COMPUTERIZED THERMAL IMAGING INC, SB-2/A, 1998-06-09

COMPUTERIZED THERMAL IMAGING INC
SB-2/A, 1998-06-09
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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<PAGE>

As Filed with Securities and Exchange Commission on May 26, 1998

Registration No. 333-47237

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM SB-2/A
AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

COMPUTERIZED THERMAL IMAGING, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 3815 87-0458721
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)

476 HERITAGE PARK BOULEVARD, SUITE 210
LAYTON, UTAH 84041
(801) 776-4700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

DAVID A. PACKER WITH A COPY TO:
PRESIDENT NORMAN T. REYNOLDS, ESQ.
476 HERITAGE PARK BOULEVARD, SUITE 210 LOOPER, REED, MARK & MCGRAW
LAYTON, UTAH 84041 1300 POST OAK BOULEVARD, SUITE 2000
(801) 776-4700 HOUSTON, TEXAS 77056
(NAME, ADDRESS, INCLUDING ZIP CODE, AND (713) 986-7000
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE FOR THE REGISTRANT)

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement has been declared effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE
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<S> <C> <C> <C> <C>
Common Stock to be Resold (2):
Newly Issued Shares . . . . . . . . . . . . . . 18,229,167 $0.675 $ 12,304,688 $ 3,629.88
Shares Underlying Compensation Warrants . . . . 2,552,083 $0.675 $ 1,722,656 $ 508.19
Shares Outstanding. . . . . . . . . . . . . . . 2,749,611 $0.675 $ 1,855,987 $ 547.52
Shares Underlying Resale Warrants . . . . . . . 3,840,615 $0.675 $ 2,592,415 $ 764.76
Shares Underlying Options . . . . . . . . . . . 6,525,000 $0.675 $ 4,404,375 $ 1,299.29
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Total . . . . . . . . . . . . . . . . . . . . . . 33,896,476 $ 22,880,122 $ 6,749.64
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</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Common Stock to be resold includes shares of the Common Stock underlying
certain outstanding securities which are exercisable for or convertible
into shares of the Common Stock which have not yet been exercised or
converted.
(3) Based upon the average of the bid and ask prices of the Common Stock
reported on the OTC Bulletin Board on February 25, 1998.

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

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<PAGE>

COMPUTERIZED THERMAL IMAGING, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2

FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus . . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . . . . . . Inside Front Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors. . . . . . . . . . Prospectus Summary; Risk Factors; The Company
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . Outside Front Cover Page; Risk Factors
6. Dilution. . . . . . . . . . . . . . . . . . . . . . . . Dilution
7. Selling Security-Holders. . . . . . . . . . . . . . . . Plan of Distribution and Selling Stockholders
8. Plan of Distribution. . . . . . . . . . . . . . . . . . Plan of Distribution and Selling Stockholders
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . Business - Litigation
10. Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . . . . The Company; Management - Executive Officers and Directors

11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . *
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. . . . . *
15. Organization Within Last Five Years . . . . . . . . . . The Company
16. Description of Business . . . . . . . . . . . . . . . . Business
17. Management's Discussion and Analysis
or Plan of Operation. . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . . Business
19. Certain Relationships and Related Transactions. . . . . Management - Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . Risk Factors; Price Range of Common Stock and Dividend Policy;
Description of Securities
21. Executive Compensation. . . . . . . . . . . . . . . . . Management - Executive Compensation
22. Financial Statements. . . . . . . . . . . . . . . . . . Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . . . . . . *

</TABLE>

(*) None or Not Applicable

<PAGE>

SUBJECT TO COMPLETION, DATED MAY 26, 1998

COMPUTERIZED THERMAL IMAGING, INC.

RESALE OF 33,896,476 SHARES OF COMMON STOCK

This Prospectus relates to the resale of 33,896,476 shares of the common
stock of Computerized Thermal Imaging, Inc., a Nevada corporation (the
"Company"),which may be sold by the holders thereof (the "Selling Stockholders")
from time to time as market conditions permit in the market, or otherwise, at
prices and terms then prevailing or at prices related to the then current market
price, or in negotiated transactions. The shares common stock of the Company,
$0.001 par value per share (the "Common Stock"), to be resold include:
(i)18,229,167 shares to be purchased by an unrelated investor (the "Newly Issued
Shares"); (ii) 2,552,083 shares to be issued upon the exercise of warrants to be
issued to such investor (the "Compensation Warrants") which become exercisable
upon issuance at variable prices based on the sales price of shares of the
Common Stock and expire on the fifth anniversary of the date of issuance; (iii)
2,749,611 shares issued and outstanding; (iv) 3,840,615 shares underlying
outstanding warrants exercisable at prices ranging from $0.72 to $5.00 per share
which expire on various dates ranging from March 31, 1999 to March 13, 2002 (the
"Resale Warrants"); and (v) 6,525,000 shares underlying outstanding options
exercisable at prices ranging from $0.60 per share to $1.25 per share which
expire automatically on various dates ranging from July 21, 2000 to June 12,
2005 (sometimes hereinafter collectively referred to as the "Options"). Unless
otherwise specified, the Compensation Warrants and the Resale Warrants are
sometimes collectively referred to herein as the "Warrants." See "Management -
Stock Options and Restricted Stock," "Certain Transactions," "Description of
Securities," and "Plan of Distribution and Selling Stockholders." As used
herein, the term "Offering" includes all shares of the Common Stock covered by
this Prospectus. Shares offered by the Selling Stockholders may be sold in
unsolicited ordinary brokerage transactions or privately negotiated transactions
between the Selling Stockholders and purchasers without a broker-dealer. A
current prospectus must be in effect at the time of the sale of the shares of
the Common Stock to which this Prospectus relates. Each Selling Stockholder or
dealer effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a current prospectus
upon such sale. The Company will not receive any proceeds from the resale of
the Common Stock by the Selling Stockholders. Unless otherwise exempted,
Selling Stockholders and their agents engaged in the resale of Common Stock may
be deemed underwriters under the Securities Act of 1933. The Common Stock is
quoted on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. (the "NASD") under the symbol "COII." On March 31, 1998, the
closing bid and ask prices of the Common Stock were $0.57 and $0.52 per share,
respectively. There can be no assurance that an active trading market will be
sustained. See "Price Range of Common Stock and Dividend Policy."

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

THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 7.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

THE DATE OF THIS PROSPECTUS IS ______, 1998

<PAGE>

CAUTIONARY STATEMENT

INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Price Range of Common Stock And Dividend Policy. . . . . . . . . . . . . . .19
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . .50
Plan of Distribution And Selling Stockholders. . . . . . . . . . . . . . . .56
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-2
</TABLE>

2
<PAGE>

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION IS
FURNISHED.

AVAILABLE INFORMATION

The Company has not been previously subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
although it will become subject to the reporting requirements of the Exchange
Act following the registration of the securities described herein. In
accordance with the Exchange Act, the Company will file reports, proxy
statement, and other information with the Securities and Exchange Commission
(the "Commission"). In addition, the Company intends to furnish its
stockholders with annual reports containing audited financial statements and
such interim reports as it deems appropriate.

Pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the Company has filed a Registration Statement on Form SB-2 with the Commission
of which this Prospectus forms a part. This Prospectus does not contain all of
the information contained in the Registration Statement and the exhibits
thereto, certain parts of which have been omitted in accordance with rules of
the Commission. Any statements contained herein concerning the provisions of
any document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission are not necessarily complete, and, in each instance,
reference is made to the copy of the document so filed for a more complete
description of the matter involved, and each such statement is qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
are on file with, and may be examined without charge, at the following public
reference facilities of the Commission: 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may be obtained, at prescribed
rates, from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission maintains an Internet
web site that contains information, including registration statements, of
issuers who file electronically with the Commission. The address of that web
site is http://www.sec.gov.

3
<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE
FINANCIAL, BUSINESS ACTIVITIES, MANAGEMENT AND OTHER PERTINENT INFORMATION
HEREIN RELATE ON A CONSOLIDATED BASIS TO THE COMPANY AND ITS 80 PERCENT OWNED
SUBSIDIARY, THERMAL MEDICAL IMAGING, INC. INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY AND CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS." ADDITIONALLY, UNLESS OTHERWISE INDICATED, ALL
COMMON STOCK SHARE AND PER SHARE DATA AND INFORMATION IN THIS PROSPECTUS ASSUME
NO EXERCISE OF OUTSTANDING OPTIONS OR WARRANTS INTO SHARES OF THE COMMON STOCK,
OR THE ISSUANCE OF ANY UNVESTED SHARES OF THE RESTRICTED STOCK. MOREOVER,
UNLESS OTHERWISE INDICATED, ALL MONETARY AMOUNTS HAVE BEEN EXPRESSED IN UNITED
STATES DOLLARS.

THE COMPANY

Computerized Thermal Imaging, Inc. (the "Company") was incorporated on June
10, 1987 in the State of Nevada as Business Helpers, Inc. The Company amended
its Articles of Incorporation on August 25, 1989 to effect a name change to DTI
Dorex, Ltd. and again on November 3, 1989 to its current name. In April 1992,
the Company further amended its Articles of Incorporation to provide for a
capital structure of 100,000,000 shares of common stock, par value of $0.001 per
share, and 3,000,000 shares of preferred stock with such designations,
preferences and other features as may be required by the Company's Board of
Directors. In 1988, the Company, through the issuance of shares of its Common
Stock, acquired substantially all of the assets of Thermal Imaging, Inc., an
Oregon corporation (hereinafter sometimes referred to as "TII"), which assets
consisted primarily of certain intellectual property regarding thermal imaging
intellectual property.

The Company is a development stage company that is a medical imaging
systems integrator producing a computerized clinical thermal imaging diagnostic
and patient management system (the "CTI System") that has been trademarked under
the name COMPUTERIZED THERMAL IMAGING. The Company's plans to license the CTI
System to various health care providers such as hospitals, HMOs and free
standing image centers through "Use Agreements." Revenues will be generated
under the Use Agreements by charging the health care providers monthly for time
usage and for the disposable supplies purchased in conjunction with the CTI
System. The Company also plans to sell the CTI System to certain countries in
Asia, such as the People's Republic of China (the "PRC"), where use of thermal
imaging for medical use is more prevalent than the United States. As of the
date of this Prospectus, the PRC's Ministry of Public Health has been unable to
obtain funding for a project for which the Company initially contracted in 1995,
although it maintains its intention to pursue placement of the CTI System in its
hospitals. The Company does not intend to make material expenditures for this
project until funding is obtained for the PRC.

The CTI System is currently composed of four elements. One element is a
climate controlled lab (herein referred to as a "QTA Lab"). The second element
is the examination unit, consisting of an infra-red camera, imaging monitor,
high resolution printer, computer and proprietary software and telemedicine
interface. The third element of the CTI System is a digital health card that
encodes a patient's thermal image for subsequent comparison by physicians, or
even the patient's entire medical record, in a digital format on a plastic card
the size of a credit card. The fourth element is a proprietary medical
protocol. The Company's 80 percent owned subsidiary, Thermal Medical Imaging,
Inc., a Nevada corporation (herein sometimes referred to as "TMI") utilizes the
CTI System specially configured as a breast cancer system which is a
non-invasive, non-contact procedure that does not involve breast compression or
exposure to radiation (the "TMI System"), and which is comprised of an infra-red
camera, a central processing unit, a display unit, examination equipment for
which a patent application has been filed, and a power distribution unit. The
TMI System employs a proprietary patient positioning system in the data
acquisition process.

As of the date of this Prospectus, neither the CTI System nor the TMI
System has been formally approved by the FDA. Management believes that the CTI
System has clearance to be sold in the United States without obtaining further
government approval from the United States Food and Drug Administration (the
"FDA") under a "510(k)" application conforming to similar products already
cleared by the FDA for use for medical purposes. However, as a practical
matter, specific insurance and medicare payment codes are not available for
patients to obtain cost reimbursement for use of a specific medical imaging
system without FDA approval. CTI believes that no other thermography or thermal
imaging procedures currently being used for medical purposes, even with FDA
approval, are

4
<PAGE>

equivalent to the TMI System. Thus, the sale of the TMI System in the U.S. for
use in the detection of breast cancer requires FDA approval. Consequently, the
TMI System is presently undergoing clinical testing by physicians of hospitals
at three independent sites in accordance with a protocol which management
expects to lead to pre-market approval (hereinafter sometimes referred to as
"PMA") by the FDA. See "Business." While the Company hopes to receive PMA
within the next 12 months, various factors , including the length of the time
needed to collect sufficient research data, analyze patient images, submit
comparison findings to the FDA, and obtain independent FDA consultant review,
could effect delays, and there is no guarantee that any or all of the stages
will be completed or achieved. In addition, the cost associated with completing
clinical trials of the TMI System is estimated to be approximately $3 Million,
but this figure could vary depending on numerous factors, including the length
of clinical trials, the efficiency of the prototype TMI System, the testing
methods employed, and the results of FDA review. The inability of the Company
and/or TMI to raise sufficient working capital to fund the clinical trials could
adversely affect the ability of TMI to complete the PMA process.

Several risk factors exist which should be carefully reviewed by
prospective investors prior to making a decision to investment in the Company.
These factors include, but are not limited to, the effect of the following
events or contingencies on the business of the Company: (i) lack of working
capital and guaranteed sources of financing; (ii) potential violations of
securities laws in connection with past offerings of Common Stock may be claimed
by a shareholder or the SEC to delay effective dates or to increase legal fees
or impose penalties; (iii) the failure of the Company to provide stockholders
with an opportunity to exercise preemptive rights; (iv) a claim by the Company
against Select Capital Advisors and several investors for fraud and recission
and counterclaims by those investors of misrepresentations made; (v) past due
accounts to two primary creditors (TRW and the Company's law firm); (vi) the
unknown but substantial cost required both to obtain FDA approval to make any
medical claims for efficacy and to obtain insurance payment code authorizations
for each procedure using the CTI System and TMI System; and (vii) dependence on
key employees.

The inability of the Company to obtain substantial additional funds in the
near term constitutes a significant risk of investment. Management has
recently secured a financing agreement with an unrelated third party investor
which provides for a total cash infusion of up to $7 million over a three year
period. Recognition of the total funding amount by the Company is conditioned
on the satisfaction of various conditions, including maintaining SEC reporting
company status, and may be unilaterally limited by the investor once it has
acquired beneficial ownership of 4.9 percent of the Company's Common Stock. As
of the date of this Prospectus, the Company has limited access to additional
capital sources. In past years, Company shareholders have infused capital when
other financing or capital sources were not available. If the Company does not
commence generating adequate revenues or if the Company does not attract new
capital sufficient to meet operating needs, the Company could not maintain the
existing TMI or subsequent CTI clinical trials to obtain FDA approval or to
obtain insurance payment codes, and the Company would have difficulty selling
its product, in which case the Company would focus on sales to foreign markets
that do not require FDA approval.

The Company's principal executive office is located at 476 Heritage Park
Boulevard, Suite 210, Layton, Utah 84041, and its telephone number is (801)
776-4700. TMI's principal executive office is located at 1760 South Telegraph
Road, Suite 202, Bloomfield Hills, Michigan 48302, and its telephone number is
(248) 745-4960.

5
<PAGE>

THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Common Stock Outstanding Prior
to the Offering . . . . . . . . . 47,162,653 shares (1)
Common Stock to be Resold . . . . . 33,896,476 shares (2). See "Plan of
Distribution and Selling Stockholders."
OTC Bulletin Board Symbol . . . . . COII
</TABLE>

(1) Includes shares of the Common Stock issued and outstanding as of March 31,
1998. Does not include (i) 18,229,167 shares proposed to be issued as
Newly Issued Shares; (ii) 2,552,083 shares underlying the Compensation
Warrants; (iii) 3,840,615 shares underlying the Resale Warrants; and (iv)
7,825,000 shares issuable upon exercise of outstanding options. See
"Management - Stock Options and Restricted Stock" and "Description of
Securities."

(2) Includes (i) 18,229,167 Newly Issued Shares; (ii) 2,552,083 shares to be
issued upon the exercise of the Compensation Warrants (The number of Newly
Issued Shares and shares underlying Compensation Warrants being registered
hereby generally are calculated based on the formula set forth in the
Bristol Asset Management, L.L.C. Investment Agreement (the "Investment
Agreement"). The formula used to calculate the number of Newly Issued
Shares being registered hereunder is as follows: 7,000,000 DIVIDED BY 74
percent X $0.52 (the lowest sales price for the Common Stock on the
principal exchange of the Company during the 10 trading days prior to
January 30, 1998) = 18,229,167 shares of the Common Stock. The number of
shares of the Common Stock underlying the Compensation Warrants was
calculated as follows: 18,229,167 X 14 percent = 2,552,083 shares. If the
sales price for the Common Stock used in the formula is different than the
example of $0.52 contained herein, then the number of Newly Issued Shares
and the number of shares underlying the Compensation Warrants will change.
However, for the purposes of this Prospectus, the formula price of $0.52
per share is being used. If the sales price is greater than $0.52 per
share, a lesser number of shares of the Common Stock will be issued.);
(iii) 2,749,611 shares issued and outstanding; (iv) 3,840,615 shares
underlying the Resale Warrants; and (v) 6,525,000 shares underlying the
Options. See "Plan of Distribution and Selling Stockholders."

6
<PAGE>

SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table presents summary historical data of the Company on a
consolidated basis as of June 30, 1997 and 1996 and for the fiscal years ended
June 30, 1997 and 1996, respectively, which present the consolidated results of
continuing operations of the Company and its 80 percent owned subsidiary,
Thermal Medical Imaging, Inc. This historical data as of June 30, 1997 and 1996
and for the fiscal years then ended has been derived from the Company's audited
Financial Statements included elsewhere in this Prospectus. The summary
historical consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.

Six Months Ended Years Ended
December 31, June 30,
------------ --------
1997 1996 1997 1996
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues, net . . . . . . . . . . . . . . . . . . . $ -- $ 55,815 $ 55,815 $ 125,000
Other income. . . . . . . . . . . . . . . . . . . . 1,247 3,097 5,762 9,869
----------- ----------- ----------- -----------
Total revenue . . . . . . . . . . . . . . . . . . . 1,247 58,912 61,577 134,869

Loss from operations. . . . . . . . . . . . . . . . (1,615,916) (723,245) (2,112,843) (2,828,250)
Net loss. . . . . . . . . . . . . . . . . . . . . . (1,615,916) (723,245) (2,112,843) (2,828,250)
Net loss per weighted-average share
of Common Stock outstanding . . . . . . . . . . . (0.04) (0.02) (0.06) (.0.09)
Number of weighted-average shares of
Common Stock outstanding. . . . . . . . . . . . . 39,004,006 32,906,563 33,803,045 30,875,600

BALANCE SHEET DATA:
Current assets. . . . . . . . . . . . . . . . . . . $ 263,184 $ 81,509 $ 196,056 $ 163,928
Total assets. . . . . . . . . . . . . . . . . . . . 2,899,914 959,613 2,257,737 770,974
Current liabilities . . . . . . . . . . . . . . . . 1,967,344 588,577 1,671,448 226,674
Total liabilities . . . . . . . . . . . . . . . . . 2,292,344 608,557 2,346,448 226,674

Stockholders' equity (deficit). . . . . . . . . . . 607,570 (178,944) (88,711) 544,300
Working capital (deficit) . . . . . . . . . . . . . (1,704,160) (507,069) (1,475,392) (62,746)

</TABLE>

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RISK FACTORS

AN INVESTMENT IN THE COMPANY INVOLVES CERTAIN RISKS. PROSPECTIVE INVESTORS
SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS TOGETHER WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION.

DEVELOPMENT STAGE COMPANY. Since inception, the Company has been engaged
almost exclusively in organizational and research and development activities,
and has only recently begun product commercialization. Accordingly, as a
development stage company, the Company has a limited operating history upon
which an evaluation of the Company's prospects can be made. Consequently, the
likelihood of success must be considered in view of all of the risks, expenses
and delays inherent in the establishment of a new business, including, but not
limited to, expenses and delays of commencing a new business, slower than
forecasted manufacturing and marketing activities, the uncertainty of market
assimilation of the Company's products and other unforeseen factors.
Furthermore, there can be no assurance that the Company's proposed business as
described herein will prove successful or that the Company will ever be able to
operate profitably.

LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES. The Company was
formed in June 1987 and has not generated significant revenues to date. As of
June 30, 1997, the Company had an accumulated deficit of $13,010,022, funded by
paid in capital. For the fiscal years ended June 30, 1997 and 1996, the Company
had operating losses of $2,112,843 and $2,828,250, respectively, resulting
principally from costs incurred in research and development efforts and other
costs of operations. The Company expects that operating losses will continue
until such time as product sales generate sufficient revenues to fund its
continuing operations, as to which there can be no assurance.

INDEPENDENT ACCOUNTANTS' REPORT; GOING CONCERN QUALIFICATION. The report
from the Company's independent accountants includes an explanatory paragraph
which describes substantial doubt concerning the ability of the Company to
continue as a going concern, without continuing additional contributions to
capital. The Company may incur losses for the foreseeable future due to the
significant costs associated with manufacturing, marketing and distributing its
CTI System and TMI System (hereinafter sometimes collectively referred to as the
"Systems" and individually referred to as a "System") and due to continual
research and development activities which will be necessary to develop
applications for the Company's thermal imaging technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements - Report of Independent Accountants."

UNCERTAINTIES CONCERNING FUTURE PROFITABILITY. The Company's ability to
achieve profitability will depend, in part, on its ability to successfully
develop clinical applications and obtain regulatory approvals for its products
and to develop the capacity to manufacture and market such products on a wide
scale. There is no assurance that the Company will be able to successfully make
the transition from research and development to manufacturing and selling
commercial thermal imaging products on a broad basis. While attempting to make
this transition, the Company will be subject to all risks inherent in a growing
venture, including the need to produce reliable and effective products, develop
marketing expertise and enlarge its sales force. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require
substantial additional funds for its research and development programs,
preclinical and clinical testing, development of its sales and distribution
efforts, operating expenses, regulatory processes and manufacturing and
marketing programs. The Company's capital requirements will depend on numerous
factors, including the progress of its research and development programs;
results of preclinical and clinical testing; the time and cost involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights; the economic
impact of competing technological and market developments; developments and
changes in the Company's existing research, licensing and other relationships;
and the terms of any new collaborative, licensing and other arrangements that
the Company may establish. The Company believes that its assets and
contributions from affiliates will be sufficient to meet its short-term
operating expenses and capital expenditures for a limited time, but the Company
will need to raise additional capital to meet its needs for the next 12 months.

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<PAGE>

In order to meet its expected capital needs, the Company executed the
Investment Agreement with Bristol Asset Management, L.L.C. ("Bristol"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Subject to certain
conditions, the Company may require Bristol to purchase up to $7,000,000
worth of Common Stock during the three year term of the Investment Agreement.
Certain conditions precedent must be satisfied or exist in order to trigger
Bristol's obligation to purchase shares, including, but not limited to, the
ability to engage in unrestrained trading of the Common Stock on the
principal exchange on which the shares are traded, and the registration for
resale of the purchased Common Stock under the Exchange Act. If the Company
fails to maintain reporting status or is delisted from the principal exchange
on which the Common Stock is traded, Bristol shall have not have an
obligation to contribute any funds to the Company. In addition, if Bristol
is deemed to be the beneficial owner of 4.9 percent of the Company's Common
Stock, Bristol unilaterally may elect not to purchase the Common Stock so
requested. For these purposes, all Common Stock beneficially owned by
Bristol, whether or not purchased under the terms of the Investment
Agreement, shall count towards the ownership limitation. As a result of
these conditions, it is possible that Bristol's total investment under the
Investment Agreement, if any, could be limited to an aggregate cash
contribution well below the $7,000,000 commitment. If Bristol only purchases
stock under the Investment Agreement, Bristol should make an investment of
about $2.2 Million before the 4.9 percent limitation would apply if the
current market price of free trading Common Stock remains constant. The
company has no access to the Financial Statements of Bristol, a privately
owned company and relies upon Ambient Capital, its financial adviser, to
attest for Bristol's ability to perform. See "Principal Stockholders -
Bristol Asset Management, L.L.C. Investment Agreement."

Other than Bristol and the plan of Ambient Capital Group, Inc. to solicit
financing after this registration statement becomes effective, there are no
other known sources of liquidity. The Company's cash requirements may vary
materially from those now forecasted due to potential future acquisitions, the
progress of research and development programs, results of clinical testing,
relationships with strategic partners, if any, competitive and technological
advances, decisions of the FDA and foreign regulatory processes and other
factors. There can be no assurance, however, that additional capital or
financing will be available when needed, or if available, will be available on
acceptable terms. Insufficient funds may prevent the Company from implementing
its business strategy or may require the Company to delay, scale back or
eliminate certain of its research and product development programs, including
the FDA clinical trials currently being conducted by TMI, or to license to third
parties the rights to commercialize products or technologies that the Company
would otherwise seek to develop on its own.

SECURITIES LAWS ISSUES. Within the last three years of the date of this
Prospectus, the Company has raised working capital by means of the sale of its
securities through various private offerings thought to be exempt from the
registration requirements of the Securities Act or various applicable state
securities laws. Some of those sales were for services rendered and some were
to persons who were not provided with prepared offering materials and who did
not sign detailed subscription agreements supplying investor information,
including states of the sales, although management believes the persons were
qualified accredited investors or otherwise qualified. In the event that any of
the exemptions from registration with respect to the sales of such securities
under the Securities Act and applicable state securities laws were not in fact
available, the Company may face exposure to claims by federal and state
regulators for any such violations. In addition, if any purchaser of the
Company's securities were to prevail in a suit resulting from a violation of the
Securities Act or applicable state securities laws with respect to the
unavailability of such exemption, the Company could be liable to return the
amount paid for such securities with interest thereon, less the amount of any
income received thereon, upon tender of such securities, or for damages if the
purchaser no longer owns the securities. As of the date of this Prospectus,
management is not aware of any alleged specific violation or the likelihood of
any claim. There can be no assurance that litigation asserting such claims will
not be initiated, or that the Company would prevail in any such litigation.

PREEMPTIVE RIGHTS ISSUES. Pursuant to Title 7, Chapter 79 of the Nevada
Revised Statutes, stockholders of corporations organized before October 1, 1991,
with certain limited exceptions, have preemptive rights to acquire unissued
shares, treasury shares or securities convertible into such shares, except to
the extent limited or denied by the corporation's articles of incorporation
or by statute. The Company was incorporated on June 10, 1987, and prior to
March 1998, its Articles of Incorporation did not provide for any limitation
with respect to preemptive rights. In the various offerings of its
securities, the Company did not offer to the existing stockholders preemptive
rights to acquire any of the securities so offered. If stockholders were to
make claims for the failure by the Company to offer the preemptive rights to
which they were entitled, and the prior sale were not excepted, the Company
may be required to sell shares at a price lower than the current market price
of shares to match a prior sale price and enable a shareholder to maintain
its ownership percentage, or possibly other remedies. As of the date of this

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<PAGE>

Prospectus, management is not aware of any stockholder who intends to make any
claim with respect to the failure by the Company to offer any such preemptive
rights. There can be no assurance that litigation asserting such claims will
not be initiated, or that the Company would prevail in any such litigation. See
"Description of Securities - Preemptive Rights."

CLAIMS INVOLVING STOCKHOLDERS. The Company has initiated a suit in Nevada
to recover shares issued and damages from a former director for failure of
consideration. During the year ended June 30, 1994, the Company issued
1,000,000 shares of the Common Stock to a former director of the Company based
upon the director's representation that he would arrange large-scale financing
and capital by certain proposed contributors. During the year ended June 30,
1997, actions were taken to cancel the shares of the Common Stock because the
Company contends that the issuance was conditional upon performance by the
former director to consummate the financing. The Company recently learned that
a lender to the former director asserts a pledge of 500,000 shares of the Common
Stock as collateral for a loan. The 500,000 pledged shares of the Common Stock
issued to the director are included as issued and outstanding shares in the
accompanying Consolidated Financial Statements at June 30, 1997 and 1996. See
"Business - Litigation."

PAST DUE ACCOUNTS. The Company is involved in discussions with its primary
systems development vendor regarding past due accounts. TRW, an Ohio
corporation, is performing software development and strategic integration and
management services regarding the testing, development and deployment of the
Systems. The Company has become delinquent in the payment of costs and fees
under contracts with TRW (see Note 6 to the Consolidated Financial Statements
that are included elsewhere in this Prospectus) and, accordingly, TRW, although
not having filed formal legal actions, has threatened the Company that it will
be withholding delivery of source codes of developed software if the past due
amounts are not paid. The payable to TRW at one time had been as high as
$897,762, but as of May 7, 1998, the outstanding account balance was
approximately $440,438. If TRW carries through with its threat and withholds
the delivery of the source codes or other key deliverables, the TMI operations
would be shut down, or severely restricted from analyzing clinical data. See
"Business - Litigation."

The Company also owes amounts for legal fees to its primary legal counsel,
Looper, Reed, Mark & McGraw, Incorporated (the "Attorneys"), and two other
litigation firms for a total outstanding balance of approximately $370,000. The
Company has agreed with the Attorneys on an installment payment plan for
reducing the payable and is not in default of that agreement. In order to
provide security for the amounts owed, the Company has executed pledge
agreements and mutual releases granting the Attorneys a security interest in the
common stock of TMI owned by the Company and in the intellectual property of
both the Company and TMI. See "Business - Litigation." The Company has made
periodic payments to TRW and to all three law firms, and management believes
that the Company will continue to do so.

NEW PRODUCT DEVELOPMENT AND INTEGRATION; TECHNOLOGICAL CHANGE. Upon first
introduction, many physicians may equate the Systems with the predecessor
technology of "thermography," an analog infra-red camera system without the
Company's computer algorithm analysis using computed thermal data gathered by
high quality digital thermal

10
<PAGE>

imaging cameras, and educating physicians that the Systems are new technology
may take more time than anticipated by the management. The market for the
Systems is characterized by rapid technological advances, changes in customer
requirements and frequent new product introductions and enhancements. The
Company's future success will depend upon its ability to enhance and integrate
its current product line, to complete products currently under development, to
develop and introduce new products that keep pace with technological
developments, and to respond to evolving customer requirements. Any failure by
the Company to anticipate or respond adequately to technological developments by
its competitors or to changes in customer requirements, or any significant
delays in product integration, development or introduction could result in a
loss of competitiveness or revenues. Timeliness of delivery of either a System
when ordered or services for a System delivered is of critical importance to
certain customers, and the Company's failure to successfully develop and ship
such products in a timely manner could result in cancellation of customer orders
which would have a material adverse effect on the Company's business and results
of operations. TMI has no assurance that it can finance its development,
marketing, or production costs. In an effort to raise the needed capital, the
Company has executed the Investment Agreement with Bristol Asset Management,
L.L.C. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." At the date of this
Prospectus there is no known financing source for TMI, so the Company must fund
or finance the balance of the clinical trials and any subsequent development,
operating costs, marketing and production costs until TMI develops its business
and either arranges financing or is profitable. All risk factors set out in
this Prospectus for the Company also apply to the risks of the Company's
investment in TMI. There can be no assurance that the Company will be
successful in completing its product integration efforts or in developing and
marketing new products or product enhancements on a timely or cost-effective
basis, and such failure could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -
Products."

DEPENDENCE ON THE CTI SYSTEM AND THE TMI SYSTEM; UNCERTAINTY OF MARKET
ACCEPTANCE. The Company's success is dependent on the development and market
acceptance of its CTI System and the TMI System. All of the Company's revenues
will be derived from the placement or sale of the Systems for the global health
care market. The market for the Systems is still relatively undeveloped and may
not experience material expansion in the near future as planned by management.
In the event that the Company's market does not develop as anticipated, the
Company's business, financial condition and results of operations would be
adversely effected. The rate of deploying the TMI System in the U.S. will
depend upon the degree to which clinics and physicians accept, after PMA
approval, the TMI System as complementary to mammography to detect breast cancer
(the only claim authorized for ongoing clinical trials) or as an independent
examination technology, due to the worldwide existence of mammography equipment.
TMI management believes the TMI System results will be accepted by the medical
community.

The commercial success of the Systems will depend upon their acceptance by
the medical community as useful and cost-effective. There can be no assurance
that the Company can market the Systems or that the Company will introduce new
products that achieve significant market acceptance in the future. Moreover,
when the Systems are being marketed for sale or use, new product introductions
or enhancements by the Company's competitors or the use of other technologies
could cause a decline in sales or loss of market acceptance of the Systems. In
addition, third-party payors in the U.S., such as governmental programs and
private insurance plans, can indirectly affect the pricing or the relative
attractiveness of the Systems by regulating the maximum amount of reimbursement
that they will provide for the taking, storing and interpretation of medical
images. A decrease in the reimbursement amounts for imaging procedures may
decrease the amount which physicians, clinics and hospitals are able to charge
patients for such services. In management's view, the acceptability and
adaptability of the Systems could be enhanced by such a decrease because the
Systems are less costly to use and deploy than magnetic resonance imaging
("MRI") or computed tomography ("CAT") scan. Third-party payors may require FDA
approval before authorizing any payment codes solely for use of either System,
although physicians might still use the Systems as a diagnostic tool even
without separate payment codes. In the event that the Systems and products
under development do not achieve market acceptance, the Company's business,
financial condition and results of operations could be adversely effected. See
"Business - Products" and "- Third-Party Reimbursement."

TMI DEPENDENCE ON THE COMPANY. TMI is an 80 percent owned subsidiary of
the Company that has developed the TMI System exclusively using contributions of
capital from the Company. The efficacy of the TMI System is currently subject
to confirmation in FDA clinical trials as a tool complementary to mammography.
TMI has no source of revenue, other than contributions to its capital made by
the Company, until the clinical trials are successfully concluded and TMI or CTI
then is able to market for sale or use the TMI System. TMI has no assurance

11
<PAGE>

that it can finance its development, marketing, or production costs. The
Company must fund or finance the balance of the clinical trials and any
subsequent development, operating, marketing and production costs until TMI
develops its business and then is capable of financing its operations. The
management believes that the Investment Agreement should provide the Company
with a sufficient amount of capital to fund the completion of FDA clinical
trials on the TMI System after this registration statement becomes effective, a
prerequisite to the obligations thereunder to make contributions to the Company.
All risk factors set forth in this Prospectus for the Company also apply to the
risk of the Company's investment in TMI.

RISKS APPLICABLE TO FOREIGN SALES. Sales of the Company's products to
foreign markets may account for a substantial portion of the Company's
forecasted revenues. Foreign sales expose the Company to certain risks,
including the difficulty and expense of maintaining foreign sales distribution
channels, barriers to trade, potential fluctuations in foreign currency exchange
rates, political and economic instability, availability of suitable export
financing, accounts receivable collections, tariff regulations, quotas, shipping
delays, foreign taxes, export licensing requirements and other United States and
foreign regulations that may apply to the export of medical equipment. The
regulation of medical devices worldwide also continues to develop, and there can
be no assurance that new laws or regulations will not have an adverse effect on
the Company. In addition, the Company may experience additional difficulties in
providing prompt and cost effective service of its thermal imaging systems in
foreign countries. The Company does not carry insurance against such risks.
The occurrence of any one or more of these events may individually or in the
aggregate have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Business - Risks of Doing Business in
the PRC and Other Foreign Countries."

DEPENDENCE ON CONTRACTS WITH THIRD PARTIES. The Company does not
manufacture the hardware components of its Systems but rather purchases these
components from third parties in accordance with specific design specifications.
Although there is more than one manufacturer capable of manufacturing these
components, the failure of any one manufacturer to deliver its components in a
timely manner could result in a loss of business for the Company and further
result in time delays for installation of the Systems. The anticipated cost of
production could increase if the Company is required to seek and make
arrangements for different manufacturers to produce the components as a
precaution. Moreover, even though the Company may seek a remedy from a
manufacturer, any thermal imaging component manufactured by such third party may
be defective, resulting in a type of claim for damages against the Company for
which the Company may not have the right to claim from the manufacturer.

