AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2004

Registration No. 333-_______

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM SB-2

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933

LIFESTREAM TECHNOLOGIES, INC.
-----------------------------
(Exact Name of Registrant as Specified in Its Charter)

Nevada 5047 82-0487965
------ ---- -----------
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Number) Identification No.)
Incorporation or
Organization)

510 Clearwater Loop, Suite 101
Post Falls, Idaho 83854
(208) 457-9409
--------------
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------

Christopher Maus
President and Chief Executive Officer
510 Clearwater Loop, Suite 101
Post Falls, Idaho 83854
(208) 457-9409
--------------
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)

Copies of all communications to:

Steven I. Weinberger, Esq.
Schneider Weinberger LLP
2499 Glades Road, Suite 108
Boca Raton, Florida 33431
Telephone: (561) 362-9595
Facsimile No. (561) 362-9612

Approximate Date of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.

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]

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT TO BE PRICE PER OFFERING REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED UNIT (1) PRICE (1) FEE
- ---------------------------------------------------- ------------------ ------------- -------------- --------------

Common stock, $.001 par value per share (2) 2,225,669 $0.057 126,863 $ 16.07

Common stock, $.001 par value per share, issuable
upon conversion of convertible debentures (3) 57,939,996 $0.057 3,302,580 $418.44

Common stock, $.001 par value per share,
issuable upon exercise of common stock
purchase warrants (4) 17,381,999 $0.065 1,129,830 $143.15
---------- --------- -------

TOTAL 77,547,664 4,559,273 $577.66
========== --------- -------

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

(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.

(2) Consists of currently outstanding shares of common stock registered
pursuant to previously granted piggyback registration rights. Fee based on
the last sale price of our common stock, $.001 par value per share, as
reported by the Over-the-Counter Bulletin Board on March 17, 2003.

(3) Shares of our common stock issuable upon the conversion of convertible
debentures. Fee based on the last sale price of our common stock, $.001 par
value per share, as reported by the Over-the-Counter Bulletin Board on
March 17, 2003.

(4) Shares of our common stock issuable upon the exercise of common stock
purchase warrants. Fee based on the exercise price of the common stock
purchase warrants.

Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered such additional number of shares as may be issuable as a result of
stock splits, dividends, reclassifications and similar adjustment provisions of
the debentures and warrants.

Lifestream Technologies, Inc. hereby amends this registration statement on
such date or dates as may be necessary to delay its effective date until
Lifestream Technologies, Inc. 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 Commission,
acting pursuant to said Section 8(a), may determine.

Subject to Completion
Dated March 22, 2004

Selling Security Holder Offering Prospectus

LIFESTREAM TECHNOLOGIES, INC.
77,547,664 shares of common stock

This prospectus covers the resale of an aggregate of 77,547,664 shares of
our common stock, consisting of 2,225,669 shares of currently outstanding common
stock, 57,939,996 shares of common stock issuable upon conversion of convertible
debentures and 17,381,999 shares issuable upon exercise of common stock purchase
warrants.

Our common stock is listed on the over-the-counter Bulletin Board under the
symbol "LFTC". On March 17, 2004, the last reported sale price for our common
stock was $0.057 per share.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING AT PAGE 4.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is __________, 2004.

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.

TABLE OF CONTENTS

Page

Prospectus Summary.......................................................1
Risk Factors.............................................................4
Use of Proceeds.........................................................11
Price Range of Common Stock and Dividend Policy ........................11
Forward Looking Statements..............................................12
Business................................................................13
Management's Discussion and Analysis or Plan of Operation ..............24
Management..............................................................37
Executive Compensation..................................................39
Certain Relationships and Related Transactions .........................45
Security Ownership of Certain Beneficial Owners and Management .........46
Description of Securities...............................................48
Selling Security Holders................................................49
Plan of Distribution ...................................................52
Legal Matters...........................................................53
Experts.................................................................53
Additional Information..................................................54
Financial Statements...................................................F-1

77,547,664 SHARES
COMMON STOCK

LIFESTREAM
TECHNOLOGIES, INC.

----------
PROSPECTUS
----------

________________, 2004

PROSPECTUS SUMMARY

LIFESTREAM TECHNOLOGIES

We market a proprietary over-the-counter, total cholesterol monitoring
device for at-home use by both health-conscious and at-risk consumers. Our
consumer device enables an individual, through regular at-home monitoring of
their total cholesterol level, to continually assess their susceptibility to
developing cardiovascular disease, the single largest cause of premature death
and permanent disability among adult men and women in the United States of
America.

Once an individual is diagnosed with an elevated total cholesterol level,
our consumer device enables an individual to readily ascertain and track certain
collective benefits being derived from diet modification, an exercise regimen
and drug therapy. By doing so, we believe that an individual's long-term
adherence to an effective cholesterol-lowering program is reinforced.

We introduced our current consumer device to the retail marketplace in
October 2002. It is the successor to a consumer device that we first debuted in
January 2001.

Our current base of customers primarily consists of national and regional
drug store chains, and, to a lesser extent, pharmacy-featuring grocery store
chains, specialty catalog and Internet-based direct marketers and independent
pharmacies. To date, our ability to conduct those significant marketing
activities that we deem critical to building broad market awareness of, and
demand for, our consumer device has been severely limited due to financial
constraints. In September 2003, we secured a portion of the long-term financing
we have sought to enable us to move forward with our marketing plan and, in
October 2003, we began a three-month advertising campaign. In February 2004, we
secured additional financing allowing us to continue implementing our
advertising campaign and expanding awareness for our home cholesterol monitor.
Any future marketing campaigns will be dependent upon our ability to obtain
additional financing, as well as analyzing the results of the campaign currently
underway.

OUR CURRENT CONSUMER DEVICE

Our current consumer device has a suggested retail price of $119.95, but is
routinely offered by certain of our more prominent retail store chain customers
at a price below the psychologically important $100.00 price point for many
consumers. We are selling our current consumer device to customers at an average
wholesale price significantly less than that which we historically sold our
predecessor consumer device, yet we are realizing a substantially improved
average gross margin as a result of its reengineered technological platform.

Our current consumer device:

o Provides a quantified total cholesterol reading from a single drop
of blood within three minutes without any prior fasting,

o Meets the measurement precision guidelines set forth by the National
Cholesterol Education Program,

o Classifies individual test results using the American Heart
Association's "desirable," "borderline" and "high" risk-level
categories for total cholesterol in adults,

o Utilizes inexpensive, disposable dry-chemistry test strips,

o Computes an individual's rolling average total cholesterol level
based on their six most recent test results,

o Allows for the secure storage, via encryption, of up to 200
chronologically-dated test results onto an optional smart card,
which is inserted into an existing slot within our device, for
subsequent retrieval and longer-term trend analysis,

o Is compact, lightweight and portable with dimensions of
approximately 5.50" x 4.00" x 1.75" and a weight of approximately
one pound,

o Operates on the power of two AAA batteries, and

o Is warranted for one year from defects in materials or workmanship.

To perform a test, an individual merely sticks their finger using an
accompanying sterile lancing device and deposits a single drop of blood onto one
of our disposable, dry chemistry test strips that has been previously inserted
into an opening at the optical head of the device. The test strip then initiates
a chroma-phor reaction with lipoprotein to produce a color change in direct
proportion to the quantity of total cholesterol detected in the blood sample.
The resulting color change is then read by the device's integrated photometry
system and electronically converted into a clinically accurate, quantified
measurement of total cholesterol that is displayed within three minutes on an
integrated easy-to-read, liquid-crystal display screen.

OUR RELATED SUPPLIES AND ACCESSORIES

We offer the following supplies and accessories for use with our consumer
device:

o OUR TEST KIT REFILLS. Our test kit refills, which include six
individually packaged test packets, have a suggested retail price of
$19.95. Each single-use, disposable testing packet contains a
dry-chemistry total cholesterol test strip, a sterile lancet, an
alcohol swab, and a band-aid.

o OUR "DATA CONCERN" PERSONAL HEALTH CARD(R). Our "Data Concern"
Personal Health Card(R)is individually packaged and has a suggested
retail price of $19.95.

o OUR "PLUS-EDITION" CONSUMER DEVICE BUNDLE. Our "Plus-Edition"
Consumer Device Bundle, which has a suggested retail price of
$129.95, includes a consumer device, a complementary CD-ROM software
program, a serial cable and an extended three-year warranty. By
connecting our consumer device to a personal computer via the serial
cable and installing our software, an individual can compute a
longer-term rolling average of their historical test results and
convert such into detailed, easy-to-understand printable charts. We
believe that these value-added analytical features enable an
individual to more readily ascertain and track the collective
benefits being derived over an extended period of time from diet
modification, an exercise regimen and drug therapy, thereby further
reinforcing their ongoing adherence to an effective
cholesterol-lowering program.

Our executive offices are located at 510 Clearwater Loop, Suite 101, Post
Falls, Idaho 83854. Our telephone number is (208) 457-9409; our facsimile number
is (208) 457-9509. Unless otherwise indicated, references in this prospectus to
"Lifestream," "we," "us" and "our" are to Lifestream Technologies, Inc., and our
wholly owned subsidiaries.

THE OFFERING

Common Stock Outstanding: 154,675,276 shares

Common Stock Reserved: 91,426,269 shares, including 75,321,995 shares
covered by this prospectus that are issuable upon
exercise of warrants and conversion of debentures,
10,484,526 shared previously registered for resale
upon exercise of warrants and conversion of
debentures and 5,619,748 shares issuable under our
stock option plans

OTCBB Trading Symbol: LFTC

SUMMARY FINANCIAL DATA

The following summary of our financial information has been derived from
our financial statements that are included elsewhere in this prospectus. The
information for the years ended June 30, 2003 and 2002 is derived from our
audited financial statements. The information for the three and six months ended
December 31, 2003 and 2002 is derived from our unaudited financial statements
and is not necessarily indicative of the results that may be expected for the
entire fiscal year ending June 30, 2004.

Statement of Operations

SIX MONTHS ENDED
(UNAUDITED) FISCAL YEARS ENDED
------------------------------ ------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------

Net sales ......................... $ 1,412,526 $ 3,062,549 $ 4,236,653 $ 3,667,157
Cost of sales ..................... $ 1,085,672 $ 2,017,911 $ 3,516,827 $ 4,037,897
Gross profit (loss) ............... $ 326,854 $ 1,044,638 $ 719,826 $ (370,740)
Loss from operations .............. $ (2,154,340) $ (1,568,116) $ (4,268,508) $(11,019,173)
Net loss .......................... $ (3,960,863) $ (2,940,286) $ (8,106,945) $(14,677,279)
Net loss per share ................ $ (0.04) $ (0.12) $ (0.24) $ (0.67)

Balance Sheet Data

DECEMBER 31,
(UNAUDITED) JUNE 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- ------------ ----------- -----------

Working capital (deficit) ......... $ 363,962 $(3,975,810) $ (947,111) $(1,157,962)
Total assets ...................... $ 4,233,670 $ 6,273,063 $ 5,077,925 $ 6,606,321
Current assets .................... $ 2,685,913 $ 4,297,464 $ 3,290,620 $ 4,230,610
Long-term debt .................... $ 3,033,374 $ 2,191,006 $ 3,498,768 $ 2,543,004
Stockholders' deficit ............. $(1,121,655) $(4,191,217) $(2,658,574) $(1,325,255)

RISK FACTORS

An investment in our common stock is highly speculative. You should be aware you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully read this entire prospectus and consider the
following risk factors. The risks and uncertainties described below are not the
only ones we face. There may be additional risks and uncertainties that are not
known to us or that we do not consider to be material at this time. If the
events described in these risks occur, our business, financial condition and
results of operations could be adversely affected, and you could lose your
entire investment in Lifestream.

This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements. This section discusses the business
risk factors that might cause those differences.

OUR WEAK FINANCIAL CONDITION HAS RAISED, AND WILL LIKELY CONTINUE TO RAISE,
SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We have incurred substantial operating and net losses, as well as negative
operating cash flows, since our inception. Our significant working capital and
stockholders' deficits as of June 30, 2003 and 2002, among other factors,
resulted in our independent certified public accountants modifying their audit
report on our consolidated financial statements for the fiscal years ended June
30, 2003 and 2002 to express substantial doubt regarding our ability to continue
as a going concern. Although we recently have been successful in restructuring
certain debt obligations as they have become due and in raising additional
investment capital to fund certain immediate and near-term operating needs, we
remain in need of substantial additional investment capital to fund our
longer-term operating needs, including the servicing of our remaining debt
obligations and the conducting of those marketing activities we believe
necessary to achieve meaningful sales growth.

IF WE CANNOT TIMELY SECURE NECESSARY FINANCING, WE WILL BE UNABLE TO CONTINE TO
GROW OUR SALES, IN WHICH EVENT WE WILL LIKELY BE REQUIRED TO CURTAIL OR CEASE
OPERATIONS.

We have realized limited sales revenues to date that we primarily attribute
to our continuing inability to fund the marketing activities we believe
necessary to develop broad market awareness and acceptance of our total
cholesterol monitors. Our inability to leverage our operating costs with sales
has resulted in continuing significant operating and net losses, as well as
negative operating cash flows. For the years ended June 30, 2003 and 2002, we
incurred losses of $8,106,945 and $14,677,279, respectively, and for the six
months ended December 31, 2003, we incurred a net loss of $3,960,863. Our
continuing losses adversely affect our ability to secure funding.

We continue to actively seek substantial investment capital to enable us to
fully execute the balance of our business plan, that primarily being the
conducting of those marketing activities we believe necessary to achieve
meaningful sales growth. Our ability to effectively promote our monitors,
support and sustain our existing retail relationships, cultivate, support and
sustain additional retail relationships, and thereby realize meaningful sales
growth, remains dependent upon our timely receipt of substantial additional
investment capital. Absent meaningful sales growth, our ability to achieve net
profitability and positive operating cash flow remains highly unlikely.

OUR CONTINUED SALE OF EQUITY SECURITIES WILL DILUTE EXISTING STOCKHOLDERS AND
MAY ADVERSELY AFFECT THE MARKET FOR OUR SHARES.

In March through June 2003, our Board of Directors authorized us to proceed
with a "best efforts" private placement offering of up to 40,000,000 shares of
our common stock at a fixed price of $0.10 per common share. Through June 30,
2003, we sold 32,387,500 common shares to some of our principal stockholders and
several new, accredited investors, realizing $3,238,750 in gross cash proceeds.
The holders of $2,500,000 of our short-term convertible debt also converted that
debt into common stock at $.10 per common share. In addition, we agreed with

the holder of approximately $4,900,000 of additional convertible term notes with
maturities in 2006 to amend the conversion price to a price equal to the lesser
of $.10 a share, the price for share of our next equity offering or at such
other amount as may be subsequently agreed to by us and the noteholder at the
time such notes become convertible. The proceeds of the stock sales were
primarily utilized to satisfy certain term debt obligations, to fund certain
past due accounts payable and payroll obligations and to provide minimal
near-term operating capital. The issuance of these shares, while providing us
with necessary financing, also resulted in a dilution of approximately 71% to
our outstanding stock as of March 1, 2003. Additionally, on May 1, 2003, we were
successful in converting $2,000,000 of outstanding borrowings under a revolving
credit facility for which repayment had become due and payable into a
twenty-four month term loan at a reduced rate of interest.

In September 2003, we completed a private placement offering of $3,350,000
in unsecured convertible debentures from which we received $3,067,000 in net
cash proceeds. The debentures were convertible into common shares at a
conversion price of $0.13 per share. For every two dollars of original debenture
principal, the holder received a detachable stock purchase warrant allowing for
the purchase over the subsequent two-year period of a share of the our common
stock at $0.2144 per share. On January 13, 2004, we entered into an Exchange
Agreement with each holder of these convertible debentures. Under the Exchange
Agreement, each debenture holder agreed, subject to a 4.99% beneficial ownership
limitation, to exchange the principal amount of its debenture for shares of the
our common stock, at the rate of $0.09 of debenture principal per share of
common stock. Accrued but unpaid interest on each note was paid at the time of
the exchange by the issuance of additional shares of common stock at the rate of
$0.09 per share. Accordingly, in January 2004 we issued 32,427,204 shares of
common stock upon exchange of debenture principal in the amount of $2,975,624
and the payment of accrued but unpaid interest. Additionally, we issued
2,227,807 shares of common stock to adjust the conversion rate applied to
$175,000 of principal previously converted by a debenture holder to the $0.09
rate stated in the Exchange Agreement.

On February 19, 2004, we entered into a Securities Purchase Agreement for
up to $2,775,000 million in private financing through the sale of convertible
debentures and common stock purchase warrants to certain investors, including
current institutional stockholders, which provided us net proceeds of
approximately $2.1 million. The purchase price for the convertible debentures
gives effect to an original issue discount of approximately $500,000, the amount
of which was withheld from the proceeds at the time of the closing of the
financing. The term of the debentures is two years, and the debentures are
convertible at a conversion price of $0.05 per share. The conversion price and
number of shares issuable upon conversion of the debentures is subject to
adjustment upon the occurrence of certain events, including stock dividends,
subdivisions, combinations and/or reclassifications of the our common stock. In
connection with this transaction and subject to a 4.9% beneficial ownership
limitation, participating warrant holders have agreed to exercise 9,615,384
outstanding warrants held by them.

In March 2004, we issued an additional $122,000 of convertible debentures
from which we received 100,000 in net proceeds after an original issue discount
of $22,000. These debentures were issued under the same terms and conditions are
the debentures issued on February 19, 2004 discussed above.

In connection with the February and March 2004 financing transactions, we
issued to the investors common stock purchase warrants to purchase up to
17,381,999 common shares over a nineteen-month period at an exercise price of
$0.065 per share, subject to adjustment upon the occurrence of events
substantially identical to those provided for in the debentures. We have the
right to call the warrants in the event that the average closing price of our
common stock exceeds 200% of the exercise price for a consecutive 20-day trading
period.

We expect to continue our efforts to acquire additional financing in the
future to fund additional marketing efforts and inventory and such additional
financing will result in further dilution to existing outstanding stockholders.
Moreover, the increase in the number of shares available in the public
marketplace may reduce the market price for our shares and, consequently, the
price investors may receive at the time of sale.

THE PRICE VOLATILITY FOR OUR COMMON STOCK AND THE LACK OF AN ACTIVE MARKET MAY
ADVERSELY AFFECT THE ABILITY OF STOCKHOLDERS TO BUY AND SELL OUR SHARES.

Our common stock is currently listed and traded on the Over-the-Counter
Bulletin Board. Our common stock has experienced, and continues to experience,
significant volatility in its market price. Additionally, our common stock has
experienced, and continues to experience, limited trading volume on any given
market day. These factors may adversely affect both the liquidity and market
price of our stock.

WE CURRENTLY DO NOT HAVE SUFFICIENT AUTHORIZED BUT UNISSUED COMMON SHARES TO
MEET OUR CURRENT OBLIGATIONS AND IF THE SHAREHOLDERS TO NOT AUTHORIZE AN
INCREASE IN THE NUMBER OF AUTHORIZED SHARES, WE MAY BE IN BREACH OF CONTRACTUAL
OBLIGATIONS AND UNABLE TO FUND FUTURE EQUITY FINANCING TRANSACTIONS.

The terms of certain purchase securities agreements provide that we will
seek shareholder approval for an increase in our authorized common shares. If we
are unable to obtain approval for the increased authorized Common Stock, we will
be in breach of our contractual obligations and would also be unable to seek
other equity financing or even debt financing which also contemplated an equity
factor. Our recent February 19, 2004, financing is an example of the additional
financing that we continue to need, but that will require additional authorized
Common Stock for issuance in connection with the financings, whether convertible
debt or equity.

WE REMAIN DEPENDENT UPON THREE KEY MANAGEMENT PERSONNEL AND IF WE ARE UNABLE TO
RETAIN THEM, OUR OPERATIONS WILL SUFFER.

We believe that our future success currently remains dependent upon the
knowledge, skills, services and vision of Christopher Maus, our Chairman of the
Board of Directors, Chief Executive Officer and President, and to a lesser
extent, Brett Sweezy, our Chief Financial Officer, and Edward Siemens, our Chief
Operating Officer. Our dependence upon these individuals has increased over our
most recent fiscal year as a result of significant staff reductions we have made
to reduce our operating costs. The significant staff reductions have resulted in
substantial additional demands on our existing officers and staff. Despite our
increased dependency on these individuals, they each agreed, effective April
2003, to prospective one-third reductions in their respective contractual
salaries until we realized an improvement in our financial condition. Effective
June 2, 2003, we restored one half of the pay cuts prospectively. In January
2004, the Board of Directors approved the issuance of restricted stock to these
officers in lieu of cash payment for compensation lost as a result of these pay
cuts. Our ability to retain these individuals remains uncertain and any loss or
disablement of these individuals could have a material adverse effect on our
business, and as a result, on our results of operations, liquidity and cash
flows. Due to other commitments, in November 2003, Mr. Sweezy reduced his time
devotion to our business to part-time. However, Mr. Sweezy has informed us that
he currently intends to continue his part-time employment by us. There can also
be no assurance that the proceeds we would receive under a $5,000,000 key man
life insurance policy we maintain on Mr. Maus would sufficiently compensate us
in the event of his unfortunate death. Our retention and possible recruitment of
experienced and talented management will also be critical to our future success.

WE REMAIN DEPENDENT UPON ROCHE DIAGNOSTICS GMBH TO SUPPLY US WITH DRY-CHEMISTRY
TEST STRIPS AND IF WE FAIL TO MEET MINIMUM PURCHASE REQUIREMENTS, ROCHE MAY
DISCONTINUE ITS SUPPLY RELATIONSHIP WITH US.

We continue to exclusively rely upon Roche Diagnostics GmbH for supplying
us with the dry chemistry test strips required for the operation of our total
cholesterol monitors. Should we fail to meet our contractually mandated minimum
purchase requirements, Roche may elect to discontinue its relationship with us
or to impose price increases. As we did not meet the calendar 2002 minimum sales
threshold set forth in the agreement, Roche began prospectively assessing us a
10% price surcharge in exchange for agreeing to maintain our U.S. exclusivity.
This surcharge was based on our revised sales forecasts for the duration of the
agreement. Should we fail to meet these sales forecasts, Roche may impose a more
significant price surcharge on us as a condition to further maintaining our U.S.
exclusivity. We do not believe that a suitable technological or economical
alternative to Roche's dry chemistry test strips is readily available in the
marketplace, and therefore any disruption in our relationship with Roche or any
inability by us to pass through imposed price increases would likely have a
material adverse impact on our business, and as a result, on our results of
operations, liquidity and cash flows.

WE REMAIN DEPENDENT UPON ROCHE DIAGNOSTICS GMBH TO SUPPLY US WITH DRY-CHEMISTRY
TEST STRIPS AND IF WE FAIL TO SUCCESSFULLY RESOLVE AN ONGOING DISPUTE OVER
ROYALTY PAYMENTS ON PROPRIETARY OPTICS TECHNOLOGY, ROCHE MAY DISCONTINUE ITS
SUPPLY RELATIONSHIP WITH US.

Our agreement with Roche licenses us its proprietary optics technology,
which we utilized in our predecessor consumer device in exchange for an
agreed-upon royalty per device sold. However, we recognized no royalty
obligation on sales of our current consumer device, which we began selling in
October 2002, as we viewed the re-engineered optics technology used in this
device as being proprietary to us, and not Roche. In May 2003, Roche asserted in
a letter to us that the subject optics technology was, in their opinion, still
subject to royalties under our agreement. Given our continuing material
dependency on Roche for its test strips and not wanting to possibly jeopardize
such relationship, we responded in July 2003 with a letter proposing a
substantially lower royalty on each device sold and retroactively recognized a
corresponding royalty obligation accrual, which is reflected in our accompanying
consolidated financial statements. Negotiations are currently ongoing. As such,
the ultimate resolution of this matter remains uncertain and any disruption in
our relationship with Roche would likely have a material adverse impact on our
business, and as a result, on our results of operations, liquidity, and cash
flows.

BECAUSE WE ARE DEPENDENT UPON A FEW MAJOR CONSUMER RETAIL CHAINS FOR
SUBSTANTIALLY ALL OF OUR CURRENT SALES, THE LOSS OF ANY ONE OF THEM WOULD REDUCE
OUR REVENUES, LIQUIDITY AND PROFITABILITY.

Significant portions of our sales to date have been, and continue to be,
made through major consumer retail chains. Any disruption in our relationships
with one or more of these consumer retail chains, or any significant variance in
the magnitude or the timing of orders from any one of these chains, may have a
material adverse impact on our business, and as a result, on our results of
operations, liquidity and cash flows. Any such adverse impact may
correspondingly have a material adverse impact on the market price of our common
stock.

OUR CONTINUED RELIANCE ON LIMITED SERVICE PROVIDERS FOR THE OUTSOURCED ASSEMBLY
OF OUR PRODUCTS LEAVES US VULNERABLE TO LATE PRODUCT DELIVERY.

We outsource the assembly of our total cholesterol monitors to Servatron
Inc. and/or Opto Circuits (India) Limited. We periodically engage one or both of
them, on an as-needed basis, under free-standing purchase orders to assemble our
total cholesterol monitors. Any disruption in our relationship with such
assemblers would likely have a material adverse impact on our business, and as a
result, on our results of operations, liquidity and cash flows.

OUR RELATIVE INEXPERIENCE WITH ADVERTISING MAY DELAY THE GROWTH OF MARKET
AWARENESS AND PENETRATION FOR OUR CURRENT PRODUCT.

As more extensively discussed elsewhere in this prospectus, we need
substantial additional advertising to promote our current consumer device and
yet, we, as a company, have had limited experience with advertising due to our
limited financial resources. There can be no assurance that our future
advertising initiatives will be successful in building the necessary broad
market awareness and demand for our consumer device.

IF WE ARE UNSUCCESSFUL IN PROTECTING OUR PATENTS, LICENSES, TRADEMARKS AND
TECHNOLOGIES, OR IF WE INFRINGE UPON THE RIGHTS OF OTHERS, WE COULD INCREASE
COMPETITION AND EXPOSE OURSELVES TO CLAIMS FOR DAMAGES.

Our future success remains dependent upon our ability to obtain, maintain
and enforce our materially important patents, licenses and trademarks,
particularly those critical to our product image and the various technologies
employed in our products. Although we remain actively engaged in protecting all
such material assets, both in the U.S. and abroad, there can be no assurance
that these assets will not be challenged by third parties, invalidated or
designed around, or that they will provide protection that has ongoing
commercial significance. It must also be noted that any related litigation will
likely be costly and time-consuming and there can be no assurance

of a favorable outcome. There can also be no assurance that our actions will not
inadvertently infringe upon the proprietary rights of others, thereby subjecting
us to remedial or punitive sanctions, or that we would be subsequently
successful in procuring licensing rights on commercially reasonable terms. Any
failure on our part to successfully protect these material assets, to avoid
inadvertently infringing upon the proprietary rights of others, or to
successfully obtain sought after patents, licenses or trademarks in the future,
may have a material adverse impact on our business, and as a result, on our
results of operations, liquidity and cash flows.

WE EXPERIENCE COMPETITION FROM MANY PARTICIPANTS IN THE MEDICAL EQUIPMENT AND
HOME TESTING MARKET AND OUR ABILITY TO COMPETE IN THE MARKETPLACE REMAINS
UNCERTAIN.

We compete with firms that market inexpensive equivocal, non-instrument
based, disposable cholesterol screening tests for the personal-use market as
well as with firms that market more expensive quantitative, instrument-based,
reusable diagnostic measuring devices, such as our cholesterol monitors, for the
personal and professional-use markets. Equivocal, non-instrument-based,
disposable cholesterol screening tests primarily are designed and engineered to
indicate to a consumer user whether a high cholesterol situation exists, and if
so, to provide a crude indication of its likely magnitude. If an elevated
cholesterol level is indicated, the consumer is advised to timely consult a
medical doctor who, in turn, will seek a precise measurement of the individual's
total cholesterol from a quantitative, instrument-based, diagnostic device.
Quantitative, instrument-based, reusable diagnostic measuring devices primarily
are designed and engineered to provide clinically accurate measurements of one
or more components within blood for making risk assessments related to one or
more chronic diseases. These devices vary widely as to their scope,
capabilities, ease-of-use and price. As our total cholesterol monitors are
intended by us to be directly used by individuals and primary-care physicians,
they may also be viewed as indirectly competing with the traditional
patronization of medical laboratories for blood analysis services. Many of our
existing and potential competitors have substantially greater financial,
technical and other resources and larger, more established marketing, sales,
distribution and service organizations than we do. Since the scope,
capabilities, ease-of-use and price of screening tests and diagnostic devices
vary widely, the perceptions and preferences of consumers and medical
professionals may also vary widely. As such, there can be no assurance that our
cholesterol monitors, as currently configured, packaged and marketed, will be
able to successfully compete in the longer term with existing or future
competing products or services.

GOVERNMENT REGULATION MAY DELAY OR PREVENT US FROM SUCCESSFULLY MARKETING OUR
PRODUCTS.

We have previously obtained all federal and state regulatory clearances and
approvals we believe applicable to our current line of total cholesterol
monitors. However, many, if not all, of these clearances and approvals remain
subject to continual review, particularly by the United States Food and Drug
Administration. The subsequent claiming of jurisdiction by a federal or state
regulatory agency to which we have not previously obtained regulatory clearances
or approvals, or the subsequent discovery of an actual or perceived problem by
us or a regulatory authority, could give rise to certain marketing restrictions
or to a temporary or permanent withdrawal of one or more of our current products
from the market. We also remain subject to regulatory oversight, particularly
from the FDA, with respect to various other matters, including our manufacturing
practices, record-keeping and reporting. For instance, the FDA requires the
integration of their quality system into any facility it registers as a "medical
device facility". This quality system requirement encompasses product
development and manufacturing, customer service, incident reporting and labeling
control. Our assembly facilities, as well as the assembly facilities of our
outsourced assemblers, are registered with the FDA. As such, these assembly
facilities, and the production processes employed within them, remain subject to
the FDA's quality system requirement and ongoing periodic audits by the FDA.
While we believe that all of our current products, as well as all of our related
marketing and assembly activities, including those of our assemblers, continue
to comply in all material respects with all applicable federal and state
regulations, such compliance is heavily subject to one's interpretation of the
applicable regulations, which often can be difficult or ambiguous. Any failure
by us or our agents to maintain material compliance with existing or future
regulations will likely have a material adverse impact on our business, and as a
result, on our results of operations, liquidity and cash flows. Additionally,
while we do not envision the near-term submission of any potential future

products for regulatory clearances or approvals, it must be noted that the
process of obtaining regulatory clearances or approvals can be costly and
time-consuming, and as such, there can be no assurance that any sought after
regulatory clearances or approvals will be obtained. Also, while our marketing
efforts for the foreseeable future will be primarily directed towards U.S.
markets, we anticipate eventually pursuing overseas markets for which we
understand regulatory clearances and approvals vary widely from country to
country. Any longer-term failure by us to obtain sought after domestic or
foreign regulatory clearances or approvals may have a material adverse impact on
our longer-term business, and as a result, our results of operations, liquidity
and cash flows.

ONGOING HEALTH CARE INITIATIVES MAY JEOPARDIZE THE DEMAND FOR OUR PRODUCTS, AS A
RESULT OF WHICH, OUR REVENUES AND PROFITABILITY WILL SUFFER.

The uncertainty of health care reform may have a material impact upon our
business. The income and profitability of medical device companies may be
affected by the efforts of government and third party payers to contain or
reduce the costs of health care through various means. In the United States,
there have been, and we expect that there will continue to be, a number of
federal, state and private proposals to control health care costs. These
proposals may contain measures intended to control public and private spending
on health care. If enacted, these proposals may result in a substantial
restructuring of the health care delivery system. Any significant changes in the
health care system could have a substantial impact over time on the manner in
which we conduct our business and may have a material adverse impact on our
business.

RECENT LEGISLATION DESIGNED TO PROTECT THE INTEGRITY AND CONFIDENTIALITY OF
PATIENT MEDICAL RECORDS MAY INCREASE THE COSTS ASSOCIATED WITH DELIVERY OF OUR
PRODUCTS AND, ACCORDINGLY, OUR PROFIT MARGINS MAY DECREASE.

Federal and state laws relating to confidentiality of patient medical
records could limit the use of our product capability to store and utilize
medical information. The Health Insurance Portability and Accountability Act of
1996, also known as HIPAA, mandates the adoption of national standards for
transmission of certain types of medical information and the data elements used
in such transmissions to insure the integrity and confidentiality of such
information. The U.S. Secretary of Health and Human Services has promulgated
regulations to protect the privacy of electronically transmitted or maintained,
individually identifiable health information. We believe that our products will
enable compliance with the regulations under HIPAA adopting standards for
electronic healthcare transmissions. However, there can be no assurances that we
will be able to comply with the regulations without altering our products and we
may be required to incur additional expenses in order to comply with these
requirements. Further, some state laws could restrict the ability to transfer
patient information gathered from our product. Any such restrictions could
decrease the value of our applications to our customers, which could have a
material adverse impact on our business, and as a result, on our results of
operations, liquidity and cash flows.

THE POLICIES AND PRACTICES OF THIRD-PARTY REIMBURSERS SUCH AS MEDICARE MAY
DECREASE THE DEMAND FOR OUR PRODUCTS AND ADVERSELY IMPACT OUR BUSINESS.

By limiting the amount they are willing to reimburse for the purchase of a
personal-use total cholesterol monitor or the obtaining of a total cholesterol
test, third-party reimbursers, including Medicare, may adversely impact the
prices and relative attractiveness of our total cholesterol monitors. Although
we do not believe that the reimbursement policies of third-party reimbursers
have had any significant adverse impact on us to date, any future changes in
their policies or reimbursement rates may adversely impact our ability to
maintain our suggested retail prices or diminish the attractiveness of our total
cholesterol monitors. Although Congress has recently acted favorably towards
providing preventive cholesterol screening tests by professionals for Medicare
seniors, the new Medicare Reform Bill has not been finalized or passed by
Congress. Furthermore, any failure by third-party reimbursers to embrace the
benefits of total cholesterol monitors or to maintain their reimbursement rates
may have a material adverse impact on our business, and as a result, on our
results of operations, liquidity and cash flows.

