| **Incorporated in Delaware       81 West Main Street       Waterbury, CT 06702      (203) 755-5083** | ****   | **IRS Employer ID #            06-1339248** |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|
|                                                                                                 |   |                                                                      |

| **Title of each class:** Common Stock, $0.001 par value |   | **Name of each exchange on which registered** American Stock Exchange |
|---------------------------------------------------------|--------|-----------------------------------------------------------------------|

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| **ANNUAL PERIOD**          | ****   | ****   | **MONTHLY LEASE         RATE** | ****   | ****   | **ANNUAL LEASE        RATE** | ****   |
|----------------------------|--------|--------|--------------------------------|--------|--------|------------------------------|--------|
|                       |   |   |                                |   |   |                              |   |
| Feb 1 2004 to Jan 31, 2005 |   | $      | 9,388.96                       |   | $      | 112,667.58                   |   |
| Feb 1 2005 to Jan 31, 2006 |   | $      | 9,388.96                       |   | $      | 112,667.58                   |   |

| **ANNUAL PERIOD**            | ****   | ****   | **MONTHLY LEASE         RATE** | ****   | ****   | **ANNUAL LEASE        RATE** | ****   |
|------------------------------|--------|--------|--------------------------------|--------|--------|------------------------------|--------|
|                         |   |   |                                |   |   |                              |   |
| May 1 2004 to April 30, 2005 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2005 to April 30, 2006 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2006 to April 30, 2007 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2007 to April 30, 2008 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2008 to April 30, 2009 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2009 to April 30, 2010 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2010 to April 30, 2011 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |
| May 1 2011 to April 30, 2012 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |

----

| ****                          | ****   | **Common Stock** | ****     |
|-------------------------------|--------|------------------|----------|
| **Year Ended June 30, 2004,** | ****   | ****             | **High** | **** | **** | **Low** | **** |
|                          |   |             |          |   |   |  |   |
| 4th Quarter                   |   | $                | .77      |   | $ | .57 |   |
| 3rd Quarter                   |   |             | .88      |   |   | .48 |   |
| 2nd Quarter                   |   |             | .77      |   |   | .43 |   |
| 1st Quarter                   |   |             | .89      |   |   | .65 |   |
|                          |   |             |     |   |   |   |   |
|                          |   |             |     |   |   |   |   |
| **Year Ended June 30, 2003,** | ****   | ****             | **High** | **** | **** | **Low** | **** |
|                          |   |             |          |   |   |  |   |
| 4th Quarter                   |   | $                | .80      |   | $ | .40 |   |
| 3rd Quarter                   |   |             | .88      |   |   | .40 |   |
| 2nd Quarter                   |   |             | .66      |   |   | .42 |   |
| 1st Quarter                   |   |             | 1.47     |   |   | .40 |   |

----

| **Plan Category**                                                                             | ****   | **Number of         securities        to be issued upon        exercise of        outstanding options** | ****   | ****   | **Weighted-average        exercise price of        outstanding        options,** | ****   | **Number of securities        remaining available        for future issuance        under equity        compensation plans** |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by            security holders         |   | 956,371                                                                                                 |   | $      | 1.42                                                                             |   | 1,900,000                                                                                                               |
| Equity compensation plans not      approved by           security holders |   | 370,629                                                                                                 |   | $      | .77                                                                              |   | 195,844                                                                                                                 |
| Total                                                                                         |   | 1,327,000                                                                                               |   | $      | 1.24                                                                             |   | 2,095,844                                                                                                               |
|                                                                                          |   |                                                                                                         |   |   |                                                                                  |   |                                                                                                                              |

