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


                                   FORM 10-KSB
(MARK ONE)

            (X)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004

                                       OR

            ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        FOR THE TRANSITION PERIOD FROM TO
                        COMMISSION FILE NUMBER 000-26555


                           ACCUIMAGE DIAGNOSTICS CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            NEVADA                                              33-0713615
  (STATE OR JURISDICTION OF                                  (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NUMBER)

  400 OYSTER POINT BOULEVARD, SUITE 201, SOUTH SAN FRANCISCO, CALIFORNIA 94040
                    (Address of principal executive offices)

                            TELEPHONE: (650) 875-0192
              (Registrant's Telephone Number, Including Area Code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, $0.001 PER SHARE PAR VALUE


         Check  whether the  registrant:  (1) filed all  reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

                                 YES [X] NO [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

         Issuer's revenues for fiscal year ended September 30, 2004: $552,245

         As of December 30, 2004 there were  48,336,295  shares of common stock,
$0.001 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

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                           ACCUIMAGE DIAGNOSTICS CORP.

                        2004 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS

PART I

ITEM 1:        Description of Business                                         3

ITEM 2:        Description of Property                                        12

ITEM 3:        Legal Proceedings                                              12

ITEM 4:        Submission of Matters to a Vote of Security Holders            12

PART II

ITEM 5:        Market for Common Equity and Related Shareholder Matters       13

ITEM 6:        Management's Discussion and Analysis                           14

ITEM 7:        Financial Statements                                           21

ITEM 8:        Changes In and Disagreements with Accountants and
               Accounting and Financial Disclosure                            22

ITEM 8A:       Controls and Procedures                                        22

PART III

ITEM 9:        Directors and Executive Officers of the Registrant             22

ITEM 10:       Executive Compensation                                         22

ITEM 11:       Security Ownership of Certain Beneficial Owners and
               Management                                                     22

ITEM 12:       Certain Relationships and Related Transactions                 22

ITEM 13:       Exhibits and Reports of Form 8-K                               22

Signatures                                                                    24

Exhibit Index                                                                 25


                                       2


<PAGE>


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         AccuImage  Diagnostics  Corp.  ("AccuImage"  or the "Company") has made
forward-looking  statements  in this annual report that are subject to risks and
uncertainties.  Forward-looking  statements include  information  concerning our
possible or assumed future results of  operations.  Also,  when the Company uses
such words as "believe,"  "expect,"  "anticipate,"  "plan," "could," "intend" or
similar expressions,  it is making forward-looking  statements.  You should note
that an investment in our securities  involves  certain risks and  uncertainties
that could affect our future financial results. The Company's actual results may
differ  materially as a result of certain factors,  including those set forth in
this Form 10-KSB.  Potential investors should consider carefully the stated risk
factors, as well as the more detailed information contained in this Form 10-KSB,
in evaluating the Company's business, financial condition, results of operations
and  prospects  before  making a decision  to invest in the common  stock of the
Company.

PART I

ITEM 1.  DESCRIPTION OF BUSINESS

         BUSINESS DEVELOPMENT

         AccuImage  was  incorporated  in  Nevada on  February  2, 1990 as Black
Pointe Holdings,  Inc., which was established in order to identify and acquire a
medical equipment leasing business. Early attempts to do this were unsuccessful,
and the  Company  was  inactive  for a number of years  until new  parties  with
interests in three-dimensional medical technology invested. In 1996, the Company
changed its name to AccuImage Diagnostics Corp., and it entered into a licensing
arrangement  with  AccuImage,  Inc.,  a  Nevada  corporation,  which  owned  the
exclusive  rights to certain  computer  software  and  technology,  and began to
develop the medical imaging  software that the Company sells today. On September
30, 1997,  pursuant to a Stock Exchange  Agreement,  the Company obtained all of
the outstanding shares of AccuImage,  Inc., which was subsequently dissolved. On
June 30,  1999,  the Company  filed a Form 10-KSB to become a reporting  company
under  the  Securities  Exchange  Act of 1934.  The  Company's  common  stock is
currently traded on the OTC Bulletin Board under the symbol "AIDP-OB".

         BUSINESS OF ISSUER

         AccuImage  is  engaged in the  development,  marketing  and  support of
software for the visualization, analysis and management of medical imaging data.
The software's primary function is to enhance physicians' interpretation of data
from medical imaging  modalities such as computed  tomography  ("CT"),  magnetic
resonance  ("MR") and ultrasound  through the  application of  three-dimensional
("3D")  computer  graphics  and image  processing  technologies.  This  enhanced
analysis can support  physicians in clinical  diagnosis,  surgical  planning and
medical  research.   Three-dimensional  visualization  allows  communication  of
findings in a form  readily  understood  by  physicians  and others  without the
specialized training otherwise required for interpreting the images generated by
the  medical  imaging  modalities.  Efficiency  gains  and cost  savings  may be
realized  through  automated   reporting  tools  and  provision  for  electronic
distribution of the medical imaging data and post-processed results via internal
networks and the Internet.

         The AccuImage software was conceived and developed on the same hardware
platform that it is now distributed  on:  standard,  high-performance,  low cost
personal computer ("PC") workstations  running the Windows operating system from
Microsoft.  The software  interfaces with various medical imaging modalities via
the standard  medical  imaging DICOM protocol and uses the Internet and standard
PC networks for subsequent  distribution of images and  post-processed  results.
Through  this  combination  of  standard   underlying  products  and  protocols,
AccuImage  is  able to  offer  to  physicians  cost-effective,  easy-to-use  yet
powerful visualization, analysis and labor saving tools for everyday use.

         The Company  markets its  products to  radiology  departments,  imaging
centers and original  equipment  manufacturers  ("OEMs") of  diagnostic  imaging
systems both through a direct sales  force,  non-exclusive  distributors  in the
United States and independent distributors in international markets.


                                       3


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THE MEDICAL IMAGING INDUSTRY BACKGROUND

         The application of scanning and imaging techniques to medicine has been
responsible  for a revolution in medical  practices since the development of the
CT  scanner  in the  mid-1970's.  The CT scanner  provided  the  ability to view
anatomical  images  of the  interior  of  the  human  body  as a  collection  of
cross-sectional  "slices".  In addition to CT,  magnetic  resonance  imaging and
ultrasound  are  two  more  recently   developed   techniques   that  are  being
increasingly   applied.   These  processes  use  radio  and  ultra-sound  waves,
respectively,  to  non-invasively  image the  interior  of the body,  often with
greater effect than with x-ray technology. Positron Emission Tomography scanners
and Nuclear  Medicine cameras are also capable of imaging cross sectional slices
of the body.  These  innovative  technologies  have  been  rapidly  adopted  and
incorporated in new  physician-care  practices based on the imaging  information
they provide.

         The   cross-sectional   images   from  these   imaging   devices   have
traditionally  been  transferred  in  batches  to  large-format  film for review
(similar in appearance to  conventional  x-ray film). As computer and networking
technologies  improve,  companies  are  offering  systems  that  provide for the
electronic storage and transmission of images as well as providing  computerized
viewing stations,  eliminating the need for film. Further technological advances
have  made  possible   viewing  and   manipulation  of  the  data  as  complete,
three-dimensional    visualizations   reconstructed   by   software   from   the
cross-sectional data.

         In  parallel  with the  development  of these  cross-sectional  imaging
techniques,  conventional  x-ray imaging  increasingly  is being  performed in a
digital format.  Fluoroscopic  images are digitized into a digital video stream.
Conventional  x-ray  films  are  increasingly  scanned  and  stored in a digital
format.  New digital  image  sensors have been  developed  that replace film and
provide  the  digital   image  without  an   intervening   x-ray  film  (Digital
Radiography).  This  collection of techniques is known as Picture  Archiving and
Communications  Systems ("PACS").  It is believed that PACS will be the way that
modern hospitals in the near future manage radiological image review,  transport
and storage.

         This digital  revolution  in medical  imaging  means that images can be
shared inside and outside the hospital or imaging center with the aid of network
technology including the Internet and private Intranets. The American College of
Radiology,  the  National  Electrical   Manufacturers'   Association  and  other
professional  organizations  have in recent years sponsored the development of a
standard  image storage and  communication  protocol so that images from various
devices  can be shared in a common  display  format.  This  standard is known as
DICOM (Digital Imaging and Communications in Medicine).  The widespread adoption
of the DICOM standard creates a business opportunity for AccuImage and others to
participate  in the  developing  of a  market  for  applications  software  that
provides  visualization and analysis solutions for users of network  distributed
medical images.

         A number  of trends  are  evident  in the  highly  competitive  medical
imaging  industry.  Successive  generations of scanning  devices bring increased
scanning   speed  and  image  detail.   Consequently,   increasing   numbers  of
cross-sectional  slices are being produced in a single study. This tends to make
the  viewing  of  printed  images on x-ray  film  logistically  impractical  and
expensive,  favoring a computerized visualization system that can rapidly browse
the large  dataset and  integrate  it directly  with 3D  reconstructions  of the
subject anatomy.

         Another  recent trend is an increasing  shortage of  radiologists.  The
Company has positioned  itself to provide tools that enhance reading  efficiency
by providing  automated and structured  reporting  products.  This area is being
actively pursued with new R&D projects.

THE ACCUIMAGE TECHNOLOGY

         The core technology of the AccuImage software is a special  application
of  three-dimensional  computer  graphics  known as "Volume  Rendering."  Volume
Rendering  applies the power of modern computer  systems to the  cross-sectional
image data in order to create three-dimensional visualizations of the subject of
the original scan. Often,  semi-transparent  and colorful images are produced to
enhance the  understanding  of the graphics.  Volume  rendering can display some
parts  of the  data to  allow  hard,  solid  tissue  such  as bone to be  viewed
"through" and "behind" softer tissue such as muscle, which can be made to appear
as  semi-transparent.   This  allows  the  physician  to  rapidly,   safely  and
non-invasively view inaccessible body parts.


                                       4


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         The Company's software development team successfully implemented Volume
Rendering  technology in software  developed for the Microsoft Windows operating
system using Intel processors,  to take advantage of the latest  multi-processor
systems with ever-increasing  clock speed. This technology,  in conjunction with
sophisticated  analysis and review software,  forms the technology "core" of the
AccuImage product line.

         In support of the visualization  and analysis  technology the AccuImage
software provides,  the software also features data communication and management
crucial  to the  efficient  workflow  of a modern  imaging  center or  radiology
department. The DICOM standard is used for transfer of images within a facility,
with  web-based  Internet  distribution  provided  for secure  and rapid  remote
access,  transfer and review.  Automated reporting and databasing tools complete
the suite of capabilities offered by the AccuImage product line.

         An area in which the Company has expanded is subsumed under the generic
term of structured reporting,  where AccuImage software is used by physicians to
prepare patient  reports.  This software allows  physicians to save on reporting
time and increase consistency in their reporting.  The Company has also expanded
into the computed and digital  radiography market with image stitching,  storage
and distribution products.

TARGET MARKETS FOR ACCUIMAGE PRODUCTS

         AccuImage  seeks to place its  products  in the  developing  market for
computerized  medical  imaging  review,  visualization  and  communication.  The
customers in this market specialize in a range of activities, including advanced
visualization and analysis,  imaging center  management,  filmless operation and
image  distribution.  The  market  is  developing  to  include  centralized  and
distributed radiology (i.e.  Teleradiology),  remote diagnosis and consultation,
pre-surgical  planning  and  post-surgical  follow-up,   cancer  assessment  and
treatment  planning,  as well as educational  applications  for the  technology.
Hence,  the  customers for these  applications  include  radiology,  surgery and
oncology  departments of hospitals,  leading research centers,  imaging centers,
clinics and physician groups.

THE ACCUIMAGE MARKETING STRATEGY

         The Company's  main  strategy for  marketing  its  technology is direct
sales to  radiology  professionals  through  its sales  force  and  distribution
network.  Since  radiologists  represent the physician  base closest to and most
actively  involved in medical imaging,  the Company believes they will represent
the best  opportunity  for placement of the  Company's  products in the short to
medium  term.  Radiology  represents  a  developing  market  for  both  advanced
visualization/analysis  techniques  and networked  distribution  and  efficiency
enhancing  products.  In order to develop the  AccuImage  brand in the radiology
community,  the Company has  expanded  its  presence at  professional  meetings,
enhanced its visibility through publications and presentations, and initiated an
active  research  and  development  effort that has  already  resulted in unique
products for this market.  The Company sells  directly to  institutions  through
advertising,  trade show presence,  distributors  and direct sales.  The Company
also  has OEM  relationships  which it is  trying  to  expand  and  seeks  other
distribution channels both domestically and abroad.

PRODUCTS AND DEVELOPMENT

         AccuImage has a  comprehensive  product line and  distribution  system;
however,  since the Company operates in a fiercely  competitive software market,
further  deployment of  considerable  resources for  continued  development  and
product enhancement is an ongoing  requirement.  The Company's main products are
the eStation3D  web-based image distribution system and the AccuView workstation
for advanced analysis, postprocessing and image management.

         o  AccuView Workstation: A solution for medical imaging applications.

         The product is supplied either as a software-only item or together as a
hardware and software  item.  In the latter case,  the Company buys  standard PC
equipment and combines them with the software to make a complete workstation. In
the former case,  the buyer  installs the  workstation  software on their own PC
equipment.  The  workstation  consists  of several  software  modules  which are
capable of functioning  independently.  The Company occasionally  supplies these
modules individually, either as software-only items, or as software and hardware
items combined, where the hardware is standard PC equipment. In order to support


                                       5


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its  workstation   business,   the  Company  offers  on-site   training  by  its
applications  personnel,  and in the cases where it supplies  the  hardware;  it
generally provides  unlimited  telephone support for one year along with on-site
and  return-to-base  support  options.  Software-only  sales  generally  include
telephone support for one year.

         The complete workstation  configuration features full-color,  3D volume
rendering, fly-through/fly-around path planning, expert-based report generators,
and coronary  artery calcium scoring  software,  with an emphasis on ease of use
and procedural workflow.

         The  AccuView  Workstation  is capable of taking a CT dataset of hollow
vessels (such as the windpipe) and generating a 3D view which simulates what one
might see from "inside" the vessel,  looking down its length or up at its walls.
The effect is similar to the view  generated by an endoscope,  a medical  device
which is  physically  placed  inside a patient  with a small  camera and a light
attached at the end. The image from the camera is then displayed on a TV screen.
The  AccuView  approach is more  comfortable  for the  patient  since no medical
instruments need be inserted.

         The modular architecture of the AccuView workstation allows the Company
to market the  product in a form which can be  upgraded,  offering  the  Company
continuing sales prospects and a continuing revenue stream.

         o  EStation3D web-based distribution system.

         The  eStation3D   provides  a  simple   approach  for  web-based  image
distribution and remote image management,  ideally suited to imaging centers and
radiology  departments  wishing to provide  competitive  service to a  referring
physician base or reading physician staff. The eStation3D server receives images
from scanners or PACS systems using the standard DICOM protocol, then compresses
and encrypts them for  publication  on the Internet  external to the  facility's
private network.  The facility  administrator  assigns the study to a particular
receiving  physician,  who then  later  logs in via a  standard  web  browser to
download the images and associated reports.

         The downloadable  eStation3D image review software supports basic slice
review and simple 3D  browsing of the  dataset,  and can be upgraded to the full
AccuView workstation capability.

MARKETING AND DISTRIBUTION

         AccuImage  markets its products  through  direct sales and  distributor
channels  to  radiology  professionals  in  hospitals  and  independent  imaging
centers.  The Company  maintains  an  advertising  presence  in major  radiology
periodicals  and journals,  and ensures that the Company web site is up to date.
The  Company  also  actively  courts  the trade  presses  in order to  develop a
presence in editorial comment on subjects related to the Company's activities.

         The Company's  products are primarily  distributed  directly by its own
sales and installation staff, with the rest of the product  distribution managed
by  several  U.S.  and  international  distributors,   including  GE-Imatron,  a
non-exclusive U.S. distributor of AccuImage workstations.

         The Company has had  distributors  in various  parts of the world,  but
these channels have generated negligible revenue and the Company does not expend
resources on their maintenance.

         Distributors  are sold the  software  at a discount  off the  Company's
published  MSRP and then install it on hardware  purchased by the  distributors.
The Company supplies the distributors  with marketing  materials and responds to
distributors'  requests  for minor  improvements  and  enhancements  as required
ensuring success in particular sales.

