================================================================================

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


                                   FORM 10-QSB

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)


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

                               501 GRANDVIEW DRIVE
                   SOUTH SAN FRANCISCO, CALIFORNIA 94080-4920
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                 (650) 875-0192
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

                                     YES  X    NO
                                        -----    -----

As of March 31, 2004 there were  48,336,295  shares of the Issuer's Common Stock
outstanding,  with a par  value of  $0.001.  No shares  of  Preferred  Stock are
outstanding.

     Transitional Small Business Disclosure Format: YES       NO  X
                                                       -----    -----

================================================================================

<PAGE>

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

                        ACCUIMAGE DIAGNOSTICS CORPORATION
                         QUARTERLY REPORT ON FORM 10-QSB
                       FOR THE PERIOD ENDED MARCH 31, 2004
                                TABLE OF CONTENTS
--------------------------------------------------------------------------------


                                                                           PAGE
PART I     FINANCIAL INFORMATION                                          NUMBER

ITEM 1.    Financial Statements:

           Condensed Balance Sheets as of March 31, 2004 (unaudited)
               and September 30, 2003 (audited)                               3

           Condensed Statements of Operations (unaudited) for the
               three and six months ended March 31, 2004 and 2003             4

           Condensed Statements of Cash Flows (unaudited) for the
               six months ended March 31, 2004 and 2003                       5

           Notes to Financial Statements                                      6

ITEM 2.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations                           12

ITEM 3.    Controls and Procedures                                            18

PART II    OTHER INFORMATION

ITEM 1.    Legal Proceedings                                                  18

ITEM 2.    Changes in Securities and Use of Proceeds                          18

ITEM 3.    Defaults Upon Senior Securities                                    18

ITEM 4.    Submission of Matters to a Vote of Security Holders                18

ITEM 5.    Other Information                                                  18

ITEM 6.    Exhibits and Reports on Form 8-K                                   19

           Signatures                                                         20


<PAGE>


--------------------------------------------------------------------------------
PART I:  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                        ACCUIMAGE DIAGNOSTICS CORPORATION
                            CONDENSED BALANCE SHEETS

                                                                                MARCH 31,           SEPTEMBER 30,
                                                                                  2004                   2003
                                                                            ------------------   --------------------
                                                                                (UNAUDITED)            (AUDITED)
<S>                                                                          <C>                  <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                $     916,779        $          --
    Accounts receivable, net of allowance of $28,229 and                           112,146              112,170
       $50,000, respectively
    Other receivable, net                                                           25,000               50,000
    Inventory                                                                       40,400               49,193
    Prepaid expenses and other current assets                                       22,997                9,091

                                                                            ------------------   --------------------
       Total current assets                                                      1,117,322              220,454
                                                                            ------------------   --------------------

Property and equipment, net of accumulated depreciation and
    amortization                                                                      39,204               45,412
                                                                            ------------------   --------------------
Other assets
    Deposits                                                                         9,993                9,993
    Goodwill, net                                                                  309,063              309,063
    Other intangible assets, net                                                     3,661                4,393

                                                                            ------------------   --------------------
       Total other assets                                                          322,717              323,449
                                                                            ------------------
                                                                                                 --------------------
                                                                             $   1,479,243        $     589,315
                                                                            ==================   ====================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable                                                         $     209,127       $      250,730
    Accrued liabilities                                                            141,158              299,010
    Product warranty reserve                                                        25,000               25,000
    Deferred revenue                                                               148,526               37,000
    Short-term note payable to an officer of the company                         1,020,685              762,600
                                                                            ------------------   --------------------
       Total current liabilities                                                 1,544,496            1,374,340
                                                                            ------------------   --------------------

Shareholders' equity (deficit):
    Preferred shares - $0.001 par value; 10,000,000 shares authorized;                  --                   --
       none issued or outstanding
    Common shares - $0.001 par value; 50,000,000 authorized;                        48,337               22,887
       48,336,295 and 22,886,295 shares issued and outstanding on
       March 31, 2004 and September 30, 2003, respectively
    Paid-in-capital                                                              4,692,146            3,488,348
    Accumulated deficit                                                         (4,805,736)          (4,296,260)

                                                                            ------------------   --------------------
       Total shareholders' deficit                                                 (65,253)            (785,025)

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

                                                                             $   1,479,243        $     589,315
                                                                            ==================   ====================