NEED FOR FDA AND FOREIGN GOVERNMENTAL APPROVALS; GOVERNMENT REGULATION.
The Company's products may be regulated as medical devices by the FDA under the
Federal Food, Drug and Cosmetic Act (the "FDC Act") and the regulations
promulgated thereunder. As such, these devices require compliance with either
FDC Act Section 510(k) under which the Company currently relies, or acceptance
of a premarket approval application (herein referred to as "PMA") by the FDA
prior to commercialization. Satisfaction of applicable regulatory requirements
may take several years and varies substantially based upon the type, complexity
and novelty of such devices, as well as the clinical procedure. Although
filings and governmental approvals may be required in some foreign countries
before the devices can be marketed, other countries may require no approval.
There can be no assurance that further clinical trials of the Systems or of any
future products will be successfully completed or, if they are completed, that
any requisite FDA or foreign governmental clearances or approvals will be
obtained. FDA or other governmental clearances or approvals of products
developed by the Company in the future may require substantial filing fees, or
costs to conduct clinical trials, which could limit the number of applications
sought by the Company and may entail limitations on the indicated uses for which
such products may be marketed. In addition, approved or cleared products may be
subject to additional testing and surveillance programs required by the FDA and
other regulatory agencies, and product approvals and clearances could be
withdrawn for failure to comply with regulatory standards or by the occurrence
of unforeseen problems following initial marketing. The Company is also
required to adhere to applicable requirements for current good manufacturing
practices and other health requirements, to engage in extensive record keeping
and reporting, and to comply with the FDA's product labeling, promotional and
advertising requirements. See "Business - Government Regulation."

The Company does not have, and has not applied for, specific FDA approval
for the CTI System. The Company has concluded that the CTI System as
configured, excluding any diagnostic or analytical software interpretations of
the information read from other examinations, can be marketed and sold in the
United States without any further FDA approval pursuant to an exemption under
Section 510(k) of the FCA Act. Numerous thermal imaging

12
<PAGE>

cameras, using digital examination output, have been submitted to the FDA for
510(k) exemption, which results in classification by the FDA as being equipment
"substantially equivalent" to other equipment previously submitted to the FDA
and legally marketed in the U.S. The Company intends to use thermal imaging
camera devices in connection with its computer software programs that would
qualify under such 510(k) exemption. As a result, management believes no FDA
approval is required in order for health care providers or radiologist to use
the CTI System, which would consist of the camera and software to compute the
digital data collected from the thermal image, the QTA Lab, and the digital
recording cards, if desired by the health care provider. If the CTI System is
marketed under the 510(k) exemption, any health care provider could only rely
upon non-specific payment codes for billing purposes in connection with
third-party reimbursement, which could limit the incentive for health care
providers to use the CTI System. Nevertheless, as long as the Company uses a
thermal imaging collection device that is substantially equivalent equipment
that has been cleared for 510(k) exemption by the FDA, CTI may sell the CTI
System in the U.S. CTI could apply for a particular 510(k) exemption, or even
for a PMA for a specific medical use of the CTI System, in which case the 510(k)
exemption process may take a few months. Any PMA application will require
substantial cost and many months of clinical trials and independent examinations
to confirm any specific medical claim under which the CTI System may be sold.
TMI is conducting clinical trials, the results of which will be submitted to the
FDA for a PMA to enable the sale of the TMI System, after completion of the
clinical trials and confirmation, as a unique process which may be sold to
health care providers under the medical claim that it is complementary to
mammography to identify and distinguish malignant from benign tumors. TMI has
been conducting clinical trials for almost one year, after completion of
pre-testing examinations and development of data required to qualify for the
PMA. See "Business - Government Regulation." Even after TMI were to complete
the PMA process and receive approval by the FDA, TMI would necessarily be
required to conduct other clinical trials further authorized by the FDA to make
any further medical efficacy claims for use of the TMI System for claiming the
efficacy from use of the TMI System independent of mammography or any other
imaging modality, which would require substantial cost and additional time for
development and conduct of pre-test and clinical trials.

DEPENDENCE UPON KEY PERSONNEL. Although the Company depends on outside
manufacturing and servicing capabilities, there are and will be acute dependence
upon certain key members of management and technical personnel. Particular
reliance will be made on David A. Packer, the President of the Company, formerly
an employee of TRW. Furthermore, a part of the Company's current marketing
emphasis is based upon opportunities in the PRC and Thailand. General Richard
V. Secord, the Company's Chief Operating Officer, has been a key person in
negotiating the Company's inroads into these markets. Moreover, Kenneth M.
Dodd, TMI's President, has been developing the TMI System configured for breast
cancer detection. Certain other key personnel will be added on an "as needed"
basis to complete the tactical management group. Because of the specialized
nature of the Company's business, the Company's ability to maintain its
competitive position will depend, in part, upon its ability to attract and
retain highly qualified people in the areas of management and technology while
maintaining relationships with leading research institutions. However, if the
Company wishes to expand its scope of product and market coverage, there can be
no assurance that the Company will be able to attract the personnel on a timely
basis to accomplish such advancements. The loss of the services of
Messrs. Packer or Dodd or General Secord, or other key individuals may adversely
affect the Company's business and prospects. At this time, the Company does not
carry key man life insurance on any of its employees. See "Business" and
"Management."

ABILITY TO MANAGE PROJECTED GROWTH. Should the Company's growth strategy
prove successful, a significant strain may be placed on the Company's customer
service and support operations, sales, administrative personnel and other
resources. The Company's ability to manage future growth, if any, effectively
will require the Company to continue to improve its operational, management and
financial systems and controls and to train, motivate and manage its employees.
In particular, if financing or equity raising efforts are successful, the
Company will be required in the near future to recruit a significant number of
technically qualified personnel to expand its direct sales force and customer
support group. As a result, the Company is subject to certain growth-related
risks, including the risk that it will be unable to retain the necessary
personnel or acquire other resources necessary to service such growth
adequately. There can be no assurance that the Company can expand this resource
as rapidly as necessary or finance the working capital needed for such
expansion. If the Company's management is unable to effectively manage future
growth, if any, the Company's business, financial condition and results of
operations could be adversely affected.

COMPETITION. Competition in some markets for the Systems may be intense.
A large number of companies offer imaging systems which may be offered as
competitive with those of the Company. Many of the Company's

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competitors are larger and more established and have substantially more
financial, technical, research and development and marketing resources than the
Company. Several large multi-national corporations offer competitive products,
such as X-ray or MRI equipment. Other large corporations have the technical and
financial ability to design and market competitive products, and some of them
have produced and marketed such products in the past. There can be no assurance
that such large potential competitors will not elect to reenter the market
competing with the Systems, which could have a material adverse effect on the
Company's ability to sell the Systems. There can be no assurance that the
Company will be able to compete successfully in the future, or that future
competition for product sales will not have a material adverse effect on the
business, financial condition and results of operations of the Company. See
"Business - Competition."

UNCERTAIN PROTECTION FOR INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS.
The Company generally does not rely solely on patent protection with respect to
its products. However, the Company does rely on a combination of copyright and
trade secret laws, employee and third-party nondisclosure agreements, and other
protective measures to protect intellectual property rights pertaining to its
products and technology. As of the date of this Prospectus, no patents have
been issued to the Company. However, TMI has filed one patent application with
respect to the TMI System, and expects to file additional patent applications in
the future. In the meantime, there can be no assurance that applicable
copyright or trade secret law or nondisclosure agreements will provide
meaningful protection of the Company's copyrights, trade secrets, know-how or
other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such copyrights, trade secrets, know-how or
other proprietary information. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. There can be no assurance that the
Company or TMI will be able to protect its intellectual property successfully.

The Systems and component technology incorporate subject matter that the
Company believes is in the public domain or that it otherwise has the right to
use. There can be no assurance that third parties will not assert patent,
copyright or other intellectual property infringement claims against the Company
with respect to the Systems or technology or other matters. There may be third
party patents, copyrights and other intellectual property relevant to the
Systems and technology which are not known to the Company. Although no third
party has asserted that the Company is infringing such third party's patent
rights, copyrights or other intellectual property, there can be no assurance
that litigation asserting such claims will not be initiated, that the Company
would prevail in any such litigation, or that the Company would be able to
obtain any necessary licenses on reasonable terms if at all. Any such claims
against the Company, with or without merit, as well as claims initiated by the
Company against third parties, can be time consuming and expensive to defend or
prosecute and to resolve. See "Business - Patents and Intellectual Property."

LICENSE WITH TMI. Upon formation of TMI, CTI entered an agreement
licensing to TMI all of its intellectual property, medical protocols, CTI System
configurations, independent contractor component trade secrets and similar
technology for the purpose of enabling TMI to proceed to develop its TMI System.
The License Agreement authorized TMI to use all of the Company's technology,
without reservation, for development of the TMI System for use for the detection
of breast cancer in North America only. The License Agreement calls for mutual
cross-license provisions by which the Company and TMI agreed to continually
license the other to use any further developments that either of them may
produce for the duration of the agreement. That License Agreement entered
June 8, 1996 has now expired by its terms, but before such expiration, the
Company and TMI entered the Stock Transfer Agreement dated January 28, 1997 by
which the Company obtained controlling interest (over 80 percent) of the
outstanding common stock of TMI and in which the parties agreed to negotiate in
good faith to enter a new license agreement to preserve the original spirit of
the original License Agreement. Thus, although the Company and TMI operate
currently in contemplation of having cross-license agreements and restrictions
on TMI only to operate in North America, there is no binding license agreement
at this time which would restrict TMI from operating outside that geographical
boundary, and there may be no contractual obligation requiring TMI to license
its TMI System technology to the Company. Although the Company has voting
control over TMI at this time to preserve its practical control of such
technology, certain events could occur, such as an event of bankruptcy or the
possible exercise of rights by any vendor in the event of collateral or
statutory materialman's lien, that could result in the loss of control by the
Company over TMI or its technology, in which case the absence of a binding
license agreement could result in the loss by the Company of the TMI System
technology. See "Business - Patents and Intellectual Property"; also see
"Business - Litigation - Past Due Accounts."

14
<PAGE>

UNCERTAINTY IN U.S. HEALTH CARE INDUSTRY. Cost containment measures
instituted by health care providers as a result of regulatory reform or
otherwise could result in greater selectivity in the allocation of capital
funds. Such selectivity could have a material adverse effect on the Company's
ability to sell the Systems and services. See "Business - Third Party
Reimbursement."

PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The manufacture and
sale of medical image information systems entail significant risk of product
liability claims. The Company believes it needs no product liability insurance
now because its operating Systems are either in development or operated by TMI,
which carries insurance for its clinical trials. There can be no assurance that
the Company can obtain insurance coverage with limits adequate to protect the
Company from any liabilities it might incur in connection with the sale of the
Systems. The Company anticipates obtaining product liability coverage as
products are commercialized. Such insurance is expensive and in the future may
not be available on acceptable terms, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes thermal
imaging is a completely safe procedure, without harmful radiation produced with
X-rays, but the Company could still be required to defend claims as a defendant
for a claim for failure to detect a malady, even though a CTI System only is a
tool and does not diagnose, requiring devotion of needed capital toward defense
costs. Company liability should be limited only to any foreseeable damages
proximately resulting from improper operation of a CTI System, but lawsuits
without insurance protection can occur.

NO COMMITMENT TO PURCHASE SHARES. No entity or individual, including any
selling agent, the Company, its officers or its directors, has any obligation to
purchase any of the shares of the Common Stock to be resold or underlying
Compensation Warrants, Resale Warrants, or Options and being registered hereby.
Any of the shares of the Common Stock which may be offered for sale by the
Selling Stockholders will be offered through the secondary market, and
consequently no assurance can be given that any such shares will be sold or that
the Selling Stockholders or subsequent purchasers will be able to sell their
shares of the Common Stock for the same price as they were purchased. Pursuant
to the terms of the Investment Agreement, the Company may require Bristol Asset
Management, L.L.C. ("Bristol") to purchase Newly Issued Shares. However, the
number of Newly Issued Shares which the Company may require Bristol to purchase
is subject to various monthly and aggregate limitations. Moreover, Bristol is
not required to purchase any Newly Issued Shares until the Company has fulfilled
certain conditions precedent set forth in the Investment Agreement.

CONFLICTS OF INTEREST. Prior to the Offering, certain officers, directors
and related parties have engaged in business transactions with the Company.
Primarily, the Company has sold shares of the Common Stock for cash and in
exchange for services rendered to the Company by Thermal Imaging, Inc. (herein
sometimes referred to as "TII"), a company controlled by affiliates (the
"Affiliates") of David B. Johnston, the Chairman of the Board, and to PDH, Ltd.,
a company controlled by Doug Holt, a consultant to the Company, who has received
shares of the Common Stock in exchange for services rendered and cash
contributed to the Company. All sales of shares of the Common Stock to these
Affiliates of the Company, as shares restricted pursuant to Rule 144 promulgated
under the Securities Act ("Rule 144"), were priced at a value of about 50
percent of the then current trading price of free trading shares. Management
believes that the terms of these transactions were as favorable to the Company
as those which could have been obtained from unaffiliated third parties under
similar circumstances. Most material affiliated transactions consisted of
purchases of the Common Stock by Affiliates of officers and directors at prices
below the then current trading prices of free trading shares of the Common
Stock. All future transactions between the Company and its Affiliates will be
on terms no less favorable than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of the
Board of Directors of the Company. See "Management - Certain Transactions."

POSSIBLE CONFLICTS OF INTEREST. Many of the officers and directors of the
Company are also officers and/or directors of other companies, some of which are
Affiliates of the Company. David B. Johnston is the Chairman of the Board and
Chief Executive Officer of the Company and also is a director and represents a
controlling shareholder (by attribution among family members) of TII, owning
approximately 25 percent of the outstanding shares of the Common Stock of the
Company. Potential conflicts could arise in the future when the Company prices
restricted shares to be sold to TII or any Affiliate, and some decisions to be
made by Mr. Johnston as a director on behalf of the Company could be in conflict
with the interest of a Selling Stockholder. General Richard V. Secord is an
officer and director of the Company and is also a director of TMI and the Chief
Operating Officer without additional compensation of

15
<PAGE>

TriSun/CTI Asia, Ltd., a no-asset company formed in Cyprus to purchase the
Systems for installation in hospitals in the PRC. Each of the foregoing
companies can be construed as affiliated with the Company or a company with
which the Company has material contracts. There are numerous possibilities of
conflicts of interest which could arise based upon the common control of the
Company and the roles of Messrs. Johnston and Dodd and General Secord on behalf
of the Company and their respective roles in management of the Affiliates.
Although each of the officers and directors of the Company will make every
effort to work in the best interest of the Company, there is no assurance that
if a conflict arises it will be resolved in favor of the Company.

RETENTION OF CONTROL. The Company's officers, directors and principal
stockholders beneficially will own approximately 38.7 percent of the outstanding
shares of the Common Stock at the completion of the Offering, without taking
into account any of the Newly Issued Shares or any shares of the Common Stock
underlying the Compensation Warrants. As a result, the officers, directors and
principal stockholders of the Company will have the ability to control the
day-to-day affairs and the fundamental policies of the Company. Voting together
such stockholders, including the officers and directors of the Company, could
possibly block any major corporate transactions, such as a merger or sale of
substantially all of the Company's assets, that under Nevada law requires the
affirmative vote of holders of a majority of the outstanding shares of the
Common Stock of the Company. See "Management" and "Principal Stockholders."

ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the Company.
In addition, the Board of Directors has the authority to issue up to 3,000,000
shares of the Preferred Stock in one or more series and to fix the preferences,
rights and limitations of any such series without stockholder approval. The
ability to issue shares of the Preferred Stock could have the effect of
discouraging unsolicited acquisition proposals or making it more difficult for a
third party to gain control of the Company, or otherwise could adversely affect
the market price of the Common Stock. See "Description of Securities." In
addition, TMI's Articles of Incorporation likewise provide for the issuance of
preferred shares which could have anti-takeover implications, but the Company
maintains an 80 percent controlling interest to change those terms if the
Company desires to do so.

DIVIDEND POLICY. The Company has not paid or declared any cash dividends
with respect to the Common Stock, nor does it anticipate any such payments or
declarations in the foreseeable future. Any future dividends will be declared
at the discretion of the Board of Directors and will depend, among other things,
on the Company's earnings, if any, its financial requirements for future
operations and growth, and such other factors as the Company may then deem
appropriate. Investors should not rely on the receipt of dividends in the near
future or at any time in the future when evaluating the merits of an investment
in the shares of the Common Stock. See "Price Range of Common Stock and
Dividend Policy."

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following the completion of the Offering could
have an adverse effect on the market price of the Common Stock. As of March 31,
1998, there were approximately 47,162,653 shares of the Common Stock issued and
outstanding. Upon completion of the Offering, all of the shares of the Common
Stock being registered hereby and approximately 25,457,077 shares of the Common
Stock held by current stockholders of the Company will be immediately eligible
for public sale without restrictions, except for shares held by Affiliates
(those controlling or controlled by or under common control with the Company and
generally deemed to include officers and directors) of the Company. The
remaining approximately 13,824,265 shares of the Common Stock are "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act. Approximately 1,393,300 shares of the Company's currently
outstanding restricted securities are eligible for sale under Rule 144(k). No
prediction can be made as to the effect, if any, that future sales of additional
shares of the Common Stock or the availability of such shares for sale under
Rule 144, other applicable exemptions or otherwise will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of the Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices of the Common
Stock. See "Principal Stockholders."

IMPACT ON MARKET OF DEBENTURE CONVERSION OR WARRANT OR OPTION EXERCISE. In
the event of the exercise of a substantial number of the outstanding warrants
and options of the Company within a reasonably short period of time after the
right to convert or exercise commences, the resulting increase in the amount of
the Common Stock in the trading market could substantially affect the market
price of the Common Stock. See "Description of Securities."

16
<PAGE>

NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF THE COMMON
STOCK. Although the Common Stock is quoted on the OTC Bulletin Board, there can
be no assurance that an active public market for the Common Stock will be
sustained after the Offering. The trading price of the Common Stock could be
subject to wide fluctuations in response to quarter to quarter variations in
operating results, announcements of innovations or new products by the Company
or its competitors, and other events or factors. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations which
affects the market price of securities of publicly traded companies and which
have often been unrelated to the operating performance of these companies.
Broad market fluctuations may adversely affect the market price of the Common
Stock. See "Price Range of Common Stock and Dividend Policy" and "Description
of Securities."

"PENNY STOCK" ISSUES. The shares of the Common Stock are "penny stocks" as
defined in the Exchange Act, which are traded in the over-the-counter market on
the OTC Bulletin Board. As a result, an investor may find it more difficult to
dispose of or obtain accurate quotations as to the price of the shares of the
Common Stock being registered hereby. In addition, the "penny stock" rules
adopted by the Commission under the Exchange Act subject the sale of the shares
of the Common Stock to certain regulations which impose sales practice
requirements on broker-dealers. For example, broker-dealers selling such
securities must, prior to effecting the transaction, provide their customers
with a document which discloses the risks of investing in such securities.
Furthermore, if the person purchasing the securities is someone other than an
accredited investor or an established customer of the broker-dealer, the
broker-dealer must also approve the potential customer's account by obtaining
information concerning the customer's financial situation, investment experience
and investment objectives. The broker-dealer must also make a determination
whether the transaction is suitable for the customer and whether the customer
has sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the Common Stock.

If the Company can meet the listing requirements in the future, the Company
intends to apply to include the shares of the Common Stock being registered
hereby for quotation on The Nasdaq SmallCap Market operated by the NASD. The
Common Stock has not yet been approved for quotation on The Nasdaq SmallCap
Market and there can be no assurance that an active trading market will develop
or if such market is developed that it will be sustained. The NASD recently
approved changes to the standards for companies to become listed on The Nasdaq
SmallCap Market, including, without limitation, new corporate governance
standards, a new requirement that companies seeking listing have net tangible
assets of $2,000,000, market capitalization of $35,000,000 or net income of
$500,000 and other qualitative requirements. If the Company is unable to
satisfy the requirements for quotation on The Nasdaq SmallCap Market, trading in
the Common Stock being registered hereby would continue to be conducted on the
OTC Bulletin Board. Even if the shares of the Common Stock are listed for
quotation on The Nasdaq SmallCap Market, the market price of the shares must
remain above $5.00 per share or else such shares will be subject to the "penny
stock" rules of the Commission discussed above. If the market price of such
shares falls below $1.00 per share, such shares will be delisted from The Nasdaq
SmallCap Market and will once again be quoted on the OTC Bulletin Board.

In addition to the recent changes in The Nasdaq SmallCap Market listing
requirements discussed above, NASD has recently announced changes in the
requirements for continued quotation on the OTC Bulletin Board. Essentially the
new rules require OTC Bulletin Board companies to file quarterly statements with
the Commission or appropriate banking or insurance regulators. If companies
currently quoted on the OTC Bulletin Board do not comply with the new NASD
rules, their shares will only be quoted in the less automated "Pink Sheets," a
system run by the National Quotation Bureau, Inc. As stated in this Prospectus,
the Company is seeking registration under the Exchange Act and consequently will
be obligated to make all filings required under the Exchange Act. If for some
reason the Company should fail in its registration efforts described in this
Prospectus or not file its required reports pursuant to the Exchange Act, it is
possible that the Company would no longer be eligible for quotation on the OTC
Bulletin Board and would be relegated to the "Pink Sheets." There can be no
assurance that an active trading market will develop for the shares of the
Common Stock in the "Pink Sheets" or if such market is developed that it will be
sustained.

Moreover, states impose restrictions on transferring penny stocks "that may
impair the ability of any investor to sell the Common Stock. For example, Utah
Securities Commission prohibits brokers from soliciting buyers for such
securities, which makes selling more difficult.

17
<PAGE>

NEED TO MAINTAIN A CURRENT PROSPECTUS. The Company must maintain a current
prospectus in order for the Selling Stockholders to sell the shares of the
Common Stock to which this Prospectus relates. In the event that the Company is
unable to maintain a current prospectus due to lack of sufficient financial
resources or for other reasons, the Selling Stockholders may be unable to resell
their shares of the Common Stock in any public market.

SHARES RESERVED FOR ISSUANCE. The Company has 14,217,698 shares of the
Common Stock reserved for issuance upon the exercise of the Warrants and the
options. These convertible securities are convertible or exercisable at prices
that range from fixed prices of $0.60 to $5.00 per share and variable prices
depending on market price of the Common Stock and expire on various dates
extending to June 12, 2005. There can be no assurance that any of these
securities will be sold or converted or exercised, or that the Company will
receive any proceeds from the conversion or the exercise thereof. The exercise
or conversion of these securities, and the resale of the underlying shares of
the Common Stock, could have a dilutive effect on the prevailing market price of
the Common Stock. See "Dilution," "Management - Stock Options" and "Description
of Securities."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. Management believes that
this Prospectus contains forward-looking statements, including statements
regarding, among other items, the Company's future plans and growth strategies
and anticipated trends in the industry in which the Company operates. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will in fact transpire or prove to be
accurate. The inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.

18
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is traded on the OTC Bulletin Board under the symbol
"COII." The following table sets forth the range of high and low closing bid
prices for the Common Stock for the periods indicated as reported by the NASD.
These prices represent inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions. There can be no assurance that an active trading market in the
shares of the Common Stock will be sustained.

Common Stock
Bid Price
---------
Low High
Calendar Year 1995 --- ----
------------------
<S> <C> <C>
Third Quarter $1.19 $2.28
Fourth Quarter $0.88 $2.38

Calendar Year 1996 Low High
------------------ --- ----
First Quarter $1.00 $2.19
Second Quarter $1.06 $1.56
Third Quarter $0.94 $2.84
Fourth Quarter $1.19 $2.13

Calendar Year 1997 Low High
------------------ --- ----
First Quarter $1.00 $2.00
Second Quarter $0.50 $1.25
Third Quarter $0.56 $1.69
Fourth Quarter $0.52 $1.06

Calendar Year 1998 Low High
------------------ --- ----
First Quarter $0.47 $0.81

</TABLE>

As of December 31, 1997, 42,330,362 shares of the Common Stock were issued
and outstanding. The Company believes that the Common Stock is held of record
and beneficially by approximately 4,800 persons on that date. Additional
issuances for contributions through recent private offerings resulted in
approximately 47,162,653 shares of Common Stock outstanding on March 31, 1998.

The Company has not paid or declared any dividends with respect to the
Common Stock, nor does it anticipate paying any cash dividends or other
distributions on the Common Stock in the foreseeable future. Any future
dividends will be declared at the discretion of the Board of Directors and will
depend, among other things, on the Company's earnings, if any, its financial
requirements for future operations and growth and such other facts as the
Company may then deem appropriate.

19
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at June
30, 1997 and December 31, 1997. This table should be read in conjunction
with the Company's Financial Statements and Notes thereto that are included
elsewhere in this Prospectus.

June 30, 1997 (1) December 31, 1997 (1)
----------------- ---------------------
<S> <C> <C>
Stockholders' deficit:
Common Stock, $0.001 par value, 100,000,000 shares authorized;
35,737,649 and 42,137,598 shares issued and outstanding
on June 30, 1997 and December 31, 1997, respectively. . . . . . . . . . $ 35,738 $ 42,138
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 13,410,573 15,916,370
Subscription receivable . . . . . . . . . . . . . . . . . . . . . . . . (525,000) (525,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (13,010,022) (14,825,938)
----------------- ------------------

Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . $ (88,711) $ (607,570)
----------------- ------------------
----------------- ------------------

</TABLE>

(1) Does not give effect to the issuance of (i) 18,229,167 shares of the Common
Stock upon the purchase of the Newly Issued Shares; (ii) 2,552,083 shares
of the Common Stock upon exercise of the Compensation Warrants; (iii)
3,840,615 shares of the Common Stock upon exercise of the Resale Warrants;
and (iv) 7,825,000 shares of the Common Stock upon exercise of the Options.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the combined financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto contained in this
Prospectus. Statements contained in this "Management's Discussion and Analysis
of Financial Conditions and Results of Operations," which are not historical
facts may be forward-looking statements. Such information involves risks and
uncertainties, including those created by general market conditions, competition
and the possibility that events may occur which could limit the ability of the
Company to maintain or improve its operating results or execute its primary
growth strategy. Although the Company believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and there can therefore be no assurance that the forward-looking
statements included herein will prove to be accurate. The inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Moreover, such forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof.

In October 1996, the Company initiated its relationship with TRW Systems
Integration Group (some subsequent contracts have been entered with other
affiliates of the consolidated group, any of which companies may be referred to
in this Prospectus as "TRW") to design a plan for systems integration to
implement the Golden Health Telemedicine Contract and related contracts entered
by a subsidiary affiliate of the Company (TriSun/CTI Asia, Ltd.) and a company
formed by the Ministry of Public Health in the Peoples Republic of China. This
initial agreement formed the long-term relationship with TRW, which later
resulted in the execution of contracts with TRW for commercializing the CTI
System and for developing the software and data analysis systems integration for
the TMI System. The Company has deferred any further expenditures toward the
Golden Health Telemedicine Contract until the Ministry of Public Health performs
in causing the hospitals to place the Letters of Credit as provided in the
contracts, but the Company has maintained communications with representatives of
the Ministry of Public Health toward a plan for implementing those contracts.
The Asian relationships also include an agreement entered in 1996 with
Dr. Ladavan of the Orchard Hospital in Thailand for the purchase of one CTI
System for $125,000, 50 percent of its anticipated market value, setting forth
an intention to enter a joint venture for the production and marketing of CTI
Systems in Thailand. The decision of the Company to defer further development
for commencing those contracts was based primarily upon the decision of the
Company to channel all of its resources to TMI for completion of the FDA
clinical trials. The Company intends to resume its Asian relationships and to
commence that business when funds become available.

20
<PAGE>

In 1996, the Company entered a License Agreement with TMI and initiated the
development by TMI of a new configuration of the CTI System to develop the TMI
System for use in the detection of breast cancer for marketing in North
America. When TMI was incapable of financing its activities, and when TMI had
made progress through its pre-testing to obtain FDA approval to proceed for a
PMA, CTI entered the Stock Transfer Agreement in 1997 to devote a primary
portion of its funds toward the development of the TMI System and toward the
clinical trials designed to obtain a PMA. This resulted in the development of
clinical relationships with several health care providers and medical university
teaching institutions, including Provence Hospital in Washington, DC and two
Los Angeles hospitals managed by the University of Southern California Medical
Branch. The clinical trial agreements require TMI to pay for the examinations
using the TMI System as complementary medical technology with mammography.
Commencement of the clinical trials also has resulted in TMI engaging QBRI, an
independent consultant authorized by the FDA to verify clinical examination
results.

GENERAL

For inception through the most current interim period ending December 31,
1997, the Company has been involved in the research, development and production
of its thermal imaging technology products. Although still in development
stage, the Company has generated nominal revenues of $125,000, from the sale of
a system to Thailand in 1996, and $55,815, from the sale of lasercards to a
purchaser in China in 1997. The Company has relied almost entirely on the sale
of securities to fund its research and development operations. The Company has
always historically sustained losses and will continue to sustain losses from
its operations until its products achieve acceptance within the medical
community and the public. As evidenced by the financial statements of the
Company, the level of the Company's losses has been largely dictated by the
amount of capital the Company has been able to raise and the volume of costs
incurred under the research program being conducted with TRW.

RESULTS OF OPERATIONS

INTERIM PERIOD. The Company incurred a loss of $1,615,916 for the six
months ended December 31, 1997 as compared to a loss of $723,245 in fiscal year
1996. Both losses were primarily the result of research and development expenses
incurred in the development of the Company's thermal imaging systems, legal fees
incurred in the development of its business relationships in China, and expenses
related to fund raising activities. The general and administrative expenses of
the Company totaled $1,333,137 in 1997 versus $689,702 in 1996. This increase
is attributable to the Company's efforts to accelerate the research and
development activities undertaken pursuant to the TRW contract and certain
payroll-related expenses of the TMI staff. The Company's research and
development costs increased to $161,003 in 1997 from $81,455 in 1996. The
depreciation expense of the Company's equipment increased to $92,719 in 1997
from $70,826 in 1996. The Company's rent, travel expenses, accounting expenses,
and outside consulting expenses all increased significantly resulting in a jump
in general and administrative expenses of $643,435. The Company also incurred
$225,834 in legal fees in 1997 versus $157,001 in 1996. Interest expenses
increased to $123,023 in 1997 versus $11,000 in 1996 due to the subordinated
debentures being outstanding in 1997. The Company's loss was greater in 1997
than 1996, principally due to the increased volume of activity related to the
FDA trials, the hiring of an additional employee in 1997, and the inability of
the Company to generate additional capital, allowing it to incur additional
expenses under its TRW contract and payroll-related costs.

The Company funded its losses in fiscal year 1997 through the sale of its
stock for cash in the amount of $250,000, the receipt of advances from Thermal
Imaging, Inc. ("TII"), an affiliate of Mr. Johnston, in the amount of $1,363,630
in exchange for the issuance of additional shares of Common Stock, and the
issuance of Common Stock for services provided to the Company and valued at
$319,000. In addition, the Company repaid $355,500 of outstanding debt
obligations relating to debentures as a result of the conversion of such amount
into shares of Common Stock by the debenture holders. The Company funded its
losses in fiscal year 1996 through the issuance of $500,000 of convertible
debentures and received advances from TII in the approximate amount of $317,058.
The advances from TII were repaid by the issuance of Common Stock in the later
periods of 1996. The Company incurred $651,051 in software development costs in
1997 and $236,250 in 1996, expenses which were capitalized in the Company's
balance sheets.

FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996. The Company incurred a
loss of $2,112,843 for the

21
<PAGE>

fiscal year ended June 30, 1997 and $2,878,250 for the fiscal year ended
June 30, 1996. The reduction in losses was largely attributable to the fact
that fewer shares of Common Stock were issued in consideration for services;
$405,498 in 1997 and $893,152 in 1996. In 1996, the Company also settled
certain stockholder disputes against the Company by issuing Common Stock in
the amount of $508,280. These issuances were made in connection with the
Assumption of Liabilities Agreement executed by the Company and Thermal
Imaging, Inc., an affliate of Mr. Johnston.

Research expenses also increased substantially in fiscal year 1997 due
to the research and development relationship entered into by the Company with
TRW. As a result, research and development expenses increased from $1,811 in
1996 to $359,873 in 1997.

The Company funded its losses in fiscal year 1997 through the issuance of
Common Stock in exchange for cash contributions in the aggregate amount of
$1,010,209 compared to $2,259,070 raised in 1996. In addition, outstanding debt
obligations in the amount of $64,125 and represented by certain convertible
debentures were retired through conversions into Common Stock. The Company
received revenues from the sale of lasercards to a purchaser in China in the
amount of $55,815 in 1997 and the sale of a system to Thailand in 1996 for
$125,000. Neither transaction resulted in any significant profit margins.

The Company relies upon independent contractors to perform much of its
software development, systems integration and installations. Although Mr. David
A. Packer, President of the Company hired in 1997 from TRW, and Messrs. Kenneth
M. Dodd and Bill Black, employed by TMI in 1995 from EDS, all have extensive
systems integration, systems development and installation experience, the
Company and TMI have no other employees to perform the tasks of developing and
installing the CTI System and the TMI System. Both the Company and TMI have
contracted with TRW since late 1995 for specific technical support. The costs
incurred to engage TRW have totaled approximately $2,000,000 for research,
systems development, software development and data analysis. TRW is presently
owed past due amounts for services. TRW by September 1997 completed its
software development required to enable TMI to conduct clinical trials. The
Company and TMI have slowed down additional development work with TRW until this
past due amount is substantially reduced from new Company financing. TRW is
being paid currently for its maintenance and data analysis work being performed
for TMI's clinical trials.

The report from the Company's independent accountants includes an
explanatory paragraph which describes substantial doubt concerning the ability
of the Company to continue as a going concern, without substantial additional
contributions to capital. The Company may incur losses for the foreseeable
future due to the significant costs associated with manufacturing, marketing and
distributing the CTI System and TMI System, and due to continual research and
development activities which will be necessary to develop applications for the
Company's thermal imaging technology.

The Company's ability to achieve profitability will depend, in part, on its
ability to successfully develop clinical applications and obtain regulatory
approvals for its products and to develop the capacity to manufacture and market
such products on a wide scale. There is no assurance that the Company will be
able to successfully make the transition from research and development to
manufacturing and selling commercial thermal imaging products on a broad basis.
While attempting to make this transition, the Company will be subject to all
risks inherent in a growing venture, including the need to produce reliable and
effective products, develop marketing expertise and enlarge its sales force.

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LIQUIDITY AND CAPITAL RESOURCES

The Company has had no significant revenues from operations in either of
the last two fiscal years nor in the first six months of the fiscal year
beginning July 1, 1997. The Company's cash requirements consist of its
salaries, office expenditures, legal and accounting fees to comply with
securities registration needs, legal fees for contracting, TMI's operational
budget requirements, including TRW's technical support of TMI and the
Company, and the costs of maintaining TMI's clinical trials. Available funds
are insufficient to pay Company and TMI operating costs and incurred TRW
development costs (approximately $440,000) and incurred legal fees
(approximately $370,000). The Company intends to raise additional equity
funds from the sale of the Common Stock through private offerings, either
pursuant to the Investment Agreement or from new investors introduced
pursuant to the Financial Advisory Agreement, to meet its cash requirements
through 1998. The Company has no assured source of liquidity from the sale
of assets or from financing until after this registration statement becomes
effective to qualify the Company as a fully reporting company, a condition to
raising funds under the Investment Agreement..