         The majority of AccuImage  sales to end-users  and  distributors  are a
combination of "off-the-shelf"  hardware and the Company's software product. The
Company  purchases  standard  hardware  products  such as  computer  systems and
related  peripherals  and integrates its software  product,  performing  quality
assurance  and  testing of the  completed  workstation  prior to shipping to the
customer or distributor.


                                       6


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         A second mode of  distribution is  software-only  distribution by which
the Company  delivers  only the  software  and the  accompanying  license to the
end-user or  distributor,  who then integrates or installs the software on their
own hardware.

MANUFACTURING, INSTALLATION, TRAINING, SERVICE AND SUPPORT

         The  only   manufacturing   activity  the  Company  undertakes  is  the
integration of its software with off-the-shelf computer systems. AccuImage staff
performs  service and support by telephone,  remote system  administration,  and
on-site or return-to-base arrangements with customers.

         The  Company  handles  all   installation   for  direct  sales  of  its
workstations.  Complete systems are integrated and tested for quality  assurance
at the AccuImage  premises,  then shipped to the customer.  AccuImage  personnel
travel to the  customer  site  (usually  for 2-3 days) to  install  the  system,
integrate it with the customer's local network and medical imaging devices,  and
train site personnel on the use of the  equipment.  The cost of this training is
factored into the price of each  workstation or charged  separately.  Additional
training days can be purchased subsequent to the initial installation.

         For software-only sales, the software is sent to the customer on CD-ROM
or  downloaded  by the customer  over the  Internet.  Installation  can often be
performed from the instructions  provided with the software,  although AccuImage
staff   generally   provides   telephone   support   for   software-only   sales
installations.

         The Company records a product warranty reserve,  which is approximately
2% of hardware and software sales.  The warranty reserve was $12,000 and $25,000
at September 30, 2004 and 2003,  respectively.  The warranty reserve was reduced
by $22,000 and then $13,000 from the prior fiscal year's  reserve  primarily due
to the  negligible  warranty  service  claims  during fiscal year 2003 and 2004.
Management reviews costs  attributable to warranty support.  All new systems are
sold with one year's service and support included.  The sale of extended support
contracts to its existing customers is a new undertaking for the Company.

INTELLECTUAL PROPERTY AND MARKET PROTECTION

         The Company has performed in-house product development for the majority
of the products it currently markets.  Historically, the Company has relied upon
proprietary  source code in protecting  technology from competition.  To protect
its newly developed intellectual property, a total of 14 patents have been filed
starting  from early 2001.  Nonetheless,  such  filings are not assured  passage
through the patent examination process, and even if successful would not prevent
competitors   from  producing   products  similar  to  those  of  the  AccuImage
proprietary  software.  The  Company  has also  filed  trademark  and  copyright
applications for specific products.

         The  Company  has  in  place   appropriate   employee  and  third-party
confidentiality,  non-disclosure and proprietary information  agreements.  These
agreements generally provide that all confidential information developed or made
known to the  individual  by the Company  during the course of the  individual's
relationship with the Company is not to be disclosed to third parties, except in
specific  circumstances,  and that all inventions conceived by the individual in
the course of rendering services to the Company shall be the Company's exclusive
property.  There can be no assurance that such  agreements will not be breached,
that  remedies  for any breach would be adequate,  or that the  Company's  trade
secrets will not  otherwise  become  known to, or  independently  developed  by,
competitors. Furthermore, such measures may not provide meaningful protection of
its trade secrets,  know-how or other intellectual  property in the event of any
unauthorized  use,  misappropriation  or  disclosure.  Others may  independently
develop similar technologies or duplicate technology developed by the Company.

         The Company's  products and technologies may infringe  existing patents
or  intellectual  property  rights of third  parties.  The costs of defending an
intellectual  property claim could be substantial and could adversely affect the
business,  even if the Company were ultimately  successful in defending any such
claims.  If its products or technologies  were found to infringe the rights of a
third party, the Company could be required to pay significant damages or license
fees or cease  production,  which  could have a material  adverse  effect on its
business.


                                       7


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         Irrespective of its ability to protect its intellectual  property,  the
Company's  competitive position is largely influenced by its ability to maintain
responsiveness  to the  developing  market in which it is engaged  and to ensure
continuing  development  of  its  software  in  order  to  keep  pace  with  the
competition and developing market trends and needs.

COMPETITION

         AccuImage's 3D  visualization  and analysis  products face  competition
from the manufacturers of imaging  equipment,  other companies  offering similar
software  products,  and  in-house  development  projects  at  Universities  and
hospitals to which the Company  would  otherwise  be able to sell its  products.
Nearly  all  manufacturers  of  CT  and  MRI  scanners  offer  some  form  of 3D
visualization  workstation  as an optional  accessory  for their  scanners.  The
principal companies include GE Medical Systems, Philips Medical Systems, Siemens
Medical Systems, and Toshiba Medical Systems,  which all supply a workstation as
an option on their imaging  device.  Independent  suppliers of 3D  visualization
products  include ISG  Technologies  Inc.,  Vital  Images Inc.  (which  supplies
Toshiba with workstations),  SCImaging,  TeraRecon and Voxar, which,  similar to
the Company, act as third party vendors of a workstation product.

         Many  of  these  competitors  have  substantially   greater  financial,
marketing and technical  resources  than the Company,  and should one or more of
the   diagnostic   imaging  system   suppliers   distribute   more   competitive
visualization  products  than the ones  offered by the  Company,  the  Company's
business,  financial  condition  and results of  operations  could be materially
adversely  affected.  The Company  believes  that  continuing  innovation  while
simultaneously  stressing  quality of  product,  service  and ability to respond
rapidly to customer needs and market trends  represent its best defense  against
such  developments.  Additionally,  because  it uses a  windows-based  PC as its
platform,  the  Company  has lower  costs and  higher  margins  than many of its
competitors who are committed to more expensive,  less widely available hardware
platforms.

GOVERNMENTAL REGULATION

         Within the United States,  the use of devices in medical  procedures is
restricted  to  those  that  have  been  granted  approval  by the Food and Drug
Administration  ("FDA")  under the Federal  Food,  Drug and Cosmetic  Act.  This
approval is known as Pre Market Approval ("PMA"). Although limited marketing for
use of products on an experimental  basis is possible without full approval,  no
material  commercial  demand  may exist  unless the  device  has  received  full
approval.  Furthermore,  medical  providers will be hesitant to acquire  devices
that utilize unapproved procedures.

         The FDA  either  grants  or  refuses  approval  after a formal  written
request, known as the Pre Market Notification,  is made for a specific device to
be used for a specific procedure. Ordinarily, the applicant must demonstrate, to
the  satisfaction  of the FDA,  that  the use of that  device  for the  proposed
procedure or product would be reliable and safe and, if applicable, will have no
side  effects  currently or in the future.  This  process can require  extensive
testing,  often lasting over an extended period and costing large sums. However,
if a substantially  similar device has previously received approval for the same
or similar  applications,  Section  510(k) of the Food,  Drug and  Cosmetic  Act
allows the FDA to grant PMA without  extensive  testing and data.  AccuImage has
received 510(k) clearance to market its products from the FDA.

         Nonetheless,  even if the Company obtains regulatory approvals from the
FDA to market a product, these approvals may entail limitations on the indicated
uses of the product.  Product  approvals by the FDA can also be withdrawn due to
failure to comply with  regulatory  standards or the  occurrence  of  unforeseen
problems  following  initial  approval.  The FDA could also limit or prevent the
distribution  of the Company's  products and has the power to require the recall
of  such   products.   FDA   regulations   depend   heavily  on   administrative
interpretation,  and future  interpretations made by the FDA or other regulatory
bodies may  adversely  affect the  Company's  business.  The FDA may inspect its
business and its facilities  from time to time to determine  whether the Company
is  in  compliance   with  various   regulations   relating  to   specification,
development,  documentation,  validation,  testing,  quality control and product
labeling.  If the FDA  determines  that  the  Company  is in  violation  of such
regulations,  it could impose civil penalties,  including fines, recall or seize
products and, in extreme cases, impose criminal sanctions.


                                       8


<PAGE>


         Outside the U.S.,  there is no uniform  method of approval  for medical
devices.  International  regulatory bodies have established  varying regulations
governing  product  standards,  packaging  and  labeling  requirements,   import
restrictions,  tariff  regulations,  duties and tax requirements.  The Company's
inability or failure to comply with the varying  regulations,  or the imposition
of  new   regulations,   could   restrict  its  ability  to  sell  its  products
internationally.  Given  the low  level  of  sales in  foreign  countries,  such
restrictions would have no material effect on the Company's business.

THIRD PARTY REIMBURSEMENT

         The  federal   governmental   and  certain  states  have  enacted  cost
containment  measures such as the  establishment  of maximum fee standards in an
attempt to limit the extent and cost of governmental  reimbursement of allowable
medical expenses under Medicare,  Medicaid and similar governmental  programs. A
number of states  have  adopted  or are  considering  the  adoption  of  similar
measures.  Such  limitations  have led to a reduction  in, and may further limit
funds available for, diagnostic  testing,  and as a result may inhibit or reduce
demand  by  healthcare  providers  for  the  Company's  products.  Additionally,
hospitals may continue to face other capital  constraints that prevent them from
investing in such  equipment.  While the Company  cannot predict what effect the
policies of  governmental  entities  and other  third-party  payers will have on
future sales of the  Company's  products,  there can be no  assurance  that such
policies  would  not have a  material  adverse  impact  on the  business  of the
Company.

         It is to be noted that the largest  volume of sale of Company  products
is for the  growing  screening  market,  a market  that at this  time is  mostly
self-paid.  Customers request and pay for their examinations,  and then may seek
reimbursement  from  their  insurers  on their  own.  Economic  conditions  that
materially affect disposable income could have adverse effects on this component
of the Company's business, while acceptance of these tests by third party payers
may favorably influence this business component.

COST OF RESEARCH AND DEVELOPMENT ACTIVITIES

         The Company spent approximately  $553,467 and $604,787 on such research
and development in fiscal year 2004 and 2003, respectively.  The decrease in R&D
from the prior year is primarily a result of the  reduction in personnel  during
the latter part of fiscal year 2003 and continuing throughout fiscal year 2004.

PERSONNEL

         The Company  currently  has seven  full-time  employees.  Although  the
Company competes for such personnel with other companies and organizations  that
in many cases can offer superior facilities and resources, the Company's ability
to offer prospective  employees the opportunity to make a large  contribution in
an exciting,  growing and dynamic environment has made the recruitment of highly
qualified individuals a relatively easy task.

HISTORICAL OPERATING LOSSES

         For the fiscal year ended  September  30,  2004,  the Company  posted a
higher   operating  loss  due  to  a  decrease  in  sales  and  an  increase  in
administrative  costs,  resulting  primarily  from non-cash  stock  compensation
charges,  offset  by a  decrease  in  research  and  development  and  sales and
marketing.

         For the fiscal year ended  September  30,  2003,  the Company  posted a
higher  operating  loss due to a  decrease  in sales  offset  by a  decrease  in
operating expenses relating to administrative costs.

SHORT OPERATING HISTORY

         Although the Company was  incorporated  in February 1990, it has had no
significant  operations or business  assets until the year 1998. The Company has
been in actual  operation  under its current  management for a relatively  short
time.  It faces all of the risks  inherent  in a new  business  and those  risks
specifically  inherent in the development  and operation of a new business.  The
likelihood of the Company's success must be considered in light of the problems,
expenses,  difficulties and delays  frequently  encountered in connection with a
new business,  including,  but not limited to,  uncertainty as to the ability to
develop a market for a new product in a new area.  The  purchase  of  securities
offered by the Company must be regarded as the placing of funds at risk in a new


                                       9


<PAGE>


or "start-up" venture with all of the unforeseen costs,  expenses,  problems and
difficulties to which such ventures are subject.

MARKET DEPENDENCE

         The Company's  operations are currently focused entirely in the medical
imaging industry, and the market for the Company's products is still developing,
led by advances in technology,  as well as education and marketing  performed by
the Company and its  competitors.  There can be no  assurance  that the industry
will continue to develop in the manner it has to date, or in the manner expected
by the Company.  Hence there can be no assurance  that the Company will continue
to enjoy growth opportunities and a viable market for its products.  The success
of the Company's products will depend on its ability to successfully  market its
products, its ability to maintain competitive and responsive product support and
development, and the ability and willingness of the medical community to embrace
the  benefits  offered  by the  visualization,  analysis  and  image  management
capabilities  of the  Company's  software  products.  Of this,  there  can be no
guarantee.

CAPITAL REQUIREMENTS

         During  fiscal year 2004,  the Company  entered  into two Common  Stock
Purchase  Agreements with Dr. Aviel Faliks,  our current CEO and President ("Dr.
Faliks") pursuant to which the Company,  subject to the terms and conditions set
forth therein,  raised  $1,302,000 in cash through a private equity  offering of
32,550,000 shares of restricted common stock. These sales of securities were not
registered under the Securities Act of 1933, as amended and were exempt from the
registration  requirements  thereunder  pursuant to Section 4 (2)  thereof.  The
proceeds from this offering are being used to fund operations.

         On December 16, 2004, Dr. Faliks contributed 9,000,000 shares of common
stock back to the Company,  which he received  during the year 2004.  Dr. Faliks
had received  1,500,000 of those shares during 2004 as compensation  for serving
as the  Company's  Chief  Executive  Officer and President (he receives no other
compensation  for  such  services).  Dr.  Faliks  had  purchased  the  remaining
7,500,000  shares  from the  Company  on August 20,  2004 and the cash  proceeds
received from this purchase were not refunded back to Dr. Faliks.

         Additionally, during October 2003, Dr. Faliks made a loan in the amount
of $1 million which was used to repay all existing long-term debt of the Company
and provide additional working capital.

COMPETITIVE MARKETPLACE AND TECHNOLOGICAL OBSOLESCENCE RISK

         The  evolving  marketplace  in  which  the  Company  operates  has been
characterized to date by rapid innovation and technological  change. The Company
expects this trend to continue and hence the Company's  success will be strongly
dependent on its ability to keep pace with the advancing  technology.  This task
requires continual  research and development by the Company's  development team,
which the Company must maintain and improve.

         There can be no assurance that the Company will be able to achieve this
task and compete  effectively in the  marketplace,  and it may come to pass that
products developed by its competitors will outperform its own products,  pushing
them towards obsolescence or rendering them non-competitive.

         Certain  companies  competing  with  AccuImage  are large,  established
manufacturers of medical imaging  equipment.  While these companies do not apply
the same  corporate  focus on advanced  visualization  and analysis  products as
AccuImage,  they  nevertheless have  significantly  greater capital and staffing
resources  for  research  and   development  so  critical  to  success  in  this
marketplace.  Such companies also have  established  marketing and  distribution
networks and may have a competitive  advantage in marketing  products similar to
the  Company's.   Furthermore,   competition  in  the  broader   marketplace  of
computerized  medical  image  management  exists in the form of PACS vendors and
internal projects at universities and hospitals.  There can be no assurance that
the Company will be able to compete effectively with these entities.


                                       10


<PAGE>


DEPENDENCE ON MAJOR CUSTOMERS

         The Company derives all of its revenues from organizations operating in
the medical field, from medical professionals, and from other companies that are
in the business of manufacturing and selling medical equipment and devices.

         Two customers  accounted for a combined total of  approximately  50% of
revenue for fiscal year 2004 and three customers  accounted for a combined total
of approximately 67% of revenue for fiscal year 2003.

         The Company  derived $0 and $654,600 in revenues from AmeriScan  during
the  fiscal  years  ended  September  30,  2004 and  2003,  respectively,  which
represent  approximately  0% and  48%  of the  total  revenue  generated  by the
Company. AmeriScan filed for bankruptcy in 2003.

         The Company  derived  $182,500  and  $123,000 in revenues  from Philips
Medical  Systems  Technology  Israel  ("Philips")  during the fiscal years ended
September  30, 2004 and 2003,  respectively.  Revenue from  Philips  represented
approximately  33% and 9% of the total revenue  generated by the Company for the
fiscal years ended September 30, 2004 and 2003, respectively.

NEED FOR ADDITIONAL PERSONNEL

         The company  underwent a  reorganization  of its staff in fiscal  2003.
This  downsizing  resulted in a reduction  of corporate  business and  resources
during the latter part of fiscal year 2003 and all of fiscal year 2004.