</TABLE>

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

                                       3

<PAGE>
<TABLE>
<CAPTION>


                        ACCUIMAGE DIAGNOSTICS CORPORATION
                        CONDENSED STATEMENT OF OPERATIONS
                                   (UNAUDITED)


                                                       THREE MONTHS ENDED                SIX MONTHS ENDED
                                                           MARCH 31,                        MARCH 31,
                                                 -------------------------------  -------------------------------
                                                      2004            2003             2004            2003
                                                 -------------------------------  --------------- ---------------

<S>                                                <C>             <C>              <C>             <C>
Sales                                              $   215,259     $   405,198      $   302,241     $ 1,150,481

Cost of sales                                           21,362          25,767           21,467         211,423

                                                 --------------- ---------------  --------------- ---------------
Gross profit                                           193,897         379,431          280,774         939,058
                                                 --------------- ---------------  --------------- ---------------
Operating expenses:
   Research and development                            124,826         271,608          254,489         636,945

   Sales and marketing                                  50,700         259,421           99,021         660,558

   General and administrative  (includes non-
     cash stock compensation of $195,250
     and $203,250 for the three and six month
     periods ending March 31, 2004, respectively       333,200         199,811          440,862         381,872

                                                 --------------- ---------------  --------------- ---------------
       Total operating expenses                        508,726         730,840          794,372       1,679,375

                                                 --------------- ---------------  --------------- ---------------
Operating loss                                        (314,829)       (351,409)        (513,598)       (740,317)

Net interest income (expense) and other                 12,429        (13,552)            4,120        (19,505)

                                                 --------------- ---------------  --------------- ---------------
Net loss                                           $  (302,400)    $  (364,961)     $  (509,478)    $  (759,822)
                                                 =============== ===============  =============== ===============
Basic and diluted net loss per share               $    (0.01)     $   (0.02)       $    (0.01)     $   (0.03)
                                                 =============== ===============  =============== ===============
Weighted average shares outstanding

    Basic and diluted                               48,336,295      22,886,295       37,766,896      22,886,295
                                                 =============== ===============  =============== ===============


</TABLE>

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


                                       4
<PAGE>

<TABLE>
<CAPTION>

                        ACCUIMAGE DIAGNOSTICS CORPORATION
                        CONDENSED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

                                                                                 SIX MONTHS ENDED MARCH 31,
                                                                        ----------------------------------------------
                                                                                2004                    2003
                                                                        ----------------------  ----------------------
<S>                                                                       <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
           Net cash used in operating activities                          $     (343,306)         $    (212,656)
                                                                        ----------------------  ----------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
           Net cash used in investing activities                                       -                 (6,134)
                                                                        ----------------------  ----------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Proceeds from issuance of common stock to an officer                  1,002,000                      -
             of the company
         Proceeds from short-term borrowings from an officer of the            1,020,685                      -
            company
         Payments on long-term borrowings from shareholders                     (762,600)                     -

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

           Net cash provided by financing activities                           1,260,085                      -

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

Net increase (decrease) in cash and cash equivalents                             916,779               (218,790)

Cash and cash equivalents at beginning of period                                       -                232,246

                                                                        ----------------------  ----------------------
Cash and cash equivalents at end of period                                $      916,779          $      13,456

                                                                        ======================  ======================

SUPPLEMENTAL DISCLOSURE
    Cash paid during the period for interest                              $       32,448          $         --

    Cash paid during the period for taxes                                 $          193          $         --


</TABLE>

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


                                       5

<PAGE>


                        ACCUIMAGE DIAGNOSTICS CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 Corporation (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 sales 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.

BASIS OF PRESENTATION

In the opinion of management,  the accompanying financial statements contain all
adjustments  (consisting of only normal recurring accruals) necessary to present
fairly the financial  position at March 31, 2004 and September 30, 2003, and the
results of its  operations for the three and six months ended March 31, 2004 and
2003 and cash flows for the six months  ended March 31,  2004 and 2003.  Certain
information and footnote  disclosures  normally included in financial statements
that would have been prepared in accordance with generally  accepted  accounting
principles have been condensed or omitted  pursuant to the rules and regulations
of the Securities and Exchange  Commission,  although  management of the Company
believes that the disclosures in these financial statements are adequate to make
the  information  presented  herein not  misleading.  It is suggested that these
financial statements and notes thereto be read in conjunction with the financial
statements  and the notes thereto  included in the Company's  September 30, 2003
Form 10-KSB filed December 31, 2003. The results of operations for the three and
six months ended March 31, 2004 are not necessarily indicative of the results of
operations to be expected for the full fiscal year ending September 30, 2004.