AS A MEDICAL DEVICE MANUFACTURER, WE ARE PRONE TO PRODUCT LIABILITY CLAIMS AND
IF A CLAIM AGAINST US EXCEEDS THE LIMITS OF OUR INSURANCE COVERAGE OR COVERAGE
IS OTHERWISE DENIED, WE MAY BE FACED WITH A JUDGMENT THAT COULD JEOPARDIZE OUR
EXISTENCE.

The marketing of medical diagnostic devices, such as our total cholesterol
monitors, subjects us to the risk of product liability claims. Although we
follow certain quality assurance policies and procedures in the procuring of
components and assembling of our total cholesterol monitors, these precautions
may not insulate us from liability claims. Moreover, while we maintain product
liability insurance, this insurance is expensive and is subject to various
exclusions and limitations. There can be no assurance that our policies and
procedures will prevent us from being subjected to product liability claims or
that the scope and amount of our in force liability insurance coverage will be
sufficient to prevent a material adverse impact on our business, and as a
result, on our results of operations, liquidity and cash flows.

IT IS NOT POSSIBLE TO FORESEE ALL RISKS THAT MAY AFFECT US. MOREOVER, WE
CANNOT PREDICT WHETHER WE WILL SUCCESSFULLY EFFECTUATE OUR CURRENT BUSINESS
PLAN. EACH PROSPECTIVE PURCHASER IS ENCOURAGED TO CAREFULLY ANALYZE THE RISKS
AND MERITS OF AN INVESTMENT IN OUR SECURITIES AND SHOULD CONSIDER, WHEN MAKING
SUCH ANALYSIS, AMONG OTHERS, THE RISK FACTORS DISCUSSED ABOVE.

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of shares by the
selling stockholders.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Since October 31, 2003, our common shares have been traded on the
Over-the-Counter Bulletin Board under the symbol "LFTC". From October 10, 2000
until October 30, 2003, our common shares were traded on the American Stock
Exchange under the ticker symbol "KFL". As of March 4, 2004, we had
approximately 8,431 stockholders of record.

The following table sets forth, for the fiscal quarters indicated, the high
and low closing prices for our common stock as reported by the AMEX and,
commencing October 31, 2003, by the over-the-counter Bulletin Board.

HIGH LOW
---- ---
Fiscal 2004:
First Quarter ............................... $0.26 $0.13
Second Quarter .............................. $0.18 $0.10

Fiscal 2003:
First Quarter ............................... $0.85 $0.34
Second Quarter .............................. $0.35 $0.10
Third Quarter ............................... $0.25 $0.11
Fourth Quarter .............................. $0.31 $0.10

Fiscal 2002:
Third Quarter ............................... $2.90 $1.41
Fourth Quarter .............................. $1.46 $0.60

OUR DIVIDEND POLICY

Our Board of Directors has not declared or paid any cash dividends since
our inception. As the Board of Directors' current policy is to retain any and
all earnings to fund our ongoing operations and growth, it does not anticipate
declaring or paying any cash dividends for the foreseeable future. We are
currently restricted under Nevada corporate law from declaring any cash
dividends due to our current working capital and stockholders' deficits.

We have never paid any dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future because:

o we have experienced losses since inception;

o we have significant capital requirements in the future; and

o we presently intend to retain future earnings, if any, to finance
the expansion of our business.

Our payment of dividends in the future will depend on factors including:

o our earnings, if any;

o capital requirements;

o expansion plans;

o financial condition; and

o other relevant factors.

The resale of our securities not covered in this prospectus is subject to
Rule 144. Under Rule 144, if certain conditions are satisfied, a person
(including any of our affiliates) who has beneficially owned restricted shares
of common stock for at least one year is entitled to sell within any three-month
period a number of shares up to the greater of 1% of the total number of
outstanding shares of common stock, or if the common stock is quoted on Nasdaq,
the average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of ours for at least three months
immediately preceding the sale, and who has beneficially owned the shares of
common stock for at least two years, is entitled to sell the shares under Rule
144 without regard to any of the volume limitations described above. As of the
date of this offering, approximately 3,500,000 shares of our common stock are
eligible for resale under Rule 144. An additional 40,200,000 common shares are
subject to issuance upon conversion of convertible notes payable and would be
eligible for resale under Rule 144, however conversion of these notes payable is
limited to the number of shares that would cause the note holder to beneficially
own 9.99% of the outstanding common shares of the Company.

The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Currently,
our common stock is a "penny stock". A penny stock is subject to rules that
impose additional sales practice requirements on broker/dealers who sell these
securities to persons other than established customers and accredited investors.
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities. In addition he
must receive the purchaser's written consent to the transaction prior to the
purchase. He must also provide certain written disclosures to the purchaser.
Consequently, the "penny stock" rules may restrict the ability of broker/dealers
to sell our securities, and may negatively affect the ability of holders of
shares of our common stock to resell them.

FORWARD LOOKING STATEMENTS

Certain disclosures in this prospectus include certain forward-looking
statements within the meaning of the safe harbor protections of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Statements that include words such as
"believe," "expect," "should," intend," "may," "anticipate," "likely,"
"contingent," "could," "may," "estimate," or other future-oriented statements,
are forward-looking statements. Such forward-looking statements include, but are
not limited to, statements regarding our business plans, strategies and
objectives, and, in particular, statements referring to our expectations
regarding our ability to continue as a going concern, generate increased market
awareness of, and demand for, our current consumer device, realize improved
gross margins, and timely obtain required financing. These forward-looking
statements involve risks and uncertainties that could cause actual results to
differ from anticipated results. The forward-looking statements are based on our
current expectations and what we believe are reasonable assumptions given our
knowledge of the markets; however, our actual performance, results and
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements. Factors, within and beyond our control, that
could cause or contribute to such differences include, among others, those
described elsewhere in this prospectus under the caption "Risk Factors". Readers
are urged to carefully review and consider the various disclosures made by us in
this prospectus.

BUSINESS

AN INTRODUCTION

We market a proprietary over-the-counter, total cholesterol-monitoring
device for at-home use by both health-conscious and at-risk consumers ("our
consumer device"). Our consumer device enables an individual, through regular
at-home monitoring of their total cholesterol level, to continually assess their
susceptibility to developing cardiovascular disease, the single largest cause of
premature death and permanent disability among adult men and women in the United
States of America.

We introduced our current consumer device to the retail marketplace in
October 2002. It is the successor to a consumer device that we first debuted in
January 2001.

OUR CURRENT CONSUMER DEVICE

Our current consumer device:

o Provides a quantified total cholesterol reading from a single drop
of blood within three minutes without any prior fasting,

o Meets the measurement precision guidelines set forth by the National
Cholesterol Education Program,

o Classifies individual test results using the American Heart
Association's "desirable," "borderline" and "high" risk-level
categories for total cholesterol in adults,

o Utilizes inexpensive, disposable dry-chemistry test strips,

o Computes an individual's rolling average total cholesterol level
based on their six most recent test results,

o Is compact, lightweight and portable with dimensions of
approximately 5.50" x 4.00" x 1.75" and a weight of approximately
one pound,

o Operates on the power of two AAA batteries, and

o Is warranted for one year from defects in materials or workmanship.

OUR RELATED SUPPLIES AND ACCESSORIES

We offer the following supplies and accessories for use with our consumer
device:

o OUR TEST KIT REFILLS. Our test kit refills, which include six
individually packaged testing packets, have a suggested retail price
of $19.95. Each single-use, disposable testing packet contains a
dry-chemistry total cholesterol test strip, a sterile lancet, an
alcohol swab, and a band-aid.

o OUR "DATA CONCERN" PERSONAL HEALTH CARD(R). Our "Data Concern"
Personal Health Card(R)is individually packaged and has a suggested
retail price of $19.95.

OUR CONSUMER MARKETPLACE

The American Heart Association, as well as the National Heart, Lung and
Blood Institute's renown Framingham Heart Study, have identified elevated total
cholesterol as a primary contributor to coronary heart disease and other forms
of cardiovascular disease . In its "2003 Heart and Stroke Statistical Update,"
the American Heart Association estimates the following for U.S. adults age 20
and older, based on the most recent available data:

o Coronary heart disease is the single largest cause of premature
death and permanent disability among both men and women,

o 42 million adults have "high" total cholesterol levels (240 +
milligrams per deciliter),

o 63 million adults have "borderline-high" total cholesterol levels
(200 to 239 milligrams per deciliter),

o 50% of the men and 63% of the women who died suddenly from coronary
heart disease in 2000 had no previous symptoms,

o The lifetime risk of developing coronary heart disease after age 40
is 49% for men and 32% for women,

o 650,000 adults will have a new coronary attack during 2003,

o 450,000 adults will have a recurrent coronary attack during 2003,

o $129.9 billion of coronary heart disease -related annual costs
(including lost productivity and morbidity) in 2000.

Additionally, the National Heart, Lung and Blood Institute established the
National Cholesterol Education Program in 1985 to educate consumers and medical
professionals about the importance of knowing one's total cholesterol level and
to establish guidelines for the detection, evaluation and treatment of elevated
total cholesterol in adults. This program recommends that all adults obtain a
complete lipoprotein profile (i.e., total cholesterol, LDL "bad" cholesterol,
HDL "good" cholesterol and triglycerides), which typically is obtained through a
general physician, at least once every five years. Once an individual is
diagnosed with elevated total cholesterol and prescribed a cholesterol-lowering
drug, the program recommends subsequent testing as frequent as every six weeks.
In its May 2001 report entitled "Detection, Evaluation, and Treatment of High
Blood Cholesterol in Adults," the National Cholesterol Education Program
reinforced its historical endorsement of intensive cholesterol-lowering
treatments for adults with coronary heart disease but added a new major focus on
primary prevention, including intensive cholesterol-lowering treatments for
adults possessing multiple coronary heart disease risk factors.

OUR SALES AND MARKETING EFFORTS

To date, our ability to conduct those significant marketing activities that
we deem critical to building broad market awareness of, and demand for, our
consumer device has been severely limited due to financial constraints. As a
result, our marketing efforts primary have been limited to using our current
base of critical employees to sustain, cultivate and build upon our existing
relationships with national and regional drug and pharmacy-featuring retail
store chains, and, to a lesser extent, specialty catalog and Internet-based
direct marketers and independent pharmacies. During fiscal 2003, our specific
marketing activities principally consisted of periodically participating in
cooperative advertising campaigns with certain of our existing retail customers,
providing device brochures and discount coupons to pharmacies for subsequent
distribution to their customers, occasionally participating in trade shows,
conducting telephonic and in-person presentations to certain potential
customers, and an advertising campaign beginning in October 2003. We have also
attempted to promote our corporate web sites (www.lifestreamtech.com and
www.knowitforlife.com) where we provide, among other things, educational
information regarding cholesterol, online ordering of products and a retail
store locator.

In the near term, we aspire to further penetrate the retail marketplace
with our consumer device by establishing additional relationships with similar
retail organizations. Over the long term, we aspire to add high-volume,
mass-merchandising retail chains.

In September 2003, we secured a portion of the long-term financing we have
sought to enable us to move forward with our marketing plan and, in October
2003, we began a three-month advertising campaign. In February 2004, we secured
additional financing allowing us to continue implementing our advertising
campaign and expanding awareness for our home cholesterol monitor. Any future
marketing campaigns will be dependent upon our ability to obtain additional
financing, as well as analyzing the results of the campaign currently underway.

OUR SALES CONCENTRATIONS WITH MAJOR CUSTOMERS

Our past sales have been, and we currently expect that our sales for the
foreseeable future will be, dependent upon a few major customers. During fiscal
2003 and 2002, our sales concentrations with major customers were as follows:

FISCAL YEAR ENDED JUNE 30,
2003 2002
---------- ------------

Rite Aid Corporation ..................... 24% --
CVS Corporation .......................... 23% 14%
Eckerd Corporation ....................... 7% 19%
Albertson's, Inc. ........................ 5% 8%
Dr. Leonard's Healthcare Corporation ..... 2% 10%
AmerisourceBergen Corporation ............ 2% 7%

We primarily attribute our historical sales concentrations to our limited
revenue base, our more recent focus on establishing relationships with national
and regional drug and pharmacy-featuring grocery store chains, and our
inability, given financial constraints, to conduct the marketing activities we
deem critical to the establishment of a broad retail customer base.

OUR PRINCIPAL VENDORS AND RELATED ASSEMBLY, PACKAGING AND DISTRIBUTION
OPERATIONS

Our current principal vendors are as follows:

o ROCHE DIAGNOSTICS GMBH. We are party to a licensing and
manufacturing agreement with Roche Diagnostics GmbH of Mannheim,
Germany, that expires on December 31, 2004, pursuant to which we
procure the following:

Disposable, Dry-Chemistry Test Strips. Our agreement with Roche
currently grants us the exclusive right to market and distribute its
proprietary test strips in the U.S. We currently procure these test
strips from Roche on an individual purchase order basis. As we did
not meet the calendar 2002 minimum sales threshold set forth in the
agreement, Roche began prospectively assessing us a 10% price
surcharge in exchange for agreeing to maintain our U.S. exclusivity.
This surcharge was based on our revised sales forecasts for the
duration of the agreement. Should we fail to meet meet these sales
forecasts, Roche may impose a more significant price surcharge on us
as a condition to further maintaining our U.S. exclusivity.

Optics Technology. Our agreement with Roche licenses us its
proprietary optics technology, which we utilized in our predecessor
consumer device in exchange for an agreed-upon royalty per device
sold. However, we recognized no royalty obligation on sales of our
current consumer device, which we began selling in October 2002, as
we viewed the re-engineered optics technology used in this device as
being proprietary to us, and not Roche. In May 2003, Roche asserted
in a letter to us that the subject optics technology was, in their
opinion, still subject to royalties under our agreement. Given our
continuing material dependency on Roche for its test strips and not
wanting to possibly jeopardize such relationship, we responded in
July 2003 with a letter proposing a substantially lower royalty on
each device sold and retroactively recognized a corresponding
royalty obligation accrual, which is reflected in our accompanying
consolidated financial statements. Negotiations are currently
ongoing. As such, the ultimate resolution of this matter remains
uncertain. However, we believe that any reasonably likely
incremental royalty obligation would not be material to our expected
future consolidated financial statements.

On May 22, 2003, we entered into a structured settlement
agreement with Roche to prospectively service and ultimately
satisfy $996,921 in overdue accounts payable to them, excluding
royalty obligations currently under negotiations as discussed
above. Our payment obligations under this agreement were fully
satisfied as of December 31, 2003.

o SERVATRON INC. Our consumer device and related calibration keys are
being assembled, on an individual purchase order basis, by Servatron
Inc. in Spokane, Washington.

o OPTO CIRCUITS (INDIA) LIMITED. In October 2003, we began outsourcing
a portion of our consumer device assembly, on an individual purchase
order basis, to Opto Circuits (India) Limited in Bangalor, India.

Although we would likely incur short-term disruptions that would likely
materially adversely impact our business, financial condition, results of
operations and cash flows, we believe that the services currently procured from
Servatron and Opto Circuits could be obtained from a number of companies
available to us in the marketplace. In contrast, as the functionality of our
consumer device is materially dependent upon the dry-chemistry total cholesterol
test strips provided by Roche and the optics technology incorporated within, to
which Roche is asserting royalty rights, any disruption in our relationship with

Roche would likely have material and long-lasting adverse impacts on our
business, financial condition, results of operations and cash flows, from which
we would not likely recover. Additionally, should we ever lose our U.S.
exclusivity for Roche's total cholesterol dry-chemistry test strips, our
consumer device could become subject to more direct competition, including
potential direct competition from Roche itself, although, to date, it has not
emphasized the consumer marketplace.

Our facilities, as well as the applicable facilities of Servatron, Opto
Circuits and Roche, meet the FDA's Quality System Requirement. All assembled and
individually packaged monitors and bulk packaged calibration keys from
Servatron, as well as all bulk packaged test strips from Roche, are transferred
from their respective facilities to our facility in Post Falls, Idaho for random
quality assurance audits, repackaging, warehousing, and shipping to customers.
We believe that our production facilities and capabilities, as well as those of
Servatron, Opto Circuits and Roche, will be sufficient through at least fiscal
2004. However, any unforeseen rapid escalation in the demand for our products
could necessitate our leasing of additional square footage or the outsourcing of
certain warehousing and shipping functions, which we believe are readily
available to us in the marketplace. We have utilized, and plan to continue to
utilize, common carriers for all of our product shipping needs.

OUR PRODUCT RESEARCH AND DEVELOPMENT

We incurred product research and development expenses of $296,963 and
$1,037,398 in fiscal 2003 and 2002, respectively, principally in connection with
the re-engineering activities associated with developing and refining our
current consumer device. As these activities were substantially completed as of
our fiscal 2003 second quarter ended December 31, 2002, we have subsequently
incurred, and currently expect to continue to incur, nominal product research
and development expenditures for the foreseeable future. We incurred $27,991 of
research and development expenditures during our fiscal 2004 first half.

OUR INTELLECTUAL PROPERTY RIGHTS

We are dedicated to obtaining, maintaining and enforcing the intellectual
property rights covering our corporate image and proprietary technology, both in
the U.S. and abroad. Accordingly, we are actively engaged in creating and
protecting our copyright, trademark, patent, and trade secret assets.

We own the following U.S. copyright registrations:

o U.S. Copyright Registration No. TX5-349-588 for the software used
by our current and predecessor consumer devices,

o U.S. Copyright Registration No. TX5-348-937 for the file
structure and system documentation of our "Data Concern"
Personal Health Smart Card, and

o U.S. Copyright Registration No. TX5-351-584 for the
documentation of the software used by our current and
predecessor consumer devices.

We own the following U.S. trademark registrations:

o Registration Nos. 2,435,646 and 2,513,138 for "Cholestron" (also
registered in Canada and a number of European countries),

o Registration No. 2,321,957 for "Lifestream Technologies,"

o Registration No. 2,505,045 for the Lifestream Logo Design (double
curved lines within a circle),

o Registration No. 2,769,583 for "The Data Concern," and

o Registration No. 2,764,796 for "Personal Health Card."

We also own pending U.S. trademark applications for the following
trademarks: Lifestream, Lifestream Technologies (and logo design), Know It for
Life, Privalink, Personal Data Key, Personal Document Key, Personal

Financial Key, and Personal Health Key. Although we believe that all of these
marks are entitled to registration on the Principal Register, the outcome of the
application process for trademark registration cannot be predicted with
certainty.

We own the following U.S. patents:

o U.S. Patent No. D437,957 which claims the ornamental appearance of
our discontinued professional device,

o U.S. Patent No. D459,811 which claims the ornamental appearance of
our predecessor consumer device,

o U.S. Patent No. 3,135,716 (through our wholly-owned subsidiary,
Lifestream Diagnostics, Inc.) which claims HDL test strip
technology, and

o U.S. Patent No. 6,602,469 which claims aspects of our current
consumer device, which are incorporated yet remain non-operational
pending FDA approval, and operational aspects of our discontinued
professional device, including the display of the user's cardiac age
based on the test result and diagnostic information entered directly
into the device, such as the user's age, weight, personal history of
heart disease, family history of heart disease and other relevant
factors. This patent also covers a test strip validation technique
that allows the device to activate only for authorized test strips
used prior to the expiration date.

We also own several United States divisional patent applications claiming
additional inventions disclosed in the application that matured into U.S. Patent
No. 6,602,469. We further own pending United States and PCT International Patent
Applications for the inventions described in PCT International Patent
Application Nos. PCT/US99/26521, PCT/US02/04821 and PCT/US02/13720. In addition,
we own pending national phase patent applications for the technology described
in PCT International Patent Application No. PCT/US99/26521, International
Publication No. WO 00/28460, in the United States, Canada, European Community,
Australia, New Zealand and Israel. These applications claim a number of
inventions pertaining to our devices, smart card technology, secure medical
record maintenance technology, security related features, and a range of smart
card-enabled health-related and commercial applications. Although we believe
that all of the inventions claimed in these applications are patentable based on
the prior art known to us, the outcome of the patent application process cannot
be predicted with certainty.

OUR COMPETITION

We currently compete, directly or indirectly, with the following products
and representative firms:

o EQUIVOCAL, NON-INSTRUMENT-BASED, SINGLE-USE, DISPOSABLE TOTAL
CHOLESTEROL SCREENING TESTS. These inexpensive screening tests,
which are marketed to consumers and medical professionals, employ
very basic color metric technology. An individual, usually without
any significant advance preparation such as fasting, deposits one or
more drops of blood onto a test card, waits several minutes and then
visually interprets the resulting color card reaction, with or
without the assistance of a medical professional, to an accompanying
table that broadly converts various color shades into approximate
levels of total cholesterol. If an elevated total cholesterol level
is indicated, the accompanying instructions typically advise the
individual to timely consult a medical doctor who, in turn, will
seek a clinically precise measurement of the individual's total
cholesterol from a quantitative, instrument-based, diagnostic
device. Firms marketing these screening tests would include, but not
necessarily are limited to, CholesTrak.

o QUANTITATIVE, INSTRUMENT-BASED, REUSABLE DIAGNOSTIC MEASURING
DEVICES. These diagnostic measuring devices vary widely as to their
scope, capabilities and ease-of-use and are marketed to either
consumers or medical professionals, as appropriate. Prices range
from approximately one hundred dollars for lower-end consumer
devices, such as ours, to several thousand dollars for higher-end
devices, such as bench-top analyzers for high-volume laboratories.
Lower-end devices typically require little or no advance preparation
(e.g. fasting, etc.) and utilize a single blood drop deposited onto
a disposable, single-use, dry chemistry test strip that is
formulated for the specific blood component being measured. Certain
devices, such as ours, are

currently dedicated to measuring a single blood component while
others are capable of measuring a number of individual blood
components through separately conducted tests. Higher-end devices
typically require prior fasting and utilize a vile of blood
deposited into a test cassette for the simultaneous measurement of
multiple blood components. All such devices are designed and
engineered to provide clinically accurate quantified measurements
typically within several minutes. Firms marketing lower-end devices
would include, but not necessary are limited to, us and Polymer
Technology Systems, Inc. We have instituted a patent infringement
suit against Polymer that is described elsewhere in this prospectus.
Firms marketing higher-end devices would include, but not necessary
are limited to, Cholestech Corp.

We continue to emphasize the procurement of shelf space among national and
regional drug and pharmacy-featuring grocery store chains. To a significantly
lesser extent, we seek a retail presence with specialty catalog and
Internet-based direct marketers and independent pharmacies. Over the longer
term, we aspire to add high-volume, mass-merchandising retail chains.

Within the consumer retail store chains and specialty catalog-based direct
marketers that currently carry our consumer device, we have experienced some
indirect competition from screening tests, but little, if any, direct
competition from measuring devices. With respect to consumer retail store chains
that currently do not carry our consumer device and with which we aspire to
ultimately establish a vendor relationship, the competitive presence appears at
this time to be substantially the same. In the Internet-based, e-commerce
marketplace, we have continued to primarily note the direct competitive presence
of Polymer's devices.

Based on our current knowledge of potentially competitive products in the
consumer marketplace, Polymer's BioScanner 2000 would appear to most closely
approximate our consumer device, particularly from technological and price
points of view. It appears to us that the BioScanner 2000 primarily is marketed
for its glucose measuring capability but is purported to be capable of providing
clinically accurate measurements of a number of other blood components,
including total cholesterol, HDL cholesterol and triglycerides, through
separately conducted tests using specifically-formulated, disposable,
dry-chemistry test strips. The BioScanner 2000 also appears capable of storing
historical test results on a non-portable internal smart chip, although our
consumer device is capable of securely storing, via encryption, a significantly
larger number of historical test results on a portable, smart card. The
BioScanner 2000 appears to have a suggested retail price of $149.95.

Although the BioScanner 2000 continues to be actively marketed by certain
distributors, Polymer apparently superceded this device, effective March 31,
2003, with its release of a new device called the CardioChek Analyzer. Polymer
appears to primarily differentiate the CardioChek Analyzer from its predecessor
BioScanner 2000 through the assertion that it is capable of simultaneous
measuring, and providing individually quantified measures of, total cholesterol,
HDL cholesterol, LDL cholesterol and triglycerides from a single drop of blood
deposited onto a lipid-panel. Polymer additionally represents that its
CardioChek Analyzer contains updated analysis software, that is upgradeable to
support future dry-chemistry test strips under development, is more
user-friendly to operate, and is more trouble-free, including being more
tolerant of operator errors. The CardioChek appears to have a suggested retail
price of $179.95.

From a company standpoint, we currently believe that our primary
competitive advantage at this time is the retail shelf space presence that we
have obtained with certain leading national drug and pharmacy-featuring grocery
store chains. We believe, although there can be no assurance of such, that these
retailers will be reluctant for the foreseeable future to carry a directly
competing device given that the market for consumer cholesterol devices is still
in its early formative stages. From a device standpoint, we currently believe
that the primary competitive advantages of our consumer device at this time, as
compared to Polymer's devices, are that, for an individual who is merely
concerned with obtaining a clinically accurate quantified measurement of their
total cholesterol level, it has a significantly lower suggested retail price,
often being promoted by certain of our more prominent existing retail chain
customers below the psychological important one hundred dollar price point, and
has superior historical test storage capabilities. However, to the extent that
an individual is interested in additionally obtaining quantified

measurements of total cholesterol's sub-components or other blood components, we
currently are at a technological disadvantage.

Many of the firms that we currently directly or indirectly compete against
in the consumer marketplace, as well as firms that currently focus on the
professional marketplace but may ultimately decide to also address the consumer
marketplace, have substantially greater financial, technical, research and other
resources, and larger, more established marketing, sales, distribution and
service organizations, than we do. As such, there can be no assurance that we
will be able to maintain our competitive position in the future.

OUR GOVERNMENTAL REGULATORY ENVIRONMENT

Our developing and marketing of total cholesterol monitoring devices
subjects us to the oversight of the United States Food and Drug Administration
and similar governmental regulatory agencies abroad. The FDA Act provides for
comprehensive regulation of all stages of development, manufacturing,
distribution and promotion of "medical devices" in the U.S. Products intended
for use in the collection, preparation, and examination of specimens taken from
the human body, such as our consumer device, are considered a subcategory of
"medical devices." The same regulations apply to consumer diagnostic medical
devices as apply to professional diagnostic medical devices.

There are two primary routes by which to bring a medical device to market
in the U.S.: the Pre-Market Approval Application and the 510(k) Pre-Market
Notification. The Pre-Market Approval Application requires a comprehensive
review of specified pre-clinical and clinical data, which results in a finding
as to whether a device is safe and effective for its designated use. The 510(k)
Notification permits marketing upon a demonstration to the FDA's satisfaction
that the device is substantially equivalent to an approved device already in
commercial distribution. Generally, the clearance process can require extended
periods of testing, both prior to and after submissions to the FDA. FDA review
of submissions by a company can entail significant amounts of time and money.
There can be no assurance that the FDA or any similar governmental regulatory
agency abroad will grant market clearance for any particular medical device.

The FDA uses a classification system, i.e., Class I, II or III, to
determine the level of regulation a product will require and the approval
process that applies to the device. The classification system is based on the
"potential risk to the user" with Class I being "low risk," Class II being
"moderate risk" and Class III being "high risk." Because all new products to the
marketplace after 1976 are automatically classified as Class III devices (unless
otherwise reclassified by the FDA) in any 510(k) Notification, the applicant
must, among other things, demonstrate that the product to be marketed is
"substantially equivalent" to another legally marketed device in performance,
design, safety and intended use to avoid the more rigorous approval process
associated with Class III devices.

The FDA also requires the integration of their quality system into any
facility it registers as a "medical device facility". The quality system
requirement encompasses product development and manufacturing, customer service,
incident reporting and labeling control. Our facilities, as well as the
applicable facilities of Servatron, Opto Circuits and Roche, are registered with
the FDA and meet their quality system requirement, as well as are ISO-9001
certified.

On April 13, 1998, upon completing clinical studies of our professional
device for adults, we filed 510(k) Notification claiming substantial equivalence
to Boehringer Mannheim's Accu-Trend Instant Plus home diabetes test, a Class II
instrument already in commercial distribution. On October 5, 1998, we received
the FDA's order of "substantial equivalence" and market clearance of our
professional device for adults as a point-of-care, in-vitro monitoring device
for the measurement of total cholesterol in fingerstick whole blood samples.

On February 24, 1999, the Centers for Disease Control and Prevention, or
CDC, granted our professional device for adults a waiver from the requirements
of the Clinical Lab Improvement Amendments of 1988, or CLIA.

A waiver of the Amendments is granted by the CDC to products that meet strict
ease-of-use, accuracy and precision guidelines. The significance of the
Amendment-waiver was that it allowed us to market our professional device for
adults to healthcare professionals in medical clinics, hospitals, pharmacies and
other settings without meeting extensive CDC regulatory requirements.

On February 21, 2000, upon completing clinical studies, we submitted 510(k)
Notification for our predecessor consumer device. On July 25, 2000, we received
the FDA's market clearance for such device.

On March 6, 2000, the American Medical Association granted a revision to
their Conventional Procedural Code to include a total cholesterol finger stick
test, regardless of the instrument type or sample collection. This revision was
granted on the basis of our submission to the Association's Conventional
Procedural Code Editorial Panel proving widespread use and medical utility. As a
result, a total cholesterol test performed with our device is cleared for public
and private health plan reimbursements under the Conventional Procedural Code
coding system.

All products manufactured or distributed by us pursuant to FDA clearances
or approvals remain subject to pervasive and continuing regulation by the FDA
and certain state agencies, including record keeping requirements and reporting
of adverse experience with the use of the device. In addition, labeling and
promotional activities remain subject to scrutiny by the FDA.

We have no material environmental compliance requirements and we have not
incurred any material costs in connection with such.

OUR CORPORATE HISTORY

1989 Lifestream Development Partners was organized by two investors
as a general partnership for the purpose of developing a total
cholesterol measuring device.

June 1992 The principals of Lifestream Development Partners organized
Lifestream Diagnostics, Inc. as a Nevada corporation.

August 1992 Lifestream Development Partners transferred its net assets to
Lifestream Diagnostics in exchange for common shares.

February 1994 Lifestream Diagnostics completed a plan of legal
reorganization to become a public company whereby it executed
an exchange agreement with, and became a subsidiary of, an
inactive public shell company incorporated in Nevada.
Concurrent with this reorganization, the public shell company
adopted our current name, Lifestream Technologies, Inc., and
our common shares began trading on the Over-The-Counter
Bulletin Board Market under the ticker symbol "LFST."

June 1996 We acquired an initial 20% ownership interest in Secured
Interactive Technologies, Inc. with whom we had previously
established a development alliance to jointly create and
promote a software technology.

January 1999 We introduced our professional total cholesterol monitoring
device for adults to the medical community, commenced limited
revenue-generating operations related thereto and ceased being
a development-stage company. However, shortly thereafter, we
elected to redirect our limited operating and financial
resources into the development of an over-the-counter, total
cholesterol monitoring device for at-home use by adult
consumers, for which we envisioned, and continue to envision,
substantially greater revenue potential over the longer term.

September 1999 We acquired the remaining 80% ownership interest in Secured
Interactive by effectuating a merger whereby all of the
remaining outstanding common shares of Secured Interactive
were exchanged for shares of our common stock.

July 2000 We received the over-the-counter market clearance from the FDA
for our consumer device thereby allowing us to proceed with
related production and marketing.

October 2000 Our common shares began trading on the American Stock Exchange
under the ticker symbol "KFL."

October 2003 Our common shares ceased trading on the American Stock
Exchange and began trading on the Nasdaq Over-the-Counter
Bulletin Board under the symbol "LFTC".

In our past filings with the United States Securities and Exchange
Commission, we had disclosed certain products and product initiatives that have
not been previously readdressed in this prospectus. Such products consisted of
professional point-of-care devices for the measurement of total cholesterol in
adults and adolescents. Such product initiatives primarily related to the
development of a software product called Privalink that was intended to enable
interconnectivity between various medical diagnostic devices and the
consolidated secured storage, via encryption, of related test results and other
personal and health-related data onto a smart card and via the Internet into a
remotely maintained and password accessible database. However, given our
financial constraints and the much greater long-term market potential we
envision for our over-the-counter total cholesterol measuring device for at-home
use by consumers, we substantially discontinued all active development,
manufacturing and marketing of these other products and product initiatives
prior to, or during, fiscal 2003. We continue to fill any passive orders
received for our professional devices from remaining inventory stocks but will
not replenish such. We will continue to fill any dry-chemistry test strip orders
passively received for our professional devices on an ongoing basis as these
strips are the same strips utilized by our current consumer device.

EMPLOYEES

Our employees at December 31, 2003 and 2002, distributed among our
functional areas, were as follows:

DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
FULL-TIME PART-TIME FULL-TIME PART-TIME
-------- --------- --------- ---------

Administration and Finance .................... 9 1 8 0
Product Assembly, Testing and Packaging ....... 6 2 10 3
Sales, Marketing and Customer Service ......... 2 0 6 0
Information Technical Services ................ 1 0 2 0
Product Research and Development .............. 0 0 0 0
-- -- -- --
Total Employees ........................... 18 3 26 3
-- -- -- --

None of our employees currently are parties to collective bargaining
agreements. We consider our employee relations overall to be satisfactory.

PROPERTIES

All of our operations continue to be located in modern leased premises
within the Riverbend Commerce Park in Post Falls, Idaho, with the address of our
administrative corporate offices being 510 Clearwater Loop, Suite 101, Post
Falls, Idaho 83854. We began fiscal 2003 under two separate leases for 8,914
square feet of office space and 10,105 square feet of assembly, testing,
packaging, warehousing and shipping space. In October 2002, we entered into a
lease modification that decreased our assembly, testing, packaging, warehousing
and shipping space by 2,640 square feet. In January 2003, we entered into
another lease modification that decreased our office space by 2,523 square feet.
In October 2003, we renewed the lease for the warehousing and shipping space for
an additional one-year term. It is our current intention to renegotiate each of
the above leases before their expirations on May 31, 2004 and October 31, 2004,
respectively. We believe that suitable alternative lease space is readily
available to us at similar lease rates in proximity to our current location
should such become necessary or desirable.