The Company will require substantial additional funds for its research
and development programs, preclinical and clinical testing, development of
its sales and distribution force, operating expenses, regulatory processes
and manufacturing and marketing programs. The Company's capital requirements
will depend on numerous factors, including the progress of its research and
development programs, results of preclinical and clinical testing, the time
and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments,
developments and changes in the Company's existing research, licensing and
other relationships and the terms of any new collaborative, licensing and
other arrangements that the Company may establish. The Company believes that
its available short-term financing, attributable to contributions from its
principal shareholders to satisfy required fixed costs, will be sufficient to
meet its operating expenses and capital expenditures for a limited time, but
the Company will need to raise additional capital to meet its needs for the
next 12 months. The Company anticipates calling funds to sell Newly Issued
Shares when the conditions have been satisfied under the Investment
Agreement. The Company believes that the Investment Agreement funds will be
sufficient to satisfy the budgeted $6,005,986 in capital required to satisfy
all past due payables and projected needs to complete the TMI clinical trials
and Company operating expenses for the next 12 months. The material
uncertainties in obtaining such funding are described in the Section
"Principal Stockholders-Bristol Asset Management, L.L.C. Investment
Agreement" The Company's cash requirements may vary materially from those
now forecasted due to potential future acquisitions, the progress of research
and development programs, results of clinical testing, relationships with
strategic partners, if any, competitive and technological advances, decisions
of the FDA and foreign regulatory processes and other factors. There can be
no assurance, however, that additional capital or financing will be available
when needed, or if available, will be available on acceptable terms.
Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back or eliminate certain
of its research and product development programs or to license to third
parties the rights to commercialize products or technologies that the Company
would otherwise seek to develop on its own.

CLINICAL TRIALS. Although the Company expects to raise funds through the
Investment Agreement or Financial Advisory Agreement needed for paying its newly
incurred expenses and for paying its past due obligations to TRW and its law
firm, the Company plans to delay the anticipated clinical trial schedule to
defer costs if necessary. The FDA clinical trials requirements for TMI to
receive its PMA approval requires three separate medical facilities to conduct
examinations, and produce clinical statistical data, from use of the TMI System.
Those clinical trials are being conducted at Providence Hospital in Washington,
D.C. (previously at Howard University Hospital in Washington, D.C. through the
end of February 1998 where the pretests were conducted to qualify to proceed
with clinical trials for a PMA) and at two Los Angeles hospitals managed by the
University of Southern California Medical School. The rate of conducting
examinations determines the monthly cash flow requirements and the time for
qualifying for the PMA. TMI also incurs costs for FDA legal counsel and for
QBRI, a consulting firm recognized by the FDA for overseeing clinical trial data
collection and adherence to FDA requirements. Management estimates the cost
associated with completion of the scheduled TMI clinical trials by August 1998
to equal approximately $3,000,000. Fewer funds available would require TMI to
depend more on its employees and less on independent contractors, resulting in
delays in the schedule. The Company intends to fund the cost of completing
TMI's clinical trials through funds generated by Affiliate shareholder
contributions or through private sales of Common Stock either to investors
generated from the Financial Advisory Agreement or through effecting the
Investment Agreement. If the Company were incapable of raising those funds plus
funds needed to conduct the Company's business, TMI would have to abort its FDA
plans.

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In 1997, most of the equity funds raised by the Company in exchange for the
Common Stock was contributed by Affiliates (primarily TII) through private sales
of the Common Stock. Management believes those Affiliates would continue to
contribute the funds necessary to achieve the Company's business plan, because
of the past history of such contributions, although the cash flow from such
funding has been, and probably would continue to be, slower than if a
substantial new investor would invest.

To complete TMI's clinical trials, pay all operating expenses of the
Company and TMI, and to pay all past due payables, the Company has budgeted
$6,005,986. Past due vendor liabilities are approximately $820,000 of that
amount. The Company expects to achieve the liquidity necessary to satisfy this
budget through private sales of Common Stock to Bristol Asset Management, L.L.C.
pursuant to the Investment Agreement or pursuant to other investors generated by
the Financial Advisory Agreement. The Company understands that there are
uncertainties in achieving performance under the Investment Agreement, including
the fact that the Company has no financial information to verify the ability of
Bristol Asset Management, L.L.C., the perform under that Agreement, but the
Company relies upon the reputation of Ambient Capital to perform pursuant to the
Financial Advisory Agreement in the event that timely contributions are not made
pursuant to the Investment Agreement. See "Principal Stockholders-Bristol Asset
Management, L.L.C. Investment Agreement." Pending any time delays in achieving
liquidity pursuant to those agreements, the Company expects Affiliate
Shareholders to continue to support the Company either through loans or
contributions to capital in exchange for Common Stock that would be restricted
securities.

CTI SYSTEM DEVELOPMENT. The Company has committed to devote a major
portion of its resources and subsequent capital financing, in excess of fixed
operating costs of the Company, to the operations of TMI for the completion of
the ongoing FDA Clinical Trials. The Company anticipates funds from the
Investment Agreement to satisfy that budget requirement. After the Company is
successful in arranging new capital financing to fund completion of TMI clinical
trials as discussed above, the Company intends to use any excess funds, and any
additional funds raised through separate financings, in the further development
of the CTI System. When funding for the Company is available either from
investors originated by the Financial Advisory Agreement or additional
shareholder private purchases of Common Stock, the Company plans to conduct
multiple clinical trials involving the CTI System in the identification of soft
tissue maladies. Although such clinical trials may not be necessary for
physicians to use the Systems, the benefit of specific purpose clinical trials
will be to enable the Company to reference medical efficacy claims in connection
with marketing efforts, to enhance physician confidence in the CTI System, and
to obtain the designation of insurance payment codes for particular CTI System
procedures. Management believes that the market in the United States alone for
the CTI System would be dramatically impacted if clinical trials were to
substantiate the Company's assertion that the CTI System can distinguish and
verify fraudulent (versus real muscular) lower back pains.

MARKETING. The Company cannot assure investors that expenditures for
clinical trials will result in confirming results or an FDA approval, nor can
the Company be sure that any FDA approval or successful clinical trial will
result in a profitable business activity. In order to be successful, the TMI
System and the CTI System must be accepted both by physicians and the public.
The primary method for creating physician acceptance of the systems will be
through the publication and presentation of technical research papers to
medical professional groups. Management has already collaborated with
physicians working on the TMI System clinical trial program to submit an
abstract report to the Radiological Society of North America for presentation at
their December 1998 conference in Chicago. If the abstract is selected by the
society, a detailed research paper will be presented as part of the conference
and published in the proceedings. As more research data becomes available, the
Company hopes to team with research physicians on similar projects in the
future.

A marketing campaign must also be undertaken to educate the general public
regarding the advantages associated with the use of the Systems. Management
understands that this marketing effort will require substantial funds which are
not presently available. Management estimates that an effective marketing plan
for the Systems during the next 12 months would cost at least $228,000, a line
item included in the $6,005,986 budget for 1998. While most of the funds needed
to engage in a large-scale marketing effort would be necessary if the PMA were
approved and would likely have to come from equity financing, management
believes that usage charges from the TMI System will provide sufficient funds to
initiate the campaign. Based upon the current pace of clinical trials, the 600
qualified patient examinations required by the FDA should be completed by August
1998 for consideration for the FDA to grant the PMA.

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EQUIPMENT FINANCING. The Company would commence production and sales for
the CTI System when capital or debt financing is available and user contracts
are in place. Equipment Financing will be necessary for the Company or TMI to
market the Systems to enable manufacturing, production, and extensive
marketing. Foreign sales of CTI Systems may be likely with adequate marketing
expenditures, but substantial U.S. sales are likely to follow an FDA program for
approval. The Company contemplates revenues from the CTI System in the U.S. to
be generated pursuant to use agreements, placing the CTI System in the hospital
or medical care facility under an agreement requiring the user to compensate the
Company based upon the time used. The Company contemplates systems integration
and sales agreements for overseas production and sales. The Company expects to
obtain equipment financing for the Company and TMI, secured by the sales or use
contracts and the inventory produced. Assuming the PMA is granted after the TMI
clinical trials are completed, TMI anticipates funding to be available from
capital and debt financing to commence production and sales of the TMI System.
The Company has entered discussions with equipment financing companies that have
indicated that the Systems can be financed in this manner.

RECENT STOCK SALES. Pending the effective date of this Registration
Statement, when the Company believes it will have sources of liquidity either
through execution of Put Notices pursuant to the Investment Agreement or through
other sales of Company Common Stock to raise the capital necessary to provide
the liquidity for operations, the Company has relied upon Affiliates to
contribute to the Company the cash necessary to maintain operations. This has
resulted in the issuance of additional shares of Common Stock, which has further
diluted the interests of shareholders by increasing the number of outstanding
shares. From January 1, 1998 through March 31, 1998, the Company has received
$1,006,606 in capital contributions from Affiliates in exchange for 3,649,214
shares of Common Stock. See "PART II; Item 26; Recent Sales of Unregistered
Securities."

CHANGE OF ACCOUNTANTS

Randy Simpson, certified public accountant, audited the financial
statements of the Company for the year ended June 30, 1996 and was replaced by
Ham, Langston & Brezina, L.L.P., Certified Public Accountants on May 20, 1997.
During Mr. Simpson's tenure as principal independent accountant to the Company,
there were no disagreements between the Company and Mr. Simpson whether resolved
or not resolved, on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. Furthermore, Mr. Simpson's report
for the past fiscal year did not contain any adverse opinion or disclaimer of
opinion, excepting a "going concern" qualification and an emphasis paragraph on
the reliability of certain assets, and was not qualified or modified as to audit
scope or accounting principles.

The decision to change principal accounts was ratified by the Board of
Directors on September 18, 1997. Management effected the change in order to
provide the Company with increased service potential in anticipation of a public
registration of its securities. While no longer the principal independent
accountant, Mr. Simpson has been retained by the Company to provide accounting
assistance in connection with the preparation of this Prospectus.

Also, during the Company's two most recent fiscal years, and since then,
Mr. Simpson has not advised the Company that any of the following exist or are
applicable:

1. That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has come
to their attention that has lead them to no longer be able to rely on
management's representation, or that has made them unwilling to be
associated with the financial statements prepared by management;

2. That the Company needs to expand significantly the scope of its audit,
or that information has come to their attention that if further
investigation may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements
or any other financial presentation, or cause him to be unwilling to
rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or

3. That he has advised the Company that information has come to his
attention that he has concluded materially impacts the fairness or
reliability of either a previously issued audit report or the

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underlying financial statements for the foregoing reasons or any other
reason, except as disclosed in the Company's financial statements.

Prior to the engagement of Ham, Langston & Brezina, L.L.P. as independent
auditors, the Company did not consult Ham, Langston & Brezina, L.L.P.
regarding the application of accounting principles to a specific transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements or any other financial
presentation whatsoever.

BUSINESS

GENERAL

Computerized Thermal Imaging, Inc. (the "Company") was incorporated on June
10, 1987 in the State of Nevada as Business Helpers, Inc. The Company amended
its Articles of Incorporation on August 25, 1989 to effect a name change to DTI
Dorex, Ltd. and again on November 3, 1989 to its current name. In April 1992,
the Company further amended its Articles of Incorporation to provide for a
capital structure of 100,000,000 shares of common stock, par value of $0.001 per
share, and 3,000,000 shares of preferred stock with such designations,
preferences and other features as may be required by the Company's Board of
Directors. In 1988, the Company , through the issuance of shares of the Common
Stock, acquired all of the assets of Thermal Imaging, Inc., an Oregon
corporation ("TII"), which assets consisted primarily of certain thermal imaging
intellectual property, proprietary ideas, or technology.

The Company is a development stage company that is a medical imaging
systems integrator and proprietary protocol developer producing a computerized
clinical thermal imaging diagnostic system (the "CTI System") that has been
trademarked under the name COMPUTERIZED THERMAL IMAGING. The Company has not
filed any applications for patents covering specific aspects of the CTI System.
But, the Company owns computer software which is not generally subject to the
protection afforded by patents. However, the software is proprietary and
subject to protection as a "trade secret." Since 1995, the Company has spent
approximately $3,000,000 on research, software development, and further
development of the Systems.

The Company plans to place the CTI System in various health care providers
such as hospitals, HMOs and free standing image centers through Use Agreements.
Revenues will be generated under the Use Agreements by charging the health care
providers monthly for time usage and for the disposable supplies purchased in
conjunction with the CTI System. Once the CTI System is inserted into the
marketplace, the Company does not expect to rely on any one or a few major
customers. Consequently, it is anticipated that the CTI System will be
attractive to a widely dispersed number of customers.

PRODUCTS

The Company currently has five (5) completed Systems in use. Three (3)
Systems were supplied by CTI to TMI and have been configured for breast cancer
detection examinations. TMI has further developed the software and hardware for
those Systems, including the engineering design and patent of a positioning
table that protects the privacy of the patient and avoids invasive compression
examinations. These three units are currently being used by TMI in the clinical
trials, deploying a TMI System in each of the clinical trial sites: Norris
Comprehensive Cancer Center, Los Angeles; Los Angeles County Hospital; and
Providence Hospital, Washington, D.C. Another CTI System was sold in May 1996
to Orchard Hospital in Bangkok, Thailand, where the System has been used by that
teaching hospital for two years for several medical examination purposes to
establish the confidence level of Orchard Hospital to consider a joint venture
for distribution in Thailand. The fifth CTI System has been placed by the
Company in the Friendship Hospital in Beijing, China, which was originally
installed by the Company as a demonstration unit but was subsequently converted
to a fee-for-use revenue generating unit. The CTI System in Beijing produced
revenue of 68,000 RMB, or the equivalent of $8,200 U.S., through December 1997.
Those Beijing revenues were used to support the CTI operations in China, where
CTI maintained an office until late 1997. This fifth CTI System has been
returned to the Company offices in Layton, Utah for calibration. The Company
intends to return this fifth CTI System to China this summer, provided the
Company's anticipated funding from the Investment Agreement occurs, in
preparation of continuing marketing efforts in China.

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CTI SYSTEM. The basis of the CTI System is predicated on the principle
that every externally or internally triggered physiological event causes an
associated caloric reaction. In the opinion of management, any such abnormal
caloric activity will stimulate the body's three temperature and thermal
regulatory systems. These responses are believed to be detectable and
interpretable through tell-tale thermal symptoms and temperature regulatory
response patterns over time. Management believes that the body's thermatome
(temperature) "map" has been well established by medical science, and can
provide a reliable set of clues for diagnostic and patient management purposes,
so long as the thermal symptoms are present. At other times, symptoms such as
pain or numbness and information from other medical tests, will triangulate to
indicate a disorder. Thus, the CTI System may be used by physicians to
eliminate or identify certain possible soft tissue ailments in the process of
making a diagnosis.

"Thermal imaging" as the observation technique is called generically, is a
methodology that long has held great promise, but has not realized its potential
because of deficiencies in the enabling technology. Thus, thermal imaging has
found fairly limited acceptance by the mainstream medical community because,
until the invention and development of the Company's technology, the testing and
evaluation techniques simply have not been scientifically completed, nor
medically reliable for most disorders. The CTI System represents an integration
of state-of-the-art thermal imaging technology hardware and software components,
most of which are configured to the Company's specific needs. The CTI System is
driven by sophisticated software developed over many years by the Company and
its research contractors. The software allows for quantification of data, and
significant flexibility in data manipulation, among other advantages. However,
equally important as the CTI System's components are, the CTI System's
scientifically structured patient examination administration protocols and
standards are expected to assure the accuracy, consistency and reliability of
the CTI System's generated data.

The CTI System is suitable for use as a screening or directional tool for
imaging or diagnosis modalities, some of which are surgical, chemical and
otherwise extremely invasive. By knowing where in the body to begin looking
because of thermal irregularities, other imaging and testing can proceed more
efficiently and economically; obviously an important advantage in containing
health care costs. Additionally, management believes that as a result of the
CTI System's comparatively low user cost (less than the cost of an MRI or CAT
scan), accuracy and non-invasive procedure, the CTI System will be advantageous
for diagnostic and patient therapy purposes, in both pre- and post-therapy
assessment and with any frequency deemed necessary by the physician. The CTI
System can examine patients dynamically to enable the physician to observe
thermal reactions while the patient moves and while the patient undergoes
thermal applications.

The CTI System is currently composed of four elements. The primary
component is the examination unit, consisting of a highly sensitive and accurate
infra-red camera, imaging monitor, high resolution printer, computer and
proprietary software. The most unique feature of the CTI System is the
application specific software that drives and integrates the entire system, not
only providing user friendliness and analytical flexibility for physicians and
technicians, but enabling scientifically essential calibration corrections.
Management believes that the Company will be the first thermal imaging company
to provide a consistently objective diagnostic assessment tool that will measure
multiple thermal parameters, including facile enclosure of thermal features,
dynamic graphing of temperature distribution in the inset domain, and the use of
temperature gradient profiles in diagnostic testing.

The CTI System is a non-invasive imaging modality scientifically applicable
for an extremely wide range of patient diagnostics and therapy management
situations. The CTI System provides precise, quantitative observation, as well
as computer-assisted interpretation of irregularities in the body's temperature
and thermal regulatory systems. It is expected that with the generated data
available, physicians will be able to detect or at least infer the presence of
many diseases, disorders and injuries within the body's physiological,
neurological and vascular systems that rarely can be detected or confirmed
through conventional dense-tissue/skeletal imaging modalities such as X-ray, CAT
scan, MRI and others. The CTI System is non-dosage limited and has no
detrimental side-effect.

The second element of the CTI System is the proprietary medical protocols
that will be developed by the Company for each malady assessment. Computer
analysis requires consistently applied patient preparation and examination
application protocols.

Conformity is assured by using the third element, a climate controlled
laboratory (herein the Quantitative Thermal Assessment Laboratory or "QTA") in
which the patient examination occurs for equilibrating all patient

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examination environments. In employing the CTI System, the Company anticipates
constructing QTAs for various potential customers including large hospital
facilities, HMOs, free-standing diagnostic centers and mobile clinics. The
customer's own technicians and physicians will operate the QTA after training.
Each installation will be linked electronically to the Company's main image
archive. A QTA center which consists of a three room suite will be constructed
within a standard 16 x 20 x 8 feet two-bed hospital room. The rooms will be
precisely temperature and humidity controlled by the erection of a modular
room-within-a-room. The patient temperature equilibrium rooms will consist of
two rooms within the suite for stabilization of patient temperature as well as
other preparations for testing. The imaging room is a room within the climate
controlled suite in which the patient is placed for infra-red scanning and in
which the camera, computer console and one technician is present during the
testing.

The fourth element of the CTI System is the use of a digital health card
that encodes a patient's thermal image (capable of storing the patient's medical
record) in a digital format on a plastic card the size of a credit card. Only
recently has the technology been improved to be capable of storing the quantity
of data for accurately carrying images from the CTI System. More than one
manufacturer now can produce such cards. The Company plans to embed in the CTI
System a "reader/writer" encoded for Company access only to permit recording the
images on the cards to enable subsequent comparisons of the images by physicians
at different clinical sites over an integrated telemedicine system.

TMI SYSTEM. The Company also owns 80 percent of Thermal Medical Imaging,
Inc., a Nevada corporation (herein sometimes referred to as "TMI"). TMI
utilizes the CTI System specially configured as a breast cancer screening system
which is a non-invasive, non-contact procedure that does not involve breast
compression or exposure to radiation (the "TMI System"), and which is comprised
of an infra-red camera, a central processing unit, input devices, a display
unit, and a power distribution unit. The TMI System also employs a proprietary
patient positioning system (for which an application for a patent has been
filed) in the data acquisition process, which replaces the need for a QTA
construction. The positioning system was designed to maximize breast area
viewed and to include surrounding areas of interest, to limit patient movement
during the examination, to ensure consistent cooling, to permit applications of
localized thermal changes during the examination, and to accommodate any
residual patient breathing movement. Currently, the TMI System is undergoing
clinical testing in accordance with an FDA approved protocol which management
expects to lead to pre-market approval (herein referred to as "PMA") by the FDA.
TMI expects to file for PMA in the summer of 1998, as long as the Company can
obtain its financing for contributions to TMI to maintain its current budget
schedule.

The TMI System performs three independent but interrelated functions; data
acquisition, data analysis and clinical evaluation. The TMI System will use the
Company's infra-red detection system for use in data acquisition. The thermal
data acquired will consist of a time sequence of digitized thermal images. The
images will then be post-processed on specially developed data analysis software
to generate images for clinical assessment. The interpreting physician will
view an image and the supporting mathematical data underlying that image.

The TMI System is currently in clinical testing at Providence Hospital in
Washington, D.C. (through the end of February 1998, testing was conducted at
Howard University Hospital in Washington, D.C.), and in two hospitals managed by
the University of Southern California, Norris Cancer Center in Los Angeles and
Los Angeles County Hospital.

COMPETITION

CTI SYSTEM. The Company faces limited direct competition from the latest
versions of conventional thermal technology. Although the Systems may have
application for detection or diagnosis of numerous soft tissue ailments,
physicians must broadly accept the Systems as complementary detection technology
to prescribe its use to create a material market for its use. Many physicians
generally equate the Systems, upon first introduction, with the predecessor
technology of "thermography," an analog infra-red camera system without the
Company's computer algorithm analysis of computed thermal data using high
quality thermal imaging cameras. Educating doctors of the fact that the Systems
are new technology could take time and result in delays in any financial
revenues forecasts. In the opinion of management, thermography is comparatively
crude and unscientific and otherwise seen as inferior to the CTI System and is
not considered an economic barrier to market penetration. The CTI System should
not be seen as competitive to other diagnostic imaging products, such as MRI,
CAT scan, X-ray, ultrasonography, laser, and Doppler mapping (any more than any
one modality of that list is considered competitive to another). Each of these

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anatomical modalities has established a niche in the hospital diagnostics
market, free standing imaging centers or physicians' offices. Each modality is
better for some disorder diagnosis situations and less effective for others.
The adoption pattern of the modalities is dictated by the degree of advantage
perceived by one modality as compared to the others.

By comparison to all of the above-described modalities, the CTI System has
no direct competition from existing modalities in many diagnostic situations
because the CTI System gathers data regarding the physiological and functional
domain of human health, as opposed to the anatomical or structural facets. Most
other imaging devices address "anatomical or structural patient issues" and are
therefore complementary and not competitive to the CTI System. Large companies
have the resources to attempt to compete in the long term with the Company in
the physiological assessment of medical issues, but at present are not deemed by
management to be a threat. MRIs, CAT scans, and X-rays all image hard or dense
structures such as bones, organs and other material masses within the body.
Many soft tissue disorders simply are not detectable by conventional modalities
until they become manifested as relatively advanced anatomical abnormalities
such as irregular tissue density or damage.

TMI SYSTEM. Mammography is an X-ray technology most widely used in the
Untied States as the imaging mode for detection of breast cancer. Statistics
have been published establishing a low reliability percentage of close to 75
percent for "false positive" indications, where mammography indicates a
suspicious tumor and a follow-up surgical biopsy establishes that the tissue is
benign. An even more frightening statistic is the percentage of mammography
"false negative" indications, by which a breast cancer is not detected.
Mammography is significantly less effective in dense breast tissue; women under
the age of 40 years typically have more dense breast tissue than women of the
age of 40 years. Therefore, mammography is currently most effective in women
over the age of 40 years. The initial clinical trials approved by the FDA for
TMI are designed to establish the TMI System as complementary to mammography.
The first PMA uses will be to employ the TMI System to examine any patient with
"suspicious tissue" indications resulting from a mammography image.

Potential competition for the TMI System includes an imaging device for the
detection of breast abnormalities being developed by Imaging Diagnostics
Systems, Inc. located in Sunrise, Florida, known as a Computer Tomography Laser
Mammography System ("CTLM"). This device relies on ultra-fast laser imaging
technology which can acquire data to allow visualization of the interior
structure of the breast. The ability to localize an abnormality within the
breast is greatly enhanced by the slice plane lateral and cranio-caudal images
produced by CTLM. Such images can be stored on CD-ROM and allow the physician
to recall previous studies instantly for immediate comparison with the current
study. The advantage of CTLM over mammography is its use of laser technology to
produce the image, which does not use harmful radiation. Management, however,
believes the TMI System will prove superior to CTLM for detection of cancer
because laser images still require density of tissue, as with mammography, to
produce an image. Dense tumor formations are a later stage of cancer and
management believes the TMI System detection of physiological thermal changes
will prove to be more accurate (because some tumors are benign) and detectable
at an earlier stage.

Also, an ultrasound technique is being developed by Advanced Technology
Laboratories ("ATL"), known as High-Definition Imaging. Ultrasound sends
high-frequency sound waves into the body, which are reflected back to create
images. While ultrasound is used in numerous medical procedures, ATL's system
is the first to provide adjunctive diagnostic capability for breast cancer.

COMPONENT COMPETITION. If the Company and TMI are successful with their
product development and marketing, some component parts for the CTI System could
be in short supply. There are few manufacturers that produce an infra-red
camera and unit cooling systems of a high quality to satisfy the specifications
for a CTI System. The systems integration and software development contractor
for both CTI and TMI, TRW Systems in its TRW Healthcare Technology Division
(herein referred to as "TRW"), has tested numerous manufacturer's products for
certain parts. If the demand for CTI Systems and TMI Systems increased
dramatically, some parts may not be immediately available.

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FUTURE PRODUCT AND SERVICE PLANS

The Company will continue to invest substantially in 1998, to the extent of
its available financing, to improve the effectiveness of its proprietary
application software. In addition, the Company will continue to source from
vendors who can improve the precision and reliability of the patient testing of
the CTI System. However, the area of innovation that the Company believes will
create the next quantum leap will be the integration of the Systems with
anatomical and other imaging data. Because the Systems are digitally
quantifiable, the Company believes it is highly technically and economically
feasible for the Systems to be the foundation of inter-modality imaging, where,
for instance, image data of the CTI System is overlaid on CAT scan or MRI or
X-ray or sonographic imaging data to create a multi-dimensional "picture." This
development is not forecast until after 1998, after significant market
penetration.

At present, some other advanced modalities generally are what might be
termed "neo" or non-quantifiable. That is, even if the information from an MRI
is processed by computers digitally, the eventual interpretation of the image
still is subjective on the part of the technicians and diagnosing doctors. The
Company's plan is to first build quantified data bases of tests on the same
patient by other modalities and then develop the necessary interfaces to allow
overlay. Then, with this capability and the combined data base at hand, the
Company can begin offering computerized disorder pattern recognition assistance
based upon a multi-dimensional image of patients.

GOVERNMENT REGULATION

The FDA has no prohibiting regulations preventing the use of thermal
imaging equipment, generally perceived as an infra-red camera, for medical
purposes. There can be no assurance that any state regulatory bodies or the FDA
might not impose some restrictions, with which the Systems, or the users, must
comply. The Company believes no FDA approval is required for health care
physicians or radiologists to use the CTI System, but the Company believes that
broad acceptance for use of the CTI System will require verification of
clearance from the FDA. The Company's products may be regulated as medical
devices by the FDA under the FDC Act and the regulations promulgated thereunder.
As such, these devices require either compliance with FDC Act Section 510(k)
under which the Company currently relies, or approval of a premarket approval
application (herein referred to as "PMA") by the FDA prior to commercialization.
Satisfaction of applicable regulatory requirements may take years and varies
substantially based upon the type, complexity and novelty of such devices, as
well as the clinical procedure. Filings and governmental approvals may be
required in foreign countries before the devices can be marketed in these
countries. There can be no assurance that further clinical trials of the
Company's thermal imaging systems or of any future products will be successfully
completed or, if they are completed, that any requisite FDA or foreign
governmental clearances or approvals will be obtained. FDA or other
governmental clearances or approvals of products developed by the Company in the
future may require substantial filing fees, or costs to conduct clinical trials,
which could limit the number of applications sought by the Company and may
entail limitations on the indicated uses for which such products may be
marketed. In addition, approved or cleared products may be subject to
additional testing and surveillance programs required by the FDA and other
regulatory agencies, and product approvals and clearances could be withdrawn for
failure to comply with regulatory standards or by the occurrence of unforeseen
problems following initial marketing. The Company is also required to adhere to
applicable requirements for current good manufacturing practices, to engage in
extensive record keeping and reporting and to comply with the FDA's product
labeling, promotional and advertising requirements. Noncompliance with state,
federal or foreign requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, delay, denial or withdrawal of premarket clearance or approval of
devices, recommendations by the FDA that the Company not be allowed to enter
into government contracts, and criminal prosecution, all of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The process for obtaining FDA PMA approval for the TMI system consists of
several steps. After TMI developed a product that could have beneficial medical
use and would merit FDA approval, the first step was to hold a series of
discussions with the FDA. These discussions were designed to allow the Company
to present to the FDA the new product to be tested, it's basis of operation,
safety ramifications, intended usage, desired trial composition and desired
approval. Pretrial data was presented to the FDA by TMI to demonstrate that
there was sufficient probability of success to warrant FDA consideration. These
discussions also reviewed the intended trial protocol. These discussions led to
modifications to the intended trial composition and protocol in order to insure
that a trial produces sufficient data quantity and quality to allow a successful
FDA review after the trial. TMI has successfully completed

30
<PAGE>

this step and has an FDA approved trial protocol, requiring an initial data
collection phase where thermal images collected by the TMI System from
approximately 600 qualified patients were collected. The next step was to
set-up the trial process with the appropriate trial oversight. TMI has engaged
QBRI, a consulting firm recognized by the FDA for overseeing clinical trial data
collection and adherence to FDA requirements. TMI has completed this step of
the process. The next step of the FDA approval process is to implement the
clinical trials by executing the approved protocol and collecting actual patient
data. TMI is currently in this phase of the approval process with clinical
trial data collection underway at USC/Norris Comprehensive Cancer Center,
Los Angeles County Hospital, both in Los Angeles, and at Providence Hospital,
Washington, D.C. The clinical trials permit the medical facilities to use the
TMI System, to collect the required patient information and examination results,
to compare the TMI System data collected to the pathology findings of malignant
or benign tumors, to permit independent review for adherence to examination
procedures, and to categorize the collected data for appropriate presentation to
the FDA. This phase is expected to continue until August of 1998. Following
the completion of the trial data collection phase, TMI and its consultants must
analyze the trial results to prepare a PMA submission. The Company makes no
estimate of the time required by the FDA to review TMI's PMA submission.

The Company will rely upon a 510(k) exemption under the FCA Act, based upon
the technology of the infra-red camera components of the CTI System, as had been
approved for medical applications. The Company expects in the future to pursue
specific medical applications by applications to the FDA for a PMA or other
approval, but none have been initiated at this time by the Company.

THIRD PARTY REIMBURSEMENT

Although use of the CTI System and the TMI System is permitted now by
physicians, the absence of FDA approval is a practical impediment. Most
physicians prescribe use of external procedures and imaging modalities when
there are approved payment codes acceptable for third party reimbursement (E.G.,
insurance, Medicare, etc.) to enable patients to obtain medical treatment
payment assistance. The Health Insurance Care Finance Administration ("HICFA")
is the agency that establishes for Medicare/Medicaid a payment code approval for
certain imaging modalities for particular suspected ailments. Generally, HICFA
does not set payment codes for use of new technology unless it has obtained FDA
approval. Most insurance company reimbursement plans establish payment codes
for its insureds based upon its own experience, and for new procedures or
imaging modalities, based upon HICFA's determination. Therefore, FDA approval
is needed, at least at the inception, for each ailment examination for which the
CTI System or the TMI System is used seeking reimbursement, if not covered by
other general payment codes.

Neither CTI nor TMI currently have FDA approval for any imaging procedure.
TMI clinical trials are in process for use of the TMI System for breast cancer
detection. CTI has initiated no process to obtain separate FDA approval to
proceed with clinical trials of the CTI System. Therefore, the Company's
efforts to market the CTI System in Asia (the PRC and Thailand) may result in
revenues quicker, if further contracts are entered to sell the CTI System there,
than with the Company's plan to place the CTI System in U.S. hospitals, clinics,
and HMO facilities subject to Use Agreements.

PATENTS AND INTELLECTUAL PROPERTY

On June 8, 1996, the Company entered into a Licensing Agreement with
Thermal Medical Imaging, Inc. ("TMI") which granted an exclusive license to TMI
to distribute, research, and develop the CTI System and related technology. The
license covered applications of the CTI System to the field of breast cancer
detection and was limited in scope to North America. The Licensing Agreement
also provided for a joint research program whereby the parties would share
research data relating to the CTI System and cross-license any developed
technologies. In addition, the terms of the Licensing Agreement established
that the agreement would automatically terminate in the event of any
consolidation, merger, share exchange or other event causing a change in more
than 50 percent control of the voting shares of TMI or the Company. As a result
of the Stock Transfer Agreement executed on January 28, 1997 by the Company and
TMI, the Company gained control of 80 percent of the common stock of TMI. While
the provisions of the Stock Transfer Agreement manifests the parties' intent to
execute a new licensing agreement and outlined the terms of such an arrangement,
no new licensing agreement has been reached. Although no written licensing or
research agreements presently exist between the Company and TMI, management
believes that the cross-licensing arrangement between the two companies is still
in place and, by virtue of the Company's 80 percent controlling ownership
interest

31
<PAGE>

in TMI, it has the requisite ability to ensure access for the Company to all
material technological developments. The risk of the absence of a clear,
written licensing agreement is heightened by the financial constraints by the
Company. If the Company or TMI were to be unable to timely pay creditors, a
judgment or lien or bankruptcy against the Company or TMI could result in a
challenge to the executory nature of any licensing agreement, or the parties may
have a disagreement as to the terms of such agreement, due to the fact that
specific licensing terms are not set forth in writing. Although the Stock
Transfer Agreement evidences the intent of the parties to recognize a
cross-license agreement and geographical restrictions upon the use of the TMI
System by TMI, that expression of intent set forth in the Stock Transfer
Agreement may not be recognized, if challenged by TMI or a third party acquiring
either TMI or some of the Company's technology, as a binding license agreement.
The result could be that TMI, if subsequently under separate shareholder
control, might be a competitor to the Company in the use of the CTI System
technology and marketing of related products. The Company expects to control
this risk by paying its creditors and establishing an appropriate licensing
agreement while controlling the stock of TMI.

Neither the Company nor TMI currently holds registered U.S. or foreign
patents. TMI has acquired, by assignment, a patent application on a Functional
Thermal Imaging Apparatus which has been filed with the U.S. Patent and
Trademark Office. Management believes other developed technologies or
components of either the CTI or TMI System may warrant patent protection in the
future. Substantial engineering costs and legal fees will be incurred in order
to research, develop and file additional patent applications. The Company and
TMI intend to explore this possibility when funds become available to support
such expenditures.

RISKS OF DOING BUSINESS IN THE PRC AND OTHER FOREIGN COUNTRIES

The Company intends to continue its efforts to market the CTI System to the
PRC, Thailand and other foreign hospitals. Doing business in the PRC, as well
as in other developing countries, has risks not prevalent in the United States
or Canada. Judicial systems for enforcement of contracts in those counties is
not reliable. The Company has inserted arbitration clauses in its foreign
contracts to date, but there is risk to arbitration results, because the holding
is not subject to appeal, regardless of error in application of law.
Furthermore, foreign government laws or regulations can change in a method not
customary to American companies, including the extreme measure of
nationalization of assets.

The Company's existing contracts with a company owned by the Ministry of
Public Health in the PRC require letters of credit enforceable outside the PRC
to be issued as a precondition of performance by the Company. Management
intends to continue to take such financial precautions to protect against
financial risks of doing business in the PRC and developing countries.

