| **Incorporated in Delaware       21 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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|   | The paracep Fecal Parasite Concentrator is protected by      patents through 2018;                                     |
|--------|------------------------------------------------------------------------------------------------------------------------|
|   | The optical slide assembly and workstation for urine sediment      analysis patents expire in 2013;                    |
|   | The optical slide assembly and workstation for fecal sediment      analysis patents expire in 2018.                    |
|   |                                                                                                                   |
|   | Patent applications are pending for a DiaSys device for      testing for Bence Jones Protein in non centrifuged urine. |

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

| **ANNUAL PERIOD**            | ****   | ****   | **MONTHLY LEASE         RATE** | ****   | ****   | **ANNUAL LEASE        RATE** | ****   |
|------------------------------|--------|--------|--------------------------------|--------|--------|------------------------------|--------|
|                         |   |   |                                |   |   |                              |   |
| May 1 2005 to April 30, 2012 |   | $      | 3,004.17                       |   | $      | 36,050.00                    |   |

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| **Year Ended June 30, 2005,** | ****   | ****   | **High** | ****   | ****   | **Low** | ****   |
|-------------------------------|--------|--------|----------|--------|--------|---------|--------|
|                          |   |   |          |   |   |         |   |
| 4th Quarter                   |   | $      | .48      |   | $      | .26     |   |
| 3rd Quarter                   |   |   | .86      |   |   | .35     |   |
| 2nd Quarter                   |   |   | .50      |   |   | .32     |   |
| 1st Quarter                   |   |   | .64      |   |   | .37     |   |
|                          |   |   |     |   |   |    |   |
|                          |   |   |     |   |   |    |   |
| **Year Ended June 30, 2004,** | ****   | ****   | **High** | ****   | ****   | **Low** | ****   |
|                          |   |   |          |   |   |         |   |
| 4th Quarter                   |   | $      | .77      |   | $      | .57     |   |
| 3rd Quarter                   |   |   | .88      |   |   | .48     |   |
| 2nd Quarter                   |   |   | .77      |   |   | .43     |   |
| 1st Quarter                   |   |   | .89      |   |   | .65     |   |

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| **Plan Category**                                                                     | ****   | **Number of         securities        to be issued upon        exercise of        outstanding         options, warrants        and other rights** | ****   | **** | **Weighted-average        exercise price of        outstanding        options,****warrants        and other rights** | ****   | **Number of securities        remaining available        for future issuance        under equity        compensation plans        (excluding securities         reflected in column         (a))** |
|---------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by            security holders |   | 1,768,500                                                                                                                                         |   | $    | .40                                                                                                                  |   | 1,100,000                                                                                                                                                                                     |

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|                                    |   | **June 30,** |
|-----------------------------------------|--------|--------------|
| **(In dollars, except for ratios)**     |   |              | **2005** |   |  | **2004** |   |
|                                    |   |         |   |   |   |  |   |
| TOTAL CURRENT ASSETS                    |   | $            | 672,564  |   | $ | 1,081,329  |   |
| TOTAL CURRENT LIABILITIES               |   |              | 1,308,128  |   |  | 1,600,134  |   |
| WORKING CAPITAL      DEFICIENCY         |   | $            | (635,564) |   | $ | (518,805) |   |
|                                    |   |         |  |   |   |  |   |
| WORKING CAPITAL DEFICIT RATIO      TO 1 |   |         | (0.5) |   |   | (0.7) |   |

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|   | Name                | Company Position                                     | Age* |
|--------|---------------------|------------------------------------------------------|------|
|   | Gregory Witchel     | Chief Executive Officer      and Director            | 45   |
|   | Robert Wigoda       | Director and Secretary                               | 50   |
|   | Morris Silverman    | Chairman of the Board      of Directors              | 73   |
|   | Sherwin Gilbert     | Director                                             | 62   |
|   | Howard Bloom        | Director                                             | 50   |
|   | Jeffrey B. Aaronson | President, Chief Financial      Officer and Director | 49   |
|   |                     |                                                      |      |