GOING CONCERN

These  financial  statements  have been prepared on a going concern  basis.  The
Company has reported net  operating  losses for the three and six months  ending
March 31, 2004 and for the past three fiscal years.  Management plans to achieve
profitability in the fiscal year ending September 30, 2004 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 2003, then
it would need to reduce  expenditures to a greater degree than  anticipated,  or
raise additional funds if possible.

                                       6

<PAGE>

Certain  shareholders have agreed to provide additional  financing if necessary.
During the first quarter of fiscal 2004 the Company borrowed  $1,000,000 from an
officer of the Company (see Note 2).

USE OF 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.

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.  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. 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
of the arrangement fee 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.  Amounts
deferred  for  maintenance  services,   term  software  license  agreements  and
warranties comprise the main components of deferred revenue.

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

                                       7

<PAGE>

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.  There were no changes in the  Company's  warranty
reserve during the six months ended March 31, 2004.

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED MARCH 31,
                                                ---------------------------------------------
                                                       2004                    2003
                                                ---------------------  ----------------------
<S>                                              <C>                     <C>
Balance at the beginning of the period           $     25,000            $     50,000

   Settlements made during the period                       -                   2,607

                                                ---------------------  ----------------------
Balance at the end of the period                 $     25,000            $     47,393
                                                =====================  ======================
</TABLE>

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.
Interim period cost of goods sales is calculated  using the perpetual  inventory
record.  The  Company  reports  any  significant  adjustments  that  result from
reconciling the perpetual  inventory  record to the periodic and annual physical
inventory observations.

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.  Trade  accounts  receivable  are  presented  net of an allowance  for
doubtful  accounts of $28,229 and  $50,000 at March 31, 2004 and  September  30,
2003, respectively.

RECOVERABILITY OF LONG LIVED ASSETS

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.

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 three and six months ended
March  31,  2004,  options  and  warrants  outstanding  were  excluded  from the
calculation since their effect was antidilutive.  The total options and warrants
outstanding   at  March  31,  2004  and  2003  were   4,925,834  and  3,975,834,
respectively.

STOCK BASED COMPENSATION

The Company accounts for its stock-based  compensation plans using the intrinsic
value  method  prescribed  in  Accounting   Principles  Board  Opinion  No.  25,
"Accounting for Stock Issued to Employees." Compensation cost for stock options,
if any, is measured by the excess of the quoted  market  price of the  Company's
stock at the date of grant over the amount an  employee  must pay to acquire the
stock. SFAS No. 123 established  accounting and disclosure  requirements using a
fair-value  based method of accounting  for  stock-based  employee  compensation
plans.  Had  compensation  expense  for the  Company's  Stock  Option  Plan been
determined to be consistent  with SFAS No. 123, the Company's net loss and basic
and diluted net loss per share would have  increased to the  following pro forma
amounts:


                                       8

<PAGE>
<TABLE>
<CAPTION>

                                                           THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                MARCH 31,                       MARCH 31,
                                                         2004            2003             2004           2003
                                                    --------------  --------------   -------------- ---------------

<S>                                                   <C>             <C>              <C>            <C>
Net loss, as reported                                 $  (302,400)    $  (364,961)     $  (509,478)   $  (759,822)
   Add: Non-cash stock compensation expense
     determined under the intrinsic value method           13,750              --           13,750             --
     as reported in net loss (*)
   Less: Employee stock-based compensation
     expense determined under fair value                  (34,273)             --          (54,796)            --
                                                    --------------- ---------------- -------------- ----------------
   Pro forma net loss                                 $ (322,923)     $  (364,961)     $(550,524)     $  (759,822)
                                                    =============== ================ ============== ================
   Weighted average shares outstanding                 48,336,295      22,886,295       37,766,896     22,886,295

Shares used to compute basic and diluted
   net loss per share                                  48,336,295       22,886,295       37,766,896     22,886,295
                                                    =============== ================ ============== ================
Loss per share:
   Basic and diluted - as reported                    $   (0.01)      $   (0.02)       $   (0.01)     $   (0.03)
                                                    =============== ================ ============== ================
   Basic and diluted - pro forma                      $   (0.01)      $   (0.02)       $   (0.01)     $   (0.03)
                                                    =============== ================ ============== ================
<FN>
-----------------
(*) This amount excludes non-cash stock compensation on restricted stock awards.