         The  Company's  ability to grow will depend in part upon its ability to
attract and retain experienced professionals to staff a significant expansion of
its  activities.  Although  the  Company  has  thus  far  had no  difficulty  in
attracting and retaining qualified personnel, there can be no assurance that the
Company will not need to hire additional  management and other personnel to meet
its  long-term  goals  or that  the  Company  will be able to find  and  attract
qualified persons to fill such additional positions in the future.

MANAGEMENT OF GROWTH

         The Company's  business strategy  involves  continuing rapid expansion.
This growth will place significant strain on the administrative, operational and
financial  resources  of  AccuImage  and  increase  demands on its  systems  and
controls.  The Company's ability to manage its growth  successfully will require
it to develop  improved  systems and controls.  If the  Company's  management is
unable to  manage  growth  effectively,  the  Company's  operating  results  and
financial condition could be adversely affected.

PRODUCT LIABILITY

         The Company's business exposes it to potential product liability claims
that are inherent in the manufacture and sale of medical  devices,  and as such,
the Company may face  substantial  liability to patients  for damages  resulting
from the faulty  design or  manufacture  of  products.  The Company has obtained
product  liability  insurance  coverage  starting February 2001. There can be no
assurance that product  liability claims will not exceed coverage limits or that
such insurance will continue to be available at commercially  reasonable  rates,
if at all.  Consequently,  a product liability claim or other claim in excess of
insured  liabilities  or with  respect  to  uninsured  liabilities  could have a
material adverse effect on the Company.

PRODUCT RECALLS

         Complex medical devices, such as the Company's products, can experience
performance  problems in the field that require  review and possible  corrective
action by the manufacturer. The Company periodically receives reports from users
of its products  relating to  performance  difficulties  they have  encountered.
While no serious issues have arisen to date,  these or future  product  problems
could result in market  withdrawals  or recalls of products,  which could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.


                                       11


<PAGE>


SUBSEQUENT DEVELOPMENTS

         During the first quarter of fiscal year 2005, the Company  entered into
a Merger Agreement (the "Merger  Agreement"),  dated as of November 24, 2004, by
and among the Company,  Merge  Technologies  Incorporated,  a Nevada corporation
("Merge"),  ADI  Acquisition  Corp.,  a Wisconsin  corporation  and wholly owned
subsidiary  of  Merge  ("Acquisition   Sub"),  and  Dr.  Faliks,  the  principal
shareholder  of  the  Company  ("Dr.  Faliks"),  providing  for  the  merger  of
Acquisition  Sub with and into the  Company  (the  "Merger"),  with the  Company
continuing as the surviving corporation (the "Merger Agreement").  Following the
Merger,  the Company will continue as a wholly owned  subsidiary  of Merge.  The
Boards of  Directors  of the Company and Merge have  approved the Merger and the
Merger Agreement.

         Pursuant  to the terms of the  Merger  Agreement,  shareholders  of the
Company will receive cash for their shares of the  Company's  common stock equal
to  approximately  $0.12 per share of common stock, or a total of  approximately
$6.0  million.  Consummation  of the Merger is subject to customary  conditions,
including approval by the Company's shareholders.  The parties expect the Merger
to be completed in the first quarter of 2005.

         In connection with the Merger Agreement,  Dr. Faliks has entered into a
voting  agreement  with  Merge  in which  he has  agreed  to vote his 59% of the
Company's  common  stock in favor of the Merger (the  "Voting  Agreement").  The
Voting  Agreement  is  subject  to  termination  under  certain   circumstances,
including  termination of the Merger  Agreement by the Board of Directors of the
Company  pursuant to the Board of Directors'  fiduciary  duties to the Company's
shareholders.

         On December 16, 2004, Dr. Faliks contributed 9,000,000 shares of common
stock back to the Company,  which he received  during the year 2004.  Dr. Faliks
had received  1,500,000 of those shares during 2004 as compensation  for serving
as the  Company's  Chief  Executive  Officer and President (he receives no other
compensation for such services).  Dr. Faliks  purchased the remaining  7,500,000
shares from the Company on August 20, 2004 and the cash  proceeds  received from
this purchase were not refunded back to Dr. Faliks.


         As a result of Dr. Faliks'  contribution of shares to the Company,  his
ownership  percentage of the Company's  outstanding  common stock was reduced to
approximately 52.4%.


ITEM 2.  DESCRIPTION OF  PROPERTY

         The  Company's   principal  office  is  located  at  400  Oyster  Point
Boulevard, Suite #201, South San Francisco, California, 94080. The property is a
suite of  approximately  2,550  square  feet.  The  property  is leased  from an
unaffiliated  third party for a period of three years ending July 31, 2007.  The
monthly  lease  payments  are $3,959,  $4,106 and $4,253 for years one,  two and
three, respectively.

         The lease on the Company's  previous  principal  office,  501 Grandview
Drive,  Suite #100,  South San  Francisco,  California,  94080,  was  terminated
effective July 31, 2004.

         The Company maintains tenant fire and casualty  insurance on its leased
property in an amount deemed adequate by the Company.

ITEM 3.  LEGAL PROCEEDINGS

         The Company  may from time to time be  involved  in various  claims and
lawsuits  incidental  to the  operation  of its  business.  The  Company  is not
currently  involved in any  litigation  that it  believes  could have a material
adverse effect on its financial condition or the results of its operations.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On August 6, 2004,  the Company's  Annual Meeting of  Shareholders  was
held and the following  matters were submitted to the shareholders for action or
approval.


                                       12


<PAGE>


1.   The  shareholders  elected  seven  directors of the Company,  each to serve
     until the next Annual Meeting of  Shareholders  and until their  successors
     are  elected and  qualified.  The votes for these  directors  are set forth
     below.

                                    FOR             AGAINST
                                __________          _______

     Aviel Faliks               35,445,790            --
     Joel L. Blank              35,445,790            --
     Hirsch Handmaker           35,445,790            --
     David Goldbrenner          35,445,790            --
     Sourav Goswami             35,445,790            --
     Ron Schilling              35,445,790            --
     Chung Lew                  35,445,790            --

         Other  matters  voted  upon and  approved  by the  shareholders  at the
meeting,  and the number of votes cast with respect to each such matter, were as
follows:


2.   The  shareholders  approved a proposal to amend the  Company's  Amended and
     Restated  Articles of  Incorporation  to increase the number of  authorized
     shares of Common Stock from  50,000,000 to  75,000,000,  for an increase of
     25,000,000 shares.

            FOR           AGAINST       ABSTAIN       BROKER NON-VOTES
         __________       _______       _______       ________________

         35,323,890       124,900        1,000           2,870,802

3.   The shareholders approved a proposal to ratify the appointment of Odenberg,
     Ullakko,  Muranishi & Co. LLP as the Company's independent auditors for the
     fiscal year ended September 30, 2004.

            FOR           AGAINST       ABSTAIN       BROKER NON-VOTES
         __________       _______       _______       ________________

         35,445,790       4,000           --             2,870,802


PART II

ITEM 5.  MARKET FOR COMMON  EQUITY AND RELATED  SHAREHOLDER  MATTERS

         (A)  MARKET INFORMATION

         The  Company's  common  stock is  currently  traded on the OTC Bulletin
Board under the symbol "AIDP.OB". Beginning August 1999, the Company's stock was
traded on the National  Quotation  Bureau's Pink Sheets.  Before August 1999, it
was  trading on the OTC  Bulletin  Board.  The price  range of high and low sale
price of the Company's common stock for the periods shown is set forth below:

FISCAL YEAR ENDED SEPTEMBER 30, 2003                HIGH             LOW
____________________________________              _________       _________

    First quarter ended December 31, 2002         $   0.125       $   0.080
    Second quarter ended March 31, 2003               0.080           0.004
    Third quarter ended June 30, 2003                 0.080           0.040
    Fourth quarter ended September 30, 2003           0.100           0.040

FISCAL YEAR ENDED SEPTEMBER 30, 2004                HIGH             LOW
____________________________________              _________       _________

    First quarter ended December 31, 2003         $   0.110       $   0.040
    Second quarter ended March 31, 2004               0.220           0.080
    Third quarter ended June 30, 2004                 0.160           0.090
    Fourth quarter ended September 30, 2004           0.100           0.060


                                       13


<PAGE>


         (B)  SHAREHOLDERS

         As of September 30, 2004, there were  approximately 106 shareholders of
record of AccuImage  common stock, not including an unknown number of beneficial
holders in street name. No shares of preferred stock have been issued.

         (C)  DIVIDENDS

         The Company has never  declared a dividend and does not intend to do so
in the foreseeable  future.  Nevada Revised  Statutes  section 78.288 limits the
Company's  ability to pay  dividends  on its common  stock if any such  dividend
would render the Company insolvent.

         (D)  SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         As of September 30, 2004, the Company's equity  compensation  plans are
as follows:

<TABLE>
<CAPTION>

                                   NUMBER OF SECURITIES         WEIGHTED AVERAGE         NUMBER OF SECURITIES
                                     TO BE ISSUED UPON          EXERCISE PRICE OF         REMAINING AVAILABLE
                                  EXERCISE OF OUTSTANDING     OUTSTANDING OPTIONS,     AVAILABLE FOR FUTURE FOR
                                     OPTIONS, WARRANTS            WARRANTS AND           ISSUANCE UNDER EQUITY
PLAN CATEGORY                           AND RIGHTS                   RIGHTS             COMPENSATION PLANS (1)
_____________________________     _______________________     ____________________     ________________________
<S>                                      <C>                         <C>                       <C>

Equity compensation plans                3,892,500                   $0.21                     207,500
approved by security holders

Equity compensation plans not
approved by security holders                    --                      --                          --
                                         _________                   _____                     _______

Total                                    3,892,500                   $0.21                     207,500
                                         =========                   =====                     =======
</TABLE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

FORWARD LOOKING STATEMENTS

         The discussion  contained in this  Management  Discussion & Analysis is
"forward  looking" as that term is contemplated by Section 27A of the Securities
Act of 1933 and Section 12E of the  Securities  Exchange Act of 1934  ("Exchange
Act"),  including,  without  limitation,   statements  regarding  the  Company's
expectations,  beliefs,  intentions  or  strategies  regarding  future  business
operations  and projected  earnings  from its products and  services,  which are
subject to many  risks.  All  forward-looking  statements  included in this Form
10-QSB are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward-looking statements.
The  Company's  actual  results  may  differ  materially  as a result of certain
factors,  including  those set forth hereafter and elsewhere in this Form 10-QSB
and as disclosed in the  Company's  other filings with the Security and Exchange
Commission.  Potential investors should consider carefully the previously stated
factors,  as well as the more detailed  information  contained elsewhere in this
Form  10-QSB,  before  making a decision  to invest in the  common  stock of the
Company.

OVERVIEW

         The following  discussion  and analysis  should be read in  conjunction
with the Company's  financial  statements  and related  notes thereto  contained
elsewhere  with this Form  10-KSB.  Operating  results for fiscal years 2004 and
2003 are not necessarily  indicative of the results that may be expected for any
future periods.

         AccuImage  is  engaged in the  development,  marketing  and  support of
software for the visualization, analysis and management of medical imaging data.
The software's primary function is to enhance physicians' interpretation of data
from medical imaging modalities such as computed tomography, magnetic resonance,


                                       14


<PAGE>


and ultrasound  through the application of  three-dimensional  computer graphics
and image processing technologies. This enhanced analysis can support physicians
in clinical diagnosis, surgical planning and medical research. Three-dimensional
visualization  allows  communication of findings in a form readily understood by
physicians and others without the specialized  training  otherwise  required for
interpreting the images generated by the medical imaging modalities.  Efficiency
gains and cost savings may be realized  through  automated  reporting  tools and
provision  for  electronic   distribution   of  the  medical  imaging  data  and
post-processed results via internal networks and the Internet.

         The AccuImage software was conceived and developed on the same hardware
platform that it is now distributed  on:  standard,  high-performance,  low cost
personal computer ("PC") workstations  running the Windows operating system from
Microsoft.  The software  interfaces with various medical imaging modalities via
the standard  medical  imaging DICOM protocol and uses the Internet and standard
PC networks for subsequent  distribution of images and  post-processed  results.
Through  this  combination  of  standard   underlying  products  and  protocols,
AccuImage  is  able to  offer  to  physicians  cost-effective,  easy-to-use  yet
powerful visualization, analysis and laborsaving tools for everyday use.

         The Company  markets its  products to  radiology  departments,  imaging
centers and original  equipment  manufacturers  of  diagnostic  imaging  systems
through a direct sales force,  non-exclusive  distributors  in the United States
and independent distributors in international markets.

RESULTS OF OPERATIONS

FISCAL YEAR END

         The Company's  fiscal year end falls on September  30th, and references
to 2004 and 2003 discussed below refer to the years ended September 30, 2004 and
2003, respectively.

REVENUES

         In fiscal year 2004, total revenue decreased 59.2% to $552,245 compared
with  $1,354,498 in the prior fiscal year 2003.  This decrease was primarily due
to  the  poor  economy,   especially  in  the  medical  imaging  and  healthcare
industries,  and the  loss of  AmeriScan  as a  customer.  AmeriScan  filed  for
bankruptcy in 2003. Sales during fiscal year 2004 represented  revenue primarily
from sales of software and monthly maintenance contracts.

GROSS PROFIT

         Gross profit in absolute  dollars  decreased  by $579,633 or 53.1%,  to
$512,005 or 92.7% of net sales,  for fiscal year 2004,  from $1,091,638 or 80.6%
of net sales,  for fiscal year 2003.  The  decrease in absolute  dollars  during
fiscal year 2004 is primarily  due to lower yearly sales and the increase in the
gross margin  percentage  is due to a change in product mix as compared to prior
year.  Sales for fiscal year 2004 were  primarily  sales of software  and annual
maintenance contracts.

RESEARCH AND DEVELOPMENT

         Research and development  expenses consist  principally of research and
engineering personnel costs, equipment  depreciation,  consulting fees, supplies
and allocation of overhead.  Research and  development  expenses for fiscal year
2004  decreased  by $51,320 or 8.5%,  to $553,467  or 100.2% of net sales,  from
$604,787  or 44.7% of net  sales,  in fiscal  year 2003.  The  fiscal  year 2004
decrease in absolute  dollars is primarily  due to  reductions  in personnel and
other cost saving  measures.  The Company  intends to continue  its research and
development  efforts to maintain  its  competitive  position in the  marketplace
since the Company's  operations  require  constant  improvement  and  high-level
development of the Company's software products.

SALES AND MARKETING

         Sales and marketing expenses consist principally of sales and marketing
personnel  costs,  agency and  consulting  fees,  commissions,  promotional  and
advertising  expenses and allocation of overhead.  Sales and marketing  expenses
for fiscal year 2004 decreased by $247,165 or 41.6%, to $346,880 or 62.8% of net


                                       15


<PAGE>


sales, from $594,045 or 43.9% of net sales, in fiscal year 2003. The decrease in
absolute  dollars  for fiscal year 2004 was  primarily  due to a decrease in the
Company's  sales force,  a change in the  compensation  structure to commissions
only, a decrease in  promotional  printing and expenses and a decrease in travel
and entertainment expense.

GENERAL AND ADMINISTRATIVE

         General   and   administrative    expenses   consist   principally   of
administrative and executive  personnel costs,  provision for doubtful accounts,
fees  for  professional  services  and  allocation  of  overhead.   General  and
administrative  expenses for fiscal year 2004 increased by $312,477 or 28.3%, to
$1,417,104 or 256.6% of net sales,  from  $1,104,627  or 81.6% of net sales,  in
fiscal  year 2003.  The  increase  in  absolute  dollars for fiscal year 2004 is
primarily due to the non-cash charges  associated with stock based  compensation
incurred during the fiscal year ending September 30, 2004, partially offset by a
reduction in office staff and cost-saving measures.

RESULTS OF OPERATIONS

         Sales decreased  during fiscal year 2004 by $802,253 to $552,245,  from
fiscal year 2003. The decline in fiscal year sales  resulted in a  corresponding
decrease in gross profit.  Operating  expenses increased during fiscal year 2004
by $13,992 or 0.6%,  to  $2,317,451,  from  fiscal  year 2003.  The fiscal  year
decrease in sales is due to the poor economy,  especially in the medical imaging
and the health care industries.  The fiscal year increase in operating  expenses
is  primarily  due to the non-cash  stock based  compensation  expense  incurred
during fiscal year 2004,  offset by various cost saving measures  implemented by
the Company,  including a reduction in salaries and headcount.  This resulted in
an operating  loss of $1,805,446 for fiscal year 2004, or $593,625 more than the
operating loss of $1,211,821 in fiscal year 2003.