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| **(In dollars, except for ratios)**  |   |        | **2004**        |   |        | **2003**        |   |
|--------------------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
|                                 |   |   |            |   |   |                 |   |
| TOTAL CURRENT ASSETS                 |   | $      | 1,081,329  |   | $      | 1,789,941  |   |
| TOTAL CURRENT LIABILITIES            |   |        | 1,600,134  |   |        | 1,013,773  |   |
| WORKING CAPITAL (DEFICIT)            |   | $      | (518,805)       |   | $      | 776,168    |   |
|                                 |   |   |                 |   |   |                 |   |
| WORKING CAPITAL (DEFICIT) RATIO TO 1 |   |   | (0.7)           |   |   | 1.8        |   |
|                                 |   |   |                 |   |   |                 |   |

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| **Number** |   | **Description of Document**                                                                                                                                                                                                                                  |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |   | Certificate of Incorporation      (Incorporated by reference to the Exhibit 3.1 to the Registrant's Registration      Statement on Form 8-A filed with the Commission on October 20, 1994 )                                                                  |
| 3.2        |   | By-Laws (Incorporated by reference      to the Exhibit 3.2 to the Registrant's Registration Statement on Form 8-A      filed with the Commission on October 20, 1994)                                                                                        |
| 4.1        |   | Form of Common Stock Certificate      (Incorporated by reference to the Exhibit 4.1 to the Registrant's Registration      Statement on Form 8-A filed with the Commission on October 20, 1994)                                                               |
| 10.1       |   | Common Stock Purchase Agreement      with Icon Investors, Ltd. (Incorporated by reference to Exhibit 1.1 to the      Registrant's Registration Statement on Form SB-2 filed with the Commission      on March 24, 2004)                                      |
| 10.2       |   | Registration Rights Agreement      with Icon Investors, Ltd. (Incorporated by reference to Exhibit 1.2 to the      Registrant's Registration Statement on Form SB-2 filed with the Commission      on March 24, 2004)                                        |
| 10.3       |   | Consulting Agreement, dated February      17, 2004, with Capital Management Internationale (Incorporated by reference      to Exhibit 1.3 to the Registrant's Registration Statement on Form SB-2 filed      with the Commission on March 24, 2004)          |
| 10.4       |   | Amendment No. 1 to Common Stock      Purchase Agreement with Icon Investors, LLC (Incorporated by reference to      Exhibit 1.4 to Amendment No. 2 to the Registrant's Registration Statement      on Form SB-2 filed with the Commission on April 27, 2004) |
| 10.5       |   | Rights Agreement (Incorporated      by reference to the Exhibit 4.2 to the Registrant's Registration Statement      of Form S-3 filed with the Commission on November 27, 2002)                                                                              |
| 10.6       |   | Loan and Security Agreement dated      as of August 12, 2004 between the Registrant and Morris Silverman*                                                                                                                                                    |
| 10.7       |   | Indemnification and Mutual Contribution      Agreement dated as of August 12, 2004 among Morris Silverman, Gregory Witchel,      Robert M. Wigoda, Howard M. Bloom, Jeffrey B. Aaronson and the Registrant*                                                  |
| 10.8       |   | Convertible Promissory Note dated      as of August 12, 2004 payable to Morris Silverman in the amount of $475,000*                                                                                                                                          |
| 10.9       |   | Convertible Promissory Note dated      as of September 9, 2004 payable to Morris Silverman in the amount of $120,316.47*                                                                                                                                     |
| 10.10      |   | Personal Guaranty Agreement of      Gregory Witchel dated as of August 13, 2004*                                                                                                                                                                             |
| 10.11      |   | Personal Guaranty Agreement of      Robert M. Wigoda dated as of August 13, 2004*                                                                                                                                                                            |
| 10.12      |   | Personal Guaranty Agreement of      Howard Bloom dated as of August 13, 2004*                                                                                                                                                                                |
| 10.13      |   | Personal Guaranty Agreement of      Jeffrey B. Aaronson dated as of August 13, 2004*                                                                                                                                                                         |
| 21.1       |   | Subsidiaries of the Registrant:      DiaSys Europe, Ltd, a United Kingdom Company                                                                                                                                                                            |
| 31.1       |   | Certification of Chief Executive      Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                    |
| 31.2       |   | Certification of the Chief Financial      Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                |
| 32.1       |   | Certification of Chief Executive      Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                    |
| 32.2       |   | Certification of Chief Financial      Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                         |