We currently believe that our current physical facilities will be
sufficient, absent any unforeseen significant sales increase, to accommodate all
of our business needs through at least fiscal 2004.

We currently do not have, nor do we anticipate making, any investments in
real estate or related securities within the foreseeable future.

We believe our properties are in good condition, well-maintained and
generally suitable and adequate to carry on our business. We also believe that
we maintain sufficient insurance coverage on all of our real and personal
property.

LEGAL PROCEEDINGS

We, including our subsidiaries, are periodically involved in incidental
litigation and administrative proceedings primarily arising in the normal course
of our business. In our opinion, our gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing incidental litigation or administrative
proceedings would not materially affect our financial position, results of
operations or cash flows.

Our wholly-owned subsidiary, Lifestream Diagnostics, Inc., is the plaintiff
in patent infringement litigation, Civil Action No. CV00-300-N-MHW, against
Polymer Technology Systems, Inc., et al, currently pending in the United States
District Court for the District of Idaho. The patent-in-suit is Thakore, U.S.
Patent No. 3,135,716. We allege willful patent infringement and seek Polymer's
immediate discontinuance of the HDL test strip technology currently utilized in
their diagnostic device to which we claim ownership. The defendants have brought
a number of counterclaims, including antitrust, unfair competition, tortious
interference with business relations and patent misuse, and have only asserted
unspecified general damages. The Court conducted a "claim interpretation"
hearing (also called a "Markman" hearing) January 29-30, 2003, and issued a
Memorandum Decision on May 28, 2003 ruling against our assertion of patent
infringement. Based on the Court's claim interpretation decision, the parties
jointly requested entry of a judgment of non-infringement, a stay of the
counterclaims, and a certification that the claim interpretation decision is
ripe for appeal. The Court entered this order on August 21, 2003. We timely
filed a Notice of Appeal to the Court of Appeals for the Federal Circuit and
were subsequently assigned an Appeal Number of 03-1630. Although we believe that
our claims are well founded in law and fact, and believe that the counterclaims
and defenses alleged by the defendants are baseless, the outcome of this
litigation cannot be predicted with certainty. Settlement discussions are at a
standstill but may resume at any time.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

AN INTRODUCTION

We introduced our current consumer device to the retail marketplace in
October 2002. It is the successor to a consumer device that we first debuted in
January 2001.

SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN

We have incurred substantial operating and net losses, as well as negative
operating cash flows, since our inception. As a result, we continued to have
significant working capital and stockholders' deficits at June 30, 2003. In
recognition of such, our independent certified public accountants included an
explanatory paragraph in their report on our consolidated financial statements
for the fiscal year ended June 30, 2003, that expressed substantial doubt
regarding our ability to continue as a going concern.

On September 13, 2003, we completed a private placement offering of
$3,350,000 in unsecured convertible debentures from which we received $3,067,000
in net cash proceeds. On February 20, 2004, we completed a private placement
offering of $2,775,000 in unsecured convertible debentures from which we
received $2,077,000 in net cash proceeds. The purchase price for the convertible
debentures issued in February 2004 gives effect to an original issue discount of
approximately $500,000, the amount of which was withheld from the proceeds at
the time of the closing of the financing. In connection with this transaction
and subject to a 4.9% beneficial ownership limitation, following public
disclosure of the terms and conditions of this financing, participating warrant
holders agreed to exercise outstanding warrants held by them. Upon exercise, we
will receive an additional $481,000 in net proceeds. After this offering, we had
only approximately 1.7 million authorized common shares remaining available for
issuance. Under the terms of the offering, we have agreed to seek shareholder
approval to increase the number of authorized common shares to 500 million
shares by April 30, 2004. Subject to such increase in the number of authorized
common shares, investors in the February 20, 2004, financing have been granted
the option to purchase up to an additional $1.22 million of convertible
debentures and warrants with terms and conditions substantially identical to
those in the February 2004 transaction. Any failure by us to obtain such
approval will limit our future financing options to the issuance of higher
interest-bearing, non-convertible debt instruments.

We will continue to require additional financing to fund our longer-term
operating needs, including our continued conducting of those marketing
activities we deem critical to building broad public awareness of, and demand
for, our current consumer device. The amount of additional funding needed to
support us until that point in time at which we forecast that our business will
become self-sustaining from internally generated cash flow is highly dependent
upon the ability to continue conducting marketing activities and the success of
these campaigns on increasing our sales to consumers.

With respect to our sales and gross margins, we introduced our current
consumer device to the retail marketplace in October 2002, from which we have
realized, and expect to continue to realize, a substantially improved gross
margin. Despite such, our consolidated gross margin for the next fiscal quarter
will continue to reflect a blended rate as we attempt to deplete our remaining
inventory of our predecessor device, primarily through smaller, less prominent,
direct marketers. During such time, we may continue to periodically offer
related incentives that would adversely impact our consolidated gross margin,
the timing and degree to which currently is not determinable. However, once our
inventory of these predecessor devices is fully depleted, we anticipate a
consolidated gross margin of approximately 45% from sales of our current
consumer device before reductions for inventory obsolescence allowances.
Additionally, to the extent that we are able to continue to conduct the
meaningful marketing activities we began in October 2003, primarily targeted
radio advertising, we believe that the economic and psychological attractiveness
of our current consumer device's lower retail price point will substantially
increase the likelihood of us realizing the significant sales increases and
operating cost leverage we seek over the longer term.

With respect to our operating cost structure, we implemented a series of
difficult, yet necessary, cost-cutting measures during our preceding fiscal
year. The most significant of these measures was the elimination of
substantially all non-critical personnel, consultants and infrastructure. We
currently operate with a core staff of 19 critical full-time employees, as
compared to 38 employees at June 30, 2002. Additionally, concurrent with the
completion of all re-engineering activities associated with the development and
refinement of our current consumer device, we eliminated substantially all of
our product research and development expenditures as of December 31, 2002. We
expect that our product research and development needs and expenditures for the
foreseeable future will remain nominal.

It must be noted that, should we be unsuccessful in any of the initiatives
or matters discussed above, our business, and, as a result, our consolidated
financial position, results of operations and cash flows will likely be
materially adversely impacted, the effects from which we may not recover. As
such, substantial doubt as to our ability to continue as a going concern remains
as of the date of this prospectus.

OUR CONSOLIDATED RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST HALF OF FISCAL
2004 COMPARED TO SECOND QUARTER AND FIRST HALF OF FISCAL 2003

Our consolidated net sales for the fiscal quarter ended December 31, 2003
("fiscal 2004 second quarter"), were $787,052, a decrease of $1,143,061, or
59.2%, as compared to $1,930,113 for the fiscal quarter ended December 31, 2002
("fiscal 2003 second quarter"). For the six months ended December 31, 2003
("fiscal 2004 first half"), our consolidated net sales were $1,412,526, a
decrease of $1,650,023, or 53.9%, as compared to $3,062,549 for the six months
ended December 31, 2002 ("fiscal 2003 first half"). Consistent with our
continuing principal focus on the retail marketplace, our consumer sales
accounted for in excess of 95% of our consolidated net sales during each of the
above fiscal 2004 and 2003 periods. Monitors consistently accounted for
approximately 60% - 75% of our consumer sales whereas test strips, smart cards
and other accessories collectively accounted for the respective balances. During
our fiscal 2004 second quarter and first half, net sales of our consumer
monitors decreased approximately 58% and 52%, respectively, whereas net sales of
our related consumer test strips increased 20% and 29%, respectively from the
comparative prior periods. Net sales of smart cards and other accessories

decreased approximately 87% and 83% for fiscal 2004 second quarter and fiscal
2004 first half, respectively. Our second-generation consumer monitors, which we
began shipping during October 2002, ultimately accounted for approximately 66%
and 62% of our overall consumer monitor sales during our fiscal 2004 second
quarter and first half, respectively.

We primarily attribute the decrease in our consolidated net sales for our
fiscal 2004 second quarter and fiscal 2004 first half to our fulfillment in
fiscal 2003 first quarter of a $701,045 initial order from a prominent national
drug store chain and the fulfillment in fiscal 2003 second quarter of an
$851,475 initial order from a prominent national drug store chain. The remaining
decrease is due to increased sales returns allowance for test strips with a
short-term expiration date.

We realized a consolidated gross profit of $128,516 for our fiscal 2004
second quarter, a decrease of $698,559, or 84.5%, as compared to a consolidated
gross profit of $827,075 for our fiscal 2003 second quarter. For our fiscal 2004
first half, our consolidated gross profit was $326,854, a decrease of $717,784,
or 68.7%, as compared to a consolidated gross profit of $1,044,638 for our
fiscal 2003 first half. Our resulting gross margins were 16.3% and 23.1% for our
fiscal 2004 second quarter and first half, respectively, as compared to 42.9%
and 34.1% for our fiscal 2003 second quarter and first half, respectively. We
primarily attribute these significant decreases in our gross profits and margins
to the increase in the inventory obsolescence allowance by $186,000 and $163,281
for the fiscal 2004 second quarter and first half, respectively. The increase in
the inventory obsolescence allowance is due to our decision to suspend sales of
test strips expiring in May 2004 due to the short term in which our consumers
would be able to utilize the test strips. This resulted in the obsolescence of
all test strips with the May 2004 expiration. To a lesser extent, we attribute
the decrease in gross margins to the adverse impacts of offering pricing
discounts and incentives to certain retailers to deplete inventory supplies of
our first-generation consumer monitor.

Our ability to realize consolidated gross profits sufficient to leverage
our ongoing operating expenses, and thus, achieve sustained operating
profitability at an acceptable level, remains highly dependent upon us achieving
broad awareness and acceptance of our monitors among both retailers and
consumers. Should we be unsuccessful in our current efforts to timely procure
equity or debt financing sufficient to fund essential marketing activities, the
likelihood of us achieving the prerequisite broad market awareness and
acceptance of our consumer monitors will be remote.

Our consolidated total operating expenses were $1,481,325 (inclusive of
$91,820 in non-cash charges) for our fiscal 2004 second quarter, an increase of
$317,416, or 27.3%, from the $1,163,909 (inclusive of $130,244 in non-cash
charges) incurred during our fiscal 2003 second quarter. For our fiscal 2004
first half, our total operating expenses were $2,481,194 (inclusive of $243,532
in non-cash charges), a decrease of $131,560, or 5.0%, from the $2,612,754
(inclusive of $315,996 in non-cash charges) incurred during our fiscal 2003
first half. As further detailed below, the increase in operating expenses for
our fiscal 2004 second quarter is primarily due to the launch of the radio
advertising campaign in October of 2003.

Our consolidated sales and marketing expenses were $713,468 for our fiscal
2004 second quarter, an increase of $465,052, or 187.2%, from the $248,416
incurred during our fiscal 2003 second quarter. For our fiscal 2004 first half,
our sales and marketing expenses were $845,386, an increase of $381,972, or
82.4%, from the $463,414 incurred during our fiscal 2003 first half. These
expense increases primarily were derived from the launch of our radio
advertising campaign in October 2003, which continued throughout the fiscal 2004
second quarter. This substantial increase is offset by a decrease in salaries
expense due to headcount reductions, commissions due to decreased sales and
curtailed travel to and participation in trade shows. Our selling and marketing
expenses will significantly increase for our fiscal 2004 third quarter, and
possibly beyond, as we deploy a significant portion of the proceeds received
from our recent financings, as well as from any future financings, into
advertising campaigns.

Our consolidated general and administrative expenses were $666,514 for our
fiscal 2004 second quarter, a

decrease of $33,028, or 4.7%, from the $699,542 incurred during our fiscal 2003
second quarter. For our fiscal 2004 first half, our G&A expenses were
$1,363,928, a decrease of $271,675, or 16.6%, from the $1,635,603 incurred
during our fiscal 2003 first half. These expense decreases were attributable to
lower professional service costs due to the previous completion, contraction or
discontinuance of non-critical consulting engagements and various cost savings
realized as a result of administrative and technical support headcount
reductions, including related salaries and benefits, rent, utilities,
telecommunications and travel. Slightly offsetting the preceding were increased
costs for investor relations and a special proxy related to the increase in our
authorized common shares, and increased royalty fee accruals as a result of
ongoing negotiations with a principal vendor from whom we license the
proprietary optics technology utilized in our predecessor consumer device.
Discussions are ongoing with this principal vendor regarding whether our current
consumer device is subject to royalty fees under our licensing agreement.
Although there can be no assurance of such, we believe this vendor, given our
long-standing relationship, will ultimately agree to mutually acceptable royalty
terms.

Our product research and development expenses were $24,523 for our fiscal
2004 second quarter, a decrease of $70,213, or 74.1%, from the $94,736 incurred
during our fiscal 2003 second quarter. For our fiscal 2004 first half, our
product research and development expenses were $27,991, a decrease of $244,074,
or 89.7%, from the $272,065 incurred during our fiscal 2003 first half. This
decrease primarily was attributable to reductions in salaries, benefits, travel
and meeting expenses as the development of our current consumer device was
substantially completed by the end of our fiscal 2003 first quarter. Certain
continuing engineering activities directed at achieving further cost refinements
were also substantially completed during our preceding fiscal 2003 second
quarter. We currently expect that our product research and development needs and
expenditures will be nominal for the foreseeable future.

Our non-cash depreciation and amortization expenses were $76,820 for our
fiscal 2004 second quarter, a decrease of $44,395, or 36.6%, from the $121,215
incurred during our fiscal 2003 second quarter. For our fiscal 2004 first half,
our non-cash depreciation and amortization expenses were $156,133, a decrease of
$85,539, or 35.4%, from the $241,672 incurred during our fiscal 2003 first half.
These decreases primarily are attributable to certain equipment that became
fully depreciated during fiscal 2003. As our planned capital expenditures are
minimal, we currently anticipate that our depreciation and amortization expense
for the remaining half of fiscal 2004 will approximate that incurred during the
fiscal 2004 first half.

We incurred an $87,756 loss on the disposal of tooling equipment associated
with our predecessor consumer device during the fiscal 2004 first quarter. We
currently do not foresee any similar losses for the balance of fiscal 2004.

Primarily as a result of the foregoing, our loss from operations for our
fiscal 2004 second quarter was $1,352,809, an increase of $1,015,975, or 301.6%,
from the $336,834 incurred during our fiscal 2003 second quarter. For our fiscal
2004 first half, our loss from operations was $2,154,340, an increase of
$586,224, or 37.4%, from the $1,568,116 incurred during our fiscal 2003 first
half.

to a substantial portion of convertible debt converted subsequent to December
31, 2003, we expect the amortization of convertible debt discount to increase
significantly during the third quarter of fiscal 2004.

Primarily as a result of the foregoing, we incurred a net loss of
$2,766,012 ($0.03 per basic and diluted share) in our fiscal 2004 second quarter
as compared to a net loss of $1,009,774 ($0.04 per basic and diluted share) in
our fiscal 2003 second quarter. For our fiscal 2004 first half, we incurred a
net loss of $3,960,863 ($0.04 per basic and diluted share) as compared to a net
loss of $2,940,286 ($0.12 per basic and diluted share) for our fiscal 2003 first
half.

OUR CONSOLIDATED RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002

Our consolidated net sales for the fiscal year ended June 30, 2003 ("fiscal
2003") were $4,236,653, an increase of $569,496, or 15.5%, as compared to
$3,667,157 for the fiscal year ended June 30, 2002 ("fiscal 2002"). We
substantially attribute this overall sales increase to increased unit sales
volume, primarily from our fulfillment of an $851,475 initial order for our
current consumer device received by us in October 2002 from a new national drug
store chain customer, and, to a significantly lesser extent, increased orders
from an existing national drug store chain customer. Partially offsetting the
preceding primarily were decreased orders from an existing national drug store
chain customer that was selling down its existing inventory of our plus-edition
consumer device bundles prior to transitioning to our lower-cost, stand-alone
consumer device, which they subsequently have, the lower average wholesale price
being charged by us for our current consumer device, as compared to that for our
predecessor device, and our fiscal 2003 third quarter decision to facilitate
certain customer transitions to our current consumer device by volunteering to
accept approximately $175,000 in returns of our predecessor device.

Our consolidated net sales were $1,132,437, $1,930,113, $649,093 and
$525,010 during our fiscal 2003 first, second, third and fourth quarters,
respectively, as compared to $879,845, $1,238,353, $874,899 and $674,060 during
our fiscal 2002 first, second, third and fourth quarters, respectively. We
primarily attribute the variability in our quarterly sales contributions, the
order of which remained consistent among fiscal years, to seasonal influences
that dictate the timing of initial and repeat orders received from both new and
existing retail customers. Our fiscal 2003 second quarter disproportionately
benefited from initial orders for our current consumer device from both new and
existing retail customers. In contrast, we primarily attribute the comparative
fiscal third and fourth quarter decreases to our customers conservatively
managing their inventories as they ascertained demand and sell-through for our
current consumer device, particularly given our then deteriotating financial
condition.

We realized a consolidated gross profit of $719,826 for fiscal 2003, an
increase of $1,090,566, or 294.2%, as compared to a consolidated gross loss of
$370,740 for fiscal 2002. Our resulting consolidated gross margin was 17.0% for
fiscal 2003, as compared to (10.1%) for fiscal 2002. Our consolidated gross
margin for fiscal 2003 represents a blended rate from sales of both our current
and predecessor consumer devices whereas our consolidated gross margin for
fiscal 2002 was exclusively from sales of our predecessor consumer device. As
previously discussed, the technological platform of our current consumer device
was designed and engineered to provide us with a substantially improved gross
margin as compared to our predecessor consumer device, which we had previously
released in January 2001, despite its known poor economics, in order to capture
critical retail store shelf space given the substantial absence of any
competitive presence. Our consolidated gross loss and negative gross margin for
fiscal 2002 also reflects the adverse impacts of related introductory pricing
discounts and incentives granted.

It should be noted that we expect to continue to realize a blended gross
margin for the next few fiscal quarters as we attempt to deplete our remaining
inventory of our predecessor device, primarily through smaller, less prominent,
direct marketers. During such time, we expect to offer related incentives that
will adversely impact our consolidated gross margin, the degree to which
currently is not determinable.

Despite the substantially improved consolidated gross margin we are
realizing from sales of our current consumer device, it must be noted that our
ability to realize a consolidated gross profit sufficient to leverage our
ongoing operating expenses, and thus, achieve sustained operating profitability
at an acceptable level, remains highly contingent upon us achieving broad
awareness of, and demand for, our current device among both retailers and
consumers. Should we be unsuccessful in our ongoing efforts at obtaining the
aggregate long-term financing we currently seek, the majority of which would be
used by us to fund critical marketing activities, it is highly unlikely that we
will be able to realize significant future sales growth.

Our consolidated total operating expenses were $4,988,334 (inclusive of
$624,542 in non-cash charges) for fiscal 2003, a decrease of $5,660,099, or
53.2%, from the $10,648,433 (inclusive of $3,316,132 in non-cash charges)
incurred during fiscal 2002. As further detailed below, this overall decrease
primarily was attributable to various cash preservation and cost containment
measures we undertook during the first nine months of fiscal 2003 as our then
financial condition further deteriorated.

Our consolidated sales and marketing expenses were $1,003,543 for fiscal
2003, a decrease of $1,426,524, or 58.7%, from the $2,430,067 incurred during
fiscal 2002. This decrease primarily was attributable to reductions in our
advertising and promotional activities, and, to a significantly lesser extent,
headcount reductions and curtailed travel, including decreased participation in
trade shows.

Our consolidated general and administrative expenses were $3,245,396
(inclusive of $182,110 in non-cash charges) for fiscal 2003, a decrease of
$1,988,284, or 38.0%, from the $5,233,680 (inclusive of $1,110,844 in non-cash
charges) incurred during fiscal 2002. This decrease was realized in a number of
general and administrative expense categories. Most prominent was our
substantially decreased professional service fees, previously consisting
primarily of non-cash charges for equity-based compensation, due to the
completion, contraction or discontinuance of non-critical consulting
engagements. To a significantly lesser extent, we realized various cost savings
as a result of administrative and technical support headcount reductions,
including related salaries and benefits, travel, insurance, rent, utilities,
telecommunications, and supplies. Additionally, we have recognized substantially
lower royalty fee obligations in connection with sales of our current consumer
device, as compared to that incurred in connection with sales of our predecessor
device. Slightly offsetting the preceding expense reductions primarily were a
provision established for a potentially uncollectible trade receivable, and, to
a significantly lesser extent, increased patent enforcement legal fees and AMEX
listing fees. The aforementioned provision was established to fully offset a
seriously overdue receivable related to an order filled for a national drug
store chain. While this chain has subsequently ordered additional product from
us and timely paid all related invoices, it has withheld payment of the initial
invoice, in effect, creating a non-contractual retainage to protect itself
against any unsold devices in its inventory should we be unable in the future,
given our uncertain financial condition, to subsequently provide test strip
refills.

Our product research and development expenses were $296,963 (inclusive of
$0 in non-cash charges) for fiscal 2003, a decrease of $740,435, or 71.4%, from
the $1,037,398 (inclusive of $258,000 in non-cash charges) incurred during
fiscal 2002. This decrease primarily was attributable to reductions in salaries,
benefits, travel and meeting expenses realized during our fiscal 2003 third and
fourth quarters as the development of our current consumer device was
substantially completed by the end of our preceding fiscal 2003 first quarter
and certain continuing engineering activities directed at achieving further cost
refinements were substantially completed during our preceding fiscal 2003 second
quarter. We currently expect that our product research and development needs and
expenditures will be nominal for the foreseeable future.

Our non-cash depreciation and amortization expenses were $442,432 for
fiscal 2003, a decrease of $905,761, or 67.2%, from the $1,348,193 incurred
during fiscal 2002. This decrease primarily was attributable to significant
reductions as of our preceding June 30, 2002 fiscal year end in the amount of
our amortizable intangible assets, as a result of our then recognition of
certain impairments. As our planned capital expenditures are relatively

modest in amount, we currently believe that our fiscal 2004 depreciation and
amortization expense will materially approximate that which we incurred during
fiscal 2003.

Our resulting loss from operations for fiscal 2003 was $4,268,508, a
decrease of $6,750,665, or 61.3%, from the $11,019,173 incurred during fiscal
2002.

Our non-operating income and expenses primarily consist of interest income,
interest and financing expenses, amortization of convertible debt discount and
other miscellaneous income and expense items. Our net non-operating expenses for
fiscal 2003 were $3,838,437 (inclusive of $2,863,664 in non-cash charges), an
increase of $180,331, or 4.9%, from net non-operating expenses of $3,658,106
(inclusive of $2,893,862 in non-cash charges) in fiscal 2002. The net increase
primarily reflects (a) a financing charge incurred in connection with our
decision to retroactively issue a principal shareholder, who had previously
converted certain of our outstanding convertible notes at the then stated rate
of $1.00 per common share, an additional 4,579,407 common shares as an
inducement for him to participate in a subsequent private placement of our
common shares at $0.10 per share, (b) increased interest expense incurred as a
result of a higher average outstanding balance under our previously existing
revolving credit facility, (c) interest expense incurred on notes payable we
issued upon converting the preceding revolving credit facility, (d) increased
amortization of deferred financing costs, and (e) interest expense incurred on
overdue accounts payable. Partially offsetting the preceding primarily were (a)
decreased amortization due to a declining debt discount balance, (b) the
non-recurrence of certain fiscal 2002 equity-related financing charges, (c)
decreased interest expense on convertible notes as a result of a lower average
outstanding balance, and (d) reduced commitment fees incurred.

Primarily as a result of the foregoing, we incurred a net loss of
$8,106,945 ($0.24 per basic and diluted share) in fiscal 2003 as compared to a
net loss of $14,677,279 ($0.67 per basic and diluted share) in fiscal 2002.

OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

General

We have historically sustained our operations and funded our growth through
an ongoing combination of trade credit arrangements, short-term financings, and
debt and equity issuances. As our working capital requirements generally precede
the realization of sales and related accounts receivable, we routinely draw upon
our existing cash and cash equivalent balances and seek short and long-term
financing to fund our procurement of inventory.

As more extensively discussed in the preceding disclosures entitled
"Substantial Doubt Regarding Our Ability to Continue as a Going Concern," we
have incurred substantial operating and net losses, as well as negative
operating cash flows, since our inception. As a result, we had significant
working capital and stockholders' deficits as of our most recently completed
fiscal year ended June 30, 2003. In recognition of such, our independent
certified public accountants included an explanatory paragraph in their report
on our consolidated financial statements for our most recently completed fiscal
year ended June 30, 2003 that expressed substantial doubt as to our ability to
continue as a going concern.

It must be noted that, should we be unsuccessful in any of the initiatives
or matters discussed in the preceding disclosures entitled "Substantial Doubt
Regarding Our Ability to Continue as a Going Concern," our business, and, as a
result, our consolidated financial position, results of operations and cash
flows will likely be materially adversely impacted, the effects from which we
may not recover. As such, substantial doubt regarding our ability to continue as
a going concern remains as of the date of this prospectus.

Structured Settlement Agreement with Roche, a Principal Vendor to Which We Are
Materially Dependent

On May 22, 2003, we entered into a structured settlement agreement with
Roche to prospectively service and ultimately satisfy $996,921 in overdue
accounts payable to them. Our payment obligations under this agreement were
fully satisfied as of December 31, 2003.

Our Capital Lease Obligations

We lease certain equipment under capital leases. The aggregate net carrying
values of the underlying collateralizing assets were approximately $224,000 and
$285,000 at December 31, 2003, and June 30, 2003, respectively.

Our aggregate future obligations under capital lease agreements in
existence at December 31, 2003, were as follows:

FISCAL YEARS ENDING JUNE 30,
--------------------------------------------------------------
2004 (balance thereof) .......................... $29,968
2005 ............................................ 24,308
2006 ............................................ 6,172
-------
Total lease payments ............................ 60,448
Less imputed interest ........................... 6,074
-------
Present value of net minimum lease payments ..... 54,374
Less current maturities ......................... 43,166
-------
Total long-term capital lease obligation ........ $11,208
=======

Our Outstanding Notes Payable

Effective May 1, 2003, we converted our then expiring revolving credit
facility agreement with a financial institution. Under the new agreement, our
then outstanding balance of $2,197,800 was bifurcated into a $2,000,000
twenty-four month term loan ("term loan") and a $197,800 advance loan ("advance
loan"). The term loan accrues interest at a fixed rate of 15% per annum and is
to be repaid through the financial institution's retention of the first $75,000
of each month's assigned accounts receivable collections. The advance loan
accrues interest at 15% and is to be repaid through the financial institution's
additional retention of 25% of each month's assigned accounts receivable
collections over and beyond the initial $75,000 in collections retained to
service the term loan. This incremental 25% retention is limited to $50,000 in
any month, with a sub-limit of $25,000 should any month's aggregate accounts
receivable collections be less than $200,000. Any principal and accrued interest
balances remaining on the respective loans will be due and payable as lump sums
on April 1, 2005. Beginning with the date on which the advance loan is repaid in
full, the financial institution will become entitled to retain ten percent of
all subsequently collected accounts receivable, subject to a limitation of ten
percent of the term loan's then outstanding balance, with the aggregate
retentions to be returned to us upon our full repayment of the term loan. Either
loan may be prepaid at any time, without penalty, at our option. As with the
original revolving credit facility, both loans are secured and collateralized by
our accounts receivable, inventory, property and equipment and intellectual
property. Should any category of collateral fall below specified percentages and
margins, the financial institution will be entitled to retain additional
accounts receivable collections sufficient to restore such percentages and
margins. In consideration for extending the above loans, we will pay the
financial institution an annual fee of $100,000, beginning on May 1, 2003, and
upon each annual anniversary thereafter on which the term loan remains unpaid.
The initial annual fee was satisfied through the issuance of 1,000,000 shares of
our common stock.

As a result of the preceding conversion, we no longer have any established
credit facilities in place for future borrowings.

Our Outstanding Convertible Debentures

On September 13, 2003, we issued $3,350,000 in unsecured convertible
debentures from which we received $3,067,000 in net cash proceeds. These
debentures, which have an aggregate principal face amount of $3,175,000 at
December 31, 2003, (i) accrue interest at a fixed rate of 8.0% per annum, which
is payable at our option in either cash or authorized and unissued shares of our
common stock, (ii) are currently convertible at the option of the holders,
provided that we have sufficient authorized and unissued common shares, into
shares of our common stock at a stated rate of $0.13 per share, and (iii) become
due and payable on September 12, 2006. For every two dollars of original
debenture principal, the holder received a detachable stock purchase warrant
allowing for the purchase over the subsequent two-year period of a share of our
common stock at $0.2144 per share. Any related subsequent issuances of our
common stock is limited to any individual debenture holder beneficially owning
no more than 4.99% of our then outstanding common shares. A registration
statement filed with the United States Securities and Exchange Commission
("SEC") registering the resale of the preceding debentures and warrants became
effective on December 23, 2003.

An underlying agreement also requires that we obtain the unanimous approval
of the debenture holders prior to (i) selling any common shares or convertible
debentures from September 13, 2003, until April 21, 2004, (120 days after the
date on which the SEC declared the registration statement effective) or (ii)
selling any common shares or common share equivalents with anti-dilution
guarantees or declaring a reverse stock split during the period in which any of
these debentures remain outstanding. The agreement further stipulates that no
debenture may be prepaid without the consent of the holder and that each
debenture holder has a right of first refusal to participate in any new
financing transaction consented to through April 21, 2004.

On January 13, 2004, we entered into an Exchange Agreement with each holder
of our convertible debentures that were issued in September 2003. Under the
Exchange Agreement, each debenture holder agreed, subject to a 4.99% beneficial
ownership limitation, to exchange the principal amount of its debenture for
shares of our common stock, at the rate of $0.09 of debenture principal per
share of common stock. Accrued but unpaid interest on each debenture was paid at
the time of the exchange by the issuance of additional shares of common stock at
the rate of $0.09 per share. Accordingly, in January 2004 we issued 32,427,204
shares of common stock upon exchange of debenture principal in the amount of
$2,975,624 and the payment of accrued but unpaid interest. Additionally, we
issued 2,227,807 shares of common stock to adjust the conversion rate of
$175,000 of principal previously converted by a debenture holder to the $0.09
rate under the Exchange Agreement. As a result of the above, in January 2004 we
recognized approximately $1.5 million of additional debt discount expense
related to the beneficial conversion features of the exchange and amortized
approximately $2.7 million of previously existing debt discount related to the
convertibles debentures issued in September 2003.

From June 2001 through November 2001, we issued unsecured convertible
debentures that remain outstanding. These debentures, which have an aggregate
principal face amount of $4,020,000 at December 31, 2003, (i) accrue interest at
the prime rate plus two percent (6.0% at December 31, 2003), (ii) are currently
convertible at the option of the holders into our common stock at a stated rate
of $0.10 per share, and (iii) become due and payable on various dates between
July 1, 2006 and November 20, 2006. We have the right to force conversion of the
debentures if the market price of our common stock exceeds $3.00 per share for
20 consecutive trading days. For every two dollars of original debenture
principal, the holder received a detachable stock purchase warrant allowing for
the purchase of a share of our common stock at $2.50 per share All stock
purchase warrants related to the June 2001 to November 2001 issuances expired
unexercised as of December 31, 2003.

At the respective dates of issuance of all convertible debentures above, we
were required under accounting principles generally accepted in the United
States of America to ascertain for each of the above debenture issuances the
fair value of the detachable stock warrants and resulting beneficial conversion
feature. For each debenture issuance, the aggregate fair value of the detachable
warrants and beneficial conversion features was determined to be equal to the
aggregate principal face amount of the debt proceeds received, and as such,
these amounts were recorded as debt discounts by increasing additional paid-in
capital. These debt discounts are being amortized over

the respective lives of the underlying debentures. The aggregate unamortized
debt discount amounted to $4,850,699 and $2,883,918 at December 31, 2003, and
June 30, 2003, respectively. The remaining principal and discounted amounts of
our outstanding convertible debentures at December 31, 2003, of $7,195,000 and
$2,344,301, respectively, mature during our fiscal year ending June 30, 2007.

Our Off-Balance Sheet Liabilities

Our off-balance sheet liabilities principally consist of lease payment
obligations incurred under operating leases, which are required to be excluded
from our consolidated balance sheet by generally accepted accounting principles
in the United States of America. Our most significant operating leases pertain
to our corporate facilities. All of our other operating leases pertain to
various equipment and technology. Certain of these operating leases are
noncancellable and contain rent escalation clauses.

The future aggregate minimum lease payments under operating lease
agreements in existence at December 31, 2003, were as follows:

FISCAL YEARS ENDING JUNE 30,
--------------------------------------------------------------
2004 (balance thereof) ......................... $52,066
2005 ........................................... 22,484
-------
Total minimum operating lease payments ......... $74,550
=======

Our Consolidated Cash Flows - Second Quarter and First Half of Fiscal 2004
Compared to Second Quarter and First Half of Fiscal 2003

Our operating activities utilized $3,543,004 in cash and cash equivalents
during our fiscal 2004 first half, an increase of $2,984,101, or 533.9%, from
the $558,903 in cash and cash equivalents utilized during our fiscal 2003 first
half. On a comparative fiscal period-to-period basis, our substantially higher
utilization primarily reflects the $1,020,577 increase in our net loss as well
as the utilization of cash to decrease accounts payable by $1,379,244 during the
first half of fiscal 2004 compared to a positive cash flow from the increase in
accounts payable of $1,334,595 during the first half of fiscal 2003. Our higher
utilization also reflects the negative cash flow effects of increased accounts
receivable and prepaid expenses and decreased deferred income. Partially
offsetting these negative cash flow effects were the positive cash flow effects
of increased accrued liabilities and higher overall add-backs for various
non-cash charges related to amortization, depreciation, inducement,
compensation, and other expenses.