         The  operating  loss for the  fiscal  year  ended  September  30,  2003
includes  a  $300,000  one-time  write-down  of  the  Company's   investment  in
MDiagnostics  (formerly  AHS);  see Footnote 3 in the  financials for additional
discussion.

OFF BALANCE SHEET ARRANGEMENTS

         The Company did not engage in an off balance sheet  arrangement  during
fiscal year 2004.

LIQUIDITY AND CAPITAL RESOURCES

         During  the fiscal  year ended  September  30,  2004,  net cash used by
operating  activities  was  $779,640.  At September  30,  2004,  the Company had
$750,417 in cash and cash  equivalents.  Working  capital at September  30, 2004
equaled a deficit of $563,556 compared with a deficit of $1,153,886 at September
30, 2003.

         On September  30, 2004,  the Company held accounts  receivable  (net of
allowance for doubtful accounts) of $53,612.  Accounts  receivable are generally
kept current through punctual collections efforts.

         During the fiscal year ended  September  30, 2004,  the Company did not
have any significant investing activities.

         During the fiscal year ended  September  30, 2004,  the Company  raised
$2,302,000 in cash by issuing 32,550,000 shares of the Company's common stock to
an Officer of the Company in two rounds of private  financings for and aggregate
amount of $1,302,000, and entered into two notes for $500,000 each with the same
Officer of the Company.  This was offset by a payment of approximately  $762,600
to Board Members for outstanding notes entered into during previous years.

         The Company's revenues for the foreseeable future may not be sufficient
to obtain profitability,  and the Company may continue to experience losses. The
Company's expectations as to its cash flows, and as to future cash balances, are
subject to a number of assumptions,  including assumptions regarding anticipated
revenue,  customer purchasing and payment patterns,  and improvements in general
economic conditions, many of which are beyond the Company's control. If revenues
do not match projections,  and if losses exceed the Company's expectations,  the


                                       16


<PAGE>


Company will implement  additional cost saving  initiatives in order to preserve
cash. If the Company experiences a continued decline in demand for its products,
from  the  level  experienced  during  fiscal  2004,  it  will  need  to  reduce
expenditures to a greater degree than anticipated, or raise additional funds, if
possible.

         The Company operates in a highly  competitive  market  characterized by
rapidly changing  technology,  together with  competitors and distributors  that
have  significantly  greater financial  resources than the Company.  The Company
intends to incur  significant  expenses to develop  and promote new  products as
well as support existing products.  Failure to generate sufficient revenues from
new and existing  products,  or reduce  discretionary  expenditures would have a
material adverse effect on a Company's  ability to achieve its intended business
objectives.

FOREIGN CURRENCY TRANSACTIONS

         All the Company's  transactions  are  negotiated,  invoiced and paid in
U.S.  dollars.  International  sales  for the  fiscal  years  2004 and 2003 were
approximately $182,500 and $123,000, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The discussion  and analysis of the financial  condition and results of
operations  are based on the financial  statements,  which have been prepared in
accordance with generally accepted  accounting  principles.  Note 2 of the Notes
describe  the  significant   accounting  policies  essential  to  the  financial
statements. The preparation of these financial statements requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying  notes.  Actual results could differ materially from
those estimates.

         We  believe  the  following  to be  critical  accounting  policies  and
estimates.  That is, they are both  important to the  portrayal of the Company's
financial  condition  and  results,  and  they  require  significant  management
judgment and estimates about matters that are inherently uncertain.  As a result
of inherent uncertainty, there is a likelihood that materially different amounts
would be reported under  different  conditions or using  different  assumptions.
Although we believe that our judgments and estimates are reasonable, appropriate
and correct, actual future results may differ materially from our estimates.

         REVENUE  RECOGNITION.  The Company's  revenue is derived primarily from
two sources: (i) software license revenue,  derived primarily from product sales
to  distributors  and end users,  and (ii)  maintenance  and  services  revenue,
derived  primarily from support,  education and consulting  services provided to
end-users.   Inherent  in  the  revenue   recognition  process  are  significant
management  estimates and  judgments,  which  influence the timing and amount of
revenue recognized.  The Company typically requires deposits upon the receipt of
a signed purchase and license  agreement.  Deposits received on these agreements
represent unearned revenue and are classified as customer deposit liabilities on
the Company's balance sheet.

         The Company  accounts  for sales of software  and  maintenance  revenue
under the  provisions  of Statement  of Position  97-2 ("SOP  97-2"),  "Software
Revenue  Recognition," as amended and Emerging Issues Task Force ("EITF") 00-21,
"Accounting  for Revenue  Arrangements  with  Multiple  Deliverables."  SOP 97-2
generally  requires revenue earned on software  arrangements  involving multiple
elements to be  allocated  to each element  based on  vendor-specific  objective
evidence.  For hardware transactions where no software is involved,  the Company
applies the provisions of Staff Accounting Bulletin 104, "Revenue Recognition."

         The fee for multiple-element  arrangements is allocated to each element
of the  arrangement,  such as  maintenance  and support  services,  based on the
relative fair values of the elements.  The Company  determines the fair value of
each element in multi-element  arrangements based on  vendor-specific  objective
evidence  for each  element,  which is based on the price  charged when the same
element  is sold  separately.  If  evidence  of fair  value  of all  undelivered
elements exists but evidence does not exist for one or more delivered  elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
is recognized as revenue.

         The Company  recognizes revenue from the sale of software licenses when
persuasive evidence of an arrangement exists, the product has been accepted, the
fee is fixed or  determinable,  and  collection of the  resulting  receivable is


                                       17


<PAGE>


probable.  Acceptance  generally  occurs when the  product  has been  installed,
training has occurred and the product is in clinical use at the customer site.

         Fair  values of the ongoing  maintenance,  which  includes  updates and
support,  are based upon a percentage of the current list price of the software.
Fair value of services,  such as training or consulting,  is based upon separate
sales by the Company of these services to other customers. Payments received for
maintenance and services are deferred and recognized as revenue ratably over the
contract term. Training and consulting services are billed based on hourly rates
and are generally recognized as revenue as these services are performed.

         PRODUCT  WARRANTY  RESERVE.  Based upon historical  costs and its sales
agreements,  the Company  maintains a product  warranty reserve based on product
sales to cover anticipated  warranty costs related to software sold. The Company
typically  provides  one-year  warranties on its software and hardware  products
sold. The majority of the hardware  warranty is covered by the hardware  vendor.
The Company  continually  compares its reserves to actual costs as determined by
management and adjusts its reserves as necessary.

         The actual  results with regard to warranty  expenditures  could have a
material impact on the financial statements of the Company if the actual rate of
unit  failure  is  greater  than  what  was  estimated  by  the  Company  in the
calculation of its warranty  reserve.  The product  warranty reserve balance was
$12,000 and $25,000 as of September 30, 2004 and 2003, respectively.

         INVENTORY VALUATION METHODOLOGY. Inventories are valued at the lower of
cost or market using the first-in,  first-out  ("FIFO") method.  Inventories are
written down for estimated  obsolescence and unmarketable inventory in an amount
equal to the difference  between the cost of inventory and the estimated  market
value  based  upon  assumptions  about  future  demand  and  market  conditions.
Inventory impairment charges create a new cost basis for inventory. In addition,
the Company reports any significant adjustments that result from reconciling the
perpetual  inventory  record  to the  periodic  and  annual  physical  inventory
observations.  The inventory balance was $19,366 and $49,193 as of September 30,
2004 and 2003, respectively.

         ACCOUNTS  RECEIVABLE AND ALLOWANCE FOR DOUBTFUL  ACCOUNTS.  The Company
performs ongoing credit evaluations of its customers'  financial  conditions and
generally  requires no  collateral  from its  customers.  The Company  maintains
allowances  for  doubtful  accounts  for  estimated  losses  resulting  from the
inability of its customers to make required payments. If the financial condition
of the Company's  customers  should  deteriorate,  resulting in an impairment of
their ability to make payments,  additional allowances may be required. Accounts
receivables,  net of an  allowance  for  doubtful  accounts,  were  $53,612  and
$112,170 at September 30, 2004 and 2003, respectively.

         VALUATION OF OTHER INTANGIBLE  ASSETS AND GOODWILL.  Other  significant
estimates  include  the  estimated  cash  flows to  measure  long-lived  assets,
including  goodwill and other intangible  assets and the  recoverability  of the
Company's investment. The Company evaluates the recoverability of its long-lived
assets   periodically  by  analyzing  its  operating   results  and  considering
significant events or changes in the business environment. Goodwill was $309,063
on September 30, 2004 and 2003.  Other  intangible  assets,  net of  accumulated
amortization,   were  $2,929  and  $4,393  on  September   30,  2004  and  2003,
respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2003, the  Securities and Exchange  Commission  (the "SEC")
issued Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue  Recognition.  SAB
104 supersedes SAB 101, Revenue Recognition in Financial Statements. The primary
purpose  of SAB  104 is to  rescind  accounting  guidance  contained  in SAB 101
related to multiple element revenue arrangements,  superseded as a result of the
issuance  of EITF  00-21.  Additionally,  SAB 104  rescinds  the  SEC's  Revenue
Recognition in Financial Statements  Frequently Asked Questions and Answers (the
"FAQ")  issued  with SAB 101 that had been  codified  in SEC Topic  13,  Revenue
Recognition.  Selected  portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the  issuance of EITF 00-21,
the revenue  recognition  principles of SAB 101 remain largely  unchanged by the
issuance of SAB 104. The  issuance of SAB 104 did not have a material  impact on
the Company's financial position, results of operations or cash flows.


                                       18


<PAGE>


         In November 2003, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 03-10,  Application of EITF Issue No. 02-16,  "Accounting
by a Customer (Including a Reseller) for Certain  Consideration  Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers".
This issue clarifies whether consideration  received by a reseller from a vendor
that is  reimbursement  by the vendor for honoring the vendor's sales incentives
offered  directly to consumers  should be recorded as a reduction of the cost of
the reseller's  cost of sales.  The provisions of EITF Issue No. 03-10 should be
applied  prospectively in fiscal years beginning after December 15, 2003 with no
early adoption or retroactive  reclassification  permitted. The adoption of this
standard did not have a material  impact on the  Company's  financial  position,
results of operations or cash flows.

         In January 2003, the Financial  Accounting Standards Board (the "FASB")
issued  FASB  Interpretation  No.  46 ("FIN  46"),  "Consolidation  of  Variable
Interest  Entities,  an  Interpretation  of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary  beneficiary of the
entity  if  the  equity   investors  in  the  entity  either  do  not  have  the
characteristics  of  controlling  financial  interest or do not have  sufficient
equity at risk for the  entity  to  finance  it  activities  without  additional
subordinated   financial  support  from  other  parties.  FIN  46  is  effective
immediately  for all new variable  interest  entities  created or acquired after
January 31, 2003. For variable  interest  entities  created or acquired prior to
February  1, 2003,  the  provisions  of FIN 46 were to be applied  for the first
interim or annual period  beginning  after June 15, 2003. In December  2003, the
FASB released a revision of FIN 46 to address various  implementation issues and
modify the effective  date for applying the provision of FIN 46. A public entity
shall apply the  provisions  of the FIN 46 revision no later than the end of the
first  reporting  period that ends after  December  15, 2004 for small  business
filers. However, a public entity shall apply FIN 46 to entities considered to be
special-purpose  entities  no later  than as of the end of the  first  reporting
period  that ends  after  December  15,  2003.  The  issuance  of FIN 46 and its
revision will not have a material  impact on the Company's  financial  position,
results of operations or cash flows.

         In April 2004,  the  Emerging  Issues Task Force issued  Statement  No.
03-06 ("EITF 03-06"),  "Participating  Securities and the Two-Class Method Under
FASB  Statement No. 128,  Earnings Per Share." EITF 03-06  addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually  entitle the holder
to  participate  in  dividends  and  earnings  of the company  when,  and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating  earnings per share,  clarifying
what constitutes a participating  security and how to apply the two-class method
of  computing  earnings  per share  once it is  determined  that a  security  is
participating,  including  how to  allocate  undistributed  earnings  to  such a
security.  EITF 03-06 is effective for fiscal periods  beginning after March 31,
2004.  The  Company  does not expect the  adoption of this  statement  to have a
material impact on its financial position or results of operations.

         In June 2004, the Emerging  Issues Task Force ("EITF")  issued EITF No.
03-01,  "The Meaning of  Other-Than-Temporary  Impairment and its Application to
Certain  Investments"  ("EITF  03-01").  EITF 03-01  includes  new  guidance for
evaluating and recording  impairment losses on debt and equity  investments,  as
well as new  disclosure  requirements  for  investments  that are  deemed  to be
temporarily  impaired.  The  accounting  guidance of EITF 03-01 is effective for
reporting periods beginning after June 15, 2004. Adoption of EITF 03-01 will not
have a  material  impact on the  Company's  financial  position  or  results  of
operations.

FACTORS AFFECTING FUTURE OPERATING RESULTS

         The development and marketing of products requires  significant amounts
of capital.  Failure to increase  future  orders and revenues  might require the
Company to seek  additional  capital to meet its working capital needs during or
beyond the next twelve months if the Company is unable to reduce expenses to the
degree  necessary to avoid  incurring  losses.  If the Company needs  additional
capital  resources,  it may be required to raise additional  equity or sell debt
securities,  secure lines of credit or obtain other third party  financing.  The
timing and amount of such capital requirements cannot be determined at this time
and will depend on a number of factors,  including  demand for our  existing and
new products and changes in technology in the medical  imaging  industry.  There
can be no assurance that additional  financing will be available on satisfactory
terms when needed,  if at all.  Failure to raise such additional  financing,  if
needed, may result in the Company's  inability to achieve its long-term business
objectives.  To the extent that additional capital is raised through the sale of
additional  equity  or  convertible  debt  securities,  the  issuance  of  these
securities would result in additional dilution to the Company's shareholders.


                                       19


<PAGE>


         The  Company  operates  in  a  rapidly  changing  industry,   which  is
characterized  by  intense  competition  from  both  established  companies  and
start-up  companies.   The  market  for  the  Company's  products  is  extremely
competitive both as to price and capabilities.  The Company's success depends in
part on its ability to enhance  existing  products and introduce new  technology
products.  This requires the Company to  accurately  predict  future  technology
trends and  preferences.  The Company  must also bring its products to market at
competitive  price  levels.   Unexpected  changes  in  technological  standards,
customer demand and pricing of competitive  products could adversely  affect the
Company's  operating results if the Company is unable to respond effectively and
timely to such changes.

         The  industry  is also  dependent  to a  large  extent  on  proprietary
intellectual property rights. From time to time, the Company is subject to legal
proceedings and claims in the ordinary course of business,  including  claims of
alleged  infringement  of patents,  trademarks and other  intellectual  property
rights.  Consequently,  from  time to time,  the  Company  will be  required  to
prosecute or defend against alleged infringements of such rights.









                                       20


<PAGE>


ITEM 7.  FINANCIAL STATEMENTS




                           ACCUIMAGE DIAGNOSTICS CORP.

                              FINANCIAL STATEMENTS

          WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                           SEPTEMBER 30, 2004 AND 2003




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      F-1

BALANCE SHEETS                                                               F-2

STATEMENTS OF OPERATIONS                                                     F-3

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)                                 F-4

STATEMENTS OF CASH FLOWS                                                     F-5

NOTES TO THE FINANCIAL STATEMENTS                                            F-6









                                       21


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
      OF ACCUIMAGE DIAGNOSTICS CORP.


We have audited the accompanying  balance sheets of AccuImage  Diagnostics Corp.
as of September 30, 2004 and 2003,  and the related  statements  of  operations,
shareholders'  equity  (deficit),  and its cash flows for the fiscal  years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion,  the financial  statements  audited by us present fairly, in all
material  respects,  the financial position of the Company at September 30, 2004
and 2003,  and the  results of its  operations  and its cash flows for the years
then ended in conformity with accounting  principles  generally  accepted in the
United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in Note 1, the Company
has suffered recurring operating losses and negative cash flows from operations,
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

As discussed in Note 17 to the accompanying  financial  statements,  the Company
entered into a merger agreement on November 24, 2004, under which it will become
a wholly owned  subsidiary  of another  company.  Consummation  of the merger is
subject to the approval of the Company's shareholders, among other things.