----

| Dated September 29, 2004 |   | DiaSys Corporation                                                                                                                     |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                                   |
|                     |   | By: /s/ Gregory Witchel                     Gregory Witchel,      Chief Executive Officer |
|                     |   |                                                                                                                                   |

| Dated September 29, 2004 |   | DiaSys Corporation                                                                                                                     |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                                   |
|                     |   | By: /s/ Jeffrey B. Aaronson                 President & Chief Financial Officer |

| /s/ Gregory Witchel                        Gregory Witchel,       Chief Executive Officer and Director |   | Date: _September 29, 2004 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|

----

|                                                                                                                                                                       |   |                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|
| /s/ Jeffrey B. Aaronson            Jeffrey B. Aaronson       President & Chief Financial Officer                                             |   | Date: September 29, 2004 |
|                                                                                                                                                                       |   |                     |
| /s/ Morris Silverman                  Morris Silverman       Chairman of the Board                             |   | Date: September 28, 2004 |
|                                                                                                                                                                       |   |                     |
| /s/ NOT SIGNED                        Robert Wigoda       Secretary and Director |   | Date: September __, 2004 |
|                                                                                                                                                                       |   |                     |
| /s/ Sherwin Gilbert                     Sherwin Gilbert       Director                          |   | Date: September 28, 2004 |
|                                                                                                                                                                       |   |                     |
| /s/ Howard Bloom                            Howard Bloom       Director                    |   | Date: September 28, 2004 |

----

Report of Independent Registered Public Accounting Firm: 
Consolidated balance sheet at June 30, 2004
Consolidated statements of operations for the years ended June 30, 2004 and 2003
Consolidated statements of changes in stockholders' equity andother comprehensive income (loss) for the years ended June 30, 2004 and 2003 
Consolidated statements of cash flows for the years ended June30, 2004 and 2003
Consolidated notes to consolidated financial statements 

----

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| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                             |   |                  |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                          Cash      and equivalents                                                                                                                                                                             | $      | 69,806      |   |
|                          Restricted      cash                                                                                                                                                                                  |   | 12,141      |   |
|                          Accounts      receivable, less allowance for doubtful accounts of $ 18,995                                                                                                                            |   | 396,636     |   |
|                          Finance      receivables, net                                                                                                                                                                         |   | 50,319      |   |
|                          Inventories                                                                                                                                                                                           |   | 441,307     |   |
|                          Prepaid      expenses and other current assets                                                                                                                                                        |        | 111,120     |   |
|                                                   Total      Current Assets                       |   | 1,081,329   |   |
|                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |
| EQUIPMENT, FURNITURE AND FIXTURES, LESS ACCUMULATED      DEPRECIATION of $528,905                                                                                                                                                                                                                                                                           |   | 221,866     |   |
|                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |
| OTHER ASSETS:                                                                                                                                                                                                                                                                                                                                               |   |                  |   |
|                          Patents,      less accumulated amortization of $ 950,180                                                                                                                                              |   | 2,039,116   |   |
|                          Other      assets-non-current                                                                                                                                                                         |   | 10,151      |   |
|                          Long-term      finance receivables, net                                                                                                                                                               |        | 8,220       |   |
|                                                   Total      Other Assets                         |        | 2,057,487   |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                                | $      | 3,360,682   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                        |   |                  |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                        |   |                  |   |
|                          Accounts      payable                                                                                                                                                                                 | $      | 688,604     |   |
|                          Accrued      expenses                                                                                                                                                                                 |   | 687,652     |   |
|                          Due      to bank                                                                                                                                                                                      |   | 23,878      |   |
|                          Loans      payable from shareholders                                                                                                                                                                  |        | 200,000     |   |
|                                                   Total      Current Liabilities                  |   | 1,600,134   |   |
|                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                               |   |                  |   |
|                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |
| STOCKHOLDERS' EQUITY:                                                                                                                                                                                                                                                                                                                                       |   |                  |   |
|                          Common      stock $.001 par value:                                                                                                                                                                    |   |                  |   |
|                          Authorized      99,900,000 shares 14,202,775 issued and outstanding June 30, 2004                                                                                                                     |   | 14,203      |   |
|                          Additional      paid-in-capital                                                                                                                                                                       |   | 17,736,298  |   |
|                          Accumulated      deficit                                                                                                                                                                              |   | (16,089,735)     |   |
|                          Accumulated      other comprehensive income                                                                                                                                                           |        | 99,782      |   |
|                                                   Total      Stockholders' Equity                 |        | 1,760,548   |   |
|                                                   Total      Liabilities and Stockholders' Equity | $      | 3,360,682   |   |
|                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |

----

|                                                                    |   | Year Ended June 30, |   |
|-------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                    |        | 2004                |   |  | 2003 |   |
|                                                                    |   |                     |   |   |  |   |
| NET SALES                                                               | $      | 1,862,612      |   | $ | 2,711,263  |   |
|                                                                    |   |                     |   |   |  |   |
| COST OF GOODS      SOLD                                                 |        | 809,819        |   |  | 1,083,797  |   |
|                                                                    |   |                     |   |   |  |   |
| GROSS PROFIT                                                            |        | 1,052,793      |   |  | 1,627,466  |   |
|                                                                    |   |                     |   |   |  |   |
| OPERATING EXPENSES                                                      |   |                     |   |   |  |   |
|        Selling                       |   | 641,176        |   |   | 1,195,896  |   |
|        General      & administrative |   | 2,647,032      |   |   | 1,623,673  |   |
|        Research      & development   |        | 290,661        |   |  | 437,324  |   |
|                                                                    |        | 3,578,869      |   |  | 3,256,893  |   |
|                                                                    |   |                     |   |   |  |   |
| LOSS FROM OPERATIONS                                                    |   | (2,526,076)         |   |   | (1,629,427) |   |
|                                                                    |   |                     |   |   |  |   |
| OTHER INCOME:                                                           |   |                     |   |   |  |   |
|        Interest      income          |   | 5,266          |   |   | 16,589  |   |
|        Interest      expense         |        | (453,168)           |   |  | (5,537) |   |
|                                                                    |   |                     |   |   |  |   |
| LOSS BEFORE INCOME TAXES                                                |   | (2,973,978)         |   |   | (1,618,375) |   |
|                                                                    |   |                     |   |   |  |   |
| INCOME TAXES                                                            |        | (11,748)            |   |  | (1,944) |   |
|                                                                    |   |                     |   |   |  |   |
| NET LOSS                                                                | $      | (2,985,726)         |   | $ | (1,620,319) |   |
|                                                                    |   |                     |   |   |  |   |
| WEIGHTED AVERAGE COMMON SHARES      OUTSTANDING                         |        | 12,778,508     |   |  | 10,904,694  |   |
|                                                                    |   |                     |   |   |  |   |
| BASIC AND DILUTED      LOSS PER COMMON SHARE                            | $      | (0.23)              |   | $ | (0.15) |   |

