31, 2004

                         PART I - FINANCIAL INFORMATION

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

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

                Consolidated Statements of Operations for the three months ended
                July 31, 2004 and 2003 (unaudited) and for the Period from
                August 21, 1995 (Inception) to July 31, 2004 (unaudited)                4

                Consolidated Statements of Shareholders' Equity (deficit) for
                the Period from August 21, 1995 (Inception) to July 31, 2004
                (unaudited)                                                             5

                Consolidated Statements of Cash Flows for the three months ended
                July 31, 2004 and 2003 (unaudited) and for the Period from
                August 21, 1995 (Inception) to July 31, 2004 (unaudited)               31

                Notes to the Consolidated Financial Statements (unaudited)             33

Item 2          Management's Discussion and Analysis and Plan of Operation             60

Item 3          Controls and Procedures

PART II - OTHER INFORMATION

Item 1          Legal Proceedings                                                      89

Item 2          Changes in Securities                                                  92

Item 3          Default Upon Senior Securities

Item 4          Submission of Matters to a Vote to Security Holders

Item 5          Other Information

Item 6          Exhibits and Reports on Form 8-K                                       94

SIGNATURES
</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               July 31,          April 30,
                                                                                2004              2004
                                                                             (unaudited)
                                                                             ------------      -------------
<S>                                                                          <C>               <C>
 CURRENT ASSETS
    Cash and cash equivalents                                                $      7,688      $     42,857
    Accounts receivable                                                            60,824            30,412
    Other current assets                                                          171,910           224,817
                                                                             ------------      ------------

           Total current assets                                                   240,422           298,086
                                                                             ------------      ------------

PROPERTY AND EQUIPMENT, net                                                       758,664           610,468
                                                                             ------------      ------------

TOTAL ASSETS                                                                 $    999,086      $    908,554
                                                                             ============      ============


CURRENT LIABILITIES
    Accounts payable                                                         $    639,266      $    578,283
    Accrued expenses                                                               92,417            88,291
    Accrued payroll and payroll taxes                                             430,037           458,204
    Accrued interest                                                               98,663            74,173
    Notes payable                                                                  13,007            12,368
    Notes payable - related parties                                               306,000           348,934
    Convertible notes payable - related parties                                   673,083           609,374
    Convertible notes payable subject to rescission rights                        539,000           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                                                      67,183                --
                                                                             ------------      ------------

           Total current liabilities                                            4,610,812         3,732,780

LONG-TERM LIABILITIES
    Notes payable                                                                   1,435             1,942
    Convertible note payable - related party                                           --            38,061
                                                                             ------------      ------------

           Total liabilities                                                    4,612,247         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 31,921,459 and 30,652,482 shares issued and outstanding           31,920            30,652
    Additional paid-in capital                                                 22,302,808        19,181,421
    Deferred compensation                                                        (180,757)         (459,308)
    Committed common stock,  149,631 and 101,986 shares, respectively             158,030           179,679
    Deficit accumulated during the development stage                          (25,944,085)      (21,815,596)
                                                                             ------------      ------------

           Total shareholders' deficit                                         (3,632,084)       (2,883,152)
                                                                             ------------      ------------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                  $    999,086      $    908,554
                                                                             ============      ============

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

                                       3
<PAGE>

                                    HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
                                                   (DEVELOPMENT STAGE COMPANIES)
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE THREE MONTHS ENDED JULY 31, 2004 AND 2003 AND
                FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JULY 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   For the
                                                                                 Period from
                                                                                 August 21,
                                                                                    1995
                                                For the Three Months Ended      (Inception) to
                                              -------------------------------
                                                 July 31,         July 31,         July 31,
                                                   2004             2003             2004
                                                                  Restated
                                               (unaudited)       (unaudited)      (unaudited)
                                              -------------     -------------   --------------
<S>                                           <C>               <C>               <C>
 OPERATING EXPENSES
      General and administrative              $  1,684,873      $    962,921      $ 17,332,448
      Research and development                     220,002            98,322         2,632,111
                                              ------------      ------------      ------------

TOTAL OPERATING EXPENSES                         1,904,875         1,061,243        19,964,559

LOSS FROM OPERATIONS                            (1,904,875)       (1,061,243)      (19,964,559)
                                              ------------      ------------      ------------

OTHER INCOME (EXPENSE)
      Interest income                                  136               364             9,033
      Other income                                                                       1,423
      Interest expense                            (755,677)           (5,225)       (1,334,650)
      Financing expense                                                               (223,710)
      Penalty expense on issuance of
       convertible promissory notes
       as a penalty for late registration           (3,000)                            (50,748)
      Penalty expense on issuance of
       common stock and warrants
       as a penalty for late registration       (1,465,073)          (11,679)       (2,938,457)
                                              ------------      ------------      ------------

Total other expense, net                        (2,223,614)          (16,540)       (4,537,109)
                                              ------------      ------------      ------------

LOSS BEFORE PROVISION FOR INCOME TAXES ..       (4,128,489)       (1,077,783)      (24,501,668)

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

NET LOSS                                      $ (4,128,489)     $ (1,078,583)     $(24,515,051)

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

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

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS     $ (4,128,489)     $ (1,661,826)     $(25,944,085)
                                              ============      ============      ============

Net loss per share                            $      (0.13)     $      (0.07)
                                              ============      ============

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

BASIC AND DILUTED LOSS AVAILABLE TO
      COMMON SHAREHOLDERS PER SHARE           $      (0.13)     $      (0.09)
                                              ============      ============

BASIC AND DILUTED WEIGHTED AVERAGE
      COMMON SHARES OUTSTANDING                 31,261,473        23,216,025
                                              ============      ============
</TABLE>

                                       4
<PAGE>

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

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

Balance, April 30, 1996  (Restated)                                                                      -                -

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

Balance, April 30, 1997   (Restated)                                                                     -                -

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

                                       5
<PAGE>

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

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

Balance, April 30, 1999   (Restated)                                                                     -                -

Issuance of common stock for cash                             05/03/99              $ 0.10
Issuance of common stock for services rendered                05/05/99              $ 0.10
Issuance of common stock for cash                             06/05/99              $ 0.56
Issuance of common stock for services rendered                06/09/99              $ 0.45
Issuance of common stock for services rendered                06/28/99              $ 0.45
Issuance of common stock for cash                             06/28/99              $ 0.02
Issuance of common stock for cash                             07/12/99              $ 0.52
Issuance of common stock for cash                             07/14/99              $ 0.28
Issuance of common stock for cash                             07/14/99              $ 0.56
Issuance of common stock for services rendered                07/22/99              $ 0.37
Issuance of common stock for services rendered                11/30/99              $ 0.42
Issuance of common stock for cash                             11/30/99              $ 0.39
Issuance of common stock for cash                             11/30/99              $ 0.56
</TABLE>


                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock for cash                             12/29/99              $ 0.56
Issuance of common stock for services rendered                03/20/00              $ 0.59
Issuance of common stock for cash                             04/03/00              $ 0.56
Issuance of common stock for services rendered                04/03/00              $ 0.59
Issuance of common stock for cash                             04/03/00              $ 0.72
Issuance of common stock for cash                             04/03/00              $ 0.89
Issuance of common stock for services rendered                04/10/00              $ 0.59
Issuance of common stock for services rendered                04/24/00              $ 0.59
Issuance of common stock for services rendered                04/26/00              $ 0.59
Net loss
                                                                                              ---------------------------------

Balance, April 30, 2000   (Restated)                                                                     -                -

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

Balance, April 30, 2001   (Restated)                                                                     -                -

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


                                       7
<PAGE>


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

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


                                       8
<PAGE>


<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock for services rendered                04/21/03              $ 0.48
Common stock committed for services rendered                  04/21/03              $ 0.48
Warrants issued for services rendered                         04/28/03              $ 0.37
Offering costs on issuance of common stock subject
      to buyback for cash                                     04/23/03
Offering costs on issuance of common stock subject
      to buyback for cash                                     04/28/03
Issuance of common stock for subscription receivable          04/30/03              $ 0.40
Common stock committed to investors as a penalty
     for delayed registration of common stock                 04/30/03              $ 0.45
Net loss
                                                                                              ---------------------------------

Balance, April 30, 2003   (Restated)                                                                 95.82              $ 1

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


                                       9
<PAGE>


<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock for services rendered                11/07/03              $ 1.25
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         11/15/03              $ 1.04
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             11/15/03              $ 0.52
Offering costs on issuance of common stock subject
     to rescission rights for cash                            11/21/03
Issuance of common stock for services rendered                11/21/03              $ 0.75
Stock options issued for services rendered                    12/05/03              $ 0.60
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         12/15/03              $ 0.90
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             12/15/03              $ 0.41
Issuance of common stock for cash                             12/22/03              $ 0.71
Issuance of common stock for services rendered                01/06/04              $ 0.89
Warrants issued for services rendered                         01/06/04              $ 0.59
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         01/15/04              $ 0.88
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             01/15/04              $ 0.39
Issuance of common stock on cashless
     exercise of warrants                                     01/15/04
Issuance of common stock for services rendered                01/15/04              $ 0.88
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         01/16/04              $ 0.89
Beneficial conversion feature on convertible
     notes payable - related parties                          01/16/04
Issuance of warrants in conjunction with
     convertible notes payable - related parties              01/16/04              $ 0.18
Issuance of common stock for services rendered                01/23/04              $ 1.18
Beneficial conversion feature on convertible
     notes payable - related parties                          01/26/04
Beneficial conversion feature on convertible
     notes payable - related parties                          01/28/04
Issuance of warrants in conjunction with
     convertible notes payable - related parties              01/28/04              $ 0.15
Issuance of common stock on cashless
     exercise of warrants                                     01/30/04
Beneficial conversion feature on convertible
     notes payable - related parties                          01/31/04
Issuance of warrants in conjunction with
     convertible notes payable - related parties              01/31/04              $ 0.12
Beneficial conversion feature on convertible
     notes payable - related parties                          01/31/04
Issuance of common stock on cashless
     exercise of warrants                                     02/04/04
Offering costs on issuance of common stock subject
     to rescission rights for cash                            02/06/04
Issuance of common stock for services rendered                02/06/04              $ 1.23
</TABLE>



                                       10
<PAGE>


<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         02/15/04              $ 1.25
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             02/15/04              $ 0.69
Issuance of common stock for services rendered                02/25/04              $ 1.26
Offering costs on issuance of common stock subject
     to rescission rights for cash                            02/25/04
Common stock committed for services rendered                  03/10/04              $ 1.42
Stock options issued for services rendered                    03/10/04              $ 0.55
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         03/15/04              $ 1.75
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             03/15/04              $ 1.13
Issuance of common stock on cashless
     exercise of warrants                                     03/15/04
Beneficial conversion feature on convertible
     notes payable - related parties                          03/16/04
Issuance of common stock for cash                             03/19/04              $ 0.75
Issuance of common stock on cashless
     exercise of warrants                                     03/23/04
Issuance of common stock for cash                             03/25/04              $ 0.75
Issuance of common stock for services rendered and
     to be rendered                                           03/25/04              $    -
Issuance of common stock for cash                             03/26/04              $ 0.75
Issuance of common stock on cashless
     exercise of warrants                                     04/01/04
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             04/01/04              $ 1.03
Warrants issued for services rendered                         04/07/04              $ 1.57
Issuance of common stock for services rendered                04/07/04              $ 2.95
Issuance of common stock on cashless
     exercise of warrants                                     04/12/04
Issuance of common stock for services rendered                04/12/04              $ 2.78
Issuance of common stock on cashless
     exercise of warrants                                     04/14/04
Issuance of common stock on cashless
     exercise of warrants                                     04/15/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         04/15/04              $ 2.55
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             04/15/04              $ 1.88
Issuance of common stock on exercise of warrants              04/16/04              $ 1.50
Warrants issued for services rendered
     and to be rendered                                       04/16/04              $    -
Issuance of common stock for services rendered
     and to be rendered                                       04/16/04              $    -
Beneficial conversion feature on convertible
     notes payable - related parties                          04/19/04
</TABLE>



                                       11
<PAGE>


<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock for cash                             04/20/04              $ 0.99
Issuance of common stock on cashless
     exercise of warrants                                     04/23/04
Issuance of common stock on cashless
     exercise of warrants                                     04/28/04
Warrants issued for services rendered                         04/29/04              $ 1.09
Common stock committed for legal settlement                   04/30/04              $ 1.28
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             04/30/04              $ 1.62
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                             04/30/04              $ 1.71
Common stock committed to investors as a penalty
     for delayed registration of common stock                 04/30/04              $ 1.85
Warrants accrued but not issued to investors as a
     penalty for delayed registration of the underlying
     common stock                                             04/30/04              $ 1.22
Amortization of deferred compensation
Net Loss
                                                                                              ---------------------------------

Balance, April 30, 2004                                                                                  -              $ -

Beneficial conversion feature on convertible
     notes payable                                            05/01/04
 Issuance of warrants in conjunction with
      convertible notes payable                               05/01/04              $ 0.10
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         05/01/04              $ 2.35
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock      05/01/04              $ 1.69
Issuance of common stock for services rendered                05/05/04              $ 2.19
Issuance of common stock for services rendered                05/07/04              $ 1.97
Offering costs on issuance of common stock                    05/10/04
Common stock committed for services rendered                  05/12/04              $ 1.87
Issuance of committed common stock to investors as
  a penalty for delayed registration of common stock          05/15/04              $ 1.85
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         05/15/04              $ 1.85
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock      05/15/04              $ 1.22
Issuance of common stock for cash                             05/21/04              $ 1.51
Offering costs on issuance of common stock                    05/25/04
Offering costs on issuance of common stock                    05/26/04
Amortization of deferred compensation                         05/31/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         06/01/04              $ 1.90
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock      06/01/04              $ 1.27
Issuance of common stock for cash                             06/01/04              $ 1.51
Issuance of common stock for cash                             06/01/04              $ 1.51
Issuance of common stock for cash                             06/04/04              $ 1.51
Issuance of common stock for cash                             06/07/04              $ 1.51
</TABLE>