ODENBERG ULLAKKO MURANISHI & CO. LLP
SAN FRANCISCO, CALIFORNIA

NOVEMBER  22,  2004,  EXCEPT FOR NOTE 17, AS TO WHICH THE DATE IS DECEMBER  16TH
2004


                                       F-1


<PAGE>

<TABLE>
<CAPTION>


                           ACCUIMAGE DIAGNOSTICS CORP.
                                 BALANCE SHEETS


                                                                                  SEPTEMBER 30
                                                                         ______________________________
                                                                            2004               2003
                                                                         ___________        ___________
<S>                                                                      <C>                <C>

ASSETS
Current assets:
    Cash and cash equivalents                                            $   750,417        $        --
    Accounts receivable, net of allowance of $16,457 and                      53,612            112,170
       $50,000, respectively
    Other receivable                                                          32,095             50,000
    Inventory                                                                 19,366             49,193
    Prepaid expenses and other current assets                                 47,044              9,091
                                                                         ___________        ___________
       Total current assets                                                  902,534            220,454
                                                                         ___________        ___________

Property and equipment, net of accumulated depreciation and
    amortization
                                                                              14,377             45,412
                                                                         ___________        ___________
Other assets
    Deposits                                                                  17,311              9,993
    Goodwill                                                                 309,063            309,063
    Other intangible assets, net                                               2,929              4,393
                                                                         ___________        ___________
       Total other assets                                                    329,303            323,449
                                                                         ___________        ___________
                                                                         $ 1,246,214        $   589,315
                                                                         ===========        ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable                                                     $    58,429        $   250,730
    Accrued liabilities                                                      186,789            324,010
    Deferred revenue                                                         220,872             37,000
    Notes payable to related parties                                       1,000,000            762,600
                                                                         ___________        ___________
       Total current liabilities                                           1,466,090          1,374,340
                                                                         ___________        ___________

    Deferred rent                                                                293                 --
                                                                         ___________        ___________
       Total liabilities                                                   1,466,383          1,374,340
                                                                         ___________        ___________

Shareholders' equity (deficit):
    Preferred shares - $0.001 par value; 10,000,000 authorized;
       none issued or outstanding                                                 --                 --
    Common shares - $0.001 par value; 75,000,000 authorized;
        57,336,295 and 22,886,295 shares issued and outstanding at
       September 30, 2004 and 2003, respectively                              57,337             22,887
    Paid-in-capital                                                        5,794,979          3,488,348
    Deferred compensation                                                    (30,000)                 -
    Accumulated deficit                                                   (6,042,485)       $(4,296,260)
                                                                         ___________        ___________
       Total shareholders' deficit                                          (220,169)          (785,025)
                                                                         ___________        ___________
                                                                         $ 1,246,214        $   589,315
                                                                         ===========        ===========



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

</TABLE>


                                       F-2


<PAGE>

<TABLE>
<CAPTION>


                           ACCUIMAGE DIAGNOSTICS CORP.
                             STATEMENT OF OPERATIONS


                                                             FISCAL YEARS ENDED SEPTEMBER 30
                                                             _______________________________
                                                                 2004               2003
                                                              ___________        ___________
<S>                                                           <C>                <C>

Sales                                                         $   552,245        $ 1,354,498

Cost of sales                                                      40,240            262,860
                                                              ___________        ___________
    Gross profit                                                  512,005          1,091,638
                                                              ___________        ___________
Operating expenses:
   Research and development (includes non-cash stock
      compensation of $6,000 and $18,000 for the fiscal
      years ended September 30, 2004 and 2003, respectively)      553,467            604,787

   Sales and marketing (includes non-cash stock
      compensation of $2,000 and $6,000 for the fiscal
      years ended September 30, 2004 and 2003, respectively)      346,880            594,045

   General and administrative (includes non-cash stock
      compensation of $977,081 and $0 for the fiscal
      years ended September 30, 2004 and 2003,
      respectively)                                             1,417,104          1,104,627

                                                              ___________        ___________
       Total operating expenses                                 2,317,451          2,303,459
                                                              ___________        ___________
Operating loss                                                 (1,805,446)        (1,211,821)

Other income (expense):
    Loss on investment                                                 --           (300,000)

    Interest expense                                              (45,753)           (67,757)

    Lawsuit settlement                                             75,000             50,000

    Other income (expense), net                                    30,774              3,312
                                                              ___________        ___________
       Total other income (expense)                                60,021           (314,445)
                                                              ___________        ___________
Net loss before income taxes                                   (1,745,425)        (1,526,266)

Provision for income taxes                                            800                800
                                                              ___________        ___________
Net loss                                                      $(1,746,225)       $(1,527,066)
                                                              ===========        ===========
Basic and diluted net loss per share                          $     (0.04)       $     (0.07)
                                                              ===========        ===========
Weighted average shares outstanding
    Basic and diluted                                          43,076,186         22,886,295
                                                              ===========        ===========


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

</TABLE>


                                       F-3


<PAGE>

<TABLE>
<CAPTION>


                           ACCUIMAGE DIAGNOSTICS CORP.
                   STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


                                          COMMON STOCK
                                     ______________________      PAID-IN         DEFERRED       ACCUMULATED
                                       SHARES       AMOUNT       CAPITAL       COMPENSATION       DEFICIT           TOTAL
                                     __________     _______     __________     ____________     ___________      ___________
<S>                                  <C>            <C>         <C>              <C>            <C>              <C>

Balance at September 30, 2002        22,886,295     $22,887     $3,488,348       $     --       $(2,769,194)     $   742,041

Net Loss                                     --          --             --             --        (1,527,066)      (1,527,066)
                                     __________     _______     __________       ________       ___________      ___________

Balance at September 30, 2003        22,886,295      22,887      3,488,348             --        (4,296,260)        (785,025)

Common stock issued for cash         32,550,000      32,550      1,269,450             --                --        1,302,000
Common stock issued for services      1,900,000       1,900        202,600        (30,000)               --          174,500
Stock based compensation                     --          --        834,581             --                --          834,581
Net Loss                                     --          --             --             --        (1,746,225)      (1,746,225)
                                     __________     _______     __________       ________       ___________      ___________

Balance at September 30, 2004        57,336,295     $57,337     $5,794,979       $(30,000)      $(6,042,485)     $  (220,169)
                                     ==========     =======     ==========       ========       ===========      ===========


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

</TABLE>


                                       F-4


<PAGE>

<TABLE>
<CAPTION>


                           ACCUIMAGE DIAGNOSTICS CORP.
                             STATEMENT OF CASH FLOWS


                                                               FISCAL YEARS ENDED SEPTEMBER 30,
                                                               ________________________________
                                                                   2004               2003
                                                                ___________        ___________
<S>                                                             <C>                <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                        $(1,746,225)       $(1,527,066)
   Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation and amortization                                   24,351             23,241
     Product warranty reserve                                       (13,000)           (22,000)
     Loss on investment                                                  --            300,000
     Stock based compensation                                       985,081                 --
     Change in accounts receivable allowance                         33,543            (31,662)
     Change in inventory reserve                                     17,322                 --
     Accrued interest on notes payable to related parties            45,753             65,583
     Loss on disposal of property and equipment                      17,126                 --
     Changes in operating assets and liabilities:
       Accounts receivable                                           25,015            249,554
       Other receivable                                              25,000            (50,000)
       Inventory                                                     12,505             56,854
       Prepaid and other assets                                     (52,000)            67,052
       Accounts payable                                            (192,302)            42,189
       Accrued expenses                                            (145,681)            48,130
       Deferred revenue                                             183,872             37,000
                                                                ___________        ___________
         Net cash used in operating activities                     (779,640)          (741,125)
                                                                ___________        ___________

CASH FLOWS FROM INVESTING ACTIVITIES:
   Investment in property and equipment                              (9,343)            (3,318)
                                                                ___________        ___________
         Net cash used in investing activities                       (9,343)            (3,318)
                                                                ___________        ___________

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock to an officer of
     the Company                                                  1,302,000                 --
Proceeds from short-term borrowings from an officer of
     the Company                                                  1,000,000                 --
Proceeds (payments) on long-term borrowings
     from shareholders                                             (762,600)           512,600
                                                                ___________        ___________
         Net cash provided by financing activities                1,539,400            512,600
                                                                ___________        ___________

Net increase (decrease) in cash and cash equivalents                750,417           (231,843)
Cash and cash equivalents at beginning of period                         --            231,843
                                                                ___________        ___________
Cash and cash equivalents at end of period                      $   750,417        $        --
                                                                ===========        ===========

SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Cash paid during the period for interest                     $    63,583        $        --
                                                                ===========        ===========
   Cash paid during the period for taxes                        $       338        $       800
                                                                ===========        ===========


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

</TABLE>


                                       F-5


<PAGE>

                           ACCUIMAGE DIAGNOSTICS CORP.

                          NOTES TO FINANCIAL STATEMENTS


1.       ORGANIZATION AND OPERATIONS

The  Company  was  organized  on February 2, 1990 under the laws of the state of
Nevada as Black Pointe Holdings,  Inc. On June 26, 1996, the Company changed its
name to AccuImage Diagnostics Corp. (the "Company").

On  September  30, 1997,  pursuant to a Stock  Exchange  Agreement,  the Company
acquired all of the outstanding shares of AccuImage, Inc., a Nevada corporation,
which owned the exclusive  rights to certain  computer  software and technology,
which the Company had been  licensing.  Subsequent to the  exchange,  AccuImage,
Inc. was dissolved.

The Company is based in South San Francisco  and is engaged in the  development,
marketing  and sale of software  used for medical data and  interactive  medical
image visualization. The software, which runs on a personal computer, interprets
images  obtained from leading  equipment  manufacturers  and imaging  modalities
(e.g., CT, MRI, and Ultrasound).

The Company provides its software to three different markets. First, the Company
offers  hospitals,  clinics and medical  professionals  a scalable  solution for
transmitting  data on the Internet and  enhancing the  diagnostic  value of data
already obtained.  Second, the Company sells to Original Equipment Manufacturers
("OEMs") of medical acquisition  devices a customizable  version that adds value
to their core products.  Third,  the Company offers vendors who sell Picture and
Archiving  Communication Systems ("PACs"), a medical diagnostic software package
that complements and enhances their existing product line.

GOING CONCERN

These  financial  statements  have been prepared on a going concern  basis.  The
Company has  reported  net  operating  losses for the past three  fiscal  years.
Management  plans to  achieve  profitability  in the  next  fiscal  year  ending
September  30, 2005 by  generating  higher  revenue  through an expansion of the
Company's sales force and control of costs and expenses.

The Company's expectations as to its cash flows, and as to future cash balances,
are  subject  to  a  number  of  assumptions,  including  assumptions  regarding
anticipated revenues, customer purchasing and payment patterns, and improvements
in general economic conditions,  many of which are beyond the Company's control.
If  revenues  do not  match  projections  and if  losses  exceed  the  Company's
expectations,  the Company will implement  additional cost saving initiatives in
order to preserve  cash.  If the  Company  experiences  a continued  decrease in
demand for its products from the level experienced during fiscal year 2004, then
it would need to reduce  expenditures to a greater degree than  anticipated,  or
raise additional funds if possible.

2.       SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING

The Company presents its financial statements on the accrual basis of accounting
in accordance with accounting principles generally accepted in the United States
of America.

CASH EQUIVALENTS

The Company considers all highly liquid securities  purchased with maturities of
three months or less to be cash equivalents.


                                       F-6


<PAGE>


ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company  performs  ongoing credit  evaluations  of its customers'  financial
conditions and generally requires no collateral from its customers.  The Company
maintains  allowances for doubtful  accounts for estimated losses resulting from
the  inability of its  customers to make  required  payments.  If the  financial
condition of the Company's customers deteriorates, resulting in an impairment of
their ability to make payments,  additional  allowances  may be required.  Trade
accounts  receivable are presented net of an allowance for doubtful  accounts of
$16,457 and $50,000 at September 30, 2004 and 2003, respectively.

CONCENTRATION OF CREDIT RISK

The Company  places its cash and  temporary  cash  investments  with high credit
quality  institutions.  At September 30, 2004 and  periodically  throughout  the
year, such investments were in excess of FDIC insurance limits.

INVENTORIES AND COST OF SALES

Inventory  consisting of personal computer components are stated at the lower of
cost or market. Cost is determined by the first-in, first-out ("FIFO") method.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated  at  cost.   Property  and  equipment  are
depreciated  or amortized on a  straight-line  basis over the  estimated  useful
lives of the assets  (generally  three to five years).  Repairs and  maintenance
that do not extend the useful  life of  property  and  equipment  are charged to
expense as  incurred.  When  property  and  equipment  are retired or  otherwise
disposed  of, the asset and its  accumulated  depreciation  are removed from the
accounts and the resulting gain or loss is reflected in income.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill  resulting  from the  acquisition  of AccuImage,  Inc. (see Note 6) and
other intangible assets (software and intellectual property licenses) are stated
at cost and were amortized on a straight-line  basis over their estimated useful
lives of generally  five to ten years.  Effective  October 1, 2002,  the Company
adopted Statement of Financial  Accounting Standards ("SFAS") No. 142, "Goodwill
and Other  Intangible  Assets." In accordance with SFAS No. 142, the Company has
ceased amortizing  goodwill and instead performs an assessment for impairment at
least annually by applying a  fair-value-based  test.  Based upon such tests, no
goodwill  impairment  charge  was  required  for fiscal  year 2004 or 2003.  The
provisions  of SFAS No.  142 also  required  the  completion  of a  transitional
impairment test within 12 months of adoption,  with any impairment  treated as a
cumulative effect of change in accounting  principle.  During the fourth quarter
of fiscal 2003, the Company  completed the  transitional  impairment test, which
did not result in impairment of recorded goodwill.

IMPAIRMENT OF LONG LIVED ASSETS

The Company reviews long-lived assets for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount of an asset might not be
recoverable.  When such an event occurs, management determines whether there has
been an  impairment by comparing the  anticipated  undiscounted  future net cash
flows to the related asset's carrying value. If an asset is considered  impaired
the asset is written  down to fair value,  which is  determined  based either on
discounted cash flows or appraised value, depending on the nature of the asset.

PRODUCT WARRANTY RESERVE

Based upon historical costs and its sales  agreements,  the Company  maintains a
product  warranty reserve based on product sales to cover  anticipated  warranty
costs  related  to  software  sold.  The  Company  typically  provides  one-year
warranties  on its  software  and hardware  products  sold.  The majority of the
hardware  warranty is covered by the hardware  vendor.  The Company  continually
compares its reserves to actual costs as determined by  management,  and adjusts
its reserves as necessary. Changes to the warranty reserve are as follows:


                                      F-7


<PAGE>


                                                      FISCAL YEAR ENDED
                                                        SEPTEMBER 30,
                                                    ______________________
                                                      2004          2003
                                                    ________      ________

Balance at the beginning of the period              $ 25,000      $ 50,000

   Provision for warranty liability for sales             --         1,000
   made during the period

   Settlements made during the period                     --        (4,000)

   Reserve adjustments made during the period        (13,000)      (22,000)
                                                    ________      ________
Balance at the end of the period                    $ 12,000      $ 25,000
                                                    ========      ========

REVENUE RECOGNITION

The  Company's  revenue is derived  primarily  from two  sources:  (i)  software
license  revenue,  derived  primarily from product sales to distributors and end
users,  and (ii)  maintenance  and  services  revenue,  derived  primarily  from
support,  education and consulting  services provided to end-users.  Inherent in
the  revenue  recognition  process  are  significant  management  estimates  and
judgments,  which  influence  the timing and amount of revenue  recognized.  The
Company  typically  requires  deposits upon the receipt of a signed purchase and
license  agreement.  Deposits  received on these agreements  represent  unearned
revenue and are  classified  as customer  deposit  liabilities  on the Company's
balance sheet.