</FN>
</TABLE>


RECENT ACCOUNTING PRONOUNCEMENTS

In December  2003, the  Securities  and Exchange  Commission  (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 ("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 ("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 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 provision 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

                                       9

<PAGE>

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
March  15,  2004.  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 31, 2003. The issuance of FIN 46
and its  revision  did not have a  material  impact on the  Company's  financial
position, results of operations or cash flows.


2.       RELATED PARTY TRANSACTIONS

The following  transactions  took place between the Company and related  parties
during the six months ended March 31, 2004:

In fiscal year 2001,  the Company  received and approved  executed note purchase
agreements and subscription  agreements for a total of $500,000. As of September
30,  2003,  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 of $31,250 was repaid in October 2003.

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 mature 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 3 for equity transaction details.

3.       EQUITY TRANSACTIONS

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 was a discount from the market price
and as a result, the intrinsic value as of the date of the agreement of $500,000
will be expensed to  operations  ratably over the one-year term of the Officer's
Employment Agreement. See Note 4 for Employment Agreement details.  Accordingly,
the Company  recorded a charge to  operations  of $125,250 for the quarter ended
March  31,  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 52% at March 31, 2004.

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
during the quarter ended December 31, 2003 and $24,000 in the prior fiscal year.
The issuance 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.

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. Total options outstanding at March 31, 2004 were 2,812,500.

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 quarter ended March 31, 2004.

                                       10

<PAGE>

In March 2004, the Company's  Board of Directors  approved and in April 2004 the
Company granted 750,000 shares of Common Stock to an Officer as compensation for
performing  duties  as its  Chief  Executive  Officer  ("CEO").  See  Note 4 for
Employment Agreement details. The following shares of common stock were granted:
600,000  shares for the three  month  period  ending  March 31, 2004 and 150,000
shares for the three month period  ending June 30, 2004.  The shares were valued
at the market price on the date of grant and as a result, the Company recorded a
compensation  charge to operations of $56,250 during the quarter ended March 31,
2004.

4.       SIGNIFICANT AGREEMENTS

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 3 for equity details.

In  January  2004,  the  Company  and  Ray  Vallejo  entered  into a  Consulting
Agreement,  effective  January  1,  2004,  which  employs  Mr.  Vallejo as Chief
Operating Officer ("COO") for a two-year term.

In  February  2004,  the  Company  and SMAART  Medical  Systems  entered  into a
five-year  agreement (the "Software License Agreement") with respect to purchase
and distribution of AccuImage's medical imaging software.

5.       SUBSEQUENT EVENTS

In April 2004, the Company  granted 750,000 shares of Common Stock to an Officer
of the Company, as compensation for performing the duties of the CEO. See Note 3
for equity details and Note 4 for the Employment Agreement.

In April 2004, the Company issued  incentive stock options to another Officer of
the  Company,  allowing  him to purchase up to 250,000  shares of the  Company's
common stock. The options were issued at an exercise price that was equal to the
market  price on the date of grant.  The  exercise  period for the options is 10
years and the options vest over one year. See Note 4 for Consulting Agreement.

In April 2004, the Company issued  incentive stock options to Leon Kaufman,  the
Company's  former CEO,  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
equal to 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.






                                       11

<PAGE>

--------------------------------------------------------------------------------
ITEM 2.          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-QSB.  Operating  results  for the three and six months  ended
March  31,  2004  are not  necessarily  indicative  of the  results  that may be
expected  for any future  periods,  including  the full fiscal  year.  Reference
should  also be made to the Annual  Financial  Statements,  Notes  thereto,  and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  contained in the Company's September 30, 2003 Form 10-KSB,  filed on
December 31, 2003.

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,
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

REVENUES

Net sales were  $215,259 for the quarter  ended March 31,  2004,  as compared to
$405,198  for the same period in fiscal 2003, a decrease of $189,939 or 47%. For
the six  months  ended  March 31,  2004 and 2003,  revenues  were  $302,241  and
$1,150,481,  respectively,  a decrease of $848,240  or 74%.  Overall  revenue is
lower due to the poor economy,  especially in the medical imaging and healthcare
industries.  Sales for the  three  and six  months  ended  March  31,  2004 were
primarily sales of software, hardware and monthly maintenance contracts.