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|                                          |   |        |   |         |   | Long-Term Compensation |   |
|-----------------------------------------------|--------|-------------|--------|--------------|--------|------------------------|--------|
| Name and Position                             |        | Fiscal Year |        |  Salary |        | Stock      Options     |        | Other      Compensation |  |
| Gregory Witchel, Chief Executive      Officer |        | 2005        |        | $75,000      |        | 232,500                |        | -0- |  |
| Gregory Witchel, Chief Executive Officer      |        | 2004        |        | $75,000 (1)  |        | 145,000                |        | 100,000 shares common stock |   |
| Marshall Witzel, Chief Executive      Officer |        | 2004        |        | -0-          |        | -0-                    |        | 100,000 shares common stock |   |
| Todd DeMatteo, Chief Executive Officer        |        | 2003        |        | $167,287     |        | -0-                    |        | -0- |   |

| **Name**        |   | **Share         Options        Granted** |  | **% of Total         Options Granted        to All Employees** |  | **Exercise         Price** |  | **Expiration         Date** |   |
|-----------------|--------|------------------------------------------|--|----------------------------------------------------------------|--|----------------------------|--|-----------------------------|--------|
| Gregory Witchel |        | 232,500                                  |  | 29%                                                            |  | $0.39(1)                   |  | 11/18/09                    |        |

| **Name**                                     | **Shares        Acquired        OnExercise** | **Value Realized** | **Number of        Securities        Underlying        Unexercised        Options/SARs        At FY-End (#)(All Exercisable)** | **Value Of        Unexercised        In-The-Money        Options/SARs        At FY-End ($)(All Exercisable)** |
|----------------------------------------------|----------------------------------------------|--------------------|--------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| Gregory Witchel      Chief Executive Officer | None                                         | None               | 549,500                                                                                                                        | -0-                                                                                                           |

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|        | Name                                                                                                                  |        | Number   of Shares |        | Percentage ofOwnership (1) |        |
|--------|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
|        | Morris Silverman (2)                                                                                                  |        | 6,025,851                         |        | 31.0%                      |        |
|        | Gregory Witchel (3)                                                                                                   |        | 1,688,626                         |        | 8.8%                       |        |
|        | Jeffrey B. Aaronson (4)                                                                                               |        | 341,000                           |        | 1.8%                       |        |
|        | Robert M. Wigoda (5)                                                                                                  |        | 96,562                            |        | 0.5%                       |        |
|        | Sherwin Gilbert (6)                                                                                                   |        | 108,101                           |        | 0.6%                       |        |
|        | Howard Bloom (7)                                                                                                      |        | 218,292                           |        | 1.1%                       |        |
|        | John V. Winfield (8)                                                                                                  |        | 2,621,100                         |        | 13.4%                      |        |
|        | *Executive officers and directors      as a group (6 persons)*                                                        |        | 8,478,432                         |        | 40.6%                      |        |
|        |                                                                                                                  |        |                                   |        |                            |        |
|   | *No other shareholders are known       by the Company to hold more       than 5% of the Company's       Common Stock* |   |                              |   |                            |   |

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| **Number** |   | **Description of Document**                                                                                                                                                                                                                                                                                                                                                         |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |   | Certificate of Incorporation      (Incorporated by reference to the Exhibit 3.1 to the Company'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 Company'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 Company'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      Company'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      Company'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 Company'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 Company'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 Company'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 Company and Morris Silverman (Incorporated      by reference to the exhibit of the same number filed with the Company's      Annual Report on Form 10-KSB filed with the Commission on October 29, 2004)                                                                                                   |
| 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 Company (Incorporated      by reference to the exhibit of the same number filed with the Company's      Annual Report on Form 10-KSB filed with the Commission on October 29, 2004) |

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| 10.8  |   | Convertible Promissory Note dated      as of August 12, 2004 payable to Morris Silverman in the amount of $475,000      (Incorporated by reference to the exhibit of the same number filed with      the Company's Annual Report on Form 10-KSB filed with the Commission on      October 29, 2004 )     |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Convertible Promissory Note dated      as of September 9, 2004 payable to Morris Silverman in the amount of $120,316.47      (Incorporated by reference to the exhibit of the same number filed with      the Company's Annual Report on Form 10-KSB filed with the Commission on      October 29, 2004) |
| 10.10 |   | Personal Guaranty Agreement of      Gregory Witchel dated as of August 13, 2004 (Incorporated by reference to      the exhibit of the same number filed with the Company's Annual Report on      Form 10-KSB filed with the Commission on October 29, 2004)                                              |
| 10.11 |   | Personal Guaranty Agreement of      Robert M. Wigoda dated as of August 13, 2004 (Incorporated by reference      to the exhibit of the same number filed with the Company's Annual Report      on Form 10-KSB filed with the Commission on October 29, 2004)                                             |
| 10.12 |   | Personal Guaranty Agreement of      Howard Bloom dated as of August 13, 2004 (Incorporated by reference to the      exhibit of the same number filed with the Company's Annual Report on Form      10-KSB filed with the Commission on October 29, 2004)                                                 |
| 10.13 |   | Personal Guaranty Agreement of      Jeffrey B. Aaronson dated as of August 13, 2004 (Incorporated by reference      to the exhibit of the same number filed with the Company's Annual Report      on Form 10-KSB filed with the Commission on October 29, 2004)                                          |