The Company  accounts for sales of software and  maintenance  revenue  under the
provisions  of  Statement  of  Position  97-2 ("SOP  97-2"),  "Software  Revenue
Recognition,"  as  amended  and  Emerging  Issues  Task  Force  ("EITF")  00-21,
"Accounting  for Revenue  Arrangements  with  Multiple  Deliverables."  SOP 97-2
generally  requires revenue earned on software  arrangements  involving multiple
elements to be  allocated  to each element  based on  vendor-specific  objective
evidence.  For hardware transactions where no software is involved,  the Company
applies the provisions of Staff Accounting Bulletin 104, "Revenue Recognition."

The fee for  multiple-element  arrangements  is allocated to each element of the
arrangement,  such as maintenance  and support  services,  based on the relative
fair  values of the  elements.  The  Company  determines  the fair value of each
element  in  multi-element   arrangements  based  on  vendor-specific  objective
evidence  for each  element,  which is based on the price  charged when the same
element  is sold  separately.  If  evidence  of fair  value  of all  undelivered
elements exists but evidence does not exist for one or more delivered  elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
is recognized as revenue.

The  Company  recognizes  revenue  from  the  sale  of  software  licenses  when
persuasive evidence of an arrangement exists, the product has been accepted, the
fee is fixed or  determinable,  and  collection of the  resulting  receivable is
probable.  Acceptance  generally  occurs when the  product  has been  installed,
training has occurred and the product is in clinical use at the customer site.

Fair values of the ongoing maintenance,  which includes updates and support, are
based upon a percentage of the current list price of the software. Fair value of
services,  such as training or  consulting,  is based upon separate sales by the
Company of these services to other customers.  Payments received for maintenance
and services are deferred and  recognized  as revenue  ratably over the contract
term. Training and consulting services are billed based on hourly rates, and are
generally recognized as revenue as these services are performed.

DEFERRED REVENUE

Deferred revenue is primarily  comprised of deferrals for recurring revenues for
maintenance  services that have not yet been  rendered,  term  software  license
agreements,  and implementation consulting and other services, that have not yet
been rendered.

ADVERTISING COSTS

The  Company  expenses  advertising  costs  as they  are  incurred.  Advertising
expenses  were $0 and $31,921 for the fiscal years ended  September 30, 2004 and
2003, respectively.


                                      F-8


<PAGE>


RESEARCH AND DEVELOPMENT COSTS

Research and development  costs related to both future and present  products are
charged to expense as  incurred.  Research  and  development  costs  amounted to
approximately  $553,000 and $605,000  for the fiscal years ended  September  30,
2004 and 2003, respectively.  Pursuant to SFAS No. 86, "Accounting for the Costs
of Computer  Software to be Sold,  Leased or  Otherwise  Marketed,"  development
costs related to software products are expensed as incurred until "technological
feasibility"  of the  product  has been  established,  at which point costs must
begin to be capitalized. No software development costs have been capitalized, as
technological feasibility has not been established.

INCOME TAXES

The Company  uses the asset and  liability  method in  accounting  for  deferred
income taxes as  prescribed by Statement of Financial  Accounting  Standards No.
109,  ACCOUNTING FOR INCOME TAXES. Under this method,  deferred income taxes are
recorded to reflect the tax consequences in future years of differences  between
the carrying amount of the assets and  liabilities  for financial  reporting and
tax purposes at each fiscal year end.  Valuation  allowances  are recorded  when
necessary to reduce deferred tax assets to an amount expected to be realized.

SEGMENT REPORTING

In accordance  with the  provisions of SFAS No. 131, the Company has  determined
that it operates in one business segment, the medical imaging industry, and does
not have separately reportable segments.

USE OF ACCOUNTING ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ materially from those estimates.

The actual  results with regard to warranty  expenditures  could have a material
impact on the  financial  statements  of the  Company if the actual rate of unit
failure is greater than what was estimated by the Company in the  calculation of
its warranty reserve.

Other  significant  estimates  include  the  estimated  cash  flows  to  measure
long-lived  assets,  including  goodwill  and other  intangible  assets  and the
recoverability of the Company's investment.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  carrying  value  of  certain  financial  instruments,   including  accounts
receivable,  accounts payable and certain accrued liabilities  approximates fair
value  due to  their  short  maturities.  Based  on  borrowing  rates  currently
available  for loans with similar  terms,  the carrying  values of notes payable
approximates the fair values.

LOSS PER SHARE

Basic net loss per share is  computed by dividing  net loss  (numerator)  by the
weighted-average  number of common shares outstanding  (denominator)  during the
period. Diluted net loss per share gives effect to all dilutive potential common
shares outstanding during the period including stock options, using the treasury
stock method.  In computing  diluted net loss per share, the average stock price
for the  period  is used in  determining  the  number of  shares  assumed  to be
purchased  from the  exercise  of stock  options.  For the  fiscal  years  ended
September 30, 2004 and September 30, 2003, options and warrants outstanding were
excluded from the  calculation  since their effect was  antidilutive.  The total
options and warrants  outstanding  at September 30, 2004 and 2003 were 5,075,830
and 2,995,830, respectively.


                                      F-9


<PAGE>


STOCK-BASED COMPENSATION

Statement of  Financial  Accounting  Standards  (SFAS) No. 123,  ACCOUNTING  FOR
STOCK-BASED COMPENSATION, as amended by SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION  AND  DISCLOSURE,  establishes a fair-value  method of
accounting  for stock options and similar  equity  instruments.  The  fair-value
method requires that  compensation cost be measured on the value of the award at
the grant date, and recognized over the service period.  SFAS No. 123 as amended
allows  companies to either account for  stock-based  compensation  to employees
under the  provisions  of SFAS No.  123 as amended  or under the  provisions  of
Accounting   Principles   Board   (APB)   Opinion   No.   25  and  its   related
interpretations.  The  Company  accounts  for its  stock-based  compensation  to
employees in accordance with the provisions of APB Opinion No. 25.

The Company has  recorded  deferred  compensation  for the  difference,  if any,
between the exercise  price and the deemed fair market value of the common stock
for  financial  reporting  purposes of stock options  granted to employees.  The
compensation expense related to such grants is amortized over the vesting period
of the related stock options on a straight-line basis.

The  Company  accounts  for  equity   instruments  issued  to  non-employees  in
accordance with the provisions of SFAS No. 123, as amended,  and Emerging Issues
Task Force (EITF) Issue No. 96-18  ACCOUNTING  FOR EQUITY  INSTRUMENTS  THAT ARE
ISSUED TO OTHER THAN  EMPLOYEES FOR ACQUIRING,  OR IN CONJUNCTION  WITH SELLING,
GOODS OR SERVICES.

Had the  Company  determined  compensation  cost  based on the fair value at the
grant date for its employee  stock  options and  purchase  rights under SFAS No.
123, the Company's  net loss would have been  increased to the pro forma amounts
indicated below for the years ended September 30:


                                                        FISCAL YEARS ENDED
                                                           SEPTEMBER 30,
                                                    ___________________________
                                                       2004            2003
                                                    ___________     ___________

Net loss, as reported                               $(1,746,225)    $(1,527,066)
   Add: Non-cash stock compensation expense
     determined under the intrinsic value method         21,250              --
     as reported in net loss (*)
   Less: Employee stock-based compensation
     expense determined under fair value               (145,716)        (77,541)
                                                    ___________     ___________
   Pro forma net loss                               $(1,870,691)    $(1,604,607)
                                                    ===========     ===========
Shares used to compute basic and diluted net
  loss per share                                     43,076,186      22,886,295
                                                    ===========     ===========
Loss per share:
   Basic and diluted - as reported                  $     (0.04)    $     (0.07)
                                                    ===========     ===========
   Basic and diluted - pro forma                    $     (0.04)    $     (0.07)
                                                    ===========     ===========

(*) This amount excludes non-cash stock compensation on restricted stock awards.

The fair value of these  options  was  estimated  at the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions: 2004 - dividend yield of 0%; expected volatility of 200%; risk-free
interest rate of 2.89-3.86%, and expected life of 5 years; 2003 - dividend yield
of 0%;  expected  volatility  of 200%;  risk-free  interest  rate of 1.50%,  and
expected life of 5 years.


                                      F-10


<PAGE>


RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION

Certain  reclassifications  have been made to the 2003  financial  statements to
conform to the 2004 financial  statement  presentation.  Such  reclassifications
have had no effect on net income or gross margin as previously reported.

RECENT ACCOUNTING PRONOUNCEMENTS

In December  2003, the  Securities  and Exchange  Commission  (the "SEC") issued
Staff  Accounting  Bulletin No. 104 ("SAB 104"),  Revenue  Recognition.  SAB 104
supersedes SAB 101,  Revenue  Recognition in Financial  Statements.  The primary
purpose  of SAB  104 is to  rescind  accounting  guidance  contained  in SAB 101
related to multiple element revenue arrangements,  superseded as a result of the
issuance  of EITF  00-21.  Additionally,  SAB 104  rescinds  the  SEC's  Revenue
Recognition in Financial Statements  Frequently Asked Questions and Answers (the
"FAQ")  issued  with SAB 101 that had been  codified  in SEC Topic  13,  Revenue
Recognition.  Selected  portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the  issuance of EITF 00-21,
the revenue  recognition  principles of SAB 101 remain largely  unchanged by the
issuance of SAB 104. The  issuance of SAB 104 did not have a material  impact on
the Company's financial position, results of operations or cash flows.

In  November  2003,  the  Emerging  Issues  Task  Force (the  "EITF")  reached a
consensus on Issue No. 03-10,  Application of EITF Issue No. 02-16,  "Accounting
by a Customer (Including a Reseller) for Certain  Consideration  Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers".
This issue clarifies whether consideration  received by a reseller from a vendor
that is  reimbursement  by the vendor for honoring the vendor's sales incentives
offered  directly to consumers  should be recorded as a reduction of the cost of
the reseller's  cost of sales.  The provisions of EITF Issue No. 03-10 should be
applied  prospectively in fiscal years beginning after December 15, 2003 with no
early adoption or retroactive  reclassification  permitted. The adoption of this
standard did not have a material  impact on the  Company's  financial  position,
results of operations or cash flows.

In January 2003, the Financial  Accounting  Standards  Board (the "FASB") issued
FASB  Interpretation  No. 46 ("FIN 46"),  "Consolidation  of  Variable  Interest
Entities,  an  Interpretation  of ARB No. 51." FIN 46 requires  certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity  investors in the entity  either do not have the  characteristics  of
controlling  financial interest or do not have sufficient equity at risk for the
entity to  finance  it  activities  without  additional  subordinated  financial
support from other parties. FIN 46 is effective immediately for all new variable
interest  entities  created or acquired  after  January 31,  2003.  For variable
interest  entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 were to be applied for the first  interim or annual  period  beginning
after June 15, 2003. In December 2003, the FASB released a revision of FIN 46 to
address various implementation issues and modify the effective date for applying
the provision of FIN 46. A public  entity shall apply the  provisions of the FIN
46 revision no later than the end of the first reporting  period that ends after
December 15, 2004 for small  business  filers.  However,  a public  entity shall
apply FIN 46 to entities considered to be special-purpose entities no later than
as of the end of the first  reporting  period that ends after December 15, 2003.
The issuance of FIN 46 and its revision  will not have a material  impact on the
Company's financial position, results of operations or cash flows.

In April 2004, the Emerging Issues Task Force issued  Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No.  128,  Earnings  Per  Share."  EITF 03-06  addresses  a number of  questions
regarding the  computation  of earnings per share by companies  that have issued
securities  other than  common  stock that  contractually  entitle the holder to
participate  in dividends and earnings of the company when,  and if, it declares
dividends  on its common  stock.  The issue also  provides  further  guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a  participating  security and how to apply the two-class  method of
computing  earnings  per  share  once  it  is  determined  that  a  security  is
participating,  including  how to  allocate  undistributed  earnings  to  such a
security.  EITF 03-06 is effective for fiscal periods  beginning after March 31,
2004.  The  Company  does not expect the  adoption of this  statement  to have a
material impact on its financial position or results of operations.

In June 2004,  the Emerging  Issues Task Force  ("EITF")  issued EITF No. 03-01,
"The Meaning of  Other-Than-Temporary  Impairment and its Application to Certain
Investments" ("EITF 03-01"). EITF 03-01 includes new guidance for evaluating and


                                      F-11


<PAGE>


recording  impairment  losses  on debt and  equity  investments,  as well as new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  The  accounting  guidance of EITF 03-01 is  effective  for  reporting
periods  beginning  after June 15, 2004.  Adoption of EITF 03-01 will not have a
material impact on the Company's financial position or results of operations.

3.       INVESTMENT IN AHS, INC.

During  fiscal  2002,  the  Company  concluded a  strategic  investment  for the
promotion of its business and strategic  objectives.  In July 2001,  the Company
purchased  500,000  shares  of  Series A  Preferred  Stock at  $1.00  per  share
(representing  a non-dilutive  5% ownership  interest) of American  Health Scan,
Inc. ("AHS"), which provides cardiac and cancer screening services.

In December 2002, AHS merged with MDiagnostics, Inc. The Company's investment in
AHS was  exchanged  for 190,846  shares of Class A  non-voting  common  stock in
MDiagnostics,  Inc., representing an ownership interest of approximately 2%. The
Company's investment was considered impaired and a loss of $300,000 and $200,000
on the investment  was  recognized in the fiscal years ended  September 30, 2003
and 2002, respectively.

4.       OTHER RECEIVABLE

During fiscal 2003 the Company entered into a legal settlement with a competitor
under which the  Company is to be paid  $250,000 in  quarterly  installments  of
$25,000 over the next three years.  During the fiscal years ended  September 30,
2004 and 2003,  $75,000 and $50,000,  respectively,  of this settlement has been
recognized  as  other  income.  As of  September  30,  2004,  $125,000  has been
collected on the  settlement.  Since the  collectablility  of this receivable is
uncertain,  the remaining  $125,000 will be recognized  when  collectability  is
reasonably assured.

5.       PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following:

                                                           SEPTEMBER 30,
                                                      ________________________
                                                        2004           2003
                                                      ________       _________

Computers and equipment                               $ 35,206       $  75,979
Furniture and fixtures                                  32,774          72,304
Software                                                 7,563          37,912
                                                      ________       _________
                                                        75,543         186,195
Less: accumulated depreciation and amortization        (61,166)       (140,783)
                                                      ________       _________
                                                      $ 14,377       $  45,412
                                                      ========       =========

Depreciation  expense for the fiscal years ended September 30, 2004 and 2003 was
$22,887 and $10,665, respectively.


                                      F-12


<PAGE>


6.       GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consists of the following:

                                                           SEPTEMBER 30,
                                                      ________________________
                                                        2004           2003
                                                      _________      _________

Goodwill                                              $ 309,063      $ 309,063
                                                      =========      =========

Other license fees                                      125,716        125,716
Distribution agreement                                   15,200         15,200
                                                      _________      _________
                                                        140,916        140,916
Less: accumulated amortization                         (137,987)      (136,523)
                                                      _________      _________
                                                      $   2,929      $   4,393
                                                      =========      =========

Amortization of other  intangibles for the fiscal years ended September 30, 2004
and 2003 was $1,464 and $12,576 respectively.

ACCUIMAGE SOFTWARE

On September 30, 1997, the Company  acquired  AccuImage Inc.,  which had entered
into an agreement with the developer of a 3D medical  imaging  software  package
referred to as MIDP.  The  developer  granted to  AccuImage  Inc.  an  exclusive
license to use and sell the MIDP software for a period of ten years.

The Company subsequently assumed all the rights under the license agreement when
AccuImage Inc. was acquired.  The value of the software was  capitalized as part
of the purchase price of AccuImage,  Inc. and is included in other license fees.
It is being amortized over its expected useful life of 10 years,

On November 1, 1998,  the developer of the  software,  pursuant to an employment
settlement, transferred all rights in the software to the Company.


7.       ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

                                                           SEPTEMBER 30,
                                                      ________________________
                                                        2004           2003
                                                      _________      _________

Accrued vacation                                      $  26,500      $  40,000
Audit fees                                               24,500         20,000
Cash overdraft                                               --          2,403
Commissions                                              10,664          8,730
Consulting fees                                              --        111,366
Bonus                                                    30,490             --
Customer deposits                                            --         23,000
Accrued interest on notes payable to related party       45,753         63,583
Product warranty                                         12,000         25,000
Other expenses                                           36,882         29,928
                                                      _________      _________
                                                      $ 186,789      $ 324,010
                                                      =========      =========

8.       NOTES PAYABLE

In  fiscal  2001 the  Company  received  and  approved  executed  note  purchase
agreements  and  subscription  agreements  for a total of $500,000.  The Company
repaid the  unsecured  portion of the notes in the amount of  $250,000 in August
2001.  The unpaid  balances on the notes  amounted to $250,000 at 10%  interest,
which  represented  the secured  long-term  portion of the notes due on June 30,
2005.  All of the notes plus  accrued  interest of $31,135  were paid in October
2003.  The  Company  assigned  its rights to the stock in AHS as security to the
note holders (see Note 3).