----

|                                           |   |                                 |  |               |  |                                   |  |                       |  |                                       |  |                                                 |   |                        |  |                  |
|------------------------------------------------|--------|---------------------------------|--|---------------|--|-----------------------------------|--|-----------------------|--|---------------------------------------|--|-------------------------------------------------|--------|------------------------|--|------------------|
|                                           |   |                                 |  |               |  |                                   |  |                       |  |                                       |  |                                                 |   |                        |  |                  |
|                                                |        | **Common         Stock Shares** |  | **Par Value** |  | **Preferred         StockShares** |  | **Par         Value** |  | **AdditionalPaid in         Capital** |  | **AccumulatedOther        ComprehensiveIncome** |        | **AccumulatedDeficit** |  | **TotalEquity**  |
| BALANCE JULY      1, 2002                      |   | 10,674,971                 |  | $10,675  |  | -                            |  | -                |  | $15,708,306                      |  | $21,808                                    |   | $(11,483,690)          |  | $4,257,099  |
| Issuance of common stock for      note payable |   | 863,874                    |  | 864      |  | -                            |  | -                |  | 344,686                          |  | -                                          |   | -                 |  | 345,550     |
| Issuance of      common stock for note payable |   | 254,548                    |  | 254      |  | -                            |  | -                |  | 101,560                          |  | -                                          |   | -                 |  | 101,814     |
| Issuance of common stock for      note payable |   | 250,000                    |  | 250      |  | -                            |  | -                |  | 99,750                           |  | -                                          |   | -                 |  | 100,000     |
| Issuance of      common stock for note payable |   | 125,000                    |  | 125      |  | -                            |  | -                |  | 49,875                           |  | -                                          |   | -                 |  | 50,000      |
| Issuance of common stock for      note payable |   | 125,000                    |  | 125      |  | -                            |  | -                |  | 49,875                           |  | -                                          |   | -                 |  | 50,000      |
| Issuance of      common stock for note payable |   | 125,000                    |  | 125      |  | -                            |  | -                |  | 49,875                           |  | -                                          |   | -                 |  | 50,000      |
| Net loss                                       |   | -                          |  | -        |  | -                            |  | -                |  | -                                |  | -                                          |   | (1,620,319)            |  | (1,620,319)      |
| Foreign      currency translation adjustment   |   | -                          |  | -        |  | -                            |  | -                |  | -                                |  | 20,511                                     |        | -                 |  | 20,511      |
| BALANCE JULY 1, 2003                           |   | 12,418,393                 |  | $12,418  |  | -                            |  | -                |  | $16,403,927                      |  | $42,319                                    |   | $(13,104,009)          |  | $3,354,655  |
|                                           |   |                                 |  |               |  |                                   |  |                       |  |                                       |  |                                                 |   |                        |  |                  |
| Net loss                                       |   | -                          |  | -        |  | -                            |  | -                |  | -                                |  | -                                          |   | (2,985,726)            |  | (2,985,726)      |
| Stock compensation      award                  |   | 300,000                    |  | 300      |  | -                            |  | -                |  | 143,700                          |  | -                                          |   | -                 |  | 144,000     |
| Stock Compensation award                       |   | 26,458                     |  | 26       |  | -                            |  | -                |  | 19,024                           |  | -                                          |   | -                 |  | 19,050      |
| Stock compensation      award                  |   | 8,108                      |  | 8        |  | -                            |  | -                |  | 5,019                            |  | -                                          |   | -                 |  | 5,027       |
| Conversion of notes payable                    |   | 1,067,251                  |  | 1,068    |  | -                            |  | -                |  | 488,427                          |  | -                                          |   | -                 |  | 489,495     |
| Issuance of      common stock warrants         |   | -                          |  | -        |  | -                            |  | -                |  | 383,439                          |  | -                                          |   | -                 |  | 383,439     |
| Beneficial conversion on note      payable     |   | -                          |  | -        |  | -                            |  | -                |  | 32,500                           |  | -                                          |   | -                 |  | 32,500      |
| Foreign currency translation      adjustment   |   | -                          |  | -        |  | -                            |  | -                |  | -                                |  | 57,463                                     |   | -                 |  | 57,463      |
| Sale of Common      Stock                      |   | 382,565                    |  | 383      |  | -                            |  | -                |  | 260,262                          |  | -                                          |        | -                 |  | 260,645     |
| BALANCE JUNE 30,      2004                     |   | 14,202,775                 |  | $14,203  |  | -                            |  | -                |  | $17,736,298                      |  | $99,782                                    |        | $(16,089,735)          |  | $1,760,548  |
|                                           |   |                                 |  |               |  |                                   |  |                       |  |                                       |  |                                                 |   |                        |  |                  |