| 10.14A |   | Purchasing Agreement with Healthtrust      Purchasing Group dated December 1, 2001(1) (3)                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15A |   | Agreement for Urinalysis Equipment,      Related Supplies, and Service with Broadlane, Inc. dated April 1, 2002.      Agreement for Urinalysis Equipment, Related Supplies, and Service with Broadlane,      Inc. dated April 1, 2002.(1)(3)                  |
| 10.16  |   | Supplier Set-up form with Allegiance      dated December 8, 1999. (Incorporated by reference to the exhibit of the      same number filed with Amendment No. 1 to the Company's Annual Report on      Form 10-KSB filed with the Commission on June 30, 2005) |
| 10.17A |   | Distribution Agreement with Fisher      Scientific Company, LLC, dated July 23, 2001. (1)(3)                                                                                                                                                                  |
| 10.18A |   | Non-Exclusive Distribution Agreement      with VWR International, Inc., dated as of November 1, 2003.(1)(3)                                                                                                                                                   |
| 10.19A |        | International Sales and Service Agreement,      effective May 16, 2005, between theCompany and Genesee Brazil. (1)(3)                                                                                                                                         |
| 10.20A |        | International Distributor Agreement, effective      June 20, 2005, between the Company'swholly-owned subsidiary, DiaSys Europe,      Ltd, and Cooplab, Crl. (1)(3)                                                                                            |
| 10.21A |        | International Sales and Service Agreement,      effective as of May 4, 2005, between theCompany and Diagnostic Bioserve      Limited. (1)(3)                                                                                                                  |
| 10.22A |        | International Sales and Service Agreement,      effective as of May 22, 2005, between the Company and Bionuclear. (1)(3)                                                                                                                                      |
| 10.23  |        | 2004 Stock Option and Award Plan (2)                                                                                                                                                                                                                          |
| 10.24  |        | $50,000 Convertible Promissory Note of the      company dated August 27, 2003 payable toHoward Bloom (2)                                                                                                                                                      |
| 10.25  |        | $100,000 Promissory Note of the company dated      February 3, 2004 payable to MorrisSilverman (2)                                                                                                                                                            |
| 10.26  |        | Common Stock Purchase Warrant for 150,000 shares      dated February 3, 2004 issued toMorris Silverman (2)                                                                                                                                                    |
| 10.27  |        | $50,000 Promissory Note of the Company dated      February 3, 2004, payable to GregoryWitchel (2)                                                                                                                                                             |
| 10.28  |        | Common Stock Purchase Warrant for 75,000 shares      issued to Gregory Witchel (2)                                                                                                                                                                            |
| 10.29  |        | $50,000 Promissory Note of the Company dated      February 3, 2004, payable to Jeffrey B.Aaronson (2)                                                                                                                                                         |
| 10.30  |        | Common Stock Purchase Warrant for 50,000 shares      issued to Jeffrey B. Aaronson (2)                                                                                                                                                                        |
| 10.31  |        | Loan and Security Agreement, dated as of November      1, 2004 by and among the Company, Morris Silverman and Gregory Witchel (2)                                                                                                                             |
| 10.32  |        | $100,000 Promissory Note of the company dated      November 1, 2004 payable to Morris Silverman (2)                                                                                                                                                           |
| 10.33  |        | $100,000 Promissory Note of the company dated      November 1, 2004 payable to Gregory Witchel (2)                                                                                                                                                            |

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| 10.34 |        | $50,000 Promissory Note of the company dated      November 29, 2004 payable to Morris Silverman (2)                                                                                                                                  |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 14    |        | Code of Ethics and Business Conduct (Incorporated      by reference to the exhibit of the same number filed with Amendment No.      1 to the Company's Annual Report on Form 10-KSB filed with the Commission      on June 30, 2005) |
| 21.1  |   | Subsidiaries of the Company: 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. (2)                                                                                                                         |
| 31.2  |   | Certification of the Chief Financial      Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)                                                                                                                     |
| 32    |   | Certification of principal executive      officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley      Act of 2002. (2)                                                                                |

|        |                    | Year Ended         June 30, 2004 |   | Year Ended        June 30, 2005 |        |
|--------|--------------------|----------------------------------|--------|---------------------------------|--------|
|   |               |                             |   |                            |   |
|   | Audit Fee          | $190,000                         |   | $250,075                        |   |
|   | Audit-Related Fees | -                                |   | -                               |   |
|   | Tax Fees           | 23,000                           |   | 24,900                          |   |
|   | All Other Fees     | -                                |   | -                               |   |
|   | Total Fees         | $213,000                         |   | $274,975                        |   |