Our investing activities utilized $1,685 in cash and cash equivalents
during our fiscal 2004 first half, a decrease of $14,722, or 89.7%, from the
$16,407 in cash and cash equivalents utilized during our fiscal 2003 first half.
Our decreased utilization is attributable to lower capital expenditures.

Our financing activities provided $2,538,589 in cash and cash equivalents
during our fiscal 2004 first half, an increase of $2,455,419, or 2952.2%, from
the $83,170 in cash and cash equivalents provided during our fiscal 2003 first
half. Our fiscal 2004 increase reflects the receipt of the $3,067,000 net cash
proceeds received from our issuance of convertible debentures, as previously
discussed, being slightly offset by principal payments on our outstanding
capital lease obligations and notes payable. In contrast, our fiscal 2003 first
half reflected principal payments on outstanding convertible debentures and
other debt, being slightly offset by borrowings under our then existing
revolving line of credit.

As a result of the foregoing, our unrestricted cash and cash equivalents
decreased by $1,006,100 to $364,026 at December 31, 2003, from $1,370,126 at
June 30, 2003. Our working capital increased by $1,311,073 to $363,962 at
December 31, 2003, from a deficiency of $947,111 at June 30, 2003.

Our Consolidated Cash Flows - Fiscal 2003 Compared to Fiscal 2002

Our operating activities utilized $2,460,156 in cash and cash equivalents
during fiscal 2003, a decrease of $6,334,827, or 72.0%, from the $8,794,983 in
cash and cash equivalents consumed during fiscal 2002. On a comparative fiscal
year-to-year basis, our lower utilization substantially reflects the $6,570,334
decrease in our net loss. To a significantly lesser extent, our lower
utilization primarily reflects the positive cash flow effects of a sell-down in
inventories, the utilization of prepaid expenses, a reduction in deferred
financing costs incurred, an increase in other non-current assets, an
accumulation of past due accounts payable, and the adding back of increased
non-cash charges associated with provisions made for bad debts and inventory
obsolescence, the retroactive issuance of additional common shares to an
unrelated principal shareholder and former holder of a convertible note in order
to induce him to participate in a subsequent private placement equity offering,
the amortization of deferred financing costs and a loss incurred on the
retirement of equipment. Partially offsetting the preceding were the negative
cash flow effects of an accumulation in gross accounts receivable, the servicing
of accrued liabilities and commissions payable, and the adding back of decreased
non-cash charges associated with issuances of common stock, options and warrants
in compensation for non-employee services, the depreciation and amortization of
property, equipment, patents and licenses, write-offs of unamortized license
rights and capitalized software development costs, the issuance of common
shares, warrants and options issued a related party in order to induce him to
convert a line of credit into a convertible note, the amortization of
convertible debt discount, the beneficial conversion feature of convertible debt
issued to a related party, bonus compensation directly applied to the principal
balance of a note receivable from an officer, and a gain on sale of equipment.

Our investing activities utilized $16,407 in cash and cash equivalents
during fiscal 2003, a decrease of $279,305, or 94.5%, from the $295,712 in cash
and cash equivalents utilized during fiscal 2002. Our decreased utilization
primarily is attributable to lower capital expenditures. To a lesser extent, the
favorable comparison is attributable to the comparative fiscal 2002 year
reflecting cash outlays for software development costs, which were slightly
offset by cash inflows from repayments made by an officer against the principal
of an outstanding note receivable.

Our financing activities provided $3,256,835 in cash and cash equivalents
during fiscal 2003, a decrease of $4,773,735, or 59.4%, from the $8,030,570 in
cash and cash equivalents provided by financing activities during fiscal 2002.
Fiscal 2003 reflects cash inflows from our issuances of common stock, and, to a
significantly lesser extent, the liquidation of a restricted certificate of
deposit previously held by a bank as collateral for an irrevocable standby
letter of credit facility and our sale of a now expired option to an unrelated
party that gave them the right to subsequently purchase a non-critical and
currently unutilized technology patent to which we claim ownership. Partially
offsetting the preceding were cash outflows associated with our principal
repayments of convertible notes, borrowings under a previously existing
revolving credit facility, capital lease obligations, and notes payable. In
contrast, fiscal 2002 reflects substantially larger aggregate cash inflows from
our issuances of convertible notes and common shares and borrowings made under
our then existing revolving credit facility, being only slightly offset by cash
outflows from the issuance of the aforementioned restricted certificate of
deposit and principal repayments of convertible notes, capital lease obligations
and notes payable.

As a result of the foregoing, our unrestricted cash and cash equivalents
increased by $780,272 to $1,370,126 at June 30, 2003 as compared with $589,854
at June 30, 2002.

Our Planned Capital Expenditures

Our only significant planned capital expenditure for fiscal 2004 is the
purchase or lease of an additional automated test strip packaging machine with
an estimated cost of $350,000. However, our ultimate need for this machine is
dependent upon us meeting our fiscal 2004 sales target, which correspondingly is
dependent upon us procuring the significant additional equity or debt financing
we currently seek, as previously discussed. To a

significantly lesser extent, we currently anticipate the need to perform certain
telecommunications and computer technology upgrades during fiscal 2004 with an
estimated aggregate cost of $100,000.

OUR OTHER MATTERS

Our Seasonal and Inflationary Influences

Although we remain in the relatively early stages of the national
introduction and roll-out of our consumer monitors to retailers, we have
historically experienced certain seasonal sales influences consistent with our
initial expectations. In particular, we had expected, absent materially adverse
economic or counter-acting events, that our fiscal second quarter ending
December 31 would slightly benefit from increased orders by retailers for the
holiday shopping season. This trend was not reflected in the current fiscal
quarter and we remain uncertain as to whether this seasonality will continue in
the future.

To date, we have not been materially impacted by inflationary influences.

Our Quantitative and Qualitative Disclosures About Market Risk

We currently are exposed to financial market risks from changes in
short-term interest rates as certain of our outstanding convertible debentures,
as discussed above, have an interest rate that fluctuates with the prime rate.
Based on the aggregate outstanding balance of these convertible debentures at
December 31, 2003, and subsequent conversions of these debentures in January
2004, we believe that the prime rate would have to significantly increase, in
excess of a few hundred basis points, for the resulting adverse impact on our
interest expense to be material to our expected results of operations for fiscal
2004, and possibly beyond. However, should we be successful in procuring the
significant additional financing we currently seek and if such financing were to
be substantially in the form of variable rate debt, then our exposure to these
market risks would increase, possibly significantly.

We currently are not materially exposed to currency market risks. However,
should we in the future enter into significant contracts subjecting us to
foreign currency adjustments or denominated in non-U.S. dollar currencies, then
we would become exposed to these market risks.

We have not used, and currently do not contemplate using, any derivative
financial instruments.

Our Critical Accounting Policies

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make certain estimates and assumptions that affect the reported
amounts and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and disclosure of contingent assets
and liabilities. Our actual results have differed, and will likely continue to
differ, to some extent from our initial estimates and assumptions. We currently
believe that the following significant accounting policies entail making
particularly difficult, subjective or complex judgments of inherently uncertain
matters that, given any reasonably possible variance therein, would make such
policies particularly critical to a materially accurate portrayal of our
historical or reasonably foreseeable financial condition or results of
operations:

o Revenue Recognition. We recognize a sale, including related shipping
and handling income, and the cost of the sale, upon product shipment
provided that all material risks and rewards of ownership are
concurrently transferred from us to our customer, collection of the
related receivable by us is reasonably assured, and we are able to
reliably estimate an appropriate allowance for sales returns based
on our relevant historical product experience and future
expectations. However, our estimates of an appropriate allowance for
sales returns is inherently subjective and actual results could vary
from our estimated outcome, thereby requiring us to make future
adjustments to our net sales and results of operations.

o Allowance for Doubtful Accounts. We record an allowance for doubtful
accounts based on specifically identified amounts that we believe to
be uncollectible and those accounts that are past due beyond a
certain date. However, our estimates of an appropriate allowance for
doubtful accounts are inherently subjective and actual results could
vary from our estimated outcome, thereby requiring us to make future
adjustments to our accounts receivable and results of operations.

o Inventories. Our inventories, which primarily consist of component
parts, assembled devices and related supplies, are stated at the
lower of first-in, first-out cost or market. However, our estimates
of market and an appropriate allowance for inventory obsolescence
are inherently subjective and actual results could vary from our
estimated outcome, thereby requiring us to make future adjustments
to our inventories and results of operations.

o Impairment of Long-Lived Assets. We, on at least a quarterly basis,
evaluate each of our long-lived assets for impairment by comparing
our estimates of related future cash flows, on an undiscounted
basis, to its net book value. If impairment is indicated, we reduce
the net book value to an amount equal to the estimated future cash
flows, on an appropriately discounted basis. However, our estimates
of an asset's related future cash flows are inherently subjective
and actual results could vary from our estimated outcome, thereby
requiring us to make future adjustments to our assets and results of
operations.

Our Legal Contingencies

We as a company, including our subsidiaries, are periodically involved in
incidental litigation and administrative proceedings primarily arising in the
normal course of our business. In our opinion, our gross liability, if any, and
without any consideration given to the availability of indemnification or
insurance coverage, under any pending or existing incidental litigation or
administrative proceedings would not materially affect our financial position,
results of operations or cash flows.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers are set forth below:

NAME AGE POSITION(S) HELD
- ---- --- ----------------
Christopher Maus 50 Chairman of the Board, President and Chief
Executive Officer

Robert Boyle 57 Director, Secretary, Treasurer, and Audit
Committee Chairman

Michael Crane 48 Director, Compensation Committee Chairman,
and Member of Audit Committee

William Gridley 75 Director and Member of Audit and
Compensation Committees

Neil Luckianow 46 Director and Member of Compensation
Committee

Edward Siemens 50 Chief Operating Officer

Brett Sweezy 38 Chief Financial Officer

Jackson Connolly 55 Vice President - Production and Product
Development

CHRISTOPHER MAUS has served as the Company's Chairman of the Board,
President and Chief Executive Officer since February 1994, except for a brief
period from September 1998 to March 1999 when he served only as Chairman of the
Board. From June 1996 until its acquisition by the Company in September 1999,
Mr. Maus served on the Board of Directors of Secured Interactive Technologies,
Inc., a privately held company co-founded by Mr. Maus that developed the
Company's Privalink software technology. From June 1992 to February 1994, Mr.
Maus served as President of Lifestream Diagnostics, Inc., the privately held
legal predecessor to the Company. From 1989 to June 1992, Mr. Maus was a General
Partner in Lifestream Development Partners, the privately held legal predecessor
to Lifestream Diagnostics, Inc. Mr. Maus attended North Texas State University.

ROBERT BOYLE has served as a Director since June 1999, at which time he was
also appointed as the Company's Secretary and Treasurer. Since 1995, Mr. Boyle
has served as President of Robert Boyle, Certified Public Accountant, a local
public accounting firm located in Idaho. From 1980 to 1995, Mr. Boyle served as
President of Boyle and Stoll, Certified Public Accountants, P.A., a local public
accounting firm, located in California. Prior thereto, Mr. Boyle served with the
consulting, tax and audit staffs of a predecessor to KPMG, an international
accounting and consulting firm. Mr. Boyle has a Bachelor of Arts degree in
Accounting from San Diego State University and is licensed as a Certified Public
Accountant in the State of Idaho.

MICHAEL CRANE has served as a Director since April 1998. Since September
1993, Mr. Crane has served as Chairman of the Board of Directors and Chief
Executive Officer of privately held Dulles Greenway, Trip II (Toll Investors
Partnership II, L.P.). Since October 1996, Mr. Crane has also served as
President of Alchemy International, a privately held developer of non-evasive,
passive chemistry treatments for various forms of cancer. Mr. Crane has also
served on the Board of Directors of Discflo Corporation, a privately held
manufacturer of medical and industrial pumps, since 1988, and as Chairman of the
Board of Directors for Lochnau, Inc., a privately held investment management
corporation, since 1985. Mr. Crane has a Bachelor of Science degree in Banking
from the University of Richmond.

WILLIAM GRIDLEY has served as a Director since April 1997. Since November
1995, Mr. Gridley, who is now retired, served as the Chairman of the Board of
Directors of Hymedix Inc., a polymer chemicals company, for which he

previously served as its President and Chief Executive Officer from August 1993
to November 1995. Mr. Gridley has a Bachelor of Arts degree in English
Literature from Yale University.

NEIL LUCKIANOW has served as a Director since October 2003. Since May 2002,
Mr. Luckianow has served as Principal of NCL & Associates, LLC, a privately held
consulting firm specializing in providing commercial solutions to health care
product companies, which the Company retained as a commissioned sales agent
effective September 1, 2003. From October 1997 to March 2002, Mr. Luckianow
served as a Sales Director for Amira Medical, Inc., a privately held
manufacturer and marketer of blood glucose measuring devices that was acquired
in November 2001 by publicly held Roche Diagnostics. From 1988 to January 1997,
Mr. Luckianow served in a number of progressive positions, including as Director
of Sales, for LifeScan, Inc., a manufacturer and marketer of blood glucose
measuring devices and a subsidiary of publicly held Johnson & Johnson Company.
Mr. Luckianow has a Bachelor of Arts degree in History from Purdue University.

EDWARD SIEMENS has served as Chief Operating Officer since June 2002 and
prior thereto, since joining us in August 2000, as Chief Operating Officer -
Devices. From April 1999 to June 2000, Mr. Siemens served as President of Omron
Healthcare, Inc. ("Omron"), a publicly held manufacturer and marketer of
personal-use medical diagnostic products. Mr. Siemens previously served as
Omron's Senior Vice President of Sales and Marketing from April 1994 to April
1999 and as Omron's Vice President of Sales and Marketing from April 1992 to
April 1994. Prior thereto, Mr. Siemens was employed by McKesson Corporation, a
publicly held wholesale distributor of medical products and supplies, where he
served as Vice President of Sales from 1987 to 1992 and as Product Manager from
1985 to 1987. Mr. Siemens has a Masters degree in Business Administration from
Pepperdine University and a Bachelor of Fine Arts degree from the California
College of Arts and Crafts.

BRETT SWEEZY has served as our Chief Financial Officer since June 1999.
From June 1996 until its acquisition by us in September 1999, Mr. Sweezy served
as Chief Financial Officer and Treasurer of privately held Secured Interactive
Technologies, Inc. From March 1994 to August 2000, Mr. Sweezy also served as
President of Brett R. Sweezy, Certified Public Accountant, P.A., a local public
accounting firm, located in Idaho. Mr. Sweezy has a Bachelor of Science degree
in Economics and Business from the New England College and is licensed as a
Certified Public Accountant in the State of Idaho. Due to other commitments, in
November 2003, Mr. Sweezy reduced his time devotion to our business to
part-time. However, Mr. Sweezy has informed us that he currently intends to
continue his part-time employment by us.

JACKSON CONNOLLY has served as Vice President - Production and Product
Development since November 2000. Mr. Connelly previously served as our
Vice-President - Operations from January 1998 to November 2000 and as Director
of Operations from January 1997 to January 1998. Prior to joining us, Mr.
Connolly served as a Senior Sales Engineer at Advanced Input Devices, a
subsidiary of publicly held Esterline Technologies, from January 1994 to April
1997. Mr. Connolly has a combined Bachelor of Arts and Science degree in
Industrial Technology and Arts from California State University at Fresno.

There are no family relationships among any of our directors and executive
officers.

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth certain information regarding compensation
earned by our Chief Executive Officer and each of our four other most highly
compensated executive officers for the fiscal years ended June 30, 2003, 2002
and 2001. The persons named in the table are hereinafter referred to as the
"Named Executive Officers."

SUMMARY COMPENSATION TABLE

- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------ -------------
FISCAL RESTRICTED SECURITIES LTIP ALL OTHER
NAME AND YEAR SALARY BONUS OTHER STOCK AWARDS UNDERLYING PAYOUTS COMPENSATION
PRINCIPAL POSITION(S) (1) ($) ($) ($) ($) OPTIONS (#) ($) ($)
- ---------------------------- -------- ---------- -------- --------- ------------ ------------- ------------- -----------------

Christopher Maus 2003 166,730 3,389 7,800 -- -- -- --
Chairman of the Board, 2002 180,000 60,000 7,800 -- -- -- --
President and Chief 2001 150,000 35,000 12,000 -- 872,000 -- --
Executive Officer (2)(3)

Edward Siemens 2003 138,944 -- -- -- 300,000 -- --
Chief Operating Officer (3) 2002 150,000 -- -- -- 35,000 -- --
2001 102,731 -- 15,000 -- 360,000 -- --

Brett Sweezy 2003 119,668 -- -- -- 400,000 -- --
Chief Financial Officer (3) 2002 139,731 -- -- -- 30,000 -- --
2001 90,675 -- -- -- 178,970 -- --

Paul Beatty 2003 105,752 -- -- -- 250,000 -- --
Former Vice President - 2002 145,000 -- -- -- 30,000 -- --
Sales & Marketing 2001 84,997 -- 15,000 -- 300,000 -- --

Brian Packard 2003 48,167 -- -- -- 205,000 -- --
Former Vice President 2002 138,000 -- -- -- 20,000 -- --
Marketing 2001 78,333 -- 15,000 -- 240,000 -- --

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

(1) References to a fiscal year refer to the calendar year in which such fiscal
year ends.

(2) The Other Annual Compensation amounts for Mr. Maus represent (a) for fiscal
year 2003 and 2002, a vehicle allowance and (b) for fiscal year 2001, the
then aggregate fair market value of 12,000 common shares awarded to Mr.
Maus for his Board service during the six months ended December 31, 2000.

(3) On April 18, 2003, as we had become critically short of operating cash, we
immediately implemented 33% reductions in all senior management salaries.
We subsequently reinstated, effective June 1, 2003, one-half of these
salary reductions. The current 16.5% reductions in all senior management
salaries are expected to continue until we obtain additional financing.

EMPLOYMENT AGREEMENTS AND COMPENSATION PACKAGES

On May 1, 2001, the Board, acting upon the recommendation of its
Compensation Committee, (a) executed an employment agreement with Mr. Maus that
formally established his annual salary at $150,000 for the fiscal year ending
June 30, 2001, (b) increased Mr. Maus' annual salary to $180,000 for the fiscal
year ending June 30, 2002, and (c) granted him 800,000 stock options with an
exercise price of $1.50 per common share that vest, and become exercisable, as
follows: 100,000 on December 31, 2001, 100,000 on December 31, 2002, 100,000 on
December 31,

2003, 100,000 on December 31, 2004, 100,000 upon our achieving a $100 million
market capitalization, 100,000 upon our achieving a $200 million market
capitalization, and 200,000 upon our achieving a $400 million market
capitalization, with any unexercised options to expire on May 1, 2011. It
currently is the expectation of the Board's Compensation Committee that Mr.
Maus' annual salary will not exceed $180,000 for the fiscal year ending June 30,
2004. In connection with his Board service, Mr. Maus received a grant, effective
January 1, 2001, for 72,000 stock options with an exercise price of $1.50 per
common share that vest, and become exercisable, on a ratable monthly basis over
with his subsequent twenty-four months of Board service, with any unexercised
options to expire on January 1, 2011. In January 2004, the Board approved the
issuance of 239,167 shares of restricted common stock to Mr. Maus as payment for
$28,700 in compensation expense.

Mr. Siemens' employment began on August 21, 2000 pursuant to a
Board-approved compensation package providing him with an initial annual salary
of $125,000, an initial grant of 300,000 stock options with an exercise price of
$3.00 per common share and a $15,000 relocation allowance. The stock options,
which were formally granted on October 4, 2000, vest and become exercisable, as
follows: 50,000 immediately, 12,500 on October 4, 2001, 40,000 on December 31,
2001, 12,500 on October 4, 2002, 40,000 on December 31, 2002, 12,500 on October
4, 2003, 40,000 on December 31, 2003, 12,500 on October 4, 2004, 40,000 on
December 31, 2004 and 40,000 on December 31, 2005, with any unexercised options
to expire on October 4, 2010. On May 1, 2001, the Board, acting upon the
recommendation of its Compensation Committee, (a) increased Mr. Siemens' annual
salary to $150,000 for the fiscal year ending June 30, 2002 and (b) granted Mr.
Siemens 60,000 additional stock options with an exercise price of $1.50 per
common share that vest, and become exercisable, as follows: 15,000 immediately,
15,000 on December 31, 2001, 15,000 on December 31, 2002 and 15,000 on
December 31, 2003, with any unexercised options to expire on May 1, 2011. On
December 24, 2001, the Board, acting upon the recommendation of its Compensation
Committee, granted Mr. Siemens 35,000 additional stock options with an exercise
price of $1.50 per common share that vest, and become exercisable, as follows:
7,000 immediately, 7,000 on December 24, 2002, 7,000 on December 24, 2003, 7,000
on December 24, 2004 and 7,000 on December 31, 2005, with any unexercised
options to expire on December 24, 2011. On August 5, 2002, the Board, acting
upon the recommendation of its Compensation Committee, granted Mr. Siemens
300,000 additional stock options with an exercise price of $0.75 per common
share that vest, and become exercisable, as follows: 60,000 immediately, 60,000
on August 5, 2003, 60,000 on August 5, 2004, 60,000 on August 5, 2005 and 60,000
on August 5, 2006, with any unexercised options to expire on August 5, 2012. It
currently is the expectation of the Board's Compensation Committee that Mr.
Siemen's annual salary will not exceed $150,000 for the fiscal year ending
June 30, 2004. In January 2004, the Board approved the issuance of 196,500
shares of restricted common stock to Mr. Siemens as payment for $23,581 in
compensation expense.

On October 4, 2000, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Sweezy 162,700 additional stock options with
an exercise price of $3.00 per common share that vest, and become exercisable,
as follows: 25,040 immediately, 8,165 on October 4, 2001, 21,000 on December 31,
2001, 8,165 on October 4, 2002, 21,000 on December 31, 2002, 8,165 on October 4,
2003, 21,000 on December 31, 2003, 8,165 on October 4, 2004, 21,000 on
December 31, 2004 and 21,000 on December 31, 2005, with any unexercised options
to expire on October 4, 2010. On May 1, 2001, the Board, acting upon the
recommendation of its Compensation Committee, (a) established Mr. Sweezy's
annual salary at $139,731 for the fiscal year ending June 30, 2002 and (b)
granted Mr. Sweezy 15,000 additional stock options with an exercise price of
$1.50 per common share that vest, and become exercisable, as follows: 3,750
immediately, 3,750 on December 31, 2001, 3,750 on December 31, 2002 and 3,750 on
December 31, 2003, with any unexercised options to expire on May 1, 2011. On
June 22, 2001, the Board, acting upon the recommendation of its Compensation
Committee, granted Mr. Sweezy 1,270 additional stock options with an exercise
price of $1.50 per common share that vest, and become exercisable, as follows:
254 immediately, 254 on June 1, 2002, 254 on June 1, 2003, 254 on June 1, 2004,
and 254 on June 1, 2005, with any unexercised options to expire on June 22,
2011. On December 24, 2001, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Sweezy 30,000 additional stock options with
an exercise price of $1.50 per common share that vest, and become exercisable,
as follows: 6,000 immediately, 6,000 on December 24, 2002, 6,000 on December 24,
2003, 6,000 on December 24, 2004 and 6,000 on December 31,

2005, with any unexercised options to expire on December 24, 2011. On August 5,
2002, the Board, acting upon the recommendation of its Compensation Committee,
granted Mr. Sweezy 400,000 additional stock options with an exercise price of
$0.75 per common share that vest, and become exercisable, as follows: 80,000
immediately, 80,000 on August 5, 2003, 80,000 on August 5, 2004, 80,000 on
August 5, 2005 and 80,000 on August 5, 2006, with any unexercised options to
expire on August 5, 2012. It currently is the expectation of the Board's
Compensation Committee that Mr. Sweezy's annual salary will not exceed $139,731
for the fiscal year ending June 30, 2004. In January 2004, the Board approved
the issuance of 150,000 shares of restricted common stock to Mr. Sweezy as
payment for $18,000 in compensation expense.

Mr. Beatty's employment began on October 1, 2000 pursuant to a
Board-approved compensation package providing him with an initial annual salary
of $120,000, an initial grant of 250,000 stock options with an exercise price of
$3.00 per common share and a $15,000 relocation allowance. The stock options,
which were formally granted on October 4, 2000, vest and become exercisable, as
follows: 37,500 immediately, 9,375 on October 4, 2001, 35,000 on December 31,
2001, 9,375 on October 4, 2002, 35,000 on December 31, 2002, 9,375 on October 4,
2003, 35,000 on December 31, 2003, 9,375 on October 4, 2004, 35,000 on December
31, 2004, and 35,000 on December 31, 2005, with any unexercised options to
expire on October 4, 2010. On May 1, 2001, the Board, acting upon the
recommendation of its Compensation Committee, (a) increased Mr. Beatty's annual
salary to $145,000 for the fiscal year ending June 30, 2002 and (b) granted Mr.
Beatty 50,000 additional stock options with an exercise price of $1.50 per
common share that vest, and become exercisable, as follows: 12,500 immediately,
12,500 on December 31, 2001, 12,500 on December 31, 2002 and 12,500 on December
31, 2003, with any unexercised options to expire on May 1, 2011. On December 24,
2001, the Board, acting upon the recommendation of its Compensation Committee,
granted Mr. Beatty 30,000 additional stock options with an exercise price of
$1.50 per common share that vest, and become exercisable, as follows: 6,000
immediately, 6,000 on December 24, 2002, 6,000 on December 24, 2003, 6,000 on
December 24, 2004 and 6,000 on December 31, 2005, with any unexercised options
to expire on December 24, 2011. On August 5, 2002, the Board, acting upon the
recommendation of its Compensation Committee, granted Mr. Beatty 250,000
additional stock options with an exercise price of $0.75 per common share that
vest, and become exercisable, as follows: 50,000 immediately, 50,000 on August
5, 2003, 50,000 on August 5, 2004, 50,000 on August 5, 2005 and 50,000 on August
5, 2006, with any unexercised options to expire on August 5, 2012. On March 7,
2003, Mr. Beatty resigned, at which time, the Board, acting upon the
recommendation of its Compensation Committee, granted Mr. Beatty twelve months
during which he may exercise his then vested stock options. All unvested options
held by Mr. Beatty as of March 7, 2003 were immediately cancelled.

Mr. Packard's employment began on October 1, 2000 pursuant to a
Board-approved compensation package providing him with an initial annual salary
of $110,000, an initial grant of 200,000 stock options with an exercise price of
$3.00 per common share and a $15,000 home office allowance. The stock options,
which were formally granted on October 4, 2000, vest and become exercisable, as
follows: 25,000 immediately, 6,250 on October 4, 2001, 30,000 on December 31,
2001, 6,250 on October 4, 2002, 30,000 on December 31, 2002, 6,250 on October 4,
2003, 30,000 on December 31, 2003, 6,250 on October 4, 2004, 30,000 on December
31, 2004, and 30,000 on December 31, 2005, with any unexercised options to
expire on October 4, 2010. On May 1, 2001, the Board, acting upon the
recommendation of its Compensation Committee, (a) increased Mr. Packard's annual
salary to $138,000 for the fiscal year ending June 30, 2002 and (b) granted Mr.
Packard 40,000 additional stock options with an exercise price of $1.50 per
common share that vest, and become exercisable, as follows: 10,000 immediately,
10,000 on December 31, 2001, 10,000 on December 31, 2002 and 10,000 on
December 31, 2003, with any unexercised options to expire on May 1, 2011. On
December 24, 2001, the Board, acting upon the recommendation of its Compensation
Committee, granted Mr. Packard 20,000 additional stock options with an exercise
price of $1.50 per common share that vest, and become exercisable, as follows:
4,000 immediately, 4,000 on December 24, 2002, 4,000 on December 24, 2003, 4,000
on December 24, 2004 and 4,000 on December 31, 2005, with any unexercised
options to expire on December 24, 2011. On August 5, 2002, the Board, acting
upon the recommendation of its Compensation Committee, granted Mr. Packard
200,000 additional stock options with an exercise price of $0.75 per common
share that vest, and become exercisable, as follows: 40,000 immediately,

40,000 on August 5, 2003, 40,000 on August 5, 2004, 40,000 on August 5, 2005 and
40,000 on August 5, 2006, with any unexercised options to expire on August 5,
2012. On September 30, 2002, Mr. Packard's employment with the Company was
terminated by mutual agreement, at which time, the Board, acting upon the
recommendation of its Compensation Committee, granted Mr. Packard (a) severance
pay equal to four weeks of salary and (b) twelve months during which he may
exercise his then vested stock options. All unvested options held by Mr. Packard
as of September 30, 2002 were immediately cancelled. Subsequently, on November
1, 2002, the Board, acting upon the recommendation of its Compensation
Committee, granted Mr. Packard 5,000 additional stock options with an exercise
price of $.75 per common share in consideration for his serving as Chairman of
the Company's Medical Advisory Board from October 21, 2002 to December 1, 2002.
These options vested immediately, with any unexercised options to expire on
November 1, 2007.

EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS AND RELATED STOCK OPTION
GRANTS

1993 Incentive Stock Option Plan. We have reserved 600,000 shares of our
common stock for issuance upon the exercise of options granted or available for
grant under our 1993 Incentive Stock Option Plan ("the 1993 Plan"). The 1993
Plan is administered by either the Board or its Compensation Committee, which
determines, without limitation, the selection of the persons who will be granted
options under the 1993 Plan, the number of optioned shares and the option
exercise price per share. Options granted under the 1993 Plan fall within the
meaning of, and conform to, Section 422 of the Internal Revenue Code of 1986, as
amended. Under the terms of the 1993 Plan, all of our officers, employees,
consultants, and advisors are eligible for incentive stock options. The Board,
or its Compensation Committee, determines at its discretion which persons
receive incentive stock options, the applicable vesting provisions, and the
exercise terms thereof. The terms and conditions of each option grant may differ
and will be set forth in the optionee's individual incentive stock option
agreement. As of March 4, 2004, we had not granted any options under the 1993
Plan.

1998 Employee Stock Option Plan. We have reserved 2,000,000 shares of our
common stock for issuance pursuant to stock options or stock appreciation rights
granted under our 1998 Employee Stock Option Plan ("the 1998 Plan"). The 1998
Plan is administered by either the Board or its Compensation Committee, which
determines, without limitation, the selection of the persons who will be granted
options under the 1998 Plan, the type of options to be granted, the number of
optioned shares and the option exercise price per share. The terms and
conditions of each option grant may differ and will be set forth in the
optionee's individual stock option agreement. Our officers, directors, key
employees and consultants and those of our subsidiaries are eligible to receive
non-qualified stock options under the 1998 Plan. Only our officers, directors
and employees and those of our subsidiaries are eligible to receive incentive
stock options. As of March 4, 2004, we had 901,074 incentive stock options
outstanding under the 1998 Plan, with 745,666 of those options being vested and
exercisable.

2002 Employee Stock Option Plan. We have reserved 2,000,000 shares of our
common stock for issuance pursuant to stock options or stock appreciation rights
granted under its 2002 Stock Option Plan ("the 2002 Plan"). The 2002 Plan is
administered by either the Board, or its Compensation Committee, which
determines, without limitation, the selection of the persons who will be granted
options under the 2002 Plan, the type of options to be granted, the number of
optioned shares and the option exercise price per share. The terms and
conditions of each option grant may differ and will be set forth in the
optionee's individual stock option agreement. Our officers, directors, key
employees and consultants and those of our subsidiaries are eligible to receive
non-qualified stock options under the 2002 Plan. Only our officers, directors
and employees and those of our subsidiaries are eligible to receive incentive
stock options. As of March 4, 2004, we had not issued any options under the 2002
Plan.

EQUITY COMPENSATION NOT APPROVED BY SECURITY HOLDERS

We have periodically granted outside of its established plans non-qualified
stock options to purchase restricted shares of our common stock to key
individuals it desired to recruit, retain or motivate. All such grants were
approved by our Board, upon the recommendation of its Compensation Committee.
Each option was granted

with an exercise price equal to, or in excess of, the market price of our common
stock as of the date of grant. Each option vests 20% immediately upon grant, and
provided that the grantee remains in our employ, vests an additional 20% on each
of the four successive annual grant date anniversaries. Upon any termination of
employment, the grantee has between six and twelve months, as specified, to
exercise any vested options. Any unvested options held by the grantee at the
employment termination are immediately cancelled. As of June 30, 2003, we had
3,098,597 such options outstanding, of which 1,179,847 options were fully vested
and exercisable, as follows: Christopher Maus - 872,000 shares at $1.50 per
share; Edward Siemens - 495,000 shares at $0.75 - $3.00 per share; Brett Sweezy
- - 560,000 shares at $0.75 - $3.00 per share; Jackson Connolly - 157,903 shares
at $0.75 - $1.50 per share; and other employees - 1,013,694 shares at $0.75 to
$3.00 per share.

EQUITY COMPENSATION INFORMATION
AS OF JUNE 30, 2003

NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
- ------------------------------------ --------------------------- -- -------------------------- -- -----------------------------

EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS:

o 1993 Incentive Stock
Option Plan -- -- 600,000

o 1998 Employee Stock
Option Plan 875,442 $2.02 1,124,558

o 2002 Employee Stock
Option Plan -- -- 2,000,000

EQUITY COMPENSATION NOT APPROVED
BY SECURITY HOLDERS:

o Restricted Stock Grant
Agreements 3,098,597 $1.30 --
--------- ----- ---------
TOTAL 3,974,039 $1.46 3,724,558
========= ===== =========

The following table contains information concerning stock options granted
to the Named Executive Officers during the most recently completed fiscal year
ended June 30, 2003. All grants were made outside of our stock option plans.

OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS
OPTION/SARS GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME GRANTED (#) IN FISCAL YEAR (%) PRICE ($/SHARE) EXPIRATION DATE
- ------------------------ -------------------- -------------------- ---------------- ---------------

Christopher Maus -- -- -- --
Edward Siemens (1) 300,000 18.40% $0.75 8/05/12
Brett Sweezy (2) 400,000 24.54% $0.75 8/05/12
Paul Beatty (3) 250,000 15.34% $0.75 8/05/12
Brian Packard (4) 205,000 12.58% $0.75 8/05/12

- ----------

(1) On August 5, 2002, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Siemens 300,000 additional stock
options with an exercise price of $0.75 per common share that vest, and
become exercisable, as follows: 60,000 immediately, 60,000 on August 5,
2003, 60,000 on August 5, 2004, 60,000 on August 5, 2005 and 60,000 on
August 5, 2006, with any unexercised options to expire on August 5, 2012.

(2) On August 5, 2002, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Sweezy 400,000 additional stock options
with an exercise price of $0.75 per common share that vest, and become
exercisable, as follows: 80,000 immediately, 80,000 on August 5, 2003,
80,000 on August 5, 2004, 80,000 on August 5, 2005 and 80,000 on August 5,
2006, with any unexercised options to expire on August 5, 2012.

(3) On August 5, 2002, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Beatty 250,000 additional stock options
with an exercise price of $0.75 per common share that vest, and become
exercisable, as follows: 50,000 immediately, 50,000 on August 5, 2003,
50,000 on August 5, 2004, 50,000 on August 5, 2005 and 50,000 on August 5,
2006, with any unexercised options to expire on August 5, 2012. On March 7,
2003, Mr. Beatty resigned, at which time, the Board, acting upon the
recommendation of its Compensation Committee, granted Mr. Beatty twelve
months during which he may exercise his then vested stock options. All
unvested options held by Mr. Beatty as of March 7, 2003 were immediately
cancelled.

(4) On August 5, 2002, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Packard 200,000 additional stock
options with an exercise price of $0.75 per common share that vest, and
become exercisable, as follows: 40,000 immediately, 40,000 on August 5,
2003, 40,000 on August 5, 2004, 40,000 on August 5, 2005 and 40,000 on
August 5, 2006, with any unexercised options to expire on August 5, 2012.
On September 30, 2002, Mr. Packard's employment was terminated by mutual
agreement, at which time, the Board, acting upon the recommendation of its
Compensation Committee, granted Mr. Packard (a) severance pay equal to four
weeks of salary and (b) twelve months during which he may exercise his then
vested stock options. All unvested options held by Mr. Packard as of
September 30, 2002 were immediately cancelled. Subsequently, on November 1,
2002, the Board, acting upon the recommendation of its Compensation
Committee, granted Mr. Packard 5,000 additional stock options with an
exercise price of $0.75 per common share in consideration for his serving
as Chairman of our Medical Advisory Board from October 21, 2002 to
December 1, 2002.

OPTION EXERCISES AND HOLDINGS

The following table provides information with respect to the Named
Executive Officers regarding exercises of options/SARs during the most recently
completed fiscal year ended June 30, 2003 and unexercised options/SARs held as
of June 30, 2003.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END (#) FY-END (#)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
- ---------------------- ------------ ------------ ---------------------- -------------------

Christopher Maus -- -- 472,000/650,000 --
Edward Siemens -- -- 274,000/421,000 --
Brett Sweezy -- -- 265,982/429,988 --
Paul Beatty -- -- 225,750/354,250 --
Brian Packard -- -- 130,250/174,750 --

- ----------
(1) Based upon the market price of $0.30 per share on June 30, 2003, determined
on the basis of the closing selling price per share of our common stock on
the American Stock Exchange, less the option exercise price payable per
share.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On September 1, 2003, we engaged NCL & Associates, LLC, as a commissioned
sales agent. Neil Luckianow, who became a member of our Board on October 16,
2003, and currently is standing as the Class III nominee to the Board, is the
Principal of NCL & Associates, LLC. We believe that the agreed upon commission
rate is commensurate to that at which it could have engaged unrelated sales
agents.

During fiscal 2003, Robert Boyle, a member of our Board, and Brett Sweezy,
our Chief Financial Officer, purchased 50,000 and 97,500 common shares,
respectively, pursuant to our private placement of common shares. These common
shares were purchased by Mssrs. Boyle and Sweezy at the same $0.10 per share
price paid by all unrelated parties.

Through fiscal 2001, the Board periodically approved the advancement of
funds to Christopher Maus, our Chairman of the Board, President and Chief
Executive Officer. The underlying promissory note is unsecured, has a stated
interest rate of 8.75% and requires bi-weekly repayments of principal and
interest through May 23, 2014. However, on May 1, 2002, the Board indefinitely
suspended the bi-weekly servicing requirement. During fiscal 2002, Mr. Maus made
principal repayments of $61,621, which included the application of a $60,000
bonus awarded by the Board to Mr. Maus for his fiscal 2002 performance. On
August 29, 2003, the Board awarded Mr. Maus a $3,389 bonus for his fiscal 2003
performance with such bonus applied in its entirety against the accrued interest
on the outstanding note receivable balance. On October 15, 2003, the Board
resolved that all related interest accruals during fiscal 2004 are to be
concurrently offset by equivalent bonus awards to Mr. Maus. The underlying
promissory note had an outstanding principal balance of $38,728 at December 31,
2003 and 2002.

During fiscal 2001 and 2002, we conducted a private placement offering of
unsecured convertible notes from which it received $7,647,500 in proceeds. For
every two dollars of note principal, the holder received a detachable stock
purchase warrant allowing for the purchase of a share of our common stock at
$2.50 per share. RAB Europe Fund Ltd., together with its affiliates, purchased
notes having an aggregate principal face amount of $5,470,000 at June 30, 2002.
The notes issued to RAB exclusively contained an anti-dilution provision
providing for a formula-driven, then indeterminable downward adjustment of their
conversion rate should we subsequently issue common shares at a price below the
conversion rate while such notes remained outstanding. In connection with the
preceding offering, we agreed to pay certain individuals and entities, including
RAB, each a commission, payable in common shares, equal to five percent of the
offering proceeds they procured. RAB earned and received commissions of $120,000
in fiscal 2002.

During fiscal 2003, the conversion rate of the notes RAB held was adjusted
downward from the original $1.00 per common share to $0.10 per common share in
connection with a private placement of our common stock at $0.10 per share that
commenced in March 2003. Concurrently, we obtained RAB's agreement to forfeit
its prospective anti-dilution rights and to cancel the stock purchase warrants
held by it in exchange for 1,000,000 shares of our common stock. The aggregate
fair value assigned to the common shares of $100,000 was recognized by us as a
financing cost in fiscal 2003. At December 31, 2003, notes with an aggregate
principal face amount of $4,020,000 remained outstanding that accrue interest at
the prime rate plus two percent (6.00% at December 31, 2003) and become due and
payable on various dates between July 1, 2006 and November 20, 2006, all of
which are held by RAB.

During fiscal 2002, we executed an agreement with Michael Crane, a
principal shareholder and member of the Board, whereby we repaid $200,000 in
outstanding principal and accrued interest against debt obligations incurred to
Mr. Crane during fiscal 2001 and issued Mr. Crane an unsecured convertible note
for the remaining $469,984 aggregate principal balance. The note accrued
interest at the prime rate plus two percent (6.75% at June 30, 2002), was
immediately convertible at Mr. Crane's option into common stock of the Company
at a rate of $1.00 per share, and was to become due and payable on August 1,
2003. In connection with the preceding agreement, we issued Mr. Crane 40,000
common shares and warrants allowing him to purchase 134,000 additional common
shares

at $1.00 per share. The agreement further stipulated that for every
subsequent quarter the note remained outstanding that we would issue Mr. Crane
additional warrants for the purchase of 23,500 common shares at $1.00 per share.
The aggregate fair value assigned to the common shares and warrants of $322,159
was recognized by us as a financing cost in fiscal 2002. During fiscal 2003, Mr.
Crane agreed to convert the $469,984 principal balance, as well as $53,336 in
accrued interest thereon, into 5,233,200 common shares, concurrent with our
private placement of common stock to unrelated parties at $0.10 per share.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table shows certain information known to us regarding our
common stock beneficially owned as of the date of this prospectus, by:

o each person who is known by us to own beneficially or exercise
voting or dispositive control over 5% or more of our common stock,

o each executive identified in the Summary Compensation Table;

o each of our directors, and

o all officers and directors as a group.

Under securities law, a person is considered a beneficial owner of any
securities that the person has the right to acquire beneficial ownership of
within 60 days. Except as otherwise indicated, we have been informed that the
persons identified in the table have sole voting and dispositive power with
respect to their shares. The table is based upon information furnished to us by
the beneficial owners or otherwise obtained from our stock transfer books.

SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED BENEFICIALLY OWNED (2)
- ----------------------------------------------------------------------- ------------------ ----------------------

DIRECTORS AND OFFICERS

Christopher Maus (3) ............................................ 3,467,367 2.23%
Michael Crane (4) ............................................... 3,125,391 2.02%
Robert Boyle (5) ................................................ 314,700 Less than 1%
William Gridley (6) ............................................. 199,000 Less than 1%
Neil Luckianow .................................................. -- Less than 1%
Edward Siemens (7) .............................................. 609,385 Less than 1%
Brett Sweezy (8) ................................................ 692,936 Less than 1%
Jackson Connolly (9) ............................................ 251,706 Less than 1%
---------- ------------
All Directors and Officers as a Group (8 persons) (10) .......... 8,660,485 5.53%
---------- ------------
OTHER BENEFICIAL OWNERS:
RAB Europe Fund Limited (11) .................................... 15,950,000 9.99%
c/o RAB Capital Limited
No. 1 Adam Street
London W2CN 6LE
United Kingdom

Mercer Management (12)
c/o Gordon Rock
5820 East Mercer Way ........................................ 11,194,661 7.09%
Seattle, WA 98040

- ----------
(1) Unless otherwise indicated, the business address for each beneficial owner
is c/o Lifestream Technologies, Inc., 510 Clearwater Loop, Suite 101, Post
Falls, Idaho 83854.

(2) Percentage of ownership includes 154,675,276 actual shares of common stock
outstanding as of the date of this prospectus. Shares of common stock
subject to stock options or warrants that are currently exercisable or will
become exercisable within 60 days, and shares of common stock subject to
convertible term notes that are currently convertible or will become
convertible within 60 days, are deemed outstanding for computing the
beneficial ownership percentage of the person or group holding such
options, warrants and notes, but are not deemed outstanding for computing
the percentage of any other person or group.

(3) Includes 622,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(4) Includes 142,500 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days. Excludes
101,590 common shares held by Lochnau, Inc., a privately held investment
management corporation for which Mr. Crane serves as Chairman of the Board
of Directors, to which Mr. Crane disclaims any beneficial ownership.

(5) Includes 122,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(6) Includes 72,000 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days.

(7) Includes 408,500 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(8) Includes 393,297 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(9) Includes 146,739 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(10) Includes 1,907,036 shares issuable upon exercise of options and warrants
that are currently exercisable or will become exercisable within 60 days.

(11) RAB Europe Fund Ltd., owns convertible term notes of ours that can be
converted into 40,200,000 shares of our Common Stock. RAB Europe Fund Ltd.
does not have the right to convert any debt, to the extent such conversion
would cause RAB Europe Fund Ltd., together with its affiliates, to have
acquired a number of shares of our Common Stock during the 60-day period
ending on the date of conversion which, when added to the number of shares
of our Common Stock held at the beginning of such 60-day period, would
exceed 9.99% of the number of shares of our Common Stock then outstanding.
The number of shares beneficially owned by RAB Europe Fund Ltd., in the
table above, reflects this limitation.

(12) Includes 799,500 shares issuable upon exercise of options and warrants that
are currently exercisable and 2,440,000 shares issuable upon conversion of
convertible term notes that are currently convertible.

DESCRIPTION OF SECURITIES

Lifestream is currently authorized to issue up to 250,000,000 shares of
common stock, par value $.001 per share and 15,000,000 shares of preferred
stock, par value $.001 per share. As of the date of this prospectus, there are
154,675,276 shares of common stock and no shares of preferred stock outstanding.

On December 1, 2003, a special meeting of our stockholders was held, at
which, stockholders authorized an increase in the number of shares of common
stock we are authorized to issue from 100,000,000 to 250,000,000. On the October
15, 2003 record date for the meeting, there were 99,741,024 shares of common
stock issued and outstanding. At the meeting, holders of 74,504,565 shares of
common stock were present, in person or by proxy. Of the shares present,
72,982,396 shares were voted in favor of the increase in authorized shares,
1,371,492 shares were voted against the increase and 150,677 shares abstained.

Lifestream has given notice of a Special Meeting of Stockholders which will
be held at Red Lion Templin's Resort located at 414 East First Avenue, Post
Falls, Idaho, on April 28, 2004, at 9:00 a.m., Pacific Time. The sole purpose of
the Special Meeting is to approve an amendment to the Articles of Incorporation
to increase the number of authorized shares of common stock from 250,000,000
shares to 750,000,000 shares.

COMMON STOCK

Subject to the dividend rights of preferred stockholders, common
stockholders share dividends on a proportionate basis, as may be declared by the
board of directors. Upon our liquidation, dissolution or winding up, after
payment to creditors and holders of our outstanding preferred stock, our
remaining assets, if any, would be divided proportionately on a per share basis
among the holders of our common stock.

Each share of our common stock has one vote. Holders of our common stock do
not have cumulative voting rights. This means that the holders of a plurality of
the shares voting for the election of directors can elect all of the directors.
In that event, the holders of the remaining shares will not be able to elect any
directors. Our by-laws provide that a majority of the outstanding shares of our
common stock are a quorum to transact business at a stockholders' meeting. Our
common stock has no preemptive, subscription or conversion rights. Also, our
common stock is not redeemable.

PREFERRED STOCK

We are authorized to issue a total of 15,000,000 shares of preferred stock,
par value $.001 per share. Our board of directors may issue preferred stock by
resolutions, without any action of the stockholders. These resolutions may
authorize issuance of preferred stock in one or more series. In addition, the
board of directors may fix and determine all privileges and rights of the
authorized preferred stock series including:

o dividend and liquidation preferences,

o voting rights,

o conversion privileges, and

o redemption terms.

We include preferred stock in our capitalization to improve our financial
flexibility. However, we could use preferred stock to preserve control by
present management, in the event of a potential hostile takeover. In addition,
the issuance of large blocks of preferred stock could have a dilutive effect to
existing holders of our common stock.

We have neither created any series of preferred stock nor issued any shares
of preferred stock as of the date of this prospectus.

TRANSFER AGENT

The transfer agent for the shares of our common stock is Nevada Agency and
Trust Company, 50 West Liberty, Suite 880, Reno, Nevada 89501.

SELLING SECURITY HOLDERS

TRANSACTION OVERVIEW

SECURITIES PURCHASE AGREEMENT

On February 19, 2004, Lifestream entered into a securities purchase
agreement with Palisades Master Fund LP, Alpha Capital AG, Crescent
International Ltd. and Bristol Investment Fund, Ltd. The securities purchase
agreement provided for the purchase and sale of our convertible debentures in
the aggregate amount of approximately $2.775 million. Under the terms of the
agreement, Lifestream received approximately $2,077,000 million, net of an 8%
placement agent fee and legal and other expenses. The purchase price for the
convertible debentures gives effect to an original issue discount of
approximately $500,000, the amount of which was withheld from the proceeds at
the time of the closing of the financing.

In March 2004, we issued an additional $122,000 of convertible debentures
to a private investor from which we received $100,000 in net proceeds after an
original issue discount of $22,000. The terms of these convertible debentures
issued in March 2004 are identical to those of the February 19, 2004 private
offering.

The convertible debentures mature and the outstanding principal is payable
on February 19, 2006. The debentures may not be prepaid without the prior
written consent of the debenture holder.

The debentures are convertible immediately by the investors, in whole or in
part, into shares of Lifestream common stock at an initial conversion price of
$0.05.

The number of shares issuable upon conversion of the debentures and the
conversion price is subject to adjustment in the event of:

o stock splits, subdivisions, dividends and combinations and/or
reclassifications or our common stock;

o distributions on account of our common stock; and/or

o our issuance of additional common stock at less than the conversion
price of the debenture on the date of issuance or less than the fair
market value of our common stock on the date of issuance.

We agreed to file a registration statement covering the shares issuable in
connection with the February 19, 2004 securities purchase agreement. That
registration statement was filed with the Securities and Exchange Commission on
March 22, 2004, within the time required by the securities purchase agreement.
However, if the registration statement has not become effective on or before
July 18, 2004, debenture holders could declare an event of default and demand
repayment of the debentures. We also agreed to seek shareholder approval to
increase the number of authorized common shares to 500 million shares, and,
subject to receipt of such authorization, we will register such number of
additional shares as is necessary to cause the registration of 125% of the
common shares underlying the debentures and warrants then outstanding. Also
subject to such increase in the number of authorized common shares, investors in
the February 19, 2004 financing have been granted the option to purchase an
additional $1.22 million in convertible debentures and warrants, upon terms and
conditions substantially identical to those applicable to the February 19, 2004
transaction.

In connection with this transaction and subject to a 4.9% beneficial
ownership limitation, participating

warrant holders agreed to exercise 9,615,384 outstanding warrants held by them.
Upon exercise, we will receive an additional $481,000 in net proceeds.

An underlying agreement requires that we obtain the unanimous approval of
the debenture holders prior to the occurrence of certain events including stock
dividends, subdivisions, combinations and reclassifications of our common stock
until less than 20% of the principal remains outstanding on the debentures. The
agreement further stipulates that each debenture holder has a right of first
refusal to participate in any new financing transaction consented to for a one
year period ending after effectiveness of the registration statement. We are
also be prohibited from conducting any other offering activities subsequent to
filing the registration statement with the SEC and through the date on which
either the SEC declares it effective or we withdraw it.

In connection with these February 19, 2004 and March 2004 financing
transactions, we issued common stock purchase warrants to the purchasers of the
convertible debentures to purchase an aggregate of 17,381,999 shares of our
common stock. The warrants are exercisable:

o at a price of $0.065 per share;

o during the nineteen-month period terminating September 19, 2005; and

o on a cashless basis, whereby the holder, rather than pay the
exercise price in cash, may surrender a number of warrants equal to
the exercise price of the warrants being exercised. The cashless
basis exercise is only available if a registration statement for
these shares is not effective prior to February 19, 2005.

The number of shares issuable upon exercise of the warrants, and the
exercise price, is subject to adjustment in the event of:

o subdivisions, combinations, stock dividends, mergers and/or
reclassifications of our common stock;

o mergers;

o certain distributions on account of our common stock; and/or

o our issuance of additional common stock at less that the exercise
price of the warrants on the date of issuance or less than the fair
market value of our common stock on the date of issuance.

We have the right to call the warrants in the event that the average
closing price of our common stock exceeds 200% of the exercise price for a
consecutive 20-day trading period.

Resale of the shares of our common stock issuable upon conversion of the
convertible debentures and exercise of the warrants is covered by this
prospectus.

OTHER SHARES COVERED BY THIS PROSPECTUS

We have registered an aggregate of 2,225,669 additional shares for resale
by ten persons to whom we issued these shares during the period from January 7,
2004, to January 21, 2004. These shares were issued as follows:

On January 7, 2004, we issued 975,669 restricted shares of our common stock
to certain of our employees as payment for $117,080 in compensation expense.

On January 9, 2004, we issued 1,000,000 restricted shares of our common
stock to a financing company in settlement of a $100,000 loan commitment fee.

On January 21, 2004, we issued 250,000 restricted shares of our common
stock to an investment banking firm in exchange for investment banking services
and research coverage.

Resale of the shares issued in these transactions is covered by this
prospectus.

OWNERSHIP TABLE

The following table sets forth:

o the name of each selling security holder;

o the amount of common stock owned beneficially by each selling
security holder (which includes those shares underlying the
convertible debentures) notwithstanding the contractual limitation
on each selling security holder that they may not beneficially own
more than 4.99% of our common stock at any time;

o the number of shares that may be offered by each selling security
holder pursuant to this prospectus;

o the number of shares to be owned by each selling security holder
assuming sale of the shares covered by this prospectus; and

o the percentage of our common stock to be owned by each selling
security holder assuming sale of the shares covered by this
prospectus (based on 154,675,276 shares of common stock of
Lifestream outstanding as of the date of this prospectus), as
adjusted to give effect to the issuance of shares upon the exercise
of the named selling security holder's warrants, but no other
person's warrants.

Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to outstanding
voting securities, as well as any voting securities that the person has the
right to acquire within 60 days, through the conversion or exercise of any
security or other right. The information as to the number of shares of our
common stock owned by each selling security holder is based upon our books and
records and the information provided by our transfer agent.

We may amend or supplement this prospectus, from time to time, to update
the disclosure set forth in the table. Because the selling security holders
identified in the table may sell some or all of the shares owned by them which
are included in this prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling security holders upon termination of this
offering. We have, therefore, assumed for the purposes of the following table,
that the selling security holders will sell all of the shares owned beneficially
by them, which are covered by this prospectus, but will not sell any other
shares of our common stock that they presently own.

NUMBER OF SHARES
NUMBER OF SHARES NUMBER OF SHARES OWNED AFTER PERCENT AFTER
NAME OF SELLING SECURITY HOLDER BENEFICIALLY OWNED TO BE OFFERED OFFERING OFFERING
- ------------------------------- ------------------ ------------- -------- --------

Palisades Master Fund L.P. 35,384,610(1)(14) 32,499,995 2,884,615 1.3%
Crescent International Ltd. 24,449,027(2)(14) 12,688,000 11,761,027 5.0%
Alpha Capital Ltd. 13,111,377(3)(14) 11,102,000 2,009,377 *
Bristol Investment Fund, Ltd. 18,180,590(4)(14) 15,860,000 2,320,590 1.0%
Mercer Management 11,194,661(5)(14) 3,172,000 8,022,661 3.5%
Capital South 1,000,000 1,000,000 -- *
HPC Capital Management 250,000 250,000 -- *
Christopher Maus 3,467,367(6) 239,167 3,228,200 1.4%
Brett Sweezy 692,936(7) 150,000 542,936 *
Ed Siemens 609,385(8) 196,500 412,885 *
Jack Connolly 251,706(9) 81,667 170,039 *
Craig Coad 359,355(10) 183,334 176,021 *
Gerri Vance 77,127(11) 41,667 35,460 *
Matt Colbert 51,091(12) 41,667 9,424 *
Shirley Vesser 90,446(13) 41,667 48,779 *
- ------------------------------- ----------- ----------- ----------- -------------
TOTAL 109,169,678 77,547,664 31,622,014
=============================== =========== =========== =========== =============

- ----------
* less than 1%

(1) Includes 24,999,996 shares underlying convertible debentures and 7,499,996
shares underlying common stock purchase warrants.

(2) Includes 11,975,289 shares underlying convertible debentures and 6,004,923
shares underlying common stock purchase warrants.

(3) Includes 8,540,000 shares underlying convertible debentures and 4,485,077
shares underlying common stock purchase warrants.

(4) Includes 12,200,000 shares underlying convertible debentures and 3,660,000
shares underlying common stock purchase warrants.

(5) Includes 2,440,000 shares underlying convertible debentures and 799,500
shares underlying common stock purchase warrants and options.

(6) Includes 622,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(7) Includes 393,297 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(8) Includes 408,500 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(9) Includes 146,739 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(10) Includes 140,732 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.

(11) Includes 35,460 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days.

(12) Includes 9,424 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days.

(13) Includes 42,779 shares issuable upon exercise of options that are currently
exercisable or will become exercisable within 60 days.

(14) The selling security holder's beneficial ownership is contractually limited
to 4.99% of our issued and outstanding stock, which is not reflected in the
above table.

Lifestream agreed to pay for all costs and expenses in the issuance, offer,
sale and delivery of the shares of our common stock. These include all expenses
and fees of preparing, filing and printing the registration statement and
mailing of these items. Lifestream will not pay selling commissions and expenses
for any sales by the selling security holders, but will indemnify the selling
security holders against civil liabilities including liabilities under the
Securities Act of 1933.

PLAN OF DISTRIBUTION

The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o settlement of short sales;

o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

The selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares or common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock, from
time to time, under this prospectus, or under an amendment to this prospectus
under Rule 424 (b)(3) or other applicable provision of the Securities Act of
1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors-in-interest as selling stockholders under this
prospectus.

The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other
successors-in-interest will be the selling beneficial owners for purposes of
this prospectus.

The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933 in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933.

The selling stockholders have informed us that they do not have any
agreement or understanding, directly or indirectly, with any person to
distribute the common stock.

We are required to pay all fees and expenses incident to the registration
of the shares. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act of 1933.

LEGAL MATTERS

Schneider Weinberger LLP will review the validity of the issuance of the
shares of common stock offered by this prospectus. Schneider Weinberger LLP is
located at 2499 Glades Road, Suite 108, Boca Raton, Florida 33431.

EXPERTS

The financial statements of Lifestream Technologies, Inc. as of and for the
fiscal years ended June 30, 2003 and 2002, appearing in this prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, as
set forth in their report (which contained an explanatory paragraph regarding
the Company's ability to continue as a going concern) thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

We have filed with the SEC the registration statement on Form SB-2 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.

The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the SEC's regional offices located at New York,
New York and Chicago, Illinois. You may request copies of these documents by
writing to the Securities and Exchange Commission and paying the required fee
for copying. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for more information about the operation of their public
reference rooms. Copies of our filings are also available at the Securities and
Exchange Commission website at http://www.sec.gov.

The registration statement, including all exhibits and schedules and
amendments, has been filed with the SEC through the Electronic Data Gathering,
Analysis and Retrieval system. Following the effective date of the registration
statement relating to this prospectus, we will continue to be subject to the
reporting requirements of the Exchange Act and in accordance with these
requirements, will continue to file annual, quarterly and special reports, and
other information with the SEC. We also intend to furnish our stockholders with
annual reports containing audited financial statements and other periodic
reports as we think appropriate or as may be required by law.

Copies of our SEC filings and other information about us are also available
on our website at http://www.lifestreamtech.com. The information on our website
is neither incorporated into, nor a part of, this prospectus.

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Lifestream Technologies, Inc. and Subsidiaries Page
-----

Report of Independent Certified Public Accountants................................................. F - 2
Consolidated Balance Sheets as of June 30, 2003 and 2002........................................... F - 3
Consolidated Statements of Loss for the years ended June 30, 2003 and 2003......................... F - 5
Consolidated Statements of Changes in Stockholders' (Deficit) Equity as of June 30, 2003 and 2002.. F - 6
Consolidated Statements of Cash Flows as of June 30, 2003 and 2002................................. F - 7
Notes to Consolidated Financial Statements......................................................... F - 9

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and Stockholders of
Lifestream Technologies, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Lifestream
Technologies, Inc. and Subsidiaries as of June 30, 2003 and 2002, and the
related consolidated statements of loss, changes in stockholders' (deficit)
equity and cash flows for the fiscal years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 consolidated financial position of
Lifestream Technologies, Inc. and Subsidiaries as of June 30, 2003 and 2002, and
the consolidated results of their operations and their cash flows for the fiscal
years then ended, in conformity with accounting principles generally accepted in
the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
accompanying consolidated financial statements, the Company has incurred
substantial operating and net losses, as well as negative operating cash flows,
since its inception. As a result, the Company has negative working capital and a
stockholders' deficit, including a substantial accumulated deficit, at June 30,
2003. The aforementioned factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP

Spokane, Washington
August 8, 2003, except for Note 19,
as to which the date is September 15, 2003

F-2

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS (Note 2)
June 30,
-------------------------
2003 2002
---------- ----------

Current assets:
Cash and cash equivalents ................................. $1,370,126 $ 589,854
Restricted cash equivalent ................................ -- 600,000
Accounts receivable, net of allowance for doubtful accounts
of $453,645 and $91,188, respectively (Notes 4 and 11) .. 269,398 308,018
Inventories, net (Notes 5 and 11) ......................... 1,612,590 2,586,625
Prepaid expenses .......................................... 38,506 146,113
---------- ----------
Total current assets ......................................... 3,290,620 4,230,610
Property and equipment, net (Notes 6, 11 and 12) ............. 647,527 1,003,580
Patent rights, net of accumulated amortization of $1,556,851
and $1,473,910 (Note 11) ................................ 562,945 645,886
Deferred financing costs (Notes 11 and 13) ................... 422,897 672,732
Note receivable - officer (Note 7) ........................... 38,728 38,728
Other ........................................................ 115,208 14,785
---------- ----------
Total assets ................................................. $5,077,925 $6,606,321
========== ==========

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

F-3

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30,
------------------------------
2003 2002
------------ ------------

Current liabilities:
Accounts payable ............................................... $ 2,173,720 $ 1,416,214
Accrued liabilities (Note 9) ................................... 766,047 800,162
Deferred income (Note 10) ...................................... 250,000 --
Revolving credit facility (Note 11) ............................ -- 2,221,018
Current maturities of notes payable (Note 11) .................. 900,000 33,302
Current maturities of capital lease obligations (Note 12) ...... 147,964 151,268
Current maturities of convertible notes, principal face
amounts of $0 and $775,000, respectively (Note 13) .......... -- 766,608
------------ ------------
Total current liabilities ......................................... 4,237,731 5,388,572
Note payable, less current maturities (Note 11) ................... 1,069,932 --
Capital lease obligations, less current maturities (Note 12) ...... 42,754 81,977
Convertible notes, principal face amounts of $5,270,000 and
$7,039,984, respectively (Note 13) ............................. 2,386,082 2,461,027
------------ ------------
Total liabilities ................................................. 7,736,499 7,931,576

Commitments and contingencies (Notes 9, 10, 12, 16 and 18)

Stockholders' deficit (Notes 14 and 15):
Preferred stock, $.001 par value; 15,000,000 shares authorized;
none issued or outstanding ................................... -- --
Common stock, $.001 par value; 100,000,000 shares authorized;
92,894,590 and 24,967,997 issued and outstanding, respectively 92,895 24,968
Additional paid-in capital ..................................... 39,511,226 32,805,527
Accumulated deficit ............................................ (42,262,695) (34,155,750)
------------ ------------
Total stockholders' deficit ....................................... (2,658,574) (1,325,255)
------------ ------------
Total liabilities and stockholders' deficit ....................... $ 5,077,925 $ 6,606,321
============ ============

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

F-4

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS

Fiscal Year Fiscal Year
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------

Net sales ............................................... $ 4,236,653 $ 3,667,157
Cost of sales ........................................... 3,516,827 4,037,897
------------ ------------
Gross profit (loss) ..................................... 719,826 (370,740)
------------ ------------
Operating expenses:
Sales and marketing ............................... 1,003,543 2,430,067
General and administrative......................... 3,245,396 5,233,680
Product research and development .................. 296,963 1,037,398
Depreciation and amortization ..................... 442,432 1,348,193
Write-off of unamortized license rights (Note 17) . -- 416,833
Write-off of capitalized software development costs
(Note 17) ....................................... -- 182,262
------------ ------------
Total operating expenses ................................ 4,988,334 10,648,433
------------ ------------
Loss from operations .................................... (4,268,508) (11,019,173)
------------
Non-operating income (expenses):
Interest income ................................... 17,624 22,883
Interest and financing expenses (Notes 11 and 13).. (2,083,272) (1,635,734)
Amortization of convertible notes discount (Note 13) (1,703,431) (2,008,607)
Other, net ........................................ (69,358) (36,648)
------------ ------------
Total non-operating expenses, net ....................... (3,838,437) (3,658,106)
------------ ------------
Net loss ................................................ $ (8,106,945) $(14,677,279)
============ ============

Net loss per common share - basic and diluted ........... $ (0.24) $ (0.67)
============ ============

Weighted average number of common shares outstanding--
Basic and diluted .................................. 33,229,702 21,959,297
============ ============

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

F-5

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY

Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ----------- -------------- -------------- --------------

Balances as of June 30, 2001 .................. 20,345,331 $ 20,345 $ 22,384,031 $(19,478,471) $ 2,925,905

Common stock issued for cash, net of issuance
costs (Note 14) ............................ 2,850,000 2,850 2,667,150 -- 2,670,000

Common stock issued for services (Note 14) .... 663,919 664 963,810 -- 964,474

Common stock issued upon conversion of
convertible debt and accrued interest (Note 14) 1,108,747 1,109 1,107,638 -- 1,108,747

Stock warrants issued to creditors as financing
costs (Note 14 and 15) ..................... -- -- 456,925 -- 456,925

Compensatory stock options issued for services
(Note 15) .................................. -- -- 712,473 -- 712,473

Beneficial conversion feature and fair value of
warrants issued with the convertible debt
(Note 13) .................................. -- -- 4,513,500 -- 4,513,500

Net loss ...................................... -- -- -- (14,677,279) (14,677,279)
---------- ----------- ------------ ------------ ------------

Balances as of June 30, 2002 .................. 24,967,997 24,968 32,805,527 (34,155,750) (1,325,255)

Common stock issued for cash, net of issuance
costs (Note 14) ............................ 34,837,500 34,838 3,448,912 -- 3,483,750

Common stock issued for services (Note 14) .... 4,567,140 4,567 468,397 -- 472,964

Common stock issued upon conversion of
convertible debt and accrued interest (Note 14) 22,901,730 22,902 2,267,272 -- 2,290,174

Common stock issued in settlement of a stock
purchase agreement dispute (Note 14) ....... 1,040,816 1,041 (1,041) -- --

Retroactive issuance of additional note
conversion shares to a principal shareholder 4,579,407 4,579 453,362 -- 457,941
(Note 14)

Compensatory stock options issued for services
(Note 15) .................................. -- -- 68,797 -- 68,797

Net loss ...................................... -- -- -- (8,106,945) (8,106,945)
---------- ----------- ------------ ------------ ------------
Balances as of June 30, 2003 .................. 92,894,590 $ 92,895 $ 39,511,226 $(42,262,695) $ (2,658,574)
========== =========== ============ ============ ============

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

F-6

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Fiscal Year
Ended Ended
June 30, 2003 June 30, 2002
------------- ------------------

Cash flows from operating activities:
Net loss ............................................................ $ (8,106,945) $(14,677,279)

Non-cash items:
Depreciation and amortization of property and equipment and patent
and license rights .............................................. 442,432 1,348,193
Write-off of unamortized license rights (Note 17) ................ -- 416,833
Write-off of capitalized software development costs (Note 17) ... -- 182,262
Amortization of convertible debt discount (Note 13) ............... 1,703,431 2,008,607
Amortization of deferred financing costs (Notes 11 and 13) ........ 349,835 227,376
Provision for bad debts ........................................... 407,905 9,553
Provision for inventory obsolescence .............................. 315,734 67,634
Bonus compensation applied to note receivable -- officer
principal (Note 7) ............................................ -- 60,000
Loss (gain) on retirement (sale) of equipment ..................... 12,969 (479)
Retroactive issuance of additional note conversion shares to a
principal shareholder as an inducement (Note 14) ................ 457,941 --
Issuance of common shares, options and warrants to related party as
an inducement to convert line of credit into convertible note
(Note 13) ....................................................... -- 310,364
Issuances of compensatory common stock, options and warrants for
employee and non-employee services (Note 14) .................... 296,922 1,546,609
Beneficial conversion feature of convertible debt issued to related
party (Note 13) ................................................. -- 91,000
Net changes in assets and liabilities:
Accounts receivable ............................................... (369,285) 149,282
Inventories ....................................................... 658,301 (670,229)
Prepaid expenses .................................................. 107,607 59,286
Accounts payable .................................................. 802,345 313,170
Accrued liabilities .............................................. 461,075 544,818
Commissions payable ............................................... -- (585,601)
Change in deferred financing costs and other non-current assets ... (423) (196,382)
------------ ------------
Net cash used in operating activities .................................. (2,460,156) (8,794,983)
------------ ------------
Cash flows from investing activities:
Capital expenditures ................................................ (16,407) (203,750)
Software development costs capitalized .............................. -- (93,583)
Repayments of note receivable - officer (Note 7) .................... -- 1,621
------------ ------------
Net cash used in investing activities .................................. (16,407) (295,712)
------------ ------------
Cash flows from financing activities:
Proceeds from option and purchase agreement (Note 10) ............... 250,000 --
Proceeds from borrowings under credit facility (Note 11) ............ -- 2,221,018
Proceeds from issuances of convertible notes, net (Note 13) ......... -- 4,422,500
Proceeds from sales of common stock, net (Note 14) .................. 3,483,750 2,670,000
Payments on capital lease obligations (Note 12) ..................... (42,527) (176,602)
Payments of borrowings under credit facility (Note 11) .............. (251,086) --
Payments on notes payable ........................................... (33,302) (36,330)
Payments on convertible notes (Note 13) ............................. (750,000) (470,016)
Restricted cash equivalent .......................................... 600,000 (600,000)
------------ ------------
Net cash provided by financing activities .............................. 3,256,835 8,030,570
------------ ------------
Net increase (decrease) in cash and cash equivalents ................... 780,272 (1,060,125)
Cash and cash equivalents at beginning of period ....................... 589,854 1,649,979
------------ ------------
Cash and cash equivalents at end of period ............................. $ 1,370,126 $ 589,854
============ ============

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

F-7

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Fiscal Year
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------

Supplemental schedule of cash activities:
Interest paid in cash ............................................ $ 459,398 $ 24,257

Supplemental schedule of non-cash investing and financing activities:
Equipment acquired through capital lease obligations
(Note 6 and 12) .................................................. $ -- $ 220,588
Discount on beneficial conversion feature and fair value of
detachable stock warrants (Note 13) .............................. -- 4,422,500
Deferred financing costs (Note 11 and 13) ........................... -- 392,500
Debt converted to convertible notes ................................. -- 640,000
Convertible notes and accrued interest converted to common
stock (Note 14) .................................................. 2,290,174 1,108,747
Bonus to officer of accrued interest on note receivable
(Note 7) ......................................................... 3,389 --
Issuance of common stock in exchange for (Note 14):
Financing costs ................................................ 807,941 126,899
Prepaid intellectual property legal fees ....................... -- 150,000

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

F-8

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND ORGANIZATIONAL STRUCTURE

Lifestream Technologies, Inc., together with its wholly-owned subsidiaries (the
"Company"), a Nevada corporation headquartered in Post Falls, Idaho, is a
marketer of a proprietary total cholesterol measuring device for at-home use by
health conscious consumers and at-risk medical patients. Through regular
monitoring of one's total cholesterol level, an individual can continually
assess their susceptibility to developing cardiovascular disease. Once diagnosed
with a dangerously elevated total cholesterol level, regular at-home testing
with one of our devices enables a patient to readily ascertain the benefits
derived from diet modification, an exercise regimen and/or a drug therapy,
thereby reinforcing their continuing compliance with an effective
cholesterol-lowering program.