Successful operations in developing countries usually require a joint
venture with a respected citizen of that country. The Company has maintained
one full time employee in the PRC who maintains his relationships with the
Ministry of Public Health. The initial sale of the CTI System to the Orchard
Hospital in Thailand was initiated through a personal relationship established
in earlier years by General Richard V. Secord, the Chief Operating Officer of
the Company. There is no assurance that a venture will be formed in Thailand,
but the Company's contacts in Thailand have been successfully using and
demonstrating the CTI System and providing a recurring downloading of patient
information. Thailand and the PRC are countries where thermography (a
technology predecessor to the CTI System without computer data analysis and
without high definition cameras) has been accepted for years, largely due to its
use in proving the efficacy and proper location of acupuncture. Management
intends to use this relationship to establish a financing venture in Thailand.
There is no assurance that any venture will be profitable, but the Company
intends to pursue such ventures when it is successful to raise he necessary
capital to pay start up costs.

EMPLOYEES

The Company and TMI currently employ eight persons on a full time basis.
The Company has in the past, and will continue in the future, to employ
independent contractors, and make extensive use of its outside directors and
other consultants. None of the employees of the Company and its subsidiaries
and joint operations are represented by a labor organization. The Company
believes its relationships with all of these employees are satisfactory.

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<PAGE>

FACILITIES

The Company leases approximately 1,000 square feet of office space in Lake
Oswego, Oregon for an annual rental of approximately $24,000, approximately
2.065 square feet of office space in Bloomfield Hills, Michigan for an annual
rental of approximately $30,000, and approximately 2,000 square feet of office
space in Layton, Utah for an annual rental of approximately $34,800. The
Company believes that its facilities are adequate for its current operations.

LITIGATION

SELECT CAPITAL ADVISORS, INC. DEBENTURES AND WARRANTS. On December 9,
1997, the Company filed suit against Select Capital Advisors, Inc. ("Select"),
Ronald G. Williams ("Williams"), and various other parties in the United States
District Court for the Southern District of Florida for damages and recission
with respect to the fraudulent sale of certain 12 percent convertible debentures
issued by the Company. In March 1997, the Company was introduced to Select and
Williams for the purpose of raising capital and a line of credit. Select,
Williams and several of the other defendants represented that they had the
experience, reputation and resources to raise the needed money. The Company
entered into an agreement with Select to raise the needed money in stages
through capital and financing, to immediately loan or guarantee a loan of $2
Million for operating capital, and to perform certain investment banking
services. The Company paid a $10,000 fee. In April 1997, Select agreed, to
comply with one of its commitments in the initial agreement, to raise $1,500,000
through the issuance of the Company's convertible debentures through an offering
to foreign investors purportedly pursuant to an exempt offering under Regulation
S permitted by the Securities Act. Only some of those debentures were sold, at
a 20 percent discount off face value of $662,500, accruing interest at the rate
of 12 percent per annum and offering the Purchasers rights to convert into
Common Stock, on three different installment dates, at a price determined to be
the lower of 90 percent of the market value of Company free trading shares at
the date of subscription or 90 percent of the five day average price prior to
the date of conversion. The Purchasers demanded free trading shares, rather
than restricted Common Stock pursuant to Rule 144, claiming that Select had
represented to the Purchasers that they would be issued registered securities.
The Company discovered that numerous false and misleading statements were made
by Select, Williams, and possibly other defendants in connection with the sale
of the debentures; that various documents were changed by Select, Williams, and
the other defendants without the knowledge of the Company; that the agreement
was breached by Select; that the defendants engaged in market manipulation; that
material omissions were made by Williams and Select both to the Company and to
the purchasers; and that unlicensed broker-dealers sold the debentures. Some
shares were issued in conversion and delivered before the Company knew of the
misrepresentations. The Company offered recission to all debenture holders due
to Select's representations and canceled the debentures and all shares issued,
including all compensation warrants issued to Select. Management believes that
it will prevail in the litigation. A portion of the debenture holders,
representing approximately $181,500 in face value, have accepted the offer of
the Company to rescind the debentures for a total of $180,000, which has been
paid by the Company. Most of the remaining debenture holders have offered to
settle themselves out of the litigation in exchange for 978,000 shares of Common
Stock, calculated at the contractual conversion price of $0.45 per share. The
Company has accepted such offer to avoid this part of the litigation. The
Company agreed to rely upon the purchasers' securities legal counsel's opinion
as to when those shares become free trading. One remaining holder of $62,500
face value has not responded to the recission offer.

CLAIMS INVOLVING STOCKHOLDERS. The Company initiated litigation in 1998
against a former director to recover shares of Common Stock, or resulting
damages, that had been issued to the director in consideration of an agreement
and representation to deliver a commitment from SPRINT, or a similar
telecommunications company, to contribute a substantial amount to the Company
for immediate delivery of planned China production of CTI Systems. The shares
were issued, but the stockholder failed to perform the promised consideration.
During the year ended June 30, 1995, the Company issued 1,000,000 shares of the
Common Stock to Richard Thompson, a former director of the Company, based upon
the director's representation that he would arrange large scale financing by
certain proposed contributors. During the year ended June 30, 1997, actions
were taken to cancel the Common Stock, because the Company contended that the
issuance was conditioned upon Mr. Thompson's performance, which has never
materialized. A lender to Mr. Thompson asserts a pledge of 500,000 shares of
the Common Stock as collateral for a loan and, as such, is a protected purchaser
under the Uniform Commercial Code. See "Description of Securities - Canceled
Shares." An agreement has been reached between the Company and the lender that
permitted the lender to liquidate the number of shares required to satisfy the
outstanding indebtedness and recoverable costs secured by the shares. The
remaining 48,000

33
<PAGE>

shares have been delivered to the transfer agent of the Company, pursuant to
agreement by the lender, and it is the transfer agent's intention to interplead
those shares to confirm the Company's right to cancel the shares and recover
damages. The certificate representing the 500,000 shares of the Common Stock
secured by a pledge was re-instated for purposes of the agreement and are
included as issued and outstanding shares in the accompanying Consolidated
Financial Statements at June 30, 1997.

PAST DUE ACCOUNTS. The Company is involved in discussions regarding past
due accounts with its primary vendor, TRW, an Ohio corporation performing
contract software development, and strategic planning and management services,
primarily though its Utah and California offices, regarding the testing,
development and deployment of the Systems. The Company has become delinquent in
the payment of costs and fees under contracts with TRW (see Note 6 to the
Consolidated Financial Statements that are included elsewhere in this
Prospectus) and, accordingly, TRW, although not having filed formal legal
actions, has notified the Company that it will be withholding delivery of source
codes of developed software until the past due amounts are paid. If TRW carries
through with its threat and withholds the delivery of the source codes, TMI's
operations would be shut down or severally restricted, including data analysis
for its FDA clinical trials. In the past eight (8) months, the Company has
reduced its total outstanding account to TRW from $897,762 to its balance as of
May 7, 1998, which is $440,438, of which $338,643 is past due.

The Company has accrued payables to three law firms, including its primary
legal counsel Looper Reed Mark & McGraw, Incorporated (the "Attorneys"), and an
Ohio and Nevada firm for litigation matters for legal services. At June 30,
1997, the Company owed the Attorneys $198,717, and at December 31, 1997 owed the
Attorneys $296,524. The Attorneys have agreed to an installment plan for paying
over time the remaining balance of $347,745 as of May 15, 1998, and the Company
is not in default of that agreement. In order to provide security for the
amounts owed, the Company has indemnified the Attorneys and executed pledge
agreements granting the Attorneys a security interest in its 80 percent common
stock of TMI and in the intellectual property of both the Company and TMI. The
Company has made periodic payments to both TRW and the law firms, and management
believes that the Company will continue to do so.

In addition to the above, the Company, in the normal course of its
business, is subject to claims and litigation in the areas of product and
general liability. The Company believes that TMI has adequate insurance
coverage for most claims that are incurred in the normal course of its business,
including liability coverage for commercial liability, premises, general
liability, crime, umbrella, and workers compensation, and directors and officers
coverage. The Company self-insures its current operations and carries no
separate liability insurance policies, but intends to obtain coverage as its
operations permit production and sales. In such cases, the effect on the
Company's financial statements is generally limited to the amount of its
insurance deductibles. Management does not believe at this time that any such
claims have a material impact on the Company's financial position, operations
and liquidity.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below are the directors and executive officers of the Company,
together with their ages as of the date of this Prospectus.

NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------

<S> <C> <C> <C>
David B. Johnston (1). . . . . . . . . . . . . . . 55 Chairman of the Board and Chief Executive Officer August 1987

David A. Packer . . . . . . . . . . . . . . . . . 47 President and Treasurer N/A

Richard V. Secord. . . . . . . . . . . . . . . . . 63 Chief Operating Officer, Secretary, and Director February 1996

Brent M. Pratley, M.D. (1) (2) . . . . . . . . . . 61 Director June 1994

Milton R. Geilmann (1) (2) . . . . . . . . . . . . 61 Director January 1998

Harry C. Aderholt (2). . . . . . . . . . . . . . . 78 Director January 1998

</TABLE>

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

The Company may employ such additional management personnel as the Board of
Directors deems necessary. The Company has not identified or reached an
agreement or understanding with any other individuals to serve in such
management positions, but does not anticipate any difficulty in employing
qualified personnel.

A description of the business experience during the past several years for
each of the directors and executive officers of the Company is set forth below.

David B. Johnston has served as Chairman of the Board of the Company since
August 1987 and Chief Executive Officer, effective July 1, 1997. He currently
serves as an officer and/or director of TMI and of Thermal Imaging, Inc. (herein
sometimes referred to as "TII"), Affiliates of the Company. From 1984 through
1989, Mr. Johnston was President of Funding Selection, Inc., an Oregon
investment banking and mergers and acquisitions firm. Prior to that, Mr.
Johnston was Chairman of Grace Capital, Ltd. in Oregon, a specialized medical
and computer high technology private placement firm. Mr. Johnston received a
Bachelor of Science degree in Business Administration from Brigham Young
University and a graduate degree in banking and corporate finance from the
University of Southern California.

David A. Packer was elected President of the Company in April 1997.
Effective July 1, 1997, he was also elected to be Treasurer of the Company.
Before joining the Company Mr. Packer served as a senior manager for TRW's
engineering office in Ogden, Utah from 1976 until 1997. Mr. Packer received a
Bachelor of Science in Electronics from Brigham Young University in 1975.

Richard V. Secord (Major General, United States Air Force, Retired) was
elected Chief Operating Officer of the Company in June 1995 and currently serves
in that same position for TriSun/CTI Asia, Ltd., an Affiliate of the Company.
He was elected as a director of the Company effective February 1996 and services
as Vice Chairman and Secretary of the Company effective July 1, 1997. General
Secord previously served as President of the Company from February 1996 to April
1997. He is also Executive Vice President and a director of TMI. General
Secord was instrumental in securing the Company's contracts in Thailand and with
the Chinese government through TriSun/CTI Asia, Ltd., a joint venture between
the Company and TriSun Medical America, Inc., which was formed at the direction
of the PRC Ministry of Public Health to effect the GOLDEN HEALTH CARE PLAN for
the People's Republic of China. General Secord was awarded THE ORDER OF THE
WHITE ELEPHANT, one of the highest decorations awarded a non-Thai military
officer, for his distinguished valor and service in assisting the Thai military.
General Secord served in many positions while performing military service. He
was the first military officer to be appointed Deputy Assistant Secretary of
Defense (Near East, Africa and South Asia). General Secord received a Bachelor
of Science from the United States

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<PAGE>

Military Academy. He is also a graduate of the United States Air Force Command
and Staff College, and the United States Naval War College. In addition, he
holds a Masters degree in International Affairs from George Washington
University.

Brent M. Pratley, M.D. was elected as a director of the Company in
June 1994 and served as the Secretary of the Company from June 1994 to
September 1997. Dr. Pratley is currently licensed to practice medicine in Utah
and California, and since 1978 has been in private practice in General
Orthopedics and Sports Medicine at Utah Valley Regional Medical Center located
in Provo, Utah, as well as in Los Angeles, California. Dr. Pratley received his
Doctor of Medicine degree in Orthopedic Surgery in 1968 from the College of
Medicine at the University of California, Irvine, California.

Kenneth M. Dodd was the Executive Vice President of the Company from
October 1995, through 1997, but his primary responsibilities and duties have
been to TMI since its formation. Mr. Dodd is President, Chief Executive Officer
and a director of TMI, an 80 percent owned subsidiary of the Company. He began
as an intern in 1984 in General Motor's financial department and moved through
the organization to become Director of International Sales, Document
Processing/Imaging Division of Electronic Data Systems, a subsidiary of GM,
where his responsibilities included developing global market plans and
recruiting, training and leading the sales force worldwide. Mr. Dodd graduated
from the Northwood Institute in Midland, Michigan in 1985 with honors in two
majors, Business and Economics.

Milton R. Geilmann was elected as a director of the Company in
January 1998. Mr. Geilmann has been associated with the medical field for over
32 years. From 1985 to 1993, he worked at E. R. Squibb and Sons, where he held
many positions, including Nuclear Consultant for Diagnostic Medicine. Mr.
Geilmann received a Masters of Science in Pharmacology in 1957 from State
University of New York.

Harry C. Aderholt (Brigadier General, United States Air Force, Retired) was
elected as a director of the Company in January 1998. General Aderholt served
in Southeast Asia, particularly Thailand, for many years both in and out of the
U.S. Air Force. Following his retirement from military service in 1976, General
Aderholt engaged in various private business ventures, including serving as Vice
President of Air Siam in Bangkok, Thailand.

Directors of the Company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed or their earlier resignation or removal from office. The Company does
not have an Executive Committee. However, the Company does have an Audit
Committee and a Compensation Committee which were created in January 1998. The
Audit Committee reviews and reports to the Board of Directors on the financial
results of the Company's operations and the results of the audit services
provided by the Company's independent accountants, including the fees and costs
for such services. The Compensation Committee reviews compensation paid to
management, including administration of the Company's 1997 Stock Option and
Restricted Stock Plan, and recommends to the Board of Directors appropriate
executive compensation. There is no family relationship between or among any of
the directors and executive officers of the Company, except for the relationship
between Mr. Johnston and Mr. Packer, who are cousins by marriage.

EXECUTIVE COMPENSATION

During the fiscal year ended June 30, 1997, Mr. Secord and Mr. Dodd were
each paid salaries and bonuses exceeding $100,000. Mr. Johnston, the Chairman
of the Board and Chief Executive Officer, was not paid a cash salary but was
instead deemed compensated in the form of periodic issuances of restricted
shares of Common Stock to Thermal Imaging, Inc. (herein referred to as "TII"),
an affiliate of Mr. Johnston. In certain instances during fiscal year 1997, and
prior years, funds raised from investors in the Company were delivered to TII
and deposited into TII bank accounts. In those cases where reliable evidence
was not available to accurately verify the subsequent transfer of funds from
TII to the Company or to creditors of the Company, or to distinguish
contributions made by TII to the Company in return for restricted shares of
Common Stock from transfers of funds collected by TII on behalf of the Company,
all unaccounted for funds, or excess restricted shares of Common Stock issued to
TII, have been deemed compensation to Mr. Johnston. See "Certain Transactions -
Proceeds From the Sale of Securities." The periodic issuance of restricted

36
<PAGE>

shares of the Common Stock to TII are in settlement of both services provided to
and expenses incurred on behalf of the Company by Mr. Johnston.

The total compensation and reimbursement of expenses to officers and
directors for the fiscal year ended June 30, 1997 was $575,231, including
$152,498 worth of restricted Common Stock issued to Mr. Johnson via TII. In
addition, Mr. Packer was granted options to purchase 500,000 shares of Common
Stock, subject to certain vesting requirements.

All corporate decisions regarding employee compensation and stock option
awards during the last three year period have been approved by the Board of
Directors. In January 1998, the Board of Directors created a Compensation
Committee composed of Dr. Pratley, Mr. Geilmann and General Aderholt, all
non-employee directors. The committee will assume responsibility for reviewing
all executive compensation matters and administering the Company's 1997 Stock
Option and Restricted Stock Plan.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- -------------------------

SECURITIES
UNDERLYING
NAME AND PRINCIPAL FISCAL ALL OTHER RESTRICTED OPTIONS AND
POSITION YEAR SALARY BONUS COMPENSATION (1) COMMON STOCK WARRANTS (3)
-------- ---- ------ ----- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David B. Johnston, 1997 -0- -0- $152,498 -0- -0-
Chairman of the Board, and 1996 -0- -0- $541,850 -0- -0-
Chief Executive Officer, and 1995 -0- -0- $2,000,000 (2) -0- -0-
Treasurer (6)(7)

Richard V. Secord, 1997 $204,486 -0- -0- -0- -0-
President and 1996 $189,697 -0- -0- -0- -0-
Chief Operating Officer (3)(4) 1995 $ 21,875 -0- -0- -0- 2,000,000

Kenneth M. Dodd, 1997 $156,667 -0- -0- -0- -0-
President of TMI (5) 1996 $ 52,000 -0- -0- -0- 500,000

David A. Packer, 1997 $ 31,657 -0- -0- -0- 500,000
President and Treasurer (6)

</TABLE>

(1) Certain of the officers of the Company routinely receive other benefits
from the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during the last three
completed fiscal years, which cannot be precisely ascertained, did not
exceed the lesser of $50,000 or 10 percent of the total compensation
reported for the named executive officers excepting Mr. Johnston who has
foregone annual monetary compensation in favor of the issuance of
restricted shares of the Common Stock. Included in All Other Compensation
for Mr. Johnston are reimbursements of travel expenses for himself and
other executives of the Company which were paid by TII. Based on available
information, General Secord's All Other Compensation, which is comprised of
reimbursed travel and a $500 per month car allowance, did not exceed 10
percent of annual compensation during the periods discussed , but did total
approximately $11,000 for fiscal year 1997.

(2) The valued referenced represents the fair market value of the shares of
Common Stock, ranging from $0.28 to $1.00 per share, when issued in the
name of Thermal Imaging, Inc. ("TII"), an Affiliate of Mr. Johnston. The
issuance of the referenced shares was treated as compensation to Mr.
Johnston as a result of discrepancies arising from the funding relationship
between TII and the Company. See "Certain transactions - Proceeds From
the Sale of Securities." Over the last three fiscal years, Mr. Johnston
indirectly has been issued 3,084,516 shares of the Common Stock as
compensation or repayment of expenses, which based on the fair market
value at the time of issuance equals an aggregate of $2,694,348.
Mr. Johnston is either the record or beneficial owner of a total of
12,072,784 shares of the Common Stock of the Company issued and
outstanding as of March 31, 1998 (including shares of the Common
Stock held in the names of Thermal Imaging, Inc.). The aggregate
value of all Common Stock beneficially held by Mr. Johnston, pursuant
to Section 13d-3 of the Exchange Act, as of March 31, 1998,
based upon the closing market price of the Company's unrestricted
shares of the Common Stock as of March 31, 1998, was $6,760,759.

(3) None of the options granted to employees have been exercised. Mr. Johnston
was granted options to purchase 1,000,000 shares of the Common Stock of the
Company on September 18, 1997. General Secord was granted an option to
purchase 1,250,000 shares of the Common Stock of the Company on September
18, 1997. See "Employment Contracts." Of Mr. Johnston's options on
1,000,000 shares, only 250,000 shares are vested as of the date hereof. Of
General Secord's options on 3,250,000 shares, only 1,312,500 shares are
vested as of the date hereof. Of the 500,000 optioned shares granted to
Mr. Packer, none of the options are vested as of the date hereof. Of
Mr. Dodd's options on 500,000 shares, only 375,000 shares are vested as of
the date hereof.

(4) General Secord served as President of the Company from February 1996 to
April 1997. He was elected Secretary of Company effective July 1, 1997.

(5) Mr. Dodd received $156,667 during the fiscal year ended June 30, 1997.
While Mr. Dodd resigned from his position of Executive Vice President of
the Company in May 1998, he still serves as President of TMI and his
employment continues to be governed by the terms of his original employment
agreement with the Company , executed October 11, 1995. Options to
purchase 500,000 shares of the Common Stock of the Company were granted on
October 11, 1995. Mr. Dodd has also received stock in TMI totaling
approximately 7.5 percent of the outstanding TMI shares. The value of the
TMI shares on the date of issue was insignificant, and, therefore, not
reflected as compensation to Mr. Dodd.

37
<PAGE>
(6) Mr. Packer was elected President of the Company in April 1997 and Treasurer
of the Company effective July 1, 1997.

EMPLOYMENT CONTRACTS

David B. Johnston, the Chief Executive Officer of the Company, and the
Company entered into an Employment Agreement dated October 29, 1997, but
effective September 18, 1997. The term of the agreement is for three years,
automatically renewable for additional periods of one year thereafter unless
terminated upon the giving of notice at least 14 days prior to the annual
renewal date. The agreement calls for no mandatory annual cash compensation,
but does provide for compensation in the form of non-statutory stock options
covering 1,000,000 shares of the Common Stock at an exercise price of $0.75 per
share. Twenty-five percent of the options vested upon the execution of the
agreement, and 25 percent of the remaining options vest on each anniversary date
of the agreement. The options granted to Mr. Johnston must be exercised within
five years from the date of grant. To the extent applicable, the options
granted to Mr. Johnston are subject to the Company's 1997 Stock Option and
Restricted Stock Plan. At the cost of the Company, Mr. Johnston has "piggyback"
registration rights with respect to the shares of the Common Stock derived from
the exercise of the options. As of the date of this Prospectus, none of the
options granted to Mr. Johnston under the agreement have been exercised. The
agreement subjects Mr. Johnston to a two year non-compete restriction, the
obligation not to induce any employee of the Company to leave his employment
with the Company during the term of the agreement or for two years after the
termination thereof, and the duty not to reveal any confidential information
about the business of the Company.

None of the shares of the Common Stock to be issued to Mr. Johnston in
connection with the exercise of the options is being registered under the
Securities Act pursuant to this Prospectus.

David A. Packer, the President of the Company, and the Company entered into
an Employment Agreement dated April 30, 1997. The term of the agreement is for
three years and calls for compensation of $135,000 per year, plus non-statutory
stock options covering 500,000 shares of the Common Stock at an exercise price
of $0.97 per share. One-third of the options vest on each anniversary date of
the agreement. The options granted to Mr. Packer must be exercised within five
years from the date of the agreement. If the agreement is terminated for
"cause" as defined in the agreement, or Mr. Packer voluntarily terminates the
agreement, all of the options granted to Mr. Packer thereunder, and which have
not been exercised, shall be forfeited. At the cost of the Company, Mr. Packer
has "piggyback" registration rights with respect to the shares of the Common
Stock derived from the exercise of the options. The agreement subjects Mr.
Packer to a two year non-compete restriction, the obligation to give the Company
the right to take advantage of any business opportunity, and the duty not to
reveal any confidential information about the business of the Company.

The resale of 500,000 shares of the Common Stock to be issued to Mr. Packer
in connection with the exercise of the options is being registered under the
Securities Act pursuant to this Prospectus.

Richard V. Secord, the Chief Operating Officer of the Company, and the
Company entered into an original Employment Agreement dated June 12, 1995, which
was superseded by a new agreement dated September 18, 1997. The term of the new
agreement is for three years and calls for compensation of $175,000 per year.
In addition to the cash compensation, the agreement ratifies an original grant
to General Secord of non-statutory stock options covering 2,000,000 shares of
the Common Stock at an exercise price of $1.25 per share, 50 percent of which
vested on June 12, 1996 and 50 percent of which will vest on June 12, 1998. The
options granted pursuant to the original agreement must be exercised within ten
years from the date of grant. In addition, General Secord was granted
additional non-statutory options covering 1,250,000 shares of the Common Stock
at an exercise price of $0.70 per share. Twenty-five percent of these
additional options vested on September 18, 1997, and 25 percent of the remaining
options vest on each anniversary date of the agreement (September 18). These
options must be exercised within five years from the date of grant. To the
extent applicable, the additional options granted to General Secord are subject
to the Company's 1997 Stock Option and Restricted Stock Plan. At the cost of
the Company, General Secord has "piggyback" registration rights with respect to
the shares of the Common Stock derived from the exercise of the options. As of
the date of this Prospectus, none of the options granted to General Secord under
the agreement have been exercised. The agreement subjects General Secord to a
two year non-compete restriction, the obligation not to induce any employee of
the

38
<PAGE>

Company to leave his employment with the Company during the term of the
agreement or for two years after the termination thereof, and the duty not to
reveal any confidential information about the business of the Company.

The resale of 3,250,000 shares of the Common Stock to be issued to General
Secord in connection with the exercise of the options is being registered under
the Securities Act pursuant to this Prospectus.

Kenneth M. Dodd, the President of TMI, an 80 percent owned subsidiary of
the Company, executed an Employment Agreement with the Company on October 11,
1995. The term of the agreement is for three years and calls for compensation
of $150,000 per year, plus non-statutory stock options covering 500,000 shares
of the Common Stock at an exercise price of $1.25 per share. The annual cash
compensation shall increase to $175,000, if and when the Company sells its 100th
CTI System. One-half of the options vested on June 1,1996, 125,000 options
vested on June 2, 1997, and the remaining 125,000 options will vest on October
11, 1998. The options granted to Mr. Dodd must be exercised within 10 years
from the date of the agreement. If the agreement is terminated for "cause" as
defined in the agreement, or Mr. Dodd voluntarily terminates the agreement, all
of the options granted to Mr. Dodd thereunder, and which have not been
exercised, shall be forfeited. At the cost of the Company, Mr. Dodd has
"piggyback" registration rights with respect to the shares of the Common Stock
derived from the exercise of the options. As of the date of this Prospectus,
none of the options granted to Mr. Dodd under the agreement have been exercised.
The agreement subjects Mr. Dodd to a two year non-compete restriction, the
obligation to give the Company the right to take advantage of any business
opportunity, and the duty not to reveal any confidential information about the
business of the Company. As part of the consideration for the agreement, Mr.
Dodd was appointed the Chief Executive Officer of TMI and received 2,830,959
shares of the common stock of TMI (approximately 7.6 percent of its issued and
outstanding common stock).

The resale of 500,000 shares of the Common Stock to be issued to Mr. Dodd
in connection with the exercise of the options is being registered under the
Securities Act pursuant to this Prospectus.

DIRECTOR COMPENSATION

By appropriate resolution of the Board of Directors, directors may be
reimbursed or advanced cash for expenses, if any, relating to attendance at
meetings of the Board of Directors and may be paid a fixed sum (as determined
from time to time by the vote of a majority of the directors then in office) for
attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the Company
in any other capacity and receiving compensation therefor. Members of special
or standing committees may, by appropriate resolution of the Board of Directors,
be allowed similar reimbursement of expenses and compensation for attending
committee meetings.

STOCK OPTIONS AND RESTRICTED STOCK

In June 1995, the Board of Directors adopted the Company's 1995 Stock
Option Plan, which was never ratified by the stockholders and formally
terminated by the Board of Directors on September 18, 1997. On September 18,
1997, the Board of Directors adopted the Company's 1997 Stock Option and
Restricted Stock Plan (the "Plan") subject to the approval of the stockholders
of the Company. The Plan was formally adopted by the stockholders of the
Company on February 6, 1998. The Plan provides for the grant by the Company to
employees of the Company of (i) options to purchase shares of the Common Stock,
and (ii) shares of the Company's restricted Common Stock (the "Restricted
Stock"). The options and the Restricted Stock are hereinafter sometimes
collectively referred to as the "Plan Awards." Options granted under the Plan
may include non-statutory options that do not meet the requirements of Sections
421 through 424 of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as incentive stock options ("ISO") intended to qualify under Section 422
of the Code. An aggregate of 5,125,000 shares of the Common Stock may be issued
pursuant to the provisions of the Plan. The Plan shall be administered by the
Board of Directors or by a committee of the Board composed solely of two or more
non-employee directors (the "Administrator"). The Administrator shall
administer the Plan so as to comply at all times with the Exchange Act,
including Rule 16b-3 (or any successor rule), and, subject to the Code, shall
otherwise have absolute and final authority to interpret the Plan. The Plan
shall continue in effect for a term of 10 years unless sooner terminated
pursuant to its provisions.

As mentioned above, the 1995 Stock Option Plan was to be submitted to the
stockholders in order to qualify for statutory stock option treatment under the
Code, but such submittal never occurred. Employees of the Company

39
<PAGE>

who were awarded options pursuant or in reference to the 1995 Stock Option Plan
have ratified their agreements to reflect that the plan was never submitted to
the stockholders for approval but that such options shall incorporate, as
contractual terms, the terms and conditions of the 1995 Stock Option Plan.

STOCK OPTIONS. Pursuant to the Plan, the term of each option shall be 10
years from the date of grant or such shorter term as may be determined by the
Administrator; provided, in the case of an ISO granted to a 10 percent
stockholder, the term of such ISO shall be five years from the date of grant or
such shorter time as may be determined by the Administrator. Each option
granted under the Plan may only be exercised to the extent that the optionee is
vested in such option. Except as otherwise provided, all options issued under
the Plan shall vest 20 percent each year over a five year period.
Notwithstanding the foregoing, the Administrator shall have the discretionary
power to establish the vesting periods for any option granted under the Plan,
except that in no case may the Administrator permit more than 25 percent of any
option to vest before the first anniversary of the earlier of the date of grant
or the date on which the optionee began providing services to the Company. The
exercise price shall be such price as is determined by the Administrator in its
sole discretion; provided, however, the exercise price shall not be less than
100 percent of the Fair Market Value of the shares of the Common Stock subject
to such option on the date of grant (or 110 percent in the case of an option
granted to an employee who is a 10 percent stockholder on the date of grant). A
10 percent stockholder shall mean a person that owns more than 10 percent of the
total combined voting power of all classes of outstanding stock of the Company
or any subsidiary, taking into account the attribution rules set forth in
Section 424 of the Code. Any shares of the Common Stock issued upon exercise of
an option shall be subject to such rights of repurchase and other transfer
restrictions as the Administrator may determine in its sole discretion. To the
extent that the aggregate Fair Market Value (determined on the date of grant) of
the shares with respect to which ISOs are exercisable for the first time by an
individual during any calendar year under the Plan, and under all other plans
maintained by the Company, exceeds $100,000, such options shall be treated as
non-statutory options. "Fair Market Value" shall be the mean between the
closing bid and asked prices of the shares of the Common Stock on the date in
question (on the principal market in which the shares are traded), or if the
shares were not traded on such date, the mean between closing bid and asked
prices of the shares on the next preceding trading day during which the shares
were traded.

RESTRICTED STOCK. The Administrator shall have the authority to grant
shares of the Common Stock to employees that are subject to certain terms,
conditions, and restrictions (the "Restricted Stock"). The Restricted Stock may
be granted by the Administrator either separately or in combination with
options. The terms, conditions and restrictions of the Restricted Stock shall
be determined from time to time by the Administrator without limitation, except
as otherwise provided in the Plan; provided, however, that each grant of
Restricted Stock to an employee shall require the employee to remain an employee
of the Company or any of its subsidiaries for at least six months from the date
of grant. Restricted Stock shall be granted to employees for services rendered
and at no additional cost to the employee, provided, however, that the value of
the services performed must, in the opinion of the Administrator, equal or
exceed the par value of the Restricted Stock to be granted to the employee. The
terms, conditions, and restrictions of the Restricted Stock shall be determined
by the Administrator on the date of grant. No certificates will be issued to an
employee with respect to the Restricted Stock until the date the Restricted
Stock becomes vested in accordance with the Plan. The Restricted Stock may not
be sold, assigned, transferred, redeemed, pledged or otherwise encumbered during
the period in which the terms, conditions and restrictions apply (the
"Restriction Period"). More than one grant of Restricted Stock may be
outstanding at any one time, and the Restriction Periods may be of different
lengths. Receipt of the Restricted Stock is conditioned upon satisfactory
compliance with the terms, conditions and restrictions of the Plan and those
imposed by the Administrator. On the date the Restriction Period terminates,
the Restricted Stock shall vest in the employee. If an employee (i) with the
consent of the Administrator, ceases to be an employee of, or otherwise ceases
to provide services to, the Company or any of its subsidiaries, or (ii) dies or
suffers from permanent and total disability, the vesting or forfeiture
(including without limitation the terms, conditions and restrictions) of any
grant under the Plan shall be determined by the Administrator in its sole
discretion, subject to any limitations or terms of the Plan. If the employee
ceases to be an employee of, or otherwise ceases to provide services to, the
Company or any of its subsidiaries for any other reason, all grants of
Restricted Stock under the Plan shall be forfeited (subject to the terms of the
Plan).

As of the date of this Prospectus, no shares of the Restricted Stock have
been granted under the Plan.

40
<PAGE>

As of the date of this Prospectus, the following options were outstanding
under the Plan:

NAME OF PERSON TO
WHOM OPTIONS NUMBER OF SHARES EXPIRATION DATE
WERE GRANTED UNDER OPTION OF OPTION VESTING DATE
------------ ------------ --------- ------------
<S> <C> <C> <C>
David B. Johnston, 250,000 09/18/02 (1) 09/18/97 (2)
Chairman of the Board, 250,000 09/18/02 (1) 09/18/98 (2)
Chief Executive Officer, 250,000 09/18/02 (1) 09/18/99 (2)
and Treasurer 250,000 09/18/02 (1) 09/18/00 (2)

Richard V. Secord, 312,500 09/18/02 (1) 09/18/97 (2)
Chief Operating Officer (3)(4) 312,500 09/18/02 (1) 09/18/98 (2)
312,500 09/18/02 (1) 09/18/99 (2)
312,500 09/18/02 (1) 09/18/00 (2)

Kenneth M. Dodd, -0- N/A N/A
President of TMI (3)

David A. Packer, -0- N/A N/A
President and Treasurer (3)(4)

</TABLE>

(1) The option may terminate prior to this date. An option will automatically
terminate and revert to the Company upon the termination of employment with
"cause," as defined in the employee's Employment Agreement. In addition,
an option will automatically terminate and revert to the Company if vested
as of the date of resignation or termination "without cause," as defined in
the employee's Employment Agreement, but not exercised on or before the
expiration of 90 days after the termination date of employment.
(2) Conditioned on the employee's continued employment with the Company.
(3) The employee holds options granted prior to the adoption of the Plan. The
options were originally granted pursuant to the terms of the Company's 1995
Stock Option Plan which was never ratified by the stockholders and formally
terminated by the Board of Directors on September 18, 1997. See "- Stock
Options and Restricted Stock" and "- Employment Contracts." The terms of
the employee stock option agreements were amended to ratify and incorporate
the terms of the 1995 Stock Option Plan into the respective stock option
agreements as contractual provisions.
(4) General Secord was President of the Company from February 1996 to April
1997, and was elected Secretary effective July 1, 1997. Mr. Packer was
elected President in April 1997 and Treasurer effective July 1, 1997.

The resale of 1,250,000 shares of the Common Stock to be issued upon the
exercise of the above described options granted pursuant to the Plan and in
favor of General Secord is being registered under the Securities Act pursuant to
this Prospectus.

41
<PAGE>

The following table shows, as to the named executive officers, information
concerning individual grants of options during the fiscal year ended June 30,
1997.