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| Dated March 21, 2006 |   | DiaSys Corporation                                                                                                                                                        |
|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                      |
|                 |   | By: /s/ Gregory Witchel                     Gregory Witchel,      Chief Executive Officer      (principal executive officer) |
|                 |   |                                                                                                                                                                      |

| Dated March 21, 2006 |   | DiaSys Corporation                                                                                                                                                         |
|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                       |
|                 |   | By: /s/ Jeffrey B. Aaronson                 President & Chief Financial Officer       (principal financial officer) |

| /s/ Gregory Witchel                        Gregory Witchel,       Chief Executive Officer and Director |   | Date: March 21, 2006 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|

|                                                                                                                                                        |   |                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
| /s/ Jeffrey B. Aaronson            Jeffrey B. Aaronson       President & Chief Financial Officer                              |   | Date: March 21, 2006 |
|                                                                                                                                                        |   |                 |
| /s/ Morris Silverman                  Morris Silverman       Chairman of the Board              |   | Date: March 17, 2006 |
|                                                                                                                                                        |   |                 |
| /s/ Robert Wigoda                     Robert Wigoda       Secretary and Director |   | Date: March 20, 2006 |
|                                                                                                                                                        |   |                 |
| /s/ Sherwin Gilbert                     Sherwin Gilbert       Director           |   | Date: March __, 2006 |
|                                                                                                                                                        |   |                 |
| /s/ Howard Bloom                            Howard Bloom       Director     |   | Date: March 17, 2006 |

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Report of Independent Registered Public Accounting Firm: 
Consolidated balance sheet at June 30, 2005
Consolidated statements of operations for the years ended June 30,2005 and 2004
Consolidated statements of changes in stockholders' equity andother comprehensive income (loss) for the years ended June 30, 2005 and 2004 
Consolidated statements of cash flows for the years ended June 30,2005 and 2004
Consolidated notes to consolidated financial statements 

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|                                                                                                                                                                                                                                                                                                                                                                                            |   | June 30, 2005    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                                                                 |   |                  |   |
|                          Cash      and cash equivalents                                                                                                                                                                                                            | $      | 993         |   |
|                          Accounts      receivable, less allowance for doubtful accounts of $13,275                                                                                                                                                                 |   | 210,210     |   |
|                          Finance      receivables                                                                                                                                                                                                                  |   | 8,232       |   |
|                          Inventories                                                                                                                                                                                                                               |   | 322,155     |   |
|                          Prepaid      expenses and other current assets                                                                                                                                                                                            |        | 130,974     |   |
|                                                   Total      Current Assets                                                           |   | 672,564     |   |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
| PROPERTY AND EQUIPMENT, LESS                                                                                                                                                                                                                                                                                                                                                                    |   |                  |   |
|                          Accumulated      depreciation of $602,170                                                                                                                                                                                                 |   | 186,009     |   |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
| OTHER ASSETS:                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |   |
|                          Patents      less accumulated amortization of $1,077,416                                                                                                                                                                                  |   | 1,911,880   |   |
|                          Other      assets-non-current                                                                                                                                                                                                             |   | 10,151      |   |
|                          Long-term      finance receivables                                                                                                                                                                                                        |        | 2,587       |   |
|                                                   Total      Other Assets                                                             |        | 1,924,618   |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                                                                    | $      | 2,783,189   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
|                          Accounts      payable                                                                                                                                                                                                                     | $      | 561,267     |   |
|                          Accrued      expenses                                                                                                                                                                                                                     |   | 305,929     |   |
|                          Due      to bank                                                                                                                                                                                                                          |   | 40,932      |   |
|                          Loans      payable from shareholders                                                                                                                                                                                                      |        | 400,000     |   |
|                                                   Total      Current Liabilities                                                      |   | 1,308,128   |   |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                   |   |                  |   |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |
| STOCKHOLDERS' EQUITY:                                                                                                                                                                                                                                                                                                                                                                           |   |                  |   |
|                          Common      stock $.001 par value:                                                                                                                                                                                                        |   |                  |   |
|                                                   Authorized      99,900,000 shares 18,278,875 issued and outstanding at June 30,2005 |   | 18,279      |   |
|                          Additional      paid-in-capital                                                                                                                                                                                                           |   | 19,466,110  |   |
|                          Accumulated      deficit                                                                                                                                                                                                                  |   | (18,118,899)     |   |
|                          Accumulated      other comprehensive income                                                                                                                                                                                               |        | 109,571     |   |
|                                                   Total      Stockholders' Equity                                                     |        | 1,475,061   |   |
|                                                   Total      Liabilities and Stockholders' Equity                                     | $      | 2,783,189   |   |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |   |