2. SUBSTANTIAL DOUBT REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN

The Company has incurred substantial operating and net losses, as well as
negative operating cash flows, since its inception. As a result, the Company
continued to have significant working capital and stockholders' deficits at June
30, 2003. In recognition of such, the Company's independent certified public
accountants have included an explanatory paragraph in their report on the
accompanying consolidated financial statements for the fiscal year ended June
30, 2003 that expresses substantial doubt as to the Company's ability to
continue as a going concern. The Company has pursued, and continues to pursue, a
number of initiatives intended to ensure its ability to continue as a going
concern. The Company's significant initiatives, and related matters, are
discussed below.

With respect to its financial condition, the Company completed the following
transactions during its fiscal 2003 fourth quarter that significantly decreased
its working capital deficiency at June 30, 2003 and should prospectively provide
it with additional cash flow flexibility and interest cost savings. First,
effective May 1, 2003, the Company successfully converted its then expiring
revolving credit facility with a financial institution. Under the new agreement,
the Company's then outstanding balance of $2,197,800, which had been accruing
interest at a fixed rate of 18% per annum, was bifurcated into a $2,000,000
twenty-four month term loan and a $197,800 advance loan, both with a fixed
interest rate of 15% per annum. The repayment terms of the term loan are
intended to provide the Company with additional monthly cash flow should it be
successful in growing its net sales and accounts receivable. Second, in June
2003, the Company completed a private placement of its common shares with
accredited investors that provided it with $3.5 million in net cash proceeds.
These proceeds have been subsequently utilized primarily to service seriously
overdue accounts payable with critical vendors, to procure additional inventory
in preparation for the upcoming holiday selling season, from which the Company
has experienced increased demand in past years, and to provide the Company with
a modest cash balance from which to fund its near-term basic operating needs. As
part of this private placement, holders of $1.8 million of the Companys then
outstanding convertible notes, which were becoming due in August 2003, converted
such notes, and $0.5 million in accrued interest thereon, into common shares.

At June 30, 2003, the Company had only 7,105,410 authorized common shares
remaining available for future issuance. Accordingly, the Company currently is
preparing a proposal for submission to its shareholders wherein it will request
an increase in its authorized common shares from 100 million to 250 million.
Should its shareholders not approve its pending proposal, the Company will be
substantially limited to the future issuance of interest-bearing debt
instruments to obtain needed financing.

Since June 30, 2003, the Company has been actively pursuing approximately $5.0
million in additional financing to fund its long-term operating needs, including
its initial conducting of those long-delayed marketing activities it deems
critical to building broad public awareness of, and demand for, its current
consumer device. Although there

F-9

can be no assurance of such, the Company currently believes that this additional
financing, if obtained, and the sales increases it expects to realize from the
initial marketing activities it will fund, will be sufficient to support it
until that point in time at which it forecasts that its business will become
self-sustaining from internally generated cash flow.

As more extensively discussed in Note 19, the Company completed on September 13,
2003 a private placement of $3,350,000 in convertible notes to an investment
group, including certain of its existing institutional shareholders, from which
it received $3,067,000 in net cash proceeds. The Company was required to
immediately place $1,533,500 of the proceeds into escrow, the future release of
such funds to it is contingent upon the approval by a majority of its
shareholders of the proposed increase in its authorized common shares, as
discussed above, and the initiation of trading in the Company's common shares on
the OTC-BB. Any failure by the Company to obtain the approval of its
shareholders for the requested increase in its authorized common shares will
constitute a default, and, as a result, the noteholders may demand immediate
repayment, as defined below. All notes have a stated 8.0% annual rate of
interest, payable at the Company's option in either cash or authorized and
unissued shares of its common stock, mature on September 10, 2006, and are
convertible, only if the Company has sufficient authorized and unissued common
shares, into shares of its common stock at a stated rate of $0.13 per share.

In connection with the immediately preceding private placement, the Company is
required to file a registration statement with the United States Securities and
Exchange Commission ("SEC") registering the notes and accompanying stock
purchase warrants on or before October 27, 2003. Depending upon the occurrence
and duration of certain intervening events to which it has little or no control
over, the Company may be required to obtain the SEC's declaration of
effectiveness for this registration statement as early as January 11, 2004, to
which there can be no assurance. Any failure by the Company to meet the mandated
deadlines will constitute a default, and, as a result, the holders may demand
immediate repayment. Within the context of any default, repayment is defined as
being the greater of (i) 130% of the aggregate outstanding principal balance and
accrued interest or (ii) a currently indeterminable amount based upon the
aggregate outstanding principal and accrued interest adjusted upwards in
accordance with a formula dependent upon any increase in the market price of the
Company's common stock subsequent to September 13, 2003. An underlying agreement
also requires that the Company obtain the unanimous approval of the noteholders
prior to (i) selling any common shares or convertible notes from September 13,
2003 until 120 days after the date on which the SEC declares the registration
statement effective or (ii) selling any common shares or common share
equivalents with anti-dilution guarantees or declaring a reverse stock split
during the period in which any of these notes remain outstanding. The agreement
further stipulates that no note may be be prepaid without the consent of the
holder and that each noteholder has a right of first refusal to participate in
any new financing transaction consented to through the 120 day period ending
after effectiveness of the registration statement. The Company will also be
prohibited under the Securities Act of 1933, as amended, from conducting any
other offering activities subsequent to filing the registration statement with
the SEC and through the date on which either the SEC declares it effective or
the Company withdraws it.

The Company is continuing, with the assistance of an investment banking firm, to
pursue the balance of the long-term financing it requires, within the
restrictions set forth immediately above. However, as more extensively discussed
in Note 18, the Company's Board of Directors voted on September 23, 2003 to
withdraw the Company's listing with the American Stock Exchange ("AMEX") and to
obtain a listing with the Over-The-Counter Bulletin Board ("OTC-BB"). The date
on which the Company's common shares will no longer trade on the AMEX is
currently unknown but it is anticipated to be within days or weeks of this
filing. The Company believes that it meets the requirements for trading on the
OTC-BB and is discussing quotation on the OTC-BB with several potential Market
Makers for sponsorship on the OTC-BB upon its effective withdrawal from the
AMEX. However, even if it is traded on the OTC-BB, the Company's common shares
may be more difficult to buy or sell, and, as a result, its common shares may
experience greater price volatility.

In light of the preceding restrictions, the Company may be significantly impeded
in its ability to retain long-term financing it has recently procured or to
obtain the balance of the long-term financing it requires to continue as a

F-10

going concern. Absent its obtaining and retention of all the long-term financing
it requires, it is unlikely that the Company will be able to realize its
business plan and continue to operate.

With respect to its sales and gross margins, the Company introduced its current
consumer device to the retail marketplace in October 2002, from which it has
realized, and expects to continue to realize, a substantially improved gross
margin. Despite such, the Company's consolidated gross margin for the next few
fiscal quarters will continue to reflect a blended rate as it attempts to
deplete its remaining inventory of its predecessor device, primarily through
smaller, less prominent, direct marketers. During such time, the Company expects
to offer related incentives that will adversely impact its consolidated gross
margin, the degree to which currently is not determinable. However, once its
inventory of these first-generation devices is fully depleted, the Company
anticipates a consolidated gross margin in excess of 50% from sales of its
current consumer device. Additionally, to the extent that it is able to conduct
meaningful marketing activities, the Company believes that the economic and
psychological attractiveness of its current consumer device's lower retail price
point will substantially increase the likelihood of it realizing the significant
sales increases and operating cost leverage it seeks over the longer term.

With respect to its operating cost structure, the Company has progressively
taken a series of difficult, yet necessary, cost-cutting measures over the
preceding several months. The most significant of which has been the elimination
of substantially all non-critical personnel, consultants and infrastructure. The
Company currently operates with a core staff of 17 critical employees, as
compared to 38 employees at June 30, 2002. On April 18, 2003, as it had become
critically short of operating cash, the Company immediately implemented 33%
reductions in all senior management salaries, 10% reductions in all other
salaries, and 10% workweek reductions on all hourly employees. While it has
subsequently reinstated, effective June 1, 2003, 50% of all salary reductions
and restored all hourly employees to full work weeks, the Company continues to
realize a meaningful net savings in its salaried payroll. Additionally,
concurrent with the completion of all re-engineering activities associated with
the development and refinement of its current consumer device, the Company
eliminated substantially all of its product research and development
expenditures as of December 31, 2002. The Company expects that its product
research and development needs and expenditures for the foreseeable future will
remain nominal.

It must be noted that, should the Company be unsuccessful in any of the
initiatives or matters discussed above, its business, and, as a result, its
consolidated financial position, results of operations and cash flows will
likely be materially adversely impacted, the effects from which it may not
recover.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include the operations of the Company
and its two wholly-owned subsidiaries, Lifestream Diagnostics, Inc. and Secured
Interactive Technologies, Inc. All material intercompany transactions and
balances have been eliminated in consolidation.

FISCAL YEAR-END

The Company's fiscal year-end is June 30th. References to a fiscal year refer to
the calendar year in which such fiscal year ends.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and disclosure of contingent assets
and liabilities. These estimates and assumptions are based on the

F-11

Company's historical results as well as management's future expectations. The
Company's actual results could vary materially from management's estimates and
assumptions.

RECLASSIFICATIONS

Certain amounts in the consolidated financial statements for the prior fiscal
year have been reclassified to be consistent with the current fiscal year's
presentation.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid debt instruments with a maturity date
of three months or less at the date of purchase. The Company maintains its cash
and cash equivalents with high quality financial institutions thereby minimizing
any associated credit risks.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company records an allowance for doubtful accounts based on specifically
identified amounts that the Company believes to be uncollectible and those
accounts that are past due beyond a certain date. If actual collections
experience changes, revisions to the allowance may be required. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.

INVENTORIES

Inventories, which primarily consist of component parts, assembled devices and
related supplies, are stated at the lower of first-in, first-out cost or market.

PATENT RIGHTS

Direct costs incurred in acquiring each patent right have been capitalized and
are being subsequently amortized into operating results on a straight-line basis
over seventeen years, such period being equal to both the statutory and
estimated useful life of each respective patent.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Cost includes expenditures for
major additions and improvements as well as any incremental interest costs
incurred during the period in which activities necessary to get the asset ready
for its intended use are in progress. Maintenance and repairs that do not extend
the useful life of the related property or equipment are charged to operations
as incurred. The provision for related depreciation has been computed using the
straight-line method over the following estimated useful lives: production
machinery and equipment - five years; technology hardware and software - three
years; and office furniture and equipment - five years. The provision for
related amortization is computed using the straight-line method over the shorter
of the estimated useful lives of the leasehold improvements, being five years,
or the contractual lives of the underlying operating leases.

The net book value of property and equipment sold or retired is removed from the
asset and related depreciation and amortization accounts with any resulting net
gain or loss included in the determination of net loss.

IMPAIRMENT OF LONG-LIVED ASSETS

Management, on at least a quarterly basis, evaluates each of the Company's
long-lived assets for impairment by comparing the related estimated future cash
flows, on an undiscounted basis, to its net book value. If impairment is

F-12

indicated, the net book value is reduced to an amount equal to the estimated
future cash flows, on an appropriately discounted basis.

DEFERRED FINANCING COSTS

Deferred financing costs are amortized using the interest method over the term
of the related debt agreement.

DEFERRED INCOME TAXES

Deferred income tax assets and liabilities are recognized for the expected
future income tax benefits or consequences, based on enacted laws, of temporary
differences between tax and financial statement reporting. Deferred tax assets
are then reduced by a valuation allowance for the amount of any tax benefits
that more likely than not, based on current circumstances, are not expected to
be realized.

PRODUCT WARRANTIES

The Company's products are accompanied by limited liability warranties of
varying durations against defects in material or workmanship. At the time of
each product's sale, the Company's management makes an estimate based on its
historical experience and future expectations of the probable future cost to be
incurred in honoring the accompanying warranty and accrues a corresponding
liability. To date, the Company's warranty liabilities, in the aggregate, have
not been material.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values reported for cash equivalents, restricted cash equivalent,
accounts receivable, accounts payable and accrued expenses materially
approximated their respective fair values at each balance sheet date due to the
immediate or short-term maturity of these financial instruments. The carrying
values reported for non-current obligations materially approximated their
respective fair values at each balance sheet date as the stated or discounted
rates of interest reflected then prevailing market rates of interest.

REVENUE RECOGNITION

The Company recognizes a sale, including related shipping and handling income,
and the cost of the sale, upon product shipment provided that all material risks
and rewards of ownership are concurrently transferred from the Company to its
customer, collection of the related receivable is reasonably assured, and
management is able to reliably estimate an appropriate allowance for sales
returns based on relevant historical product experience and future expectations.
Cost of sales primarily consists of direct labor, material and overhead,
including freight-in costs, warehousing costs, shipping and handling costs,
returned product processing costs, and inventory valuation adjustments for
obsolescence.

MAJOR CUSTOMERS

Two customers individually accounted for approximately 24% and 23% of the
Company's consolidated net sales for fiscal 2003 and approximately 10% and 30%
of accounts receivable at June 30, 2003, respectively. Three customers
individually accounted for approximately 19%, 14% and 10% of the Company's
consolidated net sales for fiscal 2002 and approximately 7%, 35%, and 3% of
accounts receivable at June 30, 2002, respectively.

ADVERTISING COSTS

The Company expenses all advertising costs as incurred. Consolidated sales and
marketing expenses include advertising costs of $469,669 and $1,408,787 during
fiscal 2003 and 2002, respectively.

F-13

PRODUCT RESEARCH AND DEVELOPMENT

The Company expenses all product research and development costs as incurred.

STOCK-BASED COMPENSATION

As allowed by Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to
retain the compensation measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
its related interpretations for stock options issued to employees. Under APB No.
25, compensation cost is recognized at the measurement date for the amount, if
any, that the quoted market price of the Company's common stock exceeds the
option exercise price. The measurement date is the date at which both the number
of options and the exercise price for each option are known. No stock-based
employee compensation cost is reflected in the Company's reported net losses, as
all options granted had an exercise price equal to or in excess of the market
value of the underlying common stock on the respective dates of grant.

On December 31, 2002, the Financial Accounting Standards Board amended the
transition and disclosure requirements of SFAS No. 123 through the issuance of
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends
the existing disclosures to make more frequent and prominent disclosure of
stock-based compensation expense beginning with financial statements for fiscal
years ending after December 15, 2002.

If the Company had accounted for its stock-based employee compensation under the
fair value recognition and measurement principles of SFAS No. 123, the Company's
reported net losses would have been adjusted to the pro forma net losses
presented below:

Fiscal Years Ended
-------------------------------
June 30, June 30,
2003 2002
-------------------------------
Net loss, as reported ................ $(8,106,945) $ (14,677,279)

Add: SFAS No. 123 compensation expense
(1,609,790) (1,892,255)
----------- --------------
Pro forma net loss ................... $(9,716,735) $ (16,569,534)
=========== ==============
Net loss per share:
Basic and diluted -- as reported.. $ (0.24) $ (0.67)
=========== ==============
Basic and diluted -- pro forma .... $ (0.29) $ (0.75)
=========== ==============

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

Fiscal Years Ended
-------------------
June 30, June 30,
2003 2002
-------------------

Risk-free interest rate ............ 4.3% 4.3%

Expected volatility ................ 123.9% 120.2%

Expected life in years ............. 2 - 10 2 - 10

Expected dividends ................. None None

The estimated fair values for stock options granted during fiscal 2003 and 2002
were $0.19 to $0.75 and $0.51 to $2.15, respectively.

F-14

NET LOSS PER SHARE

Basic and diluted net loss per share has been computed by dividing net loss by
the weighted average number of common shares outstanding during the fiscal year.
At June 30, 2003 and 2002, the Company had stock options, stock warrants and
convertible debt outstanding that could potentially be exercised or converted
into 64,833,575 and 20,160,607 additional common shares, respectively. Should
the Company report net income in a future period, diluted net income per share
will be separately disclosed giving effect to the potential dilution that could
occur under the treasury stock method if these stock option, stock warrants and
convertible debt were exercised or converted into common shares.

SEGMENT REPORTING

The Company's chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management currently manages the
Company's business, assesses its performance, and allocates its resources as a
single operating segment.

To date, the Company's products have been principally marketed to customers
residing within the United States of America. Net sales realized from customers
residing in other geographic markets were less than 1% and 3% of consolidated
net sales in fiscal 2003 and 2002, respectively.

RECENTLY ADOPTED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), which revises the accounting for purchased goodwill and other
intangible assets. Under SFAS No. 142, goodwill and other intangible assets with
indefinite lives will no longer be systematically amortized into operating
results. Instead, each of these assets will be tested, in the absence of an
indicator of possible impairment, at least annually, and upon an indicator of
possible impairment, immediately.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related obligation
for its recorded amount or incurs a gain or loss upon settlement.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). SFAS No. 144 was issued to
resolve certain implementation issues that had arisen under SFAS No. 121. Under
SFAS No. 144, a single uniform accounting model is required to be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and certain additional disclosures are required.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements, by rescinding SFAS No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 ("APBO No.
30") will now be used to classify those gains and losses. Additionally, SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. Finally, SFAS No. 145 also makes
technical corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change accounting
practice.

F-15

The Company adopted the provisions of SFAS No. 145 that amended SFAS No. 13, as
required, on May 15, 2002, for transactions occurring after such date with no
material impact on its consolidated financial statements. The Company adopted
SFAS Nos. 142, 143 and 144, as well as the remaining provisions of SFAS No. 145,
as required, on July 1, 2002, with no material impact on its accompanying
consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 was issued to
address the financial accounting and reporting for costs associated with exit or
disposal activities, unless specifically excluded. SFAS No. 146 requires that a
liability for a cost associated with a covered exit or disposal activity be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for a liability for one-time termination benefits
that is incurred over time. If employees are not required to render service
until they are terminated in order to receive the one-time termination benefits
or if employees will not be retained to render service beyond the minimum
retention period (as dictated by existing law, statute or contract, or in the
absence thereof, 60 days), a liability for the termination benefits shall be
recognized and measured at its fair value at the communication date. If
employees are required to render service until they are terminated in order to
receive the one-time termination benefits and will be retained to render service
beyond the minimum retention period, a liability for the termination benefits
shall be measured initially at the communication date based on the fair value of
the liability as of the termination date. The liability shall be recognized
ratably over the future service period. SFAS No. 146 also dictates that a
liability for costs to terminate an operating lease or other contract before the
end of its term shall be recognized and measured at its fair value when the
entity terminates the contract in accordance with the contract terms. A
liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit to the entity is to be recognized and
measured at its fair value when the entity ceases using the right conveyed by
the contract. SFAS No. 146 further dictates that a liability for other covered
costs associated with an exit or disposal activity be recognized and measured at
its fair value in the period in which the liability is incurred. The Company
adopted SFAS No. 146, as required, on January 1, 2003, with no material impact
on its accompanying consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The Company
adopted FIN 45, as required, on January 1, 2003, with no material impact on its
accompanying consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 amended SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123") to provide for alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. SFAS No. 148 further amends
the disclosure provisions of SFAS No. 123 and APBO No. 28 to require prominent
annual and interim disclosures about the effects on reported net income or loss
of an entity's accounting policy decisions with respect to stock-based employee
compensation. As the Company continues to account for stock-based employee
compensation under the intrinsic value based method allowed by APBO No. 25, the
Company's adoption of the disclosure provisions of SFAS No. 148, as required, on
January 1, 2003 had no impact on its accompanying consolidated financial
statements.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses

F-16

consolidation by business enterprises of variable interest entities that possess
certain characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. As the Company has not had, and continues
not to have, any ownership in variable interest entities, the Company's adoption
of FIN 46, as required, on January 31, 2003, had no impact on its accompanying
consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly and clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, except in certain circumstances, and for hedging
relationships designated after June 30, 2003. The Company adopted SFAS No. 149,
as required, on July 1, 2003 with no impact.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
established standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The Company adopted SFAS No. 150, as required, on May
31, 2003 for financial instruments entered into or modified after such date,
with no impact on its accompanying consolidated financial statements. The
remaining provisions of SFAS No. 150 are effective beginning with the Company's
fiscal 2004 first quarter ending September 30, 2003 and must be applied
prospectively by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at July 1, 2003. The Company adopted these remaining
provisions of SFAS No. 150, as required, on July 1, 2003, with no impact.

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE

The following schedules set forth the activity in the Company's allowance for
doubtful accounts receivable for the following periods:

FISCAL YEARS ENDED
-------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Balance, beginning of year ........ $ 91,188 $ 26,158
Additions to allowance ............ 427,617 180,339
Deductions, net of recoveries ..... (65,160) (115,309)
--------- ---------
Balance, end of year .............. $ 453,645 91,188
========= =========

5. INVENTORIES, NET

Inventories, net, consist of the following:

JUNE 30,
--------------------------------
2003 2002
----------- ------------
Raw materials ..................... $ 1,203,877 $ 1,524,618
Work in process ................... 63,861 493,381
Finished goods .................... 719,548 627,588
----------- -----------
1,987,286 2,645,587
Less allowance for inventory
obsolescence .................... (374,696) (58,962)
----------- -----------
Inventories, net .................. $ 1,612,590 $ 2,586,625
=========== ===========

F-17

6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

JUNE 30,
-------------------------------
2003 2002
----------- -----------
Production machinery and equipment $ 889,545 $ 873,138
Technology hardware and software . 583,844 613,351
Leasehold improvements ........... 368,495 368,495
Office furniture and equipment ... 123,565 123,565
----------- -----------
1,965,449 1,978,549
Less accumulated depreciation and
amortization .................... (1,317,922) (974,969)
----------- -----------
Property and equipment, net ...... $ 647,527 $ 1,003,580
=========== ===========

7. NOTE RECEIVABLE - OFFICER

Through fiscal 2001, the Company's Board of Directors periodically approved the
advancement of funds to the Company's Chief Executive Officer. The underlying
promissory note is unsecured, accrues interest at a stated interest rate of
8.75% per annum and requires bi-weekly repayments of principal and interest
through May 23, 2014.

Effective May 1, 2002, the Board of Directors indefinitely suspended the
bi-weekly servicing requirement. The Board of Directors subsequently awarded the
Company's Chief Executive Officer a $60,000 bonus for his fiscal 2002
performance with such bonus applied in its entirety against the outstanding note
receivable balance.

On August 29, 2003, the Board of Directors awarded the Company's Chief Executive
Officer a $3,389 bonus for his fiscal 2003 performance with such bonus applied
in its entirety against the accrued interest on the outstanding note receivable
balance.

8. DEFERRED TAX ASSETS

The Company's deferred tax assets principally relate to (i) net operating loss
carry-forwards that are available, within statutory annual limits, to offset
future taxable income, if any, (ii) purchased software technology and (iii)
compensatory stock options granted. These deferred tax assets, which
approximated $15.5 million and $13.1 million at June 30, 2003 and 2002,
respectively, were fully offset by valuation allowances for financial reporting
purposes. At June 30, 2003, the Company had net operating loss carry-forwards of
approximately $33.4 million that expire in calendar years 2006 through 2023.

9. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

JUNE 30,
------------------------
2003 2002
-------- --------
Accrued interest payable ................ $472,413 $511,462
Accrued royalties payable ............... 104,104 39,960
Accrued sales returns, including warranty
obligations ........................... 103,947 54,278
Accrued wages, benefits and related taxes 79,672 188,793
Accrued other ........................... 5,911 5,669
-------- --------
Total accrued liabilities ............... $766,047 $800,162
======== ========

F-18

10. OPTION AND PURCHASE AGREEMENT

Pursuant to an option and purchase agreement dated November 20, 2002, the
Company received $250,000 from an unrelated party in exchange for granting them
an option to purchase for an additional $500,000 a non-critical and currently
unutilized technology patent to which the Company claims ownership. The Company
has reflected the $250,000 received as deferred income at June 30, 2003. As this
option and purchase agreement subsequently expired unexercised on July 10, 2003,
the Company will recognize a $250,000 non-operating income during its fiscal
2004 first quarter.

11. NOTE PAYABLE

Effective May 1, 2003, the Company renegotiated its existing revolving credit
facility agreement with a financial institution. Under the new agreement, the
Company's then outstanding balance of $2,197,800 was bifurcated into a
$2,000,000 twenty-four month term loan ("term loan") and a $197,800 advance loan
("advance loan"). The term loan accrues interest at a fixed rate of 15% per
annum and is to be repaid through the financial institution's retention of the
first $75,000 of each month's assigned accounts receivable collections. The
advance loan accrues interest at 15% and is to be repaid through the financial
institution's additional retention of 25% of each month's assigned accounts
receivable collections over and beyond the initial $75,000 in collections
retained to service the term loan. This incremental 25% retention is limited to
$50,000 in any month, with a sub-limit of $25,000 should any month's aggregate
accounts receivable collections be less than $200,000. Any principal and accrued
interest balances remaining on the respective loans will be due and payable as
lump sums on April 1, 2005. Beginning with the date on which the advance loan is
repaid in full, the financial institution will become entitled to retain ten
percent of all subsequently collected accounts receivable, subject to a
limitation of ten percent of the term loan's then outstanding balance, with the
aggregate retentions to be returned to the Company upon its full repayment of
the term loan. Either loan may be prepaid at any time, without penalty, at the
Company's option. As with the original revolving credit facility, both loans are
secured and collateralized by the Company's accounts receivable, inventory,
property and equipment and intellectual property. Should any category of
collateral fall below specified percentages and margins, the financial
institution will be entitled to retain additional accounts receivable
collections sufficient to restore such percentages and margins. In consideration
for extending the above loans, the Company will pay the financial institution an
annual fee of $100,000, beginning on May 1, 2003 and upon each annual
anniversary thereafter on which the term loan remains unpaid. The initial annual
fee was satisfied through the issuance of 1,000,000 shares of the Company's
common stock.

12. OPERATING AND CAPITAL LEASES

The Company leases its corporate facilities as well as certain equipment under
operating leases. Certain of these operating leases are noncancellable and
contain rent escalation clauses. The Company incurred aggregate rent expense
under operating leases of $128,866 and $183,032 during fiscal years 2003 and
2002, respectively. The Company also leases certain equipment under capital
leases. The aggregate net carrying value of the underlying collateralizing
assets was approximately $285,000 and $434,000 at June 30, 2003 and 2002,
respectively.

F-19

The future aggregate minimum lease payments under lease agreements in existence
at June 30, 2003 are as follows:

OPERATING CAPITAL
FISCAL YEARS ENDING JUNE 30, LEASES LEASES
---------------------------------------------------------------------------
2004 ...................................... $ 69,864 $159,088
2005 ...................................... 4,299 29,648
2006 ...................................... -- 11,512
2007 ...................................... -- 5,340
2008 ...................................... -- 5,340
Thereafter ................................ -- --
-------- --------
Total lease payments ...................... $ 74,163 210,928
======== ========
Less imputed interest ..................... 20,210
--------
Present value of net minimum lease payments
190,718
Less current maturities ................... 147,964
--------
Total long-term capital lease obligation .. $ 42,754
========

13. CONVERTIBLE DEBT

The Company has outstanding unsecured convertible notes with an aggregate
principal face amount of $5.3 million that accrue interest at the prime rate
plus two percent (6.00% at June 30, 2003) and become due and payable on various
dates between July 1, 2006 and November 20, 2006. These notes were initially
convertible at the option of the holders into common stock of the Company at a
rate of $1.00 per common share. However, pursuant to an anti-dilution provision
providing for a formula-driven downward adjustment of their conversion rate
should the Company subsequently issue common shares at a price below the then
stated conversion rate, the conversion rate was adjusted downward to $0.10 per
common share in connection with a private placement of the Company's common
shares that commenced in March 2003. The Company has the right to force
conversion of the notes if the market price of its common stock exceeds $3.00
per share for 20 consecutive trading days. For every two dollars of original
note principal, the holder received a detachable stock purchase warrant allowing
for the purchase of a share of the Company's common stock at $2.50 per share. At
the respective dates of issuance, the Company was required under accounting
principles generally accepted in the United States of America to ascertain the
fair value of the detachable stock warrants and resulting beneficial conversion
feature. The aggregate fair value of the detachable warrants and beneficial
conversion feature was equal to the aggregate principal face amount of the debt
proceeds received, and as such, this amount was recorded as a debt discount by
increasing additional paid-in capital. This debt discount is being amortized to
interest expense over the life of the underlying notes. The related unamortized
debt discount amounted to $2,883,918 and $4,578,957 at June 30, 2003 and 2002,
respectively. The remaining principal and discounted amounts of the Company's
outstanding convertible debt obligations at June 30, 2003 of $5,270,000 and
$2,386,082, respectively, mature during the Company's fiscal year ending June
30, 2007.

14. STOCKHOLDERS' DEFICIT

General

On June 10, 2002, the Company's shareholders approved an amendment to the
Articles of Incorporation increasing the number of authorized "blank check"
preferred shares from 5 million to 15 million and the number of authorized
common shares from 50 million to 100 million.

Common Stock Issued For Cash

During fiscal 2003 and 2002, the Company issued 34,837,500 and 2,850,000 shares
of its common stock in "best efforts" private placements with accredited
investors from which it received $3,483,750 and $2,670,000, respectively (net of
$55,000 and $180,000 in issuance costs, respectively). The fiscal 2003
placements included

F-20

50,000 and 97,500 common shares sold, at the same price paid by unrelated
parties, to a member of the Company's Board of Directors and the Company's Chief
Financial Officer, respectively.