                                       12
<PAGE>


<TABLE>
<CAPTION>
                                                                                  Price per            Series A Convertible,
                                                                                   Equity                Preferred Stock
                                                                Date                Unit             Shares           Amount
                                                             -------------------------------------------------------------------
<S>                                                          <C>               <C>
Issuance of common stock for cash                             06/07/04              $ 1.51
Issuance of common stock for cash                             06/07/04              $ 1.51
Offering costs on issuance of common stock                    06/10/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         06/15/04              $ 1.26
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock      06/15/04              $ 0.69
Common stock committed for services rendered                  06/16/04              $ 1.11
Beneficial conversion feature on convertible
     notes payable - related parties                          06/16/04
Beneficial conversion feature on convertible
     notes payable - related parties                          06/17/04
Issuance of common stock for cash                             06/18/04              $ 1.01
Beneficial conversion feature on convertible
     notes payable                                            06/23/04
Issuance of warrants in conjunction with
      convertible notes payable                               06/23/04              $ 0.15
Beneficial conversion feature on convertible
     notes payable                                            06/23/04
Issuance of warrants in conjunction with
      convertible notes payable                               06/23/04              $ 0.15
Issuance of committed common stock for legal settlement       06/24/04              $ 1.28
Amortization of deferred compensation                         06/30/04
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         07/01/04              $ 1.86
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock      07/01/04              $ 1.23
Issuance of common stock to investors as a
     penalty for delayed registration of common stock         07/15/04              $ 1.20
Common stock committed to investors as a
     penalty for delayed registration of common stock         07/15/04              $ 1.20
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock      07/15/04              $ 0.64
Common stock committed for services rendered                  07/21/04              $ 0.94
Warrants issued for services rendered                         07/26/04              $ 0.39
Issuance of common stock for services rendered                07/28/04              $ 0.97
Common stock committed to investors as a
     penalty for delayed registration of common stock         07/31/04              $ 0.79
Warrants accrued but not issued to investors as a penalty
     for delayed registration of the underlying common stock  07/31/04              $ 0.47
Amortization of deferred compensation                         07/31/04
Net loss                                                                                                -                -
                                                                                              ---------------------------------
Balance at July 31, 2004                                                                                -                -
                                                                                              ---------------------------------
</TABLE>


                                       13
<PAGE>


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

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

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

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

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

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



                                       14
<PAGE>


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

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

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

Issuance of common stock for cash                                  35,767            36           3,629
Issuance of common stock for services rendered                    117,216           117          11,894
Issuance of common stock for cash                                  17,883            18           9,982
Issuance of common stock for services rendered                     89,410            90          40,307
Issuance of common stock for services rendered                    277,170           277         124,953
Issuance of common stock for cash                                   4,471             4              96
Issuance of common stock for cash                                   2,861             3           1,497
Issuance of common stock for cash                                  44,708            45          12,455
Issuance of common stock for cash                                  17,883            18           9,982
Issuance of common stock for services rendered                    247,218           247          90,402
Issuance of common stock for services rendered                     52,305            52          21,675
Issuance of common stock for cash                                  53,650            54          20,946
Issuance of common stock for cash                                   8,942             9           4,991
</TABLE>


                                       15
<PAGE>


<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>

Issuance of common stock for cash                                  80,475            81          44,919
Issuance of common stock for services rendered                      2,235             2           1,309
Issuance of common stock for cash                                 107,301           107          59,893
Issuance of common stock for services rendered                  1,307,700         1,308         765,802
Issuance of common stock for cash                                   2,794             3           1,997
Issuance of common stock for cash                                   8,383             8           7,492
Issuance of common stock for services rendered                     50,159            50          29,374
Issuance of common stock for services rendered                     22,352            22          13,090
Issuance of common stock for services rendered                      2,235             2           1,309
Net loss
                                                           -----------------------------------------------

Balance, April 30, 2000   (Restated)                           14,242,097        14,242       3,735,124

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

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

Issuance of common stock for services rendered                    116,903           117          27,940
Issuance of common stock for services rendered                     67,057            67          29,930
Issuance of common stock for cash                                  22,354            22           9,978
Issuance of common stock for cash                                  22,354            22           9,978
Issuance of common stock for services rendered                    350,933           351         223,917
Issuance of common stock for cash                                   8,942             9           9,991
Issuance of common stock for cash                                 223,542           224          49,776
Issuance of common stock for services rendered                    525,281           525         116,965
Issuance of common stock for cash                                  67,062            67          14,933
Warrants issued for services rendered                                                            24,924
Issuance of common stock for services rendered                     13,411            14           2,986
Issuance of common stock for services rendered                     67,057            67          14,932
Issuance of common stock for services rendered                     11,176            11           2,489
Issuance of common stock for services rendered                    217,176           217          48,359
Issuance of common stock for services rendered                     87,235            87          19,425
Issuance of common stock for cash                                 223,542           224          49,776
Issuance of common stock for cash                                   3,577             4             796
Issuance of common stock for services rendered                  1,230,276         1,230         273,948
Issuance of common stock for services rendered                     22,352            22           4,978
Issuance of common stock for services rendered                    212,348           212          47,284
Stock options issued for services rendered                                                        1,402
Issuance of common stock for services rendered                     33,529            34           7,465
Stock options issued for services rendered                                                        2,142
Stock options issued for services rendered                                                        3,809
Issuance of common stock for services rendered                  2,235,241         2,235         497,725
Issuance of common stock for cash                                  10,283            10           2,410
Issuance of common stock in private
     placement for cash                                         1,225,000         1,225       1,223,775
Net loss
                                                           -----------------------------------------------
</TABLE>


                                       16
<PAGE>


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

Common stock committed on exercise of stock
     options in subsidiary
Issuance of common stock for services rendered                      5,589             6          12,010
Financing expense in connection with
     issuance of warrants                                                                       223,710
Conversion of convertible notes payable - related
     parties and accrued interest into common stock                 5,780             6           5,774
Conversion of convertible notes payable - related
     parties and accrued interest into common stock                 5,438             5           5,435
Issuance of common stock in private placement for
     cash                                                         500,000           500         499,500
Stock options issued for services rendered                                                      761,007
Conversion of notes payable - related
     parties into common stock                                     15,000            15          14,985
Conversion of convertible notes payable - related
     parties and accrued interest into common stock                11,680            12          11,664
Stock options issued for services rendered                                                      187,163
Issuance of common stock for services rendered                      5,589             6           9,328
Stock options issued for services rendered                                                    3,305,542
Stock options issued in exchange for settlement
     of accounts payable                                                                         50,000
Issuance of Series A convertible preferred stock
     in private placement for cash                                                              979,300
Offering costs on issuance of Series A convertible
     preferred stock in private placement for cash                                             (178,902)
Dividends on Series A preferred stock                              68,150            68          78,292
Beneficial conversion feature on issuance of
     Series A preferred stock                                                                   767,431
Issuance of common stock in private placement for
     cash                                                       1,349,934         1,350       1,821,056
Offering costs on issuance of common stock in
     private placement for cash                                                                (196,793)
Common stock committed for services rendered
Warrants issued for services rendered                                                           390,409
Warrants issued for services rendered                                                           162,792
Stock options issued in exchange for settlement
     of accounts payable                                                                         15,000
Stock options issued for services rendered                                                       59,373
Issuance of common stock on cashless exercise of
     warrants                                                      33,909            34             (34)
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock                    9,162             9              (9)
Issuance of common stock on cashless conversion
     of the Series A convertible preferred stock                    9,174             9              (9)
Amortization of deferred compensation
Warrants issued for services rendered                                                           130,712
Common stock committed for services rendered
Reversal of deferred compensation                                                            (2,272,561)
</TABLE>



                                       17
<PAGE>



<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>
Issuance of common stock for services rendered                     21,277            21          10,288
Common stock committed for services rendered
Warrants issued for services rendered                                                            18,284
Offering costs on issuance of common stock subject
      to buyback for cash                                                                       (20,000)
Offering costs on issuance of common stock subject
      to buyback for cash                                                                       (24,500)
Issuance of common stock for subscription receivable               10,000            10           3,972
Common stock committed to investors as a penalty
     for delayed registration of common stock
Net loss
                                                           -----------------------------------------------

Balance, April 30, 2003   (Restated)                           24,125,882      $ 24,126    $ 13,573,900

Warrants issued for services rendered                                                             8,079
Issuance of common stock for services rendered                     45,000            45          21,555
Warrants issued for services rendered                                                            35,598
Stock options issued for services rendered                                                        5,458
Issuance of common stock on cashless conversion
     of Series A preferred stock                                2,129,316         2,129          (2,128)
Dividend on induced conversion of Series A
     preferred stock                                                                            583,243
Issuance of committed common stock                                128,136           128          57,533
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              25,952            26          11,653
Issuance of committed common stock                                 20,000            20           9,671
Issuance of common stock on exercise of
     warrants                                                      34,000            34             306
Issuance of committed common stock                                 11,178            11          17,538
Issuance of common stock on conversion of
     convertible notes payable - related parties                  300,000           300          99,700
Stock options issued for services rendered                                                       52,742
Issuance of common stock for services rendered                      6,000             6           2,994
Issuance of committed common stock                                 44,705            45           7,119
Issuance of common stock for cash                                 222,222           222          99,778
Issuance of common stock for cash                                 400,000           400         207,600
Issuance of common stock for cash                                 272,464           272         187,728
Issuance of common stock for services rendered                      6,000             6           6,354
Stock options issued for services rendered                                                       31,514
Beneficial conversion feature on convertible
     notes payable - related parties                                                                341
Issuance of common stock for cash                                  86,957            87          59,913
Issuance of common stock for cash                                 144,928           145          99,855
Issuance of common stock for cash                                 666,666           667         499,333
Offering costs on issuance of common stock
     for cash                                                                                   (40,000)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock             148,260           148         191,107
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                 6,009
Issuance of common stock for cash                                  63,000            63          59,938
Stock options issued for services rendered                                                      278,142
</TABLE>


                                       18
<PAGE>


<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>
Issuance of common stock for services rendered                     12,000            12          14,988
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              44,187            44          45,910
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                 7,143
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                               (5,250)
Issuance of common stock for services rendered                      2,000             2           1,498
Stock options issued for services rendered                                                       24,104
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              61,242            61          55,057
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                 7,937
Issuance of common stock for cash                                  42,254            42          29,958
Issuance of common stock for services rendered                     27,500            28          24,447
Warrants issued for services rendered                                                            17,775
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              75,739            76          66,574
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                 9,837
Issuance of common stock on cashless
     exercise of warrants                                          54,053            54             (54)
Issuance of common stock for services rendered                     12,000            12          10,548
Issuance of common stock to investors as a
     penalty for delayed registration of common stock               2,520             3           2,240
Beneficial conversion feature on convertible
     notes payable - related parties                                                             58,245
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                 91,755
Issuance of common stock for services rendered                     55,000            55          64,845
Beneficial conversion feature on convertible
     notes payable - related parties                                                              4,026
Beneficial conversion feature on convertible
     notes payable - related parties                                                             41,196
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                143,804
Issuance of common stock on cashless
     exercise of warrants                                          48,000            48             (48)
Beneficial conversion feature on convertible
     notes payable - related parties                                                              6,046
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                 43,954
Beneficial conversion feature on convertible
     notes payable - related parties                                                              9,558
Issuance of common stock on cashless
     exercise of warrants                                          25,049            25             (25)
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                               (5,250)
Issuance of common stock for services rendered                      3,333             3           4,097
</TABLE>



                                       19
<PAGE>



<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              99,332            99         124,066
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                19,415
Issuance of common stock for services rendered                      2,667             3           3,357
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                               (7,000)
Common stock committed for services rendered
Stock options issued for services rendered                                                       15,917
Issuance of common stock to investors as a
     penalty for delayed registration of common stock             120,464           121         210,691
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                38,323
Issuance of common stock on cashless
     exercise of warrants                                           2,958             3              (3)
Beneficial conversion feature on convertible
     notes payable - related parties                                                             15,831
Issuance of common stock for cash                                  40,000            40          29,960
Issuance of common stock on cashless
     exercise of warrants                                          17,334            17             (17)
Issuance of common stock for cash                                  40,000            40          29,960
Issuance of common stock for services rendered and
     to be rendered                                               200,000           200         323,800
Issuance of common stock for cash                                  40,000            40          29,960
Issuance of common stock on cashless
     exercise of warrants                                           7,879             8              (8)
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                10,735
Warrants issued for services rendered                                                            78,297
Issuance of common stock for services rendered                     12,000            12          35,388
Issuance of common stock on cashless
     exercise of warrants                                         302,638           303            (303)
Issuance of common stock for services rendered                    100,000           100         277,900
Issuance of common stock on cashless
     exercise of warrants                                          12,701            13             (13)
Issuance of common stock on cashless
     exercise of warrants                                          18,235            18             (18)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock             141,383           141         360,386
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                74,639
Issuance of common stock on exercise of warrants                   35,776            36          53,628
Warrants issued for services rendered
     and to be rendered                                                                          75,461
Issuance of common stock for services rendered
     and to be rendered                                            75,000            75         213,675
Beneficial conversion feature on convertible
     notes payable - related parties                                                             78,024
</TABLE>