                                      F-13


<PAGE>


In  fiscal  2003  the  Company   borrowed  an  additional   $512,600  from  four
stockholders at 10% interest.  All of the notes were short-term  notes, and were
repaid  along with the accrued  interest  of $32,448 in October  2003 with funds
from a new investor (see Note 13).

In October 2003 and November 2003, the Company entered into two Promissory Notes
with an Officer of the Company for $500,000 each, totaling $1,000,000. The notes
bear interest at 5% per annum and matured in October 2004 and in November  2004,
respectively.  In addition,  the Company  entered  into a Common Stock  Purchase
Agreement  with the same  Officer of the Company  pursuant to which the Company,
subject to the terms and conditions set forth therein, raised $1,002,000 in cash
through a private  equity  offering of 25,050,000  shares of  restricted  common
stock.  Interest due as of September 30, 2004 of $45,753 was paid to the Officer
in November 2004, but the principle remains unpaid.

Interest  expense on all notes payable for the fiscal years ended  September 30,
2004 and 2003 was $45,753 and $67,757 respectively.

9.       STOCKHOLDER'S EQUITY

In October 2003, the Company entered into a Common Stock Purchase Agreement with
an Officer of the Company  pursuant to which the  Company,  subject to the terms
and conditions set forth  therein,  raised  $1,002,000 in cash through a private
equity offering of 25,050,000 shares of restricted common stock. The shares were
issued at a price of $0.04 per share,  which reflects a discount from the market
price.  As a result,  the  intrinsic  value as of the date of the  agreement  of
$500,000 is being  expensed to operations  ratably over the one-year term of the
Officer's Employment Agreement. (See Note 11.) Accordingly, the Company recorded
a charge to operations of $375,750 for fiscal year ended September 30, 2004. The
sale of these securities was not registered under the Securities Act of 1933, as
amended and was exempt from the registration requirements thereunder pursuant to
Section 4 (2) thereof.  The proceeds  from this  offering are being used to fund
operations.

In  November  2003,  the Company  issued  incentive  stock  options to its Chief
Operating  Officer,  allowing  him  to  purchase  up to  100,000  shares  of the
Company's  common stock.  The options were issued at an exercise  price that was
less than the market  price on the date of grant,  and as a result  the  Company
recorded a  compensation  charge to  operations of $9,856 during the fiscal year
ended  September 30, 2004.  The exercise  period for the options is 10 years and
the options were 100% vested on the date of grant.  (See Note 11 for  Consulting
Agreement.)

In December 2003,  the Company issued 400,000 shares of restricted  common stock
to employees for prior services rendered as consultants during fiscal year 2003.
The shares were valued at the market  price on the date of issuance at $0.08 per
share and as a result,  the Company recorded charges to operations of $8,000 and
$24,000 during the fiscal year ended September 30, 2004 and 2003,  respectively.
The issuance of these  securities was not registered under the Securities Act of
1933, as amended and was exempt from the registration requirements thereunder.

In December  2003, the Company  issued  incentive  stock options to its Board of
Directors  allowing  them to  purchase up to 1 million  shares of the  Company's
common stock.  The options were issued at an exercise  price of $0.10 per share,
which was  greater  than the  market  price on the date of grant.  The  exercise
period for the options is 10 years and the options  were 100% vested on the date
of grant.

In February 2004, the Company's Board of Directors  resolved that in recognition
of their past  service,  the Company  grant  immediate  and full  vesting of all
unvested  stock options held by each director as of that date. The grants expire
the  sooner of 10 years  after the  vesting  commencement  date or 90 days after
termination of their  three-year  Consulting  Agreements with the Company.  As a
result,  the intrinsic  value of the unvested  options,  which was $13,750,  was
expensed to  operations  during the fiscal year ended  September  30, 2004.  The
intrinsic  value was measured  using the exercise  price and the market price on
the date the options were fully vested.

In March 2004, the Company's Board of Directors approved and the Company granted
a total of 1.5 million  shares of Common Stock,  respectively,  to an Officer as
compensation for performing  duties as its Chief Executive  Officer ("CEO") (See
Note 11). The shares were valued at the market price on the date of grant and as


                                      F-14


<PAGE>


a result,  the Company recorded a compensation  charge to operations of $142,500
during  fiscal year ended  September  30,  2004,  and deferred  compensation  of
$30,000 at September 30, 2004 (see Note 17).

In April 2004, the Company issued stock options to a consultant who is acting as
its Chief  Operating  Officer,  allowing him to purchase up to 600,000 shares of
the Company's  common stock.  The value of the options was calculated  using the
Black  Scholes  model using the  following  assumptions:  dividend  yield of 0%,
expected volatility of 200%; risk-free interest of 3.07%; and expected life of 5
years. Based on this calculation,  the Company recorded a compensation charge to
operations  of $52,725  during the fiscal year ended  September  30,  2004.  The
exercise  period for the  options is five  years and the  options  vest over six
quarters (See Note 11).

In August 2004, the Company entered into a Common Stock Purchase  Agreement with
an Officer of the Company  pursuant to which the  Company,  subject to the terms
and  conditions  set forth  therein,  raised  $300,000 in cash through a private
equity offering of 7,500,000 shares of restricted  common stock. The shares were
issued at a price of $0.04 per share,  which reflects a discount from the market
price and as a result,  the  intrinsic  value as of the date of the agreement of
$375,000 was expensed to operations in the fiscal year ended September 30, 2004.
The sale of these  securities  was not  registered  under the  Securities Act of
1933, as amended and was exempt from the  registration  requirements  thereunder
pursuant to Section 4 (2)  thereof.  The proceeds  from this  offering are being
used to fund operations. This purchase of the Company's common stock resulted in
the Officer of the Company  owning a majority  interest in the Company  totaling
59% at September 30, 2004 (see Note 17).

A summary of the Company's outstanding warrants is presented below:

                                                   AVERAGE
                                                   EXERCISE    EXPIRATION
                                       SHARES       PRICE         DATE
                                      _________    ________    __________
Issued during fiscal year ended
  September 30, 2000                  1,183,330     $1.50       9/30/05
                                      _________     _____

Outstanding at September 30, 2004     1,183,330     $1.50
                                      =========     =====


10.      CONCENTRATIONS

The Company  derives all of its  revenues  from  organizations  operating in the
medical field, from medical professionals,  and from other companies that are in
the business of manufacturing and selling medical equipment and devices.

Two customers accounted for a combined total of approximately 50% of revenue for
fiscal  year  2004  and  three  customers  accounted  for a  combined  total  of
approximately 67% of revenue for fiscal year 2003.

The Company derived $0 and $654,600 in revenues from AmeriScan during the fiscal
years  ended  September  30,  2004  and  2003,  respectively,   which  represent
approximately  0%  and  50% of  the  total  revenue  generated  by the  Company.
AmeriScan filed for bankruptcy in 2003.

The Company  derived  $182,500  and $123,000 in revenues  from  Philips  Medical
Systems  Technology Israel  ("Philips")  during the fiscal years ended September
30, 2004 and 2003, respectively.  Revenue from Philips represented approximately
33% and 9% of the total  revenue  generated  by the Company for the fiscal years
ended September 30, 2004 and 2003, respectively. (See Note 14.)

The Company  sells its products to  distributors  and customers  throughout  the
United States.  At September 30, 2004, three customers,  each of which accounted
for more than 10% of the Company's accounts receivable, accounted for 71% of the
total accounts receivable in aggregate.  At September 30, 2003, three customers,
each of which accounted for more than 10% of the Company's accounts  receivable,
accounted for 81% of the total accounts receivable in aggregate.


                                      F-15


<PAGE>


11.      COMMITMENTS AND CONTINGENCIES

The  Company  from time to time is  involved  in  various  claims  and  lawsuits
incidental  to the  operation  of its  business.  The  Company is not  currently
involved  in such  litigation  that it  believes  could have a material  adverse
effect on its financial condition or the results of its operations.

EMPLOYMENT AND CONSULTING AGREEMENTS

During fiscal 2003, the Company concluded employment  agreements with its former
Chief  Executive  Officer,  Vice President of Operations,  and Vice President of
Finance, since these individuals are no longer with the Company.

During fiscal 2003 the Company  entered into various  employment  and consulting
agreements  that  provide for  issuance of the  Company's  stock in exchange for
services rendered to the Company.  These agreements relate primarily to services
rendered in connection with product development, sales and technical support. In
December 2003, the Company issued common stock for these services and recorded a
charge to  operations  of $8,000 and $24,000 in the fiscal year ended  September
30, 2004 and 2003, respectively,  based on the fair value of the stock (see Note
9).

In January  2004,  the  Company  and Aviel  Faliks  entered  into an  Employment
Agreement, effective January 1, 2004, which employs Mr. Faliks as the CEO of the
Company for a one-year term. (See Note 9.)

In  January  2004,  the  Company  and  Ray  Vallejo  entered  into a  Consulting
Agreement,  effective  January 1, 2004,  pursuant to which Mr. Vallejo serves as
the Company's Chief Operating  Officer ("COO").  The Consulting  Agreement has a
two-year term (see Note 9).

In January 2004, the Company and Leon Kaufman,  former  President and CEO of the
Company,  entered  into a  Consulting  Agreement,  effective  January  1,  2004,
pursuant to which Mr.  Kaufman  serves as the Company's  Head of Research  until
October 2004.

In January 2004, the Company and Macias and Ryan, Inc. entered into a Consulting
Agreement,  effective  January 10, 2004,  pursuant to which Ms. Kathleen M. Ryan
serves  as  the  Company's  Chief  Financial  Officer  ("CFO").  The  Consulting
Agreement will terminate upon 30 days' written notice by either party.

LEASES

On June 20, 2001, the Company entered into a two-and-a-half-year operating lease
agreement  for  its  former  headquarters/operating   facility  located  at  400
Grandview Drive in South San Francisco,  CA. The commencement  date of the lease
was June 20,  2001.  The Company  paid a fee to cancel this lease in fiscal 2003
and entered into a new lease on August 1, 2003 for its new  headquarters  at 501
Grandview  Drive,  South San Francisco.  The new lease was a one-and-a half year
operating lease with monthly payments of $1,035.

In June 2004,  the Company  canceled the 501  Grandview  Drive lease and entered
into   a  new   three-year   operating   lease   agreement   for   its   current
headquarters/operating  facility  located at 400 Oyster Point Boulevard in South
San Francisco, California. The commencement date of the lease was August 1, 2004
and the monthly lease payments are $3,959,  $4,106 and $4,253 for years one, two
and three, respectively.

Total rent expense was $17,587 and $84,935 for the fiscal years ended  September
30, 2004 and 2003, respectively.


                                      F-16


<PAGE>


Minimum rental  commitments under the facility  operating lease agreement are as
follows:

Fiscal year ended September 30,

2005                           $ 47,808
2006                             49,568
2007                             42,528
                               ________
Total                          $139,904
                               ========

12.      STOCK OPTION PLAN

During  fiscal 1997,  Company  adopted a Stock Option Plan that  authorized  the
issuance of options for up to 1,600,000  shares of the  Company's  common stock.
Subsequently,  the Board of Directors  authorized the issuance of options for an
additional 2,500,000 shares of the Company common stock.

Under this plan,  no option may be exercised  after the  expiration  date of ten
years from the date of grant and no option may be  exercised as to less than one
hundred  (100)  shares at any one time.  There are two  categories  of  options:
Incentive Stock Options (ISO) and Non-Qualified Stock Options (NSO).

ISOs may be granted to employees  at a purchase  price of not less than the fair
market  value of the  common  stock  share at the date of grant.  ISOs  shall be
exercisable not more than ten (10) years from date of grant,  except that in the
case of any person who owns more than 10% of the voting  power of all classes of
stock,  in which case the ISO shall be  exercisable  no more than five (5) years
from date of grant.

NSOs may be granted to any eligible participant. The purchase price shall not be
less than 85% of the fair  market  value of the shares at the grant date  except
that when the grantee  owns more than 10% of the voting  power of all classes of
stock at the date of grant,  the price is to be 110% of the Fair Market Value of
the  shares at the date of grant.  NSOs shall be  exercisable  not more than ten
(10) years from the date of grant.

In general,  granted  ISO's expire  three months after the employee  termination
date.  If  employment  termination  is due to cause,  the options  shall  expire
immediately;  and  if  employment  termination  is due to  permanent  and  total
disability, the options may be exercised up to one year following termination.

A summary of Stock Option Plan activity is as follows:
                                                                     WEIGHTED
                                                                     AVERAGE
                                                      NUMBER OF      EXERCISE
                                                       OPTIONS        PRICE
                                                     ___________     ________

Balance at September 30, 2002                          3,205,020      $   0.51
   Granted                                               375,000          0.20
   Exercised                                                  --            --
   Cancelled/forfeited                                (1,767,520)        0.375
                                                     ___________      ________
Balance at September 30, 2003                          1,812,500      $   0.28
   Granted                                             2,400,000          0.14
   Exercised                                                  --            --
   Cancelled/forfeited                                  (320,000)         0.12
                                                     ___________      ________
Balance at September 30, 2004                          3,892,500      $   0.21
                                                     ===========      ========

Options exercisable at September 30, 2004              3,203,490

Weighted average fair value of options granted
during the fiscal years:

   2004                                              $      0.13
                                                     ===========
   2003                                              $      0.22
                                                     ===========


                                      F-17


<PAGE>


The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its stock options.

The following table summarizes  information about the stock options  outstanding
at September 30, 2004:

<TABLE>
<CAPTION>


                                    OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                    ___________________________________________________     _________________________________
                                    WEIGHTED-AVERAGE
                                       REMAINING           WEIGHTED-                             WEIGHTED-
RANGE OF              NUMBER        CONTRACTUAL LIFE        AVERAGE             NUMBER            AVERAGE
EXERCISE PRICES     OUTSTANDING        (IN YEARS)        EXERCISE PRICE      EXERCISABLE       EXERCISE PRICE
_______________     ___________     ________________     ______________     ______________     ______________
<C>                    <C>                 <C>              <C>                 <C>                <C>

$  0.04                400,000             9.04             $0.04               400,000            $0.04
   0.10                930,000             9.21              0.10               930,000             0.10
   0.15                600,000             9.53              0.15               414,167             0.15
   0.17                525,000             5.78              0.17               412,500             0.17
   0.20                600,000             9.43              0.20               300,000             0.20
   0.24                237,500             6.00              0.24               173,177             0.24
   0.38                250,000             3.46              0.38               250,000             0.38
   0.50                 55,000             5.05              0.50                51,354             0.50
   0.60                150,000             3.95              0.60               128,125             0.60
   0.64                 40,000             6.06              0.64                39,167             0.64
   0.88                 30,000             5.23              0.88                30,000             0.88
   1.03                 75,000             5.48              1.03                75,000             1.03
                     _________             ____             _____             _________

$  0.04 - $1.03      3,892,500             6.68             $0.21             3,203,490            $0.21
                     =========             ====             =====             =========            =====
</TABLE>


The  exercise  period for the options is for 10 years from the date of the grant
and vesting is over a 4-year period.

13.      RELATED PARTY TRANSACTIONS

In fiscal year 2001,  the Company  received and approved  executed note purchase
agreements and subscription agreements for a total of $500,000. At the beginning
of fiscal year 2004, the unpaid balance on the notes amounted to $250,000, which
represented the secured long-term portion of the notes due on June 30, 2005. All
of the notes plus accrued interest was repaid in October 2003.

In August 2001, two  stockholders  advanced  $450,000 to the Company.  The notes
payable bear an interest  rate of 10% per annum.  The terms of the notes payable
required  the  Company to repay  $225,000  within  seven days after the  Company
completed its equity  investment in AHS, Inc. (see Note 3), and $225,000 on June
30,  2005.  The Company  repaid  these  stockholders  $225,000  plus  applicable
interest in August 2001.  The remaining  balance was repaid in October 2003 (see
Note 8).