OPTION/WARRANT GRANTS IN LAST FISCAL YEAR

NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/WARRANTS
OPTIONS/WARRANTS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED EMPLOYEES IN FY97 PER SHARE DATE
---- ------- ----------------- --------- ----
<S> <C> <C> <C> <C>
David B. Johnston, -0- N/A N/A N/A
Chairman of the Board,
Chief Executive Officer,
and Treasurer (4)

Richard V. Secord, -0- N/A N/A N/A
Chief Operating Officer (1)(4)

Kenneth M. Dodd, -0- N/A N/A N/A
President of TMI

David A. Packer, 500,000 (2) 100 $0.97 04/30/02 (3)
President and Treasurer (1)

</TABLE>

(1) General Secord was President of the Company from February 1996 to April
1997, and was elected Secretary effective July 1, 1997. Mr. Packer was
elected President in April 1997 and Treasurer effective July 1, 1997.
(2) Represents options to purchase Common Stock.
(3) The option may terminate prior to this date. An option will automatically
terminate and revert to the Company upon the termination of employment with
"cause," as defined in the employee's Employment Agreement. In addition,
an option will automatically terminate and revert to the Company if vested
as of the date of resignation or termination "without cause," as defined in
the employee's Employment Agreement, but not exercised on or before the
expiration of 90 days after the termination date of employment.
(4) Mr. Johnston was granted an option to purchase 1,000,000 shares of the
Common Stock of the Company on September 18, 1997. General Secord was
granted an option to purchase 1,250,000 shares of the Common Stock of the
Company on September 18, 1997. See "Employment Contracts."

No warrants to purchase shares of the Common Stock have been granted to any
officer, director, or employee of the Company.

42
<PAGE>

The following table shows, as to the named executive officers, information
concerning aggregate option and warrant exercises during the fiscal year ended
June 30, 1997 and the option and warrant values as of June 30, 1997.

AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION AND WARRANT VALUES

NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS OPTIONS/WARRANTS AT
SHARES ACQUIRED AT JUNE 30, 1997 JUNE 30, 1997
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE (1)
---- ----------- -------------- -------------------------- ------------------------------
<S> <C> <C> <C> <C>
David B. Johnston, -0- -0- -0- -0-
Chairman of the Board,
Chief Executive Officer,
and Treasurer

Richard V. Secord, -0- -0- 1,000,000/1,000,000 -0-
Chief Operating Officer (2)

David A. Packer, -0- -0- 0/500,000 -0-
President and Treasurer (2)

Kenneth M. Dodd, -0- -0- 375,000/125,000 -0-
President of TMI

</TABLE>

(1) The value of the unexercised in-the-money options/warrants at June 30, 1997
was determined by calculating the difference between the exercise price per
share of the Common Stock, as set forth in the respective stock option
agreement, and the closing price per share of the Common Stock on June 30,
1997. The resulting amount is deemed to be the value of the
options/warrants for purposes of this table. In the event the exercise
price per share of the Common Stock exceeded the closing price per share of
the Common Stock on June 30, 1997, a "zero" value is shown.
(2) General Secord was President of the Company from February 1996 to April
1997, and was elected Secretary effective July 1, 1997. Mr. Packer was
elected President in April 1997 and Treasurer effective July 1, 1997.

LONG-TERM INCENTIVE PLANS

The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.

CERTAIN TRANSACTIONS

Management believes that all prior related party transactions are on terms
no less favorable to the Company as could be obtained from unaffiliated third
parties. Management's reasonable belief of fair values is based upon expert
opinions received by management, with respect to share valuations, and, with
respect to the consideration to the Company, is based upon proximate similar
transactions with third parties or attempts to obtain the consideration from
third parties. All ongoing and future transactions with such persons, including
any loans or compensation to such persons, will be approved by a majority of
disinterested, independent outside members of the Board of Directors.

Since its inception the Company has been dependent upon certain
individuals, consultants, officers/stockholders and the related corporations
under their control (collectively referred to as the "Affiliates") to provide
capital, management services, assistance in finding new sources for debt and
equity financing and guidance in the development of the Company's thermal
imaging system. The Affiliates have generally provided services and incurred
expenses on behalf of the Company in exchange for shares of the Common Stock.
The Company has issued Form 1099's for all such share issuances for services
rendered after July 1, 1996.

PROCEEDS FROM THE SALE OF SECURITIES. In certain instances in years prior
to 1997, Affiliates accepted cash raised through the issuance of short term
promissory notes and private placements of securities, including shares of the
Common Stock and debentures, on behalf of the Company. Such amounts were
deposited into the separate bank accounts of certain Affiliates and either
transferred directly to the account of the Company or transferred to third
parties in payment of debts of the Company. In a majority of these instances,
Thermal Imaging, Inc. ("TII"), an

43
<PAGE>

Affiliate of Mr. Johnston, the Chief Executive Officer of the Company, received
funds raised from investors and deposited the amounts in an account over which
Mr. Johnston had sole control. The funds received in the TII account were
commingled with other assets of TII.

In an effort to account for such proceeds, the auditors have assumed that
all funds raised during the past three fiscal years which were not paid by
investors directly to the Company were initially transferred to TII. In those
cases where reliable evidence is not available to accurately verify the
subsequent transfer of funds from TII to the Company or to creditors of the
Company, or to distinguish contributions made by TII to the Company in return
for shares of the Common Stock from transfers of funds collected on behalf of
the Company for which shares of the Common Stock had been issued to subscribers,
the discrepancies have been treated as compensation to Mr. Johnston and charged
as a compensation expense to the Company and reflected as operating, general and
administrative expenses in the accompanying financial statements. For example,
this amount for the fiscal year ending June 30, 1997, was $171,264, as reflected
in the Summary Compensation Table. This resulting amount constitutes the total
of all compensation paid during such period to Mr. Johnston.

DOREX SETTLEMENT. Between July and October 1995, the Company reached
various settlements with former stockholders of Dorex, Inc. ("Dorex") regarding
threats of litigation arising out of the Company's acquisition of certain
research contracts with the State University of New York - Buffalo ("SUNY") and
intellectual property relating to thermal imaging technology. In 1989, Dorex
entered into a research agreement with SUNY regarding the development and
application of computerized thermography analysis. After Dorex became unable to
meet funding obligations under the research program, TII, an Affiliate of Mr.
Johnston and a stockholder in Dorex, paid arrearages due under the agreement and
assumed future payment obligations in order to continue the project. As a
result of an arrangement negotiated, TII gained an assignment of the research
agreement and related technology to the exclusion of Dorex. TII subsequently
transferred all of its contractual and proprietary rights in the project to the
Company. According to management, certain Dorex stockholders threatened
litigation against the Company as a result of its role in the acquisition of the
research agreement and related technology. In order to avoid litigation, the
management issued 630,000 shares of the Common Stock to Dorex stockholders in
1995 in consideration of their discharge and release of the Company from all
claims and liabilities relating to the technology. Settling Dorex stockholders
executed written agreements acknowledging their release of the Company. Some
remaining stockholders have not settled. In an effort to protect the Company
from future costs associated with the Dorex transaction, the Company entered
into an Assumption of Liability Agreement (the "Liability Agreement") with TII,
effective April 17, 1996. The terms of the Liability Agreement provide that in
exchange of the issuance of 112,500 shares of the Common Stock to TII, TII
agrees to assume liability for all claims made by Dorex stockholders against the
Company after April 17, 1996.

STOCK TRANSACTIONS WITH AFFILIATES. A substantial portion of the cash
contributed to the Company over the past several years has come from Affiliates.
The primary Affiliate contributors have been TII, an Affiliate of Mr. Johnston,
and Paul D. Holt d/b/a PDH, Ltd., an independent contractor who provides various
administrative services to the Company. All of the restricted shares of the
Common Stock issued to the Affiliates, unless otherwise noted, has been valued
at 50 percent of the average monthly trading price of free trading shares of the
Common Stock. Management believes that such a valuation method fairly and
accurately reflected the fair market value of restricted shares of the Common
Stock at the respective dates of issue.

44
<PAGE>

The following is an analysis of transactions involving the Affiliates
during the fiscal years ended June 30, 1997 and 1996:

TII PDH, LTD.
--------------------------- ---------------------------
YEAR ENDED JUNE 30, 1997 SHARES AMOUNT SHARES AMOUNT

<S> <C> <C> <C> <C>
Shares of the Common Stock issued as
compensation and repayment of expenses
incurred on behalf of the Company by the
Affiliates at prices ranging from $0.18 to
$0.73 per share ................................. 287,266 $152,498 400,000 $253,000
Investment in the Company ......................... 1,960,418 980,209 -- --
--------- ---------- ------- --------
Total - 1997 ...................................... 2,247,684 $1,132,707 400,000 $253,000
--------- ---------- ------- --------
--------- ---------- ------- --------

YEAR ENDED JUNE 30, 1996

Shares of the Common Stock issued as
compensation and repayment of expenses
incurred on behalf of the Company by the
Affiliates at prices ranging from $0.53 to
$0.70 per share ................................. 530,000 $474,500 194,383 $122,461
Investment in the Company ......................... 1,120,000 672,000 -- --
--------- ---------- ------- --------
Total - 1996 ...................................... 1,650,000 $1,146,500 194,383 $122,461
--------- ---------- ------- --------
--------- ---------- ------- --------

</TABLE>

45
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table presents certain information regarding the beneficial
ownership of all shares of the Common Stock at March 31, 1998 (i) each person
who owns beneficially more than five percent of the outstanding shares of the
Common Stock, (ii) each director of the Company, (iii) each named executive
officer, and (iv) all directors and officers as a group. See "Management -
Stock Options and Restricted Stock" and "- Certain Transactions."

SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER (1) NUMBER PERCENT (8)
---------------------------- ------ -----------
<S> <C> <C>
David B. Johnston (2) .............................. 12,072,784 25.5
Richard V. Secord (3) ......................... 1,312,500 2.9
Brent M. Pratley, M.D. ........................ 600 *
Kenneth M. Dodd (4) ........................... 375,000 *
David A. Packer (5) ........................... 257,405 *
Harry C. Aderholt ............................. 45,000 *
Milton R. Geilmann ............................ 15,000 *
Daron Dillia (6) .............................. 5,052,525 9.7
All directors and officers
as a group (seven persons) (7) .............. 14,078,289 28.6

</TABLE>

* Less than one percent.
(1) Unless otherwise indicated, each person named in the above-described table
has the sole voting and investment power with respect to his shares of the
Common Stock beneficially owned. The business address of each individual
is the same as the address of the Company's principal executive offices
except for Dr. Pratley whose business address is 1055 North 300 W., No.
501, Provo, Utah 84604; Mr. Geilmann, whose business address is 20660 S.W.
Shoshone Drive, Tualatin, Oregon 97062; and General Aderholt, whose address
is 23 Miracle Strip Parkway, N.E., Ft. Walton Beach, Florida 32548.

(2) Includes no shares of the Common Stock actually issued and; 250,000 shares
of the Common Stock which are covered by options are exercisable within 60
days from Mach 31, 1998. Also includes 11,822,784 shares of the Common
Stock owned by Thermal Imaging, Inc., an Affiliate of Mr. Johnston.

(3) Includes no shares of the Common Stock actually issued; 1,312,500 shares of
the Common Stock which are covered by options are exercisable within 60
days from March 31, 1998.

(4) Includes no shares of the Common Stock actually issued; 375,000 shares of
the Common Stock which are covered by options are exercisable within 60
days from March 31, 1998.

(5) Includes 90,739 shares of Common Stock issued and outstanding; 166,666
shares of Common Stock which are covered by options exercisable within 60
days from March 31, 1998.

(6) Includes 259,000 shares of the Common Stock issued and outstanding and
700,000 shares of the Common Stock underlying the Resale Warrants in the
name of Daron Dillia. Also includes 2,846,275 shares of the Common Stock
issued and outstanding, 2,000,000 shares of the Common Stock which are
covered by options exercisable within 60 days of March 31, 1998, and
206,250 beneficially held, in the name of Manhattan Financial Group. See
"Plan of Distributions and Selling Stockholders."

(7) Includes an aggregate of 11,974,123 shares of the Common Stock issued and
outstanding and an aggregate of 2,104,166 shares of the Common Stock which
are covered by options exercisable within 60 days from March 31, 1998.

(8) Unless otherwise provided, the calculation of percentage ownership is based
on the total number of shares of the Common Stock outstanding as of
March 31, 1998. Any shares of the Common Stock which are not outstanding
as of such date but are subject to options, warrants, or rights of
conversion exercisable within 60 days of March 31, 1998 shall be deemed to
be outstanding for the purpose of computing percentage ownership of
outstanding shares of the Common Stock by such person but shall not be
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.

MANHATTAN FINANCIAL GROUP CONSULTING AGREEMENT

Effective January 1, 1997, the Company and Manhattan Financial Group of
Manhattan Beach, California ("MFG"), executed a Consulting Agreement covering
financial services. MFG provides regular financial advising services to the
Company, such as strategic consulting to arrange financing of projects. For
example, MFG arranged, for no additional fee other then the Common Stock set
forth below, the sale of convertible debentures in 1996 and the 8% Convertible
Debenture in 1997, and MFG negotiated and arranged an equipment financing
commitment not utilized in 1996. The term of the agreement is for one year,
automatically renewable for additional periods of one year thereafter unless
terminated upon proper notice. The consideration for the agreement was 100,000
shares of the Common Stock and an option to purchase 2,000,000 shares of the
Common Stock at an exercise price of $0.60 per share (the original executed
agreement referenced an exercise price of $0.75 per share, but the agreement was
amended to reflect a reduced exercise price of $0.60 per share). Fifty percent
of the options vested upon the execution of the agreement, and the remaining 50
percent of the options vested on December 31, 1997. At the cost of the Company,

46
<PAGE>

MFG has "piggyback" registration rights with respect to the shares of the Common
Stock derived from the exercise of the options. As of the date of this
Prospectus, none of the options granted to MFG under the agreement have been
exercised. In the event of termination of the agreement before its expiration
date, all options exercisable must be exercised on or before the expiration of
three years following the termination date, extended by agreement, from an
original exercise period of 90 days following the termination date. In
addition, the agreement subjects MFG to a duty not to reveal any confidential
information about the business of the Company.

In a related transaction, on July 9, 1997, MFG and the Company entered into
a Restricted Stock Purchase Agreement wherein the Company would issue to MFG
500,000 shares of the Common Stock in consideration for, and subject to, total
contributions of up to $150,000 to the Company in conjunction with the PR
Expense Administration Agreement between the Company and Liberty Capital Group,
Inc. As of the date of this Prospectus, MFG has funded approximately $50,000
pursuant to its obligation. The effective purchase price of the Common Stock
was set at $0.30 per share.

The resale of 2,600,000 shares of the Common Stock issued, or to be issued,
to MFG in connection with the above described Consulting Agreement and
Restricted Stock Purchase Agreement, including any shares to be issued upon the
exercise of any options, is being registered under the Securities Act pursuant
to this Prospectus.

AMBIENT CAPITAL GROUP, INC. FINANCIAL ADVISORY AGREEMENT

On October 29, 1997, the Company appointed Ambient Capital Group, Inc.
("Ambient") to act as its financial adviser with respect to planning and
executing capital structure strategies, revising the Company's business plan,
and certain other matters related thereto. These financial advising services
will include negotiation of equipment financing of capital financing for
equipment and will include the introduction of new capital financing sources to
the Company. The term of the agreement is for 12 months, with month-to-month
extensions thereafter, until terminated upon 60 days notice by either party.
Ambient received an initial retainer fee for its services of 83,333 shares of
the Common Stock and 83,333 warrants giving Ambient the right to purchase five
shares of the Common Stock at $0.72 per share for each warrant issued. These
warrants are valid for a period of four years from the date of issue. In
addition, Ambient will receive success fees for raising equity and debt capital,
for advising on mergers and acquisitions, and for other corporate finance
transactions pursuant to separate engagement agreements for each transaction to
be negotiated in good faith at such time as the specific type transaction and/or
amount of capital to be raised is determined. If Ambient terminates the
engagement before the initial 12 month term, then Ambient agreed to a pro-rated
cancellation of all unexercised warrants based on the number of months that the
agreement was in effect. The agreement provides Ambient with anti-dilution
protection for stock splits, stock dividends, and similar corporate events.
Moreover, the shares of the Common Stock issued pursuant to the agreement and
all shares of the Common Stock underlying the warrants shall have standard
"piggyback" registration rights at no cost to Ambient.

The resale of 499,998 shares of the Common Stock to be issued to Ambient in
connection with the above described agreement, including any shares to be issued
upon the exercise of any warrants, is being registered under the Securities Act
pursuant to this Prospectus.

WILLARD HARPSTER CONSULTING AGREEMENT

Effective January 1, 1997, the Company and Willard Harpster ("Harpster")
executed a Consulting Agreement covering financial services associated with the
development of a comprehensive business plan, future acquisition strategies,
capital development and fund raising. The Company requested in 1997 and 1998
numerous consultations with Harpster for advice to inhibit short selling of
Common Stock, for review of Common Stock sales and trading compliance, and for
advice in development of its business plan for presentation to capital markets.
In consideration of such services, Harpster was granted an option to purchase
all or any portion of 275,000 shares of the Common Stock at a purchase price of
$0.75 per share. All of the options are currently exercisable. The agreement
shall remain in effect for a period of one year commencing on the effective
date, but shall automatically renew, if not terminated as therein provided, for
successive one year periods. Notwithstanding the foregoing, the Company or
Harpster may terminate the agreement at any time upon 10 days written notice.
In the event Harpster terminates the agreement or the Company terminates the
agreement for "cause" then any options that are exercisable as of the date of
such termination shall be deemed earned by Harpster, surviving termination, but
in all cases must be exercised on or before

47
<PAGE>

the expiration of 90 days following the termination date, and any options that
are not yet exercisable as of the date of such termination will terminate
automatically without notice and be of no further force or effect. In the event
the Company terminates the agreement without cause then any portion of the
options which Harpster has the right to exercise as of the date of such
termination of employment must be exercised on or before 90 days after the date
of termination. All options not exercisable as of the date of termination of
employment and all options earned by Harpster, if any, not exercised on or
before the expiration of the 90 day period will terminate automatically without
notice and be of no further force or effect. The options will terminate
automatically without notice and be of no further force or effect to the extent
the options are not yet exercised before January 1, 2002. All shares of the
Common Stock which Harpster obtains from the exercise of options will be subject
to "piggyback" registration rights.

The resale of 275,000 shares of the Common Stock to be issued to Harpster
in connection with the exercise of the options as described in the above
described agreement is being registered under the Securities Act pursuant to
this Prospectus.

PDH, LTD. AGREEMENT

PDH, Ltd. has been issued shares of the Common Stock valued at $124,406 as
compensation and reimbursement of expenses for public relations services
rendered from July 1, 1995 through June 30, 1996, and $163,000 as compensation
and reimbursement of expenses for public relations services rendered through
June 30, 1997. The resale of all of the shares of the Common Stock issued to
PDH, Ltd. is being registered under the Securities Act pursuant to this
Prospectus. PDH, Ltd. is the d/b/a business name for Paul Douglas Holt and any
persons engaged by him. This consultant has been engaged by the Company for
several years to assist the Company with advisory and administrative duties,
including stockholder communications. The Company engages PDH, Ltd. in lieu of
full time employees. PDH, Ltd. coordinates shareholder requests for management
review and response and processes Company payables, eliminating the need for
administrative staff. PDH, Ltd. has been familiar with Company administrative
expense and operations requirements and has on occasion paid such costs in
exchange for shares of the Common Stock in the Company.

BRISTOL ASSET MANAGEMENT, L.L.C. INVESTMENT AGREEMENT

On January 20, 1998, the Company entered into an Investment Agreement
(herein referred to as the "Investment Agreement") with Bristol Asset
Management, L.L.C., a Delaware limited liability company ("Bristol"), regarding
the periodic purchase of shares of the Common Stock. Ambient produced this
Investment Agreement for the Company, and the Company has no financial
information available to confirm the financial capability of Bristol to perform.
Subject to the provisions of the Investment Agreement, the Company shall issue
and sell to Bristol, and Bristol shall be obligated to purchase from the
Company, up to $7,000,000 worth of the Common Stock, which shall constitute the
term of the Investment Agreement.

The determination of the timing and amount of the Common Stock to be sold
shall be made by the Company, in its sole discretion, to the extent not limited
by the terms of Investment Agreement. The Company is permitted to deliver
written notices to Bristol (the "Put Notice") stating a dollar amount of the
Common Stock which the Company intends to sell to Bristol five business days
following the date (the "Put Notice Date") on which the Put Notice is given to
Bristol; provided the Company may not deliver a Put Notice if (i) trading of the
Common Stock on the principal market on which it is then traded (the "Principal
Exchange") is suspended or the Common Stock has been delisted, (ii) the closing
price of the Common Stock on the Principal Exchange is less than $0.15 per
share, (iii) a registration statement filed with the Commission is not effective
or is subject to a stop order or is otherwise suspended, (iv) the Dow Jones
Industrial Average has dropped more than five percent within the preceding five
business days, or (v) the Common Stock to be sold is not then registered for
resale under the Exchange Act. The maximum amount to be purchased under a Put
Notice may not exceed the lesser of (i) $7,000,000 less all amounts previously
paid by Bristol, and (ii) the product of (x) the number of shares of the Common
Stock of the Company traded on the Principal Exchange on which the Common Stock
traded for the preceding calendar month, multiplied by (y) the average of the
closing bid prices for the Common Stock during the prior calendar month,
multiplied by (z) 14 percent.

48
<PAGE>

Company shall issue and sell to Bristol the number of shares of the Common Stock
equal to the draw down divided by 74 percent of the lowest sales price for the
Common Stock on the Principal Exchange (the "Lowest Sale Price") during the 10
trading days prior to the Put Notice Date (the "Look Back Period"). In the
event that the Lowest Sale Price during the 20 trading days after a particular
closing is less than 95 percent of the Lowest Sale Price applicable to such
closing, then the Company shall promptly issue to Bristol an additional number
of shares of the Common Stock with respect to such closing such that the number
of shares of the Common Stock issued to Bristol at such closing plus such
additional number of shares are equal to the funds drawn down at such closing
divided by 74 percent of the Lowest Sale Price during such 20 trading day
period. Bristol shall also be issued additional warrants equal to 12 percent of
the number of additional shares so issued and the exercise price of such
additional warrants and the warrants issued at such closing shall be adjusted to
100 percent of the Lowest Sale Price during such 20 trading day period.

Generally, at each closing, the Company shall also deliver to Bristol
warrants to purchase shares of the Common Stock (the "Warrant Shares"). The
warrants shall expire on the fifth anniversary of the date of issuance.
Generally, the warrants shall entitle the holder thereof to purchase a number of
Warrant Shares equal to 12 percent of the number of shares of the Common Stock
purchased at the closing in question at an initial exercise price equal to 100
percent of the average closing sales price for the Common Stock on the Principal
Exchange during the Look Back Period in question.

The Company agrees that all shares of the Common Stock issued to Bristol
pursuant to the Investment Agreement shall, at the time of such issuance and for
so long thereafter as is required by the Investment Agreement, be subject to an
effective registration statement on Form S-1 or an equivalent thereof, covering
the resale or other disposition thereof by Bristol at any time and from time to
time after each such issuance, and with respect to the Warrant Shares, covering
the resale or other disposition by the holders thereof at any time and from time
to time after each such issuance.

As conditions precedent to the obligation of Bristol to purchase any shares
of the Common Stock, the Company must meet numerous organizational, financial,
and reporting criteria, including the ability to engage in the contemplated
transactions, unrestrained trading of the Common Stock on the Principal
Exchange, effectiveness of the Company's registration statement and
certification of corporate authority to engage in the contemplated transactions.

In addition to conditions precedent which must be satisfied prior to
Bristol's obligation to purchase the Common Stock under the Investment
Agreement, the total amount of the Common Stock which the Company can require
Bristol to purchase may be limited to a percentage of the total shares of the
Common Stock outstanding. Under the Investment Agreement, Bristol may refuse to
purchase the Common Stock, as requested in a properly delivered Put Notice, if
the purchase of the Common Stock would result in Bristol beneficially owning
more than 4.9 percent of the Common Stock outstanding, determined in accordance
with Section 13(d) of the Exchange Act and including shares of the Common Stock
acquired pursuant to the Investment Agreement or through unrelated transactions.
As a result, it is possible that Bristol's total investment under the Investment
Agreement could be limited to an aggregate dollar amount well below $7,000,000.
If Bristol only purchases Common Stock pursuant to the Investment Agreement and
the market price of such free trading Common Stock remains at May 1-15 prices,
the 4.9 percent limitations could limit Bristol's required purchases to an
investment in Company Common Stock of approximately $2.2 Million.

As an illustration, assuming that all of the necessary conditions had been
met, the delivery of a Put Notice on April 1, 1998 would have required Bristol
to contribute $441,809.06 in exchange for 1,148,152 shares of Common Stock.
Pursuant to Section 1.3 of the Investment Agreement, the draw down amount would
be determined by taking the product of the number of shares of Common Stock of
the Company traded on the principal exchange during the month of March
(5,954,300), multiplied by the average of the closing bid prices for the Common
Stock during the month of March ($0.53) multiplied by 14 percent. The number of
shares to be issued in exchange for the draw down amount of $441,809.06 would be
determined by dividing the amount by 74 percent of the lowest sales price for
the Common Stock during the 10 trading days prior to April 1, 1998 ($0.52).
Based on this calculation, Bristol would be entitled to receive 1,148,152 shares
of Common Stock of the Company. In addition to the issuance of shares of Common
Stock, Bristol would be entitled, upon receipt of such Put Notice, to warrants
entitling Bristol to purchase 137,778 shares of Common Stock at $0.55 per share.

49
<PAGE>

As a result of this single transaction, and pursuant to the provisions of
Section 13d-3 of the Exchange Act, Bristol would be deemed to hold beneficial
ownership in at least 1,285,930 shares of Common Stock, representing 2.7 percent
of the Common Stock outstanding as of March 31, 1998.

Pursuant to the Investment Agreement, 20,781,250 shares of the Common Stock
to be issued to Bristol, including any shares to be issued upon the exercise of
the Compensation Warrants, are being registered under the Securities Act
pursuant to this Prospectus. The number of shares described in this section
includes (i) 18,229,167 Newly Issued Shares; and (ii) 2,552,083 shares to be
issued upon the exercise of the Compensation Warrants. The number of Newly
Issued Shares and shares underlying Compensation Warrants being registered
hereby are generally calculated based on the formula set forth in the Investment
Agreement. The formula used to calculate the number of Newly Issued Shares
being registered hereunder is as follows: 7,000,000 DIVIDED BY 74 percent x
$0.52 (the lowest sales price for the Common Stock on the principal exchange of
the Company during the 10 trading days prior to January 30, 1998) = 18,229,167
shares of the Common Stock. The number of shares of the Common Stock underlying
the Compensation Warrants was calculated as follows: 18,229,167 X 14 percent =
2,552,083 shares. If the sales price for the Common Stock used in the formula
is different than the example of $0.52 contained herein, then the number of
Newly Issued Shares and the number of shares underlying the Compensation
Warrants will change. However, for the purposes of this Prospectus, the formula
price of $0.52 per share is being used. If the sales price is greater than
$0.52 per share, a lesser number of shares of the Common Stock will be issued.

DESCRIPTION OF SECURITIES

Under the Company's Articles of Incorporation, the authorized capital stock
of the Company consists of 103,000,000 shares, of which 100,000,000 are shares
of common stock, par value $0.001 per share (the "Common Stock") and 3,000,000
are shares of preferred stock (the "Preferred Stock"). As of March 31, 1998,
47,162,653 shares of the Common Stock were issued and outstanding, while no
shares of the Preferred Stock were issued or outstanding. The Company has
reserved 18,229,167 shares of the Common Stock for issuance upon the purchase of
the Newly Issued Shares, 2,552,083 shares of the Common Stock for issuance upon
the exercise of the Compensation Warrants, 3,840,615 shares of the Common Stock
for issuance upon the exercise of the Resale Warrants, and 7,825,000 shares of
the Common Stock for issuance upon exercise of the options.

The following description of certain matters relating to the Common Stock,
the Preferred Stock, and the Warrants is a summary and is qualified in its
entirety by the provisions of the Company's Articles of Incorporation and
Bylaws.

COMMON STOCK

The holders of the Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders of the Company. The holders of
the Common Stock have the sole right to vote, except as otherwise provided by
law or by the Company's Articles of Incorporation, including provisions
governing any shares of the Preferred Stock. In addition, such holders are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor,
subject to the payment of preferential dividends with respect to any shares of
the Preferred Stock that from time to time may be outstanding. In the event of
the dissolution, liquidation or winding up of the Company, the holders of the
Common Stock are entitled to share ratably in all assets remaining after payment
of all liabilities of the Company and subject to the prior distribution rights
of the holders of any shares of the Preferred Stock that may be outstanding at
that time. All outstanding shares of the Common Stock being registered for
resale hereby, will be fully paid and nonassessable. The resale of (i)
2,749,611 shares of the Common Stock issued and outstanding, (ii) 6,525,000
shares of the Common Stock pursuant to the exercise of the Options, and (iii)
18,229,167 shares of the Common Stock with respect to the Newly Issued Shares
are being registered hereby.

CUMULATIVE VOTING RIGHTS

50
<PAGE>

The holders of the Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than 50 percent of the issued and outstanding
shares of the Common Stock voting for the election of directors can elect all of
the directors if they choose to do so, and in such event, the holders of the
remaining shares of the Common Stock voting for the election of the directors
will be unable to elect any person or persons to the Board of Directors.

PREEMPTIVE RIGHTS

Pursuant to Title 7, Chapter 79 of the Nevada Revised Statutes,
stockholders of corporations organized before October 1, 1991, with certain
limited exceptions, have preemptive rights to acquire pro rata unissued shares,
treasury shares or securities convertible into such shares, being offered for
sale, except to the extent limited or denied by the corporation's articles of
incorporation. The Company was incorporated on June 10, 1987, and prior to
March 1998, its Articles of Incorporation did not provide for any limitation
with respect to preemptive rights. In the various offerings of its securities,
the Company did not offer to the existing stockholders preemptive rights to
acquire any of the securities so offered. The applicable remedy, if any, for
the failure by the Company to offer to its stockholders the preemptive rights is
not certain after the passage of time and Common Stock price fluctuations. If a
stockholder were to timely demand preemptive rights for a particular
non-excepted prior sale, the Company might be required in equity to sell
additional Common Stock to complaining stockholders at previously offered prices
to enable a stockholder exercising such rights to maintain its ownership
percentage for prior sales that would effect preemptive rights. To the extent
that any stockholders were entitled to the right to purchase shares of the
Common Stock upon the exercise of any such preemptive rights, the Company plans
to allow any such requesting stockholders the right to purchase their pro rata
amount of such shares at the same price per share to which they would have been
entitled if such preemptive rights had been offered in conformity with Nevada
law. Any such offering of preemptive rights will be in conformity with the
Securities Act and the various states where any such stockholders may be
located. If any shareholders were to exercise their preemptive rights within
the applicable statute of limitations for any non-excepted sales of securities
prior to March 1998, the percentage interests of investors may be diluted by
any such sales of additional securities and the contributions to the Company
from such sales, if required to be offered at the price of previous issuances
and if such price is below the current market value, could result in
contributions to the Company at a per share contribution less than the current
market value. The Company cannot speculate whether any shareholders would elect
such preemptive rights, if the statute of limitations has not barred such
rights, or how much additional capital would be raised or how many shares would
be issued or whether other remedies would be available. Thus, the Company
assigns no liability to this contingency. As of the date of this Prospectus,
management is not aware of any stockholder who intends to make any claim with
respect to the failure by the Company to offer any such preemptive rights. On
February 4, 1998, a majority of the stockholders, by written consent, voted
to amend the Articles of Incorporation of the Company to deny preemptive
rights with respect to each new issuance of shares of the Common Stock.
However, the amendment to the Articles of Incorporation will have no effect
with respect to preemptive rights which may have existed for certain sales of
Common Stock prior to such amendment.

PREFERRED STOCK

The Board of Directors is authorized, without action by the holders of the
Common Stock, to provide for the issuance of the Preferred Stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
shall be superior to the Common Stock. The issuance of one or more series of
the Preferred Stock could adversely affect the voting power of the holders of
the Common Stock and could have the effect of discouraging or making more
difficult any attempt by a person or group to attain control of the Company. As
of the date of this Prospectus, there are no shares of the Preferred Stock
issued and outstanding.

WARRANTS

PRIVATE PLACEMENT WARRANTS. During the period from November 1995 though
February 1996, in connection with a private placement of 2,000,000 shares of the
Common Stock at $1.00 per share, the Company also granted to the investors
warrants to acquire an equal number of shares at $5.00 per share for a two-year
period. Warrants for an additional 203,150 shares of the Common Stock were
issued to the investors in the private placement in

51
<PAGE>

September 1996 due to the failure by the Company to file a registration
statement covering the shares of the Common Stock offered in the private
placement. These additional warrants were likewise exercisable at $5.00 per
share. In the spring of 1997, the Company effected a further settlement with
investors in the private placement regarding the Company's obligation to
register the shares of the Common Stock offered in the private placement. The
terms of the settlement provided that certain investors would turn in the
warrants held at that time in exchange for warrants equal to one and one-half
times the warrants held at a new exercise price of $2.50 per share. Due to the
various settlements effected by the Company, as of February 6, 1998 such
investors held warrants which upon exercise would represent 3,273,950 shares of
the Common Stock (the"PPM Warrants").

DEBENTURE WARRANTS. In connection with the purchase of the Company's 6%
Convertible Debenture, (which was fully converted and canceled by the Company on
February 6, 1998) on August 15, 1996 the Company issued a warrant for 100,000
shares of the Common Stock at $2.00 per share which expires on August 15, 2001
(the "6% Convertible Debenture Warrant"). In connection with the purchase of
the Company's 8% Convertible Debenture, on March 13, 1997 the Company issued a
warrant for 50,000 shares of the Common Stock at $1.50 per share which expires
on March 13, 2002 (the "8% Convertible Debenture Warrant").

AMBIENT WARRANTS. As additional compensation to Ambient Capital Group,
Inc. ("Ambient") for providing services relating to capital structure strategies
and the revision of the Company's business plan, the Company issued Ambient
83,333 warrants on October 29, 1997 (the "Ambient Warrants"). The Ambient
Warrants entitle the holder to purchase five shares of the Common Stock at $0.72
per share for each warrant issued. The Ambient Warrants are valid for a period
of four years from the date of issuance.

The resale of 3,273,950 shares of the Common Stock underlying the PPM
Warrants, 100,000 shares of the Common Stock underlying the 6% Convertible
Debenture Warrant, 50,000 shares of the Common Stock underlying the 8%
Convertible Debenture Warrant and 416,665 shares of Common Stock underlying the
Ambient Warrants (collectively, the "Resale Warrants") is being registered
hereby pursuant to registration rights granted to the holders thereof. The
Company has agreed to pay all expenses in connection with such registration,
except for underwriting discounts and commissions and legal fees for counsel to
the holders.

COMPENSATION WARRANTS. In conjunction with purchase of the Newly Issued
Shares under the Investment Agreement, Bristol shall generally be issued
warrants to purchase a number of shares of the Common Stock equal to 12 percent
of the number of Newly Issued Shares purchased at each closing at an initial
exercise price equal to 100 percent of the average closing sales price for the
Common Stock on the Principal Exchange during the Look Back Period (the
"Compensation Warrants"). See "Principal Stockholders - Bristol Asset
Management, L.L.C. Investment Agreement." The Compensation Warrants will expire
five years from the date of issuance. The resale of 2,552,083 shares of the
Common Stock underlying the Compensation Warrants is being registered pursuant
to this Prospectus.