                                       12

<PAGE>

GROSS PROFIT

Gross profit  decreased by $185,534 or 49%, to $193,897 or 90% of net sales, for
the quarter ended March 31, 2004,  from $379,431,  or 94% of net sales,  for the
comparable  period in the prior  year.  For the first six months of fiscal  year
2004,  gross  profit  decreased  by  $658,284  or 70%, to $280,774 or 93% of net
sales,  from $939,058 or 82 % of net sales, for the comparable  period in fiscal
year 2003.  The  decrease  in absolute  dollars  during the three and six months
ended  March 31, 2004 was  primarily  due to lower sales and a change in product
mix. Sales during the first three and six months of fiscal year 2004 represented
revenue from sales of software, hardware and monthly maintenance contracts.

RESEARCH & 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 the second
quarter of 2004  decreased  by $146,782 or 54%, to $124,826 or 58% of net sales,
from $271,608 or 67% of net sales,  in the comparable  period of the prior year.
Research and  Development  expenses for the first six months of fiscal year 2004
decreased  by $382,456 or 60%, to $254,489 or 84% of net sales, from $636,945 or
55% of net sales,  in the  comparable  period of the prior year. The decrease in
absolute  dollars for the three and six months ended March 31, 2004 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 the second  quarter of fiscal 2004  decreased by $208,721 or 80%, to $50,700
or 24% of net sales, from $259,421 or 64% of net sales, in the comparable period
of the  prior  year.  For the first six  months  of fiscal  year 2004  sales and
marketing expenses decreased by $561,537 or 85%, to $99,021 or 33% of net sales,
from $660,558 or 57% of net sales,  in the comparable  period of the prior year.
This  decrease in absolute  dollars for the three and six months ended March 31,
2004 was primarily due to a decrease in the Company's  sales force,  a change in
the  compensation  structure  to  commissions  only 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 the second  quarter of fiscal year 2004  increased  by $133,389 or
67%, to $333,200 or 155 % of net sales,  from  $199,811 or 49% of net sales,  in
the comparable period in the prior year. General and administrative expenses for
the first six month of fiscal year 2004 increased by $58,990 or 15%, to $440,862
or 146% of net sales,  from  $381,872  or 33% of net sales,  for the  comparable
period of the prior year.  The increase in absolute  dollars is primarily due to
the non-cash charges  associated with stock based  compensation  incurred during
the quarter  ended March 31,  2004,  partially  offset by a reduction  in office
staff.

RESULTS OF OPERATIONS

Sales  decreased by $189,939 to $215,259,  and by $848,240 to $302,241,  for the
three and six months ended March 31,  2004,  respectively,  from the  comparable
periods in fiscal  year 2003.  The sales  decline  resulted  in a  corresponding
reduction in gross profit.  Operating  expenses decreased by $222,114 or 30%, to
$508,726, and by $885,003 or 53% to $794,372, for the three and six months ended
March 31, 2004,  respectively,  from the same comparable  periods in fiscal year
2003.  The  decrease  in  sales is due to the poor  economy,  especially  in the
medical  imaging  and the health care  industries.  The  decrease  in  operating
expenses is primarily due to cost saving  measures  implemented  by the Company,
including a reduction in salaries and headcount, partially offset by stock based

                                       13

<PAGE>

compensation  expenses  incurred  during the quarter ended March 31, 2004.  This
resulted in an operating loss of ($302,400) and ($509,478) for the three and six
months ended March 31, 2004 respectively,  or $62,561 and $250,344 less than the
operating loss of ($364,961) and ($759,822) for the comparable periods in fiscal
year 2003.

OFF BALANCE SHEET ARRANGEMENTS

The Company did not engage in an off balance  sheet  arrangement  during the six
months ending March 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

During  the six  months  ended  March  31,  2004,  net  cash  used by  operating
activities was $343,306. At March 31, 2004, the Company had $916,779 in cash and
cash  equivalents.  Working  capital  at March 31,  2004  equaled  a deficit  of
($427,174) compared with a deficit of ($1,153,886) at September 30, 2003.

On March 31, 2004,  the Company held accounts  receivable  (net of allowance for
doubtful accounts) of $112,146.  Accounts  receivable are generally kept current
through punctual collections efforts.

During  the six  months  ended  March 31,  2004,  the  Company  did not have any
investing activities.