                                       20
<PAGE>


<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>

Issuance of common stock for cash                                  30,303            30          29,970
Issuance of common stock on cashless
     exercise of warrants                                           6,269             6              (6)
Issuance of common stock on cashless
     exercise of warrants                                           2,000             2              (2)
Warrants issued for services rendered                                                            54,675
Common stock committed for legal settlement
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                11,738
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                17,790
Common stock committed to investors as a penalty
     for delayed registration of common stock
Warrants accrued but not issued to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                27,717
Amortization of deferred compensation
Net Loss
                                                           -----------------------------------------------
Balance, April 30, 2004                                        30,652,482      $ 30,652    $ 19,181,421

Beneficial conversion feature on convertible
     notes payable                                                                               25,262
 Issuance of warrants in conjunction with
      convertible notes payable                                                                 399,738
Issuance of common stock to investors as a
     penalty for delayed registration of common stock               6,667             7          15,660
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock                                        186,733
Issuance of common stock for services rendered                     95,000            95         207,955
Issuance of common stock for services rendered                      3,500             4           6,891
Offering costs on issuance of common stock                                                      (13,000)
Common stock committed for services rendered
Issuance of committed common stock to investors as
  a penalty for delayed registration of common stock               84,486            84         156,215
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              77,823            78         143,894
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                         27,732
Issuance of common stock for cash                                  29,801            30          44,970
Offering costs on issuance of common stock                                                       (5,000)
Offering costs on issuance of common stock                                                       (2,250)
Amortization of deferred compensation
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              32,223            32          61,192
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock                                        140,443
Issuance of common stock for cash                                  13,245            13          19,987
Issuance of common stock for cash                                  19,868            20          29,980
Issuance of common stock for cash                                  66,225            66          99,934
Issuance of common stock for cash                                  33,113            33          49,967
</TABLE>


                                       21
<PAGE>


<TABLE>
<CAPTION>
                                                                   Common Stock               Additional
                                                           -----------------------------       Paid-in
                                                                  Shares         Amount        Capital
                                                           -----------------------------------------------
<S>                                                        <C>                <C>             <C>
Issuance of common stock for cash                                  19,868            20          29,980
Issuance of common stock for cash                                  66,225            66          99,934
Offering costs on issuance of common stock                                                      (11,500)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock             187,028           187         235,468
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                         36,412
Common stock committed for services rendered
Beneficial conversion feature on convertible
     notes payable - related parties                                                              1,305
Beneficial conversion feature on convertible
     notes payable - related parties                                                              3,859
Issuance of common stock for cash                                  99,010            99          99,901
Beneficial conversion feature on convertible
     notes payable                                                                               30,044
Issuance of warrants in conjunction with
      convertible notes payable                                                                 209,956
Beneficial conversion feature on convertible
     notes payable                                                                                7,511
Issuance of warrants in conjunction with
      convertible notes payable                                                                  52,489
Issuance of committed common stock for legal settlement            10,500            11          13,429
Amortization of deferred compensation
Issuance of common stock to investors as a
     penalty for delayed registration of common stock              32,223            32          59,903
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                        136,473
Issuance of common stock to investors as a
     penalty for delayed registration of common stock             209,217           209         250,851
Common stock committed to investors as a
     penalty for delayed registration of common stock
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                         37,715
Common stock committed for services rendered
Warrants issued for services rendered                                                            38,573
Issuance of common stock for services rendered                    182,955           183         177,283
Common stock committed to investors as a
     penalty for delayed registration of common stock
Warrants accrued but not issued to investors as a penalty
     for delayed registration of the underlying common stock                                     15,500
Amortization of deferred compensation
Net loss                                                               -             -               -
                                                           -----------------------------------------------
Balance at July 31, 2004                                      31,921,459      $ 31,920    $ 22,302,808
                                                           -----------------------------------------------
</TABLE>


                                       22
<PAGE>


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

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

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

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

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

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


                                       23
<PAGE>


<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Balance, April 30, 1998   (Restated)                                   -                -         (804,823)        (250,790)

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

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

Issuance of common stock for cash                                                                                     3,665
Issuance of common stock for services rendered                                                                       12,011
Issuance of common stock for cash                                                                                    10,000
Issuance of common stock for services rendered                                                                       40,397
Issuance of common stock for services rendered                                                                      125,230
Issuance of common stock for cash                                                                                       100
Issuance of common stock for cash                                                                                     1,500
Issuance of common stock for cash                                                                                    12,500
Issuance of common stock for cash                                                                                    10,000
Issuance of common stock for services rendered                                                                       90,649
Issuance of common stock for services rendered                                                                       21,727
Issuance of common stock for cash                                                                                    21,000
Issuance of common stock for cash                                                                                     5,000
</TABLE>


                                       1

                                       24
<PAGE>


<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Issuance of common stock for cash                                                                                    45,000
Issuance of common stock for services rendered                                                                        1,311
Issuance of common stock for cash                                                                                    60,000
Issuance of common stock for services rendered                                                                      767,110
Issuance of common stock for cash                                                                                     2,000
Issuance of common stock for cash                                                                                     7,500
Issuance of common stock for services rendered                                                                       29,424
Issuance of common stock for services rendered                                                                       13,112
Issuance of common stock for services rendered                                                                        1,311
Net loss                                                                                        (1,247,576)      (1,247,576)
                                                               ------------------------------------------------------------

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

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

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

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


                                       25
<PAGE>


<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Balance, April 30, 2002   (Restated)                                   -                -       (6,860,779)         (95,023)

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


                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Issuance of common stock for services rendered                                                                       10,309
Common stock committed for services rendered                       9,691                                              9,691
Warrants issued for services rendered                                                                                18,284
Offering costs on issuance of common stock subject
      to buyback for cash                                                                                           (20,000)
Offering costs on issuance of common stock subject
      to buyback for cash                                                                                           (24,500)
Issuance of common stock for subscription receivable                                                                  3,982
Common stock committed to investors as a penalty
     for delayed registration of common stock                     57,661                                             57,661
Net loss                                                                                        (5,925,680)      (5,925,680)
                                                               ------------------------------------------------------------

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

Warrants issued for services rendered                                                                                 8,079
Issuance of common stock for services rendered                                                                       21,600
Warrants issued for services rendered                                                                                35,598
Stock options issued for services rendered                                                                            5,458
Issuance of common stock on cashless conversion
     of Series A preferred stock                                                                                          -
Dividend on induced conversion of Series A
     preferred stock                                                                              (583,243)               -
Issuance of committed common stock                               (57,661)                                                 -
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                11,679
Issuance of committed common stock                                (9,691)                                                 -
Issuance of common stock on exercise of                                                                                   -
     warrants                                                                                                           340
Issuance of committed common stock                               (17,549)                                                 -
Issuance of common stock on conversion of
     convertible notes payable - related parties                                                                    100,000
Stock options issued for services rendered                                                                           52,742
Issuance of common stock for services rendered                                                                        3,000
Issuance of committed common stock                                (7,164)                                                 -
Issuance of common stock for cash                                                                                   100,000
Issuance of common stock for cash                                                                                   208,000
Issuance of common stock for cash                                                                                   188,000
Issuance of common stock for services rendered                                                                        6,360
Stock options issued for services rendered                                                                           31,514
Beneficial conversion feature on convertible                                                                              -
     notes payable - related parties                                                                                    341
Issuance of common stock for cash                                                                                    60,000
Issuance of common stock for cash                                                                                   100,000
Issuance of common stock for cash                                                                                   500,000
Offering costs on issuance of common stock
     for cash                                                                                                       (40,000)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               191,255
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                     6,009
Issuance of common stock for cash                                                                                    60,001
Stock options issued for services rendered                                                                          278,142
Issuance of common stock for services rendered                                                                       15,000
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                45,954
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                     7,143
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                                                   (5,250)
Issuance of common stock for services rendered                                                                        1,500
Stock options issued for services rendered                                                                           24,104
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                55,118
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                     7,937
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock for services rendered                                                                       24,475
Warrants issued for services rendered                                                                                17,775
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                66,650
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                     9,837
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock for services rendered                                                                       10,560
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                 2,243
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                 58,245
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                                     91,755
Issuance of common stock for services rendered                                                                       64,900
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                  4,026
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                 41,196
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                                    143,804
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                  6,046
Issuance of warrants in conjunction with
     convertible notes payable - related parties                                                                     43,954
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                  9,558
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                                                   (5,250)
Issuance of common stock for services rendered                                                                        4,100
</TABLE>


                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               124,165
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    19,415
Issuance of common stock for services rendered                                                                        3,360
Offering costs on issuance of common stock subject
     to rescission rights for cash                                                                                   (7,000)
Common stock committed for services rendered                       9,940                                              9,940
Stock options issued for services rendered                                                                           15,917
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               210,812
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    38,323
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                 15,831
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock for services rendered and
     to be rendered                                                              (324,000)                                -
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    10,735
Warrants issued for services rendered                                                                                78,297
Issuance of common stock for services rendered                                                                       35,400
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock for services rendered                                                                      278,000
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               360,527
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    74,639
Issuance of common stock on exercise of warrants                                                                     53,664
Warrants issued for services rendered
     and to be rendered                                                           (75,461)                                -
Issuance of common stock for services rendered
     and to be rendered                                                          (213,750)                                -
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                 78,024
</TABLE>


                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Issuance of common stock on cashless
     exercise of warrants                                                                                                 -
Warrants issued for services rendered                                                                                54,675
Common stock committed for legal settlement                       13,440                                             13,440
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    11,738
Issuance of warrants to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    17,790
Common stock committed to investors as a penalty
     for delayed registration of common stock                    156,299                                            156,299
Warrants accrued but not issued to investors as a
     penalty for delayed registration of the underlying
     common stock                                                                                                    27,717
Amortization of deferred compensation                                             153,903                           153,903
Net Loss                                                                                        (7,600,103)      (7,600,103)
                                                               ------------------------------------------------------------
Balance, April 30, 2004                                        $ 179,679       $ (459,308)   $ (21,815,596)    $ (2,883,152)

Beneficial conversion feature on convertible
     notes payable                                                                                                   25,262
 Issuance of warrants in conjunction with
      convertible notes payable                                                                                     399,738
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                15,667
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock                                                            186,733
Issuance of common stock for services rendered                                                                      208,050
Issuance of common stock for services rendered                                                                        6,895
Offering costs on issuance of common stock                                                                          (13,000)
Common stock committed for services rendered                      13,090                                             13,090
Issuance of committed common stock to investors as
  a penalty for delayed registration of common stock            (156,299)                                                 -
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               143,972
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                                             27,732
Issuance of common stock for cash                                                                                    45,000
Offering costs on issuance of common stock                                                                           (5,000)
Offering costs on issuance of common stock                                                                           (2,250)
Amortization of deferred compensation                                              92,202                            92,202
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                                61,224
Issuance of warrants to investors as a penalty for
     delayed registration of the underlying common stock                                                            140,443
Issuance of common stock for cash                                                                                    20,000
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock for cash                                                                                   100,000
Issuance of common stock for cash                                                                                    50,000
</TABLE>


                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   Deficit
                                                                                                 Accumulated
                                                                  Committed                       during the
                                                                   Common         Deferred       Development
                                                                    Stock       Compensation        Stage            Total
                                                               ------------------------------------------------------------
<S>                                                             <C>              <C>              <C>              <C>
Issuance of common stock for cash                                                                                    30,000
Issuance of common stock for cash                                                                                   100,000
Offering costs on issuance of common stock                                                                          (11,500)
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               235,655
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                                             36,412
Common stock committed for services rendered                       9,990                                              9,990
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                  1,305
Beneficial conversion feature on convertible
     notes payable - related parties                                                                                  3,859
Issuance of common stock for cash                                                                                   100,000
Beneficial conversion feature on convertible
     notes payable                                                                                                   30,044
Issuance of warrants in conjunction with
      convertible notes payable                                                                                     209,956
Beneficial conversion feature on convertible
     notes payable                                                                                                    7,511
Issuance of warrants in conjunction with
      convertible notes payable                                                                                      52,489
Issuance of committed common stock for legal settlement          (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                                                                59,935
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                                            136,473
Issuance of common stock to investors as a
     penalty for delayed registration of common stock                                                               251,060
Common stock committed to investors as a
     penalty for delayed registration of common stock                546                                                546
Issuance of warrants to investors as a penalty for 50%?
     delayed registration of the underlying common stock                                                             37,715
Common stock committed for services rendered                       8,460                                              8,460
Warrants issued for services rendered                                                                                38,573
Issuance of common stock for services rendered                                                                      177,466
Common stock committed to investors as a
     penalty for delayed registration of common stock            116,004                                            116,004
Warrants accrued but not issued to investors as a penalty
     for delayed registration of the underlying common stock                                                         15,500
Amortization of deferred compensation                                              72,199                            72,199
Net loss                                                              -                -        (4,128,489)      (4,128,489)
                                                              -------------------------------------------------------------
Balance at July 31, 2004                                      $ 158,030        $ (180,757)   $ (25,944,085)    $ (3,632,084)
                                                              -------------------------------------------------------------
</TABLE>