In fiscal year ended September 30, 2002, Leon Kaufman, former President and CEO,
advanced  $50,000 to the  Company.  The terms of the note  payable  required the
Company to repay  $25,000  within  seven days after the  Company  completed  its
equity  investment in AHS, Inc. (see Note 3), and $25,000 on June 30, 2005.  The
note payable  bears an interest  rate of 10% per annum.  This note was repaid in
October 2003 (see Note 8).

Dr. Hirsch Handmaker,  a director of the Company,  is Chairman and Acting CEO of
VirtuRad.com,  LLC  ("VirtuRad").  On March 1, 2002, the Company  entered into a
contract with VirtuRad to provide  AccuStitch  software,  which is to be used in
conjunction with VirtuRad products that are sold and/or  distributed by VirtuRad
to VirtuRad customers.  The Company had $36,000 and $10,000 in sales to VirtuRad
for the fiscal years ended  September 30, 2004 and 2003,  respectively,  and was
owed $12,000 and $21,746 as of  September  30, 2004 and 2003,  respectively.  In
addition,  the Company  entered  into a  Consulting  Agreement  with  Healthcare


                                      F-18


<PAGE>


Technology  Group  ("HTG") in January  2004,  in which  Hirsch  Handmaker is the
President.  The term of the  contract  is for one year and the Company is to pay
$11,000 at the beginning of each quarter. During the fiscal year ended September
30, 2004, the Company paid $33,000 on this contract.

In fiscal year 2003,  the  Company  borrowed an  additional  $512,600  from four
shareholders at 10% interest.  All of the notes were  short-term  notes and were
repaid in October  2003 from  proceeds  received  through  the  issuance  of two
Promissory Notes to an Officer of the Company.

In October 2003 and November 2003, the Company entered into two Promissory Notes
with an Officer of the Company for $500,000 each, totaling $1,000,000. The notes
bear interest at 5% per annum and matured in October 2004 and in November  2004,
respectively.  In addition,  the Company  entered  into a Common Stock  Purchase
Agreement  with the same  Officer of the Company  pursuant to which the Company,
subject to the terms and conditions set forth therein, raised $1,002,000 in cash
through a private  equity  offering of 25,050,000  shares of  restricted  common
stock. (see Note 9.)

In August 2004, the Company entered into a Common Stock Purchase  Agreement with
an Officer of the Company  pursuant to which the  Company,  subject to the terms
and  conditions  set forth  therein,  raised  $300,000 in cash through a private
equity offering of 7,500,000 shares of restricted common stock. (see Note 17).

The Company had a 5% ownership interest in AHS, Inc. (see Note 3). Sales to AHS,
Inc. for the fiscal years ended September 30, 2004 and 2003 were $0 and $17,000,
respectively.

14.      FOREIGN SALES

The Company has earned revenue from sources outside the United States. All sales
are payable in US dollars.  Total  foreign  sales were $182,500 and $123,000 for
the fiscal years ended September 30, 2004 and 2003, respectively.

15.      INCOME TAXES

In fiscal years ended September 30, 2004 and 2003, the Company's only income tax
expense was the California minimum payment of $800.

A  reconciliation  of the  provision  for income tax expense  with the  expected
income tax computed by applying the federal  statutory income tax rate to income
before provision for (benefit from) income taxes is as follows:

                                                      FISCAL YEARS ENDED
                                                       SEPTEMBER  30,
                                                     ___________________
                                                      2004         2003
                                                     ______       ______

Income tax provision (benefit) computed at
   federal statutory rate                           (34.00%)     (34.00%)
State taxes, net of federal tax benefits             (5.83%)      (5.83%)
Net operating loss carryforward                      39.82%       39.82%
                                                     ______       ______

    Effective tax rate                                0.01%        0.01%
                                                     ======       ======

Deferred tax assets, net, consist of the
   following (in thousands):

                                                       SEPTEMBER 30,
                                                    ____________________
                                                     2004         2003
                                                    _______      _______

Net operating loss carryforwards                    $ 1,841      $ 1,400
Depreciation and amortization                            11           10
Other accruals and allowances                            --           62
                                                    _______      _______
    Total deferred tax assets                         1,852        1,472
Valuation allowance for deferred tax assets          (1,852)      (1,472)
                                                    _______      _______
    Net deferred tax assets                         $    --      $    --
                                                    =======      =======


                                      F-19


<PAGE>


At  September  30,  2004,  the Company has  approximately  $5.9 million and $3.4
million in net operating loss carryforwards which are available to offset future
federal and state income  taxes,  respectively,  and expire  beginning  2018 and
2008.  In addition,  as of September  30,  2004,  the Company had  approximately
$110,000  and   approximately   $115,000  of  federal  and  state  research  and
development credits,  respectively. The federal credits will expire beginning in
2012 if not  utilized.  The state tax  credits  will be  carried  forward  until
utilized.

Under Internal  Revenue Code Section 382 and 383, the future  utilization of net
operating losses and tax credits may be limited in certain  circumstances  where
there is a significant ownership change. Events which may cause changes include,
but are not limited to, a  cumulative  ownership  change of more than 50% over a
three year period.

The Company has elected to reserve fully the benefit of tax carryforwards  until
such time as it is able to reasonably expect to realize those benefits.

16.      RETIREMENT PLAN

The Company sponsored a SIMPLE IRA Plan to provide  retirement  benefits for its
employees who meet the  eligibility  requirements.  Employees  may  contribute a
certain  percentage  of their  annual  compensation  to the plan,  limited  to a
maximum annual amount as set  periodically  by the Internal  Revenue  Service of
$9,000 and $8,000 for calendar  years 2004 and 2003,  respectively.  The Company
could  make  a  3%  matching   contribution  based  on  each  employee's  annual
compensation.  Employees' right to both elective and matching  contributions are
immediately  vested.  The Company made no matching  contribution in fiscal years
2004 and 2003, and cancelled this benefit program in fiscal year 2004.

17.      SUBSEQUENT EVENTS

During the first quarter of fiscal year 2005, the Company  entered into a Merger
Agreement (the "Merger Agreement"),  dated as of November 24, 2004, by and among
the Company,  Merge Technologies  Incorporated,  a Nevada corporation ("Merge"),
ADI Acquisition  Corp., a Wisconsin  corporation and wholly owned  subsidiary of
Merge  ("Acquisition  Sub"), and Dr. Aviel Faliks, the principal  shareholder of
the Company ("Dr. Faliks"), providing for the merger of Acquisition Sub with and
into the Company (the  "Merger"),  with the Company  continuing as the surviving
corporation  (the "Merger  Agreement").  Following the Merger,  the Company will
continue as a wholly owned  subsidiary of Merge.  The Boards of Directors of the
Company and Merge have approved the Merger and the Merger Agreement.

Pursuant to the terms of the Merger Agreement,  shareholders of the Company will
receive  cash  for  their  shares  of  the  Company's   common  stock  equal  to
approximately  $0.12 per share of common stock, or a total of approximately $6.0
million.  Consummation  of  the  Merger  is  subject  to  customary  conditions,
including approval by the Company's shareholders.  The parties expect the Merger
to be completed in the first quarter of 2005.

In connection  with the Merger  Agreement,  Dr. Faliks has entered into a voting
agreement  with  Merge in which he has  agreed to vote his 59% of the  Company's
common  stock  in favor of the  Merger  (the  "Voting  Agreement").  The  Voting
Agreement  is subject to  termination  under  certain  circumstances,  including
termination  of the Merger  Agreement  by the Board of  Directors of the Company
pursuant  to  the  Board  of  Directors'   fiduciary  duties  to  the  Company's
shareholders.

On December 16, 2004, Dr. Faliks,  contributed  9,000,000 shares of common stock
back to the  Company,  which he received  during the year 2004.  Dr.  Faliks had
received  1,500,000 of those shares during 2004 as  compensation  for serving as
the  Company's  Chief  Executive  Officer and  President  (he  receives no other
compensation for such services).  Dr. Faliks  purchased the remaining  7,500,000
shares from the Company on August 20, 2004 and the cash  proceeds  received from
this purchase were not refunded back to Dr. Faliks (see Note 9).

As a result of Dr. Faliks'  contribution  of shares to the Company his ownership
percentage   of  the   Company's   outstanding   common  stock  was  reduced  to
approximately 52.4%.


                                      F-20


<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         From December 1999 through  November  2002,  the Company's  independent
accountant was Berg & Company LLP (later,  Pohl McNabola Berg & Company LLP). In
November 2002, Odenberg Ullakko Muranishi & Co. LLP of San Francisco, California
became the Company's independent accountants. During the past four fiscal years,
there have been no disagreements between the Company and its accountants.

ITEM 8A. CONTROLS AND PROCEDURES

         Within 90 days prior to the date of this Form 10-KSB,  the Company made
an evaluation,  under the  supervision and with  participation  of the Company's
management,   including  the  Company's   Chief   Executive   Officer,   of  the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's Chief Executive  Officer  concluded that the Company's  disclosure
controls  and  procedures  are  effective  in timely  alerting  them to material
information relating to the Company required to be included in this Form 10-KSB.

         There has been no significant change in the Company's internal controls
or in other  factors,  which could  significantly  affect the internal  controls
subsequent to the date the Company carried out its evaluation.

PART III

         Certain information required by Part III is omitted from this Report in
that the Company  will have filed its  definitive  proxy  statement  pursuant to
Regulation  14A no later than 120 days after the end of the fiscal year  covered
by this report, and certain information  included therein is incorporated herein
by reference.

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information relating to the directors of the Company is set forth under
the caption "Proposal No. 1 - Election of Directors" in the Company's definitive
Proxy Statement (the "Proxy Statement") in connection with the Annual Meeting of
Stockholders  to be held in the  first  quarter  of 2005.  Such  information  is
incorporated herein by reference. Information relating to the Executive Officers
of the Company is set forth under the caption "Executive  Officers" in the Proxy
Statement.

ITEM 10. EXECUTIVE COMPENSATION

         Information  relating to executive  compensation is set forth under the
caption  "Executive  Compensation" in the Proxy  Statement.  Such information is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  relating to ownership of equity  securities of the Company
by certain  beneficial  owners and  management  is set forth  under the  caption
"Beneficial Ownership of Common Stock" in the Proxy Statement.  Such information
is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information relating to certain  relationships and related transactions
is set forth under the caption  "Transactions with Management and Others" in the
Proxy Statement. Such information is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The exhibits  listed on the  accompanying  "Index to Exhibits" are filed or
     are incorporated herein by reference as part of this report.

(b)  Reports on 8-K.

     On November 22, 2004,  the Company filed a From 8-K under Item 1 announcing
     it entered into a Merger  Agreement with, Merge  Technologies  Incorporated
     ("Merge"),  ADI  Acquisition  Corp.,  and Dr. Aviel  Faliks,  the principal


                                       22


<PAGE>


     shareholder  of the Company  ("Dr.  Faliks").  Pursuant to the terms of the
     Merger  Agreement,  shareholders of the Company will receive cash for their
     shares of the Company's common stock equal to approximately $0.12 per share
     of common stock, or a total of  approximately  $6.0 million.  This Form 8-K
     also announced  that in connection  with the Merger  Agreement,  Dr. Faliks
     entered into a Voting  Agreement  with Merge in which he has agreed to vote
     his 59% of the Company's common stock in favor of the Merger.

     On December  16,  2004,  the Company  filed a Form 8-K/A under Item 1 which
     amended  the  Company's  Current  Report  on Form 8-K  originally  filed on
     November 22, 2004.  The Company filed this  amendment to the current report
     to update the disclosure in Item 1.01 thereof,  to reflect that on December
     16, 2004, Dr. Faliks  contributed  9,000,000 shares of common stock back to
     the Company,  which he received during the fiscal year 2004. As a result of
     Dr. Faliks'  contribution of shares to the Company, the number of shares of
     Company  common  stock   outstanding  was  reduced  by  9,000,000   shares.
     Consequently,  the disclosure concerning cash the shareholders will receive
     as a result of the Merger was  changed and is now  approximately  $0.12 per
     share of common  stock.  Also,  Dr.  Faliks'  ownership  percentage  of the
     Company's outstanding common stock was reduced to approximately 52.4%.


                                       23


<PAGE>


                                   SIGNATURES


     In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                           ACCUIMAGE DIAGNOSTIC CORP.



Date:  January 5, 2005     By:  /s/ AVIEL FALIKS
                           _____________________________________________
                                    Aviel Faliks
                                    Chairman of the Board, President and
                                    Chief Executive Officer



                           By:  /s/ KATHLEEN M. RYAN
                           _____________________________________________
                                    Kathleen M. Ryan
                                    Chief Financial Officer



     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Registration  Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

        NAME                           TITLE                        DATE
_____________________     ________________________________     _______________

/s/ AVIEL FALIKS          Chairman of the Board, President     January 5, 2005
_____________________     and Chief Executive Officer
    Aviel Faliks

/s/ HIRSCH HANDMAKER      Director                             January 5, 2005
_____________________
    Hirsch Handmaker

/s/ DAVID GOLDBRENNER     Director                             January 5, 2005
_____________________
    David Goldbrenner

/s/ CHUNG LEW             Director                             January 5, 2005
_____________________
    Chung Lew


                                       24


<PAGE>


                                 EXHIBIT INDEX

EXHIBIT NO.                               DESCRIPTION

   10.01       Promissory Note between AccuImage Diagnostics  Corporation and
               Aviel  Faliks,  dated  October 23,  2003,  which is  incorporated
               herein by  reference  to the  Registrant's  Report on Form 10-QSB
               (File No. 000-26555) filed with the Commission on March 16, 2004.

   10.02       Promissory Note between AccuImage Diagnostics  Corporation and
               Aviel  Faliks,  dated  November  6, 2003,  which is  incorporated
               herein by  reference  to the  Registrant's  Report on Form 10-QSB
               (File No. 000-26555) filed with the Commission on March 16, 2004.

   10.03       Common Stock Purchase  Agreement  between   AccuImage Diagnostics
               Corporation  and Aviel Faliks,  dated October 24, 2003,  which is
               incorporated  herein by reference to the  Registrant's  Report on
               Form 10-QSB (File No.  000-26555)  filed with the  Commission  on
               March 16, 2004.

   10.04       Employment Agreement between  AccuImage   Diagnostics Corporation
               and Aviel Faliks,  dated January 1, 2004,  which is  incorporated
               herein by  reference  to the  Registrant's  Report on Form 10-QSB
               (File No. 000-26555) filed with the Commission on May 17, 2004.

   10.05       Consulting Agreement between AccuImage Diagnostics Corporation
               and Ray Vallejo,  dated  January 1, 2004,  which is  incorporated
               herein by  reference  to the  Registrant's  Report on Form 10-QSB
               (File No. 000-26555) filed with the Commission on May 17, 2004.

   10.06       Lease Agreement between AccuImage Diagnostics Corp. and Kashiwa
               Fudosan America, Inc., dated June 15, 2004, which is incorporated
               herein by  reference  to the  Registrant's  Report on Form 10-QSB
               (File No.  000-26555)  filed  with the  Commission  on August 13,
               2004.

   10.07       Common Stock Purchase  Agreement  between AccuImage  Diagnostics
               Corporation and Aviel Faliks, dated August 20, 2004.

   10.08       Common Stock Purchase  Agreement  between AccuImage  Diagnostics
               Corporation and Aviel Faliks, dated August 20, 2004.

    31.1       Certification of Chief Executive  Officer,  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  302  of  the
               Sarbanes-Oxley Act of 2002.

    31.2       Certification of Chief Financial  Officer,  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  302  of  the
               Sarbanes-Oxley Act of 2002.

    32.1       Certification of Chief Executive  Officer,  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

    32.2       Certification of Chief Financial  Officer,  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

    99.1       Merger Agreement dated November 24, 2004, by and among Merge
               Technologies  Incorporated,   ADI  Acquisition  Corp.,  AccuImage
               Diagnostics and Aviel Faliks,  which are  incorporated  herein by
               reference  to the  Registrant's  Report  on Form  8-K  (File  No.
               000-26555) filed with the Commission on November 22, 2004.

    99.2       Voting, Proxy and Option Agreement dated November 24, 2004,  by
               and among Merge Technologies Incorporated and Aviel Faliks, which
               is incorporated herein by reference to the Registrant's Report on
               Form 8-K  (File  No.  000-26555)  filed  with the  Commission  on
               November 22, 2004.


                                       25