During the six months  ended March 31,  2004,  the Company  raised $2 million in
cash by issuing 25,050,000 shares of the Company's common stock to an officer of
the Company in a private  financing  for $1 million,  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  anticipates that cash  requirements for the remainder of the fiscal
year will be met by  current  capital  resources  and  operational  income  from
increasing revenues.  However, 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 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  2003,  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 of the  Company's  transactions  are  negotiated,  invoiced and paid in U.S.
dollars.  International  sales for the three and six months ended March 31, 2004
were $34,800 and $92,800, 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 1 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.

                                       14

<PAGE>

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.
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. 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
of the arrangement fee 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 for 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.  Amounts
deferred  for  maintenance  services,   term  software  license  agreements  and
warranties comprise the main components of deferred revenue.

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 $25,000 as of
March 31, 2004 and September 30, 2003.

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

                                       15

<PAGE>

record to the periodic and annual physical inventory observations. The inventory
balance was $40,400 and $49,193,  as of March 31, 2004 and  September  30, 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.   Trade  accounts
receivables,  net of an  allowance  for  doubtful  accounts,  were  $112,146 and
$112,170 at March 31, 2004 and September 30, 2003, respectively.

VALUATION OF LONG-LIVED 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.  Long-lived assets, net of accumulated  amortization,
were $3,661 and $4,393 on March 31, 2004 and September  31, 2003,  respectively.
Goodwill,  net of accumulated  amortization,  was $309,063 on March 31, 2004 and
September 30, 2003.

RECENT ACCOUNTING PRONOUNCEMENTS

In December  2003, the  Securities  and Exchange  Commission  (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 ("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 ("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 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 provision 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
March  15,  2004.  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 31, 2003. The issuance of FIN 46
and its  revision  did not have a  material  impact on the  Company's  financial
position, results of operations or cash flows.


                                       16

<PAGE>

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 our 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.

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.



                                       17


<PAGE>

--------------------------------------------------------------------------------
ITEM 3.           CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------


Within  90 days  prior to the date of this  Form  10-QSB,  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-QSB.

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 II.      OTHER INFORMATION
--------------------------------------------------------------------------------


ITEM 1.   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 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

None.



ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.



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

No matter was submitted to the vote of security holders during the quarter ended
March 31, 2004.


ITEM 5.   OTHER INFORMATION

On January 1, 2004,  the Company and Aviel  Faliks  entered  into an  Employment
Agreement,  effective  January 1, 2004,  which  employs Mr.  Faliks as the Chief
Executive Officer of the Company for a one-year term.

On January 1, 2004,  the  Company  and Ray  Vallejo  entered  into a  Consulting
Agreement,  effective  January  1,  2004,  which  employs  Mr.  Vallejo as Chief
Operating Officer for a two-year term.

On  February  20,  2004,  five  of the six  directors  submitted  their  written
resignations  to  the  Company  during  the  Board  of  Directors  Meeting.  The
resignations  were effective at the adjournment of the meeting.  Also during the
meeting,  the  Directors  unanimously  voted to  elect  six new  persons  to the
Company's Board effective  immediately upon the adjournment of the meeting.  The
newly elected  Board of Directors is subject to a  shareholder  vote at the next
Annual  Shareholder  Meeting scheduled in June 2004. Also, in February 2004, the
directors  entered into a Resignation and Consulting  Agreement with the Company
dated  February 20, 2004.  These persons will be retained as advisors to the new
Board for three years as part of an "Advisory Committee" to the Board.

On March 5, 2004, the Company's Board of Directors appointed Aviel Faliks as the
Chairman of the Board.

                                       18

<PAGE>

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

         The Exhibits listed in the accompanying Exhibit Index are filed as part
of this report.


     (b) There were no reports on Form 8-K filed during the quarter  ended March
31, 2004.






                                       19

<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 CORPORATION




Date:  May 17, 2004          By: /s/ AVIEL FALIKS
                                 -----------------------------------------
                                     Aviel Faliks
                                     President and Chief Executive Officer



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




                                       20

<PAGE>

                                  EXHIBIT INDEX

     EXHIBIT NO.                   DESCRIPTION


        10.04         Employment  Agreement  between  AccuImage  Diagnostics
                      Corporation and Aviel Faliks, dated January 1, 2004.
        10.05         Consulting  Agreement  between  AccuImage  Diagnostics
                      Corporation  and  Ray  Vallejo, dated January 1, 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.


                                       21