                                       30
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        For the
                                                                                                      Period from
                                                                                                      August 21,
                                                                                                         1995
                                                                  For the Three Months Ended        (Inception) to
                                                                -----------------------------          July 31,
                                                                   July 31,        July 31,              2004
                                                                     2004            2003
                                                                                   Restated
                                                                  (unaudited)     (unaudited)         (unaudited)
                                                                -------------     -----------        -------------
<S>                                                             <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                     $ (4,128,489)     $ (1,078,583)     $(24,515,051)
   Adjustments to reconcile net loss to net cash
    used in operating activities
     Depreciation                                                     52,338            30,281           295,876
     Issuance of common stock for services rendered                  392,411            21,600         5,151,020
     Common stock committed for services rendered                     31,540             3,000            31,540
     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                           --            58,200         2,066,540
     Additional compensation to officer in the form of
       convertible note payable - related party                           --                --            42,171
     Amortization of deferred compensation                           278,551                --         1,465,435
     Amortization of debt discount on convertible
       notes payable                                                 730,164                --         1,222,944
     Issuance of convertible notes payable as a penalty
      for the delayed registration of the underlying common
       stock                                                           3,000                --            10,000
     Issuance of common stock as a penalty for the delayed
       registration of shares of common stock                        767,514            11,679         2,049,877
     Issuance or commitment to issue warrants as a penalty
       for the delayed registration of the underlying
       common stock                                                  581,008                --           812,290
     Common stock committed as a penalty for the delayed
       registration of shares of common stock                        116,550                --           116,550
     (Increase) decrease in
         Restricted cash                                                  --                --                --
         Accounts receivable                                         (30,412)               --           (60,824)
         Other receivable                                                 --                --                --
         Other current assets                                         52,906           (53,873)         (161,911)
         Other assets                                                     --            63,317                --
     Increase (decrease) in
         Accounts payable                                             86,630           205,988         1,493,061
         Accrued expenses                                              4,126            (1,600)           92,417
         Accrued payroll and payroll taxes                           (27,478)           (3,038)          821,594
         Accrued interest                                             24,491             5,226           103,713
         Other current liabilities                                    67,183                --            67,183
                                                                ------------      ------------      ------------

Net cash used in operating activities                           $   (959,394)     $   (694,126)     $ (7,663,467)
                                                                ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and equipment                        $   (200,534)     $    (24,308)       (1,050,063)
                                                                ------------      ------------      ------------

Net cash used in investing activities                               (200,534)          (24,308)       (1,050,063)
                                                                ------------      ------------      ------------
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                --         2,468,268
   Offering costs on issuance of common stock                        (31,750)               --           (89,250)
   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           200,000
   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
   Payment on notes payable                                             (557)               --            (1,064)
   Proceeds from issuance of notes payable - related parties              --                --           471,853
   Payments on notes payable - related parties                       (42,934)               --          (589,265)
   Proceeds from convertible notes payable - related parties              --                --            55,400
   Payments on convertible notes payable - related parties                --                --           (35,400)
   Proceeds from convertible notes payable
     subject to rescission rights                                    300,000                --           685,000
   Proceeds from collection of subscription receivable               425,000           443,482           868,482
                                                                 -----------       -----------       -----------

Net cash provided by financing activities                          1,124,759           643,822         8,721,218
                                                                 -----------       -----------       -----------

Net increase (decrease) in cash and cash equivalents                 (35,169)          (74,612)            7,688

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                         $     7,688       $    32,396       $     7,688
                                                                 ===========       ===========       ===========

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

       Interest paid                                             $       176       $        --       $     3,064
                                                                 ===========       ===========       ===========


       Income taxes paid                                         $        --       $        --       $    14,183
                                                                 ===========       ===========       ===========
</TABLE>

The accompanying notes are an integral part of these financial statements


                                       31
<PAGE>


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued 281,455, 45,000, and
13,606,614 shares of common stock, respectively, for services rendered valued at
the fair value of the common stock on the issuance date of $392,411, $21,600 and
$5,151,020, respectively.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company committed to issue 25,000,
6,000, and 25,000 shares of common stock, respectively, for services rendered
valued at the fair value of the common stock on the commitment date of $31,540,
$3,000 and $31,540, respectively.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued warrants to purchase
100,000, 200,000, and 1,010,000 shares of common stock, respectively, for
services rendered valued at the fair value of the common stock on the issuance
date of $38,573, $43,677 and $976,035, respectively.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued unsecured convertible
notes payable-related party, in exchange for accounts payable due to the legal
counsel of the Company of of $25,648, $238,816, and $673,083, respectively.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company expensed $767,514, $11,679
and $2,049,877 for the issuance of 545,181, 25,952 and 1,386,904 shares of
common stock, respectively, as a penalty for the late registration of common
stock.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company committed to issue 116,459, 0
and 116,459 shares of common stock, respectively, valued at $116,550, $0 and
$116,550, respectively, as a penalty for the late registration of common stock.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, the Company issued convertible notes payable of
$3,000, $0 and $10,000 as a penalty for the late registration of common stock to
be issued upon conversion of convertible notes payable.

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company expensed $581,008, $0 and
$812,290 for the issuance or committed issuance of warrants to purchase 489,651,
0 and 690,943 shares of common stock, respectively, as a penalty for the late
registration of common stock to be issued upon exercise of the warrants.

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


                                       32
<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. 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", 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 four 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) a compact version of the Company's
explosives detection technology which is housed in a suitcase on wheels and is
more mobile than the vehicle-borne version; (ii) an anti-tank landmine detector;
(iii) an unexploded ordnance detector, which is also useful to detect Improvised
Explosive Devices (IEDs), both of which are typically above the ground; and (iv)
a device the Company calls a Refractorymeter which can detect fissures or
erosions in the ceramic lining of oil cracking tanks. 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 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.

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.



                                       33
<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 July
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.


                                       34
<PAGE>


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


<TABLE>
<CAPTION>
                                         AS ORIGINALLY        RESTATEMENT                 AS
                                            REPORTED           ADJUSTMENT              RESTATED
<S>                                            <C>             <C>             <C>       <C>
 BALANCE SHEET
                      Current assets           $   781,133     $   (232,631)   13        $   548,502
                                      --------------------- -----------------      ------------------
                        Total assets

                                                 1,279,584                 -               1,279,584
                                      ===================== =================      ==================

   Accrued payroll and payroll taxes                17,116           371,198    7            388,314

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

           Total current liabilities               977,707           371,198    7

                                                                     694,000    6          2,042,905
                                      --------------------- -----------------      ------------------

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

 SHAREHOLDERS' DEFICIT

                        Common stock                28,819           (2,000)    6             26,819
                                      --------------------- -----------------      ------------------

          Additional paid-in capital            10,972,210         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
                                                                      11,679    5
                                                                    (28,153)   11
                                                                   (199,400)    6         14,474,849
                                      --------------------- -----------------      ------------------

              Committed common stock                 7,164             3,000                  10,164
                                      --------------------- -----------------      ------------------

      Deficit accumulated during the
                   development stage          (10,725,239)       (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
                                                                     (3,000)   10
                                                                     (7,294)    7
                                                                    (11,679)    5
                                                                      28,153   11        (15,294,076)
                                      --------------------- -----------------      ------------------

          Total stockholders' equity               282,954         (694,000)    6
                                                                   (371,198)    7          (782,244)
                                      --------------------- -----------------      ------------------

Total liabilities & shareholders'
equity                                           1,279,584                                 1,279,584
                                      ===================== =================      ==================
</TABLE>


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                        AS ORIGINALLY         RESTATEMENT                 AS
                                           REPORTED            ADJUSTMENT              RESTATED
                                           --------            ----------              --------
<S>                                     <C>                   <C>                     <C>
STATEMENT OF OPERATIONS
                 Contract Revenues             $   103,749     $   (103,749)   12          $       -

          General & Administration               1,028,240          (42,908)    8
                                                                    (32,705)    9
                                                                       3,000   10
                                                                       7,294    7            962,921
                                    ----------------------- -----------------      ------------------

            Research & Development                 202,071         (103,749)   12             98,322
          Total operating expenses               1,230,311          (42,908)    8
                                                                    (32,705)    9
                                                                       3,000   10
                                                                       7,294    7
                                                                   (103,749)   12          1,061,243
                                    ----------------------- -----------------      ------------------

              Loss from operations             (1,126,562)            42,908    8
                                                                      32,705    9
                                                                     (3,000)   10
                                                                     (7,294)    7        (1,061,243)
                                    ----------------------- -----------------      ------------------

               Penalties on equity                       -          (11,679)    5           (11,679)
               Total other expense                 (4,861)          (11,679)    5           (16,540)

  Loss before provision for income
                             taxes             (1,131,423)            42,908    8
                                                                      32,705    9
                                                                     (3,000)   10
                                                                     (7,294)    7
                                                                    (11,679)    5        (1,077,783)
                                    ----------------------- -----------------      ------------------

                          Net loss             (1,132,223)            42,908    8
                                                                      32,705    9
                                                                     (3,000)   10
                                                                     (7,294)    7
                                                                    (11,679)    5        (1,078,583)
                                    ----------------------- -----------------      ------------------

          Preferred stock dividend               (611,396)            28,153   11          (583,243)
             Net loss available to
                      shareholders             (1,743,619)            42,908    8
                                                                      32,705    9
                                                                     (3,000)   10
                                                                     (7,294)    7
                                                                    (11,679)    5
                                                                      28,153   11        (1,661,826)
                                    ======================= =================      ==================
</TABLE>


                                       36
<PAGE>

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

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

3) For the period ended April 30, 2002, the Company reversed $255,460 of expense
for the issuance of common stock for cash that was originally recorded as 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 months
ended July 31, 2003, the Company recorded an expense of $11,679 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 three months ended July
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.

7) For the three months ended July 31, 2003, the Company recorded an estimated
payroll tax liability of $7,294 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 $371,198. The Company has accrued the
liability for its failure to timely file payroll tax returns, W-2s and 1009s.

8) For the three months ended July 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.


                                       37
<PAGE>

9) For the three months ended July 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 months ended July 31, 2003, the Company expensed $3,000 for
common stock issued to Members of the Board of Directors. Accordingly,
additional paid in capital and accumulated deficit were increased by the same
amount.

11) For the three months ended July 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 July 31, 2003, the Company reclassified $103,749
of grant income as an offset against research and development costs in
accordance with section 3.50 of the Government Contract Audit Guide for
Fixed-Price Best-Efforts cost Sharing Arrangements.

13) In fiscal year 2003, the Company issued 500,000 stock options to a business
development consultant with a fair value of $761,007. As of July 31, 2003, the
Company reclassified the long-term portion of $232,631 to other assets from
other current assets. The stock option grant was amortized over the three year
life of a contract to which it applies.

NOTE 3 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, during the
three months ended July 31, 2004 and 2003 and the period from August 21, 1995
(inception) to July 31, 2004, the Company incurred net losses available to
common shareholders of approximately $4,128,489 $1,661,826, and $25,944,085,
respectively, and it had negative cash flows from operations of approximately
$959,394, $622,892, and $7,663,467, respectively. In addition, the Company had
an accumulated deficit of $25,944,085 and was in the development stage as of
July 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.

In addition to the capital raised as of July 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 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.


                                       38
<PAGE>

                          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.

          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 are not registered
within certain deadlines, a penalty is 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 11, 16, 17 and
18 and the commitment to issue such penalty securities is described in Note 15.


                                       39
<PAGE>


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.

                         RESEARCH AND DEVELOPMENT COSTS

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

                            STOCK-BASED COMPENSATION

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

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

No stock options were granted during the three month period ended July 31, 2004.

The following table compares net loss attributable to common stockholders and
loss per share for the three months ended July 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>
                                                                 July 31, 2004          July 31, 2003
                                                             ----------------------- ---------------------
<S>                                                          <C>                     <C>
     Net loss attributable to common stockholders                       (4,128,489)           (1,661,826)
     Total stock-based employee compensation expense
              determined under fair value based methods for
                    all awards, net of related tax effects                (156,115)           (1,157,841)
                                                             ----------------------- ---------------------
     Pro forma net loss attributable to common stockholders             (4,284,604)           (2,819,667)

     Basic loss per share:
              As reported                                                    (0.13)                (0.29)
                    Pro forma                                                (0.14)                (0.29)
     Diluted loss per share:
              As reported                                                    (0.13)                (0.29)
                    Pro forma                                                (0.14)                (0.29)
</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.


                                       40
<PAGE>

                 WARRANTS ISSUED AS FINANCING AND OFFERING COSTS

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

                                  INCOME TAXES

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

                               NET LOSS PER SHARE

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

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

                                                               July 31, 2004
                                                             -----------------
      Stock Options                                                 6,768,675
      Warrants                                                     11,200,829
      Convertible notes payable and acrued
            interest - related parties                                728,862
      Convertible notes payable and accrued
            interest - subject to recission rights                  1,213,981
      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
                                                             -----------------
                                                                   24,761,909
                                                             -----------------


                                    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.


                                       41
<PAGE>


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 July 31,
2004 as filed on Form 10-QSB (the "Report"), and the Company's Annual Report
filed on Form 10-KSB for the year ended April 30, 2004, including the
information under the heading entitled "Risk Factors", as well as review the
disclosures contained in the Forward-Looking Statements set out 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 obtaining financing to continue operations and fund anticipated
losses, and the timing and success of product introductions. Some of these risks
pertain to its business in general, and others are risks which would only affect
its common stock.