----

|                                                                                                                                                                                                                                                           |   |        Year        Ended June 30, |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                                                                                          |   |                                                                 | 2004 |   |   | 2003 |
|         Net      Loss                                                                                                                                                                                                  |   |                                                                 |  |   |   |  |
|         Adjustments      to reconcile net loss to net cash flows used in operating activities:                                                                                                                         |   | $                                                                    | (2,985,726) |   | $ | (1,620,319) |
|                 Amortization      of patents and software                                                                                                                      |   |                                                                 | 185,012  |   |   | 192,807  |
|                 Depreciation      of equipment, furniture and fixtures                                                                                                         |   |                                                                 | 69,260  |   |   | 65,751  |
|                 Write      off of other receivable                                                                                                                             |   |                                                                 | 29,833  |   |   | -  |
|                 Stock      compensation                                                                                                                                        |   |                                                                 | 168,077  |   |   | -  |
|                 Charge      for beneficial conversion of note payable                                                                                                     |   |                                                                 | 32,500  |   |   | -  |
|                 Common      stock warrants                                                                                                                                     |   |                                                                 | 383,439  |   |   | -  |
|                 Changes      in assets and liabilities:                                                                                                                        |   |                                                                 |  |   |   |  |
|                         Accounts      receivable                                                                                       |   |                                                                 | 504,323  |   |   | (415,859) |
|                         Inventories                                                                                                    |   |                                                                 | 33,463  |   |   | 68,313  |
|                         Prepaid      expenses and other current assets                                                                 |   |                                                                 | 24,305  |   |   | (27,920) |
|                         Other      assets                                                                                              |   |                                                                 | 6,151  |   |   | 37,438  |
|                         Accounts      payable and accrued expenses                                                                     |   |                                                                      | 706,360  |   |  | (30,651) |
|                                 Net      cash flows used in operating activities               |   |                                                                      | (843,005) |   |  | (1,456,056) |
| CASH FLOWS FROM INVESTING      ACTIVITIES:                                                                                                                                                                                                                     |   |                                                                 |  |   |   |  |
|         Purchases      of equipment, furniture and fixtures                                                                                                                                                            |   |                                                                 | (41,291) |   |   | (24,443) |
|         Finance      receivables                                                                                                                                                                                       |   |                                                                 | 110,141  |   |   | 137,494  |
|         Costs      of computer software                                                                                                                                                                                |   |                                                                 | (222) |   |   | (22,163) |
|         Costs      of patents                                                                                                                                                                                          |   |                                                                 | -  |   |   | (28,683) |
|         Decrease(increase)in      restricted cash                                                                                                                                                                      |   |                                                                      | 104,056  |   |  | (116,197) |
|                                 Net      cash flows provided by (used in) investing activities |   |                                                                      | 172,684  |   |  | (53,992) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                                                                                          |   |                                                                 |  |   |   |  |
|         Issuance      of common stock                                                                                                                                                                                  |   |                                                                 | 260,645  |   |   | -  |
|         Proceeds      from loans from shareholders                                                                                                                                                                     |   |                                                                 | 450,000  |   |   | 1,017,364  |
|         Payments      on loans from shareholders                                                                                                                                                                       |   |                                                                      | (100,000) |   |  | -  |
|                                 Net      cash flows provided by financing activities           |   |                                                                      | 610,645  |   |  | 1,017,364  |
|         Effect      of foreign currency translation on cash                                                                                                                                                            |   |                                                                      | 57,463  |   |  | 20,511  |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                                                                                                                                                                                        |   |                                                                 | (2,213) |   |   | (472,173) |
| CASH AND EQUIVALENTS,      BEGINNING OF YEAR                                                                                                                                                                                                                   |   |                                                                      | 72,019  |   |  | 544,192  |
| CASH AND EQUIVALENTS, END OF YEAR                                                                                                                                                                                                                              |   | $                                                                    | 69,806  |   | $ | 72,019  |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                                                                                                                                                                            |   |                                                                 |  |   |   |  |
|         Interest      paid                                                                                                                                                                                             |   | $                                                                    | 28,102  |   | $ | 15,466  |
| SUPPLEMENTAL NON-CASH FLOW INFORMATION:                                                                                                                                                                                                                        |   |                                                                 |  |   |   |  |
|         Conversion      of notes payable                                                                                                                                                                               |   | $                                                                    | 489,495  |   | $ | 697,364  |