52
<PAGE>

CANCELED SHARES

As a result of an internal audit conducted by the Company's management,
including a review of all stock transactions within the past four years, the
Board of Directors approved the cancellation of 5,897,960 shares of the Common
Stock during 1997. The shares of the Common Stock were canceled for various
reasons, including failure of consideration, duplicative issuances, and the
disparity in value between the number of shares issued and the services rendered
to the Company by the respective stockholders. The cancellations have been
effected by the Transfer Agent as follows:

NAME NUMBER OF SHARES CANCELED
---- -------------------------
<S> <C>
Thermal Imaging, Inc (1)............. 4,330,000
PDH, Ltd (2). ....................... 467,260
Bin Zhou (3) ........................ 250,000
Richard Thompson (4) ................ 500,000
Maxwell Rabb (4) .................... 250,000
Robert Gray (4) ..................... 100,000
Bruce Huddleston (5) ................ 700

</TABLE>

(1) Several stock issuances to Thermal Imaging, Inc., an Affiliate of Mr.
Johnston, were canceled due to failure of consideration. The cancellations
included the following: (i) cancellation of 300,000 shares of the Common
Stock originally issued on February 22, 1995 as a finder's fee relating to
funding which never materialized; (ii) cancellation of 1,400,000 shares of
the Common Stock originally issued on September 22, 1995 in anticipation of
cash contributions to the Company which never materialized due to the
breach by its intended funding source; (iii) cancellation of 630,000 shares
of the Common Stock originally issued on April 18, 1996 due to the fact
that the shares had been directly issued to Dorex shareholders in
settlement of claims for which Thermal Imaging, Inc. had assumed liability
pursuant to the Assumption of Liability Agreement (the Company canceled
certificates totaling 700,000 shares of the Common Stock and re-issued a
certificate to Thermal Imaging, Inc. representing 70,000 shares of the
Common Stock); and (iv) cancellation of 2,000,000 shares of the Common
Stock originally issued on February 27, 1997 in anticipation of cash
contributions to the Company which never materialized.

(2) The Company formally canceled 167,260 shares of the Common Stock originally
issued to PDH, Ltd. on November 18, 1996 due to the fact that the value of
the shares issued was in excess of the value of the services rendered to
the Company. In addition, the Company canceled and set-off 300,000 shares
of the Common Stock originally issued on April 4, 1996 against
approximately 300,000 shares of the Common Stock due to PDH, Ltd. for
services rendered and expenses incurred through June 30, 1997. The
cancellation was to due to the fact that the value of the shares issued
exceed the value of the services rendered to the Company. Due to the fact
that the set-off was made against unissued shares of the Common Stock, the
transaction did not involve the formal cancellation of additional
certificates.
(3) Pursuant to an understanding reached between the Company and Dr. Ben Zhou,
a former director of the Company, Zhou was to receive 250,000 shares of the
Common Stock in the event the China Project was implemented by
November 1997. The China Project was not implemented by November 1997. The
parties never executed a written document to memorialize the agreement.
While the minutes of the Company evidence that the 250,000 shares of the
Common Stock have been recorded as issued, delivery of the certificates
never took place, consistent with the Company's representation and
understanding that the shares would not be earned until first revenues were
generated from the delivery and installation of CTI systems in China. The
Company's position was clarified in letters to Zhou dated June 1996 and
January 1997.

(4) The Company has taken action to cancel certain stock certificates that were
conditionally issued and delivered to Richard Thompson, a former director
of the Company, and Maxwell Rabb and Robert Gray, both consultants to the
Company. The Company conditionally issued shares of the Common Stock to
Thompson (1,000,000), Rabb (275,000) and Gray (100,000) based on Thompson's
representation that he had arranged large scale financing by SPRINT and
another proposed contributor. Relying on Thompson's representations that
such agreements had been reached, the shares were issued and delivered
directly to Thompson. When the Company discovered that no financing
agreements had been reached with SPRINT, the Company demanded return of the
certificates from Thompson. After numerous attempts to persuade Thompson
to return the certificates, the Board of Directors canceled the
certificates, along with other certificates issued to Rabb and Gray by
resolutions adopted on February 18, 1997 and April 21, 1997. As of the
date of this Prospectus, the certificates have not been returned.
Unfortunately, Mr. Thompson pledged one of the certificates, Certificate
No. 8313, to a lender in January 1997, who claims to be a protected
purchaser under the Uniform Commercial Code. An agreement has been reached
to permit the lender to liquidate the number of shares required to satisfy
the outstanding indebtedness and recoverable costs secured by the shares,
which shares have been liquidated and the balance of the shares 48,000 have
been returned to the Company's Transfer Agent who intends to interplead
them to resolve the Company's right to cancel such shares.

(5) The Company canceled these shares of the Common Stock due to the failure of
consideration.

STOCK NOT PAID UP

On February 28, 1996 the Company accepted a "Personal Note - Secured" (the
"Note") in the principal amount of $525,000 from Daron Dillia d/b/a Manhattan
Financial Group ("MFG") in exchange for the issuance of 525,000 units (one unit
= one share of the Common Stock and one warrant) offered by the Company in
conjunction with its Private Placement Memorandum dated November 13, 1995. The
Note matured on February 28, 1997 and interest has been accruing on the
outstanding amount due since such date at a rate of nine percent per annum. The
terms of the Note also provide that the amount due will be secured by the
525,000 units issued to MFG which shall be held by the Company until the Note is
paid in full. Pursuant to an agreement between MFG and Benjamin W. and Nancy L.

53
<PAGE>

Anderson which was incorporated into the terms of the Note (the "Collateral
Guarantee"), the Andersons' pledged 500,000 shares of the Common Stock and
200,000 units as additional security under the Note. As consideration under the
Collateral Guarantee, MFG agreed to transfer 200,000 shares of the Common Stock
from the 525,000 units acquired pursuant to the Note to the Andersons.

In accordance with N.R.S. 78.211, the Company may authorize the issuance of
shares in consideration of any tangible or intangible property or benefit
delivered to the Company, including promissory notes. Upon receipt of the
consideration for which the Board of Directors authorized the issuance of the
shares, the shares issued therefor are fully paid. An issuance of 325,000
shares to Daron C. Dillia and 200,000 shares to Benjamin or Nancy Anderson was
approved by the Board of Directors on February 29, 1996 in consideration for
"money received as a result of the Private Placement Memorandum dated November
13, 1995." According to management, the certificates representing all shares and
warrants issued in connection with the Note are held by the Company.

As of the date of this Prospectus no payments have been made by MFG towards
the outstanding indebtedness due under the Note, nor has the Company made any
effort to collect such amounts.

CERTAIN PROVISION OF THE ARTICLES OF INCORPORATION AND BYLAWS

GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of the Preferred Stock
and to set the voting rights, preferences and other terms thereof, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
Common Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the ability of the Board of
Directors to issue the Preferred Stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption of
control by the stockholders, even if such removal or assumption would be
beneficial to the stockholders of the Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests of the stockholders, and could
potentially depress the market price of the Common Stock. The Board of
Directors believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders.

MEETINGS OF STOCKHOLDERS. The Bylaws provide that a special meeting of the
stockholders may be called by the Chairman of the Board, the President, the
Board of Directors, or the holders of not less than 10 percent of the
outstanding shares of the capital stock of the Company entitled to vote at such
a meeting unless otherwise required by law. The Company's Bylaws provide that
only those matters set forth in the notice of the special meeting may be
considered or acted upon at the special meeting.

INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Articles
provide that a director of the Company will not be personally liable to the
Company or its stockholders for monetary damages for any act or omission in good
faith. By its terms, and in accordance with applicable state law, however, this
provision does not eliminate or limit the liability of a director of the Company
for any breach of duty based upon an act or omission (i) involving appropriation
in violation of duty of any business opportunity of the Company, (ii) involving
acts or omissions that are not in good faith or which involve intentional
misconduct or a knowing violation of the law, or (iii) involving unlawful
distributions or transactions from which the director derived an improper
personal benefit. The Articles provide further that the Company shall indemnify
its directors, except in such matters as to which the director shall be adjudged
liable for his own negligence or intentional misconduct in the performance of
his duty. A similar indemnification and limitation of liability provision in
the Company's Bylaws also extends such protection to officers of the Company.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company is aware that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

54
<PAGE>

AMENDMENT OF BYLAWS. The Bylaws provide that the Bylaws may be altered,
amended or repealed by the Board of Directors or the stockholders of the
Company. Such action by the Board of Directors requires the affirmative vote of
a majority of the directors present at such meeting.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Until the issuance of all of the shares of the Common Stock covered by the
Warrants, the Options, and the Debenture, the Company's authorized but unissued
capital stock will consist of approximately 55,431,025 shares of the Common
Stock. One of the effects of the authorized but unissued capital stock may be
to enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of the Company by means of a tender offer, proxy
contest or otherwise, and thereby to protect the continuity of the Company's
management. If in the due exercise of its fiduciary obligations, for example,
the Board of Directors were to determine that a takeover proposal was not in the
Company's best interests, such shares could be issued by the Board of Directors
without stockholder approval in one or more private or public offerings or other
transactions that might prevent or render more difficult or costly the
completion of the proposed takeover transaction by diluting the voting or other
rights of the proposed acquirer or insurgent stockholder or stockholder group,
by creating a substantial voting block of institutional or other investors that
might undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, the Company's Articles grant the Board of Directors
broad power to establish the rights and preferences of the authorized, but
unissued Preferred Stock, one or more series of which would be issued entitling
holders to vote separately as a class on any proposed merger or consolidation,
to convert Preferred Stock into a larger number of shares of the Common Stock or
other securities, to demand redemption at a specified price under prescribed
circumstances related to a change in control, or to exercise other rights
designed to impede a takeover.

The issuance of shares of the Preferred Stock pursuant to the Board's
authority described above could decrease the amount of earnings and assets
available for distribution to holders of the Common Stock, and adversely affect
the rights and powers, including voting rights, of such holders and may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Board of Directors does not currently intend to seek stockholder approval
prior to any issuance of authorized, but unissued stock, unless otherwise
required by law.

TRANSFER AGENT

The Company's transfer agent for the Common Stock is Merit Transfer
Company, 68 South Main Street, Suite 708, Salt Lake City, Utah 84101.

55
<PAGE>

PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS

This Prospectus relates to the aggregate resale of 33,896,476 shares of
Common Stock which may be sold by Selling Stockholders. The shares of Common
Stock to be resold include (i)18,229,167 shares to be purchased by an unrelated
third party investor (the "Newly Issued Shares");(ii) 2,552,083 shares to be
issued upon the exercise of warrants to be issued to such investor (the
"Compensation Warrants");(iii) 2,749,611 shares issued and outstanding; (iv)
3,840,615 shares underlying outstanding warrants (the "Resale Warrants"); and
(v) 6,525,000 shares underlying outstanding options (sometimes hereinafter
collectively referred to as the "Options").

The following tables set forth certain information with respect to the
resale of the Common Stock by the Selling Stockholders as described in this
Prospectus. The Company will not receive any proceeds from the resale of Common
Stock by the Selling Stockholders. However, the Company will receive the
proceeds from the sale of the Newly Issued Shares, the exercise price per share
upon the exercise of the Resale Warrants, the Compensation Warrants and the
Options.

RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S");
SHARES TO BE ISSUED AS NEWLY ISSUED SHARES ("NS") AND SHARES UNDERLYING
RESALE WARRANTS ("W"), COMPENSATION WARRANTS ("CW"), AND OPTIONS ("O").

SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED AMOUNT OWNED
STOCKHOLDER BEFORE RESALE (1) OFFERED (2) AFTER RESALE PERCENTAGE
----------- ----------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Fritz Abendroth (W) 61,875 61,875 -0- -0-
Ambient Capital Group, Inc. (S) 83,333 83,333 -0- -0-
Ambient Capital Group, Inc. (W) 416,665 416,665 -0- -0-
Benjamin or Nancy Anderson (S) 600,000 600,000 600,000 -0-
Benjamin Anderson (W) 568,750 568,750 568,750 1.3
Jeremy Brent Andrus (W) 60,500 60,500 -0- -0-
Mary Ellen Ashby (W) 45,375 45,375 -0- -0-
Lynn Beckman (W) 41,250 41,250 -0- -0-
Randall S. Benson (W) 20,625 20,625 -0- -0-
Joanne L. Bingo (W) 94,875 94,875 -0- -0-
Charles W. Brinkman (W) 41,250 41,250 -0- -0-
Bristol Asset Management, L.L.C. (NS) 18,229,167 18,229,167 -0- -0-
Bristol Asset Mangement, L.L.C. (CW) 2,552,083 2,552,083 -0- -0-
Cameron Capital, Ltd. (W) 150,000 150,000 -0- -0-
Brent L. Cox (W) 41,250 41,250 -0- -0-
Crown Development, Inc. (W) 82,500 82,500 -0- -0-
Cheryl Demler (S) 10,000 10,000 -0- -0-
Cheryl Demler (W) 7,150 7,150 -0- -0-
Daron C. Dillia (W) 700,000 700,000 700,000 1.5
Kenneth M. Dodd (O) 500,000 500,000 500,000 1.0
Misty Dorman (W) 25,410 25,410 -0- -0-
Donna L. Doxey (W) 82,500 82,500 -0- -0-
Robert A. Dresser (S) 138,000 138,000 -0- -0-
Douglas Emery (S) 12,000 12,000 -0- -0-
Sylvia Epstein (S) 50,000 50,000 -0- -0-
Dennis W. Ferchland (W) 20,625 20,625 -0- -0-
David Finney (S) 96,000 96,000 -0- -0-
Merrill Fowler (S) 50,000 50,000 -0- -0-
Jack Gately (S) 50,000 50,000 -0- -0-
Ursula Anne Gately (S) 7,000 7,000 -0- -0-
Joseph K. Grote (W) 41,250 41,250 -0- -0-

</TABLE>

56
<PAGE>

SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED AMOUNT OWNED
STOCKHOLDER BEFORE RESALE (1) OFFERED (2) AFTER RESALE PERCENTAGE
----------- ----------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Sandra Hale (S) 15,000 15,000 -0- -0-
Bruce B. Hall (W) 41,250 41,250 -0- -0-
Willard Harpster (O) 275,000 275,000 -0- -0-
Gerald Lynn Hayward (W) 41,250 41,250 -0- -0-
Darrell J. Horne (W) 82,500 82,500 -0- -0-
Soon-Yon Jin (W) 41,250 41,250 -0- -0-
Lance J. Larson (W) 41,250 41,250 -0- -0-
Manhattan Financial Group (S) 600,000 600,000 600,000 1.1
Manhattan Financial Group (O) 2,000,000 2,000,000 2,000,000 4.1
Masahisa Masuda (W) 330,000 330,000 -0- -0-
Brad Mefford (W) 41,250 41,250 -0- -0-
Meto Miteff (S) 6,752 6,752 -0- -0-
Orlando Nickerson (W) 41,250 41,250 -0- -0-
Stephen A. Oliver Trust (W) 20,625 20,625 -0- -0-
David Packer (O) 500,000 500,000 500,000 1.0
PDH, Ltd. (S) 933,926 933,926 933,926 1.9
Carol T. Racine (W) 33,750 33,750 -0- -0-
Max B. Reece (W) 41,415 41,415 -0- -0-
Max & Gayle Reece (JTWROS) (S) 100 100 -0- -0-
Steven M. Rhodes (W) 20,625 20,625 -0- -0-
James P. Roake (W) 123,750 123,750 -0- -0-
Susan D. Scott (W) 20,625 20,625 -0- -0-
Larry R. Sears (W) 41,250 41,250 -0- -0-
Richard V. Secord (O) 3,250,000 3,250,000 3,250,000 6.4
Peter P. Smith (W) 41,250 41,250 -0- -0-
Gerald N. Stanley (W) 41,250 41,250 -0- -0-
Richard Stevens (S) 2,500 2,500 -0- -0-
Jack M. & Geraldean Stevens (JTWROS)(W) 82,500 82,500 -0- -0-
Richard M. & Carolyn Stevens (JTWROS)(W) 41,250 41,250 -0- -0-
David D. Stewart (W) 41,250 41,250 -0- -0-
Ross D. Stokes (W) 25,000 25,000 -0- -0-
Bee Bee Tan (W) 41,250 41,250 -0- -0-
Charles Howard Thomas (W) 28,600 28,600 -0- -0-
Daniel G. Thomas (W) 27,500 27,500 -0- -0-
Eric Wagner and Jeri Wagner (S) 4,000 4,000 -0- -0-
Alice G. Watts (S) 1,000 1,000 -0- -0-
Harold Werth, Jr. (S) 40,000 40,000 -0- -0-
Harold Werth, Jr. (W) 6,875 6,875 -0- -0-
Louis Woodworth (S) 50,000 50,000 -0- -0-

</TABLE>

* Less than one percent.

(1) Shares Beneficially Owned Before Resale include shares of the Common Stock
underlying outstanding Resale Warrants ("W"), Options ("O"), Compensation
Warrants ("CW") and Newly Issued Shares ("NS").

(2) Shares offered include outstanding shares of the Common Stock subject to
the restrictions of the Securities Act and held by the Selling Stockholder
less than two years as of the date of this Prospectus, and shares of the
Common Stock underlying outstanding Resale Warrants ("W"), Options ("O"),
Compensation Warrants ("CW") and Newly Issued Shares ("NS").

The 33,896,476 shares of the Common Stock offered by the Selling
Stockholders for resale may be sold by the Selling Stockholders from time to
time as market conditions permit in the market, or otherwise at prices and terms
then prevailing or at prices related to the current market price, or in
negotiated transactions. The Selling Shareholders may sell their shares in
unsolicited ordinary brokerage transactions or privately negotiated transactions
between the Selling Stockholders and purchasers without a broker.

57
<PAGE>

A current prospectus must be in effect at the time of the sale of the
Common Stock to which this Prospectus relates. Any Selling Stockholder or
dealer effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a Prospectus. Unless
otherwise exempted, Selling Stockholders and their agents engaged in the resale
of Common Stock may be deemed underwriters under the Securities Act of 1933.

LEGAL MATTERS

Certain legal matters relating to the issuance and resale of shares hereby
will be passed upon for the Company by Looper, Reed, Mark & McGraw,
Incorporated, Houston, Texas.

EXPERTS

The Consolidated Financial Statements and schedules for the years ended
June 30, 1997 and 1996, and for the period from inception, June 30, 1987, to
June 30, 1997 included in this Prospectus and in the Registration Statement have
been audited by Ham, Langston & Brezina, LLP, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.

58
<PAGE>

CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987,
TO JUNE 30, 1997

F-1
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
TABLE OF CONTENTS

----------

Page(s)
-------
<S> <C>
Report of Independent Accountants F-3

Consolidated Financial Statements:

Consolidated Balance Sheet as of June 30, 1997
and 1996 F-4

Consolidated Statement of Operations for the years
ended June 30, 1997 and 1996, and for the period
from inception, June 10, 1987, to June 30, 1997 F-5

Consolidated Statement of Stockholders' Equity (Deficit)
for the years ended June 30, 1997 and 1996, and for
the period from inception, June 10, 1987, to June 30,
1997 F-6

Consolidated Statement of Cash Flows for the years
ended June 30, 1997 and 1996, and for the period
from inception, June 10, 1987, to June 30, 1997 F-10

Notes to Consolidated Financial Statements F-12

</TABLE>

F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders of Computerized Thermal Imaging, Inc.:

We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. (a development stage enterprise) as of June 30, 1997 and
1996, and the related statements of operations, stockholders' equity and cash
flows for the years then ended, and for the period from inception, June
10, 1987, to June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based upon our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computerized Thermal
Imaging, Inc. as of June 30, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended and for the period from inception,
June 10, 1987, to June 30, 1997, in conformity with generally accepted
accounting principles.

As described in Note 13, since its inception the Company has undertaken various
private placements and other offerings of its common stock without offering
this existing stockholders preemptive rights to acquire common stock so
offered. Neither the likelihood of claims nor the range of loss that could
arise from this matter is presently determinable. Accordingly, the financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements and discussed in Note 15, the Company has incurred
significant recurring losses from operations since inception, is in a negative
working capital and stockholders' deficit position at June 30, 1997, and is
dependent on outside sources of financing for continuation of its operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with regard to this matter are also
discussed in Note 15. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ Ham, Langston & Brezina, LLP

Houston, Texas
February 20, 1998, except
Note 14 as to which the date
is May 10, 1998

F-3

<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND 1996

----------

1996
AS RESTATED
ASSETS 1997 (SEE NOTE 2)
----------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $193,852 $163,928
Deposits 2,204 -
----------- --------------
Total current assets 196,056 163,928
----------- --------------
Property and equipment, net 350,729 506,671
Software development costs, net 1,493,868 100,375
Stock offering and debt issuance costs, net 217,084 -
----------- --------------
Total assets $2,257,737 $770,974
----------- --------------
----------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable $936,964 $127,066
Accrued liabilities 254,602 99,608
Current maturities of convertible debentures 479,882 -
----------- --------------
Total current liabilities 1,671,448 226,674

Convertible debentures, net of current maturities 675,000 -
----------- --------------
Total liabilities 2,346,448 226,674
----------- --------------
Commitment and contingencies (Notes 6, 11, 13 and 14)

Stockholders' equity (deficit):
Convertible preferred stock, $5.00 par value, 100,000 shares authorized - -
Common Stock, $0.001 par value, 100,000,000 shares authorized,
35,870,413 and 33,097,316 shares issued and outstanding
at June 30, 1997 and 1996, respectively 35,738 32,907
Additional paid-in capital 13,410,573 11,933,572
Subscription receivable (525,000) (525,000)
Losses accumulated during the development stage (13,010,022) (10,897,179)
----------- --------------
Total stockholders' equity (deficit) (88,711) 544,300
----------- --------------
Total liabilities and stockholders' equity (deficit) $2,257,737 $770,974
----------- --------------
----------- --------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987, TO JUNE 30, 1997

----------

YEAR ENDED
JUNE 30, 1996
YEAR ENDED AS RESTATED INCEPTION TO
JUNE 30, 1997 (SEE NOTE 2) JUNE 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Interest income $5,762 $9,869 $ 16,576
Income from sale of prototype 55,815 125,000 180,815
----------- ----------- ------------
Total income 61,577 134,869 197,391
----------- ----------- ------------

Costs and expenses:
Operating, general and administrative
expenses 1,727,879 2,491,090 10,744,028
Research and development costs 359,873 1,811 791,994
Interest expense 86,668 11,938 1,157,011
Litigation settlement - 508,280 514,380
----------- ----------- ------------
Total costs and expenses 2,174,420 3,013,119 13,207,413
----------- ----------- ------------

Net loss $(2,112,843) $(2,878,250) $(13,010,022)
----------- ----------- ------------
----------- ----------- ------------

Weighted average shares outstanding 33,803,045 30,875,600
----------- -----------
----------- -----------

Net loss per common share $(0.06) $(0.09)
----------- -----------
----------- -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1997

----------

LOSSES
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------- ------------------- PAID-IN SUBSCRIPTION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL
------ ------ ------ ------ ------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, June 10, 1987 - $ - - $ - $ - $ - $ - $ -

Stock issued for cash to founding
stockholders in 1987 - - 5,000,000 5,000 - - - 5,000

Stock issued for cash in connection
with a public offering of common
stock in 1988 - - 5,000,000 5,000 14,562 - - 19,562

Stock issued for cash in connection with
a Regulation D offering of common
stock in 1989 - - 80,000 80 249,930 - - 250,010

Stock issued for services in 1990 - - 500,000 500 254,500 - - 255,000

Stock issued for cash in connection with
a Regulation D offering of common
stock in 1991 - - 180,000 180 89,820 - - 90,000

Stock issued for services in 1991 - - 3,240,000 3,240 1,616,760 - - 1,620,000

Stock issued for services in 1992 - - 4,860,000 4,860 578,340 - - 583,200

Stock issued for services in 1993 - - 1,134,500 1,134 82,726 - - 83,860

Stock issued for extension of
debt agreement in 1993 - - 9,000 9 691 - - 700

Stock issued in connection with
claims by certain stockholders
in 1993 - - 1,000 1 59 - - 60

Stock issued for cash in 1994 - - 387,000 387 25,613 - - 26,000
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONTINUED

F-6
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1997

----------

<TABLE>
<CAPTION>
LOSSES
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------- -------------------- PAID-IN SUBSCRIPTION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL
------ ------ ------ ------ ------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for services in 1994 - - 1,485,660 1,486 149,148 - - 150,634

Stock issued for extension of
debt agreement in 1994 - - 9,000 9 591 - - 600

Stock issued in connection with
claims by certain stockholders
in 1994 - - 51,000 51 5,989 - - 6,040

Preferred stock issued in connection
with certain loans made
to the Company in 1994 47,000 235,000 - - - - - 235,000

Stock issued for cash in 1995 - - 679,202 680 407,995 - - 408,675

Stock issued for services in 1995 - - 3,506,461 3,506 3,049,200 - - 3,052,706

Stock issued to convert certain
notes payable in 1995 - - 702,400 702 117,941 - - 118,643

Conversion of preferred stock to
common stock in 1995 (42,000) (210,000) 124,600 125 209,875 - - -

Losses accumulated during the
period from inception, June 10,
1987, to June 30, 1995 - - - - - - (8,018,929) (8,018,929)
------- ------- ---------- ------ --------- ------- --------- ---------
Balance at June 30, 1995, as
restated (See Note 2) 5,000 25,000 26,949,823 26,950 6,853,740 - (8,018,929) (1,113,239)
------- ------- ---------- ------ --------- ------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONTINUED

F-7
<PAGE>

----------

LOSSES
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------- -------------------- PAID-IN SUBSCRIPTION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL
------ ------ ------ ------ ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for cash in connection
with a Regulation D
offering of common stock -- -- 1,462,600 1,463 1,461,137 -- -- 1,462,600

Stock issued for a note receivable
in connection with a
Regulation D offering of
common stock -- -- 525,000 525 524,475 (525,000) -- --

Stock issued for offering costs
in connection with a Regulation
D offering of common stock -- -- 53,650 53 (53) -- -- --

Stock issued in connection with
the settlement of a note payable
to an individual -- -- 734,942 735 721,345 -- -- 722,080

Stock issued in connection with
the settlement of claims by
certain stockholders -- -- 578,000 578 507,702 -- -- 508,280

Conversion of preferred stock (5,000) (25,000) 14,700 14 24,986 -- -- --

Stock issued in repayment of
certain notes payable and
interest expense -- -- 146,590 147 153,060 -- -- 153,207
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONTINUED

F-8
<PAGE>

----------

LOSSES
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------- ----------------- PAID-IN SUBSCRIPTION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL
------ ------ ------ ------ --------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for cash -- -- 1,163,625 1,164 795,306 -- -- 796,470

Stock issued for services -- -- 1,277,633 1,278 891,874 -- -- 893,152

Net loss accumulated in 1996 -- -- -- -- -- -- (2,878,250) (2,878,250)
------ ------ --------- ------ ---------- -------- ------------ ----------
Balance at June 30, 1996, as
restated (See Note 2) -- -- 32,906,563 32,907 11,933,572 (525,000) (10,897,179) 544,300

Stock issued as a bonus to inves-
tors in connection with the
Company's 1996 Regulation D
offering of common stock -- -- 211,900 212 (212) -- -- --

Conversion of debentures to
common stock -- -- 98,768 99 64,026 -- -- 64,125

Stock issued for cash -- -- 1,833,152 1,833 1,008,376 -- -- 1,010,209

Stock issued for services -- -- 687,266 687 404,811 -- -- 405,498

Net loss accumulated in 1997 -- -- -- -- -- -- (2,112,843) (2,112,843)
------ ------ --------- ------ ---------- -------- ------------ ----------
Balance at June 30 ,1997 -- -- 35,737,649 $35,738 $13,410,573 $(525,000) $(13,010,022) $ (88,711)
------ ------ ---------- ------- ----------- --------- ------------ ----------
------ ------ ---------- ------- ----------- --------- ------------ ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-9
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987, TO JUNE 30, 1997

----------

YEAR ENDED
JUNE 30,
YEAR ENDED 1996 INCEPTION
JUNE 30, AS RESTATED TO JUNE 30,
1997 (SEE NOTE 2) 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,112,843) $(2,878,250) $(13,010,022)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Common stock issued as compensation
for services 405,498 893,152 7,044,050
Common stock issued for interest
expense 2,105 11,147 267,765
Common stock issued in settlement
of litigation -- 508,280 514,380
Depreciation expense 186,274 87,625 284,548
Amortization of debt issuance costs 43,418 -- 53,418
Changes in operating assets and
liabilities:
Increase in deposits (2,204) -- (2,204)
Increase in accounts payable and
accrued liabilities 964,892 5,919 1,191,566
---------- ---------- ----------

Net cash used in operating
activities (512,860) (1,372,127) (3,656,499)
---------- ---------- ----------

Cash flows from investing activities:
Capital expenditures (30,332) (590,025) (635,277)
Software development costs (1,393,493) (100,375) (1,493,868)
---------- ---------- ----------

Net cash used in investing
activities (1,423,825) (690,400) (2,129,145)
---------- ---------- ----------

Cash flows from financing activities:
Proceeds from sale of common stock 1,010,209 2,259,070 4,068,526
Payment of stock offering costs (125,000) -- (125,000)
Proceeds from notes payable and
convertible debentures 1,205,000 8,000 2,510,869
Payment of debt issuance costs (123,600) -- (133,600)
Repayment of notes payable -- (60,750) (341,299)
---------- ---------- ----------

Net cash provided by financing
activities 1,966,609 2,206,320 5,979,496
---------- ---------- ----------

Continued

F-10
<PAGE>

Net increase in cash and cash
equivalents 29,924 143,793 193,852

Cash and cash equivalents at beginning
of period 163,928 20,135 --
---------- ---------- ----------
Cash and cash equivalents at end of
period $ 193,852 $ 163,928 $ 193,852
---------- ---------- ----------
---------- ---------- ----------

Supplemental disclosure of cash flow
information:

Cash paid for interest expense $ -- $ -- $ 5,293
---------- ---------- ----------
---------- ---------- ----------

Cash paid for income taxes $ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-11
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

----------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Computerized Thermal Imaging, Inc. (the "Company") is a Nevada Corporation,
involved in the development of a thermal imaging system for applications in the
health care industry. The Company's system is based upon computer
interpretation of thermal photography using proprietary software developed by
the Company. The Company was originally incorporated as Business Helpers, Inc.
on June 10, 1987 and subsequently adopted name changes to DTI Dorex, Ltd. and,
finally, to Computerized Thermal Imaging, Inc. The Company is considered a
development stage enterprise because it has not yet generated significant
revenue from sale of its products. Since its inception, the Company has devoted
substantially all of its efforts in three areas: (1) the development of a system
for commercial application of thermal imaging technology in the medical
industry; (2) the development of markets for thermal imaging technology; and (3)
the search for sources of capital to fund its efforts. Following is a summary
of the Company's significant accounting policies:

(a) PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiary, Thermal Medical Imaging, Inc. ("TMI"). All significant intercompany
transactions and accounts have been eliminated in consolidation. TMI was not a
majority owned subsidiary at June 30, 1996; however, the Company exercised
control over TMI because (1) the Company developed and controlled the technology
on which TMI's thermal imaging systems would ultimately be based; (2) the
Company represented TMI's sole source of capital to fund its operations; and (3)
key directors and management of the Company also occupied key management
positions in TMI. Accordingly, the operations of TMI have been consolidated
with those of the Company during the years ending June 30, 1997 and 1996. The
Company acquired actual majority ownership of TMI during 1997 through continued
cash investments.

(b) SIGNIFICANT ESTIMATES. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the periods. Actual results could differ from estimates making it
reasonably possible that a change in the estimates could occur in the near term.

(c) CASH AND CASH EQUIVALENTS. The Company considers all highly
liquid short-term investments with an original maturity of three months or less
when purchased to be cash equivalents.

(d) PROPERTY AND EQUIPMENT. Property and equipment are recorded at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Expenditures
for major renewals and betterments that extend the original estimated economic
useful lives of the applicable assets are capitalized. Expenditures for normal
repairs and maintenance are charged to expense as incurred. The cost and
related accumulated depreciation of assets sold or otherwise disposed of are
removed from the accounts, and any gain or loss is included in operations.

(e) SOFTWARE DEVELOPMENT COSTS. The Company has capitalized certain
costs related to the development of software which is the basis of its thermal
imaging system. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86 "Accounting for the Cost of Computer Software to be Sold, Leased
or Otherwise Marketed," capitalization of such costs began upon establishment of
technological feasibility and will cease when the Company's thermal imaging
system is available for general release to customers.

(f) INVESTMENT IN JOINT VENTURE. The Company's investment in a joint
venture is accounted for using the equity method.

(g) ISSUANCE COSTS. Debt issuance costs are deferred and recognized
over the term of the related debt.

F-12

<PAGE>

Stock issuance costs are deferred and offset against proceeds from sale of
common stock upon closing.

(h) INCOME TAXES. The Company uses the liability method of
accounting for income taxes. Under this method, deferred income taxes are
recorded to reflect the tax consequences on future years of temporary
differences between the tax basis of assets and liabilities and their financial
amounts at year-end. The Company provides a valuation allowance to reduce
deferred tax assets to their net realizable value.

(i) RESEARCH AND DEVELOPMENT EXPENSES. Research and development
costs are expensed as incurred. These costs consist of direct and indirect
costs associated with specific projects.

(j) STOCK-BASED COMPENSATION. Stock-based compensation is accounted
for using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," rather than
applying the fair value method prescribed in SFAS No. 123, "Accounting for
Stock-Based Compensation."

(k) LOSS PER SHARE. Loss per share is computed on the basis of the
weighted average number of shares of common stock outstanding during each
period. Common equivalent shares from common stock options and warrants are
excluded from the computation as their effect would dilute the loss per share
for all periods presented.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128, which is effective for periods ending
after December 15, 1997, requires changes in the computation, presentation, and
disclosure of earnings per share. All prior period earnings per share data must
be restated to conform with the provisions of SFAS No. 128. The Company will
adopt SFAS No. 128 during the year ended June 30, 1998, but does not expect the
new accounting standard to have a material impact on the Company's reported
financial results.

(l) FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company includes fair
value information in the notes to financial statements when the fair value of
its financial instruments is different from the book value. When the book value
approximates fair value, no additional disclosure is made.

(m) RECENTLY ISSUED PRONOUNCEMENTS. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. It requires (a) classification of the components of other
comprehensive income by their nature in a financial statement and (b) the
display of the accumulated balance of the other comprehensive income separate
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for years beginning
after December 15, 1997 and is not expected to have a material impact on
financial position or results of operations.

2. PRIOR PERIOD ADJUSTMENTS. During the period from inception, June 10,
1987, to June 30, 1995, and during the year ended June 30, 1997, the Company
issued common stock to repay certain notes payable, to compensate key employees
and consultants, to pay interest expense on debt, to pay syndication costs and
to settle various litigation and stockholder disputes. The issuance of such
stock was not afforded consistent accounting treatment but was generally
recorded at par or some other nominal value in the Company's financial
statements. Generally accepted accounting principles require that common or
preferred stock issuances be recorded at the estimated fair value of the stock
issued (or at the fair value of consideration received or services provided if
such value is more readily determinable). Company management has determined
that a value equal to one-half of the average of the high and low bid prices of
the common stock during the month of issuance is a reasonable estimate of the
fair value of common stock issued for services or the satisfaction of
obligations. Accordingly, values based upon management's formula have generally
been used for recognition of common stock issuances in non-cash transactions in
the accompanying financial statements.

During years prior to 1995, the Company incurred and capitalized a
significant amount of expenses related to the development and protection from
claims of certain data that now forms the basis for software that operates and
analyzes information produced by the Company's thermal imaging systems.
Generally accepted accounting principles require that research and development
expenses be charged to expense as incurred. Accordingly, these costs were
written off to expense prior to June 30, 1995.

F-13
<PAGE>

During the year ended June 30, 1995, the Company was involved in litigation
concerning a default under a $500,000 loan agreement. The litigation was
resolved in 1995; however, the $722,080 impact of the settlement, which
essentially covered interest that would have accrued over the term of the loan
agreement, was not recorded until shares of the Company's common stock were
issued to settle the debt in 1996. Generally accepted accounting principles
require that liabilities be recognized as incurred and, accordingly, the impact
of this settlement should have been recorded in the Company's financial
statements prior to 1996.