If any of the following events described below were to occur, the Company's
business, prospects, financial condition, or results of operations 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 device;

      o     an inability to transition the Company's prototype into a commercial
            product 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 brought forth
            by the U.S. Securities and Exchange Commission ("SEC") and certain
            disputes involving former consultants and employees;

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

      o     ability to reconcile any potential payroll tax liabilities;

      o     limitations on the Company's intellectual property rights and the
            ability to bring or defend against claims of intellectual property
            infringement;

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

      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;

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

      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 system; fluctuations in
            currency exchange rates; inconsistent intellectual property
            protections among foreign jurisdictions; export restrictions,
            tariffs, embargoes or other 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 average selling prices of
            the CarBomb Finder, caused by promotional offerings, customer volume
            orders, or competitive pricing pressures;

      o     an inability to adapt to rapid technological change;

      o     dependence upon a limited number of suppliers for component parts;


                                       42
<PAGE>


      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;

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

      o     limited number of customers and an inability to identify and address
            markets;

      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 the TSA, regarding its future products;

      o     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     economic and social impact of natural disasters and acts of
            terrorism.

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consisted of the following:


                                                 July 31, 2004    April 30, 2004
                                                 -------------    --------------

 Prepaid consulting                                $ 23,763          $ 52,021
 Prepaid insurance                                  102,033             9,634
 Equipment deposits                                  38,114           150,000
 Other                                                8,000            13,162
                                                   --------          --------

TOTAL                                              $171,910          $224,817
                                                   ========          ========


NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

                                                 July 31, 2004    April 30, 2004
                                                 -------------    --------------

Prototype equipment                               $  395,045        $  228,399

Laboratory equipment                                 542,833           501,445

Furniture and fixtures                                51,110            58,610

Leasehold improvements                                51,150            51,150

Web site development                                  14,400            14,400
                                                  ----------        ----------
                                                   1,054,538           854,004

Less accumulated depreciation                        295,874           243,536
                                                  ----------        ----------

                 TOTAL                            $  758,664        $  610,468
                                                  ==========        ==========


Depreciation and amortization expense for the three months ended July 31, 2004
and 2003 and the period from August 21, 1995 (inception) to July 31, 2004, was
$52,338, $30,281 and $295,876, respectively.


                                       43
<PAGE>

NOTE 8 - ACCRUED PAYROLL AND PAYROLL TAXES

Microdevices has not filed, or needs to amend, certain of its 1099's, W-2's and
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 July 31, 2004, the Company has accrued $400,734 for payroll taxes, penalties
and interest. The Company intends to file, or amend as necessary, its 1099's,
W-2's and payroll tax returns and pay any amounts due as soon as possible.

Excluding the payroll tax liability mentioned above, the Company has salaries
and wages payable of $29,303 as of July 31, 2004.

NOTE 9 - NOTES PAYABLE

Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                                                       July 31, 2004        April 30, 2004
                                                                                       -------------        --------------
<S>                                                                                    <C>                  <C>
         Note payable to an equipment supplier, secured by equipment, payable in
           monthly installments of $169, plus interest at 18% per annum, due
           in January 2007.                                                             $      3,413          $     3,970

         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.                                                   11,029                7,840
                                                                                 -----------------------------------------
                                                                                              14,442               14,310

         Less current portion                                                                 13,007               12,368
                                                                                 -----------------------------------------

           LONG-TERM PORTION                                                             $     1,435          $     1,942
                                                                                 =========================================
</TABLE>


                                       44
<PAGE>

NOTE 10 - NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties consisted of the following:

<TABLE>
<CAPTION>
                                                                                       July 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. The note was repaid in May 2004.                                         45,000                45,000

          Note payable to 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, unsecured,
           bearing interest at 5% per annum, and due on demand.                            207,000               249,934
                                                                              -------------------------------------------

                                                                                           306,000               348,934

         Less current portion                                                              306,000               348,934
                                                                              -------------------------------------------

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

NOTE 11 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES

Convertible notes payable - related parties consisted of the following:

<TABLE>
<CAPTION>
                                                                                       July 31, 2004        April 30, 2004
                                                                                       -------------        --------------
<S>                                                                                    <C>                  <C>
          Convertible notes payable to 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 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 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>

                                       45
<PAGE>

NOTE 12 - CONVERTIBLE NOTES PAYABLE SUBJECT TO RESCISSION RIGHTS

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

<TABLE>
<CAPTION>
                                                                                       July 31, 2004        April 30, 2004
                                                                                       -------------        --------------
<S>                                                                                    <C>                  <C>
   Convertible notes payable, unsecured, bearing interest at 5% per annum and
    due in January 2006. The holders of the notes 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, (i)
    additional detachable warrants to purchase 2% of the amount of shares
    exercisable under the original warrants and (ii) additional convertible
    notes payable equal to 2% of the original principal balance, for each
    subsequent month until a registration statement is filed and maintained
    effective by the Company, or the penalties become impermissible as a matter
    of law as prescribed in the instrument. Additionally, the convertible notes
    payable provide the investors 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 before January 15, 2005 at a
    price per share below $0.45. If shares are to be sold at a price per share
    under $0.45, the investors also have a first right of refusal to purchase
    said shares offered. 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 the holder of the convertible note
    payable as a result of the Company's inability to file a registration
    statement within certain specified deadlines, and reflecting the same terms
    of, the convertible notes payable above.                                                       4,000              1,000

   Convertible note payable, unsecured, bearing interest at 5% per annum and 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 prepayment date or the maturity
    date. The convertible note payable has detachable warrants to purchase
    shares of common stock with a three and one-half year term 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 notes
    payable at similar terms.                                                                    185,000            185,000
                                                                                      --------------------------------------
                                                                                                 539,000            236,000

                                                                                      --------------------------------------
   Less current portion                                                                     $    539,000       $    236,000
                                                                                      --------------------------------------

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

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.


                                       46
<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 $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 the investors. Earlier, the Company sold
to the investors in a private offering, while 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 of the
United States and effectively rendered such private offering illegal. If this is
the case, the purchasers of convertible notes payable may have similar
rescission rights available to certain shareholders as described in Note 13.
(See Note 13 for a full description of the circumstances surrounding the
rescission rights of investors). 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 any penalties due the holders of securities with registration rights,
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 the $539,000 from the sales
of convertible notes payable, effected during this period when the registration
statement was on file, as a current liability as of July 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 those shares
to be registered were for the sale of newly issued shares, and the remainder was
to be registered 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 its public offering, and re-filed a registration statement
solely seeking to register the shares of selling stockholders. This registration
statement was withdrawn on April 16, 2004.

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 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 public offering on a continuous basis at varying prices or a
negotiable price, the only overlap occurred with respect to the selling
stockholders' registration statement. Although the Company, as an issuer, was
not selling stock 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 only 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 makes rendering such
offering and unregistered public offering illegal. In such event, the persons
who purchased securities in such an offering may be entitled to, among 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.


                                       47
<PAGE>

While the Company has not completed any independent investigation into whether
or not 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 (for example, the effect of Rule 155,
which is a safe harbor with respect to integration if one of the simultaneous
offerings that caused the integration has been abandoned), the Company does not
anticipate receiving any demands for repurchase of these shares. Nevertheless,
until such time as the Company has determined with the Company's legal advisors
whether or not integration has occurred, the Company has 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 July 31, 2004. As of
April 30, 2004, the liability was offset by a $425,000 subscription receivable,
which was subsequently received by the Company in May 2004.

NOTE 14 -RESEARCH AND DEVELOPMENT COSTS

The Company has been engaged in commercializing a proprietary technology for
assembling sensor systems for numerous governmental and commercial applications
and markets. The Company's technology has 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. Further, the Company's management believes that
its technology has 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 extended 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 $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 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 the Anti-Tank Landmine Detector 7AT7 once the Company
has completed development activities.

Under the terms of the contract, the U.S. Army pays a portion of the Company's
research and development costs on a periodic basis during the term of the
contract, for which the Company is required to submit monthly written reports
detailing its progress under the contract. When the written report is accepted
by the U.S. Army, the Company 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.


                                       48
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   For the
                                                                                 Period from
                                                                                 August 21,
                                                                                    1995
                                                                               (Inception) to
                                               Three Months ended July 31,        July 31,
                                           -------------------------------- ------------------
                                                   2004            2003             2004
                                           ----------------- -------------- ------------------
<S>                                              <C>             <C>             <C>
      Research and development costs             $  311,238      $ 202,071       $  3,565,921

      Grant proceeds                               (91,236)      (103,749)          (933,810)
                                           ----------------- -------------- ------------------
      Net research and development costs         $  220,002       $ 98,322       $  2,632,111
                                           ----------------- -------------- ------------------
</TABLE>


NOTE 15 - COMMITMENTS AND CONTINGENCIES

                              EMPLOYMENT AGREEMENTS

In July 2004, HiEnergy entered into an employment agreement with its Controller.
Major terms of the agreement are as follows:

      o     The Company will pay its Controller $60 per hour for work performed
            beginning July 26, 2004.

      o     The Company will grant its Controller a warrant to purchase 100,000
            shares of HiEnergy common stock with a five year term with an
            exercise price of $0.99, which is the closing price of the Company's
            traded shares for July 26, 2004. The warrant vests immediately and
            includes registration rights.

      o     The Company will reimburse the Controller, on a monthly basis, for
            the medical and dental insurance plan in which he participates.

      o     The Company will pay for any legal costs that the Controller may
            incur in connection with any work that he has undertaken on behalf
            of the Company and indemnify him against any judgments not covered
            under the Company's D&O insurance policy.

      o     The Company will keep its D&O insurance coverage in effect at all
            times under the present policy limits and for a period of three
            years following the termination of the Controller's employment, if
            commercially viable.

      o     The Company will reimburse the Controller for reasonable
            out-of-pocket expenses for a remote office.

      o     The Controller would continue working in the same capacity with the
            Company as before and will take direction from its CEO, CFO and/or
            financial consultants.


                              CONSULTING AGREEMENTS

In July 2004, the Company executed an engagement letter with an independent
contractor to provide financial consulting and financial reporting services.
Major terms of the agreement are as follows:

      o     The Company will pay the consultant a signing bonus of $10,000, due
            and payable as of the date the agreement was executed.

      o     The Company will pay the consultant cash remuneration of $4,807.69
            on a bi-weekly basis for the duration of the engagement.


                                       49
<PAGE>

      o     The Company will issue the consultant as deferred compensation,
            promissory notes bearing 5% interest, in the amount of $25,000 on
            October 6, 2004, January 6, 2005 and April 6, 2005, provided the
            consultant is still engaged on said dates. Any issued notes
            outstanding shall become immediately due in the event the consultant
            ceases to be a service provider and may be prepaid should funds
            become available for prepayment of similar promissory notes issued
            to certain employees of the Company.

      o     The Company will grant the consultant a non-qualified option to
            purchase 500,000 shares of HiEnergy common stock with a five year
            term and an exercise price of $1 per share. The option shall be
            forty percent vested on January 6, 2005, provided the consultant is
            then still a service provider; seventy percent vested on April 6,
            2005, provided the consultant is then still a service provider; and
            fully vested on July 6, 2005, provided the consultant is then still
            a service provider. The option will immediately vest if the Company
            is sold or absorbed by a merger or any other change in corporate
            ownership structure.

In July 2004, the Company executed an employment services contract with a
professional legal and financial staffing corporation. As of the date of this
Report, one professional is actively contracted and performing services. Major
terms of the agreement are as follows:

      o     The Company will pay the staffing corporation a non-refundable
            retainer of $2,200.

      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.

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

                                 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 will be used for production and testing of the Company's
products. The addendum begins in February 2004 and expires in September 2005.
The additional monthly rent will be $4,123.

Rent expense for the three months ended July 31, 2004 and 2003 was $41,679 and
$26,400, respectively. Future minimum payments at July 31, 2004 under these
lease agreements are as follows

                           Year Ending
                             July 31,
                         -----------------
                               2005                            $107,637
                               2006                              66,375
                                                   ---------------------
                               TOTAL                           $174,012
                                                   =====================


                                       50
<PAGE>


                           PLACEMENT AGENCY AGREEMENTS

In July 2004, the Company entered into an exclusive agreement with a placement
agent to arrange for the sale of debt or equity securities. Major terms of the
agreement are as follows:

      o     The term of the agreement will be until the proposed financing is
            completed or at such time as either the Company or the placement
            agent gives 10 days' written notice of cancellation.

      o     The Company will pay a success fee equal to 8% of any of the gross
            proceeds received by the Company derived from the efforts of the
            placement agent, plus $5,000 in anticipated legal expenses at
            closing, to be paid from the proceeds of such closing.

      o     The Company will issue warrants to purchase 10% of the amounts of
            securities placed with investors through the efforts of the
            placement agent. The exercise price of the warrants will be equal to
            the price at which the securities were placed. The warrants vest
            immediately, expire four years from the date of grant, and include
            "piggyback" registration rights.

                               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 believe the evidence is inconclusive whether Phil
Gurian had control over these HiEnergy shares and if so, whether the Company's
former president and director had any knowledge of that control.

In April 2003, the Enforcement Division of the SEC commenced a formal
investigation as to the undisclosed ownership of the Company's securities by,
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 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.

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.


                                       51
<PAGE>

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

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

                                   LITIGATION

The Company received a letter dated December 5, 2002, from an attorney
representing Richard T. Eckhouse, a consultant, demanding payment for accounting
services allegedly performed by Mr. Eckhouse pursuant to a Letter Agreement
dated November 7, 2001, between Mr. Eckhouse and Microdevices. The Letter
Agreement provides that Mr. Eckhouse was to be paid $350 per hour, which was to
be paid as follows:

      (i) one-third or $117 in cash; (ii) one-third or $117 paid by a Promissory
      Note at 10% annual interest, maturing when HiEnergy receives government
      funding of $900,000 or an investment totaling $300,000 or more; and (iii)
      one-third or $117 paid by Class A common stock of Microdevices at $5.00
      per share.