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|                                                                    |   | Year Ended June 30, |   |
|-------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                    |        | 2005                |   |  | 2004 |   |
|                                                                    |   |                     |   |   |  |   |
| NET SALES                                                               | $      | 1,914,077      |   | $ | 1,862,612  |   |
|                                                                    |   |                     |   |   |  |   |
| COST OF GOODS      SOLD                                                 |        | 980,550        |   |  | 809,819  |   |
|                                                                    |   |                     |   |   |  |   |
| GROSS PROFIT                                                            |        | 933,527        |   |  | 1,052,793  |   |
|                                                                    |   |                     |   |   |  |   |
| OPERATING EXPENSES                                                      |   |                     |   |   |  |   |
|        Selling                       |   | 702,555        |   |   | 641,176  |   |
|        General      & administrative |   | 1,921,185      |   |   | 2,647,032  |   |
|        Research      & development   |        | 234,653        |   |  | 290,661  |   |
|                                                                    |        | 2,858,393      |   |  | 3,578,869  |   |
|                                                                    |   |                     |   |   |  |   |
| LOSS FROM OPERATIONS                                                    |   | (1,924,866)         |   |   | (2,526,076) |   |
|                                                                    |   |                     |   |   |  |   |
| OTHER INCOME:                                                           |   |                     |   |   |  |   |
|        Interest      income          |   | 1,229          |   |   | 5,266  |   |
|        Interest      expense         |        | (102,479)           |   |  | (453,168) |   |
|                                                                    |   |                     |   |   |  |   |
| LOSS BEFORE INCOME TAXES                                                |   | (2,026,116)         |   |   | (2,973,978) |   |
|                                                                    |   |                     |   |   |  |   |
| INCOME TAXES                                                            |        | (3,129)             |   |  | (11,748) |   |
|                                                                    |   |                     |   |   |  |   |
| NET LOSS                                                                | $      | (2,029,245)         |   | $ | (2,985,726) |   |
|                                                                    |   |                     |   |   |  |   |
| WEIGHTED AVERAGE      COMMON SHARES OUTSTANDING                         |        | 16,964,674     |   |  | 12,778,508  |   |
|                                                                    |   |                     |   |   |  |   |
| BASIC AND DILUTED      LOSS PER COMMON SHARE                            | $      | (0.12)              |   | $ | (0.23) |   |