During years prior to 1996, the Company issued 47,000 shares of $5.00
preferred stock to certain individuals that provided debt financing to the
Company. These shares were recorded at $0.01 per share; however, generally
accepted accounting principles require that preferred shares (which in this
circumstance are convertible to $5.00 of common stock, based upon the market
value of the common shares at the date of conversion or on a share per share
basis, whichever method produces a more favorable outcome for the preferred
stockholder) be recorded at $5.00 per share as a cost of the related financing.
Such financing cost should then be amortized as interest expense over the term
of the related debt.

During the year ended June 30, 1996, the Company improperly accounted for
its majority owned subsidiary, TMI and its investment in TriSun/CTI Asia, Ltd.
(See Note 5). These entities were accounted for using the cost method; however,
generally accepted accounting principles require that TMI be consolidated and
that TriSun/CTI Asia, Ltd. be accounted for using the equity method.
Accordingly, the impact of using proper methods of accounting for these entities
is reflected in the 1996 financial statements.

The effect of correcting these errors in application of generally accepted
accounting principles on the Company's financial statements at June 30, 1996 and
1995 is shown below.

JUNE 30, 1996 JUNE 30, 1995
------------- --------------
<S> <C> <C>
Increase (decrease) in total assets $ 3,898,786 $ 1,404,405
------------- --------------
------------- --------------

Increase (decrease) in total liabilities $ 2,469,002 $ 434,975
------------- --------------
------------- --------------

Increase in common and preferred stock and additional paid-in capital $ 5,658,673 $ 5,340,674
------------- --------------
------------- --------------

Increase in accumulated deficit $(7,088,457) $ (7,180,054)
------------- --------------
------------- --------------

Decrease in net loss for the year ended June 30, 1996 $(141,597)
-------------
-------------

Increase in net loss per common share for the year ended June 30, 1996 $ -
-------------
-------------

</TABLE>

3. PROPERTY AND EQUIPMENT. Property and equipment at June 30, 1997 and
1996 consists of the following:

1997 1996 LIFE
--------- --------- ---------
<S> <C> <C> <C>
Office furniture, fixtures and equipment $ 165,112 $134,780 5 - 7 years
Thermal imaging diagnostic units 470,165 470,165 3 years
--------- ---------
635,277 604,945
Less accumulated depreciation (284,548) (98,274)
--------- ---------
$ 350,729 $506,671
--------- ---------
--------- ---------

</TABLE>

The thermal imaging diagnostic units are prototypes currently undergoing
clinical trials in the United States and being tested in a hospital located in
Bangkok, Thailand. Depreciation expense during the years ended June 30, 1997
and 1996 was $186,274 and $87,625, respectively.

4. DEFERRED DEBT ISSUANCE AND STOCK OFFERING COSTS. During the year
ended June 30, 1997, the Company incurred significant costs in connection with
the issuance of convertible debentures and in connection with a planned
registration and offering of its common stock under the Securities and Exchange
Act of 1933. Deferred debt issuance and stock offering costs at June 30, 1997
consist of the following:

F-14
<PAGE>

<TABLE>
<S> <C>
Debt issuance costs $ 92,084
Stock offering costs 125,000
-------
$217,084
-------
-------

</TABLE>

5. INVESTMENT IN TRISUN/CTI ASIA, LTD. Effective May 24, 1995, the
Company formed TriSun/CTI Asia, Ltd. (the "Joint Venture"), a 50%-50% joint
venture with Tri Sun Medical China, Inc., a corporation established under the
direction of the Chinese Ministry of Health. The Joint Venture's primary
purpose is to install a telemedicine network and thermal imaging diagnostic
equipment in medical centers in China. The Joint Venture has obtained
deployment contracts with the Peoples Republic of China, however, the Ministry
of Health has to date been unable to obtain funding for the project. Management
believes that China represents a promising source of future business; however,
the Company does not intend to make capital contributions to the Joint Venture
until funding is obtained by the Chinese Ministry of Health and development and
testing of its thermal imaging diagnostic units are completed. During the year
ended June 30, 1996, the company incurred expenses of approximately $200,000
related to its involvement in the Joint Venture and such expenses are reflected
as operating, general and administrative expenses in the statement of
operations, because operations through the Joint Venture have been
insignificant.

6. SOFTWARE DEVELOPMENT COSTS. In June 1996 and October 1996, the
Company, through TMI, entered into two significant contracts (the "Contracts")
with TRW, Inc. ("TRW"). Under the terms of the Contracts, TRW will provide the
Company with software enhancements and ultimately a fully integrated thermal
imaging system. TRW will also develop a plan for deployment of the Company's
thermal imaging systems in major health care markets including systems
installation, training, testing and logistic support. Following is an analysis
of amounts incurred and committed in connection with the Contracts through June
30, 1997:

<TABLE>
<S> <C>
Total commitment $4,700,000
Amount incurred under the contracts through June 30, 1997 1,490,922
-----------
Remaining commitment $3,209,078
-----------
-----------

</TABLE>

The remaining commitment does not include amounts totaling $673,540 that
are included in accounts payable at June 30, 1997. Subsequent to June 30, 1997,
the Company became delinquent on payments under the Contracts; however, the
Company has established a payment plan under which partial payments, to which
TRW has informally agreed, are now being made. (See Note 13).

Of the amounts incurred under the Contracts, $1,193,711 has been
capitalized as software development cost and $297,211 has been charged to
research and development expense. In addition to amounts incurred under the
contracts, the Company has also capitalized internal costs totaling $300,157.

7. CONVERTIBLE DEBENTURES. Convertible debentures at June 30, 1997
consist of the following:
<TABLE>
<S> <C>
Convertible debenture due to an investment company bearing interest at 6%
per year and maturing in August 1999. This debenture is payable in
semi-annual payments of interest only and includes a provision under which
a penalty of 1.5% of the principal is payable monthly until such time as
the Company completes a registration under the Securities and Exchange Act
of 1933 of the shares of common stock to be issued upon conversion of the
debenture. This debenture is convertible to shares of the Company's common
stock at a conversion price per share equal to the lesser of the average
closing bid price of the common stock for the five consecutive trading days
immediately preceding the date of this debenture or 77% of the average
closing bid price of the common stock for the five consecutive trading days
prior to conversion. In connection with the issuance of this debenture, the
Company also issued the investment company a warrant to purchase 100,000
shares of the Company's common stock at $2.00 per share. (See Note 10) $550,000

Senior Convertible Debenture due to an investment company bearing interest
at 8% per year and maturing in March 2000. This debenture is payable in
semi-annual payments of interest only and is convertible to shares of the
Company's common stock

F-15
<PAGE>

at a conversion price per share equal to the lesser of the average closing
bid price of the common stock for the five consecutive trading days
immediately preceding the date of this debenture or 77% of the average
closing bid price of the common stock for the five consecutive trading days
prior to conversion. In connection with the issuance of this debenture, the
Company also issued the investment company a warrant to purchase 50,000
shares of the Company's common stock at $1.50 per share. (See Note 10)
125,000

Series A Senior Subordinated Convertible Redeemable Debentures bearing
interest at 12% per year based upon the face value of the debt (however
these debentures were issued at a 20% discount to face value and the
effective interest rate to maturity is approximately 40% per year). These
debentures mature in April 1998 and are convertible to shares of the
Company's common stock at a conversion price per share equal to the lower
of 90% of the average closing bid price of the common stock for the five
business days immediately preceding the notice of conversion or 90% of the
closing bid price of the common stock on the business day immediately
preceding the date of subscription by the holder. 479,882
----------
Total convertible debentures 1,154,882
Less current maturities (479,882)
----------
$675,000
----------
----------
</TABLE>

Future annual maturities of convertible debentures at June 30, 1997 are as
follows:

YEAR ENDED JUNE 30, AMOUNT
------------------- ----------
<S> <C>
1998 $ 479,882
1999 -
2000 675,000
----------
$1,154,882
----------
----------

</TABLE>

Subsequent to June 30, 1997, certain of the convertible debentures were
converted to common stock.

8. INCOME TAX. The composition of deferred tax assets and the related
tax effects at June 30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Benefit from carryforward of net operating losses $1,454,584 $924,086
Less valuation allowance (1,454,584) (924,086)
----------- ----------
Net deferred tax asset $ -0- $ -0-
----------- ----------
----------- ----------

</TABLE>

The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal statutory
rate of 34% were applied to pre-tax loss is as follows:

1997 1996
-------------------------------- ------------------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT PRE-TAX LOSS AMOUNT PRE-TAX LOSS
-------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Benefit for income tax federal statutory rate $718,367 34.0 $961,605 34.0
Non-deductible expenses (187,869) (8.9) (303,671) (10.7)
Increase in valuation allowance (530,498) (25.1) (657,934) (23.3)
--------- -------- ---------- --------
Total $ -0- -0- $ -0- -0-
--------- -------- ---------- --------
--------- -------- ---------- --------

</TABLE>

The non-deductible expenses shown above related primarily to the issuance
of common stock for services using different valuation methods for financial and
tax reporting purposes.

F-16
<PAGE>

At June 30, 1997, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $5,000,000 of unused net
operating losses available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in various years between
2002 and 2012. The benefit from utilization of net operating loss carryforwards
could be subject to limitations if significant ownership changes occur in the
Company.

9. STOCKHOLDERS' EQUITY. Following is an analysis of activity in the
Company's stockholder equity accounts during the year ended June, 30, 1997.

PRICE RANGE SHARES TOTAL
----------- ------ -----
<S> <C> <C> <C>
Common Stock issued for services based upon the
estimated fair value of the shares at the date of issue $0.50 to $0.73 687,266 $405,498

Common Stock issued as compensation to investors
for failure to promptly issue shares in connection
with a Regulation D offering of common stock
and common stock warrants completed during 1996.
These shares were not valued but were considered
an offering cost of the Regulation D offering - 211,900 -

Common stock issued upon conversion of debentures $0.64 98,768 64,125

Common stock issued for cash $0.50 to $0.60 1,833,152 1,010,209
--------- ----------
Totals for 1997 2,831,086 $1,479,832
--------- ----------
--------- ----------

</TABLE>

Following is an analysis of activity in the Company's stockholder equity
accounts during the year ended June, 30, 1996:

PRICE RANGE SHARES TOTAL
----------- ------ -------
<S> <C> <C> <C>
Common stock issued for cash in connection with a
Regulation D offering of common stock and common
stock warrants $1.00 1,462,600 $1,462,600

Common stock issued for a note receivable in connection
with a Regulation D offering of common stock and
common stock warrants $1.00 525,000 525,000

Common stock issued for offering costs - 53,650 -

Common stock issued in connection with the settlement of
a note payable to an individual $0.98 734,942 722,080

Common stock issued to settle claims of stockholders Preferred stock $0.81 to $0.91 578,000 508,280
converted to common stock based upon a
ratio equal to $5.00 over the quoted market price of the
common stock at the date of issue $1.67 to $1.70 14,700 25,000

Common stock issued upon conversion of notes and in
payment of related interest expenses $0.95 to $1.77 146,590 153,207

Common stock issued for cash $0.35 to $1.00 1,163,625 796,470

Common stock issued for services based upon the estimated
fair value of the shares at the date of issue $0.53 to $1.50 1,277,633 893,152
--------- ----------
Totals for 1996 5,956,740 $5,085,789
--------- ----------
--------- ----------

</TABLE>

F-17
<PAGE>

Following is an analysis of activity in the Company's stockholders' equity
accounts during the period from inception, June 10, 1987 to June 30, 1995:

PRICE RANGE SHARES TOTAL
----------- ------- --------
<S> <C> <C> <C>
Common stock issued for cash to founding
stockholders in 1987 $0.001 5,000,000 $ 5,000

Common stock issued for cash in connection
with a public offering of common stock
in 1988 0.005 5,000,000 19,562

Common stock issued for cash in connection
with a Regulation D offering of common
stock in 1989 3.13 80,000 250,010

Common stock issued for services in 1990 0.51 500,000 255,000

Common stock issued for cash in connection
with a Regulation D offering of common
stock in 1991 0.50 180,000 90,000

Common stock issued for services in 1991 0.50 3,240,000 1,620,000

Common stock issued for services in 1992 0.12 4,860,000 583,200

Common stock issued for services in 1993 0.06 to 0.14 1,134,500 83,860

Common stock issued for extension of debt
agreement in 1993 0.06 to 0.10 9,000 700

Common stock issued in connection with
claims by certain stockholders in 1993 0.06 1,000 60

Common stock issued for cash in 1994 0.04 to 0.12 387,000 26,000

Common stock issued for services in 1994 0.04 to 0.16 1,485,660 150,634

Common stock issued for extension of debt
agreement in 1994 0.04 to 0.10 9,000 600

Common stock issued in connection with
claims by certain stockholders in 1994 0.04 to 0.12 51,000 6,040

Stock issued for cash in 1995 0.35 to 1.00 679,202 408,675

Stock issued for services in 1995 0.18 to 1.03 3,506,461 3,052,706

Common stock issued to convert certain
notes payable in 1995 0.10 to 1.76 702,400 118,643

Common stock issued in conversion of
preferred stock in 1995 1.67 to 1.69 124,600 210,000
----------- ------------

Totals from inception to June 30, 1995 26,949,823 $6,880,690
----------- ------------
----------- ------------
</TABLE>

10. STOCK WARRANTS AND OPTIONS

STOCK WARRANTS

During the year ended June 30, 1996, in connection with a Regulation D
offering under which the Company sold 1,987,600 shares of common stock at
$1.00 per share, the Company granted the participating investors warrants to
acquire an equal number of shares at $5.00 per share for a two-year period.
Additional warrants for 211,900 shares were issued to the participating
investors during 1997 due to a failure by the

F-18

<PAGE>
Company to promptly issue shares sold in the Regulation D offering.
Accordingly, warrants for a total of 2,199,500 shares at $5.00 per share were
issued in connection with this offering.

Subsequent to June 30, 1997, the Company has recently made an offer
to the investors that participated in the Regulation D offering under which
the number of shares covered by the original warrants is increased by 50%,
the exercise price is lowered to $2.50 per share and the expiration date is
extended to March 31, 1999.

During the year ended June 30, 1997, the Company issued a warrant for
50,000 shares of the Company's common stock at $1.50 per share in connection
with the funding of a $125,000 convertible debenture. (See Note 7) The Company
also issued a warrant for 100,000 shares at $2.00 per share in connection with
the funding of a $550,000 convertible debenture. Each of the warrants issued
with the convertible debentures expires five years from the date of issuance.
(See Note 7)

STOCK OPTIONS

The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the success
of the Company's business and to enhance the ability to attract and retain the
services of qualified persons. The issuance of such options are approved by the
Board of Directors. The exercise price of an option granted is determined by
the fair market value of the stock on the date of grant.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is greater than or equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rate of 6%; no dividend yield;
weighted average volatility factor of the expected market price of the Company's
common stock of 0.70; and a weighted-average expected life of the options of 4
years.

The Black-Scholes option valuation model was developed for use in
estimating 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 employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is included in expense at the date of issuance. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Pro forma net loss $ $ (2,878,250)
Pro forma net loss available
to common stockholders $ $ (2,878,250)
Pro forma basic and dilutive
lows per share $ $ (0.10)
</TABLE>

F-19
<PAGE>

A summary of the Company's stock option activity and related information
for the years ended June 30, 1997 and 1996 follows:

WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE EXERCISE PRICE
----------- --------------- ----------------
<S> <C> <C> <C>
Options outstanding at July 1, 1995 2,000,000 $1.25 $1.25

Options granted 500,000 $1.25 $1.25
---------
Options outstanding at June 30, 1996 2,500,000 $1.25

Options granted 1,750,000 $0.70 - $0.97 0.77
---------

Options outstanding at June 30, 1997 4,250,000 $1.06
---------
---------

</TABLE>

Following is a summary of outstanding options at June 30, 1997 (See Note
14):

NUMBER OF SHARES VESTED EXPIRATION DATE EXERCISE PRICE
------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
500,000 375,000 October, 2000 $1.25
1,250,000 312,500 August, 2001 0.70
500,000 - April, 2002 0.97
2,000,000 1,000,000 June, 2005 1.25

</TABLE>

11. LEASE COMMITMENTS. The Company has entered into a lease agreement for
office space which is accounted for as an operating lease. Rent expense for
each of the years ended June 30, 1997 and 1996 was $30,300.

At June 30, 1997, the future minimum payments required under this
noncancellable operating lease are as follows:

YEAR ENDED JUNE 30, AMOUNT
------------------- --------
<S> <C>
1998 $30,300
1999 30,300
2000 5,050
--------
$65,650
--------
--------

</TABLE>

12. RELATED PARTY TRANSACTIONS. Since its inception, the Company has been
dependent upon certain individuals, officers/ stockholders and the related
corporations under their control (collectively referred to as the "Affiliates")
to provide capital, management services, assistance in finding new sources for
debt and equity financing and guidance in the development of the Company's
thermal imaging system. The Affiliates have generally provided services and
incurred expenses on behalf of the Company in exchange for shares of the
Company's common stock. However, in certain instances in years prior to 1996,
one such Affiliate deposited directly to its account, cash collected on behalf
of the Company. Such cash was raised through issuance of notes payable and
common stock of the Company for which a complete accounting for the proceeds was
not made by the Affiliate. In this circumstance the difference has been charged
to compensation expense and reflected as operating, general and administrative
expenses in the accompanying financial statements. Following is an analysis of
transactions involving the Affiliates during the years ended June 30, 1997 and
1996:

F-20
<PAGE>

AFFILIATE 1 AFFILIATE 2
--------------------------------- ---------------------------
YEAR ENDED JUNE 30, 1997 SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Shares of the Company's Common Stock issued as
compensation and repayment of expenses
incurred on behalf of the Company by the
Affiliates at prices ranging from $0.18 to
$0.73 287,266 $152,498 400,000 $253,000
Investment in the Company 1,960,418 980,209 - -
----------- ----------- -------- --------
Total for 1997 2,247,684 $1,132,707 400,000 $253,000
----------- ----------- -------- --------
----------- ----------- -------- --------
YEAR ENDED JUNE 30, 1996
Shares of the Company's Common Stock issued as
compensation and repayment of expenses
incurred on behalf of the Company by the
Affiliates at prices ranging from $0.53 to
$0.70 530,000 $474,500 194,383 $122,461
Investment in the Company 1,120,000 672,000 - -
----------- ----------- -------- --------
Total for 1996 1,650,000 $1,146,500 194,383 $122,461
----------- ----------- -------- --------
----------- ----------- -------- --------

</TABLE>

The Company has been involved in certain stockholder disputes concerning
its technology and has generally been successful in settling such disputes
primarily through issuances of common stock. Affiliate 1 has agreed to
indemnify the Company should additional stockholder disputes regarding the
Company's technology arise.

13. LITIGATION AND CONTINGENCIES. At June 30, 1997, the Company is
involved in various matters of litigation or dispute and other contingencies, as
follows:

In April 1997, the Company entered into an agreement ( the "Select
Agreement") with a financial services company that committed the financial
services company to initially raise $1,500,000 in capital for the Company.
Under the Select Agreement the financial services company was also obligated to
provide a loan of $2,000,000 to the Company immediately upon completion of a due
diligence period. After completing the due diligence period, the financial
services company began an alternative interim fund raising effort that generated
530,000 of loans through the issuance of convertible debentures and certain of
the debentures have been converted to common stock of the Company. Upon
conversion, the debenture holders received restricted common stock subject to a
statutory holding period although such debenture holders assert that they were
told by the financial services company that they would receive free trading
shares. Both the debenture holders and the financial services company have
threatened litigation against the Company; however, the Company believes that it
has no liability for misrepresentations made by the financial services company
and believes that issuance of free trading shares would be in direct violation
of federal securities laws. Furthermore, the Company contends that it has been
damaged by the financial services company's failure to perform under the Select
Agreement. In March 1998 the Company offered recission to all holder of
debentures purchased under the Select Agreement. Substantially all debenture
holders settled for cash repayment or conversion to restricted common stock
based on a $0.45 per share conversion price.

In a second matter, during the year ended June 30, 1994, the Company issued
1,000,000 shares of its common stock to a former director of the Company based
upon the directors representation that he would arrange large-scale financing by
certain proposed contributors. During the year ended June 30, 1997, actions
were taken to cancel the common stock because the Company contends that the
issuance was conditional upon the former directors' ability to arrange
large-scale financing. However, the Company was recently contacted by a lender
that asserts that he had relied upon a pledge of 500,000 shares of the Company's
common stock by the former director as collateral for a loan. The 500,000
shares of common stock issued to the director are included as issued and
outstanding shares in the accompanying financial statements at June 30, 1997,
1996, and 1995.

The Company is also involved in discussions with two of its primary vendors
regarding past due accounts. The first vendor is TRW, an Ohio corporation
performing contract software development, and strategic planning and management
services regarding the testing, development and deployment of the Company's
thermal imaging systems.

F-21
<PAGE>

The Company has become delinquent in the payment of costs and fees under
contracts with TRW (See Note 6) and, accordingly, TRW, although not having filed
formal legal actions, has notified the Company that it will be withholding
delivery of source codes of developed software until past due amounts are paid.
If TRW follows through with its treats and withholds delivery of the source
codes, the Company's operation will be shut down.

The Company has also accrued a payable to its primary legal counsel (the
"Attorneys") for legal services and at June 30, 1997 owed the Attorneys
$198,717. A total outstanding debt as of May 15, 1998 is approximately
$347,000. In order to provide security for the amounts owed, the Company has
executed pledge agreements granting the Attorneys a security interest in the
Company's common stock and in the common stock of TMI and in the intellectual
property of both the Company and TMI. The Company has made partial payment on
amounts due the Attorneys; however, if the Company does not continue to make
payments as agreed, the Attorneys could foreclose on their security interests.

As a Nevada Corporation organized prior to October 1, 1991, the Company's
stockholders have generally had preemptive rights to acquire the Company's
common stock when such securities were offered for sale. However, in various
offerings of the Company's securities, the Company failed to properly offer
their existing stockholders the preemptive rights to which they were entitled.
Should any stockholder assert preemptive rights for past offerings, the Company
plans to make available the shares of stock and at the price to which the
stockholder was originally entitled. Management is not aware of any stockholder
who intends to make any claim with respect to the failure by the Company to
offer preemptive rights. However, there can be no assurance that litigation
asserting such claims will not be initiated, or that the Company would prevail
in any such litigation. Subsequent to year end a majority of the stockholders,
by written consent, amended the Articles of Incorporation of the Company to deny
preemptive rights from and after that date with respect to the issuance of
shares of the common stock. However, the amendment to the Articles of
Incorporation with have no effect with respect to preemptive rights which may
have existed prior to such amendment.

The Company is also involved various other legal disputes arising in the
normal course of business that, in the opinion of management, should not result
in significant liability, if any.

14. SUBSEQUENT EVENTS. In February 1998, the Company adopted the 1997
Stock Option and Restricted Stock Plan (the "Plan") that provides for the grant
by the Company to employees of up to 5,125,000 options for shares of the
Company's common stock or actual shares of restricted common stock. The Plan
will continue in effect for a term of ten years unless sooner terminated
pursuant to its terms. To date, no restricted stock or stock options have been
issued under the Plan.

In November 1997, the Company executed a consulting agreement with a
financial services firm (the "Consultant") under which the Company compensated
the Consultant for past services through issuance of 100,000 shares of common
stock and by the granting of three year options to acquire an additional
2,000,000 shares of the Company's common stock at $0.60 per share (based upon
the market value of the Company's common stock at the date of issuance). In a
related transaction, the Company agreed to issue the Consultant up to 500,000
shares of common stock at $0.30 per share in consideration for capital
contributions of up to $150,000. The difference in the value of the Company's
common stock at the date of the agreement and the price at which the shares will
ultimately be issued resulted in the Company recognizing compensation expense of
approximately $150,000.

In November 1997, the Company also issued stock options for a total of
275,000 shares of common stock to an individual who performed services for the
Company. The stock options bear a four year term and were issued with an
exercise price of $0.75 per share, based upon the estimated fair market value of
the Company's common stock at the date of issue. The Company recognized
compensation expense of approximately $50,000 in connection with the issuance of
these stock options.

In January 1998, the Company entered into an investment agreement (the
"Investment Agreement") with a private investment firm under which the
investment firm will purchase up to $7,000,000 of the Company's common stock
under complex terms described in the Investment Agreement, but generally equal
to 74% of the lowest sales price during a twenty-day trading period near the
time of the investment. The resulting 26% discount on the sale of the Company's
common stock will be accreted at the date of issue and will result in a charge
against income for purposes of calculating earnings per share. Prior to the
private investment firm being obligated to acquire any of the Company's

F-22
<PAGE>

common stock, the Company must meet numerous organizational, financial and
reporting criteria including the effective registration of its common stock and
the unrestrained trading of its shares on a major U.S. stock exchange.

15. GOING CONCERN CONSIDERATIONS. Since its inception, as a development
stage enterprise, the Company has generated insignificant revenue and has been
dependent on debt and equity raised from individual investors to sustain its
operations. The Company has been successful in conserving cash by issuing its
common and preferred stock to satisfy obligations, to compensate individuals and
vendors and to settle stockholder and other disputes that have arisen. However,
during the years ended June 30, 1997 and 1996, the Company incurred net losses
of $2,112,843 and $2,878,250, respectively, and negative cash flows from
operations of $512,860 and $1,372,727, respectively. These factors along with a
$1,475,392 negative working capital position at June 30, 1997 and delinquencies
in payments to major vendors (See Notes 6 and 13) raise substantial doubt about
the Company's ability to continue as a going concern.

Management plans to take specific steps to address its difficult financial
situation as follows:

- In the near term the Company plans additional private placements of
debt and common stock to fund its current operations.

- In the intermediate term, the Company plans a public offering of its
common stock under the Securities and Exchange Act of 1933 to provide
the funds necessary to bring its thermal imaging system to the
commercial market.

- In the long-term, the Company believes that cash flows from
commercialization of its thermal imaging systems will provide the
resources for continued operations.

There can be no assurance that the Company's planned private placements of
debt and equity securities or its planned public offering of common stock will
be successful or that the Company will have the ability to commercialize its
thermal imaging systems and ultimately attain profitability. The Company's
long-term viability as a going concern is dependent upon three key factors, as
follows:

- The Company's ability to obtain adequate sources of debt or equity
funding to meet current commitments and fund the commercialization of
its thermal imaging system.

- The ability of the Company to obtain positive test results of its
thermal imaging system in clinical trials currently in progress.

- The ability of the Company to ultimately achieve adequate
profitability and cash flows to sustain its operations.

16. NON-CASH INVESTING AND FINANCING ACTIVITIES. During the years ended
June 30, 1997 and 1996, the Company engaged in certain non-cash investing and
financing activities as follows:

1997 1996
---- ----
<S> <C> <C>
Common stock issued in settlement of notes payable $142,900
---------
---------
Common stock issued upon conversion of debentures $62,020
------
------

</TABLE>

F-23
<PAGE>

CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)

F-24
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC., AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED INTERIM BALANCE SHEET
DECEMBER 31, 1997 AND 1996
---------
(UNAUDITED)

ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 260,980 $ 81,509
Deposits 2,204 --
------------ ------------
Total current assets 263,184 81,509

Property and equipment, net 277,395 446,146
------------ ------------
Other assets:
Software development costs 2,144,919 336,625
Stock offering and debt issuance costs, net 214,416 95,333
------------ ------------

Total Assets $ 2,899,914 $ 959,613
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable $ 1,113,595 $ 127,066
Advances from Affiliates 69,315 317,058
Accrued liabilities 232,279 144,433
Current maturities of convertible debentures 552,155 --
------------ ------------

Total current liabilities 1,967,344 588,557

Convertible debentures, net of current maturities 325,000 550,000
------------ ------------

Total liabilities $ 2,292,344 $ 1,138,557
------------ ------------

Commitments and contingencies

Stockholders' equity (deficit):
Convertible preferred stock, $5.00 per value, 100,000 shares
authorized -- --
Common stock, $.001 par value; 100,000,000 shares authorized,
42,137,598 and 32,906,563 shares issued and outstanding
on December 31, 1997 and 1996, respectively 42,138 32,907
Additional paid-in capital 15,916,370 11,933,573
Subscription receivable (525,000) (525,000)
Losses accumulated during the development stage (14,825,938) (11,620,424)
------------ ------------
Total stockholders' equity (deficit) 607,570 (178,944)
------------ ------------

Total liabilities and stockholders' equity (deficit) $ 2,899,914 $ 959,613
------------ ------------
------------ ------------
</TABLE>

THE ACCOMPANYING SELECTED NOTES ARE AN INTEGRAL PART
OF THESE INTERIM FINANCIAL STATEMENTS.

F-25
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996,
AND THE PERIOD FROM INCEPTION (JUNE 10, 1987) THROUGH DECEMBER 31, 1997
-----------
(UNAUDITED)

SIX MONTHS SIX MONTHS
ENDED ENDED INCEPTION TO
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest income $ 1,247 $ 3,097 $ 17,823
Income from sale of prototypes -0- 55,815 180,815
----------- ----------- -------------
Total income 1,247 58,912 198,638

Operating, general and
administrative expenses 1,533,137 689,702 12,277,165
Research and development costs 161,003 81,455 952,997
Interest expense 123,023 11,000 1,280,034
Litigation settlement 514,350
----------- ----------- -------------
Total expenses 1,817,163 782,157 15,024,576
----------- ----------- -------------
Net Loss $(1,815,916) $ (723,245) $(14,825,938)
----------- ----------- -------------
----------- ----------- -------------
Weighted average shares 39,004,006 32,906,583
outstanding ----------- -----------
Loss per common share ($0.05) ($0.02)
----------- -----------
</TABLE>

THE ACCOMPANYING SELECTED NOTES ARE AN INTEGRAL PART
OF THESE INTERIM FINANCIAL STATEMENTS.

F-26
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH DECEMBER 31, 1997
----------
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,815,916) $ (723,245) $(14,825,938)
Adjustments to reconcile net loss to net cash
used in operating activities: 875,636 120,337 9,758,993
----------- ---------- ------------

Net cash used in operating activities (940,280) (602,908) (5,066,945)
----------- ---------- ------------

Cash flows from investing activities:
Purchase of equipment and computers (19,385) (10,301) (184,497)
Software development costs (651,052) (236,250) (2,144,919)
----------- ---------- ------------

Net cash used in investing activities (670,437) (246,551) (2,329,416)
----------- ---------- ------------

Cash flows from financing activities:
Net proceeds from sale of common
stock issued for cash 1,608,530 317,058 5,677,056
Payment of stock offering costs - - (125,000)
Advances from affiliates 69,315 - 69,315
Proceeds from notes payable and
convertible debentures - 500,000 2,510,869
Payment of debt issuance costs - - (133,600)
Repayment of notes payable - (50,018) (341,299)
----------- ---------- ------------

Net cash provided by financing activities 1,677,845 767,040 7,657,341
----------- ---------- ------------

Net increase (decrease) in cash 67,128 (82,419) 260,980

Cash and cash equivalents, beginning
of period 193,852 163,928 -
----------- ---------- ------------

Cash and cash equivalents, end of
period $ 260,980 $ 81,509 $ 260,980
----------- ---------- ------------
----------- ---------- ------------

Supplemental additional cash flow
information:

Cash paid for interest $ - $ - $ 5,293
----------- ---------- ------------
----------- ---------- ------------
</TABLE>

THE ACCOMPANYING SELECTED NOTES ARE AN INTEGRAL
PART OF THESE INTERIM FINANCIAL STATEMENTS.

F-27
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
for the six months ended December 31, 1997
----------
(UNAUDITED)

<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
DURING TOTAL
COMMON STOCK PAID-IN SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
-----------------
STOCK AMOUNT CAPITAL RECEIVABLE STAGE EQUITY
----- ------ ------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 35,737,649 $ 35,738 $13,410,573 $ (525,000) $(13,010,022) $ (88,711)

Common stock issued to individuals
and corporations for compen-
sation and payment of services 1,038,000 1,038 467,962 - - 469,000

Stock issued to affiliates for
advances and payment of expenses
of the Company 4,477,177 4,478 1,604,052 - - 1,608,530

Conversion of debentures and
accrued interest to common
stock 801,439 801 354,699 - - 355,500

Shares issued to a corporation
as a retainer for future fund
raising 83,333 83 29,084 - - 29,167

Issuance of stock options for com-
pensation for services - - 50,000 - - 50,000

Net loss accumulated during the six
months ended December 31, 1997 - - - - (1,815,916) (1,815,916)
---------- --------- ----------- ----------- ------------- ------------
Balance at December 31, 1997 42,137,598 $ 42,138 $15,916,370 $ (525,000) $(14,825,938) $ 607,570
---------- --------- ----------- ----------- ------------- ------------
---------- --------- ----------- ----------- ------------- ------------
</TABLE>

THE ACCOMPANYING SELECTED NOTES ARE AN INTEGRAL
PART OF THESE INTERIM FINANCIAL STATEMENTS.

F-28
<PAGE>

COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
----------

1. INTERIM FINANCIAL STATEMENTS:

The unaudited consolidated condensed interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments necessary for a fair presentation of results of operations have been
made to the interim financial statements. Results of operations for the
six-month periods ended December 31, 1997 and 1996 are not necessarily
indicative of results of operations for the respective full years.

A summary of the Company's significant accounting policies and other
information necessary to understand these consolidated condensed interim
financial statements is presented in the Company's audited financial statements
for the years ended June 30, 1997 and 1996. Accordingly, the Company's audited
financial statements should be read in connection with these financial
statements.

2. INCOME TAXES:

The difference between the 34% federal statutory income tax rate shown in
the accompanying interim financial statements is primarily attributable to an
increase in the valuation allowance applied against the tax benefit from
utilization of net operating loss carryforwards.

3. STOCKHOLDERS' EQUITY:

4. SUBSEQUENT EVENTS:

INVESTMENT AGREEMENT. On January 20, 1998, the Company entered into an
Investment Agreement (the "Investment Agreement") with Bristol Asset Management,
L.L.C. ("Bristol"), regarding the periodic purchase of shares of the Common
Stock. Under the provisions of the Investment Agreement, the Company will issue
and sell to Bristol, and Bristol shall be obligated to purchase from the
Company, up to $7,000,000 of the Common Stock during the term of the Investment
Agreement.

The determination of the timing and amount of the Common Stock to be sold
shall be made by the Company, in its sole discretion, to the extent not limited
by the terms of the Investment Agreement. The Company is permitted to deliver
written notices to Bristol (the "Put Notice") stating a dollar amount of the
common stock which the Company

F-29
<PAGE>

intends to sell to Bristol five business days following the date on which the
Put Notice is given to Bristol. However, the Company may not deliver a Put
Notice under certain circumstances as provided in the Investment Agreement. The
maximum amount to be purchased under a Put Notice may not exceed the lesser of
$7,000,000 (less all amounts previously paid by Bristol) and the product of the
number of shares of the Common Stock of the Company traded on the principal
exchange on which the Company's common stock traded for the preceding calendar
month, multiplied by the average of the closing bid prices for the Company's
common stock during the prior calendar month, multiplied by 14 percent.

Unless otherwise provided, Bristol shall be required to contribute the
amount of funds specified in the Put Notice. Simultaneously with the receipt of
the funds from Bristol in the amount specified in the Put Notice, the Company
shall issue and sell to Bristol the number of shares of the Common stock equal
to the draw down divided by 74 percent of the lowest sales price for the Common
stock on the principal exchange (the "Lowest Sale Price") during the 10 trading
days prior to the Put Notice Date (the "Look Back Period"). In the event that
the Lowest Sale Price during the 20 trading days after a particular closing is
less than 95 percent of the Lowest Sale Price applicable to such closing, then
the Company shall promptly issue to Bristol an additional number of shares of
the common stock with respect to such closing such that the number of shares of
the common stock issued to Bristol at such closing divided by 74 percent of the
Lowest Sale Price during such 20 trading day period. Bristol shall also be
issued additional warrants equal to 12 percent of the number of additional
shares so issued and the exercise price of such additional warrants and the
warrants issued at such closing shall be adjusted to 100 percent of the Lowest
Sale Price during such 20 trading day period.