In May 2003, Mr. Eckhouse filed a lawsuit against the Company, Microdevices and
Dr. Bogdan Maglich in the Superior Court of the State of California, County of
Orange, Central Justice Center, and an amended complaint in June 2003, alleging
that Microdevices owes Mr. Eckhouse a total of $313,580 for services rendered,
plus interest, attorney's fees and costs.

In June 2004, the Company reached a settlement in the legal matter with Mr.
Eckhouse. The Company agreed to pay Mr. Eckhouse $10,000 and 10,500 shares of
the Company's common stock valued at $13,440 in exchange for a mutual release.

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.


                                       52
<PAGE>

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 to commence September 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, we learned about, but have 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)".
Neither we nor our 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, the relative value of
any such claims, or any other aspect of the lawsuit.

                              MINORITY SHAREHOLDERS

As of July 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 three months ended July 31, 2004, the Company issued convertible
notes payable ("CNP") with 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 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 the penalties become
impermissible as a matter of law as prescribed in the instrument. 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 three months
ended July 31, 2004, the Company issued $325,648 of CNP, which are convertible
into 692,314 shares of common stock, all of which were in-the-money as of July
31, 2004.


                                       53
<PAGE>


                               PENALTY SECURITIES

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

As of this date, 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 until
the penalties become impermissible as a matter of law. 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        Number of
                                  Common        Shares Under
                                  Stock           Warrants                CNP
                        -------------------------------------------------------
           Aug-04                264,231           176,174               1,000
           Sep-04                286,573           182,468               1,000
           Oct-04                308,911           188,760               1,000
           Nov-04                331,249           234,518               7,000
           Dec-04                353,589           240,811               7,000
           Jan-05                375,929           247,103               7,000
           Feb-05                398,270           253,395               7,000
           Mar-05                420,607           259,689               7,000
           Apr-05                442,946           265,981               7,000
                        -------------------------------------------------------
           Total               3,182,305         2,048,899           $  46,000
                        =======================================================


                         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 July 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.

NOTE 16 - COMMON STOCK

                          COMMON STOCK ISSUED FOR CASH

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued 347,355, 600,000 and
2,396,149 shares of common stock, respectively, in exchange for cash of
$475,000, $200,000 and $2,340,623, respectively.


                                       54
<PAGE>

               OFFERING COSTS ON ISSUANCE OF COMMON STOCK FOR CASH

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company paid offering costs of
$31,750, $0 and $89,250, respectively.

                COMMON STOCK ISSUED FOR SUBSCRIPTIONS RECEIVABLE

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued 944,444, 0 and
954,444, shares of common stock, respectively, in exchange for subscriptions
receivable of $425,000, $0 and $434,982, respectively.

           COMMON STOCK ISSUED FOR SERVICES RENDERED OR TO BE RENDERED

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued 281,455, 45,000 and
13,606,614 shares of common stock, respectively, in exchange for services
rendered valued at the fair market of the common stock issued of $392,411,
$21,600 and $5,151,020, respectively.

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

      o     During the three months ended July 31, 2004, 182,955 restricted
            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.

      o     During the three months ended July 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 three months ended July 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 ISSUANCE FOR SERVICES RENDERED

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company committed to issue 25,000,
6,000 and 25,000 shares of common stock, respectively, in exchange for services
rendered valued at the fair value of the common stock on the commitment date
(which typically is the date the services are performed) of $31,540, $3,000 and
$31,540, respectively.

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

      o     During the three months ended July 31, 2004, HiEnergy committed to
            issue a total of 25,000 restricted shares of common stock valued at
            $31,540 to members of the Board of Directors of the Company and its
            subsidiaries for their attendance at scheduled meetings. Each member
            of the HiEnergy's board received 3,000 restricted shares of common
            stock for each meeting attended and each member of the board of
            HiEnergy Defense received 2,000 restricted shares of common stock
            for each meeting attended, with the exception of the Chairman of
            HiEnergy Defense who received 3,000 restricted shares for each
            meeting attended.

                      COMMON STOCK ISSUED AS PENALTY SHARES

During the three months ended July 31, 2004 and 2003, and the period from August
21, 1995 (inception) to July 31, 2004, the Company expensed $767,514, $11,679
and $2,049,877, respectively, for the issuance of 545,181, 25,952 and 1,386,904
shares of common stock, respectively, as penalties for the late registration of
common stock ("Penalty Shares"). See "Note 15 - Commitments and Contingencies,
Penalties Associated with the Late Registration of Common Stock."


                                       55
<PAGE>

              COMMON STOCK COMMITTED FOR ISSUANCE AS PENALTY SHARES

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company committed to issue 116,459, 0
and 116,459 Penalty Shares, respectively, valued at $116,550, $0 and $116,550,
respectively. 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.

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

Exercisable
July 31, 2004           3,939,449        $      0.65         1,542,726        $      1.26         5,482,175        $      0.83
                      -----------        -----------       -----------        -----------       -----------        -----------
</TABLE>


                                       56
<PAGE>

The weighted-average remaining contractual life of the options and warrants
outstanding at July 31, 2004 was 4.48 years. The exercise prices of the options
and warrants outstanding at July 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 three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 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 REPRICED IN CONJUNCTION WITH ADDITIONAL FINANCING

In June 2004, the Company amended a previously issued convertible note payable
in the amount of $50,000, which was convertible into shares of common stock at
$0.45 per share, and warrants to purchase 312,222 shares of common stock at
various exercise prices between $0.45 and $1.50. Under the amended offering, 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 NPA, 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.


                                       57
<PAGE>

A summary of the amended warrants and exercise prices follows:


               Original Agreement               Amended Agreement
           ----------------------------- --------------------------------
             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
                        ================                =================


                WARRANTS ISSUED AS PENALTY FOR LATE REGISTRATION

During the three months ended July 31, 2004 and 2003 and the period from August
21, 1995 (inception) to July 31, 2004, the Company issued or committed to issue
499,600, 0 and 690,943 respectively, warrants to purchase common stock as
penalty warrants with a fair value of $581,018, 0 and $772,028, respectively,
related to the delayed registration of the Company's common stock. The fair
values of the stock options grants were determined using the Black-Scholes
model.

NOTE 18 - SUBSEQUENT EVENTS

                    RECENT SALES AND ISSUANCES OF SECURITIES

In August 2004, the Company committed to issue 21,000 shares of common stock to
all members of the Company's Board of Directors as compensation for meeting
attendance.

In August 2004, the Company committed to issue warrants to purchase 6,933 shares
of common stock with an exercise price of $1.51 to a consultant as a finder's
fee.

From August to September 2004, the Company committed to issue unsecured
convertible notes payable totaling $476,000 to the Chairman and CEO of the
Company for loans he made to the Company, subject to board approval.

In September 2004, the Company issued a convertible note payable for $100,000,
which is convertible into shares of common stock at $0.52 per share, to an
investor for $100,000 in cash.

In September 2004, the Company issued 192,308 shares of common stock upon
conversion of a convertible note payable in the face amount of $100,000.

In September 2004, the Company issued 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 and in exchange for $33,000 in cash.

In September 2004, the Company committed to issue 15,000 shares of common stock
to the board members of the Company as compensation for meeting attendance.

                               PENALTY SECURITIES

In August through October 2004, the Company committed to issue $3,000 in
convertible notes as penalties to certain note holders with registration rights
as a result of the Company's inability to file a registration statement within
specified deadlines.


                                       58
<PAGE>


In August 2004, the Company committed to issue 275,402 shares of common stock
and warrants to purchase 179,322 shares of common stock at various exercise
prices, to various holders of securities with registration rights as penalties,
due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines.

In September 2004, the Company committed to issue 297,742 shares of common stock
and warrants to purchase 185,615 shares of common stock at various exercise
prices, to various holders of securities with registration rights as penalties,
due to the Company's inability to file and maintain effective a registration
statement within certain specified deadlines.

                      CONSULTANCY AGREEMENTS AND CONTRACTS

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

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

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

                              GOVERNMENT CONTRACTS

In September 2004, the Company entered into a Cooperative Agreement with the
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.


                                       59
<PAGE>


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

Any reference to "we," "us" and "our" herein shall mean HiEnergy Technologies,
Inc., together with its consolidated subsidiaries, 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.

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.


                                       60
<PAGE>


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

GENERAL

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

OVERVIEW OF COMPANY

HiEnergy Technologies, Inc. ("HiEnergy", together with its subsidiaries, the
"Company") is a nuclear technologies-based company focused on the research and
development of proprietary, neutron-based, "stoichiometric" sensor devices. 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, 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 three additional prototype applications which, if we are able
to raise the funds necessary to commercialize them, will be the next products we
attempt to launch: anti-tank landmine detector, unexploded ordinance detector,
which is used to detect Improvised Explosive Devices ("IEDs"), both of which are
typically above the ground, and the Refractorymeter, which can detect fissures
or erosions in the ceramic lining of oil cracking tanks. 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 April 30, 2004, the merger had not been effected,
but we anticipate its completion by the end of 2004.

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.


                                       61
<PAGE>


Our common shares currently trade on the National Association of Securities
Dealers ("NASD") OTC Bulletin Board ("OTCBB") under the symbol "HIETE". Prior to
August 19, 2004, our shares were traded on the OTCBB under the symbol "HIET".
Upon receipt by the NASD of notification that HiEnergy Technologies has filed
this Report, the "E" is expected to be removed and our trading symbol reverted
to "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 on the date an
instrument was granted.


                                       62
<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 JULY 31, 2004 COMPARED TO THREE MONTHS ENDED JULY 31, 2003

For the three months ended July 31, 2004, we incurred a net loss of $4,128,000,
as compared to a net loss of $1,079,000 for the three months ended July 31,
2003. Included in the losses are equity based expenses of $2,927,000 and
$202,000, respectively.

OPERATING EXPENSES

GENERAL AND ADMINISTRATION

General and administration expenses were $1,685,000 for the three months ended
July 31, 2004, an increase of $722,000 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>

                                Three Months Ended July 31, 2004        Three Months Ended July 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         $ 154,000   $    39,000  $  193,000     $ 83,000         $     -    $ 83,000      $110,000

 Consulting                       85,000       246,000     331,000      100,000         168,000     268,000        63,000

 Legal fees                      194,000       396,000     590,000      226,000          22,000     248,000       342,000

 Accounting fees                 140,000             -     140,000       55,000               -      55,000        85,000
 Investor  & public
 relations                        62,000             -      62,000      135,000               -     135,000      (73,000)

 Insurance                        43,000             -      43,000       30,000               -      30,000        13,000

 Travel                          129,000             -     129,000       53,000               -      53,000        76,000

 Other                           137,000        60,000     197,000       91,000               -      91,000       106,000
                             -------------------------------------- ------------------------------------------------------

                  Total        $ 944,000     $ 741,000  $ 1,685,000    $ 773,000       $ 190,000   $ 963,000     $ 722,000
                             -------------------------------------- ------------------------------------------------------
</TABLE>

For the three months ended July 31, 2004 compared to the prior year period,
salary and benefits expense increased $110,000. This increase was primarily due
to the formation of our HiEnergy Defense subsidiary in August 2003, the hiring
of 2 additional personnel, as well as normal pay increases. The hiring activity
was associated with restaffing certain key personnel vacancies which resulted
from cash saving measures instituted in March 2003 that aimed to reduce
operational expenses and 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.


                                       63
<PAGE>


Consulting expenses for the three months ended July 31, 2004 increased $63,000
over the prior year period, primarily due to an increase of equity based
compensation given to service providers in the amount of $78,000. During the
three months ended July 31, 2004, the Company relied to a greater degree on
paying for services with equity instruments in lieu of cash at substantial
discounts (due to the restricted nature of the equity instruments), which in
turn added greater expenses to our results of operations. We have had little
alternative but to offer discounted equity based compensation due to our failure
to file and maintain an effective registration statement, raise significant
capital, as well as other persistent issues. We expect to be required to
continue similar practices of isssuing discounted equity used for this purpose
through the second quarter of fiscal 2005, after which we anticipate being in a
better position from which to offer cash remuneration for services, or negotiate
less substantial discounts on equity and under more favorable terms.

Legal fees increased $342,000 for the three months ended July 31, 2004 compared
to the prior year period, primarily due to an increase in equity based
compensation given to legal service providers in the amount of $396,000, as
compared to only $22,000 for the prior year period. During the three months
ended July 31, 2004, as discussed in the preceding paragraph, the Company also
relied to a greater degree on paying for services with equity instruments in
lieu of cash at substantial discounts. Similarly, we expect that we will
continue with similar discounting of equity used for this purpose through the
second quarter of fiscal 2005. Notwithstanding, legal activity increased
significantly in the current period due to certain litigation matters concerning
disputes with former directors and consultants and certain regulatory matters
related to the SEC investigation and related Wells Notice. We expect overall
legal expenses will remain high throughout the first half of fiscal 2005,
decreasing in the second half, as we attempt to settle current SEC issues and
pending legal matters disclosed in this Report.

Accounting fees increased $85,000 for the three months ended July 31, 2004
compared to the prior year period. This increase was due to the recent
restatement of our financial results for the fiscal years ended 2002 and 2003,
as well as the completion of our fiscal 2004 audit. We expect accounting fees to
remain high for the first half of fiscal 2005, decreasing in the second half, as
we finish the filing of our restated annual and quarterly financial results,
return to normal reporting patterns, and seek futher improvements and
efficiencies in our financial controls and reporting.

Investor and public relations expense decreased $73,000 for the three months
ended July 31, 2004 as compared to the prior year period. This decrease was the
result of our cost-cutting measures instituted in March of 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.