----

|                                                                                                                                   | Common Stock**** |   |   | Additional        Paid in |        |   | Accumulated        Other        Comprehensive |        |   | Accumulated   |        |   | Total        |
|----------------------------------------------------------------------------------------------------------------------------------------|------------------|--------|--------|---------------------------|--------|--------|-----------------------------------------------|--------|--------|---------------|--------|--------|--------------|
|                                                                                                                                        | ****Shares       |        |        | Par Value****             |        |        | Capital****                                   |        |        | Income        |        |        | Deficit      |  |  | Equity**** |
| BALANCE JULY 1, 2003                                                                                                                   | 12,418,393  |        | $      | 12,418               |        | $      | 16,403,927                               |        | $      | 42,319   |        | $      | (13,104,009) |  | $ | 3,354,654  |
|                                                                                                                                        |                  |        |   |                           |        |   |                                               |        |   |               |        |   |              |  |   |  |
|                Net      loss                                | -           |        |   | -                    |        |   | -                                        |        |   | -        |        |   | (2,985,726)  |  |   | (2,985,726) |
|                Stock      compensation award                | 200,000     |        |   | 200                  |        |   | 95,800                                   |        |   | -        |        |   | -       |  |   | 96,000  |
|                Stock      compensation award                | 26,458      |        |   | 26                   |        |   | 19,024                                   |        |   | -        |        |   | -       |  |   | 19,050  |
|                Stock      compensation award                | 100,000     |        |   | 100                  |        |   | 47,900                                   |        |   | -        |        |   | -       |  |   | 48,000  |
|                Stock      compensation award                | 8,108       |        |   | 8                    |        |   | 5,019                                    |        |   | -        |        |   | -       |  |   | 5,027  |
|                Conversion      of notes payable             | 1,067,251   |        |   | 1,067                |        |   | 488,427                                  |        |   | -        |        |   | -       |  |   | 489,494  |
|                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  |
|                                                                                                                                        |                  |        |   |                           |        |   |                                               |        |   |               |        |   |              |  |   |  |
|                Net      loss                                | -           |        |   | -                    |        |   | -                                        |        |   | -        |        |   | (2,029,245)  |  |   | (2,029,245) |
|                Conversion      of accrued payroll           | 241,818     |        |   | 242                  |        |   | 113,413                                  |        |   | -        |        |   | -       |  |   | 113,655  |
|                Stock      compensation award                | 148,829     |        |   | 149                  |        |   | 56,406                                   |        |   | -        |        |   | -       |  |   | 56,555  |
|                Stock      compensation award                | 33,332      |        |   | 33                   |        |   | 12,633                                   |        |   | -        |        |   | -       |  |   | 12,666  |
|                Stock      compensation award                | 50,000      |        |   | 50                   |        |   | 16,450                                   |        |   | -        |        |   | -       |  |   | 16,500  |
|                Stock      compensation award                | 75,000      |        |   | 75                   |        |   | 29,925                                   |        |   | -        |        |   | -       |  |   | 30,000  |
|                Conversion      of notes payable             | 1,426,358   |        |   | 1,426                |        |   | 596,077                                  |        |   | -        |        |   | -       |  |   | 597,503  |
|                Conversion      of notes payable             | 135,513     |        |   | 136                  |        |   | 50,004                                   |        |   | -        |        |   | -       |  |   | 50,140  |
|                Sale      of Common Stock                    | 1,250,000   |   |   | 1,250                |   |   | 498,750                                  |   |   | -        |   |   | -       |   |   | 500,000  |
|                Sale      of Common Stock                    | 715,250     |   |   | 715                  |   |   | 356,154                                  |   |   | -        |   |   | -       |   |   | 356,869  |
|                Foreign      currency translation adjustment | -           |        |        | -                    |        |        | -                                        |        |        | 9,869    |        |        | -       |  |  | 9,869   |
|                                                                                                                                   |             |   |   |                      |   |   |                                          |   |   |          |   |   |         |   |   |   |
| BALANCE JUNE 30, 2005                                                                                                                  | 18,278,875  |        | $      | 18,279               |        | $      | 19,466,110                               |        | $      | 109,571  |        | $      | (18,118,899) |  | $ | 1,475,061  |
|                                                                                                                                        |                  |        |   |                           |        |   |                                               |        |   |               |        |   |              |  |   |  |

----

|                                                                                                                                                                                                                                                 |   |        Year        Ended June 30, |           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|----------------|
|                                                                                                                                                                                                                                                      |   |                                                                      | 2005           |   |  | 2004 |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                                                                                |        |                                                                      |                |  |  |  |   |
|         Net      Loss                                                                                                                                                                                        |   | $                                                                    | (2,029,245)    |   | $ | (2,985,726) |   |
|         Adjustments      to reconcile net loss to net cash flows used in operating activities:                                                                                                               |   |                                                                 |           |   |
|                 Amortization      of patents and software                                                                                                            |   |                                                                 | 188,794   |   |   | 185,856 |   |
|                 Depreciation      of equipment, furniture and fixtures                                                                                               |   |                                                                 | 96,292    |   |   | 94,348  |   |
|                 Write      off of other receivable                                                                                                                   |   |                                                                 | -         |   |   | 29,833  |   |
|                 Stock      Compensation                                                                                                                              |   |                                                                 | 115,721   |   |   | 206,294  |   |
|                 Charge      for beneficial conversion of note payable                                                                                           |   |                                                                 | -         |   |   | 32,500  |   |
|                 Common      stock warrants                                                                                                                           |   |                                                                 | -         |   |   | 383,439  |   |
|                 Changes      in assets and liabilities:                                                                                                              |   |                                                                 |                |   |   |  |   |
|                         Accounts      receivable                                                                             |   |                                                                 | 198,148   |   |   | 504,323  |   |
|                         Finance      receivables                                                                             |   |                                                                 | 47,720    |  |  | 110,141  |   |
|                         Inventories                                                                                          |   |                                                                 | 119,152   |   |   | 33,463  |   |
|                         Prepaid      expenses and other current assets                                                       |   |                                                                 | (19,854)  |   |   | 24,305  |   |
|                         Accounts      payable and accrued expenses                                                           |   |                                                                      | (492,006)      |   |  | 706,360  |   |
|                                 Net      cash flows used in operating activities     |   |                                                                      | (1,775,278)    |   |  | (674,863) |   |
| CASH FLOWS FROM INVESTING      ACTIVITIES:                                                                                                                                                                                                           |   |                                                                 |                |   |   |  |   |
|         Purchases      of equipment, furniture and fixtures                                                                                                                                                  |   |                                                                 | (8,306)        |   |   | (41,291) |   |
|         Costs      of computer software                                                                                                                                                                      |   |                                                                 | (125)          |   |   | (222) |   |
|         Decrease      in restricted cash                                                                                                                                                                     |   |                                                                      | 12,141    |   |  | 104,056 |   |
|                                 Net      cash flows provided by investing activities |   |                                                                      | 3,710     |   |  | 62,543  |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                                                                                |   |                                                                 |                |   |   |  |   |
|         Additional      issuance of common stock                                                                                                                                                             |   |                                                                 | 856,869   |   |   | 260,645  |   |
|         Proceeds      from loans from shareholders                                                                                                                                                           |   |                                                                 | 875,316   |   |   | 450,000  |   |
|         Payments      on loans from shareholders                                                                                                                                                             |   |                                                                      | (30,000)       |   |  | (100,000) |   |
|                                 Net      cash flows provided by financing activities |   |                                                                      | 1,702,185      |   |  | 610,645  |   |
|         Effect      of foreign currency translation on cash                                                                                                                                                  |   |                                                                      | 570       |   |  | (538) |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                                                                                                                                                                              |   |                                                                 | (68,813)       |   |   | (2,214) |   |
| CASH AND EQUIVALENTS,      BEGINNING OF YEAR                                                                                                                                                                                                         |   |                                                                      | 69,806    |   |  | 72,019  |   |
| CASH AND EQUIVALENTS, END OF YEAR                                                                                                                                                                                                                    |   | $                                                                    | 993       |   | $ | 69,806  |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                                                                                                                                                                  |   |                                                                 |                |   |   |  |   |
|         Interest      paid                                                                                                                                                                                   |   | $                                                                    | 7,934     |   | $ | -  |   |
| SUPPLEMENTAL NON-CASH FLOW      INFORMATION:                                                                                                                                                                                                         |   |                                                                 |                |   |   |  |   |
|         Conversion      of notes payable to common stock                                                                                                                                                     |   | $                                                                    | 647,643   |   | $ | 287,802  |   |
|         Conversion      of accrued payroll to common stock                                                                                                                                                   |   | $                                                                    | 113,655   |   | $ | -  |   |
|                                                                                                                                                                                                                                                      |        |                                                                      |                |  |  |  |   |