The purchasers of 1,000,000 of the common shares issued during fiscal 2002
received an anti-dilution guarantee providing for the issuance of a
formula-driven, then indeterminable number of additional common shares at no
additional consideration should the Company subsequently issue common shares or
convertible debt with a price or conversion rate below $1.00 per share,
respectively.

The purchasers of 16,000,000 of the common shares issued during fiscal 2003
received an anti-dilution guarantee providing for the issuance of a
formula-driven, then indeterminable number of additional common shares at no
additional consideration should the Company subsequently issue, on or before
July 26, 2003, common shares or common stock equivalents with an effective price
below $0.125 per share, respectively.

All previously issued and outstanding anti-dilution guarantees expired as of
July 26, 2003 without the issuance of any additional common shares by the
Company.

Common Stock Issued For Services

During fiscal 2003 and 2002, the Company issued 4,567,140 and 663,919 common
shares, respectively, to unrelated parties for the performance of various
services. The Company recognized associated expenses of $472,964 and $964,474
during fiscal 2003 and 2002, respectively, based upon the fair market value of
the common shares at their respective dates of issuance.

Common Shares Issued Upon Conversion of Convertible Debt

During fiscal 2003, holders of $1,794,984 of the Company's then outstanding
convertible notes converted such notes, and $495,190 in accrued interest
thereon, into 22,901,730 common shares. During fiscal 2002, holders of
$1,052,500 of the Company's then outstanding convertible notes converted such
notes, and $56,247 in accrued interest thereon, into 1,108,747 common shares.

Other Issuances of Common Shares

In January 2003, the Company issued 1,040,816 previously escrowed registered
shares of its common stock to an institutional shareholder in full and final
resolution of a dispute regarding the number of common shares it was entitled to
under an anti-dilution guarantee. As part of this resolution, the institutional
shareholder agreed to the cancellation of all outstanding stock purchase
warrants held by it and to waive any potential liquidated damage claims it may
have had against the Company pursuant to a related registration rights
agreement.

In March 2003, the Company elected to retroactively issue a principal
shareholder, who had previously converted certain outstanding notes of the
Company at the then stated rate of $1.00 per common share, an additional
4,579,407 common shares as an inducement for him to participate in a subsequent
private placement of common shares at $0.10 per share.

In May 2003, the Company issued 1,000,000 shares of its common stock to an
institutional holder of convertible notes in exchange for their forfeiting an
anti-dilution guarantee and warrants.

Stock Options and Warrants

During fiscal 2002, the Company executed a number of stock option agreements
with third parties for the performance of consulting and other services. These
stock option agreements covered 142,500 shares of the Company's common stock
during fiscal 2002. The option agreements contain exercise prices ranging from

F-21

$1.00 to $5.00 per share and have contractual lives ranging from one year to
five years. In connection with these stock option agreements and the related
services obtained, the Company recognized various expenses aggregating $135,842
during fiscal 2002. There were no such option agreements during fiscal 2003.

During fiscal 2003 and 2002, the Company entered into several agreements with
third parties for the performance of various services over subsequent two to
three year periods. In connection therewith, the Company granted these service
providers stock options with various exercise prices and expiration dates.
During fiscal 2003 and 2002, the Company recognized various expenses aggregating
$68,797 and $576,631, respectively, for the fair value of the issued stock
options. Such expenses will be adjusted in future fiscal periods, as the related
services are performed, based on the then calculated fair values and any
incremental changes which may occur therein. The related expenses are being
recognized as the stock options vest based on the terms of the stock option
agreements.

15. STOCK OPTIONS AND WARRANTS

The Company has an Employee Stock Option Plan (the "Plan") that provides for the
grant of options to employees to purchase shares of the Company's common stock
at exercise prices determined by the Board of Directors. As of June 30, 2003,
1,124,558 options originally made available under the Plan remain available for
grant. The Company also grants from time to time stock options and warrants
outside the Plan to directors, vendors and others to purchase shares of the
Company's common stock at exercise prices as determined by the Chief Executive
Officer and approved by the Board of Directors. These options are granted as
payment of services or as an inducement to provide the Company with financing.

On June 10, 2002, the Company's shareholders approved the adoption of the 2002
Stock Option Plan ("2002 Plan") pursuant to which two million shares of the
Company's common stock were reserved for future issuance upon exercise of
options granted at exercise prices to be approved by the Board of Directors.
These options may be issued to directors, officers, employees, or other persons
who perform services on behalf of the Company. No options have been granted
under the 2002 Plan as of June 30, 2003.

The following table summarizes stock option and warrant activity during fiscal
2003 and 2002:

WEIGHTED
AVERAGE
OPTIONS/ EXERCISE
WARRANTS PRICE
---------- --------
Options/warrants outstanding at
June 30, 2001 ............... 9,217,766 $2.32
Granted ....................... 3,473,584 2.23
Expired ....................... (345,727) 1.26
Exercised ..................... -- --
-----------
Options/warrants outstanding at
June 30, 2002 ............... 12,345,623 2.33
Granted ....................... 1,609,500 0.85
Expired ....................... (5,995,738) 2.62
Exercised ..................... -- --
----------- -----
Options/warrants outstanding at
June 30, 2003 ............... 7,959,385 $1.81
=========== =====
Exercisable at June 30, 2003 .. 5,137,476 $1.93
=========== =====

The following table summarizes information about the Company's outstanding stock
options and warrants at June 30, 2003:

F-22

OPTIONS/WARRANTS OPTIONS/WARRANTS
OUTSTANDING EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
--------------------------------------------------------------------------------------------

$0.25 - $0.50 40,000 2.81 $0.25 40,000 $0.25
$0.50 - $0.75 1,470,000 7.45 0.75 370,000 0.75
$0.98 - $1.02 803,746 1.25 1.00 801,446 1.00
$1.25 - $1.50 2,466,262 6.37 1.42 1,548,438 1.39
$1.69 - $1.95 92,000 5.57 1.81 74,000 1.77
$2.00 - $2.25 20,000 3.40 2.00 16,224 2.00
$2.44 - $2.50 1,481,250 1.34 2.50 1,318,750 2.50
$3.00 - $3.30 1,455,927 3.93 3.03 836,118 3.06
$3.50 - $3.75 7,500 2.26 3.63 7,500 3.63
$5.00 125,000 1.71 5.00 125,000 5.00
--------------------------------------------------------------------------------------------
$0.25 - $5.00 7,961,685 4.56 $1.81 5,137,476 $1.93
============================================================================================

16. EMPLOYEE SAVINGS, RETIREMENT AND PROFIT SHARING PLAN

Effective March 1, 2002, the Company established a tax-qualified employee
savings, retirement and profit sharing plan qualified under Section 401(k) of
the Internal Revenue Code ("the "401(k) Plan") pursuant to which eligible
employees may elect to defer a portion of their current compensation, up to
certain statutorily prescribed annual limits, and make corresponding periodic
contributions into the 401(k) Plan. Contributions to the 401(k) Plan, as well as
any income earned thereon, are not taxable to the employee until withdrawn from
the 401(k) Plan. All employees with 1,000 hours of service who have been
employed by the Company for at least one year are eligible to participate in the
401(k) Plan. The Company, at its discretion, may elect to (i) contribute a
matching percentage of the employees' overall contribution and/or (ii) make a
profit sharing contribution based on the overall profitability of the Company.
The Company did not make any contributions for the fiscal years ended June 30,
2003 and 2002.

17. WRITE-OFF OF LICENSE RIGHTS AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

At June 30, 2002, management deemed it appropriate to write-off the Company's
$416,833 unamortized balance for license rights. These license rights pertain
exclusively to an alternative total cholesterol measuring technology not
utilized by the Company's current line of cholesterol monitors and which is
unrelated to the Company's proprietary patents. Management's bases for the
write-off were as follows: (i) the favorable terms of the Company's current
multiple-year licensing and manufacturing agreement with the developer of the
total cholesterol dry-chemistry test strips utilized by the Company's current
line of cholesterol monitors make it highly unlikely that the Company would
elect during the remaining license term to make the substantial capital
investments necessary to internally manufacture dry-chemistry test strips
utilizing this alternative technology, (ii) the Company's recent introduction
and continuing roll-out of its consumer monitor into the retail marketplace, as
well as certain recent technological advances within the industry, have
diminished any sub-licensing prospects for this alternative technology, and
(iii) the Company's current financial position makes any internal development
and market introduction of products utilizing this alternative technology highly
unlikely during the remaining license term.

At June 30, 2002, management deemed it appropriate to write-off $182,262 in
previously capitalized, and yet to be amortized, software development costs.
These software development costs pertained exclusively to the Company's
Privalink software technology. Management's principal basis for the above
write-off was that, given its current principal focus on further penetrating the
consumer marketplace with the Company's over-the-counter, personal-use

F-23

cholesterol monitor and the Company's currently limited financial and marketing
resources, it is highly unlikely for the foreseeable future that the Company
will conduct the balance of the development activities necessary to make this
software suitable for general release and the critical marketing activities
necessary to develop the marketplace.

18. CONTINGENCIES

General

The Company is periodically involved in litigation and administrative
proceedings primarily arising in the normal course of its business. In the
opinion of management, the Company's gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing litigation or administrative proceedings
would not materially affect its financial position, results of operations or
cash flows.

Compensating Payment Provision with Principal Vendor

The Company's contract with the supplier of its dry-chemistry total cholesterol
test strips contains a provision that could potentially require the Company to
make certain compensating payments in the event the Company fails to meet
minimum annual sales requirements. The dollar amount of such future amounts, if
any, is currently indeterminable.

American Stock Exchange's Assertion of Rule Violations and the Company's Pending
Delisting

In June 2003, the Company completed a private placement of 34.9 million shares
of its common stock with accredited investors at $0.10 per share that provided
it with $3.5 million in aggregate net cash proceeds. As part of this private
placement, holders of $1.8 million of the Company's then outstanding convertible
notes, which were becoming due and payable in August 2003, converted such notes,
and $0.5 million in accrued interest thereon, at $0.10 per share into 22.9
million shares of the Company's common stock. On June 20, 2003, the Company
issued a press release, and filed a Form 8-K with the United States Securities
and Exchange Commission, publicly disclosing its completion of these
transactions. [Note: The preceding transactions are included within the fiscal
2003 activity previously summarized in Note 14 - Stockholders Deficit]

On June 27, 2003, the Company received a telephone call from an American Stock
Exchange ("AMEX") official who advised it that these common share issuances may
have violated AMEX Rules 711 and 713. The Company was advised that Rule 711
requires a company to obtain the advance approval by its shareholders of any new
issuance of common shares in excess of 5% of its previously outstanding common
shares to officers, directors and key employees at a price below the then
prevailing market price per share. The Company was additionally advised that
Rule 713 requires that a company obtain the advance approval by its shareholders
of any new issuance of common shares in excess of 20% of its previously
outstanding common shares at a price below the then prevailing market price per
share. The Company immediately advised the AMEX that any such violations were
completely inadvertent and informed them in detail regarding the perilous
day-to-day financial conditions it had been operating under immediately prior to
it undertaking these issuances out of financial necessity.

On June 30, 2003, without any advance notice to the Company, the AMEX suspended
trading in the Company's common shares. Upon becoming aware of such, the Company
issued a press release publicly announcing the AMEX's assertions regarding
possible rule violations and its request to the AMEX for an exception pursuant
to its Rule 710 of the shareholder approval requirements of Rules 711 and 713.
The AMEX allowed trading in the Company's common shares to resume on July 1,
2003.

After several extensive telephone discussions with the AMEX, the Company
submitted a preliminary proposal on

F-24

July 11, 2003 whereby it would retroactively seek shareholder approval of the
subject common share issuances. On July 21, 2003, the Company received a formal
"deficiency" letter from the AMEX that cited two issues of concern. The first
issue cited was the Company's failure to obtain advance shareholder approval of
the subject common share issuances. The second issue cited was the Company's
financial viability. The letter specifically requested that the Company respond
in writing by August 20, 2003 with a proposal to cure the cited rule violations
within 90 days and a viable plan to continue as a going concern for at least the
next 18 months. The Company submitted its formal response on August 20, 2003.

On September 22, 2003, the Company was advised by AMEX officials in a telephone
call that they had decided to proceed with delisting and that a formal letter to
that effect was forthcoming. On September 23, 2003, the Company's Board of
Directors voted to withdraw the Company's listing with the AMEX and to obtain a
listing with the Over-The-Counter Bulletin Board ("OTC-BB"). The date on which
the Company's common shares will no longer trade on the AMEX is currently
unknown but it is anticipated to be within days or weeks of this filing. The
Company believes that it meets the requirements for trading on the OTC-BB and is
discussing quotation on the OTC-BB with several potential Market Makers for
sponsorship on the OTC-BB upon its effective withdrawal from the AMEX. However,
even if it is traded on the OTC-BB, the Company's common shares may be more
difficult to buy or sell, and, as a result, its common shares may experience
greater price volatility.

19. SUBSEQUENT EVENT

The Company completed on September 13, 2003 a private placement of $3,350,000 in
convertible notes to an investment group, including certain of its existing
institutional shareholders, from which it received $3,067,000 in net cash
proceeds. The Company was required to immediately place $1,533,500 of the
proceeds into escrow, the future release of such funds to it is contingent upon
the approval by a majority of its shareholders of a proposed increase in its
authorized common shares from 100 million to 250 million and the initiation of
trading in the Company's common shares on the OTC-BB. Any failure by the Company
to obtain the approval of its shareholders for the requested increase in its
authorized common shares will constitute a default, and, as a result, the
noteholders may demand immediate repayment, as defined below. All notes have a
stated 8.0% annual rate of interest, payable at the Company's option in either
cash or authorized and unissued shares of its common stock, mature on September
10, 2006, and are convertible, only if the Company has sufficient authorized and
unissued common shares, into shares of its common stock at a stated rate of
$0.13 per share. Each noteholder received stock purchase warrants enabling them
to purchase shares of the Company's common stock at $0.2144 per share over a
subsequent two year period equal to 50% of the common shares they would be
entitled to receive upon their immediate conversion of the note principal. Any
related subsequent issuances of the Company's common stock are limited to any
individual noteholder beneficially owning no more than 4.99% of the Company's
then outstanding common shares.

In connection with the immediately preceding private placement, the Company is
required to file a registration statement with the United States Securities and
Exchange Commission ("SEC") registering the notes and accompanying stock
purchase warrants on or before October 27, 2003. Depending upon the occurrence
and duration of certain intervening events to which it has little or no control
over, the Company may be required to obtain the SEC's declaration of
effectiveness for this registration statement as early as January 11, 2004, to
which there can be no assurance. Any failure by the Company to meet the mandated
deadlines will constitute a default, and, as a result, the noteholders may
demand immediate repayment. Within the context of any default, repayment is
defined as being the greater of (i) 130% of the aggregate outstanding principal
balance and accrued interest or (ii) a currently indeterminable amount based
upon the aggregate outstanding principal and accrued interest adjusted upwards
in accordance with a formula dependent upon any increase in the market price of
the Company's common stock subsequent to September 13, 2003. An underlying
agreement also requires that the Company obtain the unanimous approval of the
noteholders prior to (i) selling any common shares or convertible notes from
September 13, 2003 until 120 days after the date on which the SEC declares the
registration statement effective or (ii) selling any common shares or common
share equivalents with anti-dilution guarantees or declaring a reverse stock
split during the period in which any of these notes remain outstanding. The
agreement further stipulates that no note may

F-25

be prepaid without the consent of the holder and that each noteholder has a
right of first refusal to participate in any new financing transaction consented
to through the 120 day period ending after effectiveness of the registration
statement. The Company will also be prohibited under the Securities Act of 1933,
as amended, from conducting any other offering activities subsequent to filing
the registration statement with the SEC and through the date on which either the
SEC declares it effective or the Company withdraws it.

The Company is continuing to ascertain the appropriate acccounting for these
notes and accompanying warrants, including their respective fair values and any
resulting debt discount.

F-26

LIFESTREAM TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
------

Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2003 and June 30, 2003............. F-28

Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended
December 31, 2003, and December 31, 2002...................................................... F-29

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended
December 31, 2003 and December 31, 2002...................................................... F-30

Notes to (Unaudited) Interim Condensed Consolidated Financial Statements................................ F-31

F-27

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

DECEMBER 31, JUNE 30,
2003 2003
------------ ------------

ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents ....................................... $ 364,026 $ 1,370,126
Accounts receivable, net ........................................ 698,374 269,398
Inventories, net (Note 4) ....................................... 987,760 1,612,590
Prepaid expenses ................................................ 635,753 38,506
------------ ------------
Total current assets ....................................... 2,685,913 3,290,620
Deferred financing costs, net ...................................... 492,529 422,897
Patent rights, net ................................................. 521,474 562,945
Property and equipment, net ........................................ 446,794 647,527
Note receivable -- officer (Note 5) ................................ 38,728 38,728
Other .............................................................. 48,232 115,208
------------ ------------
Total assets ............................................... $ 4,233,670 $ 5,077,925
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................ $ 794,476 $ 2,173,720
Accrued liabilities (Note 6) .................................... 584,309 766,047
Capital lease obligations ....................................... 43,166 147,964
Notes payable (Note 7) .......................................... 900,000 900,000
Deferred income (Note 10) ....................................... -- 250,000
------------ ------------
Total current liabilities .................................. 2,321,951 4,237,731
Capital lease obligations .......................................... 11,208 42,754
Note payable (Note 7) .............................................. 677,865 1,069,932
Convertible debentures, principal face amounts of $7,195,000 and
$5,270,000, respectively (Note 8) ............................... 2,344,301 2,386,082
------------ ------------
Total liabilities .......................................... 5,355,325 7,736,499
------------ ------------

Commitments and contingencies (Notes 8 and 11)

Stockholders' deficit (Note 9):
Preferred stock, $.001 par value; 15,000,000 shares authorized;
none issued or outstanding .................................... -- --
Common stock, $.001 par value; 250,000,000 and 100,000,000 shares
authorized, respectively; 113,179,212 and 92,894,590 issued and
outstanding, respectively ..................................... 113,179 92,895
Additional paid-in capital ...................................... 44,988,724 39,511,226
Accumulated deficit ............................................. (46,223,558) (42,262,695)
------------ ------------
Total stockholders' deficit ................................ (1,121,655) (2,658,574)
------------ ------------
Total liabilities and stockholders' deficit ................ $ 4,233,670 $ 5,077,925
============ ============

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

F-28

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------

Net sales ............................................. $ 787,052 $ 1,930,113 $ 1,412,526 $ 3,062,549
Cost of sales ......................................... 658,536 1,103,038 1,085,672 2,017,911
------------- ------------- ------------- -------------
Gross profit .......................................... 128,516 827,075 326,854 1,044,638
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing ............................. 713,468 248,416 845,386 463,414
General and administrative ...................... 666,514 699,542 1,363,928 1,635,603
Product research and development ................ 24,523 94,736 27,991 272,065
Depreciation and amortization ................... 76,820 121,215 156,133 241,672
Loss on disposal of equipment ................... -- -- 87,756 --
------------- ------------- ------------- -------------
Total operating expenses .............................. 1,481,325 1,163,909 2,481,194 2,612,754
------------- ------------- ------------- -------------
Loss from operations .................................. (1,352,809) (336,834) (2,154,340) (1,568,116)
------------- ------------- ------------- -------------
Non-operating income (expenses):
Interest income .................................. 1,232 983 3,240 2,001
Interest and financing expenses (Notes 7 and 8) .. (418,530) (352,106) (675,749) (731,472)
Amortization of convertible debt discount (Note 8) (995,547) (320,218) (1,383,219) (640,436)
Gain on unexercised option and purchase
agreement (Note 10) ............................. -- -- 250,000 --
Other ............................................ (358) (1,599) (795) (2,263)
------------- ------------- ------------- -------------
Total non-operating expenses, net ..................... (1,413,203) (672,940) (1,806,523) (1,372,170)
------------- ------------- ------------- -------------
Net loss .............................................. $ (2,766,012) $ (1,009,774) $ (3,960,863) $ (2,940,286)
============= ============= ============= =============
Net loss per share - Basic and diluted (Note 3) ....... $ (0.03) $ (0.04) $ (0.04) $ (0.12)
============= ============= ============= =============
Weighted average number of shares - Basic and diluted
(Note 3) ........................................... 102,553,484 26,027,563 99,271,612 25,503,962
============= ============= ============= =============

The accompanying notes are an integral part of these condensed consolidated
financial statements

F-29

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
----------- -----------

Operating activities:
Net loss .......................................................... $(3,960,863) $(2,940,286)
Non-cash items:
Depreciation and amortization ................................... 156,133 241,672
Loss on disposal of equipment ................................... 87,756 --
Amortization of deferred financing costs (Notes 7 and 8) ........ 213,368 180,200
Amortization of discount on convertible debentures (Note 8) ..... 1,383,219 640,436
Provision for (recovery of) doubtful accounts ................... 32,726 (29,991)
Increase (reduction) in inventory valuation allowance ........... 163,281 (3,178)
Other ........................................................... (15,357) --
Issuances of compensatory common stock, options and warrants for
employee and non-employee services ............................ 183,898 74,324
Net changes in assets and liabilities:
Accounts receivable ............................................. (461,702) (1,076,707)
Inventories ..................................................... 461,549 500,624
Prepaid expenses ................................................ (597,247) 258
Accounts payable ................................................ (1,379,244) 1,334,595
Accrued liabilities ............................................. 372,503 274,503
Deferred income ................................................. (250,000) 250,000
Other non-current assets ........................................ 66,976 (5,353)
----------- -----------
Net cash used in operating activities ...................... (3,543,004) (558,903)
----------- -----------
Investing activities:
Capital expenditures .............................................. (1,685) (16,407)
----------- -----------
Net cash used in investing activities ...................... (1,685) (16,407)
----------- -----------
Financing activities:
Proceeds from issuance of convertible debentures, net (Note 8) .... 3,067,000 --
Proceeds from borrowings under line of credit agreement ........... -- 554,391
Principal payments of capital lease obligations ................... (136,344) (3,057)
Principal payments of notes payable (Note 7) ...................... (392,067) --
Principal payments of convertible debentures and other debt ....... -- (468,164)
----------- -----------
Net cash provided by financing activities .................. 2,538,589 83,170
----------- -----------
Net decrease in cash and cash equivalents ............................ (1,006,100) (492,140)
Cash and cash equivalents at beginning of period ..................... 1,370,126 589,854
----------- -----------
Cash and cash equivalents at end of period ........................... $ 364,026 $ 97,714
=========== ===========
Supplemental schedule of cash activities:
Interest paid in cash ............................................ $ 144,903 $ 226,524

Supplemental schedule of non-cash investing and financing activities:
Discount for beneficial conversion feature on convertible notes
and the fair value of accompanying detachable stock
warrants (Note 8) .............................................. $ 3,350,000 $ --
Issuance of common stock in exchange for conversion of convertible
debt and accrued interest (Note 9) ............................. $ 1,979,241 $ --

The accompanying notes are an integral part of these condensed consolidated
financial statements

F-30

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND ORGANIZATIONAL STRUCTURE

Lifestream Technologies, Inc. (the "Company"), a Nevada corporation
headquartered in Post Falls, Idaho, is a marketer of a proprietary total
cholesterol measuring device for at-home use by health conscious consumers and
at-risk medical patients. Through regular monitoring of one's total cholesterol
level, an individual can continually assess their susceptibility to developing
cardiovascular disease. Once diagnosed with an elevated total cholesterol level,
regular at-home testing with one of our devices enables a patient to readily
ascertain the benefits derived from diet modification, an exercise regimen
and/or a drug therapy, thereby reinforcing their continuing compliance with an
effective cholesterol-lowering program.

2. SUBSTANTIAL DOUBT REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN

The Company has incurred substantial operating and net losses, as well as
negative operating cash flows, since its inception. As a result, the Company
continued to have significant working capital and stockholders' deficits at June
30, 2003. In recognition of such, the Company's independent certified public
accountants included an explanatory paragraph in their report on the Company's
consolidated financial statements for the fiscal year ended June 30, 2003, that
expressed substantial doubt regarding the Company's ability to continue as a
going concern.

As more extensively discussed in Note 8, on September 13, 2003, the Company
completed a private placement offering of $3,350,000 in unsecured convertible
debentures from which it received $3,067,000 in net cash proceeds. Also, as more
extensively discussed in Note 12, on February 20, 2004, the Company completed a
private placement offering of $2,775,000 in unsecured convertible debentures
from which it received $2,077,000 in net cash proceeds. The purchase price for
the convertible debentures issued in February 2004 gives effect to an original
issue discount of approximately $500,000, the amount of which was withheld from
the proceeds at the time of the closing of the financing. In connection with
this transaction and subject to a 4.9% beneficial ownership limitation,
following public disclosure of the term and conditions of this financing,
participating warrant holders agreed to exercise outstanding warrants held by
them. Upon exercise, the Company will receive an additional $481,000 in net
proceeds. After this offering, the Company has only approximately 1.7 million
authorized common shares remaining available for issuance. Under the terms of
the offering, the Company has agreed to seek shareholder approval to increase
the number of authorized common shares to 500 million shares by April 30, 2004.
Subject to such increase in the number of authorized common shares, investors in
the February 20, 2004, financing have been granted the option to purchase up to
an additional $1.22 million of convertible debentures and warrants with terms
and conditions substantially identical to those in the February 2004
transaction. Any failure by the Company to obtain such approval will limit its
future financing options to the issuance of higher interest-bearing,
non-convertible debt instruments.

The Company will continue to require additional financing to fund the Company's
longer-term operating needs, including its continued conducting of those
marketing activities it deems critical to building broad public awareness of,
and demand for, its current consumer device. The amount of additional funding
needed to support it until that point in time at which it forecasts that its
business will become self-sustaining from internally generated cash flow is
highly dependent upon the ability to continue conducting marketing activities
and the success of these campaigns on increasing sales to consumers.

F-31

offer related incentives that would adversely impact its consolidated gross
margin, the timing and degree to which is not currently determinable. However,
once its inventory of these predecessor devices is fully depleted, the Company
anticipates a consolidated gross margin of approximately 45% from sales of its
current consumer device before reductions for inventory obsolescence allowances.
Additionally, to the extent that it is able to continue to conduct the
meaningful marketing activities it began in October 2003, primarily targeted
radio advertising, the Company believes that the economic and psychological
attractiveness of its current consumer device's lower retail price point will
substantially increase the likelihood of it realizing the significant sales
increases and operating cost leverage it seeks over the longer term.

With respect to its operating cost structure, the Company implemented a series
of difficult, yet necessary, cost-cutting measures during its preceding fiscal
year. The most significant of these measures was the elimination of
substantially all non-critical personnel, consultants and infrastructure. The
Company currently operates with a core staff of 19 full-time employees, as
compared to 38 employees at June 30, 2002. Additionally, concurrent with the
completion of all re-engineering activities associated with the development and
refinement of its current consumer device, the Company eliminated substantially
all of its product research and development expenditures as of December 31,
2002. The Company expects that its product research and development needs and
expenditures for the foreseeable future will remain nominal.

3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation
These condensed consolidated financial statements include the operations of the
Company and its two wholly-owned subsidiaries, Lifestream Diagnostics, Inc. and
Secured Interactive Technologies, Inc. All material intercompany transactions
and balances have been eliminated in consolidation.

Fiscal Periods
The Company's fiscal year-end is June 30. References to a fiscal year refer to
the calendar year in which such fiscal year ends.

Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and the disclosure of contingent
assets and liabilities. The accounting estimates that require management's most
difficult and subjective judgments include the assessment and valuation of the
patent rights, allowance for doubtful accounts receivable and the sales returns
allowance. These estimates and assumptions are based on the Company's historical
results as well as management's future expectations. The Company's actual
results could vary materially from management's estimates and assumptions.

Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared by
the Company's management, without audit, in accordance with accounting
principles generally accepted in the United States of America and, in the
opinion of management, contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows for the periods
presented. Certain information and note disclosures normally included in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been

F-32

condensed or omitted in these interim condensed consolidated financial
statements, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The consolidated financial
position, results of operations and cash flows for the interim periods disclosed
herein are not necessarily indicative of future financial results. These interim
condensed consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and the notes thereto included in
the Company's most recent Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2003.

Net Loss Per Share
Basic and diluted net loss per share have been computed by dividing net loss by
the weighted average number of common shares outstanding during the fiscal
period. At December 31, 2003 and 2002, the Company had stock options, stock
warrants and convertible debentures outstanding that could potentially be
exercised or converted into 83,304,128 and 21,248,001 additional common shares,
respectively. Should the Company report net income in a future period, net
income per share - diluted will be separately disclosed giving effect to the
potential dilution that could occur under the treasury stock method if these
stock options, stock warrants and convertible debentures were exercised or
converted into common shares.

Stock-Based Compensation
As allowed by Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to
retain the compensation measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
its related interpretations for stock options issued to employees. Under APB No.
25, compensation cost is recognized at the measurement date for the amount, if
any, that the quoted market price of the Company's common stock exceeds the
option exercise price. The measurement date is the date at which both the number
of options and the exercise price for each option are known.

No stock-based employee compensation cost is reflected in the Company's reported
net losses, as all options granted had an exercise price equal to or in excess
of the market value of the underlying common stock on the respective dates of
grant. If the Company had accounted for its stock-based employee compensation
under the fair value recognition and measurement principles of SFAS No. 123, the
Company's reported net losses would have been adjusted to the pro forma net loss
amounts presented below:

THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------

Net loss, as reported ........................ $(2,766,012) $(1,009,774) $(3,960,863) $(2,940,286)

Add: SFAS No. 123 compensation expense ....... (511,764) (678,981) (657,634) (899,693)
----------- ----------- ----------- -----------
Pro forma net loss ........................... (3,277,776) (1,688,755) (4,618,497) (3,839,979)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted -- as reported ......... (0.03) (0.04) (0.04) (0.12)
=========== =========== =========== ===========

Basic and diluted -- pro forma ........... (0.03) (0.06) (0.05) (0.15)
=========== =========== =========== ===========

Segment Reporting
The Company's chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management currently manages the
Company's business, assesses its performance, and allocates its resources as a
single operating segment.

Recently Adopted Accounting Standards
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities: ("FIN No. 46"). In

F-33

December 2003, the FASB issued a revision to the interpretation ("FIN No.
46(r)"). FIN No. 46(r) clarifies the application of Accounting Research Bulletin
No. 51 to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN No. 46
and FIN No. 46(r) effective as of December 31, 2003, were adopted by the Company
with no material impact to the condensed consolidated financial statements. The
remaining provisions of FIN No. 46(r) will be adopted during the third quarter
of fiscal 2004, as applicable, and are not expected to have a material impact to
the Company's condensed consolidated financial statements.

In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly and clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except in
certain circumstances, and for hedging relationships designated after June 30,
2003. The Company adopted SFAS No. 149, as required, on July 1, 2003, with no
impact on the condensed consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
established standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The Company adopted SFAS No. 150, as required, on May
31, 2003, for financial instruments entered into or modified after such date,
with no impact on its accompanying consolidated financial statements. The
remaining provisions of SFAS No. 150 are effective beginning with the Company's
fiscal 2004 first quarter ending December 31, 2003, and must be applied
prospectively by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at July 1, 2003. The Company adopted these remaining
provisions of SFAS No. 150, as required, with no impact on the condensed
consolidated financial statements.

4. INVENTORIES, NET

Inventories, net, consist of the following:

DECEMBER 31, 2003 JUNE 30, 2003
----------------- -------------
Raw materials .......... $ 1,124,630 $ 1,203,877
Work in process ........ 143,220 63,861
Finished goods ......... 257,887 719,548
----------- -----------
1,525,737 1,987,286
Less valuation allowance (537,977) (374,696)
----------- -----------
Inventories, net ....... $ 987,760 $ 1,612,590
=========== ===========

5. NOTE RECEIVABLE - OFFICER
Through fiscal 2001, the Company's Board of Directors periodically approved the
advancement of funds to the Company's Chief Executive Officer. The underlying
promissory note is unsecured, accrues interest at a stated interest rate of
8.75% per annum and requires bi-weekly repayments of principal and interest
through May 23, 2014. Effective May 1, 2002, the Board of Directors indefinitely
suspended the bi-weekly servicing requirement. On October 15, 2003, the
Company's Board of Directors resolved that all related interest accruals during
fiscal 2004 are to be concurrently offset by equivalent bonus awards to the
Company's Chief Executive Officer.

F-34

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

DECEMBER 31, 2003 JUNE 30, 2003
----------------- -------------
Accrued sales returns, including warranty
obligations ........................... $224,333 $103,947
Accrued interest payable ................ 154,041 472,413
Accrued royalties payable ............... 135,300 104,104
Accrued wages, benefits and related taxes 49,514 79,672
Accrued other ........................... 21,121 5,911
-------- --------
Total accrued liabilities ............... $584,309 $766,047
======== ========

7. NOTE PAYABLE

Effective May 1, 2003, the Company renegotiated its existing revolving credit
facility agreement with a financial institution. Under the new agreement, the
Company's then outstanding balance of $2,197,800 was bifurcated into a
$2,000,000 twenty-four month term loan ("term loan") and a $197,800 advance loan
("advance loan"). The term loan accrues interest at a fixed rate of 15% per
annum and is to be repaid through the financial institution's retention of the
first $75,000 of each month's assigned accounts receivable collections. The
advance loan accrues interest at 15% and is to be repaid through the financial
institution's additional retention of 25% of each month's assigned accounts
receivable collections over and beyond the initial $75,000 in collections
retained to service the term loan. This incremental 25% retention is limited to
$50,000 in any month, with a sub-limit of $25,000 should any month's aggregate
accounts receivable collections be less than $200,000. Any principal and accrued
interest balances remaining on the respective loans will be due and payable as
lump sums on April 1, 2005. Beginning with the date on which the advance loan is
repaid in full, the financial institution will become entitled to retain ten
percent of all subsequently collected accounts receivable, subject to a
limitation of ten percent of the term loan's then outstanding balance, with the
aggregate retentions to be returned to the Company upon its full repayment of
the term loan. Either loan may be prepaid at any time, without penalty, at the
Company's option. As with the original revolving credit facility, both loans are
secured and collateralized by the Company's accounts receivable, inventory,
property and equipment and intellectual property. Should any category of
collateral fall below specified percentages and margins, the financial
institution will be entitled to retain additional accounts receivable
collections sufficient to restore such percentages and margins. In consideration
for extending the above loans, the Company will pay the financial institution an
annual fee of $100,000, beginning on May 1, 2003, and upon each annual
anniversary thereafter on which the term loan remains unpaid. The initial annual
fee was satisfied through the issuance of 1,000,000 shares of the Company's
common stock.