Insurance expense increased $13,000 over the prior year period, primarily
attributable to an increase of $8,000 in health insurance cost. Notably, in May
2004, we were able to renew our Directors and Officers liability policy for an
additional year without incurring a substantial cost increase, the current
period cost was $2,000 greater than the prior period. At present, we maintain
$2,000,000 of Directors and Officers liability insurance.

Travel expenses increased to $129,000 for the three months ended July 31, 2004,
representing an increase of $77,000 over the prior year period. This increase
was primarily due to travel expenses related to our recent demonstration of our
CarBomb Finder prototype in Istanbul, Turkey, which was attended by our
scientific personnel and required expedited shipments of equipment and materials
utilized in the demonstration.

Included in other expenses for the three months ended July 31, 2004 is $60,000
of equity based compensation for Edgar filing services and $63,000 for postage
and delivery expense. The use of our equity has become increasingly costly as
discussed above. The $63,000 for postage and shipping represents a $59,000
increase, which was in great part incurred with the shipment of our prototype
and equipment overseas for demonstration in Istanbul, Turkey. Other expense
consists of stock transfer agent fees, telephone office equipment and supplies,
licenses and permits, and web design and development, and have increased
consistent with our expanded business development and international efforts
during the current period.


                                       64
<PAGE>


RESEARCH AND DEVELOPMENT

Net research and development expenses increased $122,000 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/
                          July 31, 2004   July 31, 2003       (Decrease)
                            ---------        ---------        ---------
Salaries and benefits       $ 165,000        $ 136,000        $  29,000

Consultants                    13,000           18,000           (5,000)

Supplies                       17,000            6,000           11,000

Travel                         10,000            1,000            9,000

Depreciation                   43,000           29,000           14,000

Other                          63,000           12,000           51,000

Grant income                  (91,000)        (104,000)          13,000
                            ---------        ---------        ---------
                Net         $ 220,000        $  98,000        $ 122,000
                            ---------        ---------        ---------

Salaries and benefits related to research and development activities increased
$29,000 for the three months ended July 31, 2004 compared to the prior year
period, as we added additional scientific personnel to advance the development
of our technology and devices. Consulting expenses decreased $5,000 as a result
of the additional hiring.

Supply expense increased $11,000 for the three months ended July 31, 2004
compared to the prior year period due to increased research and development
activities and testing, which require greater expenditures for materials.

Travel expenses for the current year increased $9,000 for the three months ended
July 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 of $201,000 during the three months ended July 31,
2004 and $246,000 throughout fiscal year 2004. These increased depreciation
expense by $14,000 period over period.

Other expenses for the three months ended July 31, 2004 increased $51,000
compared to the prior year period. The primary increase is attributed to
increases in both the rental rate per square foot and the total square footage
of the rental space, and $15,000 for material modifications of our CarBomb
Finder prototype for demonstration. Other expenses, including, telephone,
furniture and fixture rentals increased consistent with our expanded business
development efforts during the current period.

For the three months ended July 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 $506,000 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.


                                       65
<PAGE>


DEPRECIATION

Total depreciation expense for the three months ended July 31, 2004 and 2003 was
$52,000 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 July 31, 2004 increased to $756,000
from $5,000 for the prior year. The increase was primarily due to $725,000 of
non-cash charges upon issuance of convertible notes payable (CNP) with
detachable warrants to investors and $5,000 for issuance of CNP issued to our
former legal counsel.

During the three months ended July 31, 2004, we expensed as interest the total
proceeds of $725,000 derived from the sale of CNP with detachable warrants to
investors, since the combined fair value of the beneficial conversion feature
and the detachable warrants exceeded $725,000 under GAAP accounting rules. The
CNP were convertible immediately and subject to rescission rights, 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.

During the three months ended July 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 for $725,000 carry a 5% interest rate, and the CNP to
our former legal counsel for $26,000 carry a 10% interest rate. These notes and
other notes payable of lesser amount, generated interest expense of $26,000 for
the three months ended July 31, 2004.

Interest income for both periods 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.

For the three months ended July 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 additional CNP equal to 2% of the principal amount of the
original notes. In addition, since the original CNP included detachable
warrants, these investors also received and will continue to receive each month,
additional detachable warrants to purchase 2% of the amount of shares underlying
the original warrants. For the three months ended July 31, 2004, we recorded a
$41,000 expense upon amending warrants to provide for the purchase of an
additional 26,400 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 July 31, 2004, we recorded $883,000 as a penalty
expense upon the issuance or the committed issuance of 661,640 shares of common
stock. Certain holders of unregistered common stock received and will continue
to receive each month additional shares 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,
amendments to their warrants providing for an additional number of shares
underlying each warrant as a percentage of the original number of shares
underlying the warrants. For the three months ended July 31, 2004, we recorded a
$540,000 expense upon amending warrants to purchase 473,202 additional common
shares as penalties to these investors. The fair value of these warrants was
determined using the Black-Scholes model.


                                       66
<PAGE>


For the three months ended July 31, 2003, we issued 25,952 shares of common
stock as penalties and recorded $12,000 for penalty expense.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2004, we had cash and cash equivalents of $8,000 and 61,000 in
grant money receivable for progress completed, which was collected in August
2004.

Other current assets, as of July 31, 2004, consisted primarily of $102,000 for
prepaid insurance and a deposit of $38,000 towards the purchase our neutron
generator component.

During the three months ended July 31, 2004, our sources of cash were as
follows:

                                                                  Amount
                                                              ---------------
          Sales of common stock                                $   443,000

          Sales of convertible notes payable
            Subject to rescission rights                           300,000

          Collection of equity subscription receivable             425,000
                                                              ---------------
                                                               $ 1,168,000
                                                              ---------------

As of July 31, 2004, accounts payable increased $61,000 from that of the fiscal
year ended April 30, 2004, to $639,000. This increase was primarily due to cash
liquidity constraints and the need to delay payments on certain obligations.
Included in the total balance are significantly aged amounts that are being
evaluated for legitimacy.

As of July 31, 2004, we had accrued expenses of $92,000, which consisted
primarily of a $50,000 fee payable to an investment bank. In August 2003, the
Company signed an agreement with an investment bank to support its bid to obtain
a $1,600,000 grant under a contract with the U.S. Navy. 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. In
exchange for this guarantee, the Company was obligated to pay the investment
bank a fee which ranged from $50,000 to $150,000, depending whether or not the
contract with the U.S. Navy was awarded to us. 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 July 31, 2004, we expensed an accrued payroll and payroll tax liability
for the most recent period of $29,000, and accrued $8,000 interest for a payroll
tax liability, bringing the total liability to $401,000 for stock compensation
(in the form of Microdevices shares) given to officers, employees, directors,
legal advisors and consultants for services rendered during the period from June
1997 through February 2002. We had previously reported an accrual of $350,000 at
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 $401,000 as calculated,
including penalties and interest. See Note 8 to our unaudited Consolidated
Financial Statements.

As of July 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.


                                       67
<PAGE>


As of July 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.

As described in Note 12 to our unaudited Consolidated Financial Statements, 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 prices 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.

Also 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 principal balance of the original CNP, 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 three months ended July 31, 2004, we issued to investors $3,000 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% 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 $539,000 as of July 31, 2004. Ignoring
accrued interest the notes would be convertible into approximately 1,197,778
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
July 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 July 31, 2004, we have reserved a current
liability of $1,058,000 against these shares until such time as we have
determined with our legal advisors whether or not the rescission rights are
valid. The current liability as of April 30, 2004 was netted against a $425,000
subscription receivable for 944,444 committed shares which was collected in May.

As of July 31, 2004, we had total liabilities of approximately $4.6 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 commissions. 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 commission of $31,750, we also issued 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.


                                       68
<PAGE>


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 beginning July 2004. We will lease purchase these
units from the vendor for up to 12 months with estimated monthly payments of
$5,800, whereas 80% of the lease payments shall be applied to 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. Payment terms for these detectors require 50% down payment upon order with
the balance due upon our receipt and acceptance.

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

PLAN OF OPERATION

Our continuing corporate focus for fiscal year 2005 is to commercialize and
bring to market our explosives identification prototypes. Our Middle Eastern
distributor (EEMCO) has had various discussions with potential customers and has
deposited $25,000 in August against the purchase of a prototype unit, which
EEMCO plans to display in Istanbul, Turkey. Istanbul is being considered as a
final staging and technical support base for sales to the Middle East. EEMCO is
wholly owned by a member of our Board of Directors who is also a shareholder of
the Company. Initial assembly will be handled from our research and development
facility located in Irvine, California. Assembly at this facility will be very
limited and we may be required to outsource certain functions and/or hire
additional technicians on a needs basis. 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. Together,
we are currently reviewing different locations and expect to choose a location
within the current quarter. We are seeking approximately 60,000 square feet of
space which will allow us to expand production based on demand. We have received
positive feedback regarding demand for our explosives identification products
but have not finalized our pricing or marketing plans. Accordingly, we will
scale production as we are better able to ascertain sales parameters. We expect
that the facility will be operational in 2005. Construction and/or build-out
costs are estimated to fall between $1 million and $2.5 million and we are
negotiating with local municipalities for monetary incentives to locate to their
area.

We plan to 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. We intend
to also build upon our investments in the base unit and technologies comprising
our explosives identifications prototypes and introduce more sophisticated
applications and configurations. We will use the proceeds of existing government
grants and any new grants or research and development contracts, as well as
other available funds and financing means to forward these objectives.

We believe that general and administrative costs will remain high in the first
half of fiscal year 2005 and show improvement in the second half as we reduce
legal and accounting expenses associated with the restatement of the Company's
financial statements and certain litigation concerning disputes with former
directors, employees and consultants and certain regulatory matters related to
SEC investigations.

Materials and production costs for our explosive identification units will be
significant in fiscal year 2005, increasing throughout the year. Working capital
requirements 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 from economies of scale upon opening of our
production facility, together with increased demand following the introduction
of our products into the marketplace. We are also evaluating service and
warranty plans and are negotiating and have entered into certain outsourcing
servicing arrangements.


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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 be necessary. We
anticipate the need to hire individuals to manage the product manufacturing and
distribution functions, and to fill and upgrade key executive positions in the
last quarter of calendar year 2004, including, among others, a Chief Financial
Officer. Other areas that may require additional personnel include serving
various sales and marketing and customer service functions. As funds are
available, 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, 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 seeking 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 to $10 million. This will cover facility build
out, inventory procurement and operations. Currently, we have no current
commitments to raise the additional capital necessary to meet these fianancial
requirements..


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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 $
$25,944,085 AS OF JULY 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 $4,128,489 for the three months ended July 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 device: the CarBomb Finder. 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 is not
well-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.


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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 a prototype of our CarBomb Finder, and are preparing to
introduce our first commercial products, which include the CarBomb Finder 3C3
and the CarBomb Finder 3C4 models, 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 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 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 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, 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 device 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, 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 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 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 device, the CarBomb Finder;

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

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

      o     receipt of any requisite approvals from the Nuclear Regulatory
            Commission (NRC), the Department of State, the Department of
            Commerce, the Department of Defense, and similar state or foreign
            authorities, as applicable;

      o     market acceptance of the CarBomb Finder and after-market
            satisfaction related to performance and maintenance issues;

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


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      o     the availability and cost of key components for the CarBomb Finder;

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

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

We have introduced our prototype device, the CarBomb Finder, 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 three months ended
July 31, 2004 and July 31, 2003, we spent $220,002 or 12% and $98,322 or 9%,
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 three months ended July 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. We anticipate
research and development costs to stay approximately at the same level, to the
extent that independent testing of the CarBomb Finder device 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, 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 device
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 was 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 MAINTAIN OR CAPTURE ADDITIONAL 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 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
SUCCESSFULLYEXECUTE 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 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 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
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 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, 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 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 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 (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 device, including neutron generators with custom modifications and
certain sub-assemblies. We have placed orders for these key components for the
first 10 CarBomb Finders 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 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. 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
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.

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. Nonethess, 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 appropriations are made by Congress for future
periods. The inability or failure by the government in funding one or more of
the contracts for our products under development would harm our business.


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

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

We have incurred net losses since our inception. For the fiscal year ended April
30, 2004 and the three months ended July 31, 2004, we reported net losses
available to common stockholders of approximately $8,183,346 and $4,128,489,
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 $1,661,826
for the three months ended July 31, 2003. Our accumulated deficit through July
31, 2004 was $25,944,085. We expect that our losses will continue into fiscal
year 2005. It appears 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
device 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
DEVICE IN AN IMPORTANT MARKET. IF THE THIRD PARTY IS UNSUCCESSFUL IN MARKETING
THE CARBOMB FINDER, 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 the relevant 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 is 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 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 AND FUTURE PRODUCTS.

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

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

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


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IF FUTURE PRODUCTS, SUCH AS THE CARBOMB FINDER, 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.

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.


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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.

During the year ended April 30, 2003 and the quarter ended July 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.


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

During the period from September 3, 2003 through April 16, 2004, we had on file
with the Securities and Exchange Commission registration statements on Form SB-2
seeking to register for public sale shares of our common stock. A total of 5
million of those shares to be registered were for the sale of newly issued
shares, and the remainder was to be registered for the account of selling
stockholders who purchased our shares in private placements conducted by us
previously. On September 19, 2003, we withdrew the registration statement
containing the shares to be registered for our own public offering, and re-filed
a registration statement solely seeking to register the shares of our selling
stockholders. This registration statement was 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 accredited
investors. While it is true that rules and regulations under the Securities Act
of 1933 do not permit us to conduct a public offering on a continuous basis at
varying prices or a negotiable price, the only overlap occurred with respect to
the selling stockholders' registration statement. Although we, as an issuer,
were not selling stock publicly and privately at the same time, it is possible
that the contemporaneous, private offering of our securities by us 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 only 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 makes rendering such offering and unregistered public offering
illegal. In such event, the persons who purchased securities in such an offering
may be entitled to, among 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 investor the amount it received as
consideration for the illegally issued securities, plus any interest accrued
with respect to such amount at the applicable rate, and the securities would be
cancelled.