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|   |                    | 2004    |   | 2003    |   |
|--------|-------------------------|---------|--------|---------|--------|
|   | Risk free interest rate | 3.42 %  |   | 3.42 %  |   |
|   | Expected dividend yield | 0.0 %   |   | 0.0 %   |   |
|   | Expected lives          | 5 years |   | 8 years |   |
|   | Expected volatility     | 77.18 % |        | 88.21 % |   |

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|                                                                                                                                                                                                                                               |   |   | 2004        |   |   | 2003        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|
|                                                                                                                                                                                                                                               |   |   |        |   |   |        |
| Net loss, as reported                                                                                                                                                                                                                              |   | $      | (2,985,726) |   | $      | (1,620,319) |
| Deduct: Total stock-based employee      compensation                expense determined under      fair value                based method for all      awards. |   |        | (348,430)   |        |        | (893,671)   |
| Pro forma net loss                                                                                                                                                                                                                                 |   | $      | (3,334,156) |        | $      | (2,513,990) |
|                                                                                                                                                                                                                                               |   |   |             |        |        |             |
| Net loss per share:                                                                                                                                                                                                                                |   |   |             |        |        |             |
|          Basic      and diluted - as reported                                                                                                                                                         |   | $      | (0.23)      |        | $      | (0.15)      |
|                                                                                                                                                                                                                                               |   |   |        |   |   |        |
|          Basic      and diluted - pro forma                                                                                                                                                           |   | $      | (0.26)      |   | $      | (0.23)      |
|                                                                                                                                                                                                                                               |   |   |        |   |   |        |

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|   | Minimum lease payments receivable        | $      | 65,195  |   |
|--------|------------------------------------------|--------|--------------|--------|
|   | Unearned income                          |        | (6,656)      |   |
|   | Net investment in sales-type      leases |   | 58,539  |   |
|   | Less: current portion                    |        | (50,319)     |   |
|   |                                     |   |              |   |
|   | Long-term Finance receivable             | $      | 8,220   |   |

|   | **Year Ended June 30:**                              |   |        |   |
|--------|------------------------------------------------------|--------|--------|--------|
|   |         2005 | $      | 56,040 |   |
|   |         2006 |   | 8,148  |   |
|   |         2007 |        | 1,007  |   |
|   |                                                 | $      | 65,195 |   |

|   | Raw material   | $ | 285,260 |   |
|--------|----------------|---|---------|--------|
|   | Finished goods |   | 156,047 |   |
|   |           | $ | 441,307 |   |

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|   |                               |   |         |   | **Estimated Useful Life**                             |   |
|--------|------------------------------------|--------|---------|--------|-------------------------------------------------------|--------|
|   | Machinery and equipment            | $      | 554,586 |   | 10 years                                              |   |
|   | Furniture and fixtures             |   | 108,392 |   | 3 to 5 years                                          |   |
|   | Computer software                  |   | 44,624  |   | 3 to 5 years      lesser       of useful life or life |   |
|   | Leasehold improvements of lease    |        | 43,169  |   |                                                  |   |
|   |                               |   | 750,771 |   |                                                  |   |
|   | Less accumulated      depreciation |        | 528,905 |   |                                                  |   |
|   |                               | $      | 221,866 |   |                                                  |   |