8. CONVERTIBLE DEBENTURES

On September 13, 2003, the Company issued $3,350,000 in unsecured convertible
debentures from which it received $3,067,000 in net cash proceeds. These
debentures, which have an aggregate principal face amount of $3,175,000 at
December 31, 2003, (i) accrue interest at a fixed rate of 8.0% per annum, which
is payable at the Company's option in either cash or authorized and unissued
shares of its common stock, (ii) are currently convertible at the option of the
holders, provided that the Company has sufficient authorized and unissued common
shares, into shares of its common stock at a stated rate of $0.13 per share, and
(iii) become due and payable on September 12, 2006. For every two dollars of
original debenture principal, the holder received a detachable stock purchase
warrant allowing for the purchase over the subsequent two-year period of a share
of the Company's common stock at $0.2144 per share. Any related subsequent
issuances of the Company's common stock are limited to any individual debenture
holder beneficially owning no more than 4.99% of the Company's then outstanding
common shares. A registration statement filed with the United States Securities
and Exchange Commission ("SEC") registering the resale of the preceding
debentures and warrants became effective on December 23, 2003.

An underlying agreement also requires that the Company obtain the unanimous
approval of the debenture holders prior to (i) selling any common shares or
convertible debentures from September 13, 2003, until April 21, 2004, (120 days
after the date on which the SEC declared the registration statement effective)
or (ii) selling any common shares or common equivalents with anti-dilution
guarantees or declaring a reverse stock split during the period in which any of
these debentures remainoutstanding. The agreement further stipulates that no
debenture may be prepaid without the consent of the holder and that each
debenture holder has a right of first refusal to participate in any new
financing transaction consented to through April 21, 2004.

F-35

From June 2001 through November 2001, the Company issued unsecured convertible
debentures that remain outstanding. These debentures, which have an aggregate
principal face amount of $4,020,000 at December 31, 2003, (i) accrue interest at
the prime rate plus two percent (6.0% at December 31, 2003), (ii) are currently
convertible at the option of the holders into common stock of the Company at a
stated rate of $0.10 per share, and (iii) become due and payable on various
dates between July 1, 2006 and November 20, 2006. The Company has the right to
force conversion of the debentures if the market price of its common stock
exceeds $3.00 per share for 20 consecutive trading days. For every two dollars
of original debenture principal, the holder received a detachable stock purchase
warrant allowing for the purchase of a share of the Company's common stock at
$2.50 per share. All stock purchase warrants related to the June 2001 to
November 2001 issuances expired unexercised as of December 31, 2003.

At the respective dates of issuance, the Company was required under accounting
principles generally accepted in the United States of America to ascertain for
each of the above debenture issuances the fair value of the detachable stock
warrants and resulting beneficial conversion feature. For each debenture
issuance, the aggregate fair value of the detachable warrants and beneficial
conversion features was determined to be equal to the aggregate principal face
amount of the debt proceeds received, and as such, these amounts were recorded
as debt discounts by increasing additional paid-in capital. These debt discounts
are being amortized over the respective lives of the underlying debentures. The
aggregate unamortized debt discount amounted to $4,850,699 and $2,883,918 at
December 31, 2003, and June 30, 2003, respectively. The remaining principal and
discounted amounts of the Company's outstanding convertible debentures at
December 31, 2003, of $7,195,000 and $2,344,301, respectively, mature during the
Company's fiscal year ending June 30, 2007.

9. STOCKHOLDERS' DEFICIT

General
The Company's shareholders elected to increase its authorized common shares from
100 million to 250 million at a special shareholders' meeting held on
December 1, 2003.

Common Shares Issued In Payment of Accrued Interest and Upon Conversion of
Convertible Debenture
In December 2003, the Company issued 12,378,778 shares of
its common stock to three institutional investors upon conversion of convertible
debentures with a principal face amount totaling $1,175,000 and $104,241 in
related accrued interest.

Common Shares Issued for Services
In October 2003, the Company issued 384,410 shares to a patent attorney in
satisfaction of $82,648 in unpaid legal fees and related accrued interest.

In October 2003, the Company issued 575,000 shares of common stock to a patent
attorney in satisfaction of $36,250 in unpaid legal fees and $50,000 as a
non-refundable retainer for legal services to be rendered.

In October 2003, the Company issued 100,000 shares of common stock to an
independent consultant in final settlement of consulting services rendered by
the consultant in the amount of $45,000. The services consisted of introducing
the Company to prospective investors.

10. OPTION AND PURCHASE AGREEMENT

Pursuant to an option and purchase agreement dated November 20, 2002, the
Company received $250,000 from an unrelated party in exchange for granting them
an option to purchase for an additional $500,000 a non-critical and currently
unutilized technology patent to which the Company claims ownership. The Company
reflected the $250,000 received as deferred income at June 30, 2003. Concurrent
with the July 10, 2003, expiration of this

F-36

option and purchase agreement, the Company recognized $250,000 in non-operating
income during the first quarter of fiscal 2004.

11. CONTINGENCIES

General
The Company is periodically involved in litigation and administrative
proceedings primarily arising in the normal course of its business. In the
opinion of management, the Company's gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing litigation or administrative proceedings
would not materially affect its financial position, results of operations or
cash flows.

Compensating Payment Provision with Principal Vendor
The Company's contract with the supplier of its dry-chemistry total cholesterol
test strips contains a provision that could potentially require the Company to
make certain compensating payments in the event the Company fails to meet
minimum annual sales requirements. The dollar amount of such future amounts, if
any, is currently indeterminable.

12. SUBSEQUENT EVENTS

On January 13, 2004, the Company entered into an Exchange Agreement with each
holder of its convertible debentures that were issued in September 2003 (See
Note 8). Under the Exchange Agreement, each debenture holder agreed, subject to
a 4.99% beneficial ownership limitation, to exchange the principal amount of its
debenture for shares of the Company's common stock, at the rate of $0.09 of
debenture principal per share of common stock. Accrued but unpaid interest on
each note was paid at the time of the exchange by the issuance of additional
shares of common stock at the rate of $0.09 per share. Accordingly, in January
2004 the Company issued 32,427,204 shares of common stock upon exchange of
debenture principal in the amount of $2,975,624 and the payment of accrued but
unpaid interest. Additionally, the Company issued 2,227,807 shares of common
stock to adjust the conversion rate applied to $175,000 of principal previously
converted by a debenture holder to the $0.09 rate stated in the Exchange
Agreement. As a result of the above, in January 2004 the Company recognized
approximately $1.5 million of additional financing expense related to the
beneficial conversion features of the exchange and amortized to expense
approximately $2.7 million of previously existing debt discount related to the
convertibles debentures issued in September 2003.

On February 20, 2004, the Company completed a private placement offering of
$2,775,000 in unsecured convertible debentures from which it received $2,077,000
in net cash proceeds. The purchase price for the convertible debentures issued
in February 2004 gives effect to an original issue discount of approximately
$500,000, the amount of which was withheld from the proceeds at the time of the
closing of the financing. The term of the debentures is two years, and the
debentures are convertible at a conversion price of $0.05 per share (66% of the
average of the 5 consecutive closing bid prices immediately prior to the closing
date of the offering). The conversion price is subject to adjustment upon the
occurrence of certain events including stock dividends, subdivisions,
combinations and reclassifications of the Company's common stock. In connection
with this transaction and subject to a 4.9% beneficial ownership limitation,
following public disclosure of the term and conditions of this financing,
participating warrant holders agreed to exercise outstanding warrants held by
them. Upon exercise, the Company will receive an additional $481,000 in net
proceeds.

The participants of the offering received detachable stock purchase warrants
allowing for the purchase of a number of common shares equal to 30% of the
number of shares which could be obtained upon conversion of the debenture
principal outstanding on February 20, 2004. The warrants can be exercised over a
nineteen-month period and have an exercise price of $0.065 per share of the
Company's common stock, subject to adjustment upon the occurrence of events
substantially identical to those provided for in the debentures. Any related
subsequent issuances of the Company's common stock are limited to any individual
shareholder beneficially owning no more than 4.99% of the Company's then
outstanding common shares. The Company has the right to call the warrants in the
event that the

F-37

average closing price of the Company's common stock exceeds 200% of the exercise
price for a consecutive 20-day trading period.

The Company is required to file a registration statement with the United States
Securities and Exchange Commission ("SEC") registering the resale of the common
shares underlying the preceding debentures and warrants on or before March 20,
2004. Depending upon the occurrence and duration of certain intervening events
to which it has little or no control over, the Company may be required to obtain
the SEC's declaration of effectiveness for this registration statement as early
as July 18, 2004, to which there can be no assurance. Any failure by the Company
to meet the mandated deadlines will constitute a default event, and, as a
result, the debenture holders may demand "repayment." Within the context of any
default, "repayment" is defined as being the greater of (i) 130% of the
aggregate outstanding principal balance and accrued interest or (ii) a currently
indeterminable amount based upon the aggregate outstanding principal and accrued
interest adjusted upwards in accordance with a formula dependent upon any
increase in the market price of the Company's common stock subsequent to
February 20, 2004. The Company has agreed to seek shareholder approval to
increase the number of authorized common shares to 500 million shares by April
30, 2004. Subject to receipt of such authorization, the Company will register
such number of additional shares as is necessary to cause the registration of
125% of the common shares underlying the debentures and warrants then
outstanding.

Subject to obtaining shareholder approval to increase the number of authorized
common shares, investors in the February 20, 2004, financing have been granted
the option to purchase up to an additional $1.22 million in convertible
debentures and warrants with terms and conditions substantially identical to
those applicable to the February 20, 2004, transaction. The conversion price for
the second offering will be 66% of the average of the 5 consecutive closing bid
prices immediately prior to the closing date of the private offering, subject to
adjustment upon the occurrence of events substantially identical to those
provided for in the debentures issued in February 2004. Warrants will be issued
similar to the first private offering and the warrant exercise price will be
130% of the set debenture conversion price. The Company will be required to file
a registration statement covering the shares underlying the debentures and
warrants of this secondary offering and will again be subject to certain
penalties if the registration statement is not filed or effective within a
predetermined time.

An underlying agreement requires that the Company obtain the unanimous approval
of the debenture holders prior to the occurrence of certain events including
stock dividends, subdivisions, combinations and reclassifications of the
Company's common stock until less than 20% of the principal remains outstanding
on the debentures. The agreement further stipulates that no debenture may be
prepaid without the consent of the holder and that each debenture holder has a
right of first refusal to participate in any new financing transaction consented
to for a one year period ending after effectiveness of the registration
statement. The Company will also be prohibited from conducting any other
offering activities subsequent to filing the registration statement with the SEC
and through the date on which either the SEC declares it effective or the
Company withdraws it.

Under accounting principles generally accepted in the United States of America,
the Company was required to ascertain the fair value of the detachable stock
warrants and resulting beneficial conversion feature of the convertible
debentures issued on February 20, 2004. The aggregate fair value of the
detachable warrants and beneficial conversion features was determined to be
equal to the aggregate principal face amount of the debt proceeds received, and
as such, these amounts were recorded as debt discounts by increasing additional
paid-in capital. These debt discounts will be amortized over the life of the
underlying debentures.

On January 7, 2004, the Company issued 975,669 shares of restricted common stock
to employees of the Company as payment for $117,080 in compensation expense.

F-38

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

(A) The Company is a Nevada corporation. Section 78.7502 of the Nevada
Revised Statutes, provides in regard to indemnification of directors and
officers that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.

(B) Section 78.7502 also provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses, including amounts paid in settlement and attorneys'
fees actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter as
to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court determines upon application that in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.

To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above or in defense of any claim, issue or matter
therein, the corporation shall indemnify him against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with the
defense.

(C) Section 78.751 of the Nevada Revised Statutes, further provides that
any discretionary indemnification under NRS 78.7502 unless ordered by a court or
otherwise advanced pursuant to statute, may be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
determination must be made either by the stockholders, by the board of directors
by majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding, or, under certain circumstances, by independent
legal counsel in a written opinion. The statute provides that the corporate
articles, bylaws or an agreement made by the corporation may provide that the
expenses of officers and directors incurred in defending a civil or criminal
action, suit or proceeding must be paid by the corporation as they are incurred
and in advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by the corporation. This right
continues for a person who has ceased to be a director, officer, employee or
agent and inures to the benefit of the heirs, executors and administrators of
such a person.

(D) Section 78.752 of the Nevada Revised Statutes, provides that a
corporation may purchase and maintain insurance or make other financial
arrangements on behalf of any person who may be indemnified as set

II-1

forth above or whether or not the corporation has the authority to indemnify him
against such liability and expenses. Provided, however, no financial arrangement
made for protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable for intentional
misconduct, fraud or a knowing violation of law, except with respect to the
advancement of expenses or indemnification ordered by a court.

(E) Section 6.1 of the by-laws of Lifestream provide that the corporation
shall, to the maximum extent and in the manner permitted by the General
Corporation Law of Nevada, indemnify each of its directors and officers against
expenses (including attorneys' fees), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 6.1, a "director" or "officer" of the
corporation includes any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was a director or officer of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor or corporation.

(F) Section 6.2 of the by-laws of Lifestream provides that the corporation
shall have the power, to maximum extent and in the manner permitted by the
General Corporation Law of Nevada, to indemnify each of its employees and agents
(other than directors and officers) against expenses (including attorneys'
fees), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of the corporation. For purposes of this Section
6.2, an "employee" or "agent" of the corporation (other than a director or
officer) includes any person (i) who is or was an employee or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.

(G) Section 6.3 of the by-laws of Lifestream provides that the corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of the General Corporation Law of Nevada.

The effect of these provisions would be to permit indemnification by the
Company of, among other liabilities, liabilities arising under the Securities
Act of 1933 (the "Securities Act").

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling
Lifestream pursuant to the foregoing provisions, Lifestream has been informed
that in the opinion of the Securities and Exchange Commission, indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
these liabilities, other than the payment by Lifestream in the successful
defense of any action, suit or proceeding, is asserted, Lifestream 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
indemnification by it is against public policy. Lifestream will be governed by
the final adjudication of this issue.

II-2

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:

SEC Registration and Filing Fee ........................... $ 578
Legal Fees and Expenses* .................................. $ 7,500
Accounting Fees and Expenses* ............................. $10,000
Financial Printing* ....................................... $ 1,000
Blue Sky Fees and Expenses* ............................... $ 1,500
Miscellaneous* ............................................ $ 100
-------

TOTAL ........................................... $20,678
=======

* Estimated

None of the foregoing expenses are being paid by the selling security holders.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

In March 2001, we obtained a $1.0 million 90-day loan from a principal
shareholder ("Shareholder") that accrued interest at the prime rate plus two
percent and was secured by all the Company's unencumbered assets other than
accounts receivable. In June 2001, the Shareholder agreed to convert the above
loan into a similarly secured convertible note with a stated interest rate of
prime plus two percent and a maturity date of March 5, 2003. The note was
immediately convertible at the option of the Shareholder into common stock of
the Company at a rate of $1.00 per share. In connection with the initial loan
and subsequent refinancing, the Company issued the Shareholder warrants allowing
him to purchase 200,000 shares of the Company's common stock at $1.00 per share
for which the Company recognized the aggregate assigned fair value of $138,444
as a financing cost in fiscal 2001. The note further stipulates that for every
subsequent quarter the note remains outstanding that the Company will issue the
Shareholder additional warrants for the purchase of 37,500 common shares at
$1.00 per share. The aggregate fair value assigned to these additional warrants
of $200,765 was recognized as a financing cost in fiscal 2002. The Company
repaid subsequently repaid the loan in full.

In March 2001, we issued 55,000 common shares to a legal firm in exchange
for services with an estimated aggregate fair market value of $57,500.

In March 2001, we issued 17,500 common shares to a consultant in exchange
for services with an estimated aggregate fair market value of $17,500.

In May 2001, we issued 75,000 common shares to a legal firm in exchange for
services with an estimated aggregate fair market value of $75,000.

In May 2001, the Company granted a vendor a stock purchase warrant allowing
them to purchase up to 65,000 shares of the Company's common stock at $1.50 per
share. In connection therewith, the Company recognized a $74,205 financing cost
in fiscal 2001 for the fair value of these warrants.

In June 2001, we issued 15,217 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 2000 with an estimated
aggregate fair market value of $17,500.

II-3

During June 2001, the Company commenced a private offering of convertible
notes with detachable stock purchase warrants from which it received net
proceeds of $6,935,250 (net of $712,250 of commissions). The notes are
unsecured, accrue interest at the prime rate plus two percent and mature on
either July 1, 2003 or July 1, 2006, as specified. The notes are immediately
convertible at the option of the holders into common stock of the Company at a
rate of $1.00 per share. The Company has the right to force conversion of the
notes if the market price of its common stock exceeds $3.00 per share for 20
consecutive trading days. Each note holder received one detachable stock
purchase warrant for every two dollars of note principal. Each warrant allows
the holder to purchase a share of the Company's common stock at $2.50 per share.
As the accompanying detachable warrants, in effect, created a beneficial
conversion feature, the Company was required by U.S. generally accepted
accounting principles to reduce the carrying value of the notes by an amount
equal to the estimated fair value of the beneficial conversion feature. This
fair value discount of $6,587,564 has been recorded as additional paid-in
capital. In connection with the immediately preceding offering of convertible
notes, the Company agreed to pay two principal stockholders each a commission
equal to five percent of the related offering proceeds. Total commissions of
$712,250 are being amortized as deferred financing fees over the term of the
convertible debt.

During the fiscal 2002 first quarter, we repaid $184,200 in outstanding
principal and interest against outstanding short-term notes and a line of
credit, which had been previously provided by a principal shareholder and member
of the Board of Directors during fiscal 2001, and consolidated the remaining
$469,984 aggregate principal balance into a two-year convertible note due
August 1, 2003. As an inducement, we issued this individual 40,000 common shares
with an estimated aggregate fair market value of $66,000 and 134,000 stock
purchase warrants with an estimated aggregate fair market value of $283,200. The
note accrues interest at the prime rate plus two percent and is immediately
convertible at the Director's option into our common stock at a stated rate of
$1.00 per share. The agreement further stipulates that for every subsequent
quarter the note remains outstanding that the Company will issue the Director
additional warrants for the purchase of 23,500 common shares at $1.00 per share.
The aggregate fair value assigned to the common shares and warrants of $322,159
was recognized as a financing cost in fiscal 2002.

In August 2001, we issued 88,063 common shares to an investor in payment of
a convertible debt offering commission with an aggregate fair market value of
$126,899.

In September 2001, we issued 9,459 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 2001 with an estimated
aggregate fair market value of $17,500.

In December 2001, we issued 10,174 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 2001 with an estimated
aggregate fair market value of $17,500.

In December 2001, we issued 10,000 common shares to an investment relations
consultant in exchange for services to be subsequently provided over a six-month
contract period beginning December 2001 with an estimated aggregate fair market
value of $17,200.

In December 2001, we issued 100,000 common shares to an investment
relations consulting firm in exchange for services to be subsequently provided
over a twelve-month contract period beginning December 2001 with an estimated
aggregate fair market value of $172,000.

During the third and fourth quarters of fiscal 2002, we issued 3,000,000
common shares in a "best efforts" private placement from which we received
$2,670,000 in cash proceeds (net of $180,000 in issuance costs) and $150,000 in
prepaid intellectual property legal fees. The purchasers of 1,000,000 of these
common shares received an anti-dilution guarantee providing for the issuance of
a formula-driven, currently indeterminable number of additional common shares at
no additional consideration should the Company subsequently issue common shares

II-4

or convertible debt with a price or conversion rate below $1.00 per share,
respectively.

In January 2002, we issued 18,006 common shares to a public relations firm
in exchange for services provided over a four-month contract period beginning
September 2001 with an estimated aggregate fair market value of $32,000.

In January 2002, we issued 60,000 common shares to an investment relations
consultant in exchange for services to be subsequently provided over a six-month
contract period beginning January 2002 with an estimated aggregate fair market
value of $105,000.

In February 2002, we issued 100,000 common shares to an engineering firm in
exchange for product re-engineering services provided over a three-month period
beginning November 2001 with an estimated aggregate fair market value of
$258,000.

In February and March 2002, we issued 1,108,747 common shares to four
investors upon the conversion of outstanding convertible term notes and accrued
interest thereon aggregating $1,108,747.

In March 2002, we issued 8,750 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 2001 with an estimated
aggregate fair market value of $17,500.

In March 2002, we issued 12,773 common shares to a public relations firm in
exchange for services provided over a three-month contract period beginning
January 2002 with an estimated aggregate fair market value of $27,000.

In May 2002, we issued 7,500 common shares to a public relations firm in
exchange for services previously provided with an estimated aggregate fair
market value of $7,875.

In June 2002, we issued 17,857 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 1, 2001 with an estimated
aggregate fair market value of $17,500.

In June 2002, we issued 25,000 common shares to a public relations firm in
exchange for services previously provided with an aggregate fair market value of
$36,000.

In June 2002, we issued 6,338 common shares to a public relations firm in
exchange for services provided over a three-month contract period beginning
April 2002 with an estimated aggregate fair market value of $9,000.

During fiscal 2002 and 2001, the Company executed a number of stock option
agreements with third parties for the performance of consulting and other
services. These stock option agreements covered 142,500 and 846,045 shares of
the Company's common stock during fiscal 2002 and 2001, respectively. The option
agreements contain exercise prices ranging from $1.00 to $5.00 per share and
have contractual lives ranging from one year to five years. In connection with
these stock option agreements and the related services obtained, the Company
recognized various expenses aggregating $135,842 and $475,374 during fiscal 2002
and 2001, respectively.

During fiscal 2002 and 2001, the Company entered into several agreements
with third parties for the performance of various services over subsequent two
to three year periods. In connection therewith, the Company granted these
service providers 325,000 stock options with various exercise prices and
expiration dates. During fiscal 2002 and 2001, the Company recognized various
expenses aggregating $576,631 and $239,533, respectively, for the fair value of
the issued stock options. Such expenses will be adjusted in future fiscal
periods, as the related services are performed, based on the then calculated
fair values and any incremental changes which may occur

II-5

therein. The related expenses are being recognized as the stock options vest
based on the terms of the stock option agreements.

We issued 18,750 common shares to an investment banking firm in exchange
for consulting services with an estimated aggregate fair market value of $13,126
during our fiscal 2003 first quarter ended September 30, 2002.

On January 31, 2003, the Company issued 1,040,816 previously escrowed
registered shares of its common stock to an institutional shareholder in full
and final resolution of a dispute regarding the number of common shares it was
entitled to under a make-whole/anti-dilution provision of the original private
placement offering. As part of this resolution, the institutional shareholder
agreed to the cancellation of all outstanding stock purchase warrants held by it
and to waive any potential liquidated damage claims it may have had against the
Company pursuant to a related registration rights agreement.

During January 2003, the Company issued 448,390 shares of its common stock
to the leaseholder of its office facilities in satisfaction of $44,839 in
accrued rent.

During February 2003, the Company issued 50,000 shares of its common stock
to a consultant in exchange for services with an estimated fair market value of
$10,000.

During March 2003, the Company's Board of Directors authorized management
to proceed with a "best efforts" private placement offering of up to 40,000,000
shares of the Company's common stock at a fixed price of $0.10 per common share.
Pursuant to this private placement we issued 35,387,500 restricted shares of our
common stock to nineteen investors, including certain related parties, at $0.10
per share. Net proceeds were $3,355,750 (net of $183,000 of commissions).

We additionally issued 27,481,137 restricted shares of our common stock to
six investors upon the conversion of $1.8 million in outstanding convertible
notes, and $0.5 million in accrued interest thereon, at a conversion rate of
$0.10 per share.

In May 2003, we issued 1,000,000 shares of our common stock to an
institutional holder of our convertible notes in exchange for their forfeiting
an anti-dilution guarantee and warrants.

In June 2003, we issued (i) 500,000 restricted shares of our common stock
to a consultant in exchange for services with an estimated aggregate fair market
value of $50,000, (ii) 1,000,000 restricted shares of our common stock to a
legal firm in exchange for services with an estimated aggregate fair market
value of $100,000, and (iii) 1,000,000 restricted shares of our common stock to
a financing company in settlement of a $100,000 loan commitment fee.

In August 2003, we issued 4,500,000 shares of our common stock to an
institutional investor in payment of $450,000 in accrued interest on outstanding
convertible notes.

In August 2003, we issued 2,500,000 shares of our common stock to an
institutional investor upon its conversion of a convertible note with a
principal face amount of $250,000.

In August 2003, two vendors returned 100,000 shares and 53,566 shares of
our common stock as refunds of $10,000 and $5,357, respectively, in prepaid
services not ultimately rendered. We retired these returned shares upon receipt.

On September 13, 2003, we completed a private placement of $3,350,000 in
convertible notes to an investment group, including certain of our existing
institutional stockholders, from which we received $3,067,000 in

II-6

net cash proceeds (net of $268,000 in commissions and $15,000 in related legal
fees). We were required to immediately place $1,533,500 of the proceeds into
escrow, the future release of such funds to us was contingent upon the approval
by a majority of our stockholders of the proposed increase in our authorized
common shares from 100 million to 250 million. This approval was obtained at a
special meeting of stockholders held on December 1, 2003. All notes have a
stated 8.0% annual rate of interest, payable at our option in either cash or
authorized and unissued shares of our common stock, mature on September 10,
2006, and are convertible, only if we have sufficient authorized and unissued
common shares, into shares of our common stock at a stated rate of $0.13 per
share. Each noteholder received stock purchase warrants enabling them to
purchase shares of our common stock at $0.2144 per share over a subsequent
two-year period equal to 50% of the common shares they would be entitled to
receive upon their immediate conversion of the note principal. Any related
subsequent issuances of our common stock are limited to any individual
noteholder beneficially owning no more than 4.99% of our then outstanding common
shares.

On October 7, 2003, we entered into an agreement to issue 384,410 shares of
our common stock to a patent attorney in satisfaction of $82,648 in unpaid legal
fees and related accrued interest.

On October 27, 2003, we entered into an agreement to issue 575,000 shares
of common stock to a patent attorney in satisfaction of $36,250 in unpaid legal
fees and $50,000 as a non-refundable flat-fee payment for legal services to be
rendered.

On October 28, 2003, we entered into an agreement to issue 100,000 shares
of common stock to an independent consultant in final settlement of consulting
services rendered by the consultant in the amount of $45,000. The services
consisted of introducing us to prospective investors.

In December 2003, we issued 12,378,778 shares of our common stock to three
institutional investors upon conversion of convertible debentures with a
principal face amount totaling $1,175,000 and $104,241 in related accrued
interest.

On January 13, 2004, we entered into an Exchange Agreement with each holder
of our convertible debentures that were issued in September 2003. Under the
Exchange Agreement, each debenture holder agreed, subject to a 4.99% beneficial
ownership limitation, to exchange the principal amount of its debenture for
shares of the our common stock, at the rate of $0.09 of debenture principal per
share of common stock. Accrued but unpaid interest on each note was paid at the
time of the exchange by the issuance of additional shares of common stock at the
rate of $0.09 per share. Accordingly, in January 2004 we issued 32,427,204
shares of common stock upon exchange of debenture principal in the amount of
$2,975,624 and the payment of accrued but unpaid interest. Additionally, we
issued 2,227,807 shares of common stock to adjust the conversion rate applied to
$175,000 of principal previously converted by a debenture holder to the $0.09
rate stated in the Exchange Agreement.

On January 7, 2004, we issued 975,669 restricted shares of our common stock
to certain of our employees as payment for $117,080 in compensation expense.

On January 9, 2004, we issued 1,000,000 restricted shares of our common
stock to a financing company in settlement of a $100,000 loan commitment fee.

On January 21, 2004, we issued 250,000 restricted shares of our common
stock to an investment-banking firm in exchange for investment banking services
and research coverage.

On February 19, 2004, we completed a private placement offering of
$2,775,000 in unsecured convertible debentures from which we received $2,077,000
in net cash proceeds. The purchase price for the convertible debentures issued
in February 2004 gives effect to an original issue discount of approximately
$500,000, the amount of which was withheld from the proceeds at the time of the
closing of the financing. The term of the debentures is two years, and the

II-7

debentures are convertible at a conversion price of $0.05 per share (66% of the
average of the 5 consecutive closing bid prices immediately prior to the closing
date of the offering). The conversion price is subject to adjustment upon the
occurrence of certain events including stock dividends, subdivisions,
combinations and reclassifications of our common stock. In connection with this
transaction and subject to a 4.9% beneficial ownership limitation, following
public disclosure of the term and conditions of this financing, participating
warrant holders agreed to exercise outstanding warrants held by them. Upon
exercise, the Company will receive an additional $481,000 in net proceeds.

In February 2004, we issued 4,615,384 shares of our common stock to two
institutional investors upon exercise of 4,615,384 common stock purchase
warrants.

In March 2004, we issued an additional $122,000 of convertible debentures
from which we received $100,000 in net proceeds after an original issue discount
of $22,000. We also issued 732,000 of detachable stock purchase warrants in
connection with this transaction. The convertible debentures and common stock
purchase warrants have identical terms and conditions to those issued on
February 19, 2004 discussed above.

In each of the foregoing transactions, the recipients of our shares were
either accredited investors or had such knowledge in business and financial
matters that they were capable of evaluating the risks and merits of acquiring
our shares. Each recipient had access to business and financial information
about us. Each certificate evidencing securities issued in the forgoing
transactions included a legend to the effect that the securities were not
registered under the Securities Act of 1933, as amended (the "Act"), and could
not be resold absent registration or the availability of an applicable exemption
therefrom. Each of the foregoing transactions was exempt from the registration
requirements of the Act by reason of Section 4(2) and the rules and regulations
thereunder.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

3.1 Amended and Restated Articles of Incorporation of Lifestream
Technologies, Inc., dated June 20, 2002 (1)

3.1.1 Certificate of Amendment to Articles of Incorporation dated December 4,
2003 (8)

3.2 By-laws of Lifestream Technologies, Inc. (2)

4.1 Form of Convertible Notes (6)

5 Opinion and Consent of Schneider Weinberger LLP **

10.1 Lease between Jacklin Land Company Limited Partnership and Lifestream
Diagnostics, Inc., a wholly-owned subsidiary of Lifestream
Technologies, Inc. dated as of May 19, 1998. (3)

10.2 License and Supply Agreement between Lifestream Technologies, Inc. and
Roche Diagnostics GmbH dated December 12, 2000 (2)

10.3 Promissory Note between Lifestream Technologies, Inc. and Capital South
Financial Services, Inc., dated May 1, 2003 (9)

10.4 Securities Purchase Agreement dated June 5, 2003. (5)

10.5 Registration Rights Agreement dated June 5, 2003 (5)

10.6 Securities Purchase Agreement dated September 10, 2003 (4)

II-8

10.7 Form of Convertible Debenture due September 10, 2006 (4)

10.8 Registration Rights Agreement dated September 10, 2003 (4)

10.9 Common Stock Purchase Warrant dated September 10, 2003 (4)

10.10 Securities Purchase Agreement dated February 19, 2004 (7)

10.11 Form of Convertible Debenture due February 19, 2006 (7)

10.12 Registration Rights Agreement dated February 19, 2004 (7)

10.13 Common Stock Purchase Warrant dated February 19, 2004 (7)

10.14 Exchange Agreement dated January 12, 2004 **

23.1 Consent of Independent Auditors BDO Seidman, LLP **

23.2 Consent of Schneider Weinberger LLP (included in Exhibit 5)**

- --------------------------------
** Filed herewith.

(1) Filed as an exhibit to our Definitive Proxy Statement filed with the
Securities and Exchange Commission on April 24, 2002 and incorporated
herein by reference.

(2) Filed as an exhibit to our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on December 26, 1996 and incorporated
herein by reference.

(3) Filed as an exhibit to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 1, 1999 and incorporated
herein by reference.

(4) Filed as an exhibit to our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on October 15, 2003 and incorporated
herein by reference.

(5) Filed as an exhibit to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 20, 2003 and incorporated herein
by reference.

(6) Filed as an exhibit to our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on October 15, 2001 and incorporated
herein by reference.

(7) Filed as an exhibit to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 1, 2004.

(8) Filed as an exhibit to our Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on February 23, 2004.

(9) Filed as an exhibit to our Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on December 10, 2003.

II-9

ITEM 28. UNDERTAKINGS

The undersigned Registrant also 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 by section 10(a)(3) of the
Securities Act of 1933;

(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;

(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;

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act
of 1933, 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.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (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 (the "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 preceding) 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

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 Form SB-2 and has duly caused this amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Post Falls, State of Idaho, on March 22, 2004.

LIFESTREAM TECHNOLOGIES, INC.

By: /s/ Christopher Maus
----------------------------------
Christopher Maus, President,
Chief Executive Officer and
Chairman of the Board of Directors

Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Christopher Maus President, Chief Executive Officer, March 22, 2004
- -------------------- Chairman of the Board, and Director
Christopher Maus (Principal Executive Officer)

/s/ Brett Sweezy Chief Financial Officer March 22, 2004
- ----------------- (Principal Financial and
Brett Sweezy Accounting Officer)

/s/ Robert Boyle Secretary, Treasurer, March 22, 2004
- ----------------- and Director
Robert Boyle

/s/ Michael Crane Director March 22, 2004
- ------------------
Michael Crane

/s/ William Gridley Director March 22, 2004
- --------------------
William Gridley

/s/ Neil Luckianow Director March 22, 2004
- ------------------
Neil Luckianow