While we have not completed an independent investigation into whether or not the
rescission rights are in fact due to certain stockholders, or whether or not
there may be defenses which could negate the requirement to offer buy-back or
rescission rights to your prior investors (for example, the effect of Rule 155,
which is a safe harbor with respect to integration if one of the simultaneous
offerings that caused the integration has been abandoned), we do not anticipate
receiving any demands for repurchase of these shares. Nevertheless, until such
time as we have determined with our legal advisors whether or not integration
has occurred, we have reserved the total proceeds estimated at $1,058,156
(without regard to penalties or other amounts that might be assessable by any
state) as a liability on our balance sheet.

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.

As an example, we have been advised about, but have not yet been served with, a
Complaint filed in federal court in Orange County, California, which is styled
as a "Complaint for Violation of Federal Securities Laws (Class Action)".
Neither we nor our legal counsel have yet had an opportunity to study the
Complaint, and therefore cannot make any determination as to the merit of the
claims asserted, possible defenses to any such claims, the relative value of any
such claims, or any other aspect of the lawsuit.

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

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

CORPORATE RISKS

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

As of July 31,m 2004, Dr. Bogdan C. Maglich , our Chief Executive Officer,
Chairman, Chief Scientific Officer, Treasurer and President, beneficially owns
24.1% 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.

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

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


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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 August 30, 2004 is 803,565 shares of common stock,
$7,000 in aggregate face amount of additional convertible notes, and warrants to
purchase an additional 178,983 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;

      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.


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<PAGE>

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 July 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.

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 36,180,087 shares of our common stock outstanding as of Ocotber 15,
2004, which does not include 19,870,148 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
up to $15,518,705 in cash and up to $1,282,435 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 percentages of
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
which 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.


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<PAGE>

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.

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.


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<PAGE>

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, such as a party that has
            completed a successful tender offer, until three years after that
            party became a 15%-or-greater stockholder; and

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

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


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<PAGE>


                         ITEM 3. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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 July 31, 2004 had not been effective
in timely alerting us on a timely basis to material information relating to the
company required to be included in our reports filed under the Securities
Exchange Act. The deficiencies which we experienced during that period resulted
from three primary problems: (1) a general lack of corporate governance due to
our extreme 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 many corporate and business functions simultaneously; (2) a lack of general
oversight through a systematic and formal approach to the conduct of our
corporate, financial and business affairs, resulting in a lack of effective
communication between management and our Board of Directors; 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 course, 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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<PAGE>

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. Our
arbitration hearing in this matter has been set to begin on September 28, 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.


                                       91
<PAGE>


                          ITEM 2. CHANGES IN SECURITIES

SET FORTH BELOW IS INFORMATION REGARDING THE ISSUANCE AND SALE OF UNREGISTERED
SECURITIES DURING THE THREE-MONTH PERIOD ENDED JULY 31, 2004

      o     In July 2004, we committed to issue 9,000 shares of our common
            stock, par value $0.001 ("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 July 2004, we issued 241,440 Shares and warrants to purchase
            176,975 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 were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In July 2004, we issued warrants to purchase 100,000 Shares with an
            exercise price of $0.99 to Jim Hertzog for consulting services,
            pursuant to his employment agreement. We believe the issuance of
            these securities was exempt under Section 4(2) of the Securities
            Act.

      o     In July 2004, we issued 182,955 Shares to Richardson & Patel, LLP
            for legal and consulting services. We believe the issuance of these
            securities was exempt under Section 4(2) of the Securities Act.

      o     In June 2004, we issued a convertible promissory note for $240,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 1,578,666 Shares at various exercise prices between $0.45
            and $1.25, to Richard Melnick. We believe the issuances of these
            securities were exempt under Section 4(2) under the Securities Act.

      o     In June 2004, we issued a convertible promissory note for $60,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 394,666 Shares at various exercise prices between $0.45 and
            $1.25, to Sherbrooke Partners, LLC. We believe the issuances of
            these securities were exempt under Section 4(2) under the Securities
            Act.

      o     In June 2004, we amended a previously issued convertible promissory
            note in the amount of $50,000, which was convertible into Shares at
            $0.45 per share, and warrants to purchase 312,222 Shares at various
            exercise prices to Richard Melnick. Under the amended offering, we
            issued separate convertible promissory notes of $40,000 and $10,000,
            in lieu of the prior note, to Richard Melnick and Sherbrooke
            Partners. LLC, respectively, and certain warrants were repriced such
            that we issued additional warrants to purchase 77,778 at various
            exercise prices between $0.45 and $1.25. We believe the issuances of
            these securities were exempt under Regulation D and/or Section 4(2)
            under the Securities Act.

      o     In June 2004, we committed to issue 9,000 Shares to the members of
            the Board of Directors 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 June 2004, we issued 10,500 Shares to Richard Eckhouse to settle
            a lawsuit. We believe the issuances of these securities were exempt
            under Regulation S and/or Section 4(2) under the Securities Act.

      o     In June 2004, we issued 99,010 Shares and warrants to purchase
            32,673 Shares with an exercise price of $2.50 to Josefa Nazabal
            Aguirre in exchange for $100,000 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 June 2004, we issued 19,868 Shares and warrants to purchase 6,623
            Shares with an exercise price of $2.75 to Benicio Alonso Perez in
            exchange for $30,000 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 June 2004, we issued 66,225 Shares and warrants to purchase
            22,075 Shares with an exercise price of $2.75 to Las Chafiras S.A.
            in exchange for $100,000 in cash. We believe the issuances of these
            securities were exempt under Regulation S and/or Section 4(2) under
            the Securities Act.


                                       92
<PAGE>


      o     In June 2004, we issued 19,868 Shares and warrants to purchase 6,623
            Shares with an exercise price of $2.75 to Miguel Gay Rogel in
            exchange for $30,000 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 June 2004, we issued 33,113 Shares and warrants to purchase
            11,038 Shares with an exercise price of $2.75 to Jose M. Sanclimens
            Genesca in exchange for $50,000 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 June 2004, we issued 66,225 Shares and warrants to purchase
            22,075 Shares with an exercise price of $2.75 to Orovales
            Investment, Inc. in exchange for $100,000 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 June 2004, we issued 13,245 Shares and warrants to purchase 4,415
            Shares with an exercise price of $2.75 to Alcia Vicens Hernandez in
            exchange for $20,000 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 June 2004, we issued 219,251 Shares and warrants to purchase
            163,491 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 were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In May 2004, we issued 29,801 Shares and warrants to purchase 9,934
            Shares with an exercise price of $2.75 to Luis Lopez Echeto in
            exchange for $45,000 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 May 2004, we committed to issue warrants to purchase 199 Shares
            with an exercise price of $2.75 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 May 2004, we committed to issue 7,000 shares of our common stock,
            par value $0.001 ("Shares") to the board members of HiEnergy
            Defense, 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 May 2004, we issued 3,500 Shares to Publex Ventures LLC as
            compensation for consulting services. We believe the issuances of
            these securities are exempt under Regulation S and/or Section 4(2)
            under the Securities Act.

      o     In May 2004, we issued 168,976 Shares and warrants to purchase
            156,277 Shares at various exercise prices to various holders of
            securities with registration rights as penalties, due to the
            inability to file and maintain effective a registration statement
            within certain specified deadlines. We believe the issuances of
            these securities were exempt under Section 3(a)(9) of the Securities
            Act.

      o     In May 2004, we issued a convertible promissory note for $425,000,
            which is convertible into Shares at $0.45 per share, and warrants to
            purchase 3,891,111 Shares at various exercise prices between $0.45
            and $1.25, to Platinum Partners Value Arbitrage Fund, LP. We believe
            the issuances of these securities were exempt under Regulation D
            and/or Section 4(2) under the Securities Act.

      o     In May 2004, we issued 351,452 Shares to Platinum Partners Value
            Arbitrage Fund, LP, which converted a convertible promissory note
            plus accrued interest in the amount of $158,153 into Shares. We
            believe the issuances of these securities were exempt under
            Regulation D and/or Section 4(2) under the Securities Act.

      o     In May 2004, we issued 95,000 Shares to Stern Consulting for
            consulting services. We believe the issuance of these securities was
            exempt under Section 4(2) of the Securities Act.


                                       93
<PAGE>

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBIT INDEX

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

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

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

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

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

4.1.1 (5)          Specimen Common Stock Certificate

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       94
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.17.1 (6)        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.
</TABLE>


                                       95
<PAGE>

<TABLE>
<CAPTION>
<S>                <C>
10.23 (16)         Consulting Agreement dated September 25, 2002 between the Registrant and Barry Alter*

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

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

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

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

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

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

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

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

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

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

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

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

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.
</TABLE>


                                       96
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

10.54 (10)         International  Distribution  Agreement  between the Registrant  and Electronic  Equipment Marketing
                   Company (EEMCO) dated July 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
</TABLE>


                                       97
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.78              Consulting Agreement dated July 22, 2004 between Greg Henkel 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

23.1               Consent of Singer Lewak Greenbaum & Goldstein LLP, independent accountants
</TABLE>

      *     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.

      (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.


                                       98
<PAGE>

      (4)   Filed on September 20, 2002 as an exhibit to HiEnergy Technologies'
            quarterly report on Form 10-QSB for the fiscal quarter ended July
            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.


                                       99
<PAGE>


(B) REPORTS ON FORM 8-K

On September 28, 2004, we filed a report on Form 8-K dated September 24, 2004.
The report disclosed under Item 9.01 that we received a letter from Integrated
Concepts & Research Corporation ("ICRC") advising of its intention to issue a
subcontract to us for assistance in completing the manufacture and delivery of a
single SmarTruck prototype integrating our CarBomb Finder system.

On September 27, 2004, we filed a report on Form 8-K dated September 24, 2004.
The report disclosed under Item 9.01 the changing of the designated trading
symbol for our common shares from "HIET" to "HIETE" as a result of our being
delinquent in our periodic reporting requirements under the Securities Exchange
Act.

On September 17, 2004, we filed a report on Form 8-K dated September 17, 2004.
The report disclosed under Item 8.01 that the designated trading symbol for our
common shares was changed from "HIETE" to "HIET" as a result of our filing our
Annual Report on Form 10-KSB for the fiscal year ended April 30, 2004 with the
Securities and Exchange Commission. Notification, and that the our common shares
would commence trading under the symbol "HIET" on September 17, 2004.

On September 14, 2004, we filed a report on Form 8-K dated September 14 , 2004.
The report disclosed under Item 9.01 that we filed our Annual Report on Form
10-KSB for the fiscal year ended April 30, 2004 with the Securities and Exchange
Commission.

On August 25, 2004, we filed a report on Form8-K dated August 24, 2004. The
report disclosed under Item 5 we were making all diligent efforts to cure its
failure to timely file its Annual Report on Form 10-KSB for the fiscal year
ended April 30, 2004, in response to our having received an extraordinary volume
of inquiries.

On August 20, 2004, we filed a report on Form 8-K dated August 19, 2004. The
report disclosed under Item 5 the changing of the designated trading symbol for
our common shares from "HIET" to "HIETE" as a result of our being delinquent in
our periodic reporting requirements under the Securities Exchange Act.

On August 9, 2004, we filed a report on Form 8-K dated August 9, 2004. The
report disclosed under Item 5 that we held a Special Meeting of the Board of
Directors to increase the number of members comprising the Board of Directors,
to appoint William A. Nitze and Peter J. Le Beau as members of the Board of
Directors and to appoint David R. Baker and Peter J. Le Beau to serve on our
Audit Committee, of which Mr. Le Beau will serve as Chairman.

On July 8, 2004, we filed a report on Form 8-K dated July 8, 2004. The report
disclosed under Item 5 that we received a "Wells Notice" and written requests
for information from the SEC.

On June 17, 2004 we filed a report on Form 8-K dated June 17, 2004. The report
disclosed under Item 5 that our technical team was scheduled to demonstrate and
test the operation of its CarBomb Finder(TM) in Spain on July 8, 2004. The
report further disclosed under Item 9 our response to news stories concerning
the Securities and Exchange Commission's filing of an application for order
requiring compliance with administrative subpoenas.

On June 9, 2004 we filed a report on Form 8-K dated June 9, 2004. The report
disclosed under Item 5 that the House of Representatives had approved $1,500,000
for Stoichemetric Explosives Detection Systems in FY 2005 National Defense
Authorization Act. The report further disclosed under Item 9 that we would be
restating its past financial statements.

On May 21, 2004, we filed a report on Form 8-K dated May 21, 2004. The report
disclosed under Item 5 that we are developing a new product called the
Refractorymeter and had submitted a patent application with the United States
Patent Office on March 11, 2004.

On May 17, 2004, we filed a report on Form 8-K dated May 17, 2004. The report
disclosed under Item 5 that we had placed orders for key components of 10
CarBomb Finders(TM); had executed a Preliminary Manufacturing Facility
Assessment Agreement with Lockwood-Greene, and had appointed a Director of Sales
and Marketing to its team.


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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:    OCTOBER 20, 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)



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