Generally, at each closing, the Company will deliver to Bristol warrants to
purchase shares of the Company's common stock (the "Warrant Shares"). The
warrants shall expire on the fifth anniversary of the date of issuance.
Generally, the warrants shall entitle the holder thereof to purchase a number of
Warrant Shares equal to 12 percent of the number of shares of the common stock
purchased at the closing in question at an initial exercise price equal to 100
percent of the average closing sales price for the common stock on the principal
exchange during the Look Back Period in question.

The Company agrees that the resale or other disposition by Bristol of all
shares of the common stock issued to Bristol pursuant to the Investment
Agreement shall, for so long thereafter as is required by the Investment
Agreement, be subject to an effective registration statement on Form S-1 or an
equivalent thereof, and with respect to the Warrant Shares, covering the resale
or other disposition by the holders thereof at any time and from time to time
after each such issuance.

As conditions precedent to the obligation of Bristol to purchase any shares
of the common stock, the Company must meet numerous organizational, financial,
and reporting criteria, including the ability to engage in the contemplated
transactions, unrestrained trading of the common stock on the principal
exchange, effectiveness of the Company's registration statement, certification
of corporate authority to engage in the contemplated transactions, and the
elimination of preemptive rights for the stockholders.

In addition to conditions precedent which must be satisfied prior to
Bristol's obligation to purchase the common stock under the Investment
Agreement, the total amount of the common stock which the Company can require
Bristol to purchase may be limited to a percentage of the total shares of the
common stock outstanding. Under the Investment Agreement, Bristol may refuse to
purchase the common stock, as requested in a properly delivered Put Notice, if
the purchase of the common stock would result in Bristol beneficially owning
more than 4.9 percent of the common stock outstanding, determined in accordance
with Section 13(d) of the Exchange Act and including shares of the common stock
acquired pursuant to the Investment Agreement or through unrelated transactions.
As a result, it is possible that Bristol's total investment under the Investment
Agreement could be limited to an aggregate dollar amount well below $7,000,000.

The Investment Agreement may be terminated at any time only with the mutual
consent of the Company and Bristol. The Investment Agreement shall
automatically terminate without any further action of either party when Bristol
has invested an aggregate of $7,000,000 in common stock pursuant to the
Investment Agreement. The resulting 26% discount on sale of the common stock
will be accredited at the date of issue and result in a reduction of income for
purposes of the calculation of earnings per share. The value assigned to the
Warrant Shares will also be accredited as a reduction of income for purposes of
the calculation of earnings per share.

F-30
<PAGE>

SALES AND OTHER ISSUANCES OF COMMON STOCK. In January 1998, the Company
issued 100,000 shares of the common stock to a related entity in consideration
for services rendered under a consulting agreement. The total estimated value
of the stock at the date of issuance was approximately $30,000.

In January 1998, the Company issued an aggregate of 3,482,786 of the common
stock to a related entity in consideration for cash contributions of
approximately $975,130.

In January 1998, the Company issued 112,752 shares of common stock in
payment for legal services rendered and value at approximately $64,220.

During January and February 1998, the Company issued an aggregate of
603,489 shares of the common stock in connection with the conversion of $200,000
of the Company's 6% convertible debentures and payment of penalties due for
non-registration.

F-31
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Articles of Incorporation do not specifically address
indemnification of directors and officers, except to make a general reference
that the directors "may exercise all rights, powers, and privileges . . .
conferred upon similar corporations organized under and by virtue of the laws of
the State of Nevada." Sections 78.751 and 78.752 of the Nevada Revised Statutes
permit a corporation to indemnify, among others, any officer or director against
certain liabilities under specified circumstances, and to purchase and maintain
insurance on behalf of its officers and directors.

Consistent with the overall scope of section 78.751 of the Nevada Revised
Statutes, Article VI of the Company's Bylaws, included in Exhibit 3.2 hereto and
incorporated herein by reference, provides, in general, that any director or
officer of the Company who is the subject of or a participant in a threatened,
pending or completed legal action by reason of the fact that such individual is
or was a director or officer shall be indemnified and held harmless by the
Company from and against the consequences of such action if it is determined
that he acted in good faith and reasonably believed (i) his conduct was in the
Company's best interest, (ii) in all other cases, that his conduct was not
opposed to the best interests of the Company, and (iii) with respect to criminal
proceedings, that he had no reasonable cause to believe his conduct was
unlawful; provided that if it is determined that such person is liable to the
Company or is found liable on the basis that personal benefit was improperly
received by such person, the indemnification is limited to reasonable expenses
actually incurred by such person in connection with the legal action and shall
not be made in respect of any legal action in which such person shall have been
found liable for willful or intentional misconduct in the performance of his
duty to the Company. Any indemnification (unless ordered by a court of
competent jurisdiction) shall be made by the Company only upon a determination
that indemnification of such person is proper in the circumstances by virtue of
the fact that it shall have been determined that such person has met the
applicable standard of conduct.

The Bylaws also provide that reasonable expenses, including court costs and
attorneys' fees, incurred by officers and directors in connection with a covered
legal action shall be paid by the Company at reasonable intervals in advance of
the final disposition of such action, upon receipt by the Company of a written
affirmation by such person of his good faith belief that he has met the standard
of conduct necessary for indemnification, and a written undertaking by or on
behalf of such person to repay the amount paid or reimbursed by the Company if
it is ultimately determined that he is not entitled to be indemnified.

The Board of Directors of the Company may also authorize the Company to
indemnify employees or agents of the Company, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to directors and officers of the Company. As of the
date of this Registration Statement, the Board of Directors has not extended
indemnification rights to persons other than directors and officers.

The Bylaws also provide that the Company has the power and authority to
purchase and maintain insurance or another arrangements on behalf of any
director, officer, employee, or agent of the Company or any affiliate of the
Company on similar terms as those described in Section 78.752 of the Nevada
Revised Statutes. The Company's Articles of Incorporation relieve its directors
from liability for monetary damages to the full extent permitted by Nevada law.
Sections 78.751 and 78.752 of the General Corporation Law of the State of Nevada
authorize a corporation to indemnify, among others, any officer or director
against certain liabilities under specified circumstances, and to purchase and
maintain insurance on behalf of its officers and directors.

II-1
<PAGE>

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant. No expenses will be paid by the
security holders.

<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee. . . . . . . . . . . . . . . . . . . . $
Printing and Engraving Expenses . . . . . . . . . . . . . .
Legal Fees and Expenses . . . . . . . . . . . . . . . . . .
Accounting Fees and Expenses. . . . . . . . . . . . . . . .
Blue Sky Fees and Expenses. . . . . . . . . . . . . . . . .
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 0000
-----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $0000
-----
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Set forth below is certain information regarding securities that the
Company has sold in the past three years to directors ("D"), officers ("O"),
employees ("E"), consultants ("C"), institutional investors ("I"), affiliates
("A"), and non-affiliates ("N").

In June 1995, the Company issued 16,500 shares of the Common Stock to John
Loos (C) as compensation for financial consulting services rendered to the
Company valued at approximately $16,995.

In June 1995, the Company issued 39,375 shares to Lindsay Brehm (N) in
connection with the conversion of the principal and interest due under a
corporate note. An outstanding amount of approximately $39,375 was converted at
a price of $1.00 per share.

In June 1995, the Company issued 29,600 shares of the Common Stock to Aul &
Associates (N) in connection with the conversion of 10,000 shares of the
Preferred Stock issued by the Company. The Preferred Stock was valued at $5.00
per share and was converted into the Common Stock at a price of $1.68 per share.

In July 1995, the Company issued an aggregate of 378,000 shares of the
Common Stock to certain stockholders of Dorex, Inc. (N) in settlement of a
threatened lawsuit arising out of the Company's acquisition of certain research
contracts with the State University of New York - Buffalo and intellectual
property relating to thermal imaging technology. The estimated value of the
stock issued to the settling stockholders equaled $343,980.

In July 1995, the Company issued 734,942 shares of the Common Stock to
Paige-Ruane, Inc. (N) as partial consideration for the settlement and dismissal
of a lawsuit pending against the Company in the State of Florida. The estimated
value of the shares of the Common Stock issued in settlement of the lawsuit
equaled $574,724.64.

In July 1995, the Company issued 10,000 shares of the Common Stock to
Benjamin Anderson (A) in consideration for a cash contribution of approximately
$12,500.

In July 1995, the Company issued 16,500 shares of the Common Stock to
Benjamin Anderson (A) in connection with the conversion of the principal and
interest due under a corporate note and additional cash consideration. An
outstanding amount of approximately $6,500 was converted into the Common Stock
at a price of $1.00 per share.

In July 1995, the Company issued 26,250 shares of the Common Stock to
Stuart Drange (N) in connection with the conversion of the principal and
interest due under a corporate note. An outstanding amount of approximately
$26,250 was converted at a price of $1.00 per share.

II-2
<PAGE>

In July 1995, the Company issued 7,000 shares of the Common Stock to Robert
Kamrow (N) and 3,000 shares of the Common Stock to Thomas Kamrow (N) in
connection with the conversion of the remaining principal and interest due under
a corporate note identifying Robert Kamrow as payee. An outstanding amount of
approximately $10,000 was converted at a price of $1.00 per share.

In July 1995, the Company issued 6,600 shares of the Common Stock to
Michael P. Kelley (N) in connection with the conversion of the principal and
interest due under a corporate note. An outstanding amount of approximately
$6,600 was converted at a price of $1.00 per share.

In July 1995, the Company issued 19,700 shares of the Common Stock to David
R. Moncrief (N) in connection with the conversion of principal and interest due
under two corporate notes. An outstanding amount of approximately $19,700 was
converted at a price $1.00 per share.

In July 1995, the Company issued 6,600 shares of the Common Stock to Eric
Wagner (N) in connection with the conversion of the principal and interest due
under a corporate note. An outstanding amount of approximately $6,600 was
converted at a price of $1.00 per share

In July 1995, the Company issued 19,690 shares of the Common Stock to Lois
White (N) in connection with the conversion of the principal and interest due
under a corporate note. An outstanding amount of approximately $19,690 was
converted at a price of $1.00 per share.

In August 1995, the Company issued 1,600,000 shares of the Common Stock to
Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $672,000 and as compensation to David B. Johnston (D, O) with an
estimated value of $448,000.

In August 1995, the Company issued 14,700 shares of the Common Stock to
John Weidner (N) in connection with the conversion of 5,000 shares of the
Preferred Stock. The Preferred Stock had a value of $5.00 per share and was
converted to the Common Stock at a price of $1.00 per share.

In September 1995, the Company issued an aggregate of 295,000 shares of the
Common Stock to The Elmo Group (N), Steve G. Ushijima (N), Douglas J. Emery (N),
Harold Werth, Jr. (N), Jennifer Forbes (A), Lori Forbes (A), Merrill Fowler (N),
and Gary Scrutton (N) in consideration for an aggregate cash contribution to the
Company of approximately $192,070.

In September 1995, the Company issued 10,000 shares of the Common Stock to
Dave Braman (N), a stockholder of Dorex, Inc., in settlement of threatened
litigation arising out of the Company's acquisition of certain research
contracts with the State University of New York - Buffalo and certain thermal
imaging technologies. The estimated value of the settlement equaled
approximately $8,400.

In September 1995, the Company issued 6,000 shares of the Common Stock to
Richard Haddad (C) as a finder's fee for bringing in certain equipment financing
investors. The Company valued the services rendered at $5,055.

In September 1995, the Company issued 1,000 shares of the Common Stock to
Philip Heyde (N) as an interest payment of approximately $840 on a corporate
note.

In September 1995, the Company issued an aggregate of 21,000 shares of the
Common Stock to Jack Gately (N), Christopher John Gately (N), and Ursula Gately
(N) in connection with the conversion of 7,000 shares of the Preferred Stock
held by Jack Gately. The Preferred Stock was valued at $5.00 per share and was
converted into the Common Stock at a price of $1.68 per share.

In September 1995, the Company issued 20,000 shares of the Common Stock to
Benjamin Anderson (A) in consideration for a cash contribution of approximately
$20,000.

II-3
<PAGE>

In October 1995, the Company issued an aggregate of 140,000 shares of the
Common Stock to William Carpenter (N), Donald B. Gartland (N), and Bob Ihle (N),
all stockholders in Dorex, Inc., in consideration for the settlement of
threatened litigation against the Company arising out of the Company's
acquisition of certain research contracts with the State University of New York
- - Buffalo and thermal imaging technologies. The estimated value of the
settlement equaled approximately $113,400.

In October 1995, the Company issued 6,500 shares of the Common Stock to
Jack Gately (N) in connection with the conversion of the outstanding principal
and interest of $3,870 due under a corporate note. An outstanding amount of
$10,803 was converted at a price of $1.68 per share.

In December 1995, the Company issued 20,000 shares of the Common Stock to
Keith Bessinger (C) for legal services rendered to the Company with an
approximate value of $10,600.

In December 1995, the Company issued 50,000 shares of the Common Stock to
Thermal Imaging, Inc. (A) as compensation due to David B. Johnston (O, D) for
services rendered to the Company. The value of the services rendered equaled
approximately $26,500.

In December 1995, the Company issued 10,000 shares of the Common Stock to
Douglas J. Emery (N) in consideration for a cash contribution of approximately
$5,300.

In December 1995, the Company issued 10,000 shares of the Common Stock to
Willard Harpster (C) in consideration for customer relations services rendered.
The Company has valued the services at approximately $9,500.

In December 1995, the Company issued 60,000 shares of the Common Stock to
Mark Lewis (N) in connection with the settlement of a threatened lawsuit against
the Company arising out of a transaction relating to the lease of certain
thermal imaging equipment and the donation of such equipment to the State
University of New York - Buffalo.

From November 1995 through February 1996, the Company issued an aggregate
of 2,000,000 shares of the Common Stock and 2,000,000 warrants, entitling
holders to purchase one share of the Common Stock at an exercise price of $5.00
per share, to various subscribers in conjunction with the Private Placement
Memorandum dated November 13, 1995 for an aggregate amount of approximately
$2,000,000.

In February 1996, in conjunction with the Private Placement Memorandum
dated November 13, 1995, the Company also issued an aggregate of 52,500 shares
of the Common Stock and 31,500 warrants at an exercise price of $5.00 per share
to various underwriters who provided services to the Company in connection
therewith. The shares of the Common Stock and warrants issued were valued at
approximately $49,500.

In February 1996, the Company issued 50,000 shares of the Common Stock to
Lewis Woodworth (N) in consideration for the settlement of a threatened lawsuit
arising out of the Company's acquisition of a certain research contracts with
the State University of New York - Buffalo and thermal imaging technologies.
The Common Stock issued was valued at approximately $42,500.

In March 1996, the Company issued 30,000 shares of the Common Stock to M&S
Acquisition (C) in consideration for valuation and financial consultant services
rendered to the Company and valued at approximately $45,000. These shares were
offered and sold pursuant to a written contract between the Company and M&S
Acquisition for compensation. As such, the Company believes that the
transaction is exempt from registration pursuant to Rule 701 of the Securities
Act.

In April 1996, the Company issued 494,383 shares of the Common Stock to
PDH, Ltd.(A, C), in consideration for administrative and shareholder relations
services rendered to the Company and valued at $214,160.

In April 1996, the Company issued 112,250 shares of the Common Stock to
Thermal Imaging, Inc. (A) in connection with the Assumption of Liability
Agreement wherein Thermal Imaging agreed to assume responsibility for and
indemnify the Company from all claims asserted or to be asserted by Dorex, Inc.
stockholders in connection with

II-4
<PAGE>

the Company's acquisition of certain research contracts with the State
University of New York - Buffalo and thermal imaging technologies. The stock
issued to Thermal Imaging, Inc. was valued at approximately $67,350.

In April 1996, the Company issued 4,000 shares of the Common Stock to Eric
Wagner (N) in connection with the conversion of principal and interest due under
a corporate note. An outstanding amount of approximately $7,000 was converted
at a price of $1.75 per share.

In June 1996, the Company issued 5,000 shares of the Common Stock to M&S
Acquisition (C) as reimbursement for expenses totaling $7,500 incurred in the
performance of services.

In August 1996, the Company issued its 6% Convertible Debenture due August
15, 1999 in the principal amount of $550,000 (the "6% Convertible Debenture") to
Cameron Capital, Ltd. The 6% Convertible Debenture is convertible into shares
of the Common Stock at a price per share equal to the lesser of the average
closing bid price of the Common Stock for the five consecutive trading days
immediately preceding the date of the 6% Convertible Debenture, or 77 percent of
the average closing bid price of the Common Stock for the five consecutive
trading days prior to conversion. In connection with the issuance of the 6%
Convertible Debenture, the Company also issued to the holder a warrant to
purchase 100,000 shares of the Common Stock at $2.00 per share.

In September 1996, the Company issued an additional 203,150 warrants to
investors in the Private Placement Memorandum dated November 13, 1995, as a
penalty due as a result of the failure of the Company to timely file a
registration statement covering the shares of the Common Stock in the Offering.

In November 1996, the Company issued 100,000 shares of the Common Stock to
PDH, Ltd. (A, C) in consideration for services rendered and as reimbursement for
expenses incurred from March 1, 1996 through November 15, 1996. The estimated
value of the stock issued equaled $73,000.

In January 1997, the Company issued 250,000 shares of the Common Stock to
Thermal Imaging, Inc. (A), in consideration for a cash contribution of
approximately $70,000.

In January 1997, the Company issued 50,000 shares of the Common Stock to
Jack Gately (N) in connection with the settlement of obligations with Fred
Redolfy. The estimated value of the Common Stock issued equaled $30,000.

In February 1997, the Company issued 750,000 shares of the Common Stock to
Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $427,500.

In February 1997, the Company issued 87,816 shares of the Common Stock to
Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $50,055.

In March 1997, the Company issued an aggregate of 982,602 shares of the
Common Stock to Thermal Imaging, Inc. (A) in consideration for cash
contributions in the aggregate amount of $530,137.12.

In March 1997, the Company issued its 8% Convertible Debenture due March
13, 2000 in the principal amount of $125,000 (the "8% Convertible Debenture") to
Cameron Capital, Ltd. The 8% Convertible Debenture is convertible into shares
of the Common Stock upon the effective date of this Registration Statement at a
price per share equal to the lesser of the average closing bid price of the
Common Stock for the five consecutive trading days immediately preceding the
date of the 8% Convertible Debenture, or 77 percent of the average closing bid
price of the Common Stock for the five consecutive trading days prior to
conversion. In connection with the issuance of the 8% Convertible Debenture,
the Company also issued to the holder a warrant to purchase 50,000 shares of the
Common Stock at $1.50 per share.

In April 1997, the Company issued 12% Series A Senior Subordinated
Convertible Redeemable Debentures (aggregate face value of $662,500), through
Select Capital Advisors, Inc., to various investors for an aggregate cash
contribution of approximately $530,000.

II-5
<PAGE>

From April through June 1997, the Company issued warrants covering
3,273,950 shares of the Common Stock to warrant holders (N, A) who were
subscribers to the Private Placement Memorandum dated November 13, 1995. The
Warrants were issued as a further settlement with investors in the private
placement regarding the Company's obligation to register the shares of the
Common Stock in the private placement. The terms of the settlement provided
that settling investors would turn in the warrants held in exchange for new
warrants entitling the holder to purchase 1 1/2 shares of the Common Stock at
$2.50 per share.

In July 1997, the Company issued 50,000 shares of the Common Stock to
Sylvia Epstein (C) in consideration for services rendered and valued at
approximately $50,000.

In July 1997, the Company issued 500,000 shares of the Common Stock to
Manhattan Financial Group (A, C) in consideration for contributions up to
$150,000 pursuant to the terms of the Restricted Stock Purchase Agreement.

In July 1997, the Company issued 322,545 shares of the Common Stock to
Cameron Capital, Ltd. in connection with the conversion of $150,000 of the
amount outstanding under the 6% Convertible Debenture ($550,000).

In July 1997, the Company issued 138,000 shares of the Common Stock to
Robert A. Dresser (C) in consideration for services rendered in connection with
the Company's marketing efforts. The services were valued at approximately
$42,780.

In July 1997, the Company issued an aggregate of 740,656 shares of the
Common Stock to Thermal Imaging, Inc. (A) in consideration for cash
contributions in the aggregate amount of $339,000.

In September 1997, the Company issued 666,666 shares of the Common Stock to
PDH, Ltd. (A, C), in consideration for a cash contribution of approximately
$250,000.

In September 1997, the Company issued 941,176 shares of the Common Stock to
Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $320,000.

In November 1997, the Company issued 551,429 shares of the Common Stock to
Thermal Imaging, Inc. (A), in consideration for a cash contribution of
approximately $193,000.

In November 1997, the Company issued 478,894 shares of the Common Stock to
Cameron Capital, Ltd. in connection with the conversion of $200,000 of the
outstanding amount due under the 6% Convertible Debenture ($550,000).

From October to November 1997, the Company issued 83,333 shares of the
Common Stock to Ambient Capital Group, Inc. (C), as a retainer fee for acting as
a financial advisor. The estimated value of the shares issued equaled
$29,166.55. In addition, the Company issued 83,333 warrants to Ambient Capital
Group, Inc., at an exercise price of $ 0.72 per share. The terms of the
warrants entitle the holder to purchase five shares of the Common Stock for each
warrant issued and such warrants are valid for a period of four years from the
date of issuance.

In January 1998, the Company issued 100,000 shares of the Common Stock to
Manhattan Financial Group (A, C) in consideration for services rendered pursuant
to the Consulting Agreement. The estimated value of the stock issued is equal
to $30,000.

In January and February 1998, the Company issued an aggregate of 3,230,189
shares of the Common Stock to Thermal Imaging, Inc. (A), in consideration for
cash contributions of approximately $975,130.

In January 1998, the Company issued an aggregate of 112,752 shares of the
Common Stock to David Finney (C) and Meto Miteff (C) in consideration for legal
services rendered and valued at approximately $64,220.

II-6
<PAGE>

During January and February 1998, the Company issued an aggregate of
603,489 shares of the Common Stock to Cameron Capital, Ltd. in connection with
the conversion of $200,000 of the outstanding amount due under the 6%
Convertible Debenture and payment of penalties due for non-registration.

In March 1998, the Company issued 600,000 shares of the Common Stock to
Benjamin or Nancy Anderson in consideration for cash contributions of
approximately $140,000.

In March 1998, the Company issued 2,246,275 shares to Manhattan Financial
Group in consideration for cash contributions of approximately $539,106.

In April 1998, the Company issued an aggregate of 216,598 shares of Common
Stock to Cameron Capital, Ltd. in connection with the conversion of $62,500 of a
$125,000 8% Convertible Debenture and payment of penalties due for
non-registration.

Unless otherwise indicated above, the issuance of securities was exempt
from registration under the Securities Act under Section 4(2) as a transaction
by an issuer not involving any public offering. In each instance, the purchaser
had a pre-existing relationship with the Company, was provided with, and/or had
access to, current information regarding the Company, and management reasonably
believed that each purchaser had sufficient investment knowledge and experience
to understand the risks and merits of investing in the securities of Company, or
was represented by a person with such knowledge and experience. Moreover, all
offers and sales of the securities were made without public solicitation, the
certificates bear restrictive legends, and appropriate stop-transfer orders have
been given to the transfer agent. No underwriter was involved in the
transactions and no commissions were paid.

ITEM 27. EXHIBITS

The following exhibits are filed as part of this Registration Statement:

EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
<S> <C>
3(a) (1) Articles of Incorporation filed June 10, 1987.
3(b) (1) Amendment to Articles of Incorporation filed July 31, 1987.
3(c) (1) Amendment to Articles of Incorporation filed September 12, 1989.
3(d) (1) Amendment to Articles of Incorporation filed November 6, 1989.
3(e) (1) Amendment to Articles of Incorporation filed April 22, 1992.
3(f) (1) Amendment to Articles of Incorporation dated February 17, 1998.
3(g) (1) Bylaws, as Amended January 15, 1998.
4 (1) Common Stock Specimen.
5(a) (1) Opinion Regarding Legality.
10(a) (1) PR Expense Funds Administration Agreement dated July 9, 1997 between the
Company, Liberty Capital Group, Inc. and Manhattan Financial Group.

<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
<S> <C>
10(b) (1) Financial Advisory Agreement dated October 29, 1997 between the Company and
Ambient Capital Group, Inc.
10(c) (1) Assumption of Liability Agreement dated April 17, 1996 between the Company
and Thermal Imaging, Inc.
10(d) (1) Investment Agreement dated January 20, 1998 between the Company and Bristol
Asset Management, LLC.
10(e) (1) Consulting Agreement dated November 5, 1997 between the Company and Daron
Dillia d/b/a Manhattan Financial Group.
10(f) (1) Consulting Agreement dated November 5, 1997 between the Company and Willard
Harpster.

II-7
<PAGE>

10(g) (1) Subscription Agreement dated August 15, 1996 between the Company and
Cameron Capital Management Ltd. With respect to 6% Convertible Debentures
aggregating $550,000.
10(h) (1) Subscription Agreement dated March 13, 1997 between the Company and Cameron
Capital Management Ltd. With respect to 8% Convertible Debentures
aggregating $125,000.
10(i) (1) 12% Series A Senior Subordinated Convertible Redeemable Debenture due April
30, 1998.
10(j) (1) Signatories to Dorex Release.
10(k) (1) Employment Agreement dated October 11, 1995 between the Company and Kenneth
M. Dodd.
10(l) (1) Letter Agreement dated June 12, 1995 between the Company and Richard V.
Secord Confirming terms for Personal Services Agreement.
10(m) (1) Employment Agreement dated April 30, 1997 between the Company and David A.
Packer.
10(n) (1) Escrow Agreement dated November 20, 1997 between the Company, Roger Sack
and First Nebraska Trust Company.
10(o) (1) Golden Health Card Contract dated April 24, 1995 between TriSun Medical
Corporation and TriSun/CTI Asia, Ltd.
10(p) (1) Golden Health Plan Hospital Systems Integration Contract dated April 24,
1995 between TriSun Medical Corporation and TriSun/CTI Asia, Ltd.
10(q) (1) Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
October 29, 1997 between the Company and David B. Johnston.
10(r) (1) Employment Agreement dated October 29, 1997 between the Company and
David B. Johnston.
10(s) (1) Letter Agreement dated July 10, 1997 between the Company and Liberty
Capital Group, Inc.'s with respect to public relations.
10(t) (1) License Agreement dated June 8, 1996 between the Company and Thermal
Imaging, Inc.
10(u) (1) Participation Option Notices by various signatories to a Private Placement
Subscription Participation Option.
10(v) (1) Pledge Agreement dated September 11, 1997 between the Company and Looper,
Reed, Mark & McGraw Incorporated.
10(w) (1) Pledge Agreement dated September 11, 1997 between Thermal Medical Imaging,
Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(x) (1) Employment Agreement dated November 13, 1997 between the Company and
Richard V. Secord.
10(y) (1) Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
January 15, 1998 between the Company and Richard V. Secord.
10(z) (1) Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.

<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
<S> <C>
10(aa) (1)
Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
10(bb) (1) June 12, 1995 between the Company and Richard V. Secord.
Commitment Letter Agreement dated March 6, 1997 between the Company and
10(cc) (1) Select Capital Advisors, Inc.
Services Agreement dated July 1997 between the Company and Liberty Capital
10(dd) (1) Group, Inc.
Stock Transfer Agreement dated January 28, 1997 between the Company and
10(ee) (1) Thermal Medical Imaging, Inc.

II-8
<PAGE>

10(ff) (1) Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and David Packer.
10(gg) (1) Amendment to Employee Stock Option Agreement dated January 22, 1998 between
the Company and Kenneth M. Dodd.
10(hh) (1) Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and Richard V. Secord.
Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
10(ii) (1) November 5, 1997 between the Company and Willard Harpster.
Computerized Thermal Imaging, Inc. Consultant Stock Option
10(jj) (1) Agreement dated November 18, 1997 between the Company and Daron
Dillia D/b/a Manhattan Financial Group.
Computerized Thermal Imaging, Inc. Restricted Stock Purchase
10(kk) (1) Agreement dated July 9, 1997 between the Company and Manhattan
10(ll) (1) Financial Group.
Computerized Thermal Imaging, Inc. 1995 Stock Option Plan.
10(mm) (1) Computerized Thermal Imaging, Inc. 1997 Stock Option and Restricted Stock
Plan.
Offshore Securities Subscription Agreement relating to 12% Series A
10(nn) (1) Senior Subordinated Convertible Redeemable Debentures of the
Company.
10(oo) (1) 12% Series A Senior Subordinated Convertible Redeemable Debentures of the
Company.
10(pp) (1) Golden Health Telemedicine Contract dated April 24, 1995 between TriSun
Medical Corporation - China and TriSun/CTI Asia, Ltd.
10(qq) (1) Contract between TRW Systems Integration Group and Computerized Thermal
Imaging, Inc. dated October 29, 1996.
10(rr) (1) Clinical Trial Agreement dated September 16, 1997 between Thermal Medical
Imaging, Inc. and Health Research Association.
10(ss) (1) Contract between TRW Systems Integration Group and Thermal Medical Imaging,
Inc. dated June 19, 1997.
11 (1) Clinical Trial Agreement dated November 7, 1997 between Thermal
15 (1) Medical Imaging, Inc. and the University of Southern California.
21 (1) Computation of Per Share Earnings.
23 (1) See Exhibit 23(b).
23(a) (1) Subsidiaries of the Registrant.
23(b) (1) Consent of Counsel (included in Exhibit 5.1).
24 (1) Consent of Ham, Langston & Brezina, LLP.
27 (1) Consent of Randy Simpson, CPA P.C.
Powers of Attorney.
Financial Data Schedule.
</TABLE>

- ----------------------------
(1) Filed herewith.

ITEM 28. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required in Section 10(a)(3) of
the Securities Act;

II-9
<PAGE>

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.

(4) That for purposes of determining any liability under the
Securities Act, (i) the information omitted from the Prospectus
filed as part of this Registration Statement, as permitted by
Rule 430A of the Securities Act and to be contained in the form
of Prospectus to be filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act, shall
be deemed to be incorporated by reference into this Registration
Statement at the time it is declared effective, and (ii) each
post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the
securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-10
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on the Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Layton, State of Utah, on the 22nd day of May, 1998.

COMPUTERIZED THERMAL IMAGING, INC.

By /s/ David A. Packer
-------------------------------------------
David A. Packer, President and
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David B. Johnston* Chairman of the Board and May 22, 1998
- --------------------------------- Chief Executive Officer
David B. Johnston

/s/ Richard V. Secord* Chief Operating Officer, Secretary May 22, 1998
- --------------------------------- and Director
Richard V. Secord

/s/ Brent M. Pratley, M.D.* Director May 22, 1998
- ---------------------------------
Brent M. Pratley, M.D.

/s/ Milton R. Geilmann* Director May 22, 1998
- ---------------------------------
Milton R. Geilmann

/s/ Henry C. Aderholt* Director May 22, 1998
- ---------------------------------
Henry C. Aderholt

/s/ David A. Packer President and Treasurer May 22, 1998
- ---------------------------------
David A. Packer

*By /s/ David A. Packer May 22, 1998
- ---------------------------------
David A. Packer,
Attorney in Fact
</TABLE>

II-11
<PAGE>

As Filed with Securities and Exchange Commission on March 3, 1998

Registration No. 333-47237
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

COMPUTERIZED THERMAL IMAGING, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 3815 87-0458721
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)

476 HERITAGE PARK BOULEVARD, SUITE 210
LAYTON, UTAH 84041
(801) 776-4700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement has been declared effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

EXHIBIT VOLUME I

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

<PAGE>
EXHIBIT 5(a)

LOOPER, REED, MARK & MCGRAW
INCORPORATED
1300 POST OAK BOULEVARD, SUITE 2000
HOUSTON, TEXAS 77056
TELEPHONE (713) 986-7000
TELECOPIER (713) 986-7100

May 22, 1998

Computerized Thermal Imaging, Inc.
476 Heritage Park Boulevard
Suite 210
Layton, Utah 84041

Re: Form SB-2 Registration Statement

Gentlemen:

As counsel for Computerized Thermal Imaging, Inc. (the "Company"), you have
requested our firm to render this opinion in connection with the Registration
Statement on Form SB-2 filed under the Securities Act of 1933, as amended (the
"Securities Act") with the Securities and Exchange Commission relating to the
resale of (i) 18,229,167 shares of Common Stock to be issued in connection with
the purchase of such shares by an investor (the "Newly Issued Shares"), (ii)
2,552,083 shares of the Common Stock to be issued upon the exercise of warrants
to be issued to such investor (the "Compensation Warrants") which become
exercisable upon issuance at variable prices based on the sales price of shares
of the Common Stock and expire on the fifth anniversary of the date of
issuance; (iii) 5,287,633 shares issued and outstanding; (iv) 3,840,615 shares
underlying outstanding warrants exercisable at prices ranging from $0.72 to
$5.00 per share which expire on various dates ranging from March 31, 1999 to
March 13, 2002 (the "Resale Warrants"); and (v) 6,525,000 shares underlying
outstanding options exercisable at prices ranging from $0.60 per share to $1.25
per share which expire automatically on various dates ranging from July 21, 2000
to June 12, 2005 (the "Options").

We are familiar with the Registration Statement and the registration of
the resale of the shares of the Common Stock contemplated thereby. In giving
this opinion, we have reviewed the Registration Statement and such other
documents and certificates of public officials and officers of the Company
with respect to the accuracy of the factual matters contained therein as we
have felt necessary or appropriate in order to render the opinions expressed
herein. In making our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents presented to us as originals,
the conformity to original documents of all documents presented to us as
copies thereof, and the authenticity of the original documents from which any
such copies were made, which assumptions we have not independently verified.

Based upon and subject to the foregoing, and upon such other matters as we
have determined to be relevant, we are of the opinion that:

1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Nevada.

2. The shares of the Common Stock to be issued upon the purchase of the
Newly Issued Shares are validly authorized and, when purchased, will be validly
issued, fully paid and nonassessable.

3. The shares of the Common Stock underlying the Compensation Warrants to
be issued upon the exercise thereof are validly authorized and, upon exercise,
will be validly issued, fully paid and nonassessable.

<PAGE>

Computerized Thermal Imaging, Inc.
May 22, 1998
Page 2

4. The shares of the Common Stock underlying the Resale Warrants, the
Options and the Debenture to be issued upon the exercise/and or the conversion
of such Resale Warrants, Options and Debenture are validly authorized and, upon
exercise or conversion, will be validly issued, fully paid and nonassessable.

We hereby consent to use in the Registration Statement of the reference to
Looper, Reed, Mark & McGraw, Incorporated under the heading "Legal Matters."

This opinion is conditioned upon the Registration Statement being declared
effective and upon compliance by the Company with all applicable provisions of
the Act and such other state securities laws, rules and regulations as may be
applicable.

Very truly yours,

LOOPER, REED, MARK & MCGRAW

<PAGE>

EXHIBIT 23(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2
of our report dated February 20, 1998, except for Note 14 as to which the
date is May 10, 1998, on our audits of the financial statements of
Computerized Thermal Imaging, Inc. for the years ended December 31, 1997 and
1996. We also consent to the reference to our firm under the caption
"Experts."

Ham, Langston & Brezina, LLP

Houston, Texas
May 26, 1998