----

----

----

|                                                                                                                                                                                                                                              |   |   | 2005        |   |   | 2004        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|
|                                                                                                                                                                                                                                              |   |   |        |   |   |        |
| Net loss, as reported                                                                                                                                                                                                                             |   | $      | (2,029,245) |   | $      | (2,985,726) |
| Deduct: Total stock-based employee      compensation                expense determined under      fair value                based method for all      awards |   |        | (444,775)   |        |        | (460,933)   |
| Pro forma net loss                                                                                                                                                                                                                                |   | $      | (2,474,020) |        | $      | (3,446,659) |
|                                                                                                                                                                                                                                              |   |   |             |        |        |             |
| Net loss per share:                                                                                                                                                                                                                               |   |   |             |        |        |             |
|          Basic      and diluted - as reported                                                                                                                                                        |   | $      | (0.12)      |        | $      | (0.23)      |
|                                                                                                                                                                                                                                              |   |   |        |   |   |        |
|          Basic      and diluted - pro forma                                                                                                                                                          |   | $      | (0.15))     |   | $      | (0.27)      |

|   |                    | 2005                            |   | 2004                            |   |
|--------|-------------------------|---------------------------------|--------|---------------------------------|--------|
|   | Risk free interest rate | 3.60 %                          |   | 3.42 %                          |   |
|   | Expected dividend yield | 0.0 %                           |   | 0.0 %                           |   |
|   | Expected lives          | 5 years     |   | 5 years     |   |
|   | Expected volatility     | 73.00 %                         |        | 77.18 %                         |   |

----

|   | Minimum payments receivable           | $      | 11,246  |   |
|--------|---------------------------------------|--------|--------------|--------|
|   | Unearned income                       |        | (427)        |   |
|   | Net investment in financed      sales |   | 10,819  |   |
|   | Less: current portion                 |        | (8,232)      |   |
|   |                                  |   |              |   |
|   | Long-term Finance receivable          | $      | 2,587   |   |

|   | **Year Ended June 30:**                              |   |        |   |
|--------|------------------------------------------------------|--------|--------|--------|
|   |         2006 |   | 8,660  |   |
|   |         2007 |        | 2,586  |   |
|   |                                                 | $      | 11,246 |   |