|   | Litigation Settlement       | $      | 478,000 |   |   |   |
|--------|-----------------------------|--------|---------|--------|--------|--------|
|   | Accrued payroll             |   | 83,375  |   |   |   |
|   | Accrued inventory purchases |   | 2,734   |   |   |   |
|   | Other accrued expenses      |        | 123,543 |   |   |   |
|   | Total                       | $      | 687,652 |   |   |   |

|   |                                  |   | 2004            |   |   |   |
|--------|---------------------------------------|--------|-----------------|--------|--------|--------|
|   | Allowance for doubtful accounts       | $      | 7,600      |   |   |   |
|   | Net operating loss tax carry forwards |        | 6,006,200  |   |   |   |
|   |                                  |   | 6,013,800  |   |   |   |
|   | Valuation allowance                   |        | (6,013,800)     |   |   |   |
|   |                                  | $      | -          |   |   |   |
|   |                                  |   |                 |   |   |   |

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|                                                                               | **Year Ended June 30, 2004**   |   | **Year Ended June 30, 2003** |
|------------------------------------------------------------------------------------|--------------------------------|--------|------------------------------|
| ****                                                                               | **Shares        Under Option** |        |                              | **Weighted        Average        Exercise         Price** |  | **Shares        Under Option** |  |  | **Weighted        Average        Exercise        Price** |
| Options outstanding at beginning      of             year | 913,000                   |   | $                            | 3.01 |   | 1,412,000  |   | $ | 3.24 |
| Options granted                                                                    | 785,000                   |   |                         | .69 |   | 18,000  |   |   | .70 |
| Options expired/withdrawn                                                          | (741,629)                      |   |                         | 2.60 |   | (517,000) |   |   | 3.62 |
| Options outstanding at end of      year                                            | 956,371                   |   | $                            | 1.42 |   | 913,000  |   | $ | 3.01 |
| Options exercisable:                                                               |                                |   |                         |  |   |  |   |   |  |
|      Number      of shares                                | 181,750                   |   | $                            | 4.49 |   | 815,250  |   | $ | 3.18 |

| **Range of        Exercise         Prices** |        | **Number        Outstanding** |        | **Weighted        Average        Remaining        Contractual        Life** |        |        | **Weighted        Average        Exercise        Price** |        | **Number        Exercisable** |        |        | **Weighted        Average        Exercise        Price** |        |
|---------------------------------------------|--------|-------------------------------|--------|-----------------------------------------------------------------------------|--------|--------|----------------------------------------------------------|--------|-------------------------------|--------|--------|----------------------------------------------------------|--------|
| $0.46 - $2.50                               |   | 1,196,000                     |   | 7.10                                                                        |   | $      | .75                                                      |   | 50,750                        |   | $      | 1.20                                                     |        |
| $2.51 - $5.00                               |   | 88,000                        |   | 3.20                                                                        |   | $      | 4.21                                                     |   | 88,000                        |   | $      | 4.21                                                     |        |
| $5.01 - $7.50                               |   | 0                             |   | 0                                                                           |   | $      | 0                                                        |   |                               |   | $      |                                                          |        |
| $7.51 - $10.00                              |   | 43,000                        |   | 5.50                                                                        |   | $      | 8.95                                                     |   | 43,000                        |   | $      | 8.93                                                     |   |
| Total                                       |   | 1,327,000                     |   |                                                                        |   |   |                                                     |   | 181,750                       |   |   |                                                     |   |

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| **Year Ended June 30:** |   |          |   |
|-------------------------|--------|----------|--------|
| 2005                    |   | $148,718 |   |
| 2006                    |   | 101,773  |   |
| 2007                    |   | 36,050   |   |
| 2008                    |   | 36,050   |   |
| 2009                    |   | 36,050   |   |
|                         |   |          |   |
|                         |   |          |   |
| 2010 and thereafter     |   | 102,142  |   |
|                         |   | $460,783 |   |

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