----

|   | Raw material   | $ | 250,423 |   |
|--------|----------------|---|---------|--------|
|   | Finished goods |   | 71,732  |   |
|   |           | $ | 322,155 |   |

|   |                          |   |               |   | **Estimated Useful Life**                             |   |
|--------|-------------------------------|--------|---------------|--------|-------------------------------------------------------|--------|
|   | Machinery and equipment       | $      | 591,994  |   | 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        |        | 43,169   |   |                                                  |   |
|   |                          |   | 788,179  |   |                                                  |   |
|   | Less accumulated depreciation |        | (602,170)     |   |                                                  |   |
|   |                          | $      | 186,009  |   |                                                  |   |

|   | Accrued payroll       | $      | 82,189  |   |   |   |
|--------|-----------------------|--------|---------|--------|--------|--------|
|   | Professional Services |   | 161,213 |   |   |   |
|   | Insurance             |   | 30,783  |   |   |   |
|   | Other                 |        | 31,744  |   |   |   |
|   | Total                 | $      | 305,929 |   |   |   |

----

|   |                                  |   | 2004            |   |   |   |
|--------|---------------------------------------|--------|-----------------|--------|--------|--------|
|   | Allowance for doubtful accounts       | $      | 2,000      |   |   |   |
|   | Net operating loss tax carry forwards |        | 6,400,000  |   |   |   |
|   |                                  |   | 6,402,000  |   |   |   |
|   | Valuation allowance                   |        | (6,402,000)     |   |   |   |
|   |                                  | $      | -          |   |   |   |
|   |                                  |   |                 |   |   |   |

----

|                                                | **Year Ended June 30, 2005**   |   | **Year Ended June 30, 2004** |
|-----------------------------------------------------|--------------------------------|--------|------------------------------|
| ****                                                | **Shares        Under Option** |        |                              | **Weighted        Average        Exercise Price** |  | **Shares        Under Option** |  |  | **Weighted        Average        Exercise Price** |
| Options outstanding at beginning      of year       | 1,327,000                 |   | $                            | 1.23 |   | 913,000  |   | $ | 3.01 |
| Options granted                                     | 800,000                   |   |                         | 0.39 |   | 1,315,000  |   |   | .72 |
| Options expired/withdrawn                           | (358,500)                      |   |                              | 0.39 |   | (901,000) |   |  | 2.16 |
| Options outstanding at end of      year             | 1,768,500                 |   | $                            | 0.40 |   | 1,327,000  |   | $ | 1.23 |
| Options exercisable:                                |                                |   |                         |  |   |  |   |   |  |
|      Number      of shares | 1,768,500                 |   | $                            | 0.40 |   | 181,750  |   | $ | 4.49 |
| Fair value of      options granted                  |                           |   | $                            | 0.24 |   |   |   | $ | 0.47 |

----

| **Range of        Exercise         Prices** |        | **Number        Outstanding** |        | **Weighted        Average        Remaining        Contractual        Life****(Years)** |        |   | **Weighted        Average        Exercise        Price** |        | **Number        Exercisable** |        |   | **Weighted        Average        Exercise        Price** |        |
|---------------------------------------------|--------|-------------------------------|--------|----------------------------------------------------------------------------------------|--------|---|----------------------------------------------------------|--------|-------------------------------|--------|---|----------------------------------------------------------|--------|
| $0.39                                       |   | 1,740,000                     |   | 9.00                                                                                   |   | $ | .39                                                      |   | 1,740,000                     |   | $ | 0.39                                                     |        |
| $1.17 - $1.22                               |   | 28,500                        |   | 6.90                                                                                   |   |   | 1.18                                                     |   | 28,500                        |   |   | 1.18                                                     |   |
| Total                                       |   | 1,768,500                     |   | 8.93                                                                                   |   | $ | .40                                                      |   | 1,768,500                     |   | $ | 0.40                                                     |   |

| **Year Ended      June 30:**                |   |          |   |
|---------------------------------------------|--------|----------|--------|
| 2006                                        |   | $101,773 |   |
| 2007                                        |   | 36,050   |   |
| 2008                                        |   | 36,050   |   |
| 2009                                        |   | 36,050   |   |
| 2010                                        |   | 36,050   |   |
|                                             |   |          |   |
| 2011 and   thereafter   |   | 66,092   |   |
|                                             |   | $312,065 |   |

----

|          | Fiscal Year Ended        June 30, 2005 |      | Fiscal Year Ended        June 30, 2004 |   |
|---------------|----------------------------------------|-----------|----------------------------------------|--------|
|          |                                   |           |                                   |   |  |   |
| Domestic      | $                                      | 386,854   |                                   | $      | 473,440 |   |
| International |                                        | 1,527,223 |                                   |        | 1,389,172 |   |
| Total         | $                                      | 1,914,077 |                                   | $      | 1,862,612 |   |

----

----